Q2 2022 Lancaster Colony Corp Earnings Call

Speaker 1: Good morning. My name is Carmen and I will be your conference call facilitator today. At this time, I would like to welcome everyone to the Lancaster Colony Corporation fiscal year 2022 second quarter conference call.

Good morning, My name is Carmen and I will be a conference call facilitator today at this time I would like to welcome everyone to the Lancaster Colony Corporation fiscal year 2022 second quarter Conference call.

Speaker 1: Conducting today's call will be Dave Susinski, President and CEO and Tom Pickett, CFO . All lines have been placed on mute to prevent any background noise. After the speakers have completed their prepared remarks, there will be a question and answer period.

Today's call will be Dave <unk>, President and CEO and Tom Pigott CFO .

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.

Speaker 1: If you would like to ask a question during this time, simply press star then the number one on your telephone keypad.

If you would like to ask a question. During this time simply press Star then the number one on your telephone keypad.

Speaker 1: and questions will be taken in the order that they are received.

And questions will be taken in the order that they are received.

Speaker 1: If you would like to withdraw your question, press the pound key. Thank you.

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

Thank you.

Speaker 1: And now to begin the conference call, here is Del Gunavsik, Vice President of Corporate Finance and Investor Relations for Lancaster Colony Corporation.

And now to begin the conference call here is Doug <unk>, Vice President of corporate Finance and Investor Relations for Lancaster Colony Corporation.

Thank you good morning, everyone and thank you for joining us today for Lancaster colony's fiscal year 2022 second quarter conference call.

Speaker 2: 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 1995.

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 that could cause actual results to differ materially and the company undertakes no obligation to update these statements based upon subsequent events.

Speaker 2: A detailed discussion of these risks and uncertainties is contained in the company's filings with the SEC.

Detailed discussion of these risks and uncertainties is contained in the company's filings with the SEC.

Speaker 2: Also note that the audio replay of this call will be archived and available at our company's website, LancasterColony.com, later this afternoon.

Also note that the audio replay of this call will be archived and available at our company's website Lancaster colony Dot Com later this afternoon.

Speaker 2: For today's call, Dave Sosinski, our President and CEO , will begin with the business update and highlights for the quarter.

For today's call, Dave <unk>, our president and CEO will begin with a business update and highlights for the quarter.

Speaker 2: Tom Bigot, our CFO , will then provide an overview of the financial results.

Tom Pigott, our CFO will then provide an overview of the financial results.

Speaker 2: Dave will then share some comments regarding our current strategy and outlook.

Dave will then share some comments regarding our current strategy and outlook.

Speaker 2: At the conclusion of our prepared remarks, we'll be happy to respond to any questions you may have.

At the conclusion of our prepared remarks, we'll be happy to respond to any questions you may have.

Yes.

Speaker 2: Once again, we appreciate your participation this morning, and I'll turn the call over to Lancaster County's President and CEO , Dave Suszynski. Dave.

Once again, we appreciate your participation. This morning, I'll now turn the call over to <unk>, President and CEO , Dave <unk> Dave.

Speaker 3: Thanks Dale and good morning everyone. It's a pleasure to be here with you today as we review our second quarter results for fiscal year 2022.

Thanks, Dale and good morning, everyone. It's a pleasure to be here with you today as we review our second quarter results for fiscal year 2022.

Speaker 3: In our fiscal second quarter, which ended December 31st, consolidated net sales grew 14.2% to a record 428 million, with retail net sales up 10.1% and food service net sales up 20.3%.

In our fiscal second quarter, which ended December 31, consolidated net sales grew 14, 2% to a record $428 million with.

With retail net sales up 10, 1% and foodservice net sales up 23%.

Speaker 3: Retail net sales growth of 10% was driven by pricing across the portfolio and volume led by the expansion of our licensing program and strong performance on Sister Schubert's frozen dinner rolls.

Retail net sales growth of 10% was driven by pricing across the portfolio and volume led by the expansion of our licensing program.

Performance on sister Schubert frozen dinner rolls.

Speaker 3: This compares to very strong retail sales growth of 19.5 percent during the same period last year.

This compares to very strong retail sales growth of 19, 5% during the same period last year.

Speaker 3: Retail sales volumes measured in pounds advanced 4% on top of the 12% volume growth last year.

Retail sales volumes measured in pounds advanced 4% on top of the 12% volume growth last year.

Speaker 3: Notably, our licensing program continued to perform well in the period, led by distribution gains for Buffalo Wild Wing Sauses, and increased household penetration and strong repeat rates for Chick-fil-A Sauses.

Notably our licensing program continue to perform well in the period led by distribution gains for Buffalo Wild wings sauces, and increase household penetration and strong repeat rates for Chick Fil a sources.

Speaker 3: In the aggregate, these two licensed sauces combined for over 10% of our net sales growth in the quarter.

In the aggregate. These two licensed sources combined for over 10% of our net sales growth in the quarter.

Speaker 3: For the quarter versus prior year, IRI data showed strong share gains for our frozen breads with Sister Schubert dinner rolls of 150 basis points to 54.1 percent, and New York Bakery garlic bread of 230 basis points to 42.5 percent.

For the quarter versus prior year IRI data showed strong share gains for our frozen breads with sister Schubert dinner rolls up 150 basis points to 54, 1% and New York bakery, garlic bread up 230 basis points to 42, 5%.

Speaker 3: With sales of $61.6 million, 2-2 was Sister Schubert's strongest holiday performance ever thanks to great retail execution in a difficult environment.

With sales of $61 6 million Q2, with sister Schubert's strongest holiday performance ever thanks to great retail execution in a difficult environment.

Speaker 3: On a two-year stack basis for the quarter, IRI Retail Scanner data shows strong sales growth and share gains for several of our branded products, including Marzetti Produce Dressings, Sister Schubert Frozen Dinner Rolls, New York Bakery Garlic Bread, and Reem's Frozen Noodles.

On a two year stacked basis for the quarter IRI retail scanner data shows strong sales growth and share gains for several of our branded products, including March Eddie produce dressing sister Schubert frozen dinner Rolls, New York bakery, garlic bread and reames frozen noodles.

Speaker 3: Of particular note, during the same two year stack period, our licensed SOS platform has grown from 22 million in sales to 78 million in sales, an increase of 250%.

Of particular note during the same two year stack period are licensed SaaS platform has grown from $22 million in sales to $78 million in sales an increase of 250%.

Speaker 3: Based on the aforementioned growth, I'm pleased to share that in January IRI named Lancaster Colony Marzetti one of a handful of CPG growth leaders for calendar year 2021. Credit to our retail and R&D teams for all their efforts in this achievement.

Based on the aforementioned growth I'm pleased to share that in January IRI named Lancaster Colony Mars, Eddie one of a handful of CPG growth leaders for calendar year 2021.

Credit to our retail and R&D teams for all their efforts in this achievement.

Speaker 3: In summary, our retail top-line performance in the quarter was driven by pass-through pricing and volume growth driven by consumer-relevant brands and great store-level execution.

In summary, our retail top line performance in the quarter was driven by pass through pricing and volume growth driven by consumer relevant brands and great store level execution.

Speaker 3: In our food service segment, NIF sales growth of 20% was driven by inflationary pricing, volume growth with our quick service restaurant or QSR customers, and a rebound in demand for our branded products.

In our foodservice segment net sales growth of 20% was driven by inflationary pricing volume growth with our quick service restaurant are <unk> customers and a rebound in demand for our branded products.

Speaker 3: Food service volumes measured in pounds advanced 7%.

Foodservice volumes measured in pounds advanced 7%.

Speaker 3: per NPD Crest, our sales to the QSR Channel continue to pace well ahead of the industry driven by our strong relationships with national account customers and our outstanding culinary team.

Per NPD crest or sales to the <unk> channel continued to pace well ahead of the industry driven by our strong relationships with national account customers and our outstanding culinary team.

Turning to our margin performance, our gross margin declined in the second quarter reflects unprecedented inflation.

Speaker 3: Turning to our margin performance, our gross margin decline in the second quarter reflects unprecedented inflation, cost incurred to support the shifting and growing demands of our business, and a wide array of supply chain disruptions.

Cost incurred to support the shifting and growing demands of our business at a wide array of supply chain disruptions.

Speaker 3: During the period, we made significant investments in labor and warehousing to improve customer service levels.

During the period, we made significant investments in labor and warehousing to improve customer service levels.

Speaker 3: And while pricing actions served to offset significant commodity cost inflation and higher freight rates, we were not able to fully recover the other industry-wide cost pressures such as elevated wage rates in the period.

And while pricing actions served to offset significant commodity cost inflation and higher freight rates, we were not able to fully recover the other industry wide cost pressures such as elevated wage rates in the periods.

Speaker 3: Finally, our margins were also adversely impacted by our decision to significantly increase our utilization of co-manufacturers in the period to help satisfy the growing demand of our bottled sauces business.

