Q3 2020 Earnings Call
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 third quarter results for fiscal year 2020.
I'd like to begin by sharing some comments regarding the grown a buyer's pandemic and its impact on our business up before I do on behalf of all of US at Lancaster colony I'd like to thank all the healthcare workers in first responders for their tireless efforts to keep a safe.
From the on onset of the krona virus pandemic, we've been steadfast that our mission is fixed.
First provide for the health safety and welfare of our teammates and second ensure that we continue to play our role in our country's vital food supply chain.
Thanks to the diligence and care of our teammates I believe we remain true to both elements of our mission all the while we have fortified and sustained our business.
I'd like to extend a very sincere. Thank you to our frontline teammates, including those that work and manufacturing distribution transportation and retail merchandising for the incredible work they do everyday to keep our business operating.
So it all our business continues to source ingredients manufacture products and ship them to our customers. We've done this all while having implemented safety protocols as outlined by the CDC Osha, the FDA and local government authorities to ensure that we continue to operate safely.
I would also like to extend the special Thank you to our office based teammates for embracing this change in sustaining our business. During this unprecedented time.
Collectively they often conducted countless Microsoft team meetings with customers suppliers partners and each other our sales teams have conducted virtual category reviews with our customers are marketers have launch marketing campaigns procurement team has brought onboard new suppliers. Our transportation team has conducted carrier bid.
And our finance team is close to book and helped us prepare our third quarter filings.
Moving on to fiscal third quarter financial results. Our reported consolidated net sales grew by 1.1% excluding all omni baking sales consolidated net sales grew 1.9% net sales in our retail segment increased 10.7%, while net sales in our foodservice segment declined.
7.8%.
Retail net sales benefited from higher demand as the cobot 19 outbreak led to increased consumer demand that built upon solid base business performance.
Third quarter sales also benefited from new product offerings, including Buffalo Wild wings sauces, and single bottles and a promising start for regional pilot of took place offices that we're supplying to grocery stores.
Both Buffalo Wild wings, and chicks placed sauce are sold under exclusive license agreements.
Separately sales trends for our New York bakery frozen garlic bread products remain favorable as the brand continued to gain share olive garden dressings posted share gains for the quarter and our sister Schubert's brand of frozen dinner rolls achieved significant sales growth in the quarter as well.
It's notable that prior to the impact of Cobot 19, our quarter to date retail sales were up about 4% due to the contributions from our new product introductions and growth from our core retail business.
And our foodservice segment, excluding all omni baking sales net sales declined 6.6%.
Food service channel demand was adversely impacted by Coven 19, beginning in mid March as restaurant Dine in purchases were eliminated in consumer purchase options were limited to carry out delivery and drive through.
These service restrictions in the foodservice industry combined with the stay at home orders led to reduced consumer demand and lower sales for our foodservice segment.
Despite the unfavorable influences of the Cobot 19 pandemic, we grew our fiscal third quarter consolidated gross profit 1.6 million or 2.1% as we benefited from the favorable sales mix shift to the retail channel along with our ongoing cost savings program.
Gross profit was reduced by a 4.5 million dollar inventory write down resulting from an abrupt slowdown in foodservice orders in mid March due to the cobot 19 impacts.
It was further reduced when we paid out 1 million in bonuses to frontline employees in our factories in distribution network in gratitude for their work in helping meet the shifting demand within our business.
Ill now turn the call over to Tom ticket, our CFO for his commentary on our Q3 financial results.
Thanks, Dave overall, we're pleased with the underlying business performance in the many actions taken by our employees to address the coded 19 outbreak during the quarter.
Consolidated net sales increased 1.1% to third quarter record of $321.4 million.
Excluding omni baking sales of 5.31 $5.3 million in the current year quarter and $7.9 million in the prior year quarter consolidated sales increased by 1.9%.
As you'll recall Ami baking sales are attributed to a temporary supply agreement. These sales will decline from the current level in coming quarters with expectation that supply agreement will end by December of 2020.
Consolidated gross profit increased $1.6 million or 2.1% to $77 million in gross margins grew by 20 basis points.
The increase was driven by favorable product mix as revenues shifted from food service to retail our cost savings programs lower commodity costs improved net price realization. These improvements were offset by the $4.5 million inventory write down in the $1 million spent on the frontline bonuses. These two items reduced our gross margin growth by 100 said.
30 basis points.
Selling general and administrative expenses increased $8.9 million or 24% the largest driver. The increase was our ERP program, which account accounted for $4.9 million against unit costs for the quarter.
Other drivers the increase included higher spending on information technology and increased consumer promotional spending as well as a half million dollar increase in our allowance for doubtful accounts related to the impact to cope with 19.
