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Lancaster Colony Corporation (NASDAQ:LANC)

F1Q08 (Qtr End 9/30/07) Earnings Call

October 29, 2007 10:00 am ET

Executives

Jay Gerlach - Chairman and CEO

John Boylan - VP, Treasurer and CFO

Earl Brown - IR

Analysts

Mitch Pinheiro - Janney, Montgomery

Greg Halter - Great Lakes Review

Operator

Good morning. My name is Satina and I will be your conference facilitator today. At this time, I would like to welcome everyone to the Lancaster Colony Corporation First Quarter Fiscal year 2008 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)

And now to begin your conference here is Earl Brown, Lancaster Colony Investor Relations.

Earl Brown

Good morning, let me also say thank you for joining us today for the Lancaster Colony first quarter fiscal year 2008 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 which 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 know 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 get fiscal 2008 off to a pretty good start, with almost 9% sales growth and 12% operating income growth. Strong sales, modest pricing relief, and some benefit from the closure of our industrial glass operations, helped us offset the challenge of still higher raw material cost.

From a capital allocation standpoint, during the quarter we repurchased 572,708 shares worth $23,245,000. And year-to-date, since July 1st we have repurchased 857,950 shares for $34,395,388, which leaves 29,890,440 shares outstanding and 2,486,787 shares available for repurchase.

Capital expenditures for the quarter totaled $8.573 million, with over 90% invested in our food operations driven mostly by our new Sister Schubert's frozen bread production facility.

Dividends paid during the quarter totaled $8.165 million.

During the quarter, we began the start up of our new Sister Schubert's plant and today we are very pleased with its progress. We are not sure yet where we expect productivity to be, but we are well on our way, and glad to have the capacity for this growing product line. We plan to expand our geographic markets and introduce new products over the coming months with this added capacity.

Strong top line performance from most of our food product lines and both our retail and food service channels produced over 7% sales growth. Price increases in the Marshall's acquisition provided over half the growth, while the balance came from the good demand of Sister Schubert, produce department items growth, and new item contribution of Texas Toast croutons and hummus.

Food service demand actually grew faster than retail in the quarter on strong dressing sauce and frozen product demand.

In spite of the sales growth, we still couldn’t get the segments operating income up to last year’s level, coming at about $400,000. We estimate the year-over-year impact of rising raw material and ingredient costs as roughly $10 million in the quarter.

In addition to ingredient cost, we had the hurdle of start up costs and related depreciation of the new Sister Schubert's plant and some much more aggressive promotional spending in certain categories.

We’re pleased to see a 9% sales increase in our glassware and candles segment. The selling off of inventory from our closed industrial glass operations was the major piece of that increase.

Candle sales were up in the quarter. The closure of our industrial glass operation also contributed to our operating income increase, as last year's quarter was quite weak and this year's sales had little operating costs. Pricing and good operations helped candle contributions in spite of still high wax cost.

Our auto segment now comprises of our Dee Zee aluminum truck accessory business, and it had a much better quarter with a very strong 18% sales growth, driven by strong demand from several original equipment-like truck programs, also some increased pricing, combined to show a much improved bottom line. Metal costs were still slightly unfavorable in the quarter.

Let me ask John to make few comments at this point.

John Boylan

Thanks, Jay. Let's first review some of the more notable line items within our September 30th balance sheet. Please note, however, that I may reference several amounts relating to September 2006, as they are disclosed in our last conference call, which have been affected by reclassifications for the discontinued operations that were divested in fiscal 2007.

Our consolidated accounts receivable at September 30th totaled $ 114.610 million which was approximately $22 million higher than at June 30th, but only $7 million greater as of last September. As what typically occurs, in the first quarter our receivable levels are strongly influenced by seasonal sales experienced by the glassware and candle segment.

Additionally, our other two segments achieved strong year-over-year sales increases in the current year's quarter. With respect to our inventories, the September 30th totaled over $153 million compared to roughly a $150 million at June and $155 million last September.

Our food segment has comparatively showed modest increases, in part, reflecting the higher sales volumes. Non-food inventory have declined, and especially so, when compared to levels of a year ago. The closure of our industrial glass manufacturing operations contributed to this decline.