Finally, our margins were also adversely impacted by our decision to significantly increase our utilization of co manufacturers in the period to help satisfy the growing demand of our bottled sauces business, while costly in the short term the decision to outsource production has not only enabled a strong retail growth we delivered.

Speaker 3: While costly in the short term, the decision to outsource production has not only enabled the strong retail growth we delivered, but also eliminated the immediate need for us to look at acquiring addressing and sauce manufacturer to support this rapid growth.

<unk>, but also eliminated the immediate need for us to look at acquiring a dressing and sauce manufacturer to support this rapid growth.

Speaker 3: In response to these operating and cost pressures, we're implementing discrete actions that should help us improve our margin profile.

In response to these operating and cost pressures, we're implementing discrete actions that should help us improve our margin profile.

Speaker 3: First, leveraging our recently completed sauce capacity expansion project at one of our Columbus-based facilities to better optimize throughput and reduce cost.

First leveraging our recently completed source capacity expansion project at one of our Columbus based facilities to better optimize throughput and reduce cost.

Speaker 3: Second, adding a new Columbus-based warehouse location and pursuing other initiatives to reduce material handling costs, decrease transportation costs, minimize third-party warehouse needs, and improve inventory management throughout our distribution network.

Second, adding a new Columbus base warehouse location and pursuing other initiatives to reduce material handling costs decreased transportation cost minimized.

Party warehouse needs and improve inventory management throughout our distribution network.

Speaker 3: Third, leveraging productivity improvements to enable us to increase the utilization of our own facilities while moderating our reliance on co-manufacturing. And finally, implementing the next phase of our revenue growth management strategy to recover increased labor cost. I'll now turn the call over to Tom Piggott, our CFO , for his commentary on our second quarter financial results.

Third leveraging productivity improvements to enable us to increase the utilization of our own facilities, while moderating our reliance on co manufacturing.

And finally implementing the next phase of our revenue growth management strategy to recover increased labor cost I'll now turn the call over to Tom Pigott, our CFO for his commentary on our second quarter financial results.

Speaker 4: Thanks Dave. Overall the results for the quarter reflected strong top line performance offset by higher cost resulting from significant inflationary impacts. Several supply chain challenges and investments made to facilitate growth. Second quarter of consolidated net sales increased by 14.2% to $428.4 million. This growth was driven by consolidated volume growth of approximately 6% in pricing actions taken in both segments.

Thanks, Dave overall, the results for the quarter reflected strong topline performance offset by higher costs, resulting from significant inflationary impacts several supply chain challenges and investments made to facilitate growth second quarter consolidated net sales increased by 14, 2% to 428.

$4 million.

This growth was driven by consolidated volume growth of approximately 6% and pricing actions taken in both segments.

Speaker 4: Consolidated gross profit decreased by $10.2 million to $96.6 million. Gross margins declined by 600 basis points.

Consolidated gross profit decreased by $10 2 million to $96 6 million.

Gross margins declined by 600 basis points.

Speaker 4: The key drivers of the gross profit decline were the high commodity inflation and increased supply chain costs.

Key drivers of the gross profit decline, where the high commodity inflation and increased supply chain costs in.

Speaker 4: Inflation for commodities and packaging materials was approximately 23 percent, consistent with our expectations.

Inflation for commodities and packaging materials was approximately 23% consistent with our expectations. The majority of the commodities, we utilized were priced at or near 10 year highs our significant exposure to soybean oil, which was up notably drove our ambition, our inflationary impact higher than many of our peers.

Speaker 4: The majority of the commodities we utilized were priced at or near 10-year highs. Our significant exposure to soybean oil, which was up notably, drove our inflationary impact higher than many of our peers.

Speaker 4: The increase in supply chain costs resulted from a number of factors. First, we experienced a high level of inflation on our factory labor and other manufacturing costs. The labor inflation was driven by our decision to raise wages to ensure we had adequate staffing to serve our customers in this tight labor market.

The increase in supply chain costs resulted from a number of factors first we experienced a high level of inflation on our factory labor and other manufacturing costs. The labor inflation was driven by our decision to raise wages to ensure we had adequate staffing to serve our customers in this tight labor market.

Speaker 4: Other indirect input costs on things like pallets and supplies were also highly inflationary.

Other indirect input costs on things like palettes and supplies were also highly inflationary.

Speaker 4: Second, our manufacturing costs were also up due to operational challenges in this environment, including supply disruptions at our facilities, lower overhead absorption at some facilities, additional personnel, and other costs we incurred to support growth.

Second our manufacturing costs were also up due to operational challenges in this environment, including supply disruptions at our facilities lower overhead absorption at some facilities additional personnel and other costs, we incurred to support growth.

Speaker 4: Third, we had higher freight and warehousing costs due to wage and fuel inflation and higher levels of inventory we built to improve service.

Third we had higher freight and warehousing costs due to wage and fuel inflation and higher levels of inventory, we build to improve service.

Speaker 4: Last, our co-manufacturing costs were up as we outsourced production to meet our growing demand.

Last our co manufacturing costs were up as we outsourced production to meet our growing demand.

Speaker 4: As Dave highlighted, we are taking several actions to address these increases and improve our operation.

As Dave highlighted we are taking several actions to address these increases and improve our operations.

Speaker 4: As a result to pricing, we continued to execute against our revenue growth management program. We benefited from a second round of pricing in our food service segment that was effective at the beginning of the quarter and our first retail pricing action that was effective at the end of the first quarter. Those actions served to offset the vast majority of the commodity inflate cost inflation we experienced during the quarter on a dollar basis.

As a results to pricing, we continue to execute against our revenue growth management program. We benefited from a second round of pricing in our foodservice segment that was effective at the beginning of the quarter and our first retail pricing action that was effective at the end of the first quarter.

Those actions to served to offset the vast majority of the commodity.

Cost inflation, we experienced during the quarter on a dollar basis.

Speaker 4: Additional actions are planned or have been implemented in an effort to recover the remainder of the commodity and freight cost increases as well as the higher labor in place.

Additional actions are planned or have been implemented in an effort to recover the remainder of the commodity and freight cost increases as well as the higher labor inflation.

Speaker 4: We also benefited from strong volume growth in both segments, with retail shipments growing 4% and food service growing 7% behind the program's date discussed.

We also benefited from strong volume growth in both segments with retail shipments growing 4% in foodservice growing 7% behind the program States discussed.

Speaker 4: selling general administrative expenses increased 6.8% or $3.3 million. This increase was driven by a higher level of investments to support the continued growth of our business.

Selling general and administrative expenses increased six 8% or $3 3 million.

This increase was driven by a higher level of investments to support the continued growth of our business. These.

Speaker 4: These investments included a supply chain optimization study, higher brokerage costs attributed to the increased sales, a modest resumption of consumer spending and IT infrastructure improvement.

These investments included a supply chain optimization study higher brokerage costs attributed to the increased sales of modest reduction resumption of consumer spending in it infrastructure improvements.

Speaker 4: Expenditures for Project Ascent, our ERP initiative, totaled $8.6 million in the current year quarter versus $8.5 million in the prior year quarter.

Expenditures for project ascent, our ERP initiative totaled $8 $6 million in the current year quarter versus $8 5 million in the prior year quarter.

Speaker 4: The company recorded two special items this quarter related to the Bantam Beggle's business. First, we re-value the contingent consideration liability to the sellers using fair value accounting. Based on that analysis, we reduced the current value of the projected payout by $2.2 million creating the income you see on the contingent consideration line of the P&L. We recorded $1.3 million of this adjustment in our food service segment and $0.9 million of this adjustment in our retail segment.

The company recorded two special items this quarter related to the Bantam Bagels business first we revalued the contingent consideration liability to the sellers using fair value accounting based on that analysis, we reduced the current value of the projected payout by $2 $2 million, creating the income you see on the contingent consideration line.

The P&L, we recorded $1 $3 million of this adjustment in our foodservice segment and <unk> $9 million of this adjustment in our retail segment.

Speaker 4: Second, we revalued the intangible assets on the balance sheet for this business, which resulted in an impairment charge of $0.9 million. This item was recorded in our retail segment. In addition, the company announced its plans to close our frozen garlic bread facility in Baldwin Park, California. Production at the facility ceased in January of 2022, and the Mama Bella brand frozen garlic bread product line was discontinued based on its small size and low profit.

We revalued the intangible assets on the balance sheet for this business, which resulted in an impairment charge of $9 million. This item was recorded in our retail segment in.

In addition, the company announced its plans to close our frozen garlic bread facility in Baldwin Park, California production at that facility ceased in January of 2022, and the Mama Bella brand frozen garlic bread product line was discontinued based on its small size and low profitability.

Speaker 4: We recorded restructuring impairment charges of $1 million related to this closure. This adjustment was not allocated to two reportable segments.

We recorded restructuring and impairment charges of $1 million related to this closure. This adjustment was not allocated to two reportable segments Consol.

Speaker 4: Consolidated operating income declined $13.3 million or 22.7 percent versus the prior year to $45.3 million. Operating income declined primarily due to the inflationary impacts and supply chain challenges I described.

