Q1 2022 Lancaster Colony Corp Earnings Call

Ladies and gentlemen, this is the operator for today's call we apologize for the inconvenience.

However, Lancaster Corporation's conference call has been delayed this call as expected there was doing momentarily until that time your lines will again be placed on hold thank you for your patience.

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Good morning, and sorry for the delay.

Thank you everyone for joining us today for Lancaster colony's fiscal year 2022 first quarter conference call. Our discussion. This morning May include forward looking statements, which are subject to the safe Harbor provisions of the private Securities Litigation Reform Act of 1095. These statements are subject to a number of risks and uncertainties and could cause actual results to differ materially.

And the company undertakes.

No obligation to update these statements based upon subsequent events a detailed discussion of these risks and uncertainties is contained in the company's filings with the SEC also note that the audio replay of this call will be archived and available at our company's website Lancaster colony's dot com later this afternoon.

For today's call basis, <unk>, President and CEO will begin with a business update on highlights for the quarter, Tom Pigott. Our CFO will then provide an overview of the financial results.

I will then share some comments regarding our current strategy and outlook at the conclusion of the prepared remarks, we'll be happy to respond to any of your questions. Once again. We appreciate your participation. This morning, I'll now turn the call over to Lancaster, colony's President and CEO, Dave Demski, Dave Thanks, Neal and good morning, everyone. It's a pleasure to be here with you today as we were.

Review, our first quarter results for fiscal year 2022, I'd like to begin by expressing my sincere and heartfelt. Thanks to everyone here at Lancaster colony for their tremendous efforts and ongoing commitment to servicing our customers and growing our business.

And our first fiscal quarter ended September 30, consolidated net sales grew 12, 3% to a record $392 million.

Net sales in our retail segment grew 15, 6%.

Net sales in our foodservice segment advanced eight 1% as expected we experienced significant cost inflation during the quarter that reduced our profit before our pricing initiatives.

Full effect.

The 15, 6% growth in retail net sales comps to a strong first quarter last year when retail net sales grew 16, 6% as the impacts of COVID-19 drove increased at home food consumption.

Retail sales growth in this year's first fiscal quarter was driven by our licensing program led by Chipotle sources, and Buffalo Wild wings sauces. The sales for those two product lines combined to account for nearly 13 percentage points of growth for the retail segment in the quarter.

IRI scanner data for the 13 week period, ending September 26 showed total U S. Food sales of Chipotle sources at $35 1 million and sales at Buffalo Wild wings sauces at $13 million.

Olive garden dressings remains another bright spot in our licensing program as it continues to gain market share in the $2 $1 billion shelf stable dressing category.

Our IRI Olive garden dressings grew their category share to six 3% during the quarter.

With respect to our own brands per IRI data for the 13 week period, ending September 26 highlights included a 450 basis point pickup in market share for our own New York bakery in the frozen garlic bread category.

In our foodservice segment, excluding omni baking sales attributed to a temporary supply agreement that ended October 31 last year net sales increased 10, 1% the.

The increase in net sales was driven by inflationary pricing and volume growth for our branded foodservice products, excluding inflationary pricing sales volumes to our national chain restaurant customers were similar to last year.

Foodservice operators industry wide are facing the challenges of a tight labor market product supply issues and rising cost NPD crest data for U S. Foodservice industry shows the weekly transactions for the quarter ending September 30 were pacing ahead of last year through mid August.

And then fell slightly below prior year levels for the remainder of the quarter.

Now I'll turn the call over to Tom Pigott, our CFO for his commentary on our first quarter financial results.

Thanks, Dave overall results for the quarter reflected strong top line performance as well as significant inflationary cost impacts.

First quarter consolidated net sales increased by 12, 3% to $392 1 million.

This growth was driven by consolidated volume growth of approximately 5% pricing primarily in our foodservice segment and favorable revenue mix consolidated gross profit decreased by $300000 to $92 $4 million.

Gross profit benefited from the volume and pricing actions. These benefits were offset by a significant amount of commodity inflation of raw material costs were up in the mid teens on a percentage basis.

This commodity inflation in excess of our pricing was the primary driver of the 290 basis point gross margin decline, we reported in the quarter.

As we have shared our planned retail pricing will be fully reflected in the second quarter. In addition, our foodservice pricing lag the commodity increase during the quarter.

