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Lancaster Colony Corporation (NASDAQ:LANC)

F1Q2011 Earnings Call Transcript

October 28, 2010 10:00 am ET

Executives

Earle Brown – IR

Jay Gerlach – Chairman, CEO and President

John Boylan – VP, CFO, Treasurer and Assistant Secretary

Analysts

Alex Bisson – Northcoast Research

Alton Stump – Longbow Research

Greg Halter – Great Lakes Review

David Leibowitz – Horizon Asset Management

A.J. Strasser – Cooper Creek Partners

Mitch Pinheiro – Janney Montgomery Scott

Seth Cohen – Valinor Management

Operator

Good morning. My name Julie and I will be your conference operator today. At this time, I would like to welcome everyone to the Lancaster Colony Corporation first quarter fiscal 2011 earnings 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 session. (Operator Instructions)

Thank you. And now, to begin your conference, here is Earle Brown, Lancaster Colony Investor Relations.

Earle Brown

Good morning. Let me also say thank you for joining us today for the Lancaster Colony first quarter fiscal 2011 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 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's Jay Gerlach. Jay?

Jay Gerlach

Good morning and thank you for joining us. Our first quarter fiscal 2011 results were challenged by rising raw material costs and other costs not fully offset by price increases or growth.

We were encouraged to see our food segment growing again, although the growth came from our foodservice channel, not retail. Candle sales had another strong growth quarter as a couple of new customers added to solid growth from our existing base.

Our net result was sales up over 4% and earnings per share of $0.81 versus $1.01 last year. Share repurchases for the quarter totaled 219,850 shares for $10.7 million. With just over 80,000 shares repurchased so far in the second quarter, we currently have actual outstanding of 27,867,000 shares and 129,000 shares authorized for repurchase.

Capital expenditures for the quarter totaled $6.7 million with over half of that amount going to our Sister Schubert's plant expansion project set for completion July 1 of next year. We estimate this project will increase our overall frozen dinner roll capacity by approximately 60%.

We continue to estimate full-year capital investment of about $45 million.

Turning to our Specialty Foods segment, we saw sales growth of almost 2% driven by foodservice channel growth. A couple of new programs were the primary contributors to that growth as the channel in general remains sluggish.

Growth in retail produce dips and our overall sales of croutons were offset by sluggish frozen demand, particularly frozen garlic breads. Texas Toast crouton sales continued strong, as did our Marzetti Caramel dips. Our new Marzetti Otria Greek yogurt dips began shipping in the quarter and Marzetti Simply Dressed refrigerated salad dressings did not start meaningful shipment until October.

Current IRI data for our key categories in measured channels shows the following for the 12 weeks ended October 3. Refrigerated dressings category up mid-single-digit, Marzetti brand up low-single digits. We are number two in the category in that period.

Refrigerated produce department dips, category download single digits, and Marzetti down low-single digits. We are number one in that category.

The overall crouton category, up mid-single digit, total Marzetti brands up mid-teens, and again, number one category position. Frozen garlic bread category is down low-single digits – were down low-single digits, again number one category position.

And lastly, our frozen dinner rolls category is up upper-single digits and our Sister Schubert brand is up low-double digits, again number one category position.

Operating margins declined to about 17.2% from last year's 20% and last quarter's 17.6%. Material costs were up about 2 million or so, primarily from dairy, eggs, sugar, packaging.

Pricing was a bit negative in the quarter as well. Our ongoing investment in consumer marketing was a factor, as was higher freight costs. Our mix was slightly less favorable as our retail share slid to about 51.4% in the quarter from 53% the prior year.

Turning to candles, in addition to the new customers and new product with existing customers, we also saw seasonal shipments get started a bit ahead of last year. While we had some pricing go into effect in September, we also met some competitive challenges that generally offset any benefits.

Our biggest cost challenge in the quarter was wax costs estimated to be up about $2.5 million in the quarter, despite our aggressive and ongoing efforts to blend alternate waxes in our final formulas.

Now, I'd like John to make a few comments relevant to our cash flows and balance sheet.

John Boylan

Thanks, Jay. Let's first review some of the more notable line items within our September 30 balance sheet. Our accounts receivables totaled $82.927 million, which was approximately $15 million higher than at June 30 and also nearly $5 million more than our receivables as of last September.

