Q2 2020 Earnings Call
Dave assistance key President and CEO and Tom Pickett CFO all lines have been placed 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 would like to ask a question. During this time simply press Star then the number one on your telephone.
Pad and questions will be taken any order that they are received if you would like to withdraw your question press. The pound key. Thank you and now to begin the conference call here as Dale Ganobsik, Vice President of Investor Relations and Treasurer for Lancaster Colony Corporation.
Thank you Jason.
Good morning, everyone and thank you for joining us today for Lancaster colony's fiscal year, 2022nd quarter Conference call.
A discussion. This morning may include forward looking statements, which are subject to the safe Harbor provisions of the private Securities Litigation Reform Act of 1995.
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 event.
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 Dotcom later this afternoon.
For today's call, Dave Demski, our president and CEO will begin with an update on our strategic initiatives and 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 our fiscal year.
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, Dave Demski, Dave.
Thanks, Dale and good morning, everyone. It's a pleasure to be here with you today as we review our second quarter results for fiscal year 2020.
I'd like to start off by sharing the progress we've made against our growth plan. This quarter. As you may recall are bit better food company growth plan consist of three simple pillars accelerate our base business growth.
Simplify our supply chain to reduce our cost and grow our margins and 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, our consolidated net sales grew by 1.6%.
Our retail segment net sales were flat, while our foodservice segment net sales grew 3.4%.
Retail net sales benefited from favorable net price realization increased sales of frozen garlic bread and continued gains for shelf stable dressings and sauces sold under license agreements.
Our New York bakery frozen bread products delivered another quarter of sales growth as we took share from other branded players.
New York Bakery also benefited from the successful launch of three cheese cheese sticks and targeted consumer support.
In addition, our licensing business continues to grow nicely as our olive garden line increased share and remains the top selling Italian dressing in the shelf stable dressing category.
Offsets to retail growth in the quarter were primarily timing related first we saw seasonal orders of our Marzetti Carmel Apple dips skew more towards Q1.
In produce dressing our bottle conversion project, which is providing a nice net price realization benefit resulted in a higher level of shipments in Q1 versus Q2.
Overall, we're making good progress in this segment and have a strong pipeline of new products planned for launch during Q3, which I will discuss later in the call.
In our foodservice segment, excluding sales attributed to omni baking, which closed on November 16, 2018, net sales increased 2% led by higher sales of branded products sold through distributors and solid topline growth for Bantam bagels.
The 2% increase in foodservice net sales compares to a strong second quarter last year. When the segment reported net sales growth of over 12%.
Turning our attention to product supply, we continued to make significant progress on our second pillar simplifying our supply chain to reduce cost and grow our margins. During Q2, our consolidated gross profit increased 8.5 million or 9.3% to 999.
999.9 million.
Gross margin improved 200 basis points to 28.1%. This improvement was driven by a handful of key initiatives, including strategic procurement.
Transportation management, along with some favorability in commodity costs since as eggs and soybean oil.
We also continued to invest in our supply chain to support growth and reduce cost I'm happy to report that construction for the expansion of our sister Schubert frozen dinner Rolls plant in horse Cape Kentucky was completed on schedule last month and the new production line. There is expected to be up and running as planned later this month.
We're also in the midst of a capital project for our Bantam bagel business to expand production capacity and Ics and increase automation that we expect to be complete and operational.
Early in fiscal year 21.
Overall, we were pleased with the progress made during our fiscal second quarter in growing our base business, reducing cost through supply chain initiatives and investing to support continued growth.
I'll now turn it over to Tom picket, our CFO for his commentary on our Q2 results.
Thanks, Dave overall, we're pleased with the results for the quarter consolidated net sales increased 1.6% to second quarter record of $355.1 million.
Excluding omni baking sales of $6.3 million in the current year quarter, and three and $3.8 million in the prior year quarter consolidated net sales increased by 90 basis points.
As you'll recall Ami baking sales are attributed to temporary supply agreement. These sales will decline from the current level in the coming quarters with the expectation that the supply agreement will end by December 2020.
Consolidated gross profit increased $8.5 million or 9.3% to $99.9 million. This increase was driven by our cost savings programs lower commodity costs prove net price realization and a favorable foodservice sales mix.
Selling general and administrative expenses increased $5.9 million or 14.8%.