Beyond the significant commodity inflation, we incurred higher co manufacturing cost as we outsource additional production to meet our growing demand as well as higher freight and warehousing costs and labor inflation. These increases were partially offset by reduced costs related to COVID-19, and our productivity initiatives.

Selling general and administrative expenses increased $3 7 million or seven 6%.

The largest driver of the increase was project ascent, which was up $1 1 million.

Other increases included investments in personnel and business initiatives to support growth.

Consolidated operating income declined to $8 4 million or 17, 2% versus the prior year quarter to $40 $5 million. The main driver of the reported operating income decline was the prior year's net $4 $5 million benefit for the special items related to the Bantam bagels business.

These items included a $5 $7 million favorable reduction in contingent consideration and a $1 2 million intangible asset impairment charge as specified on our income statement excluding.

Excluding these items, our operating income was lower due to the modest gross profit decline and the increase in SG&A expenses.

Our effective tax rate was 24, 4% this quarter versus a tax rate of 24, 3% in the first quarter of fiscal 'twenty. One we estimate the tax rate for fiscal 'twenty two to be 24%.

First quarter diluted earnings per share decreased 24 to $1 11.

The decrease was primarily driven by the prior year favorable impact of advance some special items I mentioned previously.

These items benefited prior year EPS by <unk> 13, a share in.

In addition costs related to project ascent reduced this quarter's EPS growth by <unk> <unk> per share.

The remainder of the decline related to the underlying performance of the business.

With regard to capital expenditures first quarter payments for property additions totaled $32 million for our fiscal year 'twenty. Two we are forecasting total capital expenditures between 170 and $190 million.

This forecast includes approximately $105 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 returned funds to shareholders. Our quarterly cash dividend of <unk> 75 per share paid on September 30th represented a 7% increase from the prior year amount.

Our enduring streak of annual dividend increases currently stands at 58 years.

Even with the investments, we're making and the increased dividend payments our financial position remains very strong as we finished the quarter debt free with $130 million of cash on the balance sheet.

To wrap up my commentary this quarter featured strong topline growth and significant inflationary impacts in advance of our full pricing actions.

We continue to monitor and adjust to the inflationary cost increases we are forecasting this year, while investing in the long term potential of the business.

I'll 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 number two to simplify our supply chain to reduce our cost and grow our margins and number three to identify and execute complementary M&A to grow our core.

In our fiscal second quarter, we expect our licensing program to remain an important source of growth in the retail segment. Our foodservice segment should continue to benefit from higher demand for our foodservice products and growth from select <unk> and pizza chain customers.

We anticipate the inflationary environment will continue as we face higher commodity cost, particularly for soybean oil along with increased cost for packaging freight and labor inflationary pricing, including retail segment pricing actions that took effect near the end of our first fiscal quarter combined with <unk>.

<unk> pricing in the food service segment will help to partially offset the input cost inflation.

Our ongoing cost savings programs and other net price realization efforts will also serve to reduce the unfavorable impacts of inflation in the quarter.

Note that our projected financial results and expectations remain subject to the impacts of COVID-19, including shifts in consumer demand between the retail and foodservice channels.

Industry wide supply chain challenges and inefficiencies and higher cost to produce our products and service to our customers.

Moving on to our supply chain strategy, our significant investment in production capacity at our dressing and sauce facility in horse Cave, Kentucky is progressing as planned with a target completion timeframe in the first quarter of fiscal year 2023.

Given the strong growth we are experiencing across our portfolio of products. We are continuing to evaluate other alternatives to add production capacity and grow our manufacturing footprint.

Finally, consistent with the update that we shared with you in our fourth quarter earnings results back in August the implementation phase of our ERP project project ascent is scheduled to begin in the first quarter of fiscal year 2023. This concludes our prepared remarks for today and we'd be happy to answer any.

<unk> you may have Sheryl.

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

The first question.

<unk> of consumer edge research. Please go ahead.

Good morning, everyone.

Hi, good morning.

With respect to the topline growth in the retail business, we're continuing to see strength driven particularly partnership. It appears there's room for that to continue growing throughout fiscal 2019, how.

How are you thinking about the gross the growth prospects as you lap the national launch last year.

And specifically the month at where it had been nationally distributed already.

Yeah, absolutely Brian if you go back and you look at the scanner data sales Q4 of last.

The last fiscal year I think it was about 38 million Q1 of this quarter scandal scanner data was about 35, and I think what youre likely to see is sequential growth as we continue through at least the.

