Marzetti Co (MZTI) 2019 Q1 法說會逐字稿

Good morning. My name is Denise and I will be your conference call facilitator today. At this time, I'd like to welcome everyone to the Lancaster Colony Corporation's Fiscal Year 2019 First Quarter Conference Call. Conducting today's call will be Dave Ciesinski, President and CEO and Doug Fell, Vice President and CFO. All lines have been placed on mute to prevent any background noise. After the speakers have completed their prepared remarks, there will be a question and answer period. (Operator Instructions) Thank you and now to begin the conference call, here is Dale Ganobsik, Vice President of Investor Relations and Treasurer for Lancaster Colony Corporation.

Thank you Denise. Good morning everyone and thank you for joining us today for Lancaster Colony's fiscal year 2019 first quarter conference call. Let me remind 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. Also note that the audio replay of this call will be archived and available at our Company's Website, lancastercolony.com, later this afternoon.

With that said, I'll now turn the call over to Dave, Lancaster Colony's President and CEO, Dave Ciesinski. Dave?

Thanks Dale and good morning everyone. It's a pleasure to be here with you today as we review our first quarter results for fiscal year 2019. Doug and I will provide comments on the quarter and our outlook. Following that, we'll be happy to respond to any of your questions. For the quarter, we are pleased to report that consolidated net sales increased 5.9% to a first quarter record $316.7 million versus $298.9 million last year.

Retail net sales grew 40 basis points, $162.7 million driven by price increases taken in response to higher transportation and commodity costs and volume gains on dressings and sauces sold under license agreements.

Retail net sales also benefited from reduced trade spending and coupon expenses compared to the prior year. It is worth noting that organic sales growth in Q1 of Fiscal Year 2018 was a relatively strong 4% and included some benefit from the timing of seasonal shipments of caramel dips and frozen dinner rolls that did not recur this year.

Food service net sales advanced a solid 12.5% to $153.9 million as the segment benefited from a number of factors including, first, higher sales volume from existing business as the stronger U.S. economy drove improvement for the overall restaurant industry. Second, incremental sales from new business. Third, increased sales resulting from temporary service issues experienced by some of our food service competitors. And finally, pricing actions that we implemented beginning in January to help offset freight and commodity cost.

Sales from limited time offerings to our food service national accounts were down slightly versus prior year. Also note in last year's Q1 Fiscal Year 2018, the food service segments top line performance was relatively weak with a reported sales decline of 1.4%. Consolidated gross profit grew $5.7 million, or 7.6% to $81.2 million as the increased sales volumes pricing actions, lower trade spending and reduced coupon expenses continued cost savings from our lean six sigma program in improved operating efficiencies more than offset higher freight and commodity cost.

SG&A expenses held nearly even at $32.1 million compared to last year, $31.3 million as reduced spending for digital advertising and lower brokerage costs were offset by incremental investments in personnel to support our continued growth.

Consolidated operating income increased 11.2% to $49.1 million from $44.2 million in the prior year driven by the gross profit improvement. Consolidated operating margin improved 70 basis points to 15.5%. Retail operating margin increased from 20.3% to 20.9% while food service segment operating margin increased from 10.7% to 12.3%.

Net income was $39 million, or $1.42 per diluted share compared to $29.4 million, or $1.07 per diluted share last year. Note that this year’s lower tax rate of 22.6%, compared to last year’s 34.2%, primarily reflects the favorable impact of the Tax Cuts and Job Act of 2017. The regular quarterly cash dividend was continued at the higher level of $0.60 per share set in November of 2017.

Turning our attention to retail sell-through data from IRI for the 13 weeks ending September 30, 2018 we maintained our share leadership position in all six of our key categories and increased our share position in four of those categories.

With that, I'd now like to turn it over to Doug to make some comments on the balance sheet and related items.

Thank you Dave and good morning everyone. Consistent with our past commentary, our balance sheet remains strong. I will make a few brief comments on the more meaningful changes in our balance sheet since June 30. From a high level perspective, nearly all of the increase in our cash balances of $12 million since June 30 can be summarized as follows; cash provided by operating activities of $41 million, offset by regular dividends of $16 million and property additions of $10 million. In general, our accounts receivable balances remain in-line with sales volumes and our expectations. Consistent with past quarters, our [aging's] remain solid.