With respect to the increase since June 30, as typically occurs in our first quarter, receivable levels were strongly influenced by seasonal sales experienced within the Glassware and Candles segment. Relative to the year-over-year increase, our higher sales level in the quarter influenced this fluctuation with respect to our inventories, the September 30 total of over $131 million compared to roughly $122 million at June and $111 million last September.

Seasonal aspects contributed to the increase in the quarter. The year-over-year fluctuation was primarily due to higher levels of candle-related inventories, although we also have a larger pre-build of our frozen rolls for the holiday period. We expect the year-over-year difference to diminish as we approach the end of our second fiscal quarter.

Finally, on the other side of the balance sheet, our total accrued liabilities decreased somewhat on a year-over-year basis, largely reflecting the higher level of accrued corporate income tax present as of September 2009.

Overall, we retained considerable operating flexibility as a result of our balance sheet continuing to have no debt outstanding. Further, our cash and equivalents exceeded $87 million at September 30 and shareholders’ equity at September totaled over $489 million.

Turning to cash flows for a moment, cash flows provided by operating activities for the quarter totaled approximately $9.3 million, which compares to $18.9 million provided a year-ago. Our lower net income contributed to this decline.

One specific component of the quarter's cash flows that you may find of interest is depreciation and amortization that totaled $5 million, which is similar to the $5.4 million recorded a year ago.

Other items of note for the quarter include shareholder distributions comprised of share repurchases of $10.732 million and regular dividends of $8.409 million. We’ve been pleased to have been able to increase our regular dividends for 47 consecutive years now and it would be customary for our board to consider another increase at its upcoming meeting in November.

I appreciate your attention this morning and I'll now turn the call back to Jay.

Jay Gerlach

Thanks, John. Looking to the holiday season influence second quarter, we are optimistic that we have good placement of both food and candle products, good marketing and promotional plans in place, and only need the consumer to provide the takeaway.

Sister Schubert’s frozen dinner rolls, including the recently introduced soft multigrain rolls, have the best distribution and inventory position to serve this important period since we’ve been in the business. Our new Marzetti items of Otria dips and Simply Dressed salad dressings, and our new New York brand Ciabatta Roll will be on many store shelves for the holidays as well. We are maintaining our consumer promotion plans, despite the impact of increasing raw material costs, which are likely to be a bit more unfavorable as we will start to see some impact from higher soybean oil costs in addition to still higher dairy, sugar, eggs and packaging.

We will likely be implanting pricing as appropriate early in our third quarter. So no material price benefit in this quarter. We anticipate our new foodservice program should continue to grow and hopefully, the channel in general may show some growth. Acquisition growth continues to be of great interest to us and we continue to look for opportunities.

Our cash dividend, as John mentioned, will be reviewed at our upcoming November Board member meeting, as will our share repurchase status. While a slow economy looks likely for some time, we are actively pursuing potential growth initiatives, including product innovation, geographic expansion, and enhanced consumer messaging.

Julie, we're ready to take questions?

Question-and-Answer Session

Operator

(Operator instructions) Your first question comes from the line of Alex Bisson with Northcoast Research.

Alex Bisson – Northcoast Research

Good morning. Thank you for taking my questions. I guess my first question is you talked on the foodservice side about new customer programs, could you give us a little bit more detail about what that means and does it include any actual new foodservice customers?

Jay Gerlach

In one case, there is a new customer involved. In another one, it's a new program with existing customers. We are the two primary ones.

Alex Bisson – Northcoast Research

Okay. Could you break out, particularly on the food segment, the benefit or the hurt from price and the same for raw materials?

Jay Gerlach

Alex, I think raw materials in the food side was up about $2 million in the quarter. Pricing was actually down a similar amount, around 2 million.

Alex Bisson – Northcoast Research

Got you. I noticed that your corporate expense was up 600,000 or $700,000. What was the main driver behind that?

John Boylan

Alex, this is John. The drivers behind that increase included some costs related to some of our industrial real estate properties related to closed or sold operations. We also had some unallocated general liability insurance costs.

Alex Bisson – Northcoast Research

Okay. Got you. And then finally, as you look kind of broadly across your categories on the food side, can you talk about – I know you said that your couponing and promotional schedules stay where it is, but could you talk more broadly about what you're seeing in the channel?