The next several quarters when we get into Q4, we're probably going to be close to a push because as you're well aware right. Now we are constrained and this is just on chipotle sauce I'm talking about here were constrained on capacity as you look at more broadly across that.

The algorithm in retail we expect to see continued growth sequential growth throughout the year now, let's kind of take a step back and talk about chipotle as we think about it as we finish this fiscal year and we continue this growth.

There are several things that are going to start to open up as we get into the next fiscal year.

The first of which is we're bringing online incremental bottling capacity, that's going to allow us to take the product off allocation with our customers and allow them to begin to more to merchandise the item in ways that you would other items in a grocery store.

Other thing that thats going to allow us to do is to bring to the market new flavors and new sizes and these are discussions that are actively underway.

With our partner at Chipotle, and we are going to be exciting excited to share more news about that with you in the forthcoming quarters. So.

We're excited to see how this product is performing.

We continue to see strong results in terms of trial and repeat and.

We just think that there is a.

Ton of upside on this brand proposition.

Thanks.

Helpful. And then it seems largely the biggest thing at least for the Chipotle partnership that's holding you back into capacity and then as were thinking about potentially of our opportunities within.

Our foodservice partnerships at retail how would you think about that playing out.

It's another great question. So as we look at it the way we're looking at this in general is almost Brian like the way you would look at other inorganic growth.

Sure.

A company like others, we're constantly looking at acquisition opportunities and we think of them in terms of our pipeline.

Take that exact same approach that we apply to the way, we think about licensing right with the first and closest in opportunity to be an expanding with existing partners and then looking at new partners and there again, when we bring that capacity online, it's going to give us the opportunity to bring online new partners and potentially some some.

New <unk>.

Categories I'm not in a position to share that with you right now, but we have a number of of great things that are underway and look forward to sharing more of that with you in due course.

In terms of the comp could you provide any details regarding the expected magnitude of those costs over the coming quarters, and then just a little bit more detail again on your decision to shift the implementation has until may three yes.

Yes.

So what I would tell you is next quarter is going to be on or about cost proximate to where we were in this quarter. You can expect to see probably a very marginal uptick in Q3 and Q4 as we get ready for the final push.

And then go live in Q4, and then you can expect to see those those costs start to wind down into fiscal year, 2023, and sort of the way that they are cadenced out and the reason why there are essentially going to be flat for the first quarter and this quarter is because at this point we're into testing as we.

We cross over into the next calendar year or Q3, and Q4 are really we're going to be going through very intensive training and getting employees ready to go to take this product line and these arent expenses that you can capitalize and run them through the P&L and it's the final push it as you think about what we're doing.

The first wave that we're bringing live.

It's the back office of the business in order to cash its procured pay it involves trade spending we're also bringing online our frozen Dcs and just a couple of factories in the subsequent waves what will happen is that the scope of the implementation will start to wind down.

And we're going to be essentially stamping out factories. Several at a time until we are completed with with this project, which will wind its way down through the.

At the end of 2023.

Per the timing now Theres a second question, which is why did we elect to defer the project to make it lined up with the fiscal year and there are a couple of reasons for that Ryan.

The first is we step back and we said what are truly the priorities of our business and first and foremost it servicing our key strategic customers, namely our foodservice customers be it darden restaurants at Olive garden and there are other.

Elements Chipotle at Buffalo, Wild wings, and others in many cases, we're sole supplier to those guys and their menu for their for their items.

For us to put them in a situation, where we're not able to deliver not only impacts our business, but it could severely impact their business and giving all the external complexities that we were seeing when we went through our planning process. We elected that it would be safer to push it out a little bit farther to ensure that we are in a position.

<unk> to build up inventory into executed safely. So parenthetically. If you go through when you get a chance to needle Q youre going to see some movement.

In our inventory and a part of that is driven by a rebound because of inflation, but part of that is driven by the fact that we are carrying more inventory as a buffer to make sure that we can service our business now and in preparation for servicing our business. When we prepare to go lives. So really that decision more than anything else was just driven by the fact that we.

Want to make sure that we nailed the implementation for our company and our shareholders, but we also Neil it for those strategic partners.

Thanks.

Where in your business, where you've seen the largest.

Inflationary pressures and as we're thinking about gross margins throughout the balance of the year I know you don't provide guidance, but any color on the moving pieces that would be helpful. And then maybe some of the impact of the sea.

Foodservice coming back retail still growing strongly but at some point, that's going to fade out.

