The Marzetti Company (MZTI) Q1 2013 Earnings Report, Transcript and Summary

Good morning. My name is Deshanna and I will be your conference facilitator today. At this time, I would like to welcome everyone for the Lancaster Colony Corporation First Quarter Fiscal 2013 Conference Call. Conducting today’s call will be Jay Gerlach, Lancaster Colony Chairman and CEO and John Boylan, Vice President, Treasurer and CFO. [Operator Instructions] And now to begin your conference here is Earle Brown, Lancaster Colony Investor Relations. You may now begin.

Good morning and let me also say thank you for joining us today for the Lancaster Colony First Quarter Fiscal 2013 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, risk relating to the economy, competitive challenges, changes in raw materials cost, the success of new product introductions, the effect of any restructurings and other factors as are discussed from time to time in more detail in the company’s filings with the SEC, including Lancaster Colony’s report on Form 10-K. Please note that the cautionary statements contained in the Safe Harbor paragraph of today’s news release also apply to this conference call. Now, here is Jay Gerlach. Jay?

Good morning and thank you for joining us. We’re pleased to report a very good start to fiscal 2013 with first quarter sales up 6% and earnings per share reaching $0.98 up 26% from last year. We saw sales and operating income growth in both segments of our business. During the quarter we invested $5.4 million in capital expenditures with the biggest project being the beginning of our crouton capacity expansion, which should have a total investment of approximately $11 million and be complete by March of next year. We did not repurchase any shares during the quarter. Candle sales for the quarter were up about 12% with stronger fall season shipments driving the year-over-year improvement. There was no benefit from pricing in the quarter. Operating income improved due to greater sales, higher production levels and slightly lower wax costs. Turning to our Specialty Foods. Segment sales grew by 5% with pricing contributing about 1/3of that increase. The balance of the sales growth benefited from less promotional spending and improved volume and mix. We saw our retail channel grow a bit faster than foodservice making the total retail mix about a 0.5% ahead of last year’s quarter. Our newer retail items continued to contribute to our sales growth. Newer frozen products showing growth included New York BRAND Garlic Knots and Sister Schubert Pretzel Rolls. Sister Schubert’s Mini Loaves and Sweet Hawaiian Rolls are just starting to reach store shelves. In refrigerated salad dressings our Simply Dressed line continued to deliver growth helped by new West Coast distribution. Our caramel dip has had a pretty good season and croutons continued to show growth. Our New York Texas toast line continues to be challenged by a variety of -- by a very competitive category. Latest IRI sell through data showed the following for key categories. This 12 weeks ended October 7, refrigerated dressing, the category was up 5.8%, Marzetti and Simply Dressed up 2.1%, we remain number 2 in the category. Croutons, the category was up 2%, our brands up a 11%, we remain number 1 in the category. Veggie dips category was up just under 1%, Marzetti was up about 3.8%, we remain number 1 in the category. Garlic bread, the category was down just under 1% about 0.7% and New York brand was down 1.1%, we remain number 1 in the category. Dinner rolls, category was up 0.5% the Sister Schubert's brand was up 8.5% we remain number 1 in the category. Foodservice channel growth was helped by demand from many of our national chain account customers. Improved store volumes among certain chains, new items and promotional activity all contributed. Segment operating income and margin benefited from the growth and sales volume, improved pricing and modestly lower raw material cost, somewhat lower promotional spending and the stronger retail mix were also factors. Now I would like John to make a few comments.