Consolidated operating income declined $13 3 million or 22, 7% versus the prior year to $45 3 million operating income declined primarily due to the inflationary impacts and supply chain challenges I described.

Speaker 4: These items were partially offset by the pricing actions taken and the volume growth the company

These items were partially offset by the pricing actions taken in the volume growth the company achieved.

Speaker 4: Our effective tax rate was 24.3% this quarter versus the tax rate of 23.8% in the second quarter of fiscal 21. We estimate that the tax rate for fiscal 22 will be 24%.

Our effective tax rate was 24, 3% this quarter versus the tax rate of 23, 8% in the second quarter of fiscal 'twenty one we.

We estimate that the tax rate for fiscal 'twenty, two will be 24%.

Speaker 4: Second quarter diluted earnings per share decreased $0.37 to $1.25.

Second quarter diluted earnings per share decreased 37 to $1 25 to.

Speaker 4: The decrease was primarily driven by the operating income decline. The EPS benefit for the change in contingent consideration of $0.06 per share was nearly offset by the restructuring impairment charge of $0.05 per share.

The decrease was primarily driven by the operating income decline.

<unk> benefit from the change in contingent consideration of <unk> <unk> per share was nearly offset by the restructuring and impairment charge of <unk> <unk> per share.

Speaker 4: cost related to project descent reduced EPS by 24 cents per share this quarter and 23 cents in the prior year.

Costs related to project ascent reduced EPS by <unk> 24 per share this quarter and 23 in the prior year quarter.

Speaker 4: With regard to capital expenditures, second quarter payments for property additions totaled $36.5 million. For our fiscal year 22, we are forecasting total capital expenditures between $170 and $190 million.

With regard to capital expenditures second quarter payments for property additions totaled $36 $5 million for our fiscal year 'twenty. Two we are forecasting total capital expenditures between $170 million $190 million.

Speaker 4: This forecasting includes approximately $105 million for the Horse Cave Expansion Project that will help meet the increasing demand for our dressing and sauce products.

This forecast includes approximately $105 million.

For the horse cave expansion project that will help meet the growing increasing demand for our dressing and sauce products.

Speaker 4: In addition to investing in our business, we also return funds to shareholders. Our quarterly cash dividend of $0.80 per share paid on December 31st represented a 7% increase from the prior year amount. Our enduring streak of annual dividend increases currently stands at 59 years.

In addition to investing in our business. We also returned funds to shareholders. Our quarterly cash dividend of <unk> 80 per share paid on December 31 represented a 7% increase from the prior year amount are enduring streak of annual dividend increases currently stands at 15 nine years, our financial position remains very strong as we finished the quarter debt free.

Speaker 4: Our financial position remains very strong as we finish the quarter debt free with $114 million to cash on the balance.

It was $114 million of cash on the balance sheet.

Speaker 4: So, to wrap up my commentary, this quarter featured strong top-line growth, as well as the unfavorable impacts from significant inflation, supply chain challenges, and investment.

So to wrap up my commentary this quarter featured strong topline growth as well as the unfavorable impacts from significant inflation supply chain challenges and investments we are addressing the inflationary cost increases with our revenue growth management program and as David shared we have other discrete action plans in place to address the supply chain issues.

Speaker 4: We are addressing the inflationary cost increases with our Revenue Growth Management Program. And as Dave has shared, we have other discrete action plans in place to address the supply chain issue.

Speaker 4: In addition, we're continuing to invest in the long-term potential of the business. I'll now turn it back over to Dave for his...

In addition, we're continuing to invest in the long term potential of the business.

I'll now turn it back over to Dave for his closing remarks. Thank you.

Speaker 3: 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.

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 and supported the three simple pillars of our growth plan.

Speaker 3: To number one, accelerate our core business growth. To number two, simplify our supply chain to reduce our cost and grow our margins. And number three, to expand the core with focused M&A and strategic licensing.

To number one accelerate our core business growth <unk>.

Number two simplify our supply chain to reduce our cost and grow our margins.

Number three to expand the corner with focused M&A and strategic licensing.

Speaker 3: Looking ahead to our fiscal third quarter, sales volume drivers are expected to remain, our licensing program in retail, and our QSR customers in branded products and foods.

Looking ahead to our fiscal third quarter sales volume drivers are expected to remain our licensing program and retail and our <unk> customers and branded products in foodservice pricing actions will continue to add to total net sales in the face of commodity and packaging cost inflation and higher freight cost.

Speaker 3: Pricing actions will continue to add to total net sales in the face of commodity and packaging cost inflation and higher freight costs.

Speaker 3: We also expect cost pressures attributed to higher warehousing costs, supply chain, disruptions, increased labor cost, and higher manufacturing costs to remain a headwind to our fiscal third quarter result.

We also expect cost pressures attributed to higher warehousing costs supply chain disruptions increased labor cost and higher manufacturing costs to remain a headwind to our fiscal.

Fiscal third quarter results.

Speaker 3: As a reminder, our future financial results and expectations remain subject to the impacts of COVID-19, including shifts in consumer demand between retail and food service, ongoing supply chain challenges and disruptions, and increased costs to produce our products and service our customers.

As a reminder, our future financial results and expectations remain subject to the impacts of COVID-19, including shifts in consumer demand between retail and foodservice ongoing supply chain challenges and disruptions and increased cost to produce our products and service our customers.

Speaker 3: Beyond the discrete actions I shared with you earlier that are underway to improve operations, we also made the decision to engage an outside consultant to assist us with planning for our supply chain network. While it's too early to share any of the preliminary findings of this study, we are very encouraged about the potential opportunities that have been identified. These opportunities are fully aligned with the first and second pillars of our growth plan.

Beyond the discrete actions I shared with you earlier that are underway to improve operations. We also made the decision to engage an outside consultant to assist us with planning for our supply chain network.

It's too early to share any of the preliminary findings of this study we are very encouraged about the potential opportunities that have been identified.

These opportunities are fully aligned with the first and second pillars of our growth plan.

Speaker 3: I'd also like to update you on two important initiatives currently in progress. First, our significant investment in production capacity at our dressing and sauce facility in Horse Cape is going well with the target completion time frame in the first half of fiscal 2023.

I'd also like to update you on two important initiatives currently in progress first our significant investment in production capacity at our dressing and sauce facility in horse cave is going well with the target completion timeframe in the first half of fiscal 2023.

Speaker 3: Second, the implementation phase of our ERP initiative, Project Ascent, remains on track to begin in the first quarter of fiscal year 2023.

Second the implementation phase of our ERP initiative project ascent remains on track to begin in the first quarter of fiscal year 2023.

Speaker 3: Turning to growth, I'm excited to announce that we will be adding barbecue sauce to the exciting and consumer-relevant Chick-fil-A platform. As with other Chick-fil-A sauces, we will plan by executing a small regional pilot in the March and April timeframe that will inform our broader rollout plan.

Turning to growth I'm excited to announce that we will be adding barbecue sauce to the exciting and consumer relevant Chick Fil a platform as with other Chick fillet sources, we will plan by executing a small regional pilot in the March and April timeframe that will inform our broader rollout plans.

Speaker 3: Taking a step back, while our second quarter financial performance fell short of our expectations,

Taking a step back while our second quarter financial performance fell short of our expectations.

Speaker 3: Actions are underway to help us overcome the many challenges of the current supply chain environment.

Actions are underway to help us overcome the many challenges of the current supply chain environment.

Speaker 3: Longer term, I'm confident that our business remains very well positioned for the future, with category leading retail brands, a rapidly growing and consumer-centric retail licensing program, and a food service business that supplies many of the leading and fastest-growing national chain restaurants across the country. When combined with the investment in capacity and infrastructure, we have a strong and unique platform to deliver profitable growth for years to come.

Longer term I am confident that our business remains very well positioned for the future with category, leading retail brands are rapidly growing and consumer centric retail licensing program and our foodservice business that supplies many of the leading and fastest growing national chain restaurants across the country when combined.

The investments in capacity and infrastructure, we have a strong and unique platform to deliver profitable growth for years to come.

Speaker 3: In closing, I'd like to express my sincere thanks for the ongoing efforts of the entire Lancaster Colony team as we've navigated through unprecedented cost inflation, demand fluctuations, and supply disruptions. Our focus remains on the health, safety, and welfare of our employees, continuing to play our role in the country's vital food supply chain, and preparing our business for the future.

In closing I'd like to express my sincere. Thanks for the ongoing efforts of the entire Lancaster colony team as we've navigated through unprecedented cost inflation demand fluctuations and supply disruptions. Our focus remains on the health safety and welfare of our employees continuing to play our role.

We'll in the country's vital food supply chain and preparing our business for the future.

Speaker 3: This concludes our prepared remarks for today, and we'd be happy to answer any of your questions.

This concludes our prepared remarks for today and we'd be happy to answer any of your questions.

Speaker 1: Thank you. And at this time, I would like to remind everyone in order to ask a question, please press star one on your telephone keypad.

