Q1 2021 Lancaster Colony Corp Earnings Call
[music] good morning, My name is doing.
And I'll be your conference call facilitator today at this time I would like to welcome everyone to the Lancaster Colony Corporation fiscal year Twentytwenty, One first quarter conference call.
During today's call, we'll be days doesn't keep president and CEO and time to get CFO.
All lines have been placed on mute to prevent any background noise. After the speakers have completed their prepared remarks there'll be a question and answer period. If you would like to ask a question. During this time simply pets Star then the number one on your telephone keypad and questions will be taken in order that they RBC.
If you would like to withdraw your question press the pound key thank you and now to begin the conference call here is Dale Ganobsik <unk>, Vice President of Investor Relations and Treasurer of Lancaster Colony Corporation.
Thank you Joe and good morning, everyone and thank you for joining us today for Lancaster colony's fiscal year 2021 first quarter conference call.
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 events.
A detailed discussion of these risks and uncertainties is contained in the companys filings with the SEC.
Also note that the audio replay of this call will be archived and available at our company's website like after Collie Dot Com later this afternoon.
For today's call, Dave Demski, our president and CEO will begin with a business update and highlights for the quarter comp ticket. Our CFO will then provide an overview of the financial results.
Dave will then share some comments regarding our current outlook and strategy.
At the conclusion of our prepared remarks, we'll be happy to respond to your questions.
Once again, we appreciate your participation. This morning, I'll turn the call over to Lancaster, colony's President and CEO Dave.
[music].
Thanks, Gail and good morning, everyone. It's a pleasure to be here with you today as we review our first quarter results for fiscal year 2021.
I'd like to begin by extending a sincere. Thank you to the entire Lancaster colony team for their tremendous effort during the past eight months as we confronted the impact of the COVID-19 pandemic.
From the frontline workers at our plants and distribution centers to all the associates and leaders throughout our business I'm extremely proud of how we pulled together and worked in common cause to meet the shifting demands of our business.
Throughout the quarter of Iris, we remain steadfast in our mission is fixed first to provide for the health safety and welfare of our teammates and second to ensure that we continue to play our role in our country's vital food supply chain.
Despite the uncertainty we completed our fiscal first quarter with consolidated net sales growth of 3.6%.
Net sales in our retail segment grew 16.6%, while net sales in our foodservice segment declined 9%.
Excluding omni baking sales consolidated net sales grew 5.2% and foodservice net sales declined 6.4%.
Retail net sales benefited from higher demand at the impact of Kobe 19 drove higher at home food consumption.
Frozen garlic bread olive garden dressings, and frozen dinner rolls were the biggest contributors to the increase in retail net sales.
Based on the IRA data consumption during the period outpaced shipments in a few categories.
We are already seeing shipments catch up as we move through our second quarter.
Her IR I notable highlights for the quarter include the following.
Sales of Marzetti refrigerated salad dressings grew over 12%.
New York Bakery frozen garlic breads grew almost 15% branded crude tons advanced over 21% sales.
Sister, Schubert's frozen dinner rolls increased 24.5% and.
And all of Garden dressings grew a very strong 45%.
We were also pleased to see that our recent new product introductions added about four percentage points to our retail segment Q1 sales growth as the Chick fillet and Buffalo Wild wing sauces continued to perform very well.
In late October we began the long anticipated regional rollout of Chick fillet sauces in the South East region.
The news was officially announced on October 22nd by our strategic partner Chick Filet on their social media platform, the chicken wire by weeks and the news that garnered millions of media impressions.
As previously outlined we will be expanding distribution of these items across the United States during the remainder of our fiscal year.
Overall, we were thrilled with the topline growth of our retail business and were bullish about the long term outlook. However.
However, as you will hear later in my comments. This growth came at a substantial cost due to inefficiencies that are likely to persist and this pandemic environment.
And our foodservice segment, the upward trend from the lows we encountered this past April continued throughout the quarter.
National account quick service restaurants, and pizza chain customers led the way. Despite the pandemic. We continue to partner closely with key national accounts on a range of new sauces that have and will continue to be featured on their menus in the weeks and months ahead.
Despite the relatively strong topline results consolidated gross profit for the quarter was essentially flat at $92.7 million versus $92.1 million last year.
The benefits from the heavier retail sales mix were offset by the aforementioned higher manufacturing costs due to Kobe 19 increased commodity cost and increased freight costs.
