Lancaster Colony F1Q08 (Qtr End 9/30/07) Earnings Call Transcript

Oct.29.07 | About: Lancaster Colony (LANC)

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 andCFO

Earl Brown - IR

Analysts

Mitch Pinheiro - Janney,Montgomery

Greg Halter - Great Lakes Review

Operator

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

Conducting today's call will be Jay Gerlach, LancasterColony Chairman and CEO, and John Boylan, Vice President, Treasurer and CFO.

All lines have been placed on mute to prevent any backgroundnoise. 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 todayfor the Lancaster Colony first quarter fiscal year 2008 conference call.

Now, please bear with me, while we take care of a fewdetails.

As with other presentations of this type, today's discussionby Jay Gerlach, Chairman and CEO, and John Boylan, Vice President, Treasurerand CFO, will contain forward-looking statements of what may happen in thefuture, including statements relating to Lancaster Colony's sales prospects,growth rates, expected future levels of profitability, as well as the extent ofshare repurchases and business acquisitions to be made by the Company.

These forward-looking statements are based on numerousassumptions and are subject to uncertainties and risks. Accordingly, investorsare cautioned not to place undue reliance on such statements. Factors thatmight cause Lancaster's results to differ materially from forward-lookingstatements include, but are not limited to, risks relating to the economy,competitive challenges, changes in raw materials costs, the success of newproduct introductions, the effect of any restructurings, and other factors whichare discussed from time to time in more detail in the Company's filings withthe SEC, including Lancaster Colony's report on Form 10-K. Please know that thecautionary statements contained in the Safe Harborparagraph 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 toget 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 benefitfrom the closure of our industrial glass operations, helped us offset thechallenge of still higher raw material cost.

From a capital allocation standpoint, during the quarter werepurchased 572,708 shares worth $23,245,000. And year-to-date, since July 1st wehave repurchased 857,950 shares for $34,395,388, which leaves 29,890,440 sharesoutstanding 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 SisterSchubert'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 SisterSchubert's plant and today we are very pleased with its progress. We are not sureyet where we expect productivity to be, but we are well on our way, and glad tohave the capacity for this growing product line. We plan to expand ourgeographic markets and introduce new products over the coming months with thisadded capacity.

Strong top line performance from most of our food productlines and both our retail and food service channels produced over 7% salesgrowth. Price increases in the Marshall'sacquisition provided over half the growth, while the balance came from the gooddemand of Sister Schubert, produce department items growth, and new itemcontribution of Texas Toast croutons and hummus.

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

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

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

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

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

Our auto segment now comprises ofour Dee Zee aluminum truck accessory business, and it had a much better quarterwith a very strong 18% sales growth, driven by strong demand from severaloriginal equipment-like truck programs, also some increased pricing, combinedto show a much improved bottom line. Metal costs were still slightlyunfavorable in the quarter.

Let me ask John to make fewcomments at this point.

John Boylan

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

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

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

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 ourindustrial glass manufacturing operations contributed to this decline.

Our net property plant and equipment increased less than $1million since June 30, although over $27 million, since last September. Thelatter increase reflects the construction of our new frozen roll facilitylocated 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 andamortization, increasing about $1.2 million in the quarter. Our debtoutstanding at quarter-end rose to $87.5 million, compared to $42.5 million atJune 30. Seasonal borrowing needs supporting our Glassware and Candlesbusiness, as well as the continuation of our share repurchases, have influencedthis increase.

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

Turning to cash flows for a moment, cash flows provided byoperating activities for the quarter totaled approximately $2.6 million, whichcompares to cash provided at $7.6 million in the year ago quarter. Relativechanges in working capital components, especially the extent of increasedaccounts receivable resulting from higher sales, contributed to this decrease.One specific component of the quarters' cash flows that you may find ofinterest is depreciation and amortization that totals $7.8 million, whichcompares to approximately $7 million, recorded a year ago. As previouslymentioned, other cash flows and notes for the quarter included capitalexpenditures of $8.258 million and share repurchases of $23.245 million.

In looking to our upcoming second quarter results, we wantto remind you that the prior year's comparable quarterly results reflectedincome recognition of the U.S.government's remittance to us of approximately $700,000 under the ContinuedDumping and Subsidy Offset Act. This income translated to approximately $0.01per share after taxes. For this year, we have submitted an application foranother annual remittance under the act. We currently anticipate receivingnotice of the government's intention sometime in November. However, thereremains a number of uncertainties associated with this program that do notallow us to estimate how much, if any, funding may be allocated to us thisyear.

On a closing note, I would like to briefly comment on acouple of income statement matters. First, our corporate segment expenses weresomewhat higher than usual in the quarter, primarily as a result of increasedproject related professional fees. Additionally, with respect to our effectivetax rate, we experienced a slight decline, largely attributable to a statutoryincrease in the federal deduction we received for a domestic manufacturingactivity and we anticipate the current year's full year rate to generally stayin the neighborhood of 36% or so.

