Marzetti Co (MZTI) 2014 Q2 法說會逐字稿

Good morning. My name is Jennifer and I'll be your conference operator today. At this time, I would like to welcome everyone to the Lancaster Colony Corporation FY14 second 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 speakers' remarks, there will be a question-and-answer session.

(Operator Instructions)

And now I would like to begin your conference. Here is Dale Ganobsik, Director of Investor Relations for Lancaster Colony Corporation.

Thank you, Jennifer. Good morning, everyone, and thank you for joining us today for Lancaster Colony's FY14 second quarter conference call.

Let me begin by reminding everyone that our discussion this morning may include forward-looking statements which are subject to the Safe Harbor provisions of the Private Securities Litigation Reform Act of 1995. These statements are subject to a number of risks and uncertainties that could cause actual results to differ materially, and the Company undertakes no obligation to update these statements based upon subsequent events. A detailed discussion of these risks and uncertainties is contained in the Company's filings with the SEC.

With that said, I'll now turn the call over to Lancaster Colony's Chairman and CEO, Jay Gerlach. Jay?

Good morning, and thank you again for joining us. We are pleased to review our second quarter results issued earlier this morning and a divestiture of our non-food business, Candle-lite, completed yesterday.

For perspective, the divestiture of Candle-lite will cause the historic result of our Glassware and Candles segment to be reclassified as discontinued operations beginning in the current third quarter. Thus, that segment remains included as part of the second quarter results we are reporting today.

On that basis, we saw total consolidated net sales increased by 3% and operating income improve by 13%, setting records -- record totals for the quarter. All the growth can from our Specialty Foods segment. For the Glassware and Candles segment, our second quarter results reflected a sales and operating income decline of 19% and 43%, respectively, largely due to weaker market conditions and anticipated lower seasonal sales. Earnings per share increased 12.5%, to $1.44 versus last year's $1.28.

Our Food segment had a 7% sales increase that was all volume mix, as there was no price inflation during the quarter. The quarter benefited from some seasonal business shifting from the first to the second quarter. Good seasonal demand helped our Sister Schubert's and New York brand frozen breads; and to a smaller degree, the cold weather has helped our Reames frozen noodles sales.

Newer products continue to contribute to growth, as well, including Marzetti's Simply Dressed refrigerated salad dressing and New York brand garlic knots. Food Service channel sales also grew nicely, helped by new items with existing customers, new customers, and successful limited-time offer participation. Given the strong seasonal benefit to our retail channel business, our mix moved to 56.4% retail versus 55.5% last year and 45% -- 49% in the first quarter.

Segment operating income improved approximately 18%, benefiting from improved volume, stronger mix, and trade spending levels comparable to a year ago. Material costs were also favorable in the quarter, at about 1% of sales, helped by favorable soybean oil, sweetener and egg costs. Segment performance for the first half shows net sales up 3.6% and operating income up 6.2% with operating margins at 18.3%, up about 45 basis points.

Recapping our key category performance at retail shows the following for the 12 weeks ended December 29 from IRI. The refrigerated dressing category was up 2.8%; we were down 1.1%. I would comment that our Simply Dressed product line continues to grow; declines were seen in our classic refrigerated dressings.

Croutons, the category was up 2.2%; we were up 4.6%. Veggie dips continues to struggle, with the category down 6.2%; our Marzetti brand down 7.7%. Frozen garlic bread's category was up just 1/10%; our New York brand was up 2.6%. And frozen dinner rolls, the category was down 2.8%, and Sister Schubert's brand was down 2.7%. Now I'd like John to make a few comments.

Thank you, Jay. Let me begin today by noting that my remarks reflect the presentation of our balance sheet and cash flows as inclusive of our Candle operations through December 31. As was earlier referenced by Jay and also noted in today's release, effective with our third quarter reporting, our Glassware and Candles segment will be reported as discontinued operations and result in a recasting of prior period presentations, including that of the balance sheet and cash flows. You may find the pro forma information filed yesterday on Form 8-K to be of some value in the interim.