As Tom will detail later in the call the higher manufacturing costs consisted of both hard cost for items, such as hazard pay production air gaps and PPD and soft costs, such as manufacturing inefficiencies, resulting from our efforts to keep up with the increased demand and maintain adequate service levels.
Before I pass it over to Tom I would also like to briefly update you on our Vanname bagel business.
Late in Q1, we were notified by Starbucks that due to the impact of the Corona virus pandemic on their breakfast business. They were planning a range of menu changes, including the discontinuation of the bottom line in the restaurants.
As Tom will point out this resulted in two noncash adjustments during the period of.
While we were disappointed by the decision we remain pleased with the Bantam acquisition and we're very bullish about its future.
I'll now turn the call over to Tom Pigott, our CFO for his commentary on our Q1 financial results.
Thanks, Dave overall, the results for the quarter reflected strong growth in our retail segment higher costs, primarily related to the COVID-19 outbreak out.
As well as some accounting adjustments on the banana business.
First quarter consolidated net sales increased 3.6% to $349.2 million excluding.
Excluding omni bacon sales of $2.8 million in the current year quarter and $7.9 million in the prior year quarter consolidated net sales increased by 5.2%.
As you recall Ami begin sales are attributed to a temporary supply agreement. The supply agreement came to an end in late October as planned.
Consolidated gross profit increased half a million dollars to $92.7 million in margins declined by 80 basis points. This.
This annual revenue growth in the retail segment was offset by higher manufacturing costs, including costs related to COVID-19, and higher commodity and distribution costs.
The COVID-19 related items included about $4 million in incremental frontline worker pay and other hard costs of about $1.5 million for shifts separations and expenditures for personal protective equipment as we invested to ensure the safe operation of our facilities.
We also incurred incremental soft costs totaling an estimated $3 million.
These costs were driven by the increased demand in mix changes related to covered 90 more.
More specifically these expenses included increased overtime pay internal freight and distribution costs and utilization of some less efficient production lines to help feed demand.
Note that compared to our fiscal fourth quarter ended June Thirtyth total pounds produced increased more than 20%.
Selling general administrative expenses increased $8.7 million or 22.2% there were three main drivers of the increase.
First was the investment we are making on project to ascent in support of our ERP implementation and related initiatives, which accounted for $5.6 million increase the remaining $3.1 million increase was driven by higher spending for digital marketing to attract and retain new customers as well as incremental infrastructure costs.
The company recorded two special items this quarter related to the Bantam bagels business as a result of the discontinuation Dave mentioned.
First we revalued, the contingent consideration or earn out liability to the sellers of Bantam using fair value accounting based.
Based on this analysis, we reduced the current value of the projected earnout payment by $5.7 million, creating the income you see on the contingent consideration line and the PML.
Second we evaluated the intangible assets from this business, which resulted in an impairment charge of $1.2 million.
Both items were recorded in the foodservice segment results.
Consolidated operating income declined $2.8 million to $48.9 million.
This results from this result reflects the items I mentioned earlier, most notably the higher expenditures for project descent, and the unfavorable impacts of COVID-19, partially offset by the change in the Earnout projection.
Excluding all these items the key driver of operating income growth was a strong line performance strong top line performance with retail segment.
Our effective tax rate was 24.3% this quarter versus a tax rate of 23.3% in the first quarter of fiscal 20, we estimate that our tax rate for the remainder of this fiscal 21 to be 24%.
For the first quarter diluted earnings per share decreased 13 cents to $1.35 cents the adjustment to contingent consideration increased earnings per share by 16 cents higher expenditures for project descent accounted for 15 cents of the decline.
EPS was also impacted by the impairment charge lower interest income on our cash holdings and the increase in the effective tax rate.
With regard to capital expenditures first quarter payments for property additions totaled $14.4 million for fiscal year 21, we are forecasting total capital expenditures between 70 and $90 million based on plans currently in place we.
We are in the process of evaluating additional and potentially significant investments to meet the growing demand for our dressing and sauce products. These investments will be additive to this forecast.
In addition to investing our business. We also return funds to shareholders Accordingly quarterly cash dividend paid on September Thirtyth. The 70 cents per share an 8% increase over the prior year amount our longstanding streak of annual dividend increases reached 57 years last December.
Even with the investments, we are making and the increased dividend payments our financial position remains very strong as we finished the quarter debt free with $186 million cash on the balance sheet.
