Q4 2021 Lancaster Colony Corp Earnings Call

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Good morning, My name is Andrea and I will be your conference facilitator today.

At this time I would like to welcome everyone to the Lancaster Colony Corporation fiscal year, 2021 fourth quarter conference call.

Conducting today's call will be Dave <unk> pleasure.

N C E O.

And Tom Pigott 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.

So quick question.

And the number one on.

On your telephone keypad.

Questions will be taken in the order they RVP.

If you would like to withdraw your question. Please press the pound key.

Thank you I would now like to hand, the call to Gil the Natzke Vice President.

Of Investor Relations.

Sure.

Our Lancaster colony.

Good morning, everyone and thank you for joining us today for Lancaster colony's fiscal year 2021.

<unk> fourth quarter conference call.

This morning May include forward looking statements, which are subject to the safe Harbor provisions of the private Securities Litigation Reform Act <unk> 995.

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.

Beth.

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 on our company's website <unk> <unk> Dot com later this afternoon.

For today's call Dave <unk>.

Subsequent president and CEO will begin with a business update and highlights for the quarter.

Pigott, 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 any of your questions.

Once again, we appreciate your.

Your participation. This morning, I'll now turn the call over to Lancaster, colony's President and CEO David.

Dave.

Thanks, Dale and good morning, everyone. It's a pleasure to be here with you today as we review our fourth quarter and full year results for fiscal year 2021, and look ahead to fiscal year.

2022.

I'd like to begin by extending a sincere. Thank you to the entire Lancaster colony team for their exceptional efforts and countless contributions throughout fiscal year 2021.

Our record sales of one 5 billion and record gross profit of $387 million reflects.

Commitment and resolve of our associates to overcome the many challenges posed by the impacts of COVID-19.

Throughout the pandemic, we've remained 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.

We continue to monitor the protocols and guidelines provided by government health authorities and make necessary adjustments to promote safe operations at all of our plants and distribution centers in our fiscal fourth quarter, which ended June 30.

Consolidated net sales grew 22% to a record $386 million.

Net sales in our retail segment grew 11, 4%, while net sales in our foodservice segment surged 33, 3% to.

11, 4% growth in our retail net.

Comps to a strong fourth quarter last year when retail net sales grew 24, 5% as the impact of the pandemic drove increased at home food consumption.

Retail net sales in this year's fiscal fourth quarter.

It's driven by our licensing program led by <unk>.

Sale and Buffalo Wild wings sauces.

Chick Fil a sources alone accounted for over 14 percentage points of retail sales growth as.

As planned our rollout of Chipotle sources into the retail channel reached national distribution near the end of April.

Our IRI data the household.

<unk> and repeat rates, particularly sources continue to meet or exceed our expectation.

From a sales standpoint, IRI scanner data showed that total U S sales reached $38.1 million for the 13 week period ended June 27, we remain extremely excited.

<unk>, the outlook, particularly sauces and the retail channel.

With respect.

Back to our own brands her IRI data, we continue to grow market share in several retail categories during the quarter.

This includes market share increases of 480 basis points for New York Bakery.

It about us and garlic bread.

60 basis points for Mark Zandi produce dips and 75 basis points for our branded coupons.

I'd also like to note that compared to two years ago, our fourth quarter retail sales were up in nearly all of our product categories.

When compared.

To our fourth quarter ended June 32019, excluding all license program sales, our fourth quarter retail sales were up over 10%.

In our foodservice segment, a significant 33, 3% increase in net sales resulted from volume.

<unk> gains throughout our customer base sales to leading <unk> pizza chain customers remained robust while sales to mid scale in casual dining concept recovered, notably as we lapped last year's weak demand attributed to the impacts of COVID-19.

NPD data for foodservice industry shows.

Shows that while traffic was lower industry wide sales for the month ended June of this year and recovered above pre pandemic levels exceeding sales for June of 2019 by 8%.

Fourth quarter consolidated gross profit increased eight 5% to.

Kurt $96.7 million driven by the strong sales growth and our ongoing cost savings program.

I'll now turn the call over to Tom Pigott, our CFO for his commentary on our fourth quarter results Tom. Thanks.