Let's now review some of the more noteworthy changes in our consolidated balance sheet. First, our net accounts receivable as of December 31 totaled approximately $87 million, which compared to $70 million at June 30. The seasonality of our candle sales was largely responsible for this increase, as has typically been the trend this time of year. Compared to the year-ago December, our receivables decreased about $4 million, due to the year's lower sales of candles, as partially offset by a volume driven increase in food-related receivables.

Turning to our inventories, we saw our December balances total about $93 million, which represented a decline of roughly $17 million, or 15%, since June. This decrease is consistent with the seasonal reduction we often experience between these periods. Compared to last December's levels, inventories also declined by about $8 million, or 8%, with improvements coming from both segments.

Turning to our current balance sheet capitalization, we continue to remain debt-free at December 31, with cash and equivalents exceeding $176 million. We believe this balance sheet posture continues to provide us considerable flexibility to ensure our long-term growth and support long-term shareholder returns.

Obviously, yesterday's transaction involving our Candle operations will further enhance our balance sheet and near-term cash positions. This improvement is to be derived from the receipt of both the sales proceeds and the related tax benefit on the loss. We will remain consistent in prioritizing our future cash utilization to first help grow our existing business, then acquiring good fitting food businesses at reasonable values, and then returning cash to shareholders through the repurchasing of shares or cash dividends.

Looking now at some relevant cash flow totals for the most recent six-month period, cash flows provided from operations totaled about $84 million, which well exceeds the $68 million reported in the prior year's comparable period. Comparatively favorable working capital improvements, as well as our higher net income, led to this increase. Other six-month cash flow amounts of note included dividends totaling $22.933 million, capital expenditures of $4.370 million, and depreciation and amortization of $10.649 million.

With that, I want to thank you for listening today. And I'll turn the call back over to Jay so he can conclude our prepared remarks.

Thanks, John. Looking ahead to our third and fourth quarters, we are excited to be bringing some new branded retail products to market at the end of March. Taking advantage of the food service capability, we will be introducing a freezer-to-table microwavable pasta product that is high quality and very easy to prepare. It will be offered in both individual serving and family sizes.

We also have a new frozen garlic bread product that we feel will be do unique to the category in both form and taste. We'll also have some line extensions, including a whole-grain version of our New York Texas toast and additional salad toppings to complement our crouton offering.

We do expect some seasonal impact on third quarter sales, as much of our Easter-related sales will move to the fourth quarter this year versus the third last year. Our estimate of the sales shift is roughly $4 million to $5 million.

Our outlook for Food Service channel sales is positive, given our mix of customers, new product addition, and planned limited-time offers for the second half. Recent weather extremes and state of the overall economic recovery will likely have some impact on demand. We anticipate ingredient costs to be favorable through the second half. We are pretty well covered on soybean oil and flour through June.

Our capital investment for the year has been off to a slow start, with $4.4 million invested through the first half and full-year spending estimated at roughly $15 million. Our biggest project this year is expanding our salad dressing and sauce capacity. This project is just beginning and is expected to be completed in early FY15.

Acquisition deal flow has definitely picked up, particularly with Better For You Products. We continue to evaluate these opportunities in the market, as well as developing and pursuing our own specific targets. Branded retail with category leading positions remains our priority.

We were pleased to increase our quarterly dividend rate 10% beginning with the December payment. This was our second increase of our quarterly dividend within calendar year 2013. Given our strong balance sheet and the proceeds from our Candle business sale, we will continue evaluating our opportunities to further invest and return capital to shareholders. Jennifer, we're ready to take questions.

(Operator Instructions)

Michael Halen.

Good morning. So with the cash from the sale of the Candle segment and the tax benefit, cash is going to accumulate pretty rapidly here in the next few quarters. Should we expect you to be more aggressive with dividend increases or maybe share buybacks? Can you please prioritize your uses for excess cash for us?

Mike, we don't have any specific plans to announce this morning, but we will continue, as John touched on, with the priorities we've consistently had, and investing in our existing businesses to support growth opportunities, looking for good fitting, appropriately valued acquisition opportunities, and then share repurchases and dividends. So we'll continue with that priority. Hopefully, we will see an acquisition opportunity that will develop sometime in the future here, not too distant.