So to wrap up my commentary this quarter reflected strong growth in our retail segment and improving trends for the food service segment.
We continued to monitor and adjust to the impacts of the COVID-19 upgrade but.
But overall the health of the business remains strong I will now turn it back over to Dave for his closing remarks. Thank you.
Thanks, John as we look ahead, we will continue to leverage the combined strength of our team our operating strategy and our balance sheet and support of the three simple pillars of our growth plan.
First to accelerate our base business growth second to simplify our supply chain to reduce our cost and grow our margins and third to identify and execute complementary M&A to grow our core.
Our base business is expected to continue to grow in this country.
This difficult environment looking forward to our fiscal second quarter historically our.
Our biggest sales quarter the year sales for both our retail and foodservice segment will remain subject to the shifts in demand, resulting from cobot 19th.
We expect our retail segment sales will benefit from the continued growth of frozen bread products and dressings and sauces. The licensing platform in particular is poised to provide stronger growth in the second half as we expand distribution nationally on both Buffalo Wild wings, and Chick fillet sauces.
In foodservice, we anticipate our quick service restaurant in Pizza chain customers will remain a positive for us.
We foresee inflationary headwinds from commodity and freight costs for the remainder of the fiscal year. We also.
Expect will continue to incur higher operating cost to keep up with the demand and maintain service levels in this challenging pandemic environment we.
We expect our cost savings programs and favorable net price realizations will help to partially offset these cost increases.
Specific to our supply chain strategy. We're in the final stages of evaluating a significant investment in production capacity to address the increasing demand for our dressing and sauce products.
We intend to have more to share with you on this in the future.
Project ascent, our ERP initiative remains on track as we have now completed completed the design and build phases and we are in the testing phase we expect to continue our testing in preparation through the remainder of this fiscal year, followed by the commencement of the deployment phase and early fiscal 22.
In closing I would like to once again, thank the entire Lancaster colony team for all that they have done during this quarter to fulfill our mission. This despite all the unprecedented challenges. This concludes our prepared remarks for today and we'd be happy to answer any questions you may have.
Joanne overview asked this at this time I would like to remind everyone in order to ask a question. Please press star one on your telephone keypad.
Your first question comes from the line of Brian Hollenden from D.A. Davidson and company. Your line is now open.
Yeah. Thanks, Good morning, everyone, a few quick continuing ones here.
You give us an update on how much new products.
In the quarter.
Yes, so those four percentage points to the retail business is what it did.
So sorry, if I missed that when you commented on up Brian Great question.
Revenue grew this movement to give you an idea for a biased a little bit heavier towards Buffalo Wild wings as the Chick fillet sauce for all intents and purposes was really just isolated to Florida, we didnt start to ship that into the southeast region until the very end of October.
Okay, Okay, Thats very helpful and good to know.
And then.
Just quickly on the base business two part question here, one can you quantify the drag from the loss of Starbucks.
To revenues over the next 12 or so months as you lap. This and then kind of as we look across broader foodservice here you see risk with similar menu rationalization across the balance your portfolio.
Well ill hit it may be it in sequence I'll hit the second question first we don't quite see anything quite like that Bantam item because most of what we're doing or are our key menu items that if it's a soft lets say it it's usually helping to hero some sort of protein thats on the menu. So.
They are featuring some sort of a hamper under build or a chicken sandwich filled and are soft and our Sos would be central to that.
We have seen them work to simplify what they're doing.
We haven't seen at downside to that really the bigger impact we're seeing in foodservice. This movement of movement away from bulk packaging to portion control. So case in point. If you look at our cry of that business in foodservice for the period. It was off probably to the tune of somewhere around 20%.
Our portion control part of the business is very very strong. So we're seeing those sort of things, but in this particular case I think what's happened is okay.
Across all of foodservice. The breakfast occasion has been hit particularly hard because people continue to work from home right. So if you think about that morning routine. It continues to be impacted and I think a starbucks has watched their businesses evolve they took the opportunity to step back and say what needs to be true for us that simple.
The fire breakfast assortment to make sure that we're running as efficiently as possible.
The unfortunate thing as of last Friday, and the items in the stores that were opened remained very very strong.
And it just it was a decision that theyve made yes.
As far as the impact I would prefer not to get into that you know I would tell you.
That it was at.
The higher seven figures, probably the way I would categorize it but I would flip that with we also have a real long pipeline of new opportunities that were in the process of chasing we.
