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Executives

Dale Ganobsik - IR

John Gerlach, Jr. - Chairman, President and CEO

John Boylan - VP, Treasurer and CFO

Analysts

Michael Halen - Sidoti & Company

Alton Stump - Northcoast Research

Christof Fischer - Longbow Research

Lancaster Colony Corporation (LANC) F1Q 2014 Results Earnings Call October 31, 2013 10:00 AM ET

Operator

Good morning. My name is Kimberly and I will be your conference facilitator today. At this time I would like to welcome everyone to the Lancaster Colony Corporation Fiscal Year 2014 First 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 period. (Operator Instructions).

Thank you. And now to begin their conference, here is Dale Ganobsik, Director of Investor Relations for Lancaster Corporation.

Dale Ganobsik

Thank you, Kimberly. Good morning everyone and thank you for joining us today for Lancaster Colony’s fiscal 2014 first 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 will now turn the call over to Lancaster Colony’s Chairman and CEO, Jay Gerlach. Jay?

John Gerlach, Jr.

Good morning and thank you as well for joining us. Our fiscal 2014 got off to a sluggish start, with first quarter sales down 2%; operating income, net income and earnings per share all down 7% from last year’s first quarter. Sales declined in both segments, while operating income was off only in our Specialty Food segment.

During the quarter, we invested $2 million in capital projects and repurchased approximately 40,000 shares for about $3 million. A variety of factors impacted our performance, so let me start with our Glassware and Candle segment, now consisting of Candles only.

Segment sales are off just over 10%, impacted by generally soft demand, certain seasonal business did not repeat this year, and a noticeable decline in our OEM business. Operating income actually improved slightly, with a little over wax costs and a stronger sales mix.

Moving to our food business, sales were down just fractionally. Volume was up modestly, all from our food service channel, as retail volumes were flat. Our retail sales mix declined from 51% to 49% for the quarter.

The food service channel benefited from new programs with existing customers and generally stronger demand, offset by low six figure price deflation. While our retail volumes were flat, increased trade spending resulted in lower sales dollars. The increased promotional spending included more support for added distribution of our simply-dressed refrigerated salad dressing line, which reached about 60% ACV and more support for Croutons, now that we have added capacity available. We also spent more promotional dollars to support our New York Brand Garlic Breads in a very competitive category that is not growing.

Additionally, we saw some seasonal sales that fell into the first quarter last year get pushed to the second quarter this year. We also saw decline in our private label retail business that was impacted by reduced promotional plans by our customers.

Here’s our key category brand performance from IRI for the 12 weeks ended October 6. In the refrigerated dressing, the category was up 5.3%. Our Marzetti and Simply Dressed brands, principally led by our Simply Dressed growth was up 16.7%. Croutons, where the category was up 1.1%; our New York Texas Toast Croutons were up 0.5%. Veggie Dips, the category was down 3.1%; our Marzetti and Otria brands were down 5%. Garlic bread, the category was down 3.9%, our New York brand was down 1.8%, and finally Dinner Rolls, the category was down 1.9% and our Sister Schubert brand was down 1.6%. We continue to be the leader in all five of these categories.

Operating income for the segment was impacted by the mix shift of the food service into higher promotional spending. Material costs were relatively flat to last year, with soybean oil and sweetener savings being offset by increases in flour, dairy and packaging.

Let me now ask John to make a few comments.

John Boylan

Thanks Jay and good morning. Looking at some of our more notable balance sheet fluctuations as of September 30, our accounts receivable totaling $82,890,000 increased over $12 million since June 30. A majority of this increase reflected the first quarter’s seasonally stronger candle sales.

The September 2013 level declined from the prior year September levels by roughly $13 million, as influenced by the quarter’s year-over-year sales, and due to the quarter’s sales mix.

With respect to our inventory, we saw a modest build in some seasonal food inventory, that led to consolidated inventory, increasing about $4 million since June 30, to $113 million.

Compared to the year ago total, inventories actually declined by about $8 million, primarily reflected an anticipation of lower sales of seasonal candle products.

As we remain debt free, with cash and equivalents totaling over $133 million and shareholder’s equity in excess of $512 million. Our overall balance sheet continues to be strong in its capitalization.

Moving to the quarter’s cash flows; our cash flows provided by operating activities totaled approximately $26.5 million for the quarter, which compares to $16.4 million provided a year ago. Comparatively, the relative declines in receivables and inventories contributed to this growth, is somewhat offset by the decline in net income.

One specific component of the quarter’s cash flows that you may find of interest is depreciation and amortization, that totaled approximately $5.3 million, which is slightly above last year’s $5 million. Other items of note include capital expenditures that total $2,120,000; share repurchases of $2,957,000 and regular dividends at $10,927,000.

With respect to capital expenditures, we currently believe the full year outlay will total around $18 million, down a bit from our earlier expectations as we have seen a delay in the timing of one of our larger anticipated projects.

I appreciate your attention this morning, and I will now turn the call back to Jay.

John Gerlach, Jr.