Thanks, Dave overall the results for the.

To erect seeded our expectation Dave.

As Dave highlighted the strong topline performance in both segments allowed the company to drive improved bottom line performance.

Fourth quarter consolidated net sales increased by 22% to $385.6 million.

Consolidated gross profit decreased by seven.

Quarter $8 million or eight 5% to $96.7 million.

The growth was primarily driven by higher sales volume in both segments and improved cost absorption in.

In addition, we benefited from commodity driven pricing in our foodservice segment and from savings related to our vacation policy change.

Discussed last quarter.

Offsetting this favorability were higher raw material costs as well as labor and freight inflation. We also incurred higher co manufacturing costs as we outsourced production to meet our growing demand.

Gross margins declined by 270 basis points versus the prior year quarter, primarily.

That we do the higher commodity costs in advance of our pricing actions and the mixed shift to our foodservice segment.

COVID-19 related costs were consistent year over year.

Selling general and administrative expenses increased $6.9 million or 14, 2%, primarily driven by higher spending per project.

Really do.

We also restored consumer spending and increased our it investments.

These items were partially offset by the lapping of the original horse cave expansion write offs that occurred in the prior year quarter.

Consolidated operating income increased by $742000 or one 8% to $40 nine.

$9 million.

The key driver of the operating income growth for the quarter was a strong topline performance offset by the investment we're making on project ascent.

Our effective tax rate was 22, 4% this quarter versus a tax rate of 24, 6% in the fourth quarter of fiscal 'twenty. This quarter's tax rate benefit.

Benefited from some reduction to our state tax rate.

We estimate the tax rate for the fiscal year 'twenty two to be 24%.

Fourth quarter diluted earnings per share increased by $2.15.

The increase was driven by the underlying performance of the business and the lower tax rate offset by the investment we're making.

<unk> project.

The project ascent investment reduced EPS growth by <unk> <unk> per share with regard to capital expenditures fiscal year payments for property additions totaled $88 million.

This amount was lower than expectations due to the timing of payments for projects. We currently have underway.

For our fiscal year 'twenty, two we are forecasting total capital expenditures between $360 million.

This forecast includes approximately $100 million for the horse cave expansion project that will help us meet the increasing demand for our dressing and sauce products.

In addition to investing in our business we also.

Also return funds to shareholders, our quarterly cash dividend paid on June 30 was <unk> 75 per share a 7% increase from the prior year amount our long standing streak of annual dividend increases reached 58 years in December.

Even with the investments, we're making and the increased dividend payments our financial position.

<unk> remains very strong as we finished the quarter debt free with $188 million of cash on the balance sheet.

So to wrap up my commentary this quarter featured strong growth in both segments and solid execution of our strategies across the business. We continue to monitor and adjust for the impacts of the COVID-19 outbreak, while investing in the long term potential.

Central of the business I will now turn it back over to Dave for his closing remarks. Thank you.

Thanks, Tom as we look ahead Lancaster colony will continue to leverage the combined strength of our team our operating strategy and our balance sheet in support of the three simple pillars of our growth plan.

One to accelerate our core business growth two to simplify our supply chain to reduce our cost and grow our margins in.

And three to identify and execute complementary M&A to grow our core.

In fiscal year 2020 to our retail segment will have tough comparisons to the strong growth we experience.

Experienced in fiscal year 2021.

Unless we expect retail sales will benefit from the growth of our licensing program and other new items.

In the Foodservice segment, we anticipate increased consumer demand for in restaurant dining will lead to higher sales in the coming year.

In fiscal year 2000.

Two we are forecasting a notable increase across the board in commodity costs, but particularly in soybean oil higher packaging labor and freight costs will also pose a headwind to our financial results.

To help mitigate these rising costs, we have pricing initiatives in place for our retail segment.

'twenty on a timing standpoint pricing in retail will begin to take effect in late September and early October.

With respect to our foodservice segment as many of you are aware the contracts with our foodservice customers are written to allow for periodic price adjustments to offset changes in commodity and freight cost.

Our ongoing cost savings programs will also help to partially offset the unfavorable impact of inflation in the coming year.