Our net property plant and equipment increased less than $1 million since June 30, although over $27 million, since last September. The latter increase reflects the construction of our new frozen roll facility located in Kentucky, which as Jay mentioned, was effectively placed in service early in the quarter. This new operation contributed to the food segment’s depreciation and amortization, increasing about $1.2 million in the quarter. Our debt outstanding at quarter-end rose to $87.5 million, compared to $42.5 million at June 30. Seasonal borrowing needs supporting our Glassware and Candles business, as well as the continuation of our share repurchases, have influenced this increase.

As we disclosed earlier this month, we entered into a new five year credit facility, subsequent to quarter end that at a $160 million, is somewhat larger than our prior $100 million facility. With shareholders' equity at September still totaling over $427 million, we believe our balance sheet still provides us with considerable flexibility in meeting various and possible cash needs, be they for dividends, share repurchases or business acquisitions.

Turning to cash flows for a moment, cash flows provided by operating activities for the quarter totaled approximately $2.6 million, which compares to cash provided at $7.6 million in the year ago quarter. Relative changes in working capital components, especially the extent of increased accounts receivable resulting from higher sales, contributed to this decrease. One specific component of the quarters' cash flows that you may find of interest is depreciation and amortization that totals $7.8 million, which compares to approximately $7 million, recorded a year ago. As previously mentioned, other cash flows and notes for the quarter included capital expenditures of $8.258 million and share repurchases of $23.245 million.

In looking to our upcoming second quarter results, we want to remind you that the prior year's comparable quarterly results reflected income recognition of the U.S. government's remittance to us of approximately $700,000 under the Continued Dumping and Subsidy Offset Act. This income translated to approximately $0.01 per share after taxes. For this year, we have submitted an application for another annual remittance under the act. We currently anticipate receiving notice of the government's intention sometime in November. However, there remains a number of uncertainties associated with this program that do not allow us to estimate how much, if any, funding may be allocated to us this year.

On a closing note, I would like to briefly comment on a couple of income statement matters. First, our corporate segment expenses were somewhat higher than usual in the quarter, primarily as a result of increased project related professional fees. Additionally, with respect to our effective tax rate, we experienced a slight decline, largely attributable to a statutory increase in the federal deduction we received for a domestic manufacturing activity and we anticipate the current year's full year rate to generally stay in the neighborhood of 36% or so.

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

Jay Gerlach

Thanks, John. Looking ahead, we are optimistic yet mindful of the unpredictable seasonal demand that could impact certain of our food and non-food product lines, as well the usual automotive plant holiday down-times. Food ingredients cost looked to be at current or higher levels throughout the quarter. We may see some modestly lower aluminum cost. Our most recent significant new product-introduction, New York Brand Pizzeria Dipping Sticks, is just now getting on store shelves and we are anxious to see the consumer reaction.

Capital investments should decline as our Sister Schubert's project went down, share repurchases will be ongoing, and we'll be taking a good look at our cash dividend in November, being mindful of our 44 year history of annual increases. We continue to actively pursue our strategic alternative work, and while we are not making any announcements today, we believe that we are progressing well in our efforts.

With the acquisition efforts, I commented on this a couple of months ago and they are still active, though they have not progressed as timely as I might have expected.

Thank for joining us. John, Earl and I are happy to questions. So, Tina, if you would like to queue those up, please.

Question-and-Answer Session

Operator

Thank you. (Operator Instructions). The first question comes from the line of Mitch Pinheiro with Janney, Montgomery.

Mitch Pinheiro - Janney, Montgomery

Hey.

Jay Gerlach

Hey.

Mitch Pinheiro - Janney, Montgomery

Good morning. John, Jay, how are you?

Jay Gerlach

Good morning, Mitch.

Mitch Pinheiro - Janney, Montgomery

A couple of things, first, you talked about the specialty food sales, you commented that half came from Marshall Biscuit and pricing and I assume that the half is just volume?

Jay Gerlach

Yeah. That’s correct.

Mitch Pinheiro - Janney, Montgomery

Okay. And you talk about how the salad category has progressed? It was kind of weak over year-to-date, and are you starting to pick up there, or what's driving the volume?

Jay Gerlach

Yeah. I think we are seeing a category that is still relatively flat, although we don't have real, real current [ROI] data right in front us at the moment that might give us comps, the last year when we did have it, E. coli starting to take affect, but that's a category that's flat to very slightly up.

Mitch Pinheiro - Janney, Montgomery

But what's driving the foodservice business, is it new customers?