The noticeable increase in inventory was anticipated and reflects the impact of several items including increased sales volumes, continued higher input cost from commodities, balancing and production within our plans for seasonal inventory builds and adjustments to our days of forward coverage to maintain high levels of customer service. Regarding our recent acquisition of Bantam Bagels, we believe its impact on our networking capital requirements to be relatively minimal throughout this fiscal year.

As I mentioned, Q1 cash expenditures for property additions totaled $10 million. As we conveyed in our August earnings call, we anticipate capital expenditures to be in the range of $60 million to $80 million for Fiscal 2019 and in general, we'll focus on projects to increase capacity and productivity. The most significant project planned for Fiscal 2019 is to expand production capacity to meet increased demand for our Sister Schubert's products. This project is just getting underway and has a projected completion date towards the middle of Fiscal 2020.

As we conveyed previously, other notable projects to be completed in Fiscal 2019 involve a dedicated innovation center and packaging capacity for our retail dressings. The innovation center is well underway with a completion date targeted for the spring. Additionally, our packaging capacity projects are progressing as planned. Consequently, we anticipate our cash outflows for capex to increase as we move through Q2 and into the second half of Fiscal 2019.

At this point, we do not anticipate any meaningful capex investments in Fiscal 2019 for the recent Bantam Bagels acquisition. Appreciation and amortization expense totaled $7 million for Q1. In our last earnings call we projected a level of about $30 million for Fiscal 2019. however, this annual total is expected to move slightly higher in the second half to reflect the depreciation and amortization related to the Bantam acquisition. We will provide you an update in our next earnings call.

As we conveyed last quarter, the increase in our accounts payable since June largely reflects an emphasis by our procurement team to extent payment terms with our vendors in conjunction with our ongoing lean six sigma efforts. With respect to our balance sheet capitalization, not much has changed since our last commentary. We continue to have no debt, over $674 million in total shareholders equity and nearly $218 million in cash and equivalence. Borrowing capacity under our credit facility remains at nearly $150 million.

Finally, and broadly speaking, as expected our income tax provision for our first quarter was favorably impacted by the Tax Cuts and Jobs Act. Our blended effective rate for our first quarter was estimated to be 24%, yet our actual tax rate was 22.6%. The favorable difference of 140 basis points is largely due to the impact of the recent accounting guidance on the tax treatment of employee stock option exercises. Recent tax law changes in a certain state also serve to lower our overall effective tax rate.

Looking forward, at this time, we continue to estimate our effective tax rate for Fiscal 2019 to be approximately 24%. However, the timing and magnitude of employee stock option exercises could favorably influence our ultimate effective rate. As always, thanks for joining us this morning. I will now turn the call back over to Dave for his concluding comments. Dave?

Thanks Doug. We're very pleased with the strong sales growth in our food service segment that led to a record level of consolidated net sales in the fiscal first quarter. We're also encouraged by the improvements in both gross margin and operating margin for the quarter resulting from our continued efforts to offset inflation through net pricing and the growing momentum of our lean six sigma program.

Looking ahead to fiscal's second quarter, historically our biggest sales quarter of the year, we expect higher freight cost and packaging cost to persist. Commodity inflation should turn closer to neutral as we begin to laps under the notable increases that we experienced last year; particularly eggs. As announced earlier this week, we're very excited to have added Bantam Bagels to Lancaster Colony's family of companies. We look forward to working with the founders of Bantam Bagels, Nick and Elyse Oleksak and their team and growing together through the remainder of this fiscal year and beyond.

That concludes our prepared remarks for the day and we'd be happy to answer any of your questions.

(Operator Instructions) Your first question comes Michael Gallo with CLK. Your line is open.

Yes, just a couple if I may? Just to kind of dive into the food service business first, I mean, obviously very strong sales growth. I'm trying to parse out how much of this is broad-based improvement in the overall restaurant business versus new business versus this kind of temporary supply and service issue and temporary supply and service benefit and some of your competitors, will that still be ongoing this quarter? Did you sort of get more than you thought you were going to get last quarter or do you think you can perhaps pick up some of that permanently?

