LANC

Lancaster Colony Corporation (LANC)

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Lancaster Colony Corporation (LANC)

F4Q2010 Earnings Call Transcript

August 19, 2010 10:00 am ET

Executives

Earle Brown – IR

Jay Gerlach – Chairman, President and CEO

John Boylan – VP, CFO, Treasurer and Assistant Secretary

Analysts

Alex Bisson – Northcoast Research

Shaumo Sadhukhan [ph] – Meritage

Brian [ph] – Janney Montgomery Scott

Greg Halter – Great Lakes Review

A.J. Strasser – Cooper Creek Partners

Presentation

Operator

Good morning. My name is Kelly and I will be your conference operator today. At this time, I would like to welcome everyone to the Lancaster Colony Corporation's fiscal year and fourth quarter 2010 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 period. (Operator instructions) Thank you.

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

Earle Brown

Thank you. Good morning. Let me also say thank you for joining us today for the Lancaster Colony fiscal year and fourth quarter 2010 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. Thank you for joining us. We are pleased to report a record year in 2010 for operating income, net income and earnings per share, yet disappointed with our fourth quarter finish. While macroeconomic conditions were certainly a factor, a number of our own issues contributed to our results in the quarter and I’ll comment further when I review our two operating segments.

Overall sales for the quarter were down 2% as off-season candle growth was more than offset by softness in our food business. Food operating margins for the quarter of almost 18% were down from last year's over 20% level but nearly the same as our third quarter margins and within our longer-term range of mid-to-upper teens. Glassware and Candles segment fourth quarter margins were close to breakeven versus a 3% loss last year. Earnings per share of $0.81 were off last year’s record $1.10.

Sales for the year were up 0.5% to $1,057 million with all the growth from increased candle sales. Food sales were down almost 2% in the year, our first food sales decline.

For the year and all in the fourth quarter, we repurchased 80,334 shares for $4.4 million and have 344,000 shares authorized to repurchase after 84,000 shares repurchased so far in the first quarter.

Capital expenditures in the quarter totaled $4.7 million and for the full year $12.8 million. With a need to expand our frozen dinner roll capacity to supply our fast growing Sister Schubert’s brand, and some dressing and sauce related projects, we estimate fiscal 2011 capital expense could reach $45 million [ph].

Turning to our segments – our glass and candle sales, as you know mostly candles, finished the year up over 15% with a similar increase in the fourth quarter. While we benefited from some new programs and new products, I think the consumer was also looking more to the mass channel for their candle needs. Good operations, capacity utilization and primarily lower wax costs were the factors improving this year's operating income to $9.4 million from last year’s $5.7 million operating loss.

Our specialty food segment saw operating margins reach 19.7% for the year versus 16% [ph] last year and operating income increased $30.3 million despite an $8.6 million decline in year-over-year fourth quarter operating income.

The unfavorable aspects of the fourth quarter that I would highlight are continued volume and price weakness in the foodservice channel, Easter falling in the third quarter versus fourth quarter last year, perhaps about a $4 million sales impact, retail sales in the quarter were down 3%, food service sales were down 5%.

Material costs were favorably by perhaps $4 million or so, our lowest quarter this year, although offset by about $4 million of price declines. Promotional spending on frozen products was also up quarter over quarter. Operating efficiencies were not good in the quarter as we struggled with some new item startup and the relocation of dressing production from our closed New York plant.

Higher freight costs were also a low seven-figure headwind. Operating expenses rose from a variety of causes including some costs we hope not to see repeated in fiscal 2011. Overall, for the full year, our food business saw favorable material costs in excess of $40 million, unfavorable pricing of about $18 million, sales mix of 53.5% retail versus 51% last year, and increased investment in consumer brand marketing of about $6 million.

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