Jay Gerlach

I think, Alex, not a lot has changed in general. What I think we did see in the first quarter was, particularly, in that frozen garlic bread category, some more aggressive a promotional activity by competition that we only moderately reacted to, but in general, I don't think we’re seeing a dramatic uptick in that.

In fact, our outlook on the trade spend side is relatively comparable to what we would have been doing about a year ago.

Alex Bisson – Northcoast Research

All right, thank you very much.

Jay Gerlach

Sure.

Operator

Your next question comes from the line of Alton Stump with Longbow Research.

Alton Stump – Longbow Research

Good. Thank you. Good morning.

Jay Gerlach

Good morning, Alton.

Alton Stump – Longbow Research

On the pricing front, obviously, that's a big question across the food space right now as to the receptiveness of retailers in coming quarters. If you could just maybe give some color, what sort of feedback that you have gotten at this point to date with what you have taken on the pricing front, and if you expect that to change, either for the better or for the worse for the retailers over next quarter or two?

Jay Gerlach

Our pricing generally has been – on the food side of the business has been very selective, where we’ve had some particular ingredient costs we need – we thought we needed to react to quickly. More broadly, as far as pricing plans there, we anticipate being out in the not-too-distant future with pricing that should go into effect as we get into the March quarter, so after the first of the year.

I think the industry in general is seeing the input cost pressure. I think the support is there with the commodity cost increases. So I would anticipate that while not a lot of excitement about receiving price increases then we will be able to get those implemented. We were able back on the candle side to get some pricing implemented during the first quarter, but as I mentioned, we did have a couple of competitive situations that had to be dealt with that mitigated the impact of that.

Alton Stump – Longbow Research

Okay, great. And then just sticking on the pricing conversation, that is good stuff in terms of list pricing. But from a discounting standpoint, are you seeing retailers maybe come back a little bit on their demands for how much discounting they want you or for your competitors to do?

Jay Gerlach

I don't think we've really seen a change in that at all.

Alton Stump – Longbow Research

Okay, great. Thanks, Jay.

Jay Gerlach

You’re welcome.

Operator

Your next question comes from the line of Greg Halter with Great Lakes Review.

Greg Halter – Great Lakes Review

Yes, given some of the increases we've seen from some of the restaurant chains in terms of their same-store sales growth, are you seeing any of that coming through on your foodservice side as of yet?

Jay Gerlach

You know, Greg, we've probably seen that maybe with just a couple, two or three customers maybe. In general, it still does seem to be pretty sluggish. I’d say maybe there is a little bit more optimistic tone across that customer base, but still not a lot of evidence of things improving.

Greg Halter – Great Lakes Review

Okay. Is there any evidence that maybe they’re cutting back on some of the sauces or dips or croutons or dressings or whatever that they may be offering their customers?

Jay Gerlach

No, we haven't seen that.

Greg Halter – Great Lakes Review

Okay, good. And relative to the capital spending, you indicated that you started on the plant. I know it's early at this point with a completion date about 9 months out there, but so far what kind of feedback have you received, given the progress?

Jay Gerlach

Well, I think it's again early in the process, but we think we are on schedule and cost wise on target.

Greg Halter – Great Lakes Review

And relative to geographic expansion on the food side of things, can you give us any update there? I know it's – you talked about it 3 months ago or so on the last call, but just wondered if there's been any changes and any new areas that you may be going into out west or so forth.

Jay Gerlach

Well, I think the particular initiatives have been to move our New York brand of garlic breads more broadly into West Coast distribution and also trying to push the Sister Schubert’s brand a little bit out to the west. There we've been a little challenged by capacity issues. So we’re not pushing that too hard right at the moment, but we have added little bit of distribution further west with that brand as well.

Greg Halter – Great Lakes Review

Okay. And relative to the candle business with the continued Dumping Subsidy Offset Act, do you expect another amount to come in this year? I don’t know if that's been delineated yet by the Treasury Department.

Jay Gerlach

Go ahead.

John Boylan

Greg, this is John. There's been no formal announcement of a distribution this year. We would expect that announcement to be made in late November, early December. We'd anticipate some level of distribution. It's impossible to predict exactly how much that might be.