We had actually sort of tap the brakes on chasing new opportunities just because of capacity limitations on that business. So.
Why we remain really bullish about where it's going.
So in other words it sounds like you have.
Some degree of confidence that.
That lost capacity if you will.
It can find another home there just based on customer interest, but you had yes exactly we have a strong team working against it we have a strong pipeline of new product introductions.
Some of which are going to take us into the occasionally like snacking like a pizza by sort of an item.
So there is a whole range of really exciting activity, there and that team that just mass and then 10 strap extra tight and we're just pushing forward.
Okay and then.
Maybe just to get plenty of latest high local foodservice industry thoughts.
So I guess, what's particularly noteworthy here the two.
The second wave concerns covert married team. So so maybe just kind of what you're seeing.
Credit since quarter end, if we're still seeing a plateau in trends any pullback anything that you're looking at one way or the other yes. It's a great question and I'll sort of hone in on on transaction data.
If we look at well, we'll start with foodservice first Brian If you look at really all transaction data all national accounts for the months of August September and October those those three months they were running roughly down 10% on transaction. However, the transaction size.
Or bigger so they weren't down as much when you look at the QSR segment. The QSR segment was probably running somewhere down like lets say about 88 and a half.
The that the casual dining segment was actually doing quite well it was probably running somewhere down around.
10 to 11 points and mid scale as the segment that really continued to to drag right. They were having a harder time with with off premise dining sort of solutions and they were off in the mid twentys.
Here's my our thesis right that we what we foresee happening here.
But and we've been talking about this really for maybe the last month or so.
We have predicted that there was going to be a spike we believe that it's the combined effect of the.
The fact that the weather is getting colder in the Midwest and in the northeast and other parts of the country people are heading indoors combined with the fact that we think that Theres just an overall cobot weariness, where people are maybe letting down their guard. So we fully anticipate that theres going to be a spike in cases.
Here's what I think is likely to happen I think the QSR segment has done a tremendous job of pivoting to solutions like their drive through and into delivery solutions and pickup and I think if I had to guess you may see them pull back slightly but very much I would be surprised if we saw that pull back maybe more.
And a couple of points I think even casual dining if you will look at concepts like a buffalo Wild wings and a range of others had done a really nice job of breaking the code on off premise dining I think where you're likely to see this impact most severe is on the mom and pops up and down the street that haven't broken that out.
Code on off premise dining it is conceivable that you could see schools shut in parts of the country, which might have an impact although thats, probably a tough one to.
And to forecast and I would say areas in particular that are heavy into the breakfast occasion, if I had to speculate will be impacted now the flip side of that we're already so I would say that across the industry, you're going to see a couple of points of pull back that thats going to be biased against the mid scale and mid cap.
Well with a lesser effect on QSR.
On the retail side, we're already starting to see a small software it's picking up a couple of points and I do expect that you're going to see that likely to continue I think the case this year.
You can check in with each other few months down the road, but I would speculate that they're going to continue to grow through November into December.
And then you will see them begin to gradually work their way down as as a result, probably have some more strength and lock down state by state and then hopefully in the spring.
People are starting to talk about that or therapeutics or may be even a vaccine. So we're anticipating we're going to be wrestling with this through the remainder of of our fiscal year end up.
Greetings momentarily short question I apologize for that.
No no no that was great I appreciate the color if I could just sneak one more than I'll hop out really just want 100 spirit Carter I think aside from the Panther business update Eric.
Thing that stood out the most was going to be for the margin to accrual in the quarter.
Good morning.
Great good darn eager half billion of cost tied to covert some heart some soft.
If I peers are.
Yes, no quite pair that with your commentary it sounds like we should expect similar magnitude of headwind over or at least until you start to lap some of that may be around Q4, but.
What I want to fix that I understand when the rest of the businesses.
How big of an impact were commodities and three how much of an offset we will get there I guess I'm trying to Dimensionalize. What you were able to offset what you couldn't offset and then it also sounded like some of the margin pressure came from may be running hot on capacity.
Constraints given.
Obviously.
What you have to do to maintain employee safety and facilities and the demand. So if you could just help us understand that because that's not necessarily.
That's that's an issue of near term, but but may be a sign of underlying strength here when you're running back hard but that maybe you can help.
Clear that up for me, yes, yes, thats a pretty good assessment so.
The you know as we look at the hard cost those are those are things that we're doing to run safely and to reward our employees for working.