Consolidated operating income declined $7.3 million or 20% due in part to the code 19 items, I mentioned, which totaled $6 million and the ERP investment of $4.9 million. These two items reduced our operating income growth by 29 percentage points key drivers the operating income growth. Excluding these items include the top.
Topline performance favorable mix and cost savings programs.
Our effective tax rate increased to 27% this quarter from 21% in the third quarter fiscal 2019. This increase reflects an adjustment to our estimated foreign derived intangible income tax credits higher state taxes, and a lower tax benefit from stock based compensation activity, we estimate the tax rate for the fiscal fourth quarter to.
24%.
Third quarter diluted earnings per share decreased 30 cents to 81 cents. The decline was due to the co. Good 19 items the investment in ERP in the higher tax rate, partially offset by an underlying business performed.
With regard to capital expenditures, we project our fiscal year 20 expenditures will be approximately $90 million our year to date payments for property additions of $72 million include investments for the capacity expansion project at our frozen dinner roll facility in horse gave Kentucky that we recently completed in the purchased the omni baking facility that was.
Obviously leased.
Separately specific to our ERP initiative, we also capitalized $4 million and expenditures in our fiscal third quarter for act application development stage activities.
In addition to investing in our business. We also return funds to shareholders. Our quarterly cash dividend paid on March 30, Onest was 70 cents per share an 8% increase from the prior year amount.
Our line long standing streak of annual dividend increases reach 57 years. This past December.
Despite the higher level of investments and increased dividend payments, our financial position remains very strong as we finished the quarter debt free with $178 million the cash on the balance sheet.
The company also replaced its revolving line of credit during the quarter, which remains at the same size as $150 million facility was replaced in the ordinary course of business and not prompted by the impacts of Cowen 19 determine the previous facility was set to expire in April 2021.
We have no borrowings against facility.
So to wrap up my commentary the courts quarter featured.
Strong underlying performance as well some significant impacts from coven 19, the business continues to monitor and adjust to the code 19 outbreak, while investing for longer term growth now I'll turn it back over to Dave for his closing remarks. Thank you.
Thanks, Tom as we progress through our fiscal fourth quarter look we're going to continue to focus on delivering against our mission Earth provide for the health safety and welfare of our teammates.
Second ensured that we continue to play our role in the countries vital food supply chain and we will add one additional priority to leverage the combined strength of our team our operating strategy in our balance sheet seek opportunities to better position ourselves for future growth. During the month of April our business overall continue to be impacted by the same factor.
As in retail and foodservice that shaped our fiscal third quarter results in retail. This up position is supported by IRI data and in foodservice. This is supported by NPD transaction data.
Looking forward to the remainder of Q4, we anticipate net sales in our retail segment will continue to benefit from increased demand due to the stay at home orders and other changes to consumer behavior attributed to covert 19th. We also expect our recent new product introduction and channel expansion into dollar drug channels remain in place.
And contributors to our retail segment sales growth.
Separately, we expect to foodservice industry overall, well continue to be negatively impacted by coded 19, we expect the negative impact to be most pronounced on the casual dining in midscale segments and the impact to be more muted on the QSR segment.
A reference prior to the impact to Cobot 19, our foodservice segment customer mix was approximately two thirds LSR, which has and will continue to help soften the impact on our business.
Ill now provide an update on a couple of notable projects for our business during our fiscal second quarter earnings call back in February I referenced our plans for a major capacity expansion project at one of our dressing facility.
Based on the impact to co bid 19 and related near term uncertainties, we have decided to cancel this project.
We will continue to invest in capacity is required to support the growth of our business. However, we felt it was prudent to halt this project until we had a better feel for the near and intermediate term outlook.
With respect to our ERP initiative project ascent due to the current work environment, including stay at home orders and travel restrictions. We are delaying the implementation timeframe frame for the project until the back half of fiscal year 21, or early 21 R 22 excuse me.
In closing, while the impacts of Cobot 19 have unfavorably influenced our short term results, we remain very confident in future for our business.
Excluding the cobot 19 impacts we delivered another quarter of solid financial results. We entered the co bid 19 pandemic from a position of financial and competitive strength.
We expect to emerge the same way with opportunities to grow both organically and through acquisitions.
In the interim our foodservice segment in the in our foodservice segment as our national chain customers based deep challenges, we are focusing our efforts to support them through this period of uncertainty and offer our assistance as they develop plans to return to full service.
And the retail segment, we will continue in our pursuit of growth in new product introductions and channel expansion.
This concludes our prepared remarks for to date and we'd be happy to answer any questions. You may have Ursula overview.
