LANC

Lancaster Colony Corporation (LANC)

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Lancaster Colony Corporation (LANC)

F3Q09 (Qtr End 03/31/09) Earnings Call Transcript

April 30, 2009 10:00 am ET

Executives

Earl Brown – IR

Jay Gerlach – Chairman, CEO and President

John Boylan – VP, CFO, Treasurer and Assistant Secretary

Analysts

Mitchell Pinheiro – Janney Montgomery

Jason Rodgers – Great Lakes Review

David Leibowitz – Horizon Investments

Sarah Lester – Sidoti & Company

Presentation

Operator

Good morning. My name is Chris and I will be your conference operator today. At this time, I would like to welcome everyone to the Lancaster Colony Corporation's third fiscal quarter 2009 results conference call. Conducting today's call will be Jay Gerlach, Lancaster Colony Chairman and CEO, and John Boylan, Vice President, Treasurer and CFO. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question-and-answer period. (Operator instructions) Thank you. And now to begin 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 third quarter fiscal year 2009 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 is Jay Gerlach. Jay?

Jay Gerlach

Good morning and thank you for joining us. We are pleased to report a much improved third fiscal quarter, with sales up nearly 7% and earnings per share of $0.76 versus $0.30 in last year’s unusually weak quarter. For the second quarter in a row, we saw operating margins in the Specialty Foods segment returned to more historical mid-teen levels.

During the quarter, we did not repurchase any shares and have 27,976,000 shares outstanding and 509,000 shares still authorized to repurchase. Capital expenditures totaled $2.2 million in the quarter and $8.9 million year-to-date. We would likely see full year capital expenditures of less than $15 million. With the help of both good earnings and inventory control, we reduced our outstanding debt at quarter-end to $15 million.

Turning to our Specialty Foods segment, for the quarter we saw sales growth of 10%, of which about 7% was pricing and an operating margin of 16.5%. Most of our product lines contributed to the sales growth with pricing being the primary factor to the retail channel as unit volume was near flat. Our food service channel delivered sales growth as unit volume was up in this channel.

Our sales of croutons from branded frozen retail breads and rolls outperformed that of our salad dressing and dip lines. Ingredient costs finally turned favorable year-over-year during the quarter by about $2 million. Freight costs also showed modest savings. Plant operating efficiency showed improvement as our entire operations team remains focused on enhancing productivity.

Within the Glassware and Candles segment, candle sales declined for the quarter although they were actually a bit better than we had initially expected. The segment sales were certainly impacted by the deterioration in economic conditions, but we were encouraged by some new product placement, some beneficial planogram changes, and seeing some customers with better and expected sell-through.

Our margins remained under significant pressure as high wax cost and reduced capacity utilization impacted our cost of sales. Wax costs are off their peaks, but not immediately helping the income statement.

Let me ask John to make a few comments relative to our balance sheet and cash flows.

John Boylan

Thanks, Jay. Let’s start out by discussing several key components of our consolidated balance sheet. Consolidated accounts receivable at March 31, 2009 totaled $72,355,000. This amount represented a 22% increase over last June’s total and was about 14% about the level of last March. The relative strength in timing of the quarter sales led to this growth.

With respect to our inventory, there we have a different story. Our consolidated total of approximately $91 million at the end of this March decreased nearly $30 million or 25% from the level of the past June. Further, on a year-over-year basis, our March inventories declined about $15 million or 14%. Seasonal factors influenced the June to March decline, but improved operating practices within our candle operations have also contributed to both these comparative declines, especially on a year-over-year basis.

With respect to borrowings, our long-term debt of roughly $15 million has dropped $40 million since June 30, in part reflecting the extent of cash flow generated on our higher levels of profitability. We are obviously pretty well capitalized at the present time, with our gross debt outstanding a relatively modest 4% or so of total capitalization. Except for the items I've already discussed, I believe the other changes in our balance sheet components are relatively unremarkable.

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