During this difficult environment and that was the five and a half million or 150 basis points of margin degradation, but what we saw this quarter that we we didnt really experienced too much of in the fourth quarter was the soft costs, we talked about so we're running the the factories much.
Harder to keep up demand with demand and and producing a lot more pounds of product, which which you can see we're positioning our inventory a little bit and then little bit stronger position than we've been in the past to try to keep up with this demand. So as we look at it as we go into Q2 sales.
Certainly the hard costs will continue and in this case, we do expect the soft costs to continue now as time progresses, we have some actions in place to try to mitigate some of the soft costs and overtime as you think about it over the longer term as Dave mentioned, we are going to be making some more investments in capacity to set ourselves up.
To to drive margin growth over the longer term.
Brian and I can even kind of foot maybe have illustrated with an example.
Tom mentioned that if you look at Q4 to Q1, our pounds in our factories were up 20%.
That's obviously, a pretty big increase just in pound.
But what that doesn't really highlight is the mix of the pounds, we had parts of the business by private back which were down 20%.
And then we add olive garden, which we highlighted was up 45% we had a month where pounds were up 60% on that business and it's those sorts of swings within our network that are putting a lot of stress and strain on stuff. We're running for example, bottled items in lines that weren't necessarily optimized to run those and we're running with them to.
Keep up with service levels to make sure that we're not disappointing are our customers and incurring fees. So there as you pointed out this was a bit of an extraordinary so.
Set of circumstances that are bringing this together and we do have an aggressive range of actions in place that we think will help us begin to bend the curve on these items.
Maybe even.
I think we'll see these actions take effect late in Q2, and we'll start to see the the greater manifestations of them in Q3, particularly around increasing our own internal capacity and bringing line online as a co Packers.
Appreciate all the color as always best of luck going forward.
Thank you Greg.
Your next question comes from Todd drugs from CL, King and Associates. Your line is now open.
Hey, good morning, everybody just a few questions for you.
Moving back to some of the discussion that Brian just kicked off on the on the gross profit side.
In talking about a couple of line items that you did call out as far as freight costs and some commodity inflation can you give some more color there on the headwinds that they created in the quarter and I.
I know some commodities, we're seeing very spiky behavior versus trend behavior.
Where you're seeing pressure is it more of a spiky nature due to COVID-19 or is this.
And behavior due to demand and do you expect this will have a tail for multiple quarters.
Maybe I'll lead off with a quick answer that but Tom give you more texture. There is a big part of that is related to covance and in particular, what's happened is that it's being driven by an imbalance or our supply and demand short ton on drivers.
In all of our analysis since the outbreak of Covance.
Out of the trucking schools have either slow down or shutdown and as a result of what you're seeing in the industry as a shortage in drivers and intuitively speaking it kind of makes sense if you're at a candidate wants to learn to drive a truck about the last thing you want to do is to climb in a cab over trucks.
Somebody that you don't know and spend as much time on the road.
So I would say really whats catalyzing that isn't a shortage of assets, but its drivers and we think thats going to resolve itself on the other side of the pandemic, but Tom if you want to mention yet so.
The the freight costs were in the low seven digit numbers commodity inflation as well.
But what I would tell you on those items you know that the certainly the commodities to Pete on program is working we.
We did dial back to trade spending to offset that impact. So really you know as we look at the quarter. The degradation on the margins is really the Colgate hard and soft costs.
Okay Fair enough. Thank you and then if we.
Pick about as Cheetah ex the ERP costs and that it looks like if you back out omni from both the corners, we were up about 30 basis points.
Year over year in the fourth quarter.
Thoughts on those other drivers of SGN and digital marketing spend incremental IP infrastructure costs, if you're looking at this expense line, how do you see kind of 11.5% experienced in the first quarter compared to what you're you're expecting over the balance of the year.
So yes, when you take out the project expense.
Costs were up 9% in the quarter.
In terms of the investment in consumer and digital marketing to retain new customers. We feel very good about the spend that Nielsen metrics or the IRS metrics. We get that suggests we're being we're being successful in attracting and retaining new customers to our retail franchise, which will benefit us for the longer term so that.
Investment will continue.
Into into the remaining quarters of the year.
The infrastructure cost there were investing to kinda sure up our overall infrastructure and making some investments around cyber security.
We expect some of that to mitigate towards the second half of the year, but overall from a percentage increase we do expect the first half of the year to be heavier than the second half in terms of the level of increases.
