The Marzetti Company (MZTI) Q2 2012 Earnings Report, Transcript and Summary

Good morning. My name is Nan, and I will be your conference operator today. At this time, I would like to welcome everyone to the Lancaster Colony Corporation Second Quarter Fiscal 2012 Results 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] And now to begin your conference, here is Earle Brown, Lancaster Colony Investor Relations.

Thank you. Good morning. Let me also say thank you for joining us today for the Lancaster Colony Second Quarter Fiscal 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 cost, 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 note 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. While our second quarter sales were down about 1.5%, we are reasonably pleased with the 4.5% growth in sales for our Specialty Foods segment. Candle sales, as expected, were off significantly in the quarter, as we had much less seasonal program business than the prior year. Earnings per share of $1.11, which included about $0.06 of CDSOA benefit, was below last year's $1.25 that included $0.02 of CDSOA benefit. Higher raw material costs continued to be a primary negative factor. Moving to Specialty Foods, segment sales were up about 4.5% all pricing, as our volume mix was down a fraction of 1%. Looking at our 5 key branded retail product lines in category sellthrough, aggregate dollars and units were up in all but one category, that being Veggie Dips. We were able to gain market share in 3 of these 5 categories with the other 2 remaining essentially flat. As is typical in the second quarter, our retail mix moved up to just over 55%, although a bit less than last year's 57%. Overall, retail channel net sales were up a bit under 2%, and food service channel sales were up over 8%. We continue to be pleased with our recent product innovations. Simply Dressed continues to perform well with our new light versions just starting to ship in the quarter. Our newest frozen breads, particularly New York Garlic Knots and Sister Schubert's Pretzel Rolls and Mini Baguettes, have met expectations. While we did realize about $14 million of pricing, promotional spending including support relating to these new items was up low 7 figures. Food raw material costs were up about $16 million and increased freight costs added another $2 million. Turning to our Glassware and Candles segment, sales were down $16 million or 26% as the primary impact from our decision not to pursue low-profit holiday programs fell in this quarter. Everyday program shipments were also down a bit in the quarter. Recent 12-week IRI data shows the total category down 10% and our sellthrough down 12%. Increased pricing helped to offset the impact of higher wax costs, which were up about $1 million. During the quarter, we invested $4.8 million in capital projects and anticipate full year investment of about $20 million. We have repurchased only 5,000 shares during the quarter and have a total of 1.478 million left authorized and 27.256 million shares actual outstanding. Now I would like John to make some comments relative to our balance sheet and cash flows.

Thank you, Jay. I will start my comments this morning by addressing some of the more noteworthy changes in our consolidated balance sheet. First, as of Dec. 31, our net accounts receivables totaled $84 million, which compared to $64 million at June 30. This increase is fairly similar in magnitude to what we experienced last year during this period, largely driven by the seasonality of our Candle sales. Year-over-year, the current year total was pretty much in line with the prior year's $88 million total. Our account receivable aging has stayed solid despite the generally lackluster economic conditions. With respect to our inventories, the Dec. 31, total of about $93 million was consistent with the year ago levels, but declined over $18 million since this past June, also primarily due to seasonal factors. During calendar 2012, these levels will remain influenced by fluctuation in material costs and the extent of next fall's seasonal Candle business. Turning to our current balance sheet capitalization, which we see ourselves remaining favorably postured to take advantage of growth supporting investments in our existing operations as well as through business acquisitions. We continue to remain debt-free as of Dec. 31, with cash and equivalents on hands exceeding $162 million, shareholders' equity totaled over $543 million. As for some various cash flow amounts for the most recent 6 months, shareholder distributions consisted of $18.820 million in dividends and share repurchases totaled $8,191 million. With respect to capital expenditures for the most recent 6 months, these totaled $9.080 million, and depreciation and amortization totaled $10,113 million. Finally, somewhat similar to a year ago, please note that in the current year second quarter we recorded a pre-tax distribution under the CDSOA program of just greater than $2.7 million or $0.06 per share after taxes. As we have indicated in the past, these distributions are recorded within our consolidated income statement as other income, and as such are excluded from the operating income of the Glassware and Candle segment. While it's possible there maybe some level of future distributions, we do not believe that such potential distributions are subject to reasonable estimation at this time. With that, I want to thank you for listening today, and I will turn the call back over to Jay, so he can conclude our prepared remarks.