Thank you and at this time I would like to remind everyone in order to ask a question. Please press star one on your telephone keypad.

Speaker 1: Our first question is from Tom Brooks with the Benchmark Company. Your line is open.

Our first question is from Tom Brooks with the bench Mark Company. Your line is open.

Speaker 5: Hey, good morning, gentlemen. How are you doing? Good morning.

Hey, good morning, gentlemen, how are you doing good morning.

Speaker 5: few questions if I may. Leading off just with the top line strength that we saw in the quarter, can we talk through where the strength was in food service to see that type of increase in pounds? You talked about maybe some of the branded products.

Few questions if I may.

Leading off just with the top line strength that we saw in the quarter can we talk through where the strength was in.

Foodservice to see that type of increase in pounds, you talked about maybe some of the branded products.

Speaker 3: coming back, but also strength and with your QSR and pizza customers. And I know that plays into your, uh, your customer mix. So if we could talk through the strength there, that'd be great. Yeah, absolutely. Todd, uh, first of all, again, good morning. Um,

Coming back, but also strength in with your Q S arent pizza customers and I know that plays into.

Your customer mix. So if we could talk to the strength there that'd be great.

Absolutely Todd first of all again good morning.

Speaker 3: On the branded side, as you remember, same time ago last year, we were pretty deeply in the throes of COVID, and that part of the business was soft. And as we rolled through Q1 and Q2, that segment of the business, which supports concepts up and down the street, but also to a lesser degree, K-12 education and higher education started to post.

On the branded side as you remember same time ago last year, we were pretty deeply in the throes of Covid in that part of the business was soft and as we roll through Q1 into Q2 and that segment of the business.

Which supports concepts up and down the street, but also to a lesser degree K to 12 education and higher education started to post sequential strength. So that was a material contributor to that growth.

Speaker 3: So that was a material contributor to that growth.

Speaker 3: The other side though was really, we continued to see our QSR customers, you know, some of them by name, Chick-fil-A Dominoes, and others really continued to perform well all the way through the majority of that December timeframe. Once we got to the very last week of December , we did start to see a pullback because of Omicron that we...

The other side, though was really we continued to see our <unk> customers.

Some of them by name Chipotle, Domino's and others really continued to perform well all the way through the majority of that December timeframe. Once we got to the very last week of December we did start to see a pullback because of omicron that we've seen really continue through.

Speaker 3: really continue through the remainder of January and we can talk about that in a separate context. But really to summarize, you know, we were winning with winners on the food service side in terms of concepts and then the brand.

The remainder of January and we can talk about that separate context, but really to summarize.

We were winning with winners on the foodservice side in terms of concepts and then and then the brands.

Speaker 5: That's great. Why don't we tackle Omicron now and I want to do it from a higher level. If you look at kind of what the margin pressures were running on the business kind of through that.

That's great, but why don't we tackle.

Now and I wanted to do it from a higher level. If you look at kind of what the margin pressures were.

Running on the business kind of through that.

Speaker 3: Let's say even middle of December before we really saw the spike in Omicron. How much did the inflation reality change for you with the onset of the variant? And any way you can size what margin pressures were running versus what they, what you saw once the variant really took hold? Sure. Well, I would tell you, Todd, in Q2, I don't think that we could really point to Omicron as a contributor to our margin.

Let's say even middle of December before we really saw the spike in omicron.

How much did the inflation reality changed for you with the onset of the variant.

Any way you can size what margin pressures were running versus what the what you saw.

Once the variant really took hold sure well I would tell you Todd in Q2, I don't think that we could really point to omicron as a contributor to our margins per se.

Speaker 3: When we go in and we look at MPD press data, for example, what I can tell you is that QSR as a...

When we go in and we look at NPD crest data for example.

I can tell you is that <unk> as a whole when we look at transaction data was probably right and this is all <unk> was running depending on the week.

Speaker 3: when we look at transaction data was probably, and this is all QSR, was running depending on the week to, you know, up a point to down a point or so. I can tell you once we got into the January time frame, though, that started to slow down where these concepts in transactions, now this isn't sales, this is transactions.

Upper point to down a point or so I can tell you once we got into the January time frame, though that started to slow down where these concepts in transactions now. This isn't sales. This is transactions were down in the mid single digits. When you look at all foodservice in the aggregate that same thing is true obviously because of the size of <unk>.

Speaker 3: or down in the mid-single digits. When you look at all food service in the aggregate, that same thing is true, obviously, because of the size of QSR, where the concepts across the board were, let's say,

Those are where the concepts across the board, where let's say.

Speaker 3: you know, up a point on the aggregate to down a point, sort of vacillating there. We've seen a pullback of about 600 basis points in January . So, really, I can't point.

Up a point on the aggregate down a point sort of vacillating there we've seen a pullback of about 600 basis points in January so really I can't point to omicron as a contributor on the margin side as we look at our Q2 results.

Speaker 3: to Omicron as a contributor on the margin side as we look at our Q2 results.

Speaker 5: Yeah, Dave, let me let me follow up because I might not have been clear and how I asked the question. I was talking more than overall Lancaster level. If you looked at the cost of doing business in the last

Yes, David Let me, let me follow up because I might not have been clear in how I ask the question I was talking more of an overall Lancaster level. If you looked at the cost.

Of doing business in the latter parts of.

Speaker 3: December , how did that change with Omicron, whether it was employee call-outs, friction in your distribution, and just additional costs there? Yeah. Thanks. You know, so we did – really, it was the week-ending –

December how how did that change with omicron, whether it was employee call outs friction in your distribution and just additional costs there yes.

So we did really was the week ending.

Speaker 3: December 28 is probably where we started to see the biggest spike. And I can tell you, like every place else in the country, it took off. By the first week or so of January , we were seeing case rates that were as high as we had seen at any other point in time during the course of the pandemic. We were seeing call-offs, but I can tell you we continue to operate.

December 2008 is probably where we started to see the biggest spike and I can tell you.

Like every place else in the country. It took off bye bye.

First week or so of January we were seeing case rates that were as high as we had seen at any other point in time during the course of <unk>.

<unk>.

We're seeing call offs.

But I can tell you we continue to operate.

Speaker 3: without really a lot of disruptions because of either leaning into overtime or by virtue of the fact that the pressure that you've seen in our margins, we were carrying a little bit heavier labor going into the fall because of not only an anticipation of a spike in COVID, but the fact that we were seeing a higher level of resignations on the hourly side. So as far as our ability to produce.

Without really a lot of disruptions because of either leaning into over time or by virtue of the fact that the pressure that you've seen in our margins, we were carrying a little bit heavier labor going into the fall because of not only in anticipation of a spike in COVID-19 , but the fact that we were seeing a fair a higher level.

Of resignations on the on the hourly side, so as far as our ability to produce not a lot of pressure.

Speaker 3: Not a lot of pressure, maybe a small uptick that we're going to see in overtime costs. And then December had some other noise in it. For example, we didn't get into it, but there was the tragic tornado that struck across all of Kentucky.

Maybe a small uptick that we're going to see and overtime costs and then other December had some other noise in it for example, we didn't get into it but there was the tragic tornadoes that struck across all of Kentucky.

Speaker 3: Fortunately, it didn't impact our facility in a material way, but it did impact a number of our employees, and it resulted in a bit of a slowdown in December , but not enough for us to call off and mention by name.

Unfortunately, it didn't impact our facility in a material way, but it did impact a number of our employees and it resulted in a bit of a slowdown in December but not enough for us to call often mentioned by name yet Todd some of the other impacts beyond Omicron, we did see.

Speaker 4: Yet Todd, some of the other impacts beyond Omicron, we did see a number of supply disruptions in our start supply, packaging material disruptions. And some of our suppliers had difficulty staffing in this environment to provide us with raw materials. So there was a number of disruptions, not necessarily specific to Omicron, that did impact our margins in the quarter.

A number of supply disruptions in our starts supply packaging material disruptions in some of our suppliers had difficulty staffing in this environment.

To provide us with the raw materials. So so there was a number of disruptions not necessarily specific to omicron that did impact our margins in the quarter. Yes. If you want to talk more broadly about interruptions, Tom exactly right starches and gums as a particular category of supply we are a challenge for us leading for foodservice was a particular.

Speaker 3: Yeah, if you want to talk more broadly about interruptions, Tom's exactly right. Starches and gums as a particular category of supply were a challenge for us.

Speaker 3: Lidding for food service was a particular challenge for us. Transportation inbound from our suppliers with truckers calling off continued to be a problem for us. I mean, it's really the usual suspects that you're seeing in a range of our other partners. I think the ones that were unique pressure points to us were probably more a function of the products that we make. So starches and gums that go into sauces and dressings.

Challenge for us.

Transportation inbound from our suppliers with truckers, calling off continued to be a problem for us.

It's really the usual suspects that you are seeing at a range of our other partners.

The ones that were unique pressure points to us, we're probably more a function of the products that we make so starches and gums that go into sauces and dressings.

