Earl Brown - IR Jay Gerlach - Chairman and CEO John Boylan - VP, Treasurer and CFO

Mitchell Pinheiro Oliver Wood David Liebowitz Greg Halter

Good morning. My name is Cassandra, and I will be your conference facilitator today. At this time, I would like to welcome everyone to the Lancaster Colony Corporation second quarter fiscal year 2008 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 Earl Brown, Lancaster Colony Investor Relations.

Thank you, good morning. And let me also say thank you for joining us today for the Lancaster Colony second quarter fiscal year 2008 conference call. Now, please bear with me for a moment 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?

Good morning and thank you for joining us. Our second quarter ended December 31st was quite eventful with the sale of our remaining glass operation in late November, strong sales growth in our food and remaining Dee Zee truck accessory lines, yet weak seasonal candle sales. Of greatest significance however was the ongoing challenge of still climbing food ingredient costs. For the quarter sales in total were up 5%, earnings per share up $0.54 was helped by $0.05 from a CDSOA distribution that hurt by $0.12 and $0.6 from the loss on our glass divestiture and pension settlement charge respectively. From a capital use standpoint we repurchased 675,718 shares during the quarter for $26,564,000 and year-to-date have repurchased 1,518,681 shares, leaving 1,826,000 shares available for repurchase and 29,238,000 shares actual outstanding. Capital expenditures in the quarter totaled $4.2 million, much lower due to the completion of our major food related initiatives and our divested shares. Total employment at December 31st was 4257 down from 5532 of the prior year. Looking to our Specialty Food segment performance during the quarter, the positive news is strong sales growth of almost 12%, benefiting from new capacity, particularly supporting our Sister Schubert's product line in the important fall season. The Marshall's acquisition, pricing, new products including the successful new product line of New York brand Texas Toast croutons and New York pizzeria dipping sticks. Both our retail and food surface channels showed good sales growth in the quarter. Operating income from the Specialty Foods segment shows an 8% decline in spite of strong sales and good plant operations as ingredient cost were unfavorable year-over-year in excess of $10 million and our new product introductory cost of over $1 million unfavorably impacted the quarter. Intergradient cost continue at near record levels. Pricing is definitely lagging the impact of this cost increases throughout the quarter. Food surface pricing was being adjusted and our next set of retail price increase is due in early March. Dee Zee, Automotive accessory volume had another strong quarter up 24% as our product build rates remain strong plus with the help of new programs. Volume and some pricing helped the segment record a 3% operating margin versus a loss last year. Glassware and candles was our only segment showing a sales decline and operating loss, while the divestiture of our glass operation was a major factor impacting our sales and operating income, including a $5.7 million loss on the sale. Candle sales were also quite softer during the key holiday season, the combination of couple of seasonal programs that did not repeat and weaker sell-through factors. We are pleased with the success of some of our new lines like our upscale essential element yielding a somewhat more favorable sales mix. Let me ask John now to make a few comments.

Thank you, Jay. I begin this morning by addressing some of the more noteworthy changes in our consolidated balance sheet. First, as of this past December 31st our net accounts receivables totaled almost $94 million, which was in line with the $93 million total at June 30th, but a $13 million decline from the December 2006 total. Compared to last December, the decrease reflected the weaker candle shipments we saw this quarter, as well as the impact of the glass operations divested or closed in calendar 2007. Turning to inventories, which totaled over $128 million at December 31. These declined about $22 million since this past June and over $7 million since December 2006. Our exiting the various class operations certainly contributed to these lower levels. The year-over-year reduction might have been even greater or if not for the slower than anticipated sales of candles in the second quarter having left us with higher than normal inventory levels. We will be appropriately adjusting some production schedules for these product lines moving into calendar 2008. Over in liabilities, you will note that we've reported long-term debt of $47.6 million as of December 31st. This bifurcation results from having entered into the new five year credit we disclosed this past October. At a $160 million, this facility is somewhat larger than our prior $100 million facility. Our shareholders equity at December totaling almost $410 million, we believe our balance sheet costs are still provides us with considerable flexibility in meeting various possible cash needs, be they for dividends, share repurchases, business acquisitions or capital expenditures. As on aside CapEx for the most recent six months totaled $12,430,000. Turing to our income statement I want to briefly touch on the three large items mentioned early in the press release we issued this morning. First, in the second quarter we did incur a pre-tax loss of approximately $5.7 million on the mid November sale of most assets of two glass operations. Net proceeds on the sale just exceeded $20 million. The second charge of note relates to the accounting consequences of significant pension distribution recently occurring out of a collectively bargained define benefit plan associated with the automotive floor mat operations we sold last June. This $3 million pre-tax charge is recorded in our corporate segment and represents a non-cash write-off related deferred pension cost. Finally, we also recorded a current year distribution under the CDSOA program of approximately $2.5 million in this year's second quarter or $0.05 per share after-taxes. This compares to last year's remittance of about $700,000 or a penny per share. Since October, the related anti-dumping duty is being collected by the US government are no longer subject to distribution to eligible effected companies. While there maybe some future distributions certain remaining amounts collected through the customs process prior to October, such potential distributions are not subject to reasonable estimation at this time. At the very best we do not expect to receive another payment before the last quarter of calendar 2008. At this point I will turn our presentation back over to Jay so he can conclude our prepared remarks.