Greg Halter – Great Lakes Review

Right. I think the preliminary amount is lower than it's been historically.

John Boylan

That is correct.

Greg Halter – Great Lakes Review

One last one for you, relative to any forward buys you may have on the flower side or soybean oil, if you could update us there.

Jay Gerlach

In general, our flower coverage is still just out through March. Soybean oil, we continue to follow our laddered coverage program with heavy – relatively heavy coverage looking out 6 months that we obviously update monthly and as the calendar moves out. So we continue to follow that practice with soybean oil.

Greg Halter – Great Lakes Review

So at this point, you are still relatively covered despite (inaudible) there could be some – if I'm hearing you right, some increases going out later in your fiscal year, but you're hopeful that that pricing would do a decent amount of helping to offset some of that? Is that a good characterization?

Jay Gerlach

That would certainly be our hope, but I didn't quite hear your full comment there. Something broke it up. But yeah, we would hope that is the case. As we get into the second quarter, we’d probably start to see a little bit of unfavorable soybean oil impact relatively small, but as we get into the second half of our year, the first half of the calendar year, it starts to get a bit more noticeable.

Greg Halter – Great Lakes Review

And that's where the pricing that you're hoping to implement would help to offset some of that?

Jay Gerlach

That's correct, yes.

Greg Halter – Great Lakes Review

All right. And any idea in terms of magnitude if you can directionally provide, are you talking 1 to 2% or 5 to 10% type price increases?

Jay Gerlach

It's going to be low-single digits, low-to-mid single digits.

Greg Halter – Great Lakes Review

Okay. Thank you.

Jay Gerlach

You’re welcome.

Operator

Your next question comes from the line of David Leibowitz with Horizon Asset Management.

David Leibowitz – Horizon Asset Management

Good morning.

Jay Gerlach

Hello, David.

David Leibowitz – Horizon Asset Management

I have several unrelated items, first, Jay, during your remarks, you spoke about something dollars invested in consumer marketing, was that for the food side or the candle side?

Jay Gerlach

That's the food business.

David Leibowitz – Horizon Asset Management

And could you give – quantify the amount of money that's being invested?

Jay Gerlach

Well, the year-over-year increase in the quarter was a little over $1 million, so kind of low seven figures.

David Leibowitz – Horizon Asset Management

And was this done in promotions, was this done in couponing? How would you – how does one try to figure out where the figures come from?

Jay Gerlach

For us, it's going to a variety of areas, David. So, yes, couponing, FSIs is a piece of it. Pure advertising, both print media as well as electronic media advertising, some spend on in-store merchandising signs right at the retailer level. And then there is a bit of expense around consumer research, that kind of stuff.

David Leibowitz – Horizon Asset Management

Okay. The next point – the price increases that you just referred to being in the low-to-mid single digits, is that going to permit you to head off the next round of raw material price increases or will you continue to lag on that front?

Jay Gerlach

Well, we're hoping we're going to be able to recover that generally. Now, we obviously don't know exactly where all the raw material costs may end up as the year goes on. Soybean oil has again moved to a higher level than I think most anybody would have anticipated. I don't know if it's stabilized where it is now, but we hope that will be the case.

David Leibowitz – Horizon Asset Management

And would that mean, theoretically, if you are accurate on your projections, that second-half profit margins in the food group will in fact revert to where they were last year?

Jay Gerlach

Well, you know, David, we don't give guidance on specific margins. And I guess the only thing I’d remind everybody is last year, we had some unusually high margins where not only did we have a positive price versus cost relationship going on, but very few other hiccups or unanticipated expenses in the business that is not often the case.

David Leibowitz – Horizon Asset Management

And in terms of your share buyback program, have you utilized 100% of what's on the approval so far or when the Board meets in November, they would be adding to what is still unpurchased?

Jay Gerlach

Well, we’ll discuss that at the meeting in November. We do have a little bit of authorization left, but by the time we get to the November meeting, it’ll be a very small amount.

David Leibowitz – Horizon Asset Management

And that being said, how many fewer shares will you be reporting on, on a fully diluted basis, in the next quarter versus a year ago?