As a reminder, if you looked like to ask your question. Please press Star then the number one on your telephone keypad within that Star one to ask a question, we'll pause for a moment to compiled the Q and a roster.
Your first question comes from Brian Holland with D.A. Davidson.
Thanks, Good morning, gentlemen, Maury, Brian morning, Ryan.
So I guess first question on the food service side.
Can you give us a sense of how much of your foodservice business is down.
Say, 50% or more.
Hi, there to stay at home orders or maybe doors closing and I know you have high exposure to national chains, but just have you had customers go out of business and if so can you maybe quantify.
Any contribution from those sure so maybe starting with the breakdown we said during the prepared remarks, Brian that two thirds of our business is QSR.
So the among that and Thats all our foodservice sales straight up two thirds across all of our various product types is QSR and Thats. The segment that seems to be least impacted by this and if I had to sort of ballpark that for you I would say, they're probably down in terms of traffic.
30% with some doing better than that but notable all of these customers are experiencing larger ring for each transaction. So chances are their sales.
Through let's say April were probably down somewhere closer to 20% with the pizza chains actually being closer to flat and may be up.
I will then clarify as you look at April it looked like mid April was the low watermark. If if March eight let say was a line of demarcation where sales all the sudden dropped off what we found was basically the second.
Week of April the ended the second week of April with the low water Mark and what we've seen a sequentially those trends getting better with that each passing weakened April into the first week here now as of May but laddering backup to your question.
Two thirds of our businesses QSR I would say those businesses are probably off let's just say on average to date somewhere like 20%, maybe a little bit less than that.
Part that's down hardest is casual dining.
And then it's going to vary a little bit by segment. Some of those chains are probably operating closer to 50% of there a couple of them that are better off a little bit harder than that I would submit the segments that are the absolute hardest hit our than non commercial segments that are tied into schools in venues because as you might imagine.
They are just altogether shutdown.
Other venues that have been hit hard our mom and pop shops up and down the street because they don't have drive thru and they may not have add the that say the balance sheet to withstand them, but we have not had any big customer that's gone bankrupt on us to date.
Just hasn't happened and to the best to my knowledge Theres, one national chain that has announced something.
But theyre not one of our customers.
Okay got it Thats very helpful.
So.
I guess sort of spending forward, you're sort of breakdown on the food service channel.
I would imagine even though you're getting better codes were seeing better trends coming off of the mid April trough Theres still probably down just trying to think forward here I guess near term first I mean should we expect to foodservice sales to be materially worse. In Q4, then they all are than they were in Q.
Three just kind of in the year over year basis.
And if not what would you sort of viewpoint.
And there is another company worst Brian I don't know if I would dimensional form for the following reason that if you think about it.
For all intents and purposes Q3 was really just the last couple of weeks right. I mean cobot 19 was on the Horizon I think we talked about it together towards the end of.
Was at the end of February no is very beginning in March actually.
We spoke with you during your the conference and we were talking about it coming upon the rising in the impact of Italy, but in the US. If you look at what happened in in terms of store closings that was really the back half of March So we're going to see.
More of a financial impact through the entirety of the fourth quarter.
This quarter, and then but I think what you're going to see as it's going to hit the low water Mark in April and then with openings in various states taking place now you're going to just continue to see sequential improvement.
Okay and then just.
Operating expenses should should we.
I guess for how long, we anticipate or do you anticipate those sort of maybe remaining elevated specific to coded 19.
Is that another quarter of you do see drag on beyond Q4, well, here's what I would do you mean I'll, let Tom comment on that charge that we took for inventory I view that a bit more transit strictly transitory maybe of an event.
What we've done as we initially granted a $300 bonus.
For the month of April and then what we've done for our frontline employees as we've actually put in place at $2 or in our increase in weve tied to them to the stayed home orders with the idea being that once a local government authority lipsitz stay at home orders, we intend to pull back on that $2 an hour increase so it's going to vary.
A little bit state by state jurisdiction by jurisdiction and in some cases, where its counties that are making those calls you could have the state that may be leaning one way in a county lead in another way, but thats in essence, the agreement that we put forth with our employees that I mean, I just can't say enough good things about the way they're operating my guess is.
We probably have at least another quarter to the fourth quarter of that and we'll see what it looks like into.
Into the first quarter of next fiscal year.
Okay, and then I'll just.
Just one last one for me.
On the retail side, you referenced that your prepared remarks, obviously, the 4% growth prior to the cobot 19 demand surge.
And obviously you had the channel expansion plans and initiatives.
Underway, just curious given the commentary that we've heard it sounds like those flowed through although I'm sure. There's some demand surge in there as well any impact to the timing.