Thanks, John. As we begin our third quarter, we have a new round of retail price increases going into place on certain product lines that should effectively average around 2% of retail sales. Unfavorable food ingredient costs should have somewhat less impact as we begin to anniversary those costs increase a year ago, with the fourth quarter seeing more of this benefit. Easter-related sales volume should shift somewhat to the third quarter this year versus fourth quarter last year. We plan to continue to support the growth of our new items, but will be cautious in our consumer and trade promotional spending. New product introductions in the third quarter include new flavors of Marzetti refrigerated dressings, Otria Greek Yogurt Veggie Dips and Marzetti and Chatham Village croutons. Food Service demand is holding up well at this time. Operationally, we feel our plans are running and servicing our business well. We don't have much happening in the way of acquisitions, but we continue to look with our focus on branded retail opportunities in category leading positions. In closing, while concerned about the state of the consumer, we begin the second half of fiscal 2012 feeling positive about our product placement in both the retail and food service channels, continued growth from our recent new product introductions and our retail marketing plans to support our key brands. Nan, we are ready to take questions.

[Operator Instructions] Your first question comes from Alton Stump.

This is actually Phil Terpolilli calling in for Alton. Just a couple quick questions on pricing, I know you had mentioned previously you're guiding to a range of more kind of around 3%, I think you mentioned 2% this morning. I guess between last call and this call, what changed in your eyes, is it effective commodity cost or something else?

Phil, a couple of things. I don't recall specifically saying 3% last time, although 3% was the number of the earlier price increase back in March of last year. As it relates to specific items, there is a range of what we're out in the market doing. So when we say 2% that is what we think is average over the entire retail channel business, but there are varying percentage on given lines.

Okay. And then is there any kind of initial performance takeaways from that increase or is it still kind of going through in the marketplace?

It is just going through. We don't have any real sell-through data to look at and judge any particular impact.

Okay. And then just 2 quick category questions, I know last time you mentioned some private label pressure in croutons, any kind of updates on that?

It continues to be there. So we're seeing limited growth out of our branded croutons at this point in time.

Okay. And then just with Marzetti. I know you mentioned some strength and that you're still outperforming the category. Is the category still kind of growing at the rate you have seen the last few quarters?

Yes. I think we're seeing -- we saw category growth in the most recent 12 weeks for refrigerated dressings being about 5%, and we are well outperforming that.

Your next question comes from Michael Lavery.

I just had a quick clarification first on the pricing. So last March pricing at retail was 3%? I was under the impression it was about 4%.

My recollection is 3 or 3 and a fraction. I'm not sure we got all the way to 4.

And then I just want to make sure interpreting the language in your release and your comments as far as commodity costs. I guess the unfavorable comparisons becoming increasingly less pronounced. Is that kind of implying that the earliest you would expect a turn in gross margins year-over-year would be 1Q of fiscal '13.

Well, without getting specific on trying to forecast margins, I think as we work through the second half, the opportunity for that starts to get better. Whether we see that specifically in the first quarter of next year, I don't think we can tell you for sure, Mike. But it is going to still take a little while.

Okay. But I mean it's safe to say, I mean, the third quarter and into the fourth quarter you all are going to continue to be pretty challenging?

Yes. I think that's fair to say at this point. Yes.

Your next question comes from Chuck Cerankosky.

In looking at the marketplace and the recessitivity [ph] for price increases, can you sort of split the push back you're getting from retailers as separate from what consumers are doing when they see a higher price on the shelf?

Well I think the retailers are probably getting a little price weary at this point, but as we have gone through this round we haven't had any major problems getting the pricing implemented.

And as you said, that's just now going through.

That's right. Well it was effective early -- 1st of January, 2nd of January.

How about the consumer? Where are they at when they see a price increase, and I guess how do you balance these things?

Well, they haven't obviously seen the impact of this specific increase, but if we look back over the first half the year or a little bit beyond that we're certainly not seeing a lot of unit volume growth and I think that's generally true in the industry. So yes, there is some reaction at the consumer level, and you try to balance that as best you can, but mindful of the increase input costs we're dealing with.

And turning to the Candle business, you have gotten out of some of the low margin business. What is the outlook for the rest of the year, or say over the next 12 months? Because that will include the 2012 Christmas season. How are you thinking about returns versus the lost volume and the strategic position of the business itself?

Well, I think at this point, we are first of all confident we'll make a little bit of money in the Candle business this year as we look to the calendar year, the first half of fiscal '13. Where we may be on seasonal business for next year is still up in the air. We are in the midst of negotiating those programs at the present time. So whether we'll have that volume next year that we didn't have this year or be in a similar position, it's a little bit of an unknown right at the moment.

Your next question comes from Jason Rodgers.

Did you give a figure for the cash flow from operations either for the quarter or the 6 months?

No, I did not, Jason. But as long as you have asked net cash provided by operating activities for the 6 months will total about $67 million.

67?

Yes. That compares to $75 million a year ago.

And you mentioned volumes being down fractionally, that was in both food service and retail?

Well, that was in total, but I think that's fair that both contributed to that, yes.

And looking at the third quarter, you were close as far as pricing offsetting the higher input costs, you think in the third quarter that it might be a neutral impact or even a slight positive or that you still believe it will be a negative comparison?