The largest driver this increase was our ERP program, which accounted for $4.9 million NSG name for the quarter.
We also capitalize an additional $900000 of ERP related expenditures for application development stage activities.
Reported consolidated operating income declined $7.1 million due in part to the ERP investment in the current year quarter.
And the prior years prior years favorable noncash reduction to contingent consideration for angelic because of $9.7 million.
Key drivers of the operating income growth. Excluding these items include the 200 basis point gross margin expansion the company achieved as well as the topline growth.
Our effective tax rate decreased to 21% this quarter from 23% in the second quarter fiscal 2019.
Decreased primarily reflected a higher tax benefit on stock based compensation activity.
Our tax rate for the remainder of the fiscal year 2008 is forecasted to be 23%.
Second quarter diluted earnings per share decreased 15 cents to $1.58. The investment in ERP reduced earnings per share by 14 cents and the noncash adjustment to contingent consideration increased EPS by 27 cents in the prior year period.
With regard to capital expenditures, we continue to project our fiscal year 20 expenditures to be in the range of $80 million to $100 million, our year to date spending and $57.7 million includes investment fleet capacity expansion project at our frozen dinner Rolls facility Norske, Kentucky that we recently completed and the purchase of the omni baking fun.
Clearly that was previously leased.
In addition to investing back into the business. We also return funds to shareholders. Our board of directors approved a 5% or 8% increase to our quarterly dividend that was paid in December.
Lancaster colony is proud to be one of only 13 us companies with 57 consecutive years of regular cash dividend increase.
Even with a higher level of investments increased dividend payouts, we finished the quarter debt free with over $200 million of cash on the balance sheet.
So to wrap up my commentary this quarter featured strong gross profit and margin improvement driven by cost savings program pricing discipline commodity favorability and topline growth that help fund our investments for future growth.
Now I'll turn it back over to Dave for his closing remarks. Thank you.
Thanks, Tom.
Looking ahead to the second half of our fiscal year, we expect consolidated topline growth to be in the low single digits excluding.
How many baking sales for the retail segment, we expect improve base business growth in the low to mid single digits driven by a strong pipeline of innovation that will be hitting the store shelves starting in Q3.
In licensed products were excited to announce that last month, we began shipping olive garden Italian dressing into the retail drug channel.
And we will be expanding into the dollar channel later this month, both the drug and dollar channels are new to Lancaster colony's distribution network and represent a significant growth opportunity for our business, we look forward to bringing additional products, including some from our own family of brands to these channels in the future.
Starting later in February we will be introducing in shipping Asian sauces under a license agreement with Bibibop Asian grills ebay BOP as a very fast growing on trend fast casual chain and this new license agreement will encompass their delicious Yum Yum sauce and other great tasting flavors.
In March we will be extending the license agreement with our foodservice partner Buffalo Wild wings, and begin selling individual bottles of their opponents sauces, and six different flavors traditional Buffalo Asian, Zing hunting barbecue parmesan Garlock mango hub in Euro and Caribbean jerk. This.
Expanded license in single bottle offering provides us with an opportunity to significantly increase distribution and grow the brand with retailers that we were not able to reach with our current multipack offering.
We will continue to selectively pursue license product opportunities as a source of growth for our retail segment.
Finally, I'm thrilled to announce that later this month, we will begin shipping an entirely new line of shelf stable dressings under the Marzetti brand called case fully dressed these salad dressings will consist of cleaner ingredients a package that protects them and we will be offered in eight great tasting flavors, including Blackberry poppies.
Seed Buttermilk Romano ranch and Sun dried tomato Italian.
If I had to say our increased focus on innovation and growth for our retail segment is translating into an expanding pipeline of new product introductions and growth opportunities. We will look forward to updating you on our progress in the months ahead.
In the foodservice segment, excluding omni baking sales, we anticipate low single digit sales growth in the back half of our fiscal year, driven by select national chain restaurant accounts and increased sales of our branded products.
Offsets to foodservice sales growth are expected to include the impact of a second sourcing initiative by one of our national accounts and slowing traffic trends for the sector as a whole.
Regarding our margin outlook for the second half, we're projecting commodity costs will turn inflationary most notably in our fiscal fourth quarter and we expect to finish the full fiscal year with commodity costs modestly inflationary compared to fiscal year 19.