Yeah, absolutely. Why don't we try to unpack that for you. The first thing I would tell you, Mike, is the breakdown of that roughly 12%, 10% of it is driven by volume and closer to 2% is being driven by pricing. So that gives you an idea because you know we're going to start to lap that pricing as we end the second quarter and we begin the third quarter and thereafter. Then if you sort of look at that remaining part of the volume, about a third of that is coming from a disruption with a couple of other food service competitors. Really the majority of that volume is driven from the business and that's really a couple of things; one, the food service team has done a tremendous job of continuing to drive their business and to secure new accounts.

Our branded business, which we've talked about over the course of last number of calls has also been growing. If you remember in earlier calls we talked about how we were making a deliberate and focused effort to penetrate the college and university segments as well as healthcare and those efforts are starting to bear fruit. That part of our business, what we call the branded part of food service is growing pretty strongly. And then what's happening, and I'm sure you see this among the other folks that you guys are covering Mike, is that that strong economy is helping, I think, everybody in food service and we're seeing the benefit of that as well with our customers and that customer mix.

So I think kind of clicking in a little bit closer maybe to your question of what of this is likely to persist for some period of time? I would say, my estimation would be something closer to the midpoint of all of that. I would call it mid-single digits because we are going to lap the pricing, that's no surprise, and as much as we'd like that disruption among our competitors to continue forever, we have every confidence that we're going to get themselves organized and move forward.

And Mike if I might add to that, I think some of the disruption has already began to move back to the competitor. So, to Dave's point, that will come down as we work our way through Q2 and beyond.

Great, and then just on the retail business. I guess when I look at the pricing that you had that you kind of put through and you obviously have the resell and shelf-stable dressing, I guess I would have thought the retail sales number would have been a little bit better. So, do you think that some of the pricing that you ended up losing some volume that you perhaps would have had? You know, just help us kind of unpack, you know, again, why we shouldn't see better organic retail sales?

Sure. I would start with -- you know, I think including the team in retail is probably disappointed if we were all being completely honest with where we are, but some of it is to be understood. That being said, we're always focused on doing better but let me sort of unpack it for you. The first thing that I would share is that in spite of all of the struggles that we've described in earlier calls, we have been able to get a couple of points of net price realization. And when you look at those couple of points and you sort of run them through elasticity models as you might expect, as we take price, we are losing volume. And you can see that tradeoff. Now the net pickup of that is that we are seeing an improvement on the margin line and it's -- in our case it's a more profitable tradeoff.

I don't know if I've shared this in calls but one of the ways that we think about our volume internally is there's the market share that you own and the market share that you rent and we believe that when your discounts are too deep and you're pulling over switchers but you're not making money and you're subsidizing the overall business that's market share that we're renting and that's not necessarily great share as we're looking at it -- you know, as long as we continue to see the margins ticking up, we feel okay with that part of the tradeoff.

That's sort of the internal, the mix, that we're seeing take place. What I would also turn your attention to is we talk about our six primary categories within the retail space. Four of those categories are actually declining. We're picking up share in those categories so we're still [besting] our peers but those categories are declining. So I think as we look at where do we go from here, what are we focused on, it's really two-fold? How do we grow our brands but how do we also make sure that our innovation is helping to grow those categories as a whole.

Your next question comes from Frank Camma with Sidoti. Your line is open.

Just talking about Bantam, could you just tell us -- you put in the press release about its currently about $20 million in sales. What percentage of those sales roughly are food service versus retail? I'm just trying to get an estimate of how we should think about that following a [bigger] model?

Sure. First Frank, well good morning I'll start there, and moving beyond that talk a little bit about Bantam. If you haven't tried the product yet, you absolutely have to. It's a fantastic product, great tasting, it basically is an authentic New York bagel that is filled with cream cheese and it's a handheld, it's portable, the bagel itself has the -- all of the texture and taste of a genuine New York bagel with a cream cheese filling on the inside. So it's a great product and it's a highly portable product.

What excites us about this is as a platform, both the brand and the product, plays right in the sweet spot of where a lot of growth is. If you think of the grocery store, I'm going to start there in retail, it's a $3.5 billion category that in the last year is growing at about five points. And if you look at the last three years in compounded growth in that, it's somewhere around 4%. So it is a highly relevant big fast growing category and it's a product that we know how to make. So today, we don't have a brand platform that reaches into that segment and the Bantam platform does exactly that.