John Boylan

Well, David, it's a little difficult to predict the dilutive effect just because of the nature of the calculation and its dependency upon market pricing of shares. But it also depends upon the number of shares being potentially repurchased between now and December 31. But as Jay indicated, we have relatively few shares left to repurchase between here and December 31. So it would – all else being equal, you'd expect weighted shares to be only slightly lower than a year ago. I think, in the current quarter, the differential was less than 1%.

David Leibowitz – Horizon Asset Management

Okay. And the last question, is there any fixed ratio you try or the Board tries to attain in terms of dividend versus the actual earnings per share?

Jay Gerlach

No, David, we have not had a targeted payout ratio. We talk about that, but don't have a set target.

David Leibowitz – Horizon Asset Management

Thank you very much.

Jay Gerlach

You’re welcome. Thank you.

Operator

Your next question comes from the line of A.J. Strasser with Cooper Creek Partners.

A.J. Strasser – Cooper Creek Partners

Hey, guys, how are you? Thanks for taking my call.

Jay Gerlach

Sure.

A.J. Strasser – Cooper Creek Partners

Good morning. Could you just talk a little bit about kind of the headwind that's coming from the soy costs? I may have missed it. Did you say that it's going to start hitting you in Q2, but Q3 it should hit you more?

Jay Gerlach

Yeah, that's correct. As we look out from where we are, we were still slightly favorable on soybean oil in the first quarter. It will get adjusted a bit unfavorable in the second and then more so as we move into the second half.

A.J. Strasser – Cooper Creek Partners

And I mean – and then, just if you could – and I know this has been asked before, but just to help us kind of understand some of the degradation that would happen to the margin, is it – how big of your – can you maybe quantify a little bit just in terms of how much of your COGS are soy related and just give us a sense of how much margin degradation we should be assuming kind of going forward?

Jay Gerlach

We think, A.J., that the rule of thumb we’ve talked out there before is that, for every $0.01 change in the market price of soybean oil, you might see $1 million impact to our food segment's operating income.

So if you sort of take that rule of thumb, recognize that we sort of have a laddered forward buy program, just take a look at the fluctuation in soybean oil pricing, you can get a general sense as to what the exposure might be, all else being equal.

A.J. Strasser – Cooper Creek Partners

Okay. And then lastly, nice quarter there on the candles. Should we be assuming that type of – just help us kind of gauge how that growth rate should play out through the year. Is that something we should just – and also if you could give us a sense of whether or not you expect that business to be making money this year?

Jay Gerlach

Well, we do think it should make some money this year. As it relates to the growth rate, that was probably a pretty strong quarter. We did have some new business coming on in the quarter that helped with new customers that will start to – now that they are up to speed from a pipeline fill standpoint, that will slow down some.

We probably had a little bit of our seasonal business maybe get shipped a little earlier in that quarter as well. So we wouldn't want to leave you with the impression that that's a growth rate for the coming quarters.

A.J. Strasser – Cooper Creek Partners

If it's coming from a new customer, I mean shouldn't that impact the next few quarters to come? I mean we're lapping easier comps.

Jay Gerlach

Well, it will help some, certainly, but there was a little bit of a pipeline fill getting the new customer started up. So dependent on what the more routine sell-through is, we’ll dictate what kind of growth we might see.

A.J. Strasser – Cooper Creek Partners

Okay. Great. Thank you again for taking my question.

Jay Gerlach

You’re welcome.

Operator

Your last question comes from the line of Mitch Pinheiro with Janney Montgomery Scott.

Mitch Pinheiro – Janney Montgomery Scott

Hey, good morning, guys.

Jay Gerlach

Good morning.

Mitch Pinheiro – Janney Montgomery Scott

So a couple of housekeeping things, the tax rate, John, lower in the quarter. Is that what you’ll use for the year?

John Boylan

It's probably a reasonable proxy, Mitch, in that 34 to 35% range is what we might expect.

Mitch Pinheiro – Janney Montgomery Scott

Okay. As far as marketing, what was marketing spend in the quarter or relative to last year, up, down?

Jay Gerlach

It was probably up just low seven figures, little over $1 million, Mitch.

Mitch Pinheiro – Janney Montgomery Scott

Which is – on a percentage basis, what do you think that is?

Jay Gerlach

I don't know if I've got the answer to that right here. It's probably up about – getting close to 20%.