Speaker 3: It's probably highest among the list, and then some of the packaging.

Probably highest among the list and then some of the packaging and items that are unique.

Speaker 5: Okay, great. And then one more, and I'll jump back in queue. If you look at the realities that you just talked about dealing with, kind of...

Okay, Great and then one more and I'll jump back in queue.

If you look at the realities that you just talked about dealing with kind of.

Speaker 5: Q4 and then some of the Omicron realities in the Q1, but you did highlight revenue management actions that you're taking. We are seeing favorable trends with Omicron and kind of the speed of this normalizing seems to be encouraging, knock wood. Just can we look at this gross margin performance in this quarter and think of this as a kind of a basing of where gross margins should be?

Q4, and then some of the realities into Q1, but you did highlight.

Revenue management.

Actions that youre taking.

We are seeing favorable trends with omicron in kind of the speed of this normalizing seems to be encouraging knock wood.

Can we look at this gross margin performance in this quarter and think of this as a key.

Kind of a basing of where gross margins should.

Speaker 4: kind of settle out from these pressures in the near term because we do have these positive levers that you're pulling against it going forward.

Kind of settle out from these pressures in the near term because we do have these positive levers that youre pulling and catch that going forward.

So maybe I'll comment on <unk> first.

Speaker 3: I'm pleased to report that even, I looked at the data today, we're seeing things return back to normal in terms of our cases and our plans. They're down substantially in the number of...

I'm pleased to report that <unk> bin I looked at the data today, we're seeing things return back to normal in terms of our cases in our plants. They are down substantially and the number of call offs that we're seeing are down substantially as well.

Speaker 3: So, on chronic self, I think, should begin to normalize across the country.

Omicron itself I think should begin to normalize across the country.

Speaker 4: You know, as far as the other pressures are concerned on margins, maybe Tom, I'll turn it over to you to give a better outlook. So yeah, and Todd, I'll start by saying it's difficult to give specific guidance given some of the disruptive impacts we experienced in the quarter. As you look at some of the headwinds, we do, you know, we had over 200 basis points of dilution due to the commodity.

As far as the other pressures are concerned on margins, maybe Tom I'll turn it over to you to give you an outlook so yes.

I'll start by saying, it's difficult to give specific guidance given some of the disruptive impacts we experienced in the quarter.

As you look at some of the headwinds we do we had over 200 basis points of dilution due to the commodity impacts on our raw materials and certainly we price to cover a lot of that but naturally as you raise prices and have higher costs. You have natural dilution that is going to hit your P&L and that that we expect to.

<unk> continue.

202, a little over 200 basis points going forward.

Some of the other headwinds we're expecting as continued labor and other inflation. We do expect some of these disruptions to continue now in terms of tailwind.

Speaker 4: inflation. We do expect some of these disruptions to continue. Now, in terms of tailwinds, the retail segment took another pricing action on the dough-based products recently, and the food service segment took another pricing. And the goal from a dollar basis is to offset the inflationary impacts. And then in terms of the supply chain challenges we experienced, you know, as Dave highlighted, we have some discrete actions in place. So a lot of headwinds and some tailwinds. Difficult to give you a specific kind of ongoing impact, but certainly that commodity inflation piece, we expect to stay with us, that two-to-ten.

The retail segment took another pricing action on the DAU based products recently and the foodservice.

Segment took another pricing and the goal from a dollar basis is to offset the inflationary impacts.

Speaker 4: And then in terms of the supply chain challenges we experienced, as Dave highlighted, we have some discrete actions in place.

And then in terms of the supply chain challenges, we experienced as Dave highlighted we have some discrete actions in place.

Speaker 4: So, a lot of headwinds and some tailwinds. Difficult to give you a specific kind of ongoing impact, but certainly that commodity inflation piece we expect to stay with us.

So a lot of headwinds and some tailwind difficult.

Difficult to give you a specific kind of ongoing impact, but certainly that commodity inflation piece, we expect to stay with us that too.

Speaker 4: 250 basis points of dilution given the natural higher prices and higher costs that will flow through the P&L.

250 basis points of dilution.

Given the natural higher prices and higher costs that will flow through the P&L.

Speaker 5: Okay, great. I'll pass it along and jump back into the queue. Thanks.

Okay great.

I'll pass it along a trump back into the queue. Thanks.

Speaker 1: Our next question comes from Ryan Bell with Consumer Ed to Research Your Lines Open.

Our next question comes from Ryan Bell with consumer Edge Research. Your line is open.

Good morning, everyone.

Speaker 6: So, just trying to touch a little bit more on the food service industry trends, it seems like from what your commentary was that you're gaining share, going ahead of the category overall. Maybe, could you touch a little bit more on the category growth and then sort of your relative performance? It seems, you know, some of the drivers are what your mix is, but outside of that, I just wanted to see maybe if you could provide any additional context.

Good morning, Good morning, Ryan.

Yes.

So just trying to touch a little bit more on the foodservice industry trends.

It seems like from your commentary was that Youre gaining share growing ahead of the category.

<unk>, maybe could you touch a little bit more on the category growth and then sort of your relative performance.

It seems some of the drivers or what your mix is but outside of that I. Just wanted to see maybe if you could provide any additional context.

Speaker 3: sure. So, you know, if we were maybe to take a real widening and look at this, if you go back to the summer through the middle of January , you looked at all food service.

Sure.

If we were maybe just take a real wide angle look at this if you go back to the summer through the Middle of January and you looked at all foodservice.

Speaker 3: I mean, what we would see is that the industry overall in transactions is just down modestly. If you then click in and you look at the QSR space, what you would have seen on transactions again is that the QSR space would have been, let's say, up 50 basis points, so modest growth in transactions with their sales growth supported more by pricing overall, right?

Concepts I mean, what we would see is that the industry overall and transactions is just down modestly if you didn't click in and Youll look at the <unk> space, what you would've seen on transactions again.

Is that the <unk> space would've been let's say.

50 basis points of modest growth in transactions with their sales growth supported more by pricing overall.

Speaker 3: but in transactions they would have been upmodestly. If you look at our business then and you click into that rhyme, what you're gonna find is that within that mix there are a handful of customers that are outperforming the red.

<unk>.

But in transactions they would've been up modestly.

If you look at our business then you click into that Ryan what you're going to find is that within that mix. There are a handful of customers that are outperforming the rest.

Speaker 3: Some of the QSRs, Chick-fil-A is one that we mentioned by name, and then Pizza QSR is another area subset that's performed well. So when you look at our performance versus the industry as a whole.

Some of the <unk> Chipotle is one that we mentioned by name and then Pizza <unk> is another area subset that's performed well. So when you look at our performance versus the industry as a whole typically we're performing to the tune.

Speaker 3: Typically, we're performing to the tune of, you know, historically it was a couple hundred basis points better than the industry. We're performing even better than that.

Historically, it was a couple of hundred basis points better than the industry, we're performing even better than that just because of the strength of the concepts that were aligned with what I wouldn't tell you is that we're gaining share with the concepts that we're working with but we're positioned with the concepts that are growing in the market that when you compare our business versus the <unk>.

Speaker 3: just because of the strength of the concepts that we're aligned with. Now, what I wouldn't tell you is that we're gaining share with the concepts that we're working with.

Speaker 3: But we're positioned with the concepts that are growing in the market, that when you compare our business versus the market, it's going to show that we're growing faster.

Market is going to show that were growing faster.

Speaker 6: Thanks. That's helpful. Could you also touch a little bit more on the details behind the capacity expansion efforts and what sort of the impact would be from the increase in co-manufacturing usage? And I'm not sure if I picked up on this correctly, but in terms of the co-manufacturing increase and uptick, you know, what's the duration of that and when can some of that be brought in-house and sort of the margin implications?

Thanks.

Paul.

Could you also touch a little bit more on the details behind the capacity expansion efforts.

What's sort of the impact would be from the increase in co manufacturing usage and I'm not sure. If I picked up on this correctly, but in terms of the co manufacturing increased uptake.

The duration of that and when can some of that be brought in house in terms of the margin implications there.

Speaker 3: No, and I think this is, you take all of the challenges associated with COVID. And if it's possible, you move them aside for a second. One of the things that's happened in the last two years is that we've grown our business by almost 25% when you look at consolidated net sales. When you look at our retail business, it's grown by almost a third over that same period of time. And then really, you kind of screw in two clicks deeper. As I mentioned in my transcript, when you look at our license sauces in two two of this.

I think this is you take all of the challenges associated with Covid.

If it's possible you move them aside for a second one of the things that's happened in the last two years.

We've grown our business by almost 25% when you look at consolidated net sales when you look at our retail business. It has grown by almost a third over that same period of time, and then really you kind of screw in two clicks deeper as I mentioned in my transcript when you look at our license sources.

In Q2 of fiscal year 'twenty.

Speaker 3: We did $22 million in sales for us.

We did $22 million in sales for ethylene.

