LANC

Lancaster Colony Corporation (LANC)

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Lancaster Colony Corporation (LANC)

F1Q2011 Earnings Call Transcript

October 28, 2010 10:00 am ET

Executives

Earle Brown – IR

Jay Gerlach – Chairman, CEO and President

John Boylan – VP, CFO, Treasurer and Assistant Secretary

Analysts

Alex Bisson – Northcoast Research

Alton Stump – Longbow Research

Greg Halter – Great Lakes Review

David Leibowitz – Horizon Asset Management

A.J. Strasser – Cooper Creek Partners

Mitch Pinheiro – Janney Montgomery Scott

Seth Cohen – Valinor Management

Presentation

Operator

Good morning. My name Julie and I will be your conference operator today. At this time, I would like to welcome everyone to the Lancaster Colony Corporation first quarter fiscal 2011 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 session. (Operator Instructions)

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

Earle Brown

Good morning. Let me also say thank you for joining us today for the Lancaster Colony first quarter fiscal 2011 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's Jay Gerlach. Jay?

Jay Gerlach

Good morning and thank you for joining us. Our first quarter fiscal 2011 results were challenged by rising raw material costs and other costs not fully offset by price increases or growth.

We were encouraged to see our food segment growing again, although the growth came from our foodservice channel, not retail. Candle sales had another strong growth quarter as a couple of new customers added to solid growth from our existing base.

Our net result was sales up over 4% and earnings per share of $0.81 versus $1.01 last year. Share repurchases for the quarter totaled 219,850 shares for $10.7 million. With just over 80,000 shares repurchased so far in the second quarter, we currently have actual outstanding of 27,867,000 shares and 129,000 shares authorized for repurchase.

Capital expenditures for the quarter totaled $6.7 million with over half of that amount going to our Sister Schubert's plant expansion project set for completion July 1 of next year. We estimate this project will increase our overall frozen dinner roll capacity by approximately 60%.

We continue to estimate full-year capital investment of about $45 million.

Turning to our Specialty Foods segment, we saw sales growth of almost 2% driven by foodservice channel growth. A couple of new programs were the primary contributors to that growth as the channel in general remains sluggish.

Growth in retail produce dips and our overall sales of croutons were offset by sluggish frozen demand, particularly frozen garlic breads. Texas Toast crouton sales continued strong, as did our Marzetti Caramel dips. Our new Marzetti Otria Greek yogurt dips began shipping in the quarter and Marzetti Simply Dressed refrigerated salad dressings did not start meaningful shipment until October.

Current IRI data for our key categories in measured channels shows the following for the 12 weeks ended October 3. Refrigerated dressings category up mid-single-digit, Marzetti brand up low-single digits. We are number two in the category in that period.

Refrigerated produce department dips, category download single digits, and Marzetti down low-single digits. We are number one in that category.

The overall crouton category, up mid-single digit, total Marzetti brands up mid-teens, and again, number one category position. Frozen garlic bread category is down low-single digits – were down low-single digits, again number one category position.

And lastly, our frozen dinner rolls category is up upper-single digits and our Sister Schubert brand is up low-double digits, again number one category position.

Operating margins declined to about 17.2% from last year's 20% and last quarter's 17.6%. Material costs were up about 2 million or so, primarily from dairy, eggs, sugar, packaging.

Pricing was a bit negative in the quarter as well. Our ongoing investment in consumer marketing was a factor, as was higher freight costs. Our mix was slightly less favorable as our retail share slid to about 51.4% in the quarter from 53% the prior year.

Turning to candles, in addition to the new customers and new product with existing customers, we also saw seasonal shipments get started a bit ahead of last year. While we had some pricing go into effect in September, we also met some competitive challenges that generally offset any benefits.

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