Our cost savings initiatives combined with our net price realization programs will help offset the impact of commodity cost increases.
Before I wrap up my comments I would like to update you on two very important initiatives that are tied to our long term growth.
First I'd like to provide you with an update on our ERP initiative project ascent as you May recall project ascent will enable us to replace our current 20 year old ERP system. The new ERP system will provide us with a long term scalable system infrastructure well into the future to facilitate organic growth and.
Actions all the while also helping us to drive cost savings, we're making good progress with the design phase of the project and deployment remains on schedule for the first half of fiscal year 21.
We will continue to disclose 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 cost associated with this important project.
We expect to have an estimate of the total ERP project cost to share with you and future earnings calls.
Finally in January our board of directors approved the capital expenditure for a major capacity expansion at one of our dressing facilities. This project is slated to cost roughly $95 million and will significantly increase the production capacity of our dressing and sauce business, we anticipate it will take roughly.
18 months to complete and importantly, it will enable us to keep up with the long term growth requirements of our strategic foodservice partners and our own retail business.
We expect roughly 10 million of this project cost to hit fiscal year 2000, and this number is included in the 80 to 100 million Capex forecast that Tom mentioned earlier in the call.
This concludes our prepared remarks for today and we'd be happy to answer any questions that you may have Jason.
At this time I would like to remind everyone.
Order to ask your question. Please press Star then the number one on your telephone keypad.
Your first question comes from the line of Brian Hollander from D.A. Davidson. Your line is open.
This is James Michael on for Brian Holland, Good morning, everyone.
Morning, Jay morning.
Thanks, just few questions for me.
In the content to those upcoming retail license products and then looking historically your Buffalo Wild wings and Olive Garden line.
We get a high level on how single item skews it may be a key unlock for enabling broader distribution.
Yeah, absolutely. It's a great question as you're aware up until recently, we were limited to a multi pack offering that was principally in Costco sands, and and then and Walmart.
We've been able to workout and expanded license agreement with Buffalo Wild wings, which gives us the its ability to move into all of retail.
It that way I would probably think about this is that the total addressable opportunity as well in excess of $1 billion. If you include barbecue sauces, winning sauces marinades and the other space, where this line can play there's a lot of room for the brand to run up until.
Just recently, we were limited, though to a principally just the club channel and and Walmart, where they can handle up a three packs. So we think this will provide up a major unlock and it'll give us the potential the create something that.
May be able though approach what we've been able to do with all guard.
Yes, Thats very helpful. And then changing subjects you talked in the past few quarters about how you're foodservice customers of nicely outperformed product and service.
We're seeing some sequential deceleration your growth any change my dynamic it looks like food service restaurant traffic was slowing and pick back up in November December.
Have you seen a trend in the past few months than they can you comment on any wider QSR trends that may be having an impact than your business.
Yes. Another great question historically, we've said that our business probably performs 100 5200 basis points above the sector average and what we're seeing here that caused us to the sort of guide down marginally are a couple of drivers. One is one of our strategic customers as I mentioned earlier in my transcript.
Is implementing a second sourcing initiatives. So we've absorbed one quarter that we expect to have three more quarters of that to take on so we obviously didn't lose the customer, but just I think to create supply chain redundancy like many of them do they have decided to add a second supplier.
The other thing that we are seeing though is we continued to see general softness what we're seeing is that traffic generally is trending down it's been marginally offset by increased rain, but but generally as we go deeper into the data and we go account by account, we're seeing things that are leading us to believe that we're going to CA.
Not a non a pullback, but a slight slowdown.
Understood. Thank you for your time everyone.
Thank you Dave.
Your next question comes from the line of Todd Brooks from CL King Your line is open.
Hey, good morning, everybody congratulations on the quarter.
Thank you Todd morning breakup.
If we could maybe parse the gross margin improvement the 200 basis points that we saw in fiscal Q2.
We talk about maybe whats attributable to the process improvements both supply chain and transportation management, and then I think in Q1 due to.
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Quantify what the with the benefit from better commodities was on.
The net price realization as well if we could just give some color within the 200 basis points sure. So this is top so.
The cost savings.
Program was the largest contributor of the margin growth.
There, we were tracking to about $20 million annually.
So were approximately in the $5 million range.