Note that our projected financial results and expectations for fiscal year 2022 remains subject to the impacts of COVID-19, including shifts in consumer demand between retail.

Oh, and foodservice channels and potentially higher cost to produce our products and service our customers.

Moving on to our supply chain strategy, our significant investment in production capacity, our dressing and sauce facility in horse Cave, Kentucky is moving forward as planned with a target completion timeframe.

Retailers quarter of fiscal year 2023.

A smaller expansion project at one of our production facilities located in Columbus, Ohio is on track for completion. This December that project will provide some additional capacity needed to support the growing demand for dressing and sauce products in our foodservice segment.

Additionally, because of the robust demand we are experiencing across our portfolio. We are evaluating additional ways to expand our supply footprint.

Date, we've increased our use of co manufacturing going forward. We're also evaluating other alternatives.

Given the COVID-19 related volatility.

And demand and the tenuous disposition of the global supply chain, we have elected to defer implementation for project ascent, our ERP initiative to the start of fiscal year 2023. This will allow us to prioritize servicing the shifting demands and growth of our business.

In closing.

I would once again like to thank the entire Lancaster colony team for all they have done to make fiscal year 2021 of great success I look forward to working together with everyone in the coming years, we continue our journey to be the better food company.

This concludes our prepared remarks for today and we'd.

Happy to take any questions you may have.

At this time I would like to remind everyone in order to ask a question.

Let's start on your total Xyrem Glenn on your telephone keypad.

Your first question comes from the line of Todd Brooks with CL King.

B.

Hey, good morning, everybody and congrats on the revenue results in both segments could see foodservice lift that we did.

The quarter, certainly hey, Thank you John.

Yes.

Two questions. If I may one is around if we can put a little color on maybe the pricing success.

I Havent retail and how we should.

Kind of boil that success down and like you mentioned in the pass through nature of the foodservice segment from a from a cost structure standpoint can you dimensionalize that a little bit for us with the success that you had as far as what we should be thinking for maybe gross margin trends as we look.

To fiscal 'twenty two versus fiscal 'twenty one yes.

Yes, most certainly be happy to do that.

First if you remember when we did our Q3 call, we said hey inflation on the horizon.

One of the things that we're planning for is pricing one of the things youre going to want to monitors our ability to price and where.

Happy to report that following that call, we had conversations with our retail partners Dimensionalize the inflation.

<unk> price increases and those have been successfully received and as I mentioned in the script, we expect in retail for those changes to be reflected on the shelf in September and on the late side.

Too early October so that's highly encouraging news on the foodservice side.

As you highlighted we have a process built into our contracts that sort of marks to market as we see the inflation. We go back and work with them to pass through the commodities and transportation in that fully remains in place as well so.

And the good news is from a structural perspective all of that is firmly in place and I think in the long term, that's going to allow us to and in the intermediate term to work past the impact of inflation as it pertains to the.

The impact in gross margin, maybe there is one other nuance that I would like to add for you.

So you need to think about.

And the first is I'd like to just Dimensionalize for you and for everybody else. That's on the call the magnitude of the inflation that we're seeing so if you look at our business our comps are about $1 billion, 60% of which.

Commodities raw materials and packaging when we look at our basket of goods.

Fiscal year 'twenty 'twenty, two going forward, we're looking at inflation.

Roughly 20% for that basket of goods.

A little bit more than half of that is soybean oil, but suffice it to say, we're seeing inflation, that's broad based across every category of our our spend.

And.

Good soybean oil because I know you cover lots of other companies and every company has a little bit different profile in terms of what drives their.

<unk> business and with US soybean oil is an important thing that you are going to want to track seed oil in general, but soybean oil.

Particular.

Now with this.

The reason why.

Pivoted to cost and now we will come back to pricing is because when we see that pricing the inflation come to us we're passing that along a dollar for dollar back into the business back to our retailers. What we're not doing is pricing to protect margins were pricing to protect the cost.

Cost inflation that comes in and on the retail side, what happens with that is we ended up with.

Some modest dilution against margins. So we fully expect in the short term and in the intermediate term to see some margin dilution.