Some of the implications that you would see in terms of gross margin coming from those the balance of those moving pieces.

Thanks, Brian Yes. This is Tom so overall, we did see commodity inflation in the quarter in the mid teens.

The most pronounced impact for us was in soybean oil.

The costs are close to double.

That impacts both of our segments, but in this particular quarter, we saw more of an impact in the foodservice Penang.

As a pricing lag.

Lagged the commodities and you can see that in the foodservice reported results we've reported now going forward as.

As we shared on the retail side, we do have we will get the full impact of the first round of pricing.

That that will be reflected in Q2 fully.

As well as the catch up.

Foodservice pricing, which will improve our margins there as well versus versus the declines we reported this quarter now.

In the future certainly we are modeling, our Penang and forecasting and commodities we looked at it very closely we have a number of scenarios on the board.

And over time, our our goal and our belief is that we'll be able to offset these.

These commodity impacts.

It through pricing trade reductions other revenue realization approaches.

Thanks, that's helpful and then as we're looking at some of the foodservice trends.

The improvement.

How much of it hasnt really covered due to COVID-19 yet.

And then I know you touched on some of the NPD trends in your prepared remarks, but would you be able to go into a little bit of detail about some of the industry level trends.

In foodservice and then maybe how you think about pathogens.

The sequential improvement continuing.

For the foodservice business.

Yeah, Ryan I'll go ahead and take that one.

An interesting quarter, if you look at where the quarter began in July what we saw was and I'm going to talk about transaction data right is as transactions were actually strong they were running into.

Low to mid single digit mid single digit range for all of the various outlets <unk> on a consolidated basis.

As we got towards the Middle of August all of a sudden we started to see transaction data start to pull back and it actually started to go slightly negative let's call it 1%.

And it's sort of ran that way through the remainder of the quarter now as you pull that apart what you saw where there were some segments like mid scale that continued performed pretty darn well through the whole quarter, but bear in mind that those segments, we're lapping a horrible comp last year, where they.

It would've been down 60, or 70% right, but if you kind of go to where the center of gravity of foodservice, which is around <unk> and casual dining, but <unk> principally I think the story to watch is that as we started the quarter again.

We were in the let's call it the mid single digits positive and then it flips slightly negative so by the time you looked at a 13 week data period in MPD Youre looking at transactions that are that are basically flat. What we believe is going on in this case is that operators are.

<unk> with labor and as a consequence, they're curtailing their hours of operations and in some cases their days of operation and Thats translating into fewer transactions. If you look at the sales data given the fact that they're passing on inflation, it's masking that but in terms of what we see.

In terms of the volume that runs through their boxes, we are seeing a modest pullback there. So as we look across the remainder of our fiscal year. What I would continue to focus on is Fortunately, we are going to be lapping some softer comps, but to some degree we're going to be beholden by how.

Well, they are able to staff and run their operations.

Wouldn't expect to see a material pullback in hours and operations from where they are today, but every one of these guys out there are making triage decisions in some cases theyre limited menu items to reduce complexity in the restaurant.

In other cases, they're limiting hours in order to manage complex and then the final case some of them in the case of <unk> are closing their dining rooms, and focusing on their drive through or take out business. So we do see line of sight to continued growth given the soft comps, it's a business that we believe in.

But there are challenges are manifest and they're real.

Thanks, that's helpful and then in terms of capital allocation priorities.

Two would you REO sales.

Talk about that.

Thoughts on M&A.

Or any additional capital expenditures.

Support Smith demand that Youre seeing.

Hum.

Sure.

Yes, Ryan that's an excellent question so.

As we've shared this year, we will be spending between $170 million to $190 million heavy spend behind that horse cave expansion project.

Today, we're looking at a number of growth scenarios on the business and as it relates to capital allocation I think physician wanted to supporting that growth. So we're looking at potential.

Greenfield brownfield expansions.

As well as.

Potential acquisitions of existing dressings, and sauces businesses to support the robust growth.

Then beyond that.

We do think about M&A.

I think in our our focus in the short term is to take care of our existing demand.

Support the continued growth of the licensing platform.

With our capital allocation and then implement the ERP system, and then potentially think about other alternatives.

Continue to support our growth.

Thanks, that's it for me.

Alright, alright, thank you Ryan.

Well if there are any other questions I want to thank each of you for joining this morning, and we look forward to getting together on the call. When we share with you our second quarter update in the meantime, I Hope you guys have a happy safe and productive fall.

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

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