Jay Gerlach

I think it's more new items and just good mix, good sell-through with existing customers.

Mitch Pinheiro - Janney, Montgomery

Are you getting pricing in foodservice as well?

Jay Gerlach

We have gotten, surprising there, yes.

Mitch Pinheiro - Janney, Montgomery

Okay. And relative to Marshall Biscuit, since acquiring the company sales expanded. Are you seeing any distribution gains or was it sort of tracking it still at the historical run rate?

Jay Gerlach

Generally, the historical run rate at this point.

Mitch Pinheiro - Janney, Montgomery

Okay. Moving on to sort of just the margin side, the Sister Schubert's start-up, your start-up cost in the quarter, but you're seeing, I guess pleased, I don't know after get with (inaudible) use. But are you pleased about sort of the progress there? Is that how big it was with the start-up costs in the quarter? If you could quantify it, or just you can sort of give us some color?

Jay Gerlach

John, I think we're probably just cracked it into seven figures of start-up costs.

Mitch Pinheiro - Janney, Montgomery

Okay. And I mean, are we sloping up or we sloping down here if you look into the second quarter?

Jay Gerlach

From a start-up cost standpoint, yes, I'd say sloping down. So hopefully, the business has been sloping up, yes.

Mitch Pinheiro - Janney, Montgomery

Okay. I got you. That's what I meant. And as far as commodity costs, you obviously took challenge here, I mean have you hedged at all?

Jay Gerlach

Yeah, we do make some forward buys, primarily in soybean oil, but it's not significant at this point and it's probably not a significant benefit to us at this point either.

Mitch Pinheiro - Janney, Montgomery

Okay. Do you anticipate leaving further price increases to offset future inflation there?

Jay Gerlach

Based on what we are seeing today, I would say that's pretty likely, yes.

Mitch Pinheiro - Janney, Montgomery

And how would you, or when would something like that be implemented, is there a set time or is it just when you guys decide?

Jay Gerlach

At this point, there is a no set time, but I think we will be evaluating different product categories currently, and looking at not only the cost structure, but also what the competitive market conditions are like. So we can't give you a real good sense of exact timing at this point. But again, given the high cost which everybody in industry is facing, I think there is more pricing to come on a broad scale.

Mitch Pinheiro - Janney, Montgomery

Okay. If you keep all other things that in the Specialty Foods segment, can you talk about either market share or could you describe how you are doing within the refrigerated dressings [sales wise]?

Jay Gerlach

Yeah, the most [ROI] recent data that we have seen would suggest we continue to be the number two player in the category of refrigerated dressings behind the [Morris] who is the category leader.

Mitch Pinheiro - Janney, Montgomery

Did the category grow in the quarter?

Jay Gerlach

We don't have the data that would match the specific quarter. But the most recent data we've seen would be flat to slightly down sell-through.

Mitch Pinheiro - Janney, Montgomery

I got you. And in terms of, is that flat to down unit volume or you think that's flat to down sales?

Jay Gerlach

That's dollar, I am talking about, yeah.

Mitch Pinheiro - Janney, Montgomery

Dollars, okay. Thank you. And one last question, when you talked about your overall sales growth in [Schubert], was frozen breads and rolls stronger than dressings, or new products? How would you color that?

Jay Gerlach

I would probably say that, yeah. The frozen non-garlic bread in particular would be stronger than the dressings side.

Mitch Pinheiro - Janney, Montgomery

Okay. All right. Well, I heard you before. Thank you.

Jay Gerlach

Thank you.

Operator

Thank you. [Operator Instructions] Your next question comes from the line of Greg Halter with Great Lakes Review.

Greg Halter - Great Lakes Review

Good morning, guys, and good results in the face of challenging material cost.

Jay Gerlach

Good morning, Greg, thank you.

John Boylan

Good morning, Greg

Greg Halter - Great Lakes Review

John, I missed your comment on the receivables on a year-over-year basis. I know you're about 1.15 for the current period September. But what was it last year?

Jay Gerlach

If you'll wait just one second and that has been restated, Greg for the divested automotive operations, those are now in discontinued operations.

Greg Halter - Great Lakes Review

Okay.

Jay Gerlach

A year ago it was roughly $107 million.

Greg Halter - Great Lakes Review

107?

Jay Gerlach

Yes.