Okay. That's helpful. Thank you. And just one more, in terms of the new products, the microwavable pasta and the frozen garlic bread, do they fall into the Better For You category? Are they gluten-free or whole-grain pastas or anything like that?

We're not quite -- no, they wouldn't fall in there. One of the pasta items is a whole-grain one; but no, I wouldn't generally described them as that. The pasta product, as I mentioned, is one that's really bringing convenience to the consumer that we think is very unique to that space at retail at this point in time.

Okay. Great. Thank you very much.

You're welcome.

Phil Tripoli.

Thanks. Good morning.

Hello, Phil.

Just a couple of quick questions, maybe just building off the last caller a little bit. Can you remind us with M&A, you certainly have more cash now, the range of business you'd be interested in, size wise, and then some of the categories you might be interested in?

Phil, we've typically thought that a good size range for us from a revenue standpoint would be in the $50 million to $100 million range, but certainly open-minded to opportunities that would be smaller than that. And historically, our deals have been smaller than that. And I think we'd also be willing to go above that range a little bit for the right fitting opportunity.

We certainly like the space we've got in the produce department of the supermarkets, so things that might also fit there would be of interest to us, as well as the frozen case, particularly in the bread or around that bread category in the frozen case. But we don't view ourselves as limited to just those two departments at the supermarket. We'd be willing to look really across the store, with a just a few exceptions, probably, of things we're not particularly interested in getting into.

Sure. That's very helpful. If I could ask about Specialty Foods operating margins. Going forward here, you definitely saw a nice tailwind in the quarter. Is it fair to say that could accelerate a little bit? I think you made some comments at the end that I missed, just regarding soybean oil. So any update of how you're thinking about 3Q and 4Q from a benefit standpoint, any more color?

Phil, as you recall, the second quarter is usually our strongest margin quarter, given the mix, primarily, that's shifted to retail. So we come off that strong retail mix going through the balance of the year. So while we expect to still see some favorable ingredient costs in both the third and fourth quarter, the mix shift will likely bring those margins back down a little bit from what we saw in the second quarter.

Okay. That's very helpful. And then just going back to Candles, any change to the longer term gross margin going forward from that divestiture, or does that impact the gross margin line?

I think the Food gross margins are slightly better than what we've seen out of the Candle business. And you can get a sense of that, Phil, from the pro forma information that was filed yesterday. From that information, you can see what a stand-alone Food margin would look like going forward. And just looking at the 12 months ended June '13, the gross margins are somewhat more than 1% higher with Food only, compared to the consolidated margins that were originally reported.

Okay. Perfect. That's helpful. And then just two more things, if I could. One is Simply Dressed. I think we've talked about this in the past. But it seems like it's been such a great success in that category for you guys. Are you seeing any increased competition from more competitors trying to do something similar, maybe not copycat, so to speak, but definitely more competition maybe vying for space or introducing products there?

Phil, we have seen that, particularly from Litehouse, who has in the last several months -- maybe six months, has introduced a Greek yogurt-based product that they're selling under the Opa brands. So you might see that out at retail, so that is a new entry into the space. Bolthouse continues to be another strong player in that refrigerated dressing space, as well, again utilizing a Greek yogurt-based product.

Sure. Have you noticed any changes with Bolthouse under their new owner?

No. I wouldn't say we have.

Okay. That's fair. And then just the last question. I think you talked about weather maybe benefiting a couple of your product categories. I know it's maybe premature to talk about the current quarter, but is it fair to say you're seeing an impact in weather recently to the negative, or how should we think about that?

I think we are seeing that a little bit in January. I know some of our restaurant customers are definitely seeing lower store traffic, as we've seen these storms and these very cold temperatures impacting that a bit. We even saw a little bit just late this week, from a shipping standpoint, trying to go into the Southeast.

I don't know that, that's a material impact. But yes, I think the weather is having a little bit of a negative impact overall. We have one particular product line I commented on we don't usually talk about, but our Reames brand frozen noodles that does seem to actually benefit from particularly cold weather. So it's having a little bit better winter season than we've seen in the last few years. (Multiple Speakers) Overall it's, I think, an unfavorable impact.

Okay. Yes. No, that makes sense. And actually one more, if I could. I was just reading through the release again. And you had mentioned in your outlook you might see improved distribution in the second half of the year, because of steam products. What is that related to, or can you just talk a little bit more about that?