Commodities contributed another $2 million a cost in this day of favorability of savings and as Dave mentioned, we do expect that to turn inflationary going forward.
We also got the favorability of from the price realization in the higher volumes in the foodservice segment. So those are some of the key drivers of the margin accretion that we achieved in the quarter.
And the the back half commodity outlook has it changed I know you talked about things getting inflationary on the on the Q1 call.
You are looking out are you expecting as much inflation more inflation, what some fluctuating within the within the individual line items, yes. So it turns from being favorable in this quarter to neutral and then more unfavorable in the fourth quarter based on our current projections.
No. Okay commodities that are driving that for us if you just want a little bit more texture.
Our eggs, where we've seen a pretty significant pull back over the last three quarters on egg sets driven some of the deflation in our portfolio overall that we're going to see begin to reverse itself and the other is soybeans I think as everybody who's sort of watch the sector knows due to the that trade disputes in a soybeans in soybean oil but.
Pulled back.
And we're starting to see the outlook on soybeans tighten up marginally as well.
Okay, Great and then my second.
Second question is if we look at.
Not the license partner products, the retail, but as you look at.
New product development pipeline, whether it's the cheese sticks or maybe the sweet roles you talk about expected new product performance from a revenue standpoint, or what you task the new product development side of the house with from a from a revenue creation standpoint.
Well, it's a great question Todd historically, we haven't broken out those numbers you know I can tell you anecdotally some of the things that we have going on.
In the last quarter, we talked about three cheese cheese sticks, which continued to do well.
We talked about the sweet items, the pumpkin spice roles continues to perform well.
And there is some other items and sister Schubert that I didnt get into in this call because we didnt want it to turn into a laundry list, but theres a lot of activity that's going on there on our own brand.
The tastefully dress product is one that we're very very excited about it gives us a chance to emphasize our license with olive garden, which has has become a a real leader for us to use our own brand as a means by which to reach more broadly outside of Italian in that that categories in excess of about 1 billion eight.
Shelf stable salad dressing so.
As we I don't really want to go into a number but if you had asked the team here internally it usually sound something like this a lot more and a lot faster.
And what we're not satisfied until we start to get towards that so youre going to see just to us maintain focus on continuing to.
To make sure that our existing brands like sister, Schubert, and New York and others in our portfolio are healthy and were renovating knows and net were pushing innovation to bring new and exciting and relevant items there.
Okay, Great and then just a final one on the horse cave facility being completed.
At the end of January what does that unlock for you guys going forward is it.
He is a capacity to fulfill demand is is it new product capabilities or is it more on the product cost side of production.
Great question and really what it did.
And this is the the sister Schubert Horse Cave project there.
There's sort of addressing that same need.
If you look at over the recent past our businesses continued to grow and we're running out of role capacity. So first and foremost what it enabled us to do both in retail and foodservice did keep up with our growing sister Schubert business.
When we built that facility, though we also built it with the Optionality, where we could look at potentially.
Simplifying our overall network structure as you know by going through our material. We have 16 factories, many of which are subscale in one of the things that we're looking at long term is how do we continue to find ways that are prudent to simplify and streamline our overall supply chain structure.
As you sort of pivot now and we talk about the dressing expansion that we talked about ill give you a case in point on this one.
About four years ago, five years ago, or so we were doing about 200 million pounds.
A year through our our horse K facility down there that facility now believe it or not is up to almost 300 million pounds just to give you. The idea of those sort of dressing that we're running through the pipes. So to speak and we've done that all the while without increasing capacity, we've done a lot of kaizen events and we've leveraged six sigma as a means.
By which to reign more capacity out of the existing facility, we've increased things like kettle sizes and stuff like that but we've hit a point, where given the growth of both our foodservice customers and our own retail business. We don't have room to expand without expanding the size of the box and that was a big part of that.
Driver for this one it's the first new box that we've built or an extension on a box, rather and our dressing business and probably about 12 years, maybe a little bit more than that.
Okay, great. Thank you.
You're welcome.
If there are no further questions. We will now turn the call back to Mr. Sosinski you for his concluding comments.
Jason Thank you and thank you everyone for participating this morning, we look forward to sharing our third quarter results with you in early may.
Good morning.
That concludes today's conference call you may now disconnect.
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