Thanks John. Our strategic alternative work continues with no specific news today. Capital investment will remain modest for the balance of the year, which we now estimate will total in the range of $20 million to $25 million. Our share repurchase efforts are ongoing. While we continue to explore acquisitions in the food sector, new opportunity seem relatively few at the present time. Easily our biggest challenge working through the balance of the fiscal year will continue to be food ingredient cost, which are still moving up in some cases. Pricing will help, but there is still a lag effect likely of some significance in the third quarter. The slowing economy is likely to be a factor perhaps affecting our food service channel more quickly. On the new product front we continue to be excited about the items I mentioned earlier and also look forward to introducing three new Sister Schubert's items this spring Sister Schubert's brand of biscuits, cloverleaf rolls and wheat rolls with a honey glass. Candle sales are hard to predict over the non-seasonal second half, but we do know production will have to be adjusted to reduce inventories coming out of the soft holiday period. Aluminum truck accessory demand is holding up so far, but of course, the economy is a big factor. We are cautious as we look to our second half in monitoring our spending carefully. We'll continue to support our key brands and product lines as appropriate. Cassandra, we are ready to take questions.

(Operator Instructions) So first question comes from Mitchell Pinheiro.

Good morning, Mitch.

Hey. Good morning, couple of questions here. First, just if you could help us, looking at your consolidated income statement not the other segment, but just normal line items, where do we find a couple of these unusual items, that CDSOA, is that a revenue?

The CDSOA Mitch is down in miscellaneous income and that is excluded from the operating results of the glassware and candle segment.

Okay. That's excluded from the all right. So it's in the -- so it's...

It's not in any of the individual segments.

Okay.

As its below operating income and miscellaneous income.

I see. Okay. So, it's not even in offset to corporate expense either?

That is correct.

Okay. I got you. All right. In term of the pre-tax loss that where is that on your consolidated income statement?

Both the pre-tax loss on sale and the pension settlement charge are included in cost to sales.

In cost, okay. And other one the pension is in the corporate expense line in your segment reporting and I guess the pre-tax is included in the glassware segment.

That the loss until was in the Glassware and Candle segment, that is correct.

Okay. In terms of topline on the specialty segment, nice performance there. I was wondering if you could, I don’t know if I heard this, but whether you could breakdown pricing, volume and mix?

Mitch, I think we could comment on there is a little bit over half of that increase was coming out of just ordinary growth which would include mix. So little less than half is coming from pricing and the Marshall's acquisition.

Okay. How much did Marshall add in the quarter?

Probably low-single digits, may be couple of percent.

Okay. Got you. And in terms of volume have you seen a recovery of the packaged salad business?

Yeah. I think we've seen pretty good performance of our produce category items through the second quarter, which did have somewhat weaker comparisons to year ago when we did have the negative impact going on.

If you look at where you are today versus let's say two years ago, is the category up despite the..

I don't have those numbers right in front of me. I would say its if not up a little bit, it's not far from it.

Okay. So you think we've seen a full recovery there finally?

Yeah. I would say that's reasonably fair, yeah.

How about in the dips area, if you could separate it from the dressings, how the dips sales?

Dips had a good fall season.

Is your hummus product gaining traction?

Modestly. It's been slow down to ramp up, but we continue to push it forward.

Okay. In terms of your new products, I must have missed, but you did talk about some sliding expense?

Yeah, that was particularly related to rolling out our New York Brand, Pizzeria Dipping Sticks.

Is that – generally sliding is one time in the region, but is there further sliding as you expand or is the sliding going to go away?

Between go away and greatly reduced is probably fair. It is mostly been slotted. Certainly there is still promotional expense support them, the introduction when we get over into FSI coupon and that kind of thing.