Speaker 3: In Q2 of this year, we did almost $80 million of sales.

In Q2 of this year, we did almost $80 million of sales right. So if you think this is during COVID-19 , we've taken a business that might have been operating at a run rate of about $90 million or so and we've taken it up to a run rate now.

Speaker 3: right so if you think this is during co-biz we've taken a business that might have been operating at a run rate of about ninety million or so and we've taken it up to a run rate now that's that's closer to three hundred and twenty million

That's closer to $320 million right. So that's the sort of order of magnitude of growth that we're talking on a run rate with these license sources and we've done it with continued growth on olive garden, but with the growth now a chipotle, which on a run rate in the scanner data. This is all the stuff that's publicly available Chick Fil a.

Speaker 3: right? So that's the sort of order of magnitude of growth that we're talking on a run rate with these licensed sauces. And we've done it, you know, with continued growth on Olive Garden, but with the growth now of Chick-fil-A, which on a run rate, and this is scanner data, this is all the stuff that's publicly available, Chick-fil-A

Speaker 3: is bigger than Olive Garden already, and it hasn't been in the market in a year yet, right? And then we've also been working to expand up Buffalo Wild Wings. So part of what's happening here is that we've had to make some some moves.

<unk> is bigger than olive garden already and it hasnt been in the market in a year yet and then we've also been working to expand Buffalo Wild wings. So part of what's happening here is that we've had to make some some moves pretty aggressive moves in order to bring online the capacity fast.

Speaker 3: pretty aggressive moves in order to bring online the capacity fast enough to facilitate this growth.

Enough to facilitate this growth and there's a strategic reason why we had to do it when we go out we talk to key partners like a kroger or like a Walmart and we say hey look we want you to cut in <unk> facings or 12 facings on a shelf for the product.

Speaker 3: And there's a strategic reason why we had to do it. When we go out, we talk to key partners like a Kroger or like a Walmart, and we say, hey, look, we want you to cut in eight facings or 12 facings on a shelf for the product.

Speaker 3: If we're not there to deliver on the promise, the next time we come back with an opportunity to expand, they're gonna say, talk to us next time.

Out there to deliver on the promise. The next time, we come back with an opportunity to expand they're going to say talk to us next time.

Speaker 3: Right? So we have one chance to get it on the shelf and demonstrate that it works. And we wanted to make sure, for the purposes of our long-term growth algorithm, that we didn't miss that opportunity.

So we have one chance to get it on the shelf and demonstrate that it works and we wanted to make sure for the purposes of our long term growth algorithm that we didn't miss that opportunity now to capitalize on that growth is coming at a cost not a price we're not buying down the price in order to get it to turn on the shelf quite contrary, but what we are.

Speaker 3: Now to capitalize on that growth, it's coming at a cost, not a price. We're not buying down the price in order to get it to turn on the shelf, quite the contrary. But what we are having to do is pay a material upcharge based on the strength of the items.

Having to do is pay a material up charge based on the strength of the items to get co Packers to bring <unk>.

Speaker 3: get co-packers to bring, you know, to allow us to rework our mix of business. And what I would tell you is we're pushing our, a range of products out, a lot of our own products, like Simply Dressed, et cetera, to make room within our own capacity to meet the needs of the business. Now flipping over to the capacity expansion, our biggest facility in our dressing network is our horse cave facility, it's about 250,000 square feet.

To allow us to rework our mix of business and what I would tell you is we're pushing or a range of products out a lot of our own products like simply dressed et cetera to make room within our own capacity.

To meet the needs of the business now flipping over to the capacity expansion our biggest facility in our dressing network as our horse cave facility, it's about 251000 square feet.

Speaker 3: And this expansion that we're bringing online is about another 200,000 square feet. So from a production perspective, it's going to be a material increase in the size of the facility with a couple of bottling lines and then also capacity to meet the needs.

And this expansion that we're bringing online is about another 200000 square feet. So from a production perspective, it's going to be a material increase in the size of the facility with couple of bottling lines and then also capacity to meet the needs of our foodservice business as I pointed out that project.

Speaker 3: As I pointed out, that project is slated to be done in the first half of fiscal year 23. So, you know, within the next year, we expect that project to come online. And then sequentially, we're going to be starting up kitchens and lines to allow us to gradually rework the balance of what we have out in COPAC.

<unk> is slated to be done in the first half of fiscal year 'twenty three so within the next year, we expect that project to come online and then sequentially, we're going to be starting up kitchens in lines to allow us to gradually rework the balance of what we have out in co Packers now maybe with the footnote you heard.

Speaker 3: Now maybe with a footnote, you heard one of the things that I mentioned in my comments today is that we were excited to announce that we're expanding our partnership with Chick-fil-A now to also include barbecue sauce.

One of the things that I mentioned in my comments today.

Is that we were excited to announce that we're expanding our partnership with AAA now to also include barbecue sauce and.

Speaker 3: And so, part of our decision to pull back versus leave out is going to be predicated on our ability to drive this growth, right? If we find that we continue to have more and faster opportunities, we will continue at least at some level to lean on these great COPAC partners. And they are great partners. They're helping us accommodate this growth in this environment, to the degree to which our growth rate starts to, let's say, moderate.

So part of our decision to pull back versus leave out is going to be predicated on our ability to drive this growth right.

If we find that we continue to have more and faster opportunities. We will continue at least at some level to lean on these great co pack partners and they are great partners. They are helping us accommodate this growth in this environment.

To the degree to which our growth rate starts to.

Speaker 3: at some point in the future. Obviously, we start to think about a different algorithm and, well, let's say a strategy for using our co-manufacturing.

Let's say moderate at some point in the future. Obviously, we start to think about a different algorithm and let's say our strategy for using our co manufacturers, but really what we're focusing on here is what we feel like is a really unique opportunity by virtue of our strategy around foodservice to retail licensing.

Speaker 3: But really, what we're focusing on here is what we feel like is a really unique opportunity by virtue of our strategy around food service to retail licensing.

Speaker 3: And the speed of these things has forced us to go out and lean hard into co-packers to capture the opportunity.

And the speed of these things that's forced us to go out and lean hard into co Packers to capture the opportunity.

Speaker 6: Thanks, I appreciate the context on that. And then some of the details that sort of push out for Ticklay barbecue product. And then just from a general sense, I understand that's a tough environment to try to predict what's gonna happen in terms of pricing. But if state of pricing environment overall or cost a side overall sort of stabilized.

Thanks, I appreciate the context on that and then some of the details that sort of the push out for.

Took play Bbq product.

And then just from a general sense I understand it's a tough environment to try to predict what it's going to happen in terms of pricing, but the pricing environment overall or cost side overall sort of stabilized.

Speaker 6: What do you think about the cadence or the movement sequentially of your gross margins over the balance of the years, the pricing that's currently in effect and plan to go into effect enough to tip the scales so that it might move upward on a year-over-year basis or at least the decrease starts to ameliorate somewhat?

What do you think about the cadence or the movement sequentially.

Gross margins over the balance of the year as the <unk>.

<unk>. That's currently in effect and planned to go into effect enough to tip. The scales. So that might move upward on a year over year basis or at least the decrease starts to ameliorate somewhat.

Speaker 3: So maybe I'll hit it sequentially, and then I'll turn it over to Tom to cover the points that I don't make. You know, really, for the last handful of years, we've talked about our PNOT strategy.

So maybe I'll hit it sequentially and then I'll turn it over to Tom to cover the points that I don't make.

Really for the last handful of years, we've talked about our <unk> strategy.

Speaker 3: which is pricing that of commodities. At Historic, when we launched it, we were just looking at commodities. Within about a year or so, we started to also include freight in our net PNOC.

Which is pricing net of commodities and historically when we launched it we were just looking at commodities within about a year or so we started to also include freight in our and our net <unk>.

Speaker 3: conversation. And then, you know, most recently now with the labor changes, we started to track

Conversation.

And then most recently now with the labor changes, we started to track wages in that peanut conversation. So what I would tell you Ryan to date, when we look at our Penang, we with the pricing actions. We've taken we've largely recovered the commodity component and the freight component.

Speaker 3: wages in that PNOC conversation. So what I would tell you, Ryan, to date, when we look at our PNOC, with the pricing actions we've taken, we've largely recovered the commodity component and the freight component. Where we're lagging is in the wage rate adjustments that we've made.

We're we're lagging is in the wage rate adjustments that we've made.

Speaker 3: and we're in conversations on the food service side to recover those and we have pricing actions that are in flight and retail to cover those. So I would expect from a PNOC perspective that as we go through Q3 and Q4, PNOC should become net neutral again.

And we're in conversations on the foodservice side.

Recover those and work we have pricing actions that are in flight and retail to cover those so I would expect from a PR perspective that as we go through Q3 and Q4, Penang should become net neutral again right.

Speaker 3: right? So that's how I would view that. And then what I would tell you is that there are other, let's just call them temporary, you know, points of dislocation in supply chains that we're all facing. Things like, you know, truck drivers and inbound supplier issues because of their own issues that I think we're just going to have to wait and see how they work their way through. What I would tell you is that

So that's how I would view that and then what I would tell you is that there are other let's just call them temporary.