I think that just continues with added distribution, again, of Simply Dressed and from the Sister Schubert's side of things, as well as continue to expand our New York frozen brand out into the Western markets.

Okay. Perfect. I appreciate it. Thanks, Jay.

You're welcome.

Jeffrey Thomasson.

Thanks. Good morning, and good quarter, guys.

Good morning, Jeff. Thank you.

My questions basically were just asked, but I'll rephrase it to see if you want to add any color. And the first question is just, in the past you have mentioned expansion potential with certain products in the Western portion of the US. So I was just going to ask about if you had any color to add on where things stand now, and has there been much penetration in the first half of the fiscal year and what potential remains for the second half of the year? And then the second question is just a general one. And that is, what do you see as the biggest challenge to the business over the next 12 months?

I think as it relates to the geographic expansion, Jeff, it does continue. I can't give you any real specific data on that, but we are making incremental progress, I think, through the first half; and we would expect to continue that a bit through the second. So I think that is a little bit of a positive.

The biggest challenge for the business, I think as it has been and maybe is throughout the industry, is just moving the top line. We've had a pretty good second quarter on the top line, obviously, following a little bit of a slower first quarter. But that will continue to be a challenge. We're hoping that with the product innovation that we're bringing the end of this quarter, we'll start to see some further growth from new product as we move on into FY15.

And then just before I hang up, could you go back to maybe a comment in the press release about what we should expect on fourth quarter as a result of the Easter timing?

We're ballparking roughly $4 million to $5 million in sales moving from the third quarter to the fourth versus a year ago, just because of that timing shift.

Okay. Okay, I'll follow up later today.

Thanks.

(Operator Instructions)

Greg Halter.

Yes. Good morning, guys, and congratulations on, I think, the third best food operating margin since the year 2000.

Thanks, Greg.

If you stripped out the Candle business, I'm coming up to about $1.36 in EPS. Does that sound about right?

That is correct, Greg.

Okay. And Jay, you mentioned about the covered on soybean oil and flour through June; and I think since year-end, at least the futures contracts for both of those have continued to go down. And I just wonder how the Company is positioning itself to take advantage of that and lock in even further out, or just waiting to see what happens relative to as you get closer to June?

I mentioned we're pretty well covered through June. We actually do have flour coverage that largely goes, for most of our flours, on out through September, Greg. And then on the soybean oil side, we just continue with our practice of going out 12 months, stair stepping the coverage down as we go out. We have not veered much from that. We've upticked a little bit in some of our coverage, but not dramatically so.

Okay. Any share repurchase in the quarter?

No. There were no shares repurchased.

All right. And elative to the Candle business, I know you have the CDSOA benefits that the Company's received over years. What happens -- I know there's some lawsuits there. Are those going with the buyer, or do those stay with Lancaster, if there was any negative that came out of those suits?

Greg, relative to rights to any future CDSOA distributions, technically those have remained with us, but we believe the probability of being able to make a claim without current candle manufacturing is problematic. And then since we've been the past recipient of these disbursements, the outcome of that litigation conceptually would still potentially affect us. Although as we've indicated in our past disclosures, we believe the possibility of an adverse ruling is remote.

Okay. And one last one for you. You've mentioned the tax benefits. Where will that show up going forward? Is it in the actual rate that we'll see? And do you expect your tax rate to be going forward on just the Food business?

With respect to where the tax benefit on the loss will be placed within the income statement, if you think forward to what will occur, we'll be reclassifying the Glassware and Candles results as discontinued operations, and the tax benefit geographically within the income statement will fall within discontinued operations.

Obviously, the cash benefit stays to the consolidated cash total on the balance sheet. With respect to the go forward effective tax rate, we still need to do a little bit of work as to the follow on consequences of not having the Candle assets with us. But we believe it will probably still be in the ballpark of 34%.

Okay. Great. Thank you.

You're welcome.

There are no further questions. At this time, we will turn the call back to Mr. Gerlach for any concluding remarks.

Again, thank you for joining us this morning. We'll look forward to talking to you again with our third-quarter results. Have a great day.

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