Q1 2020 Earnings Call

Based on mute to prevent any background noise. After the speakers have completed their prepared remarks, there will be a question and answer period, if you'd like to ask a question. During this time to the press Star then the number one on your telephone keypad and questions will be taken in the order that they are received.

If you would like to address your question press the pound key thank you and now to begin the conference call.

As Dale Ganobsik, Vice President of Investor Relations and Treasurer for Lancaster Colony Corporation.

Thank you Sharon good morning, everyone and thank you for joining us today for Lancaster colony's fiscal year, 2021st quarter Conference call.

Our discussion. This morning May include forward looking statements, which are subject to the safe Harbor provisions of the private Securities Litigation Reform Act, but to 95.

These statements are subject to a number of risks and uncertainties that could cause actual results to differ materially and the company undertakes no obligation to update these statements based upon subsequent events.

A detailed discussion of these risks and uncertainties is contained in the company's filings with the SEC.

Also note that the audio replay of this call will be archived and available at our company's website Lancaster colony's dot com later this afternoon.

For today's call dates Zinski, our president and CEO will begin with an update on our strategic initiatives and the highlights for the quarter.

Tom Pigott, our CFO will then provide an overview of the financial results.

Dave will then share some comments regarding our outlook for the remainder of our fiscal year.

That does at the conclusion of our prepared remarks, we'll be happy to respond to any of your questions.

Once again, we appreciate your participation. This morning, I'll now turn the call over to Lancaster, colony's President and CEO days isn't ski Dave.

Thanks, Dale and good morning, everyone. It's a pleasure to be here with you today as we review our first quarter results for fiscal year 2020.

Roughly three years ago, we launched our better food company growth plan, which consist of three simple pillars number one accelerate our base business growth.

Number two simplifier supply chain to reduce our cost and grow our margins and number three identifying execute complementary M&A to grow our core.

During the last several years, we have focused on strengthening our team implementing our growth plan and harvesting the results.

During this past quarter, we continue to leverage our strategy and grew our base business organic net sales by 2.6% return.

Segment grew organic net sales by 1.5%, while our foodservice segment grew organic net sales by 3.9%.

The increase in retail organic net sales was fueled by growth of our marriage steady branded produce dressings, veggie dips and Carmel dips.

I'll return to growth for New York Bakery frozen garlic bread and continued growth of shelf stable dressings, and sauces sold under license agreements.

We were particularly pleased with the performance of our retail team in Q1, which included relevant new innovation items, such as the launch of New York Bakery, three cheese cheese sticks and sister Schubert's Pumpkin Spice Sweet treats.

The team is also successfully executing brand renovation initiatives such as our Marzetti branded debs with a more simplified ingredient panel and improved taste.

Shifting our attention to our foodservice segment that 3.9% increase in organic net sales was led by volume gains with key national chain restaurant account customers higher sales of branded products sold through distributors.

An increase sales for our industrial business, which is predominantly frozen pasta.

It is worth noting that this is the seventh consecutive quarter of organic net sales growth for the foodservice segment with an average gain of 7.7% per quarter over that period.

Our supply chain team posted another quarter of strong results in reducing cost and improving productivity.

These results were driven by our lean six Sigma program, which is now in its third year.

Our new transportation management system, which started to go live last January was a noted source of cost savings in the quarter.

Combined with the benefit from the growth in sales and some favorability in commodity costs. The supply chain team's efforts led to a 13.4% increase in gross profit and a 170 basis point increase in gross margin for our fiscal first quarter.

Since we launched our strategy to simplify our supply chain to reduce our cost and grow our margins. The supply chain team has a t. as achieved gross savings in excess of $20 million per year.

Updating you on our recent acquisitions Bantam Bagels continues to perform in line with our expectations as we invested to further expand retail distribution.

We're also pleased to report that per IR I data retail sales for Bantam bagels nearly doubled for the 52 week period ending September 29.

On the foodservice side Bantam achieved a sequential improvement in sales of about 15% enough why 20 Q1, compared with 520 Q4 as Bantam is gaining placement in the counter display case at Starbucks cafes nationwide.

Consistent with the comments, we shared during Q4 financed teen earnings call. Our supply chain team remains fully focused on implementing operational improvements at our omni baking facility, which we acquired in November 2018, we expect most of these changes to be completed by the end of this calendar year.

Year.

Overall, we were pleased with the progress made during our fiscal first quarter and growing our base business, reducing our costs through supply chain initiatives and integrating our most recent acquisitions.

Ill now turn the call over to Tom Pigott, our CFO for his commentary on our Q1 financial results.

Thanks, Dave overall, the results of the quarter exceeded our expectations consolidated net sales increased 6.4% to first quarter record of $337.1 million. This growth was driven by increases in both the retail and foodservice segments. Excluding net sales attributed to the acquisitions of Bantam economic.

Organic net sales increased 2.6% for the quarter.