You had a – so, when I look at your commodity cost, I guess it was $10 million which looks like about $0.20 a share. The incremental cost in the quarter, you did a decent job obviously of managing that, operating income wasn’t down that much. Are you seeing benefits out of the two Horse Cave, Kentucky facilities, can you talk about --

Yeah, I think we've definitely seen what we anticipated there in the way of reduced overtime at other facilities, greatly reduced outsourcing of product to meet demand that we were doing before those facilities came online, as well as just good efficiencies as we've got really state-of-the-art production line set up there.

So the new Sister Schubert piece would you characterize that is performing at or above your exceptions.

Yeah, I think we would today, sure.

Okay. And same with the dressings?

Yes.

Okay. So as you look at your second half with continued, with pricing and you seem to be getting volume, the commodity cost is your primary issue, is there any can you talk about whether you are forward purchasing strategy, is it all spot buys at this point so how do you -- how are you handling this?

Well in the areas where we can make forward buys, we have modest ones, but they are just that, they are not out very far at all. Of course, a lot of ingredients don't have that capability. So we are subject to the spot market and I think we are still continue to be challenged by these ingredients, so they've even gone up since the second quarter.

So the pricing actions that you are taking in March on the retail side, is based on where commodity costs are today. Do you anticipate enough pricing to get back to some sort of equilibrium or how would you color that?

Well we are hoping it get as close to that, but we have actually seen commodity cost continue to move since those increases were even announced. So the potential for still some further lag concern is there. And unfortunately we don't have a better crystal ball than anybody else on what these ingredient costs are going to do from where they sit today either. So there's obviously the potential for even further pressure, should they still move up.

How about on the food service side? Where do you, I don't really understand -- where do you stand on your pricing actions?

Those prices are adjusted more routinely or frequently as ingredient cost change. So we're I wouldn't say totally current there, but we are probably closer to than we are on the retail side.

Okay. And then finally could you just talk about your market share, where you stand in the dressing business at the end of the quarter?

I know that we saw much change there. Again our strength is in the refrigerated dressing category where we would be number two to the category later which is Marie's, but not really any significant change in that share at this point.

Okay. All right. Thank you.

Thanks, Mitch.

Your next question comes from Oliver Wood.

Thanks a lot.

Good morning Oliver.

Hi. Good morning. Just really I am running short of my question and lot of them has been asked by Mitch, but just wanted to ask, I know you commented on new M&A opportunities and that's sound little bit lean, but could you comment on deal conversation that you talked about previously. I think a couple of quarters go there may be three potential deals. Are those conversations still ongoing?

A couple of those are ongoing at this point, not at a pace that we might have hoped or anticipated at that point, but still very much active conversations.

Okay. That's really it from me. Thank you.

You welcome.

Your next question comes from David Liebowitz.

Good morning.

Hi David.

Few questions totally unrelated ones to another. New product introductions for the second half overall are they going to be greater or worse than a year ago, would your anticipation be for a higher sales levels of these products than a year ago.

David, we'd probably anticipate that -- I don't have an exact comparisons second half over second half, but at least as much not little bit more. Sales volume is of course hard to predict depended on what kind of acceptance we get from the trade. We do have a lot of interest in these three new Sister Schubert's we really haven't been able to bring much new to the Sister Schubert's product line, due to capacity constrain since we obviously don't have those anymore. We're able to do some new things so we are excited to see how those play out.

Second question, you mentioned couponing in terms of sliding fees, are you seeing a more of increase in couponing visa-a visa a year ago? What you anticipate for the second half make sure if its going to increase?

Well David, I think it's a competitive environment out there and where we need to add consumer support for certain product lines or brands, particularly from a competitive standpoint or we being willing and continue to be willing to do that. As it relates to brand new items, again, in the second quarter the Pizzeria Dipping Sticks was significant sliding investment. But again, we would follow that with reasonable amount of consumer support. Again, lot of that with couponing that is going on as we speak. So that will continue on through the second half. Probably not dramatically different than the year ago period, but may be up somewhat.

Okay. Turning to your buyback program, as I recall you agreed to buyback a minimum of 2 million shares this year. Is that?

That's correct, yeah.

Now, you seem to be running well and ahead of that pace thus far this year, does that mean you would be willing to borrow additional funds to keep the buyback going at this rate?