Against the business.

A couple of reasons one of.

Which is the most significant of which is this fact that when we do see inflation of this magnitude and we price to the dollar of the cost increase that we are going to see some modest dilution in the business.

That's very helpful.

Just a follow up there.

And I don't think I don't think the story has been written yet for kind of transitory.

Versus.

Some permanent pressure on costs.

If you look historically and maybe theres not theres not an analog to compare this to your success in taking price how sticky is that if we do see.

Supply chain related improvements that do allow cost to come.

Torn relatively quickly as we move through retail.

I think it.

I've thought a lot about this started to great question I think we almost have to go back to the <unk> in the early eighties to look at inflation that was of this magnitude and if you look at at that period of time was the heyday for consumer packaged good companies.

<unk> for the precise reason that they did see inflation and they were able to pass that inflation along if past is prologue on the retail side. The pricing is extremely sticky on the foodservice side, particularly given the nature of what we do that we mark to market. It's conceivable that if we see a pullback in some of these areas.

Come down on inflation on the inflation, we would obviously adjust our prices down.

And it would go the other way, but right. It's just as we pass it through dollar for dollar on the way up we would pull it out dollar for dollar on the way down and Thats for the National account piece, but.

All indications are so far.

Far.

The first step is falling into place that we've had the conversations with retailers across the board. They are seeing it in their own private label and they've been supportive.

The conversations.

That's great and then my final question if you look at.

And there's lots of evidence of Lancaster Chase.

Thing.

Historically strong demand rebound and then.

Just demand growth from noninterest or licensed products, but success and market share gains as we look.

Across 'twenty, two and 'twenty three.

What's your roadmap for some of the actions you've had to take whether it's reaching out to come.

Co manufacturers or.

Maybe delaying growth in other verticals like drug in guest count to service this kind of surge in demand that you're seeing now.

Do you see that unfolding kind of if you can give us a map to okay, we're going to be in a place to surface. This level of demand in.

'twenty three with horse cave, it's going.

And then can you kind of just help walk us through internalizing some of the outsourced.

Manufacturing that you need right now.

Sure I'd be more than happy to and first I think I would start with the overall assumption that we're thrilled with the strength of the demand for our products both in retail and in.

Take more of this.

Some of the actions that we're taking are unique to this particular point in time, given COVID-19 and the labor uncertainty. So maybe what I would say is let's take COVID-19 and labor uncertainty and let's move that to the side for a second and let's just talk about the actions that we're putting in place to support the short.

Foodservice mediate term and long term growth in our business.

First thing that we're doing obviously is adding incremental shifts to our own facilities to make sure that they can run.

The second thing that we've done that we shared with you is that we put in place capital expansion projects. The most significant of which is the horse cave project Thats about a year out.

Terminal.

And then to bridge that gap, what we put in place was an expanded use.

Co manufacturing partners and.

And all three of those pieces are coming along exactly as we intended what we're beginning to see now Todd is as we look across the horizon.

<unk>.

We look at the strength of the velocity on the Chick fillet item the strength of the demand for Buffalo Wild wings, and just the continued growth of our produce dressing of our produce deaths.

And other items within our portfolio as I mentioned in my script, we're now looking even one step further out beyond.

Is it worse case, because we're doing scenarios, where we're looking three years out and we could see that we would be potentially tight again.

So when when I referenced what are the actions that we're putting in place. We're starting to look at okay are there co manufacturing relationships that we would want to even be longer.

Their term not necessarily.

Short or intermediate term fixed, but do we look for a strategic relationship with.

With the co manufacturing partner, but we're also looking at candidly is brownfield scenarios and even potentially purchasing.

Comat showed that opportunity presented itself so.

But I would sort of frame. This in the context that this is all sort of predicated on the fact that we're looking at the performance of these items. We're looking at the strength of demand in our foodservice business and it's an exciting time for us, but we want to do is just make sure that we're taking those actions within our forethought and enough time to make.

Sure that we just allow for seamless growth as long as this is presented before us, but also thinking about contingencies. If in the event. If it were to slow down off of this galloping pace that we're at.

That's great. Thanks Cave and I'll pass it along to the next question. Thanks.