Okay, Great and then finally, if you can look back around to shift the way you talked about the southeastern.
Region rollout that started at the end of October if you guys are giving your minds around dimensionalizing. The opportunity here can you maybe talk to.
The maybe the institutional capability to handle this magnitude of a potential launch.
Hi, there.
Experience that was brought from other launches at this magnitude or.
Expectations for what you need to build internally to handle the size opportunity and can we talk I know there was some talk about the inventory growth being stronger in the quarter as you're trying to catch up with some of this outsized demand, but is there within the $25 million of growth and inventory is there an element of that that was building.
Ports this chick Fil a launch in the southeast and the upcoming fiscal quarter. Thank you.
Yes, Sir the first question on inventory. It was yes part of it was preparing for that launch and part of it was just a seasonal build because as we go into our second quarter with items like change delay in other bread products.
Seasonally we see more consumption.
So that was a deliberate action on our part repair for what's coming ahead of us.
As far as just preparations on infrastructure, maybe I'll start first with the people and I think I would probably characterize our team as consisting of as of a lot of veterans from other big CPG earns.
I spent a lot of years and craft and at times, where I managed their us portfolio at Heinz in the grocery business craft.
If you look at the person who leads our our retail business and he is a veteran of PNG were a one time.
Spice our head of sales was a 25 year craft that red and we have a lot of CPG veterans throughout our whole supply chain. So I do I feel very good about the team that we have in place.
Now the second piece of that is it the infrastructure.
You, probably cod and Tom's comments and my comments that we did highlight back that were in the late stages of evaluating a capacity expansion project and Thats tied specifically to these items and it's also tied to growth that we have in flight in foodservice to support our foods.
This chick Fil a business. It was a project that we had initiated we had approved by our board we tactically pod as told that broke out just to see where things are going to go.
Predicated on what were seeing now as were in co based and the outlook on the AAA items in Buffalo Wild wings, where we are initiating that project going forward, that's going to create a bit of a bridge in between where we are today and then where will go longer term once that other capacity comes online and while we're planning to do there is the same thing that we.
Weve done at other places, where we weren't which is to utilize co packers and to basically get more throughput through existing line. So.
We have one new line internally in our own network, that's going to be coming up and it will start production in January we have some initiatives that will speed up throughput on existing lines by changing sellers and things like that that will also come in line in January.
It will be a combination of those so those are all the things that we're doing on the supply side doubled. We'll tell you also is we've been very deliberate about throttling things on the demand side. If we had just gone out and work with Chick Fil, a and made the Grand announcement and tried to do that nationally it would apply to us up it is it's a big item I.
I would submit that really even having worked at kraft and Heinz it could potentially have blown Emma it's.
It's.
It's just it's a big item right and it sounds like anybody is sitting around with that sort of capacity. So thats part of the reason why we've elected to do a test in a market to calibrate how big it is work with our partners our customers. So they can figure out how much holding power they need our shelf and then take those learnings and take those to other customers out in the marketplace.
And put together a regional rollout starting with the southeast ended the Midwest and up into the northeast and then eventually out into the west So that allows us to match the supply and demand. So really if you get a sense.
We do have a very detailed plan to bring online the capacity to keep up with that but we're also trying to manage our own destiny by B.
Smart on this on the demand side.
Very very helpful. Thanks, guys. I appreciate you are most welcome.
Your next question comes from the line of Ryan now from consumer Edge Research. Your line is now open.
Okay. Thank you were planning on doing.
You said that.
You said that the impact from a full year basis for bands.
Given the Starbucks is continuation of something in the seven figures.
And then within a company that you, saying are you implying that it's reasonable to believe that the Benton business should find a new home from some of the existing attractions you pack within food service is there anything we should think about in terms of potential timing broadly and potentially the magnitude of the replacement of the demand at them.
Lost due to the Starbucks discontinuation.
I'm not sure if I followed.
I think what in terms of kind of the outlook on Starbucks I think it's it's a little premature for us to come out and give you the specific flow in terms of how things will come back.
I think as Dave mentioned, there is a good pipeline of initiatives and products.
But in you know as the discontinuation occurs towards the end.
End of the calendar year.
We will we will definitely feel it in the near term to longer term, we feel good about the outlook of that business.
Yes, okay.
The impact of that is going to be felt as were bringing online a lot of growth from our license products as we expand that capacity so part.