Points of dislocation in supply chain that we're all facing things like truck drivers and inbound supplier issues because of their own issues and I think we're just going to have to wait and see how they work their way through what what I would tell you is that.

Speaker 3: As Tom and I pointed out, we're taking a range of actions to creep into our suppliers where we have to to make sure that we can assure more stable supply so we can make our factories run more predictably.

And Tom and I pointed out were taken at a range of actions to take.

Creek into our suppliers, where we have to to make sure that we can assure more stable supply. So we can make our factories run more predictably and Tom I don't know if theres anything else.

Speaker 4: And Tom, I don't know if there's anything else you want to add. I think you hit on it, Dave, and I think there's one additional point to add in that our pricing has been well received by the retailers. I think the strength of our brand is that we're seeing good reflection and the elasticity impacts are in line or lower than what we had originally projected. So we feel good about overall our ability to price to recover these costs, but it will take some time, as Dave outlined.

I think you hit on it David I think there is one additional point to add in that our pricing has been well received by the retailers I think the strength of our brands, but we're seeing good reflection.

And the elasticity impacts are in line or lower than what we had originally projected so so we feel good about overall, our ability to price to recover these costs, but it will take some time as Dave outlined.

Speaker 6: One last one for me, could you touch on some of the potential unlocks once you implement the Project Ascent program in the beginning of 2023, just in terms of general productivity and then obviously your balance sheet is quite flush, what that would mean in terms of your ability to digest the larger acquisition?

Thanks, One last one for me could you touch on some of the potential unlocks once you implement the project ascent.

Program in the beginning of 2023, just in terms of general productivity and then obviously your balance sheet is quite flush what that would mean in terms of your ability to supply just a larger acquisition.

Speaker 3: So we're on the forefront of some exciting times. If you remember, we did a pilot implementation of one of our factories that went into effect about a year ago now.

No.

So we're on the forefront of some exciting times. If you remember we did a pilot implementation of one of our factories that went into effect about a year ago now.

Speaker 3: And it's proven to be very, very helpful. And a lot of what we're seeing is just the speed to information that we wouldn't have had access to in the past that's helped us with things like staffing. We're, within the next couple of months, going to be taking the trade promotion management component live on the system. And then finally, when we go live earlier in the next fiscal year with order to cash, procure to pay, and the other components, I think that's where we would likely to see an even larger benefit.

And it's proven to be very very helpful. In a lot of what we're seeing is just the speed to information that we wouldn't have had access to in the past that has helped us with things like like staffing.

We're within the next couple of months is going to be taking the trade promotion management component live on the system and then finally when we go live.

Earlier in the next fiscal year with order to cash procure to pay and the other components I think thats, where we would likely to see and even larger benefit.

Speaker 3: The benefits are likely to come and

The benefits are likely to come in the usual places.

Speaker 3: Procurement is going to offer an opportunity. But the bigger area is just going to be the speed of information in our factories to make sure that we're staffing right and that we're sourcing right and we're running right. And it's a little bit hard for us to estimate exactly what that's going to look like in a COVID environment. And then longer term, Ryan, what this is going to give us is the ability to do much more seamless acquisitions with cost synergies than we haven't been able to do in the past.

<unk> is going to offer an opportunity.

But the bigger area is just going to be the speed of information in our factories to make sure that we're staffing right and that we're sourcing right and we're running right and it's a little bit hard for us to estimate exactly what that's going to look like in a COVID-19 environment and then longer term Ryan. What this is going to give us is the ability to do <unk>.

More seamless acquisitions with cost synergies than we haven't been able to do in the past.

Speaker 3: If you go back to the underlying reason why we did this, our current ERP system was installed in 1995. The vendor went out of business. When we installed it, we didn't really cascade it through the supply chain in areas like MRP, which had resulted in a business today that's run pretty manually. And when we look at acquisitions, it really precludes us from looking at cost synergies and we focus more on growth.

You go back to the the underlying reason why we did this or our current ERP system.

Was installed in 19, 95% vendor went out of business. When we installed that we didn't really cascaded through the supply chain in areas like <unk>.

<unk>, which has resulted in a business today, that's run pretty manually and when we look at acquisitions. It really precludes us from looking at cost synergies and we focus more on growth.

Speaker 3: Not only is this going to give us a stable platform, but I think it's going to give us a scalable platform for us to look at acquisitions or, for example, bringing online licensing and other stuff where we can ramp up very quickly and very seamlessly in a way we can't today.

Not only is this going to give us a stable platform, but I think it is going to give us a scalable platform for us to look at acquisitions or for example, bringing online licensing and other stuff, where we can ramp up very quickly and very seamlessly in a way we could we can't today.

Thank you.

Thanks Ryan.

Speaker 1: And we have a follow-up from the line of Todd Brooks from the Benchman Company. Please go ahead. Okay. Thanks for the second question.

And we have a follow up from the line of Todd Brooks from the Benchmark Company. Please go ahead.

Hey, Thanks for the second correct here.

Speaker 5: Can we talk about Chick-fil-A barbecue? And I guess...

Can we talk about Chick Fil, a barbecue and I guess.

Speaker 5: It seems like that probably hits on more categories that retail competitively than Polynesian does. Just any commentary that you can give us out of the food service side about.

It seems like that probably hits one more categories at retail competitively then.

It's been Polynesian does just any.

Any commentary you can give us out of the foodservice side about.

Speaker 3: barbecue popularity versus Polynesian popularity and kind of size where this falls between uh Chick-fil-a sauce and and Polynesian from a revenue opportunity. So in Chick-fil-a barbecue sauce is a category it's about a if I remember right 500 million dollar category maybe a little bit bigger than that as you pointed out there are a range of competitors that play the space.

Barbecue popularity versus Polynesian popularity in kind of a size where this falls between.

AAA sauce, and pollination from a revenue opportunity so you're chick-fil-a barbecue sauces categories about if I remember right $500 million category, maybe a little bit bigger than that as you pointed out there are a range of competitors that play in this space.

Speaker 3: If you look at it within Chick-fil-A's lineup, it's probably their number three sauce, so it's a material contributor.

If you look at it within Chick Fil A's lineup, it's probably one of their it's probably their number of <unk>. So it's a material contributor to what they do.

Speaker 3: And part of what this gives us, Todd, as we think about our longer-term brand, what we're looking to do ultimately is to create a bigger and more substantial brand block on the shelf. If we were to sort of say, leaping forward, what does the future look like here? I would say, obviously, Chick-fil-A original.

Part of what this gives us Todd as we think about our longer term brand.

We're looking to do ultimately is to create a bigger and more substantial brand block on the shelf is if we were to sort of say leaping forward. What does the future look like here I would say, obviously chick fillet original Polynesian sauce barbecue and then some players to be named later that are in them.

Speaker 3: Polynesian sauce, barbecue, and then some players to be named later that are in the works. But the other thing that we're going to be focusing on is launching larger sizes.

Works, but the other thing that we're going to be focusing on as large as launching larger sizes than.

Speaker 3: that allow us to drive greater holding power on the shelf, greater holding power in a pantry. And it really creates a roadmap for, for example, the way we grew ketchup when I was at Heinz and the way we thought about mac and cheese when Tom and I were at Kraft together. It all becomes part of how you grow up a really meaningful brand. You know, encouragingly, when we look at the.

That allow us to drive greater holding power on the shelf greater holding power and pantry and it really creates a roadmap for example, the way we grew catch up when I was at Heinz and the way, we thought about Mac and cheese, when Tom and I were at craft together. It all becomes part of how you grow up a really meaningful brand.

Encouragingly when we look at the brand today.

Speaker 3: We continue to have extremely high velocities. Our trial is high, our repeat is high. I believe even as of right now it's our number two brand or so in household penetration, really only trailing New York, but in due course we expect to see that, you know, quite possibly past New York as well.

We continue to have extremely high velocities are trial is high our repeat is high I believe even as of right now it's our number two brand or so in household penetration.

Really only trailing New York, but in due course, we expect to see that quite possibly passed New York as well.

Speaker 3: So, you know, it continues to be a very, very exciting platform. All of our retailers are excited about it. And maybe bringing you around to the last point is, as you recall, when we were trying to bracket this, we said that we thought it had the potential to be the same size, the same size. So, you know, we're excited about that. We're excited about that.

So.

Continues to be a very very exciting platform all of our retailers are excited about it and maybe bringing year round to the lab.

Last point is as you recall when we were trying to bracket. This we said that we thought it had the potential to be the same size as olive garden and.

Speaker 3: And right now, what we have essentially is two SKUs. We have a retail 16 ounce in original and a retail 16 ounce that's in Polynesian. And those two SKUs are already generating sales, net sales and, or excuse me, retail sales that are in excess of what we're doing out there with Olive Garden, with, you know.

