The Marzetti Company (MZTI) Q3 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 Third 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. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question-and-answer period. [Operator Instructions] Thank you. And now, to begin your conference, here is Earle Brown, Lancaster Colony’s Investor Relations.

Thank you. Good morning. And let me also say thank you for joining us today for the Lancaster Colony third 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 costs, the success of new product introductions, the effect of any restructurings, and other factors that 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 being with us today. We are pleased to report that our third quarter sales were up over 7% from last year on record third quarter food segment sales of $237.4 million, up over 9%. Unfortunately, earnings per share of $0.67 versus $0.71 last year were somewhat disappointing. Record food segment sales were particularly helped by about $11 million of pricing and a shift of roughly $4 million in Easter-driven sales to the third quarter this year versus the fourth quarter last year. Our food service channel sales saw a good chain account demand, perhaps helped by the mild winter weather. New retail products also helped as we saw newer items contribute the most of any quarter this year. These items included Marzetti Simply Dressed, New York Brand Garlic Knots, as well as Sister Schubert’s Pretzel Rolls and Mini Baguettes. Unfavorable sales comparisons were mostly in New York Brand Texas Toast where the category was very competitive and promotional. Also, our Reames Frozen Noodles were down, largely due to the lack of a cold winter. Overall, retail and food service channel sales grew about the same and our sales mix was 49.4% retail, similar to last year’s 49.2%, but down from the second quarter’s seasonally strong 55%. Revealing 12-week sell-through data for our key retail categories at March 18th, we see Marzetti’s Refrigerated Dressings up a little over 14% versus the category, up about 5.5%. We maintained our Number 2 position in the category. Our Marzetti New York and Chatham Village Branded Croutons were up about 5.5% versus a category up a little over 2%, and again we maintained our #1 category position. Marzetti Veggie Dips were up just slightly under 1% versus a category that was just above breakeven, and again maintained the #1 position in that category. Our New York Brand Garlic Bread, up about 1.5% versus a category that was actually down about 1.5%, and we maintained the #1 position. Our Sister Schubert Brand Frozen Rolls were up about 11.5% versus a category, up 4%, and again maintained our #1 position. And as you can see, we grew share in all of our key categories. Turning to operating income, we saw the benefit of higher sales volumes and the quarterly impact of pricing versus material cost increases finally turn slightly favorable at approximately $11 million in pricing versus $10 million in material cost increases. However, we also saw distribution costs move up noticeably in the quarter on higher fuel costs. Consumer marketing costs were also up due to the timing of certain expenditures, as we continued to invest in building our brands. Together, these costs were unfavorable by over $3 million. While our Glassware and Candle segment recorded a small sales decline, we were pleased to show a modest earnings increase for the segment, largely due to the stable material costs, the benefit of an improved sales mix and a little bit of pricing. Capital expenditures in the third quarter were about $3 million, and we expect to reach around $18 million in total CapEx for the fiscal year. We did not repurchase any shares in the market during the quarter and have about a 1.5 million shares authorized for repurchase and 27.2 million shares outstanding. Let me now ask John to make a few comments.

Thanks Jay. First, turning to our balance sheet, accounts receivable totaled $86.495 million at March 31st, 2012. This level was over a third above that of last June’s total, mostly reflecting the relative strength of sales toward the end of this year’s March quarter compared to the quarter ending last June. The timing of Easter, which came much earlier in April this year, influenced the 11% or so increase in accounts receivable compared to the March 2011 level. Looking at inventory, the consolidated total of approximately $100 million at the end of this March declined about $12 million or 10% from last June, primarily due to the timing of seasonal builds of Candle inventories. Our inventories at March were within about 4% of last year’s March levels. Our overall balance sheet posture remains strong, with nearly $160 million of cash and equivalents on hand, and we continue to have no debt outstanding. As you may have noted from our SEC 8-K filing earlier this week, we recently finalized a new $120 million 5-year unsecured bank credit facility that replaced an older arrangement. We believe that this new facility, along with our current liquidity allows us to retain considerable flexibility to meet our foreseeable cash needs, including for potential business acquisitions. Turning to cash flows for a moment, I would like to share a few items for your consideration. Lancaster’s consolidated cash flows provided by operating activities for the 9 months ended March 31, 2012 totaled approximately $85 million compared to about $98 million a year ago. The decline in net income in this year’s higher accounts receivable contributed to this fluctuation. Within the current fiscal year, depreciation and amortization for the first 9 months totaled $15.158 million, and we returned cash to shareholders, totaling $28.641 million through dividends. Looking to our upcoming fourth quarter comparisons, I wanted to point out that we did receive a significant special distribution last year under the government’s CDSOA program that totaled over $13 million pre-tax, or about $0.33 per share. We do not anticipate any similar such remittances in this year’s fourth quarter. I appreciate your attention this morning, and I will now turn the call back to Jay for our concluding remarks.