Consolidated gross profit increased $10.9 million or 30.4% to $92.1 million.

The increase was driven by higher net sales cost savings from our lean six Sigma project as well as favorable commodity costs.

Selling general administrative expenses increased as we invested behind strategies, Dave highlighted reported SGN, a increased $7.4 million or 23% largest driver of that increase was our ERP program in which we incurred $2.7 million and costs related to design phase of the project.

Other investments included higher consumer promotional spending in our retail segment to drive topline growth incremental costs from the Bantam acquisition as we begin to scale that business and increased personnel costs.

Consolidated operating income increased 5.3% to first quarter record of $51.7 million decrease reflects the higher gross profit investments in SDMA as well as a $900000 restructuring charge related to the plant closure that we announced in Q4.

It's important to note that the ERP investment combined with the restructuring charge reduced our operating income growth by 730 basis points for the quarter.

Our effective tax rate increases quarter to 23.3% from 22.6% in the first quarter of fiscal 2019.

Decrease reflected a lower tax benefit on stock compensation as well as an increase in state taxes.

Our tax rate for the remainder of fiscal year 20 is forecasted to be 24%.

First quarter earnings per share increased six cents or 4.2% to $1.48.

The investment in the ERP reduced earnings per share by eight cents in the restructuring charge had a negative two cents impact.

Together these two items reduced our reported earnings per share growth by 10 cents or 710 basis points.

With regard to capital expenditures, we continue to protect our fiscal year 2000 expenditures to be in the range of $80 million to $100 million.

Our Q1 expenditures of $43.2 million included ongoing investments for the capacity expansion in our frozen dinner rolls facility in horse gave Kentucky that we expect to be complete near the end of the second quarter and the purchase of the omni baking facility property that was previously leased.

So to wrap up my commentary overall the quarter feature nice topline gross pricing discipline commodity favorability and cost savings programs that help fund our investments for future growth.

Now I'll turn turn it back over to Dave for his closing remarks. Thank you.

Thanks, Tom looking ahead to the remaining three quarters of our fiscal year, our expectations for consolidated topline growth remain in the low to mid single digits overall commodity costs are projected to be generally flat in our fiscal second quarter, and then turned modestly inflationary in the back half of our fiscal year.

Our supply chain teams lean six Sigma program, including initiatives and strategic procurement combined with our net price realization programs will help offset the impact of commodity cost increases. We also anticipate continued progress with our Bantam bagel and omni baking acquisitions are planned in.

Investment in production automation for Bantam, which we expect to be completed near the end of our fiscal third quarter will add capacity for continued growth and provide a notable benefit to the overall profitability of that business.

Our supply chain team will also continue with upgrading and automating our omni baking facility to reduce cost.

An increase productivity.

Finally, I'd like to provide you with an update on our ERP initiative project has sent as you may recall project ascent will enable us to replace our 20 year old ERP system and provide us with a long term scalable system infrastructure well into the future to facilitate organic growth and scale.

Acquisitions, while also helping us drive cost savings.

We have recently completed the groundwork of building, our internal team and selecting our system integrator and software vendor. We are now beginning to design phase of the project with deployment scheduled to start in the first half of fiscal 21.

We expect to have more details to share with you regarding the cost in the timeline for project consent during our fiscal second quarter earnings call.

We will continue to disclose the ERP project cost separately in our quarterly earnings releases and SEC filings to provide the investment community and all of our stakeholders with a clear understanding of the associated expenditures for this important project.

This concludes our prepared remarks for today and we'd be happy to answer any questions you may have.

At this time I would like to remind everyone in order to ask your question. Please press star one on your telephone keypad.

Your first question comes from Jason Rodgers with Great Lakes review.

Yes.

Just a question on the gross margins, obviously very strong at the 27% level just wondering on the sustainability of that going forward.

This expectations on raw material costs and everything else baked in there.

As far as though just modeling that marginal.

Sure.

Jason as we pointed out in the back part of my commentary, we expect in the second quarter for commodities to be essentially flat and then to turn modestly inflationary in the back half of the year.

We do think we're going to be able to offset that commodity inflation through a combination of our lean six Sigma program and our disciplined PNR program that we have in place.

So I think generally that gives you a view for things of how we see than today I don't know Tom if you'd want to add anything at all overall were it was very strong quarter.

And as Dave highlighted we did have benefited some from from some commodity favorability in it that we do expect to to moderate as.

As the year progresses.

And could you quantify what that benefit was as far as the lower raw material costs.

So you know it was.

Approximately $2 million.

Commodity favorability, we also had some convert some procurement savings then that increase that number but it was roughly around $2 million.

All right and then just as far as the cost that you're incurring to automate processes that omni and Bantam and expanding distribution advance them I Wonder if you could kind of give us an idea with those were in the quarter and we should be thinking about those going forward.

Sure.