Thank you, John. Just concluding the first month of our seasonally strongest quarter, we are monitoring demand closely; and our retail channel, we believe we have promotional plans in place more comparable to the levels of a year ago. We are optimistic that seasonal shipments we expected in the first quarter will shift to this quarter, that sell-through to the consumer will be critical to the strength of the quarter.

Food service channel demand seems to be holding up okay, but it’s hard to get confident that it will be consistently better. We should start to see some overall ingredient cost savings in the second quarter.

Due to the loss of some seasonal candle business, we do expect that segment sales to be off in the quarter. We have seen an uptick in the acquisition opportunities recently, and continue to pursue our desire for branded retail category leading opportunities.

With just over 1.4 million shares authorized for repurchase and our strong balance sheet, we expect to continue to repurchasing shares from time to time and we will of course review our dividend at our upcoming November Board meeting.

Finally, I’d like to recognize and thank Earle Brown for his long support and work for us in the area of Investor Relations. He has actually been on every one of our conference calls since we started making those until today. He is retiring a little bit later in November, so we are glad to have Dale Ganobsik take on the added role of Director of Investor Relations for us.

So with that Kimberly, we are ready to take questions.

Question-and-Answer Session

Operator

(Operator Instructions). Your first question is from the line of Michael Halen.

Michael Halen - Sidoti & Company

Good morning and thanks for taking the call.

John Gerlach, Jr.

Good morning Mike.

John Boylan

Good morning.

Michael Halen - Sidoti & Company

Can you talk about the timing of the expected new product launches in 2014?

John Gerlach, Jr.

Mike, we are still looking at, well into the second half of our fiscal year, probably late third, early fourth quarter, we will have some new product come into market.

Michael Halen - Sidoti & Company

All right great. Thank you. And can you also please comment on the competitive environment? Are you seeing great discounting by your competitors?

John Gerlach, Jr.

I think that varies a little bit by category, where we continue to see that, I think most aggressively, is in the Frozen Garlic Bread area. It continues to be a challenging category overall from a growth standpoint; and again, very competitive.

Michael Halen - Sidoti & Company

Okay thanks. And finally, can you give us, I guess your commodities outlook for this fiscal year?

John Boylan

Mike, this is John. I think as we look forward through the balance of the year, we expect some modest improvement in the commodity outlook. As Jay indicated, it was relatively neutral in the first quarter. Some of the benefit we get from lower commodities will be partially offset by some deflationary impact on our food service sales. But again I think the overall benefit, while positive, will be relatively modest for the balance of the year.

Michael Halen - Sidoti & Company

Great. Thank you very much.

John Boylan

You’re welcome.

Operator

Your next question comes from Alton Stump.

Alton Stump - Northcoast Research

Thank you. Good morning.

John Gerlach, Jr.

Good morning, Alton.

Alton Stump - Northcoast Research

I’d just like to before I ask my question, that thanks to Earle for all of his great work over the years, and certainly will be missed (inaudible) Dale, but I think you have huge shoes to fill Dale. I just wanted to ask, I think you mentioned, Jay, that you sort of see maybe a little more activity on the M&A front. Could you just remind us sort of, obviously I know I cannot talk about who you may or may not be looking at, but what will be sort of the ideal type of acquisition that you’d like to do?

John Gerlach, Jr.

Well again it’d be branded retail, ideally in a category leading position. So one or two in a given category and growing. Now that position could be on a national basis, might just be on a regional basis, but we’d have the opportunity to bring some geographic growth along as well. So we are open minded as far as categories. I mean, we like the areas we are in today. So produce department is of particular interest to us, but we are – and the Frozen category, but we are also open to other categories in the store. We are certainly interested like a lot of people, in some of the better for you opportunities that may be out there, but not exclusively looking just in that area.

Alton Stump - Northcoast Research

Okay. That’s all I have. Thanks guys.

John Gerlach, Jr.

You’re welcome. Thanks.

Operator

The next question is from the line of Phil Terpolilli.

Christof Fischer - Longbow Research

Hey good morning guys. Christof Fischer calling in for Phil here. Thanks for taking the question. Just quickly, given with the increased pressure in the food service mix, just wondering what you guys expect there in the next couple of quarters? And if that could be a drag, and maybe to what extent it will be a drag?

John Gerlach, Jr.

Well again, it’s kind of unpredictable. We were obviously pleased to see some growth in that channel in the first quarter, and our challenge is just getting confident there might be some consistent growth there. It’s not unusual for us to see a month or two of pretty strong performance, but then a flat month in that channel, and there is, as you know, whether it’s food service or retail channel, but at times it seems like maybe it’s a little bit more of a factor in the food service channel, as it relates to consumer confidence and how much people are eating out at restaurants, which is certainly unpredictable, but challenged right at the moment.

Christof Fischer - Longbow Research

Okay. Well I think that’s all I had. Thanks so much.

John Gerlach, Jr.

You’re welcome.

Operator

If there are no further questions, we will turn the call back to Mr. Gerlach for any closing/concluding remarks.

John Gerlach, Jr.

Well thank you for joining us this morning. We look forward to talking to you in late January with our second quarter results. Thank you again.

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