Thanks Jay and good morning. I’ll start by commenting on several of the more notable balance sheet fluctuations as of September 30. First our accounts receivable totaled $96,053,000 which was approximately $23 million higher than at June 30 Generally similar to what we have experienced in past years the majority of this increase reflected in the first quarter's seasonally stronger Candle sales. Additionally, when compared to September 2011 our overall receivables increased about $11 million largely reflecting the improved year-over-year sales in the Glassware and Candles segment. Moving to inventories, the quarter end balance of $121 million was about $11 million greater than the June 30 total. The majority of this growth related to the first quarter seasonal build of certain frozen foods. Our year-over-year inventories also increased by approximately $10 million, which is primarily due to a build of Candle products in anticipation of increased second quarter sales. A somewhat lesser note you may also notice an increase in accrued liabilities over both June 30 and the year ago levels. This increase is most due to the extend and timing of corporate income tax payments. Our overall balance sheet continues to be strong in its capitalization as we remain debt free with cash and equivalents totaling over a $192 million and shareholders equity in excess of $581 million. Turning to cash flows for a moment, our cash flows provided by operating activities for the quarter totaled approximately $16.4 million, which compares to $17.6 million provided a year ago. Comparatively the relative growth in inventories worked against us although this impact was somewhat offset by the increases in net income and accrued liabilities. One specific component of the quarter’s cash flow, that you may find of interest in depreciation and amortization that totaled approximately $5 million, which is a similar amount to a year ago. Other items of note include capital expenditures that totaled $5,434,000 and regular dividends of $9,825,000 I appreciate your attention this morning and I’ll now turn the call back to Jay for our concluding remarks.

Thanks John, looking ahead to our second quarter, generally the stronger seasonal quarter of the year, we are encouraged by the good first quarter start. We remain mindful however of a still unpredictable economy and its impact on the consumers. Food ingredient cost was favorable last year will not be as much as originally expected as the drought impact becomes more apparent. Among the commodities we could see challenges within the back half of fiscal 2013 are eggs, dairy related items and flour. We will likely see some increased investments in brand marketing and promotional support versus last year as well. We have some exciting new products we are introducing at this week’s Produce Marketing Association trade show for example our updated and repackaged Marzetti veggie dip line will feature contemporary new packaging and smaller sizes. Also being introduced as an extension of our Simply Dressed brand, 6 new Girard flavors and a distinctive new bottle. These new additions will begin shipping to customers in our third quarter. The second quarter should be our seasonally strongest in the Candle business. We anticipate full year capital expenditures to range between $20 and $25 million with our crouton capacity expansion project as our biggest project. We continue to look for good fitting food acquisitions. While there seems to be a bit more activity in the M&A area finding the right fit value and value remains challenging. We have recently made a great commitment to external growth within our food segment by positioning a senior leader to become more focused on developing our future growth through acquisition. As many of you know fiscal ‘13 could be our 50th consecutive year of annual cash dividend increases and we look forward to considering a change at our upcoming November Board meeting. With that Deshanna we're ready to take questions.

[Operator Instructions]. Your first question comes from Alton Stump with Longbow Research.

This is actually Phil Terpolilli calling in for Alton. Couple quick questions, first on the cost coverage side. You've made it sound like second half of ‘13 is going to be difficult and I think you mentioned last quarter too. Any sense of if you are going have to take more pricing come kind of February, March, April timeframe or is it just kind of too soon to tell.

Actually it is too soon to tell. So we have no plans right at that moment but we do continue to, to watch that closely.

Okay and then just with retailers. Has there been any pressure over the last few months to lower pricing is kind of cost have fallen here.

No, I don’t think there’s been any particular pressure there.

Okay, that's helpful. And just on the new product front. I think you mentioned there is going to be several new products shipping here in 3Q the Simply Dressed line. Are a lot of those things, are they going to take incremental shelf space, or will that cannibalize existing space you have.

Well -- certainly our goal is to get some existing space with these new Simply Dressed vinaigrettes. The veggie dip changes actually, initially our packaging update. So that will be a just replacing existing product on the shelf with what we think is a much nicer more contemporary package that hopefully will help us spur some sales growth there.

Sure, and just one last question. With the -- you mentioned the press release kind of lower level of coupon redemptions. Can you just elaborate on that a little bit more, what happened in the quarter, any reasons for that?

Well I think part of it is we did little less coupon activity as far as, as getting them out into the marketplace. So that was I think the primary factor there.