Or that the earlier question as you think about this it's really Q2, it's going to be into Q2 and Q3, when we're really starting to see the impact of those licenses expand net.
Thats why as we look out over the horizon.
We dimensionalized in for you, but I don't think it's going to be a material impact in that period because of the of the growth that we're bringing online.
Okay. Thank you that's very helpful.
And could you provide a little bit of comp.
Context about the food service industry.
With respect to new location exposure.
Preferences, obviously that would be correct.
Is there any way you could talk about how.
The occasion mix impacting their business overall, yes, absolutely I would love to so if you look at what we've seen is historically breakfast was a big occasion, obviously lunch was a big occasion postcode, but what we've seen is breakfast in the station that's been most severely impacted.
And Weve seen luncheon really identification that group.
And if you looked at transactions transactions have trended down you can think about.
Lots of individual stopping at let's say their their favorite coffee shop or wherever to get something on the way to work those occasions are down.
And what you're seeing our our occasions, where people are going through a drive through and instead of buying for one they're buying for four or five.
So, but breakfast net net indication thats most severely impacted really we don't play very heavily in the breakfast space. If you think about the products that we make garlic bread garlic sticks, we make dinner rolls useful part for hospitals.
And then the dressings and sauces, they tend and salad dressing they tend to play more heavily at lunch and dinner.
Where we do have exposure and breakfast two areas. One was obviously the Phantom business at Starbucks. The other occasion that we have or the other customer is it's typically where we make an item.
But their business tends to be a stand out that it has resumed growing again, albeit not at the same rate. It was before but the comps are positive on breakfast. So as you're looking at sort of a case indications shift I don't think this is likely to result in a material impact to our business just because of the products that we're supplying.
At this point in time.
Thank you and I think probably one of the last one from me you Bill to discuss your positioning in foodservice relative to some of your key competitors.
Obviously, the bust on its new retail businesses and helping to offset the softer trends within foodservice could.
Could you maybe comment on the potential impacts your competitors might be experiencing and ultimately what that might mean in terms of capital allocation decision.
Yeah. So.
Think about it I'm going to focus most on dressings and sauces and.
And maybe cut it this way if you look at our business about.
About two thirds of our businesses in national accounts.
And a much smaller percentage of our business is in what we call branded or the business up and down the street, even within the national account business that to that three quarters, 75%.
More than 60% of that about two thirds of that is tied to the QSR. So just because of how our business has configured and within QSR QSR MPC QSR. So if you kind of go through the roster Chick Fil a at Taco bells.
Dominoes.
Papa John's folks like that that's really where the center of gravity of our business is in foodservice and the reason why we play there and we played there are well over time is because of the way we partner R&D to R&D with these folks. So we have one of our even in a coven environment one of our strategic QSR customers is coming.
And this Friday to do a top at top and a menu development project with us.
And we had another very important one that we work with albeit over Microsoft teams last Friday. So a lot of that work is continuing and I think were somewhat unique in the industry that we are heavily biased towards national accounts and within that QSR and we sell.
R&D to R&D, a number of our other competitors tend to either play in commodity oriented products, let's say mayo or or mustard, where there isn't customization that might make them a little bit more susceptible to bidding or there are more heavily developed in that the brand.
Good piece of the business right. So that would include K 12 education higher education things like health care. It would include.
Smaller restaurants.
And then.
Entertainment venues everything from stadiums to concert venues and things like that that's a part of our business where we are.
Honestly, it's been an opportunity area for us that if you've been listening to our calls over the last handful of years I've called out and said that I think there's room for us to be strategic about which segments. We go after but for right now, it's serving us well because we're biased on the other side so as far as our positioning I would definitely take our positioning for a couple reasons, one because of our customers.
But the second part of it is because of how we partner with those customers. They don't really just view us as a commodity and a cost.
But we were marketing the marketing R&D to R&D and they view us as a means by which they can create signature items and break through the noise that's out there today and attract customers.
Great. Thanks, a lot.
Any color there.
That's it for me.
Thanks, Brian Thanks, Ryan Thanks, Ryan.
Your next question comes from the line of Todd Breakfast from CL, King and Associates. Your line is now open.
Hey, just one follow up question you talked about the work that needs to be done.
To launch a product with the magnitude of Chick Fil, a while simultaneously launching a product of the magnitude.
Buffalo Wild wings single serve sauces are single bundle sauces.
Can you talk about the kind of front end.
Your licensed products pipeline.