Okay.

Thank you Todd.

Your next question comes from the line of Greg <unk> with Sidoti.

Hey, guys. Thanks for taking my questions. Just the first one can you just give us any color on repeat purchases and chipotle.

It's been extremely strong so if you look at the markets, where we've been in the longest maybe I would frankly with the following if you look at the national launch.

Launch, it's only been in place since April so we really don't have on a national basis.

Strong repeat information, it's just too early in the purchase cycle, but if we look at areas like.

The southeast what we're seeing is repeats are in.

In the high double digits in the 40% to 50% range and we're seeing household.

Household penetrations that are also in the double digits.

Great and then just as you talked about inflation you are probably not alone.

But just when you look at your portfolio of brands, where do you think the risks or opportunities in terms of substitution for consumers when they start to see these sticker shock in higher prices across the board.

People trading into private label or are there sort of.

Other areas, where people might either trade up or down within your portfolio.

You look at our portfolio things like soybean oil are going to be impacting everybody because of the formulas that people use right.

And if you look at other alternative oils that are actually more expensive not less I would say the bigger question for us the way we're thinking about it is a question of elasticity as those prices go up how do the consumers what do they do right and it could come as a result of trading down or are trading out all of that baked into our.

Our volume assumptions and planning assumptions that we have.

But it remains to be.

Okay. Okay. That's helpful. And then just one final one just on the Capex was there a shift from <unk>.

Into next year in terms of your plans seem to come in a little light.

That sounds <unk>, yes, that's that's correct.

The horse Cave project some of the project is broadly on track, but some of the payments shifted into Q1.

Okay. That's helpful. Thanks, a lot guys of course, Greg.

Your next question comes from the line of Brian.

Brian.

Anthony.

Good morning, everyone. Good morning.

Could you maybe discuss a little bit the decision to defer the implementation of project until the start of fiscal 'twenty, three and maybe highlight what that means.

On a cost standpoint in terms of the implementation.

And during 2000.

<unk>.

And also what the impact might be in terms of.

<unk> impact on cost saving.

Maybe starting with the reason for it.

Deferring.

It's everything that you are seeing out there in the news today Ryan.

It.

The amalgam of labor uncertainty and broad global supply chain uncertainty and Dan volatility in demand thats coming by way of our customers.

One period, they are way up in another period theyre backing off and.

All of that that uncertainty and the fact that our foodservice customers in particular like a chick Fil a.

Why on us and in many cases exclusively.

We felt that it wasn't prudent to lean in and hope that we could get that project to go live only to find yourself in a set of circumstances, where we couldnt supplier customers. So really after some pretty extensive consultation with our customers and our.

Revenue team, we sat back and we looked at sort of where we are as a country and where we are in the food industry today and we just felt like.

And then fiscal year 'twenty, two it's just probably too volatile for us to pick a window. I mean, you look at where we are right now and how COVID-19.

Our into how the Delta variant is starting to impact the supply chain and you look at what's happening.

With other manufacturers in terms of labor all of that creates just a pretty volatile mix.

And we're taking a view in our business that we want to win in the long term, we feel uniquely positioned.

Excuse me with a strong P&L in a very strong balance sheet, a strong portfolio of customers, we want to make sure that we're leveraging all of those to set ourselves up for.

Not just a good quarter a couple of good quarters, but really multiple years of successful run. So that's really what set up the decision.

Position for US just to look across the horizon and say when does it make sense for us to parse this.

And to take that decision. So then with the benefit of that time, we said, okay. Now what do we want to do and how do we want to use this time.

Incrementally and what we've elected to do is to pull forward some of the enhancements that we.

We would have been working on in subsequent periods.

And rework the sort.

The deployment schedule to make sure that we're making optimal use of this time.

And in other cases honestly, we've taken people that were on the project and as we've had short term issues that have arisen in the business, it's allowed us to flex our own internal.

Labor out into the business to manage through some of these.

The ups and downs and puts and takes that we're seeing every day, but I guess, what I would want to convey to you is we remain absolutely committed to the importance of the initiative.

We feel like we're well positioned to put it in place.