Our next question comes from Mitchell Pinheiro with Janney Capital Markets.

Yes a little change for me there. So Jay would you mind giving a little more detail on the retail versus foodservice segments. You said that retail grew faster can you any more detail around that. Was foodservice up?

Foodservice, yes they were both up. So it was -- I don’t have the exact number right in front of me but I think retail grew maybe 1.5% or so faster than foodservice.

Okay and what’s driving you mentioned chain, some chain account growth, is this new product activity, is it traffic, what’s driving the food service side?

Yes, the food service side I think is at least with some of our customers, we wouldn’t say it’s across the board, but I think some of them have seen pretty good store traffic increases. In some cases we’ve had a new item here or there and some, again specific to certain chains, some different promotional activity that would have impacted some of our items, so all those things contributed to that.

And as you look into the balance of the year on the food service side what should we expect. Is it macro related issues or is there any visibility into new product programs, things like that?

The visibility kind of across the board is always a little hazy. But yes we think we’ve got the things that we can impact relative to potential additional product or promotional activity certainly on the horizon. And while we’d like to be optimistic about what the store traffic for our customers is going to be like. Our outlook is as hazy as anybody else’s I think as to what the future brings.

Okay. And then it was interesting, I noticed in IRI that it seems like your shelf-stable dressings have done quite well. Is there any strategic change there? Are you doing anything different? What’s driving that growth in shelf-stable.

No, Mitch we’re not doing much different there and as you know that’s not one of our key categories. To tell you the truth I don’t even have that data in front of me so I can’t specifically comment on it. But there is nothing unusual, that we’re, that we are doing there.

Okay, just and then how about on the refrigerated side. Do you still see the Simply Dressed is that still gaining distribution for you. Are you in the near-term have you settled into a certain distributions size or can you talk about that a little bit?

I mean in the quarter yes we did pick up some important new distribution out in the West Coast. So we are -- our distribution is definitely more established than it was 6 or 9 months ago, still some opportunities out there, but not as dramatic as what we saw initially rolled it out. But we do continue to see I think solid sell through and greater acceptance with the -- with the consumer. What we are seeing perhaps there is a little bit of, a little bit of cannibalization to our classic line of Marzetti Refrigerated dressings. So nearer-term the growth has been skewed more heavily to Simply Dressed.

Okay, just last question competitively speaking have you seen any, any changes or strategic changes I guess in Bolthouse or naturally, Naturally Fresh and anything different competitively?

I don’t know if we seen anything different competitively. I do think we’ve seen particularly Bolthouse have pretty good success as it relates to consumer sell through.

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

Just wanted to ask how the Olive Garden branded dressing going into Sam’s Club has been received and how that’s doing?

It does continue to perform well. Similar I think to what we’ve seen for the last 6 months or so. So, yes, volumes are holding up very well there.

And would those sales be counted in the IRI numbers or not?

Yes. I think they would, I just don’t have that in front of me to confirm that to you.

Okay. And I know when you mention in the category the segments on the press release Glassware and Candles but then in the verbiage it is pretty much candles. I’m just wondering, how much glasses left in dollars or percent of the total or something like that.

It’s very, very little on an annual basis. It’s maybe a couple of million dollars so it’s relatively -- it’s quite insignificant actually.

Okay, all right. And I wondered if I could ask about how you are hedged out going forward in the soybean, oil and wheat.

Yes we’re as we typically are at any point in time on soybean oil we go out a total of 12 months but the bulk of our coverage is out over the next 6 months or so we’re just a little bit north of half covered I think for that period of time. Flour we're pretty much fully covered through, through the third quarter but start to then get some exposure in our fourth quarter.

And I know in the past you’ve mentioned the impact of $0.01 change in the delivered cost how that would impact the company’s operating income. I just wondered if there is any update on those figures for both soybean and flour or wheat?