New partners approaching you willingness to engage moves discussions and take them on capability to.
Maybe with the proper lead times add more meaningful products to this roster of licensed products, that's about to really expand what's your philosophy in Buffalo Wild wings.
So generally I'll give.
Give you an overview of the processing ordinarily.
To date, it started with a longstanding foodservice relationship and partnerships and knowledge, where we a supplier, but often times, we are working with them to collaborate on new menu items. So they already have a lot of confidence in our R&D organization. They have a lot of confidence in our supply chain organization in revenue.
New introduction that takes place as we introduced.
People within our retail business.
And in particular, the people that leave the licensees and we had a.
Great team of folks that do this work.
So its a foodservice and retail joint call, where they go and they make dimensionalize the opportunity.
If this if the foodservice customers interested in obviously you advance the talks and you begin to talk about particular items and.
Things like that and we began the work of Dimensionalizing, how big is the opportunity that will be no different than any other retail launch that we were doing with any of our own brands.
Dances from there to a discussion about the license and those negotiations once you bring that up then you advance into things like packaging design one of the things that's very unique about our license model is that the products that we sell in retail are the exact same formula is a product that we sell.
So take Buffalo Wild wings in the exact same formula the salad dressing for Olive garden, both our branch and the account exacting stop and typically sauce on both items that were going to be offering. The exact same items. So there are supply chain efficiencies on the back end they don't worry about the formula on the stability and stuff like that.
And later with that they're in and out of our factories regularly performing their own Q HX. So that brings some measure of confidence as well.
Beyond that once you get into network design package that you're already change parts change parts for the facility and year on year end of the conversations with customers.
And depending on how exciting the brand is customers can get really excited and move to the front ended their seat, obviously, a AAA sauce and Buffalo Wild wing cost yet all guard would be those sorts of items and then we work with our customers to Dimensionalize. How big is this item because a big part of this devastating.
And how many patients do they need on the shelf and the holding power and then we designed the end to end supply chain with our customers to figure out how we make sure that we service this thing and we grow sequentially.
So part of it part of it is the exact same work that we would do for any of our own internal items, maybe with one unique overlay whenever we're changing packaging, we're working with our partner on the foodservice side were securing their approval and then we also work with them on the watch because it's just not us announcing the item.
Often times they want to get involved in announcing the item and even talking about it in their own restaurants of case in point at Chick Fil a chick Fil a right now is offering bottom products in all of their restaurants across the United States and as we move into the holiday is there going to be offering to sell those as the three packs. So they're here on those items in their restaurants.
And they are going to be helping us sell them and retail and obviously, we have a together a mutual beneficial interest in it so thats sort of how the process works in general.
As you look at other customers as we have continued to evolve. This model what we're seeing is more and more of our existing foodservice customers now are coming to us to explore these opportunities and we're trying to be cautious and date. These make.
Making sure that we can service the growth and doing well, we're only as good as our last case that we've shipped were only as good as every one of these these partnerships. So we we are firm believers in let's go slow to go fast must be deliberate.
Because we think it's the it's a cool model at a point in time, where these these license properties tend to play well in retail.
Okay, Great. That's very helpful interest a final if I take the process you just described in detail as you saw.
The 18 month kind of start to finish or what's what's that window. So as we look at Chick fillet Buffalo Wild wings being at the tail end of the process have you created capacity to start working with new partners in the front end of the process. Thanks, I would tell you that in one of the more recent ones. It was 18 months you could probably been doing.
Faster than that depending on how big the items right. So.
In Chile, we started having conversations with them in the middle of 2019.
And our hostess compensations quickly advanced and and then we ran the pilot, which we announced.
We've been calibrating based on the pilot and make sure that we thought very deliberately through our supply chain strategy and here, we are rolling out regions. So.
I would say.
A year would be very fast.
Just to make sure that you could keep up with the item 18 months to get going I think it's.
A very reasonable pace.
Okay, great. Thanks very helpful.
There are no further questions I will now turn the call back over to Ms., just isn't ski for his concluding comments. Thank.
Thank you Joann and thank you everyone for your participation. This morning, we look forward to sharing our second quarter results with you in early February.
Meantime, we.
Wish all of you guys happy holidays that are coming up that you keep safety or families keep safe and we look forward to joining you on the next call here.
Youre soon take care.
Ladies and gentlemen, this concludes today's conference call. Thank you for participating you may now disconnect.
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Okay.
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