Greg Halter - Great Lakes Review

Okay. And are those restatements available or will it be in your 10-Q?

Jay Gerlach

I guess, at this point we would intend to present a September to June comparison. But we will take that under-advisement.

Greg Halter - Great Lakes Review

Okay. And I know you've talked about looking at alternatives to paraffin wax, and so forth. Has anything happened in that regard relative to other formulations or vegetable wax, or whatever is out there?

Jay Gerlach

At the present time Greg, the vegetable wax costs have shot up pretty dramatically and we've actually been reformulating a little bit more recently, back to more paraffin content because of that.

Greg Halter - Great Lakes Review

Okay. Well can't win there?

Jay Gerlach

And we don’t seem to right at the moment now.

Greg Halter - Great Lakes Review

And looking at your candle and glassware segment, is it still about a 70-30 mix, favoring candles?

Jay Gerlach

Yeah, that's a pretty fair mix. Yes.

Greg Halter - Great Lakes Review

Okay. And when was your next glass furnace rebuild [needed]?

Jay Gerlach

At this point we are probably out almost two years.

Greg Halter - Great Lakes Review

Okay. And on the Sister Schubert’s plant, I presume with your commentary that you are just about complete there in terms of the capital spending?

Jay Gerlach

That's right.

Greg Halter - Great Lakes Review

What do you envision for the year now on CapEx? And then I would presume that it would be more of a go-forward basis as well, given these two projects rolled in to one, if you will, is it now complete or just about complete?

Jay Gerlach

We've commented on about $30 million and I think we would stick pretty close to that, although we might have a little more likelihood of coming up a little bit shy of that at this point.

Greg Halter - Great Lakes Review

Okay. And, John I think on the corporate expense you indicated they are up somewhat, on a year-over-year basis, due to certain project related professional fees.

John Boylan

That is correct Greg.

Greg Halter - Great Lakes Review

Can you elaborate a little more on what that is related to?

John Boylan

Well, as you look at the corporate segment expense last year, it averaged about a $1.8 million, a little over that. So, the prior year first quarter was light to the average, and the current year’s quarter does include an unusual amount of professional fees. I prefer not to get into the exact background but a variety of third party fees have been incurred.

Greg Halter - Great Lakes Review

And will those be ongoing?

Jay Gerlach

Those are somewhat difficult to predict, but I might expect the average of the corporate expenses in the year to run somewhat above the year ago levels. Hopefully not quite to the extent that we have seen here in the first quarter, but that could depend upon various projects we decide to undertake.

Greg Halter - Great Lakes Review

And then moving over to the food side, we saw in soybean oil, which we know is up there, what other costs are really having a detrimental impact on the quarter?

Jay Gerlach

Just about all of them frankly, flower, dairy, eggs. It just kind of goes on and on, virtually everything is up, and in many cases, up noticeably.

Greg Halter - Great Lakes Review

Okay. And, John I think in the past you had provided sensitivity on some of the food costs like soybean oil. Is that still holding true, or has that changed at all?

John Boylan

Well, when we've indicated in the past, there is a plenty of change in soybean oil, if market would run in the neighborhood of $1 million or so. It pried just a cad higher than that. What we’re seeing, obviously, is a significant increase in basically the four buckets of cost that Jay just outlined. It is oil, dairy, and wheat driven, essentially flour and eggs. And historically we might see any one of those costs go up in a bad crop year or issues affecting the dairy herd and alike. What we’re seeing is that this year is just a broad comprehensive set of increases in all those buckets.

Greg Halter - Great Lakes Review

Okay. And one last one, on the food side relative to the price increases, Jay based on your commentary with food price, and Marshall adding to about half of the growth, would that seem to indicate that the price was about 1% to 2% on a favorable side for the quarter?

Jay Gerlach

Yeah, you apply that, and they are probably hovering right around that 2% area.

Greg Halter - Great Lakes Review

Okay. Thank you very much.

Jay Gerlach

Sure. Well thanks.

John Boylan

Thanks, Greg.

Operator

(Operator Instructions) At this time there are no further questions, we will now turn the call back to Mr. Gerlach for any closing remarks.

Jay Gerlach

Well, thank you for joining us this morning. We look forward to talking to you in late January as we report our second quarter results.

Operator

Thank you for participating in today’s Lancaster Colony Corporation's first quarter fiscal year 2008 conference call. You may now disconnect.

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