Thanks John. While we see consumers still under stress and our Easter sales were mostly in the third quarter, we are somewhat optimistic about fourth quarter sales in our Specialty Foods segment. The growth will likely be skewed to the food surface channel, although recent new products should continue to help the retail channel. Our next round of new product introductions will be in our first quarter, and we will have some exciting new frozen bread items. Compared to last year, we expect less trade, consumer and marketing spend in the fourth quarter. Overall, we anticipate that operating margin should improve from third quarter levels for the food segment. Continued consumer interest, sales mix and the level of competitive activity will likely be the primary variables. The fourth quarter is generally the slowest for the Glass and Candle segment, but we do expect the segment to be profitable for the year. We have seen more acquisition deal flows since our last call and while outcomes are always unpredictable we have found a couple of ideas to work on. Our focus remains on branded retail opportunities in category-building positions. Those conclude our prepared remarks. Nan, we are ready to take questions.

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

Yes, this is actually Phil Terpolilli calling for Alton. Just a couple of quick questions. First, if you can give us a sense of kind of what you are seeing for kind of the cost outlook for fiscal ’13? I know it’s a little bit early still, but if you kind of expect a flattish environment or what you're seeing?

Our outlook from right today, I think Phil, would be generally flattish. We will probably see a few things that are up a little bit, others hopefully flat to down slightly. Probably the only thing we are currently seeing a little downward trend in is dairy ingredients, not dramatic, but a little bit favorable. Obviously comparisons get easier as we work into next year if we don’t see any further meaningful inflation.

Sure, that’s helpful. And then just, you mentioned the Easter shift, that was obviously favorable for this year. Any idea of a ballpark, what you think the lift was from that timing shift?

We estimate about $4 million.

And then, just last question with the food service. I know you mentioned the warmer weather, but anything else you can point to or that you think might be attributable to why it’s going so well?

Well, in addition to, I think some better sell-through from the chain account customer base we have, we do have had, and I think as we look to the near-term future anyhow, some new products, some new promotional items that different customers will be or have recently done. So, that’s helping things as well.

Your next question comes from Mike Lavery.

Just a question on pricing, I think we had talked a little bit, Jay, about possibly you considered doing something once you got through Easter. Could you just kind of update us on your thoughts there?

Yes. We do have one pricing move that’s being made and actually not effective until July 1. So, we won’t see any impact in this fourth quarter, but we are putting a modest increase in our Sister Schubert product line.

So, it would be limited to Sister Schubert, though?

Right. That’s all we have planned at this point in time. As you recall, we raised prices on most of our other retail products back in January.

And just in terms of the marketing expenses, the timing of them, I know SG&A just kind of as a whole is running kind of flat through the first half, and obviously ticked up due to the timing here in the third quarter. Do you think the fourth quarter is kind of back to that kind of run rate, in terms of dollars, you are running flat?

We do expect the fourth quarter to be a bit less than, than what we did last year, a quarter I can’t recall how exactly what a comparison would be to the first half, though.

But year-on-year, just given the shift or the timing of expenses a little bit later than last year?

Yes.

Fair enough. And then, just a small clarification on the Candle segment. As far as following the third quarter trend, do you mean that from a sales delta perspective?

Well, just kind of in general, both sales and product mix, material costs were relatively flat in the third quarter, we think that’s likely the case in the fourth quarter as well. So, if those trends keep up, it’s a little bit of an improvement.

Your next question is from Jason Rogers.

Just a follow-up on the candle costs, the paraffin wax costs, were they about flat then through the third quarter?

Yes, I think that’s fair, although you will recall, you do a lot of wax blends these days. So, we also, if we can find opportunities to use a little bit more vegetable or tallow-based waxes, that certainly helps the mix as well. But that’s true of paraffin, yes.