And it's able to play across a range of different occasions so it's available in cream cheese but they also have a SKU, or a handful of SKU's actually, that are filled with eggs. And so it plays into the savory space as well. So, it is -- for us it's a bake product, it's a baked product that's frozen and it's a baked product that's frozen and served in retail. So, across all of the capabilities it feels like it's right in our sweet spot.

The food service side is the same way. So I'm going to go back to your question now if I may. Today the business is a little bit more than 50% food service and the retail business is a little bit less than 50%. The biggest customer where it's available today in food service is at Starbucks where they've done a tremendous job of building that partnership with Starbucks. Starbucks has been really happy with the product and we can see why. Like I said earlier, it's great tasting. For us the compliment is I think you guys have learned and folks that follow us about the importance of our large national accounts and the capabilities that we have there and this important brand platform allows us entry into a really strategic fast-growing food service player.

Moving beyond that, what we also love about this, as with Angelic Bakehouse is that the very core of the idea starts with the founders and Nick and Elyse are about as passionate of founders and about as authentic a people as you're going to find and we believe that following the steps of Don Penn, the founder family from New York Bakery and Sister Schubert and the [Marino]'s, that this is just a perfect fit, perfect fit today and as we grow into the future.

Okay, so you touched on it quickly, but let's see if we could throw a little deeper. How does it currently overlap with your existing stores, if you will? So, like I assume $20 million -- it sounds like you've probably got a lot of distribution you can add there. Can you make any comments on that? What you're relatively -- what Lancaster's already own?

Yes, well it plays in the similar space. You know, sometimes it's merchandise and breakfast. Sometimes it's merchandise closer to rolls. There is a big opportunity obviously to build distribution there. If you look at it in terms of occasions, we don't believe that it's net cannibalistic at all in terms of the occasions and dayparts that we play in and that's just one other part of the appeal.

Okay. And do they -- I'm assuming they don't manufacture in-house, or do they?

No, today they use a co-packer partner, a couple of co-packers.

Okay. And will you ultimately pull that in-house or is it just too soon to tell on that?

It's too soon to tell. Through the due diligence process we spent a lot of time with the founders and we also spent time with the co-packer partners and we feel very comfortable with their co-packer partners and it -- maybe we're saying too, just in terms of how we're going to approach running the business, our intention as with Angelic Bakehouse is to give the founders a fair amount of autonomy. So with a business of this size what we try to do is we put a sort of board around it that meets regularly. We equip them with resources in terms of quality assurance and engineering. We work with them to make sure that everything is appropriate in place in terms of controls and [stocks] and things like that but at the end of the day, we're very sensitive to basically squishing them with a big company. We don't want to take away from the authenticity. We can't replicate what they're able to take to a Kroger or a Target or any one of a number of other customers when they're selling.

Okay, and then flipping back to retail for a second; what were the, if there were, I noticed some shipment timing issues, but what were the biggest disappointments as far as categories there like -- because you called out some strengths, obviously, on certain things but was there any like specific category where you fell short of what you were expecting?

Well, one I would point to is the frozen garlic bread category continues to be soft. If you remember last year it was about this time that we started to have issues with the co-packer and that category has been a little bit slow to rebound. So that would be probably the one that we're watching the most closely. Sister Schubert, if you look at it, was down slightly. We picked up share but honestly part of what happened last year in that business was a timing shift in that we had customers start to take inventory earlier than they are this year. So we had a net benefit.

But if I was to sort of point to areas that we're watching, that would be one. You know, smaller scale but also one that we're watching with Flatout is we had secondary display in one of our large customers. So we added commercial bread and we added in (inaudible) and this particular store is going towards a clean store policy so we lost some of the secondary display which took a little bit of wind out of our sales there. In every one of those cases I'd point to the fact that we're still growing share but we need to be doing better.

Okay, and the last one for me if I could is just on freight trends here. When do we completely lapse the spike there? I mean, we've got to be kind of coming up to that, I mean I know they kind of continue to be inflated but when do you completely lapse that?

You know Frank, it's always a little difficult to answer that precisely but we anticipate today that we will begin to anniversary those toughest comparisons as we exit Q2.

Yes, that's what I thought. Okay, that's -- Okay, thank you.

(Operator Instructions) Your next question comes from Brian Holland with Consumer Edge Research. Your line is open.