Well, there is obviously a lot of variables there, but as, we've been long-term repurchasers and I would anticipate we would continue to repurchase. We are at a pace that probably get us pass that 2 million share level, but other needs for capital particularly acquisition certainly could come in to play as it relates to that pace overtime, but we definitely anticipate we would continue to repurchase.

That’s great lead into my last question, which is in terms of acquisitions you said there were still a couple that are ongoing can you give us some idea of their size in terms of dollar revenue would be companies you are talking with?

Well, just ballpark range or maybe $30 million to $75 million in revenue.

Okay, $75 million would be the largest you have ever done?

That's right, yeah.

Thank you very much.

Sure, you're welcome.

Your next question comes from Greg Halter.

Hello Greg.

You mentioned a price increase in coming from March in the retail side I believe --

Right.

Can you provide any magnitude of what you are looking at there?

Its probably, although its going vary by product line, but maybe in the area of 3% or so.

And I don't know, if you have provided the cash flow from operations for the quarter?

Greg, we did not and we are actually still trying to polish it off to a number would be comfortable disclosing. I do think relative to the $42.5 million of cash flow provided in the six months a year ago we'll see a 10 million or so increase largely driven by relative changes in working capital components. I don't have the precise numbers to share with you this morning.

Okay. So it could be around $50 million, $52 million something like that.

It could be $55 million, somewhere in that neighborhood.

Okay. And have you repurchased any shares in that current quarter.

Yes, we have which is part of that year-to-date update.

Okay. That's included in the [1,518,681]

That's right that includes, right through earlier this week.

Okay. And looking at the corporate expense line and I am coming up with adjusted basis for the unusual items there about $2.136 million. Does that sound about right?

You should just be able to take the $3 million pension charge off the reported number, that's what you have done Greg. That's close to what you have, I don't know if you have little something else you are doing there Greg.

I have to look at it. And also on the candle and glass area, is there anything left in glass and should you just be calling this candles down the road here?

At some point this is and yeah I would like to think we should, but as John reminds me we'll have glass in comparative numbers for a number of quarters yet. So exactly when we drop off the glass part of the segment description as have been decided, but we'll probably will go up several quarters at this point.

Okay. But it is pretty much 100% candles now.

Well 98% candles only, yeah, yeah.

Okay. That's on adjusted basis it's looks like your earnings per share came out to $0.67 if I take the 54 and adjust for those three items, does that square what you are thinking?

I just want to go to the point of from a former earnings per share, but I think the 80 would agree with your calculation?

Okay. Last question, you commented about the CapEx being only $4 million in the quarter, $12 million year-to-date which I think an expectation for 20 to 25 for the year, which seems like fairly large increases at least given what you spend in the current -- in the second quarter. Any thoughts on what would be included in that 20% to 25% for the remaining six months of the year?

Well, Greg it's looks like it's -- again it would be mostly food related projects and just a sorted equipment of different sorts, a couple of boring things like roof repairs but we do think its has the potential to add up into that get to that at least low end of the range.

Okay. That's sounds good. And I presume we won't have to talk about furnish rebuilds any longer?

No, we won't.

It's a good thing.

We are out of that business, yeah, which obviously helps on the capital investments side. The glass business was usually our most capital intense.

Right, right. Okay. And that is all I believe I have right now. Thank you.

You are welcome.

Your next question comes from Mitchell Pinheiro.

Hello Mitch.

Hello. Can you hear me?

Yes.

Again, I am having trouble operating my phone this morning. Just two follow-ups. One, with the price increase in March on the retail side, should we anticipate any buy in the quarter from modeling six, maybe borrowing some of the fourth quarter sales?

That's kind of hard to predict. We probably would get some, it's kind of hitting the early March, its kind of mid-quarter more than right at the end. So I don't know that there would lot of buy in that would really carry into the fourth quarter, but there could some. The other factor that we haven’t mentioned of course its in there as we got an unusually early Easter this year versus prior years. So that relates to somewhat seasonal demand which includes the things like Sister Schubert's particular. It maybe skewed a little bit more to third quarter this year than the last.

Last question is on Glassware, of the roughly $17 million in revenue decline, can you break that down as to what was sort of ongoing and versus what was sold?

I think of that amount of $17 million roughly $7 million of that Mitch is attributable to the divested businesses.

Okay, perfect. All right, thank very much.

Sure. You’re welcome.

If the are no further questions, we would turn the call back to Mr. Gerlach for any concluding remarks

Well, thank you for joining us this morning. I appreciate your interest and we look forward to talking to you when we report our third quarter.

This concludes today's conference call. You may now disconnect.