But as it.

As an old boss told me one time, there is no long term without the short term and we wanted to make sure that we didn't set ourselves in a position where we made a bad choice, we burned one or more of our customers and it really took us off our growth trajectory as.

As far as the <unk>.

How we think about our al.

Algorithm in fiscal year 'twenty.

'twenty, two and 'twenty three what I, what I would share with you is theres just so much other volatility in the business right now.

That there are all sorts of other changes in the business that are eclipsing what we would have seen in terms of the modest savings in the early periods of this.

Go lives so does it differ some of those savings yet.

Does does it.

Take them off the table long term absolutely not.

It's still it's a great project.

Thank you for that clarity.

And then when we're looking at.

Great.

Fireeye obviously we're.

We're seeing really strong growth.

Could be significant needs to compete.

Year over year growth.

When you're thinking about the overall distribution at.

At least from what we can see.

The ECB has plateaued in the low <unk>.

That sort of what you're seeing.

And then also I mean, obviously it doesn't tell the full story in <unk>.

The potential for new Skus.

And further distributions across the shelf, what kind of opportunities for the brand going forward.

No.

We feel pretty comfortable that were.

Television National distribution on this this item I guess I would want to cross check with you. The ACB number that did you say can you repeat for me the ACB number they view.

David.

What I've seen with the ECB and the low sixties.

Yes, our ACB is considerably higher than that we have our.

Our ACD approaching national.

At a national level.

I guess that would be one that I would want to go back and maybe offline. We can cross tab with you on the ACP number having said all of that.

Full distribution across all the big guys Walmart.

Target.

Over in all outlet.

Outlet Albertsons all of their various banners publix.

And then all of the other players nationally and we'll see if we can pull up our ACB number we're having the conversation but.

Through to June and certainly through July was considerably higher than that having said all of that.

The velocity trends have exceeded our expectation that trial and repeat rates have exceeded our expectations and.

Our retailers are thrilled and we're thrilled.

There continues to be a lot of opportunity for us to grow this platform.

What we're starting to think about now for example.

Sample if you look at other really big products on the shelf.

Hidden Valley Ranch, Sweet Baby Ray's Heinz ketchup all of those are selling in a considerably larger size or sizes and we arent in our platform. Today. So if you think about where do we go from here, it's going to be.

You've seen the number of facings on the shelf to drive holding power, it's going to be upsizing. So that we can get more into consumers' pantries and into their refrigerators and then also there remains an opportunity on the table for us to work with Chick Fil a to go into other variance.

Right now we're constrained on.

Capacity, so we can entertain those but once horse cave comes online it is going to present us with the opportunity for that sort of next leg of growth for this great platform.

Hey, Brian I'm looking at an ACB.

J D. In the latest four week period, so it's probably improved since the last time you looked at it.

Okay, great. Thanks for that clarification.

In terms of the comp on the foodservice side.

I know, you're saying, there's a pass through cost.

Down what kind of lag is there in terms of that I know in the retail business, obviously methods taken.

Taking a more active conversations with pricing.

EBIT of a lag there. So if you could talk about that that'd be helpful.

Tom do you want to take that one.

Sorry. The question was just the timing of the pricing and the lag so.

We'll take it in two parts so in foodservice.

We generally.

Price slightly.

Behind the commodities so.

Particularly in this quarter you saw we had negative pinard.

In foodservice and we'll pick that up.

Going forward and then as we as we talked about in retail.

Those pricing actions will be effective in the.

Beginning in the second quarter and so.

So essentially after we get past the first quarter, we expect to start to move towards a more neutral peanut going forward.

Thanks, and then just the last one for me.

The Bantam bagels business.

Becoming locked in terms of finding new customers to replace demand.

San Franciscans information.

No. We have we are continuing to bring online incremental foodservice customers, but nobody at this scale of a Starbucks.

Okay. Thank you.

And there are no further questions. We will now turn the call back to Mr system for concluding comments.

Well. Thank you everybody it was a pleasure to be here with you today.

We look forward to joining you again in November when we share with you our first quarter results, but until then have a great rest of the day and.

Take care of yourselves.

Okay.

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