If I could just -- most of my questions have been answered but if I could just kind of ask a little bit at the margin backdrop here, really nice improvement sequentially in year-over-year getting the gains and an inflationary cost backdrop; awfully encouraging. As I think about rolling that forward, you talked about you expected to expand margins. I think in 2019 we're not giving -- last quarter, while not giving specific guidance, if I'm rolling this forward, if I'm thinking about your cost basket stabilizing in Q2, continued good coupon trade expense management, you're getting the pricing through in retail, I know you'll lapse some food service stuff, but certainly as long as volumes sort of remain maybe in that mid-single digit range and you turn that through, that should be a point of leverage for you.

So, just thinking about the extent to which this margin trajectory will continue to accelerate from here, maybe if you can just update us on some of the puts and takes that we should be thinking about going at least through the balance of this year.

So Brian, maybe I'll address it at a higher level and then I'll let Doug double click on any of the categories specifically that he might want to speak to. So I think you know philosophically as we set up our operating model, the objective was to use pricing as a means by which to offset inflation and to really use our lean six sigma program as a means by which to drive margin improvement.

Last year, same quarter, we would have been negative on PNOC. This year we're positive on PNOC. So to your point that the pricing, well list pricing and net pricing were getting through trade, is covering those commodities. And flipping to the other side of this, the efforts that we've put in place around lean six sigma and continuous improvement are also continuing to drive results. We're sort of at a run rate now where last -- first quarter of last year would have been our first quarter or reporting results with the program up in place and here, again, now fifth quarter with it up and running, we're sort of in that mid seven figures in the quarter of benefit from lean six sigma and honestly we can look pretty far into the future and I don't see any diminution on that. I think the way that we're going to get it is it's going to evolve and we've talked about that on the call.

So bringing it then back all of the way to the beginning of your question, do we see sort of a sunset or sun slowdown in our ability to drive margins. I -- from where we see it today, I don't see it. It's a quarter-by-quarter game as we work our way through the puts and takes on specific commodities but the overall playbook seems to be working for us and maybe Doug, I'll turn it over to you, if you wanted to provide additional texture on some of the puts and takes on commodities and things?

Sure. Brian maybe just to add a little bit to Dave's comments, on the commodity front, Dave was correct in that we would expect to see some relief in commodities as we work our way through Q2 as you'll recall and as we mentioned, eggs were particularly strong in Q2 of last year due to the European issues. You know, sitting here today we don't expect that similar run-up that we saw last year. So, again, commodities should be a neutral input as we work our way through Q2.

In the back-half of the year though, sitting here today, we do anticipate some continued inflation to occur on the commodity side largely coming from resins and packaging. The core markets and so forth, as you know, are still showing signs of inflation sitting here today. As we also mentioned freight is still anticipated to be inflationary as we work our way through Q2. Hopefully we continue to see some levels of relief in the freight industry as we work our way through the balance of this year and then all of the initiatives that we have ongoing internally to help address that.

So we hope to see a little bit of improvement on the freight front of it in the back-half. I think overall as David mentioned, our net -- price net of commodities picture continues to look favorable sitting here today for both Q2 and through the balance of the year.

Perfect. Thank you. And then -- I guess if I could just follow-up on the Bantam Bagels acquisition. So, maybe first question is you talked about some -- Starbucks maybe being a key customer I'm not sure if on a $20 million revenue base that that's sort of full coverage of the Starbucks at least in North America or the U.S. So I'm just curious if that's an opportunity sort of leveraging your distribution engine to expand that relationship.

And then historically, you have this really interesting portfolio of, as you said, leading brands but sort of have a regional [bend] to them and maybe historically they're under penetrated. I think about Sister Schubert's, maybe not notably I know that there are others in there.

Thinking about this Bantam Bagels, and obviously it seems like it makes sense within the context of your deli aisle exposure, breakfast, et cetera,. as you've said, and I certainly appreciate that you've got to walk before you can run but can you give us a sense about, you know, how broad do you think distribution on this product can be if you think about sort of your retail coverage?

I think the Oleksak's have built a sort of foundation for this…

Nationwide.

Okay, got it. Thank you very much, thanks a lot.

There are no further questions at this time. We will now turn the call back over to Mr. Ciesinski for his concluding comments.

Well, thank you all for joining us today. We look forward to talking with you later this winter as we share our second quarter results. Have a great day.

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