Mitch Pinheiro – Janney Montgomery Scott

Okay. Does that marketing include – does that excludes promotion or does that include?

Jay Gerlach

No, that excludes any trade promotion.

Mitch Pinheiro – Janney Montgomery Scott

On a trade basis, I mean, is that up or down year-over-year?

Jay Gerlach

That's flat.

Mitch Pinheiro – Janney Montgomery Scott

Flat? Okay.

Jay Gerlach

Yeah.

Mitch Pinheiro – Janney Montgomery Scott

And as you look forward, marketing spend, how do you – you indicated in your comments that you have pretty good placement for the upcoming heavy cooking season here. Marketing, you like your marketing and promotional plans. Does that mean we are up or flat, or how would you describe that?

Jay Gerlach

They will be up some as we go through the second quarter.

Mitch Pinheiro – Janney Montgomery Scott

Okay. When you talk about, sort of, you were encouraged with the good placement of things, what – I mean is there any strategy here that – underlying strategy that has changed, or you are earlier – some of your, I guess, displays and things are out early ahead of where you were last year. Is that something you're doing? Is that something the retailer is doing? How would you describe that?

Jay Gerlach

It's kind of a mixture, Mitch. For example, on our caramel apple dip product, I think we did have some customers that are getting displays out a little earlier. This year, we've got, as we mentioned, some of these new items that are getting on the shelf for the first time. They’ll be there through the holidays.

And then particularly, probably, our most holiday-sensitive item is the Sister Schubert’s product line. And we, in addition to having a bit greater distribution, we've got ourselves, we think, in the best in-stock position we've had going into the holidays.

This typically has been a challenge for us to keep up with the seasonal spike in business. And as John referenced, we've been building some inventory through the good part of this calendar year to prepare for this season. We think we are in best shape we've been to service the business that we think is actually out there.

Mitch Pinheiro – Janney Montgomery Scott

And the, but related to that, I mean you're increasing capacity in Sister Schubert’s by 60%, I mean that's a pretty big number. Is that driven by some geographic expansion strategy, the ability to handle seasonal spikes? What – that's a pretty large increase. (inaudible).

Jay Gerlach

That will do those things over time, a little bit like when we initially built that plant. We’ll be able to back away some from the heavy over time production schedules, building as much inventory in advance as we've had to do this year and the costs that are associated with that. But yeah, over as we look out further, sure, growing geographically and having the ability to bring more product innovation to that product line is also part of how we see utilizing that capacity.

Mitch Pinheiro – Janney Montgomery Scott

And does that have – how will that sort of be staged in, increasing the capacity relative – in the higher – your higher depreciation expense relative to overtime costs? Is it going to be a neutral impact on the income statement?

Jay Gerlach

I don't think we can give you a specific response to that, Mitch. We can maybe take a look at some like that, but that's not the way we've looked at that project right at this point.

Mitch Pinheiro – Janney Montgomery Scott

Okay. So also, when you look at your categories, looking at refrigerated dressings for instance, how would you sort of describe the environment there? I mean I see some – when I look at IRI, some of the competition, there is a lot of big ups and big downs and I can't really make heads or tails of what's happening in the category.

Jay Gerlach

Well, I think, as we look at it right now, Mitch, it does seem like the category perhaps has settled down some from any particular aggressive promotional spending that's going on. We are trying to clearly impact the category, impact our position in the category with the Simply Dressed product line we are just bringing to market right today.

Mitch Pinheiro – Janney Montgomery Scott

So is there any trade down to the shelf stable? Or do you see any trend either way in that relationship?

Jay Gerlach

I don't know that we would say we are seeing a trend or even have great visibility to specific trade down, but we have to believe there is some of that going on in the kind of economy we are in today.

Mitch Pinheiro – Janney Montgomery Scott

Okay. Last question is the pricing that you're implementing. I know a couple other people, who were asking about the same thing. But do you expect your pricing actions to be able to, for the most part, match closely the increases in commodity costs? A couple years back in the '07, '08 commodity spike, you certainly had a negative impact in a lag basis, but is there – is this going to be more closely matched than last time or…?

Jay Gerlach

Well, we hope it's going to be more timely than last time and we would like to think it will offset most, if not, all of the cost impact we are seeing. However, I guess I’d still remind you again that when we add a few quarters of 20%-plus operating margins, those were relatively short-lived. We continue to see this as a mid to upper teens operating margin kind of business.