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

Jay Gerlach

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

Capital investments should decline as our Sister Schubert'sproject went down, share repurchases will be ongoing, and we'll be taking agood look at our cash dividend in November, being mindful of our 44 yearhistory of annual increases. We continue to actively pursue our strategicalternative work, and while we are not making any announcements today, webelieve that we are progressing well in our efforts.

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

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

Question-and-AnswerSession

Operator

Thank you. (Operator Instructions). The first question comesfrom 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 specialtyfood sales, you commented that half came from Marshall Biscuit and pricing andI 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 hasprogressed? It was kind of weak over year-to-date, and are you starting to pickup there, or what's driving the volume?

Jay Gerlach

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

Mitch Pinheiro -Janney, Montgomery

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

Jay Gerlach

I think it's more new items and just good mix, good sell-throughwith 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 thecompany sales expanded. Are you seeing any distribution gains or was it sort oftracking 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 SisterSchubert's start-up, your start-up cost in the quarter, but you're seeing, Iguess pleased, I don't know after get with (inaudible) use. But are you pleasedabout sort of the progress there? Is that how big it was with the start-upcosts in the quarter? If you could quantify it, or just you can sort of give ussome color?

Jay Gerlach

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

Mitch Pinheiro -Janney, Montgomery

Okay. And I mean, are we sloping up or we sloping down hereif 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 ascommodity costs, you obviously took challenge here, I mean have you hedged atall?

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 significantbenefit to us at this point either.

Mitch Pinheiro -Janney, Montgomery

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

Jay Gerlach

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

Mitch Pinheiro -Janney, Montgomery

And how would you, or when would something like that beimplemented, 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 willbe evaluating different product categories currently, and looking at not onlythe 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 ismore pricing to come on a broad scale.

Mitch Pinheiro -Janney, Montgomery

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

Jay Gerlach

Yeah, the most [ROI] recent data that we have seen wouldsuggest we continue to be the number two player in the category of refrigerateddressings 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 specificquarter. But the most recent data we've seen would be flat to slightly downsell-through.

Mitch Pinheiro -Janney, Montgomery

I got you. And in terms of, is that flat to down unit volumeor 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 youtalked about your overall sales growth in [Schubert], was frozen breads androlls stronger than dressings, or new products? How would you color that?

Jay Gerlach

I would probably say that, yeah. The frozen non-garlic breadin 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 comesfrom the line of Greg Halter with Great Lakes Review.

Greg Halter - Great Lakes Review

Good morning, guys, and good results in the face ofchallenging 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 ayear-over-year basis. I know you're about 1.15 for the current periodSeptember. 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 discontinuedoperations.

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 inyour 10-Q?

Jay Gerlach

I guess, at this point we would intend to present aSeptember 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 alternativesto paraffin wax, and so forth. Has anything happened in that regard relative toother formulations or vegetable wax, or whatever is out there?

Jay Gerlach

At the present time Greg, the vegetable wax costs have shotup pretty dramatically and we've actually been reformulating a little bit morerecently, 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 itstill 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 yourcommentary that you are just about complete there in terms of the capitalspending?

Jay Gerlach

That's right.

Greg Halter - Great Lakes Review

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

Jay Gerlach

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

Greg Halter - Great Lakes Review

Okay. And, John I think on the corporate expense youindicated they are up somewhat, on a year-over-year basis, due to certainproject 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 firstquarter was light to the average, and the current year’s quarter does includean unusual amount of professional fees. I prefer not to get into the exactbackground 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 expectthe average of the corporate expenses in the year to run somewhat above theyear ago levels. Hopefully not quite to the extent that we have seen here inthe first quarter, but that could depend upon various projects we decide toundertake.

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 detrimentalimpact on the quarter?

Jay Gerlach

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

Greg Halter - Great Lakes Review

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

John Boylan

Well, when we've indicated in the past, there is a plenty ofchange in soybean oil, if market would run in the neighborhood of $1 million orso. It pried just a cad higher than that. What we’re seeing, obviously, is asignificant increase in basically the four buckets of cost that Jay justoutlined. It is oil, dairy, and wheat driven, essentially flour and eggs. Andhistorically we might see any one of those costs go up in a bad crop year orissues affecting the dairy herd and alike. What we’re seeing is that this yearis 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 theprice increases, Jay based on your commentary with food price, and Marshalladding to about half of the growth, would that seem to indicate that the pricewas 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 furtherquestions, we will now turn the call back to Mr. Gerlach for any closingremarks.

Jay Gerlach

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

Operator

Thank you for participating in today’s Lancaster ColonyCorporation's first quarter fiscal year 2008 conference call. You may nowdisconnect.

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