I think, Jason, as we look out and there are some uncertainties with forecasting this. It will continue to be a mild negative. I think as we look at the business as a whole, freight should be less of an issue as we move through the back half of the fiscal year. I'd also add that as we look at our Candle business, the wax cost comparisons will likely become less unfavorable as well.

And where are you now as far as your hedges that you may have in the soybean oil or flower or anything else?

In general, Jason, there isn't any substantial difference in the process we are using now versus the last couple years. We are bought out as far as 12 months on soybean oil using a graduated program that perhaps gets us about 50% of our needs, about 6 months out, give or take. Flower tends to be a little bit more opportunistic in process, we can be bought out a little bit into fiscal '13 at this point in time.

And then if you could comment a little bit about how your business with Ralph's is going, and just looking for a general update on your expansion plans into the western part of the U.S.?

Well, Jason, we prefer not to specifically comment about customers, but we are pretty pleased, and we are particularly here talking about our Simply Dressed line of dressings with the distribution we've got on the West Coast. We do have some customers we'd still like to get distribution in, so we are not totally where we want to be, but we are glad with -- I am pleased with the ones we have and are seeing good sell-through. So we have maintained that distribution, but still a little bit of opportunity there. Moving to New York Brand of Frozen Garlic Breads into the western markets is also going according to plan, and again pleased with the results we are seeing to-date there.

Your next question comes from Mitch Pinheiro.

So Specialty sales volume was, I guess down, a fraction of 1%, is what you said.

Right.

If you look at them, and you are clearly getting some new distribution on the West Coast. If you've looked at this sort of on a same-store sales and backed away benefit of distribution gains, how would you characterize volume in, like, existing business?

Well I'm not sure I've got a real good answer for that off the top of my head, Mitch. Maybe we better give that some thought and get back to you.

When I looked at the IRI data in your refrigerated dressings?

Yes.

Your price mix was up a fair amount. I mean it was up 14%, 15% in the last 4 weeks. What would that be a function of, because you're not taking that much pricing? Is it truly a mix-driven benefit?

Well, you're right, and I'm not sure what that's coming from, but there shouldn't be much price, if any, hardly impact in that. So yes, I'd say its mix driven or some abnormality, frankly, in how they have calculated that.

Is Simply Dressed -- how is that line priced with your regular Marzetti line?

It's priced very similar, although, of course, the product content is smaller than our traditional line.

Could this be a function at all of promotional activity? Have you pulled back on promotion in a refrigerated line?

I don't think that would have much of a factor there, because frankly we don't do a lot of promotion around that product line. So I don't think that would be a big factor there, but we'll look into that.

And then, finally, with regard to acquisitions, how would you characterize the pipeline?

I'd say very quiet. It just seemed like throughout the our second quarter or late in last calendar year, things were quiet and they don't seem to have stepped up any so far in January. We continue to have some things we're exploring and trying to develop on our own, but as far as just the deal flow out there, it seems to be pretty quiet.

[Operator Instructions] Your next question comes from David Leibowitz.

Several unrelated items if I may. First, your inventory is down 18% from the beginning of the year as it was reported today. And I was wondering, how much of that is unit and how much of that is price?

That would almost be all unit, David, and it really goes to the seasonality of our Candle business. We'll usually build inventories in mid-summer and those will be drawn down by the end of the calendar year.

And, secondly, you have a comment in the release, the greater investment in product promotion. And I was wondering if you can quantify that either in dollar terms or percentages?

Well we're probably up in the low 7 figures there, David.

Next you mentioned some new products you're looking at right now. Have you considered creating a flanker brand for existing product categories or looking at a new brand for items not currently in any of your lines?

David, there is nothing actively being pursued there today. That from time-to-time maybe thought about, but nothing that's seriously under consideration today.

And lastly, do you do any business with various school districts for the lunch programs, given the current emphasis on healthier eating, which I presume means more salads and salad dressings?

We do very little business there, David. That would -- some of our products or some of our food service distributors would get into that market on occasion. But historically that's been a very challenging and low cost, low margin channel, so we haven't been very active in it. Now, whether that may change, as you point out with some of the changes on menus, perhaps that will become a little bit more of an opportunity in the future.

And the last question if I may. There was an item in the news -- in the newspapers the other day about how some of the fast food chains are giving greater emphasis to dinner time and more importantly 24-hour a day operations. Is that helping your business with these companies?

Yes, I don't know we could point to that specifically, but the demand in the quick service channel seems to be generally holding up pretty well. So it's got to be a factor if they say it's working for them.

And there are no further questions at this time. I would like to turn the call back over to Mr. Gerlach for any concluding remarks.

Well, again, thank you for joining us this morning, and we'll look forward to talking with you at the end of our third quarter.

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