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Lancaster Colony Corp. (NASDAQ:LANC)

Q2 2013 Earnings Call

January 31, 2013, 10:00 am ET

Executives

Jay Gerlach - Chairman, President & CEO

John Boylan - VP, CFO & Treasurer

Analysts

Operator

Good morning. My name Kathy and I will be your conference operator. At this time, I would like to welcome everyone to the Lancaster Colony Second Quarter Fiscal 2013 Results Conference Call. Conducting today's call will be Jay Gerlach, Lancaster Colony’s 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)

Thank you. I will now turn today's conference over to [Earle Brown], Lancaster Colony’s Investor Relations. Mr. Brown, please go ahead.

Unidentified Company Representative

Good morning. Let me also say thank you for joining us today for the Lancaster Colony’s second quarter fiscal 2013conference 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 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?

Jay Gerlach

Good morning and thank you for joining us. We are pleased to report our second quarter fiscal 2013 results with total sales up almost 5% and EPS of $1.28. We did receive a modest CDSOA distribution in the quarter of about $0.01 per share versus approximately $0.06 per share last year. John will comment later on roughly $0.02 per share tax benefit from the $5 special dividend paid in December.

Capital expenditures for the quarter totaled $5 million with our primary project being the expansion of our crouton production capacity. We expect this project to be complete in March with a total investment of approximately $11 million. Full-year capital expenditures will total about $25 million. We did not repurchase any shares during the quarter nor did we make any business acquisitions.

Turning to our food segment performance for the quarter, we saw sales increase of about 2.5% and operating income improve over 12%. Operating margins reached 18.5% versus 16.8% last year. Sales grew primarily due to pricing of about $3 million and a bit less promotional spend as volume mix was relatively flat in the quarter. While we did sales growth from both our retail and foodservice channels and continued to benefit from new product sales, we also experienced declines in our New York Texas Toast product sales.

Our Simply Dressed line of refrigerated salad dressing continued to perform well and we saw contribution from Sister Schubert's Mini Loaves, Sweet Hawaiian and Pretzel Rolls and our New York Brand Garlic Knots Our foodservice channel benefited from good demand from our top chain account customers.

Looking at IRI sell-through data for our key categories for the 12 weeks ending December 30th, chose the following. In the Refrigerated Dressing, the category was up about 6.5%, our growth was 9.7% and we did in that 12 week period, moved to number one position in the category. The Veggie Dips category was down 1%, we were flat and we maintained our number one, strong number one position in that category.

Crouton, the category showed growth of about 1.3%, our growth 2.8% and again maintained our number one position in the category. Frozen garlic bread, the category was down 4.4%; we were down 10% yet still maintained our number one market share. And in the frozen dinner roll category up 4.1%, we were up 10.6% and again maintained a strong number one position in that category.

Our operating margin improvement was helped by a bit of mix shift in net sales toward retail versus last year, improved pricing and input cost decline of about $2 million and lower promotional spending.

Moving to our glassware and candle segment, we saw that second quarter sales rise over 17% on greater seasonal business and everyday demand with some favorable impact from Hurricane Sandy.

Operating margins reached 10.5% on the benefit of greater volume a bit lower wax cost and improved product mix. Both segments are consistently good planned operations throughout the quarter.

Let me ask John now to make a few comments.

John Boylan

Thanks Jay and good morning. I will start my comments this morning by addressing some of the more noteworthy changes in our consolidated balance sheet. First, our net accounts receivable as of December 31 hold approximately $91 million which compared to $73 million at June 30. Somewhat similar to what we have seen in prior years, the seasonality of our candle sales was largely responsible for this increase. Compared to the year ago December, our receivables increased about $7 million which also reflects the current year’s higher sales of candles.

Turning to our inventories, we saw our December balances total about $101 million which represented a decline of roughly $9 million since June. This decrease is consistent with the seasonal reduction we often experience between these periods.

Larger food inventories in part influenced by the somewhat softer than expected December contributed to our year-over-year and quarter in inventories increasing about $7 million or 8%. With respect to our current balance sheet capitalization, we continue to remain (inaudible) December 31, despite the distribution of $5 per share special dividend in the quarter that totaled over a $136 million.

Even after this distribution, our cash equivalents totaled greater than $92 million at December 31, and our shareholders equity exceeded $471 million. We continue to review our balance sheet is providing great flexibility this quarter for future growth and shareholder returns.

Looking at some relevant cash flow totals, cash flows provided from operations for the most recent six months totaled of almost $68 million which is similar to the $67 million reported in the prior year’s comparable period.