Or your ability to get all of those sort of plans that had been set includes in place I guess, specifically club in dollars channels.
Good ahead of all this and whether theres any impact going forward.
So far no I mean, what we were fortunate that we began shipping those products in January and in some cases February so those pipes were already starting to build.
I think the more likely impact could be on future products that are in the works because I'm sure year canvassing other manufacturers in your conversations what you're hearing as retailers are really focusing pretty narrowly on execution, but within the realm of what you're talking about their those products have been out there and I would say the same is true.
Through for things like Buffalo, Wild wings, and chip fillet sauce, I mean, Fortunately those products are relevant enough can customers are excited about them enough.
They are saying Hey, just just bring them even in spite of everything thats going on.
Appreciate the color as always I'll jump back in acute yours.
Hey, Brian one thing that I will note that wasnt in my prepared comments, but it may help you understand the algorithm a little bit.
As far as our operating cost. So we've done two things and one is obviously, we put in place bonuses and incentives for frontline workers that I.
I've talked about but the other thing that we've done as we did enact a voluntary furlough program at select locations, where we're allowing.
Employees that may have on an underlying health concern for maybe up such an age that they're concerned about working and we're allowing those employees to opt out.
And and then what we're doing his work we're taking the savings from that voluntary furlough program and we're actually using that to fund the incremental $2 an hour that we're paying for those other employees. So if you're if you're modeling this out on a labor basis, it's essentially a push the voluntary furlough program is fun.
Finding what we're doing on the.
The incremental book here, Brian I'll, just add this is Tom I'll add a little more color to our margin outlook.
From the way we look at it today you have this fair favorable tailwind of the mix that Dave talked about.
But you also have a lot reduction in foodservice volume, which will impact our factory overhead absorption in that we have less volume going through the facilities and a fixed factory overhead piece to absorb.
You've got the frontline incremental pay that Dave mentioned.
But then trying to offset that with the furlough program and then there's some other items that were doing to make sure. We operate safely. This ship separations extra sanitation and other procedures just to manage the risks. So so there are number of tailwinds as well as well as headwinds as we look at Q4 and going forward.
Thanks, Dave and I appreciate that context first.
Your next question comes from Ryan Bill of consumer Edge research.
Hi, everyone.
Do you see your current environment, helping.
Current environment, helping to create more opportunities to bring foodservice products to retail in the short term and then maybe in the medium term.
Certainly over the intermediate term I think as much as I'd like to say it will help US right now I mean for deals that we have negotiated license agreements.
I think retailers are excited about it and I believe our foodservice customers are excited about them you know as it pertains to new deals.
I would surmise that foodservice operators are really focusing on their core business over a longer period of time, Ryan I think this is really going to help us because it helps to create a diversified stream of revenue and profit for the operators to help them sustain any sort of.
Thanks that their business might encounter hopefully not another cobot nineteena Kobe 20, lets say, but but just creates another source of revenue and and just another source of strength through their business.
Great. Thanks, and during the recessionary environment could you speak about your thoughts of the puts and takes between food at home.
And food away from home consumption, especially as you have two business units that operate in nature, yes vote ordinarily their natural hedge.
And if you go back to the great recession and other periods. What you would ordinarily see is in times of economic uncertainty.
Consumers would pull back from spending away from home when they did spend away from home they tended to spend on QSR. So you would see QSR strengthened during that period of time and then obviously they would spend more at home.
And that shift within natural hedge for our benefit and given the shift in mix between foodservice and retail there was a bit of a tailwind for the for us as well during periods of economic expansion. When people spent more away from home you could see it flow. The other way we have looked at that just to see have passed as prologue here, but whats so very unique and.
This set of circumstances that it's not a slowdown.
At least that we're in right now what we're looking at is just a full up stop in some cases as we come out of the shelter in place orders and this thing starts to take on a look up maybe eight ordinary recession.
I would expect those sorts of rules to come back into focus again.
Okay. Thanks for the clarity do you see any opportunities that you're strong balance sheet would afford as you get out of the primary uncertainty that would be related to coded 19.
Well, we're certainly monitoring that.
We I mentioned in the comments.
That we canceled a large capacity expansion project and part of that was born out of just the uncertainty of the near term and intermediate term environment.
We felt like we had enough time to let this play out a little bit before we committed but theres always the scenario that an asset comes on the market that we can buy that's both faster cheaper way to solve our capacity issues. So yes, most certainly and I think this is why we from the onset can we.
When this broke we went into a mode, where we focused on the two elements of our mission is to make sure that our people were safe, let's get a complete understanding of all the safety protocols lets implement those right and then let's make sure that our factories continue to run, albeit safely to supply food.