Greg, there really isn’t an update on the soy bean oil side. It’s sort of in that upper 6 figure range would be the impact. And we really don’t have a good rule of thumb on flour because that is sort of a wheat derived calculation that varies depending upon the type of wheat that’s involved.

Okay. And relative to the November timeframe with the potential for a dividend increase which again I can’t imagine you guys are going to break 49 year old record. But is there any sort of payout ratio that’s being targeted by the board.

No actually we do not have a specific target Greg and that’s kind of been our long term view and we’ve obviously over that many years of increasing dividends, we’ve had higher and lower payout ratios dependent on some of the fluctuation in earnings we’ve seen where we’ve consistently try to increase the dividend. Having said that I think is we’ve transitioned the business to primarily a food business . We are a little more comfortable with consistency of earnings and so while still not targeting a payout ratio I think we’re pretty comfortable in the ballpark of where we are and we could probably tolerate a little bit more. So I guess that’s the best thinking I could leave you with.

Okay. Well that’s helpful. I know usually about this time or over the next month is the CDSOA payment announcements are made. Do you expect anything from that this year?

Greg, I don’t know that there is any change in expectation this year compared to what we would have had same time a year ago. So we will wait till around Thanksgiving and see whether or not there is a notice of distribution this year.

And any expectation for a special like they did last year or catch up or whatever you want to call it?

At this point Greg there really is not such an expectation.

Okay. And, any thoughts on Candle profitability and/or margins for this year, your outlook for that business?

Well Greg, we got a little bit better start to the year than last year. The second quarter is obviously as it always is the key quarter in the business. We’ve got a little bit more seasonal demand expected. If that materializes and we can continue to keep wax costs in check and good operations. Hopefully it’s a little bit better than what we’ve been seeing. We clearly been focused a lot on that on improving margins in that business and we hope we’ll be able to accomplish that.

After years of wax cost raising it appears to me that they stabilized, may be coming down, who knows. What are your thoughts there?

Yes, maybe a little bit stabilized, I don’t know but we expect them to come down much. We perhaps benefited from continued work on developing blends of waxes that help us mitigate the high cost we’ve been dealing with but I don’t see dramatic savings there.

All right, one last quick one. The crouton plant where is that located?

It’s in Wareham, Massachusetts. It’s the original Chatham Village plant we acquired a number of years ago that we’re doing an expansion on.

And there are no further questions. We will turn the call back over to Mr. Gerlach for any concluding remarks.

Well thank you again for joining us today. We appreciate your time. Look forward to talking to you in late January with our second quarter results.

We do have a question in queue, would you like to take that?

Sure, we’ll do one more.

Okay. A question from Michael Lavery with Sidoti & Co.

Just a clarification because I got on a couple of minutes late. When you were talking about the dressing category, did you say it was up 5% percent, Marzetti was up 2.5%?

Yes that’s right, that’s refrigerated dressings, correct.

Okay. Now, is that, I forget exactly when the extension of the line was done. Is that something to do related to anniversary, a launch? I was just kind of surprised that number I thought might have been a little bit stronger.

Well, we continued to see good Simply Dressed growth Mike with the classic line actually showing a modest decline impacting us. And then the other grower in the category that is performing pretty well I think is the Bolthouse brand. So, I think those are the primary things going on right now on that category.

Okay. And just one question as I’m sure you’ve become accustomed to want to pin you down little bit more on commodity costs. So, I know obviously costs have come up and there’s going to be some impact in the second half. But just if you look at a relative basis considering you kind of had a trial in terms of gross margin. I know you don’t give guidance but you kind of had that trial in the March quarter last year in a relative basis is really where you’re talking about the fourth quarter being more challenge in the third quarter, I can’t imagine it would that challenging?

Yes I -- that’s fair certainly Mike. With the caveat on some of these ingredients things can change on pretty short notice but that’s probably fair assumption.

There are no further questions.

Well, thanks, Deshanna and again thank you all for joining us this morning.

Thank you ladies and gentlemen. This concludes today’s conference call. You may now disconnect.