Other six month cash flow amounts of note included dividends totaling of a $156,755,000; capital expenditures of $10,359,000 and depreciation and amortization $9,971,000.

As alluded to earlier by Jay, one final matter to mention is the effective tax rate for the quarter which was 33.3%. The current year’s rate benefited from the impact of the special dividend interacting with our now frozen employees stock ownership plan. We would estimate the per share impact on the quarter as being approximately $0.02 per share.

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

Jay Gerlach

Thanks John. As we move from our seasonally strong second quarter to the less seasonal third quarter, we are encouraged by the demand we have seen in January for various food products including both Sister Schubert’s and New York brands. While we have product introductions of our Simply Dressed and Girard's and our repackaged Veggie Dips line late in the quarter, they probably will have little impact on the third quarter.

The Veggie Dips change over could have a negative impact as we interrupt retailer buying for the change. Easter volume will all fall in the third quarter this year which is probably not much different than last year. We anticipate third quarter food input cost to be flat to barely favorable versus last year. Fourth quarter input cost may actually move up some from last year.

Our additional crouton capacity should be on stream by late in the quarter allowing us to pursue new business more aggressively than we have been able in the recent months. At this time, we have no significant pricing plan for the balance of the year. Although, we have no deals to report today, we are pleased with the activity that our recently added commitment to acquisition development has shown.

Hopefully, we will have some activity to report as the year progresses. As we begin the second half of fiscal 2013, we are optimistic but cautious about the strength of the consumer and potential raw material cost increases.

Kathy, we are ready to take questions.

Question-and-Answer Session

Operator

(Operator Instructions) Your first question comes from the line of [Greg Halter].

Unidentified Analyst

You have obviously mentioned and touched on the input cost side of things, I wonder if I could ask about your forward hedges on soybean oil and then wheat?

Jay Gerlach

We are pretty well covered through June on both actually. The flower cost as we go through the particularly through the fourth quarter at a little higher cost than what we've been saying, so we will see a little bit of an up tick there but generally pretty well covered.

Unidentified Analyst

And then beyond June any forwards in place.

Jay Gerlach

Only in soybean oil and that's relatively modest amounts at this point.

Unidentified Analyst

And you made some comments as well about wax costs; just wondered if you could provide what you see in that area going forward.

Jay Gerlach

We don't have great visibility there Greg, but think its generally probably pretty stable. We continue to focus a lot on looking at alternative blends of waxes to try to get our actual cost down, but actual raw material costs we expect right now to be relatively flat.

Unidentified Analyst

And you mentioned the margin in that segment I think it was 10.5%, which would be the best in probably 10 years on a quarterly basis for any quarter, just wanted to ask about the sustainability of that or whether or not do you think the low single is more of the place to be.

Jay Gerlach

I think as you look at the full year probably low to mid-single digits is realistic, that is our seasonal peak quarter and I can't, but that’s the highest in 10 years in that quarter but it is a strong performance in the quarter but not what we typically see for the full-year.

Unidentified Analyst

And back on the food business side, are there any new outlets that you may have been able to enter or any you expect with this new crew time capacity either in the West Coast or anywhere else geographically for that matter.

Jay Gerlach

In general, as you know, we have been trying to move our key categories more significantly to the west and I don’t have anything real major to report there. We continue to be pleased with the distribution in the West coast markets was simply addressed and expanding our New York brand presence in those markets with garlic breads. We have been relatively cautious over the last six months or so, as it relates to (inaudible) growth due to our capacity constraints. So we will be looking at trying to both get in to these new markets as well as provide just more general promotional support for that category again once capacity is available.

Unidentified Analyst

Alright. One last one for you. Would you expect to anticipate that your tax rate goes back to the more normal 34.5% or so area?

John Boylan

Hi, Greg, this is John. I think as we look at on the tax rate, I think for the full fiscal year, we’d expect to see the effective tax rate run a little bit below 34% or so. I think as we move in to fiscal 14, we would lose the benefit of the special dividend and see it perhaps a return to somewhat greater than 34% a little early to be precise on that, but you will see a little bit lower than normal effective tax rate for the third and fourth quarters as well.

Unidentified Analyst

Alright and you could always pay out another special cash dividend. Alright thank you.

Operator

(Operator Instructions) At this time sir there are no further questions.

Jay Gerlach

Well we appreciate you joining us this morning, certainly if there is some follow up offline feel free to call and we will look forward to talking with you late April in our third quarter results.

Operator

This concludes today’s conference. You may now disconnect.

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