Mitch Pinheiro – Janney Montgomery Scott

Okay. And this is the last question, but foodservice, how meaningful was the new program, new customers? I mean you had the channel fill sort of happening there. So is that – without the channel fill, does foodservice still show improvement?

Jay Gerlach

It would probably be pretty close to flat without that, I would estimate.

Mitch Pinheiro – Janney Montgomery Scott

Okay. Thank you.

Jay Gerlach

You’re welcome. Thank you.

Operator

Your next question comes from the line of Seth Cohen with Valinor.

Seth Cohen – Valinor Management

Hey, how are you guys?

Jay Gerlach

Good, good morning.

Seth Cohen – Valinor Management

A quick question. Just looking at some of the non-operating items or more the balance sheet items, and I'm curious, given what sales have done sequentially and year-over-year, cash is down, receivables are up meaningfully sequentially, inventory is up sequentially. That all translates into cash conversion, obviously, deteriorating quite substantially quarter-over-quarter. What is going on in the balance sheet which is different from sort of what the income statement is telling us?

Jay Gerlach

Well, I think, as you look at the balance sheet, you have to consider seasonal factors between June and September, both for receivables and inventory. As I mentioned in my comments, between September and this past June, we’ve been doing some builds on our frozen rolls and candles for inventories and also that would affect the year-over-year comparisons. We'd like to think, with respect to inventories, that we’d see the year-over-year differential by December, get back into the seven figures and in a perfect world into the low seven figures. And I think receivables, the agings are very comparable year-over-year and there is nothing of any great concern.

Seth Cohen – Valinor Management

I guess the question sort of comes down to if I look back to, I guess, sales growth, particularly on the food side of the business, which is the largest portion, either sequentially or year-over-year, or I mean you pick the time horizon, the number, the gross number of revenue is down, yet the balance sheet items for receivables are up meaningfully. I'm just trying to understand what's going on. I understand aging is the same, but the number is up.

Jay Gerlach

Well, I remember, the growth is over on the Glassware and Candles side. And those receivables as well have slightly longer dating programs than on the food side. So there is a bit of a mix issue as well.

Seth Cohen – Valinor Management

Okay. Then I guess, in terms of just I know you guys don't give guidance, but if I just look at blended operating income margin over the past, you pick it, kind of six, seven quarters, it's just been like trying to catch a falling knife for me. Any sort of color you can give for the rest of the year? I know you've given specific numbers for the quarter historically, but the numbers – it's hard for us to figure it out. You say pricing is coming in, but volume is weak and whatnot.

Jay Gerlach

Well, we don't – you are right, we don't give guidance. And I think as much we've said looking forward this morning is we do anticipate the candle business should stay profitable for the year. The food business, we've talked about these mid to upper teens operating margins is the range we anticipate being in. We are in a period of rising input costs and there is a little bit of a lag going on here trying to get some pricing relief.

And it always remains to be seen how timely and effective you can ultimately get the pricing you go after. So that does remain to be seen. Last year was, you look back the last probably four to six quarters, was somewhat of unusual period of time where we had finally gotten some price relief and input costs were in a declining mode and there were a variety of other favorable cost things going onto a much smaller scale than the input costs.

So we got some substantially higher margins than we have historically seen and especially none that we've seen over a long period of time. So we continue to think that mid to upper teen operating margin range in the food segment is what we ought to see looking out into the future.

Seth Cohen – Valinor Management

Last question and maybe I'll take it off-line after this – which year sort of '04, '05, '06, and '07, '08 is the best sort of comp for the what environment we're in today?

Jay Gerlach

Well, I couldn't give you a quick answer to that. Maybe we should take that off line. I'll need to go back and look at those years.

Seth Cohen – Valinor Management

I'm just saying sort of like wouldn’t you remember sort of commodities going up and the environment you've talked about on the call today?

Jay Gerlach

No. Well, I hope we are in an environment today where we both are positioned a little differently as it relates to soybean oil, our biggest input costs from the standpoint of forward bias and are reacting a little more timely to the cost increases we are seeing from the standpoint of trying to get a pricing relief.