And then looking at the food segment, how far out are you as far as your current forward buys on soybean oil and flour?

As you might recall, soybean oil we go out a full 12 months with a laddered level of coverage that gives us somewhere north of 50% coverage in the initial 6 months and then [indiscernible] pretty good after that. And that continues to be where we are. From a flour standpoint, we do it a little bit more opportunistically. Today, I think we are about 3/4 or so covered through the end of the calendar year.

And then, any noteworthy developments on your West Coast expansion plans?

Nothing brand new as far as any major customer wins to mention. We do continue to make progress both with, particularly New York Brand Garlic Bread products as well as Simply Dressed in those markets.

And finally, any early thoughts for your CapEx plans for fiscal 2013?

No, really don’t have anything for you there. Probably a bit more than we are seeing this year, but nothing specific I can tell you about or even a ballpark total dollar amount.

Your next question is from Mitchell Pinheiro.

Jay, I think you said that the growth rate between food service and retail, they were essentially, they were similar. Is that correct?

That’s right. Yes.

How about pricing in these segments? How would they compare to one another?

Overall, pricing, Mitch, was relatively comparable as well.

So, you sort of said that the commodities are becoming, they are flattish, maybe coming slightly favorable, you are taking pricing. You are taking pricing, it just seems a little late or is that not really accurate? Is the pricing that you are going to implement in July, a result of your input costs coverage that is flowing through?

Well, I guess, first of all, Mitch, we probably have been lagging in pricing kind of throughout the longer-term run-up in these ingredient costs. The July price increase that’s on Sister Schubert’s is trying to reflect what we see in, particularly in current flour costs, but it was a product line back in January when we raised others that we did not move on going into the particular Easter and Mother’s Day season and wanted to get through those holidays and consider doing something after that. So, it’s just Sister Schubert we are moving on in July and roughly 3%, maybe a fraction more.

When you were talking about an $11 million positive impact from pricing and a $4 million help from Easter shift, is that companywide or is that just the specialty division?

That’s just the food business, yes.

It’s the food business, okay. So, pricing looks like it was up roughly 5% in the quarter? Is that about right?

That’s a pretty good ballpark, yes.

And then, how do you - with TreeHouse buying naturally fresh, what do you think that means for the category?

I don’t know that we have got any informed - don’t have any informed view on it, and I don’t even know that we would feel comfortable speculating, just don’t know exactly what their thoughts would be.

I mean, I don’t - is private label, I mean, is there any private label in the Refrigerated Salad Dressing category?

Very little. We see just, maybe a small regional chain here or there, but not significant, no.

[Operator Instructions] Your next question is from Chuck Cerankosky.

If you can, could you talk about unit growth among the various products, especially where they deviate from the average? I mean, if you look sort of at the 7% sales growth for Specialty Foods, take out 5% price, you get an average I guess of 2% volume growth, but what is that really made up of?

First of all, Easter would be a piece in there, and that skews noticeably to our Sister Schubert brand of product. The other unit volume areas I think of significance would revolve around some of the newer products, so in Refrigerated Dressings helped a lot by Simply Dressed in the - in the bread side, the new items of Garlic Knots, Sister Schubert’s Pretzel Rolls and Baguettes are a factor and as I commented, the noticeable one going the other way on it is our New York Branded Texas Toast, I think those are the ones that would be worth mentioning.

The New York Texas Toast?

Right, that was an unfavorable unit volume move.

On the promotional spend, what are you looking at over the next several quarters? Is there a reason why it was a little higher in the most recent quarter? I mean, are you just reacting to the Easter timing or is there a plan here to deal with the rest of the year’s calendar and the need to push volume a little more or offset some of the price increases?

Well, some of it is the Easter timing, some of it is the competitive activity we see in, particularly again in that Garlic Bread category. As we look out to the future, that’s always a little hard to predict, but, and probably one of the variables we have the least comfort in what the future may look like, but still a fair amount of competitive activity in that Garlic Bread space. Beyond that, it’s supporting our new products. And again, as I mentioned, we have got some new Frozen Bread products we would be coming out with in the first quarter. So, there will be some introductory promotional spend around those as well.

And there are no further questions at this time.

Again, thank you for joining us today. We will look forward to getting together again in late August with our fourth quarter and full-year results. Thank you.

Ladies and gentlemen, this concludes today’s conference call. You may now disconnect.