Now, we're kind of moving the focus beyond just that we're continuing to do that every day and our factories and suffice it to say that's a big challenge.
But we are looking at at the external World now, we're looking at our balance sheet and trying to figure out a thorough way that we can really just not only come out of this will come out of this stronger in position for faster growth in the future.
Great. Thank you best that's it for me.
Your next question comes from Todd growth with CL King <unk> Associates.
Hey, good morning, everybody I hope you all well.
Good morning, Todd.
Few quick questions for you one you talked about how.
Retail was tracking prior to kind of the onset of the covert 19 outbreak.
Give any data either through February or through when do you think.
You want to call. It be outbreak start date, how was foodservice tracking going into the recovered 19 related adopter closer to flat.
That was flattish.
And that was more or less what we had foreshadowed in our Q2 earnings.
[laughter].
Okay, great and if you.
I know you reviewed some of the new products successes at retail.
Not much discussion you had about the extension of olive garden into the drug in discount channels and we did that happen as planned in any early read some success of extending that brand into new channels of distribution. You know it's great question. It has and it is and the way I would characterize it is it's almost like you get an athlete.
And on a team and you sort of track them on the debt chart.
And we watch the velocity of the new item and obviously when we first got out there. It was barely registering as it was building on the shelf, but we can already see that it's becoming one of the fastest growing Italian dressing and the segments and we have every confidence that it's going to continue just to grow and pass the leaders like it has in retail.
So very very excited about that and honestly Chick Fil a has been antech tremendous success, so far at retail and the test is just going on.
In Florida consumer demand has has been fantastic we have enough honestly, a very hard time, just keeping it on the shelf and it's the shelf in it disappears.
So we're excited about it in our partners in flavors are very excited about it. So we're just going to continue to nurture that in and plan to prepare for unnatural a national function.
And I believe was there one point, where you talked about maybe sizing that opportunity is equivalent to the olive garden dressing opportunity or how you're thinking about based on early results out of the pilot the size of the Chick Fil a opportunity.
I would say, it's it's larger just went the way we back into this was if you look at the overall salad dressing category, it's north of $2 billion, but all garden predominantly plays in the Italian sub segment, which is smaller right.
Ranch's, the big space, which is about 700 million I think Italians about half of that size if.
If you look at something like Chick Fil a sauce in place in dipping sauce occasions.
I would say the occasion as the opportunity for occasions. There would include the same occasions that ranch might play in that catch up might play in that honey mustard might play in a whole range of dipping sauces. So I think that the opportunity here the plainfield could easily be north of a couple billion dollars.
So I would not just me I think that team our retail team has done a very nice job sizing. This opportunity our sales team has done a great job our retailers bleed. The same thing we all tend to believe that the the addressable opportunity here is.
As such as begin with larger than then olive garden, and we'll see how much larger.
Great and then my final one this is just.
So my ignorance around manufacturing inefficiencies, but can we talk about.
Hi, there are there pick a an example number of food service sales being down.
X percent, how that kind of.
Volume drop in the production facilities flows through to the margin standpoint, just to give some.
Some color around how we should be thinking about the margin impact of that volume drop.
Yes so.
It's a great question overall foodservices two thirds of our volume.
So and you look at our factory costs and Theres a portion that's fixed and I want to get into specifics on that regard so down.
There is a negative.
Absorption impact to our margins in that were not able to absorb it's much cost out of the factories through cost of goods sold.
It's very difficult to say what that input packed will be run service volumes.
You know and as David mentioned.
We saw the beginnings of the month being down considerably and some recovery towards end of the month. So I hesitate to give you kind of any specific numbers in terms of that impact, but it's something that we're monitoring hot summer causes to reduce reducing temporary labor and overtime the voluntary furlough program.
Im reducing hiring.
We're also implementing other austerity measures to try to offset this potential impact.
Detail, but is there any.
Kind of rule of thumb Macquarie.
Our percent drop in or maybe 5% drop in foodservice.
It's too some type of drop at the operating margin line that way rule.
Components, where we can size well you know what I would say, it's because of the situation is so dynamic right now and we're taking a number of actions to try to minimize that impact I don't want to put a specific number out right now certainly as we get to through this quarter will have much much better visibility.
And be able to show those impacts with you.
Okay, great. Thanks for the time.
Well, thank you Todd.
If there are no further questions. We will now turn the call back to Mr. Sisitsky for his concluding remark everyone for participating this morning, we look forward to sharing.
Our fourth quarter results with you in August and in the meantime, we wish that each of you stay safe.
Thank you.
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