Seth Cohen – Valinor Management

Okay, I'll take it off line. Thank you very much, guys.

Jay Gerlach

You’re welcome.

Operator

Your next question is a follow-up from the line of Greg Halter with Great Lakes Review.

Greg Halter – Great Lakes Review

Good. Thank you, again.

Jay Gerlach

Hi, Greg.

Greg Halter – Great Lakes Review

The whole discussion is of price. I think last time you had a very rapid increase in soybean oil from something like $0.20 to $0.70 in a short period of time, which I don't believe you've seen yet this time. Maybe it will occur again. But that's just a more general comment I think, the price hikes that you saw back then.

Jay Gerlach

We are hopeful we won't see that again, but we have seen in just this month probably close to a $0.10 hike, which is pretty quick.

Greg Halter – Great Lakes Review

Right, right. Relative to pricing, this would include Wal-Mart as well and I presume any issues expected with that customer?

Jay Gerlach

Well, Greg, we aren't going to comment about specific customers, but we certainly would anticipate pricing – impacting our entire customer base.

Greg Halter – Great Lakes Review

Okay. And the Greek yogurt category has been booming over the last few years. And I'm just interested in your new product and how – I guess, more generally, how your strategy works relative to picking up on that trend. Is that something that you are doing inside or was it conceived on the outside or a combination or just if you could provide some input into that process, I think that would be helpful? Thanks.

Jay Gerlach

Well, yeah, that was conceived internally, and unfortunately it's just been on store shelves such a short period of time, we really don't have any consumer data yet to give you any real quantitative or even qualitative comment as to how it's being received.

Greg Halter – Great Lakes Review

Okay. Again, the Greek yogurt in general, that category seems to be doing very well from really a very low base. It's growing very rapidly, and your product, it seems like it could be piggybacking off of some of that growth.

Jay Gerlach

Well, you are right about that. And yeah, exactly, I mean, we are hoping we are on that trends.

Greg Halter – Great Lakes Review

Okay. Thank you.

Jay Gerlach

Thank you.

Operator

(Operator Instructions) Your last question is the follow-up from the line of A.J. Strasser with the Cooper Creek Partners.

A.J. Strasser – Cooper Creek Partners

Hey, John, thanks again for taking the follow-ups. So just so I can – I think a couple of participants have sort of alluded to this question. I apologize if it's repetitive, but just so I can have a takeaway point here, what makes this different than – kind of in a rising cost input environment, what makes this different than 2006 to 2008? When your earnings power is a lot less, what's different about this environment that keeps you more optimistic?

Jay Gerlach

Well, this is Jay. I think, again, we are, again, positioned differently than we were back then as it relates to our key ingredient, soybean oil. And I think we are moving more timely to try to get price relief.

And again, we are in an environment today where I think commodities – farm commodities in many areas are moving up. I think the industry, not just the specific categories we are in, but a lot of categories across the industry are going to be looking for price relief, which hopefully creates an environment where our category or our particular request for price increases is not singled out as something that is unusual.

There may have been a little bit different scenario of that relative to that going on back in that period of time.

A.J. Strasser – Cooper Creek Partners

Okay. And then lastly just, you said, on average, your volumes were up year-over-year versus last year?

Jay Gerlach

I'm not sure what you're referring to.

A.J. Strasser – Cooper Creek Partners

Just within the different segments, I'm just wondering in which categories your volumes were up.

Jay Gerlach

Well, in the quarter, we saw our growth on the retail side of the business primarily in – I shouldn't say primarily, really the categories that we’re growing in that quarter from our standpoint were croutons and our various produce dips. The frozen side of our business was somewhat softer in that quarter. And then the foodservice channel saw growth really driven by a couple of new programs.

A.J. Strasser – Cooper Creek Partners

Okay.

Jay Gerlach

Thank you.

A.J. Strasser – Cooper Creek Partners

Thank you.

Operator

Thank you. This concludes the Q&A session. At this time, I would like to turn the call back over to Mr. John Gerlach for any concluding remarks.

Jay Gerlach

We do appreciate you all joining us this morning. We'll look forward to talking to you late January and hopefully, we’ll have a good fall season, good holiday season, to report at that point. Thank you again.

Operator

This concludes today's conference call and you may now disconnect.

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