Ill describe them for you a little bit on on the front end first of all with Banton, essentially where we're spending there's two areas one of which is in slotting to help continue to expand the distribution of the product in retail the secondary and Bantam, where we're investing is in essence, where we're we're building a end to end automated line for.

For this product today.

Where its manufactured we literally have.

Envision dozens of people are more than doesn't people that are working on aligned that are manually filling the bagel balls with cream cheese or eggs or whatever the the filling is the new line will will be completely automated and it's going to take that manual labor off.

And it's also going to run at a considerably faster pace to allow the product continued to scale.

We have been negotiating with the equipment manufacturers. The project has begun and as Weve mentioned in my prepared comments, we expect that to be complete.

At the end of our third quarter. So I think roughly March timing somewhere around there as it pertains to Bantam, what we're doing there.

Is it was November of 2018, when we bought it.

Excuse me they were our and our a they were a co packer for us on our New York, Texas Toast business. They did about half of our volume we bought the business and over the course of the last year. What we've been doing is investing in upgrading ovens freezers and automating some of their processes as well and the nature of the cost that were taking on there and some.

Cases, our capex and others. Its expense give you case in point when we need to replace a repair a floor. If if we were replacing entire floor in a building we can capitalize that if it's a portion of a floor. It gets expensed. The other area that we end up taking on headwind with that project in particular is whenever we do these these.

Heavy maintenance or or heavy investment projects, we end up shutting the factory down for several days at a time 2345 days at a time, which results in a lot of absorption in the period you put those together they are both running I would venture to guess somewhere in the low to mid single digits in the period and we're going to send expect those.

As to continue on and then taper as we work into the back half.

So yes, the impact combined with the two was a low seven digit impact on the quarter's results.

Okay. That's helpful and just finally, obviously bantams doing well with the expanded distribution Starbucks how much of a contribution can that made to the topline in fiscal Tony.

By I think could be material I don't know have we disclaim looking around here in the room. If we just got a housing demand, yes, I think I.

I think at this point.

We're very optimistic about the growth potential of the business, but.

Given that we're in we're in kind of a rollout mode.

I don't want to put a specific number out there for you right now, but as we get better visibility as we progress.

Certainly be happy to share that information.

Okay. Thank you.

Once again, if you'd like to ask your question. Please press star one on your telephone keypad and we have a question from Frank Camma with Sidoti.

Hey, good morning, guys cellular Barney Frank learn and Frank.

It was wondering if you could talk about.

For the benefit in the quarter I don't know few quantify this at all either from.

Margin or not just the benefit book maybe.

Hey.

Hello impacted the quarter from revenue from eliminating some skews. The here last year was a very profitable. So obviously that has a bit a bit of a headwind to your revenue going into the quarter.

But you are already benefited I guess on the margins. If you could talk about that right I think I would probably point to Twoq cases in point, where we have.

Several cases in point, where we focus tier.

One is sister Schubert, where if you remember we announced a restructuring projects we closed our several land facility. We discontinued some items there if you're looking at the IRI data you could see some headwind on that that business.

If you look at the profit we don't disclose by segment it was.

Any significant pickup on the bottom line.

And that same thing would be true on on angelic and on up on our flatbread wraps and it was roughly to the tune of about what we'd call. It a logo had I would say the two together about a 100 basis points of growth impact.

Okay.

And that most of while positively affected the growth so I'm, assuming I guess since those are lower than there okay. Yes.

Thanks Frank.

The angelic, we'll lap that in October and the Flatbread will website in November .

Oh, Okay. That's helpful.

And then my other question just sort of on the foodservice side of the strength that you're seeing there, particularly in early mentioned the national accounts can you just give us a little more color on the as for is are you seeing it from you know obviously the underlying accounts will speak doing good but is it because they're open.

Being more doors is it because they're just doing well overall can you just talk about or are you gaining more customers I assume it's not the graph sort of sub but if you can kind of talk about the sugar or the single largest component of the growth is an increase and same store sales growth.

Some of our to occur our key customers another contributor to that would be some some store openings, but the lions share of it has been from our our biggest customers an increase in same store sales growth.

And then in other cases, we are selling more to some existing customers as well, but if you're trying to think your way through how to think about this I would say half of it at least as being powered by seems tier sales growth of our largest customers.

The next piece would be coming from store openings of some of those customers and then the last would either be new sales to existing customers or just new customers altogether. So its overall it pretty had healthy mix on a national accounts and on the branded side. We're just we're we've talked about are for while now we're we're building share and were dry.

Having penetration.

Got it. Thank you so ahead.

Thanks, Greg.

Once again, if you'd like to ask a question. Please press star one on your telephone keypad.

And if we do not have any telephone questions. At this time, we will now turn the call back to Mr. Sosinski.

Thanks, everyone for your participation. This morning, we look forward to sharing our second quarter results with you in early February and the early February .

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