And right now what we have essentially two skus, we have a retail 16 ounce and original and retail 16 ounce that's in Polynesian.

And those two skus are already generating sales net sales in our excuse me our retail sales that are in excess of what we're doing.

They're with with Olive garden.

A lot of room to run.

Speaker 5: So Dave, I'm drawing this kind of picture in my head of what Chick-fil-A will eventually look like as far as placement and breadth on the shelves at grocery. Can you kind of level set us?

So Dave I'm, drawing this kind of picture in my head of what.

AAA will eventually look like as far as placement and breadth.

On the shelf so grocery.

Kind of level set us.

Speaker 5: how long after a horse cave opening does it take to fully realize the potential of Chick-fil-A at grocery retail? So not unlocking club or anything, but maximize that grocery potential.

Long after.

A horse cave opening does it take.

To fully realize the potential of trick play at grocery retail, so not unlocking club or anything but maximize that grocery potential.

Well, maybe going back to if youre thinking about how do we line this up sequentially.

Factory is going to come online.

Speaker 3: in the second half of the next fiscal year. So it's going to be coming online, really, let's call it in the fall time period.

In the second half of the next fiscal year, so it's going to be coming online really let's call. It in the fall time period with kitchens in line starting up thereafter, that's going to allow us to.

Speaker 3: with kitchens and lines starting up thereafter. That's going to allow us to really start to expand more aggressively. There are two bottom lines there with the number of kitchens that we're going to be able to grow into. But based on the modeling, we have a base case and we have an upside case that we're looking at here.

Really start to expand more aggressively there to bottom lines there with a number of kitchens that we're going to be able to grow into.

Into.

But.

Just on the modeling we have a base case and we have an upside case that we're looking at here.

Speaker 3: And we think that factory gives us capacity for a handful of years. In the upside case, it's quite possible that we're going to be looking for another facility either to buy or build. And if you go back to the comments that were in the script...

Think that factory gives us capacity for a handful of years and the upside case, it's quite possible that we're going to be looking for.

Another facility either to buy or build and if you go back to the comments that were in the script.

Speaker 3: That was one of the things that we pointed out. We actually engaged a top tier consultancy to look at our growth algorithm and overlay our capacity footprint and then also begin to give thoughts to regionality and transportation in this and to start to think about, okay, what not only did the next two years look like but what did the next four and six years look like and how do we make sure that we grow but we're also growing margin as we push our way through.

That was one of the things that we pointed out we actually engaged a top tier consultants to look at our growth algorithm and overlay our capacity footprint and then also begin to give thoughts to reach analogy in transportation and this and to start to think about okay. What not only to the next two years look like but what are the next.

More than six years look like and how do we make sure that we grow but we're also growing margin as we push our way through this.

Speaker 3: So, you know, hopefully that gives you some to think about. And then I would tell you, we continue conversations with other partners about other life.

<unk>.

Hopefully that gives you some to think about and then I would tell you. We continue conversations with other partners about other licenses that fit into this mix.

Speaker 3: You know, I would say that continues to give us a measure of optimism in a complicated

Yes.

That continues to give us a measure of optimism and a complicated.

Speaker 3: COVID environment is that our strategy around these licenses continues to hold. And our own brands continue to perform well in the environment. We just need to make sure that it's translating to profit.

Covid environment is that our strategy around these licenses continues to hold and our own brands continue to perform well in the environment, We just need to make sure that it's it's it's translating to profit.

Speaker 5: Yeah, that's helpful. And then it dovetails into the next question. I think last call, you might have talked about the license branding strategy, and it's kind of evolved.

Yeah, that's helpful and then.

Dovetails into.

The next question I think last call you might have talked about the license branding strategy.

It's kind of evolved from a.

Speaker 5: Go deeper with the three existing partners at retail or

Go deeper with the three existing partners at retail or <unk>.

Speaker 5: look at other partners who want to work with us that we may have food service relationships with and we could help them get to retail as well. I think the last call you kind of debunked that a little bit and it's not as much of an either or as a both.

Look at other partners, who want to work with US that we may have foodservice relationships with and we can help them get to retail as well I think the last call you kind of bumped out a little bit and it sounds much of either or both.

Speaker 5: So if you can talk about maybe depth of that pipeline, opportunities that might be outside of-are there opportunities that are outside of bottled dressings and sauces where capacity may exist to unlock some more momentum on the licensed branded products? And I'll leave it there. Thanks.

If you could talk about maybe.

Of that pipeline opportunities.

Opportunities that might be outside of our there are opportunities that are outside of bottled dressings, and sauces, where capacity may exist to unlock some more momentum on the licensed brand products and I'll leave it there. Thanks.

Speaker 3: So another good question, Todd and Per, earlier conversation, we don't view it as an either or, we view it ultimately as an and.

So.

Another good question Todd and per.

Earlier conversation, we don't view it as an either or we view it ultimately is in hand.

Speaker 3: We are looking at adding other licensed partners against dressing and sauces.

Looking at adding other license partners against dressings, and sauces, we'd be very interested and we are exploring opportunities around dips. For example, and then also selectively in big categories, where we have the capabilities. So really we're looking at anywhere where we.

Speaker 3: and we are exploring opportunities around GIPS.

Speaker 3: example, and then also selectively in big categories where we have the capabilities. So really, you know, we're looking at anywhere where we have capabilities and the opportunity to move into licenses, and that's where we think this thing has, you know, literally

<unk> capabilities and the opportunity to move into licenses and that's where we think this thing has.

Literally a number of years of legs.

Speaker 3: If you look at the broader landscape, you look at the shelf, and you look at the world that our consumers live in today, I think about what

And it's.

If you look at the broader landscape.

Look at the shelf and you look at the World that are consumers later on today.

I think about when I started it and marketing.

Speaker 3: consumer packaged goods at Heinz, I mean typically you would generate an idea, you would test the idea, you would go out, you would put advertising behind the idea to try to break through to consumers and drive awareness and trial and get it on the shelf.

Consumer packaged goods at Heinz I mean, typically you would generate an idea you would test. The idea you would go out you would put advertising behind the idea to try and break through to consumers and drive awareness and trial and get it on the shelf.

Speaker 3: think about that world then, it seems quaint now in a world that's loaded with social media and all sorts of distractions that consumers have. And our ability to penetrate that and to reach consumers' minds is increasingly difficult. And I think that's part of the reason why what you're starting to see

Do you think about that world and it seems quaint now in a world that is loaded with <unk>.

Social media and all sorts of distractions that consumers have and our ability to penetrate.

That and to reach consumers minds is increasingly difficult and I think thats part of the reason why what youre starting to see.

Speaker 3: are brands that have a different sort of a hook. So take body armor, for example. Who could have ever thought that somebody could have got on the other side of Gatorade, right? Well, body armor with the backing of Kobe Bryant back in the day was strong enough, obviously, to penetrate that. You've seen the same thing play out with brands like Honest.

Our brands that have a different sort of a hub. So take body armor for example, who could have ever thought that somebody could have got on the other side of it of Gatorade right.

<unk> body armor with the backing of Kobe Bryant back in the day was strong enough obviously to penetrate that you've seen the same thing play out.

With brands like honest with Jessica Alba backing and you've seen it play out in the spirits industry with Tres Amigos and.

Speaker 3: Jessica Alba's backing and you've seen it play out in the spirits industry with Tres Amigos and with Aviation Gen.

Speaker 3: And so our view is rather than tying up with a particular partner, we would prefer to use really what we view as a core competency, culinary skills and relationships with top tier and relevant food service partners to take their products onto the shelf. And in so doing it, it allows us to leverage their marketing muscle and their awareness in order to penetrate the consumer noise.

And with deviation Gen and so.

Our view is rather than tying up with particular partner, we would prefer to use really what we view as a core competency culinary skills and relationships with with top tier and relevant foodservice partners to take their products onto the shelf.

And in so doing it it allows us to leverage their marketing muscle and their awareness and ordered.

Penetrate the consumer noise and.

Speaker 3: So I think that that strategy seems to continue to hold at sort of a really high level and when you bring it down to our little company here and the brands that we work at, we can work with, we continue to believe that it's highly relevant.

So I think thats strategy.

To continue to hold at sort of a really high level and when you bring it down to our little company here and the brands that we work at.

Work with we continue to believe that it's highly relevant in a great pathway to <unk>.

Speaker 3: great pathway to great value for us and our licensing partners.

Value for us and our licensee partners.

Okay, Great that was helpful. Thanks, Dave.

Speaker 1: And there is no further questions, I will turn the call back to Mr. Sosinski for his concluding comments.

Thank you.

And there is no further questions.

Turn the call back to me to assistance for his concluding comments.

Speaker 3: Thank you, everyone, for your participation this morning. We'll look forward to joining with you for our third quarter results early in May. And in the meantime, stay safe. And we'll look forward to talking with you then.

Thank you everyone for your participation. This morning, we'll look forward to joining with you. After our third quarter results early in May and in the meantime stay safe and we'll look forward to talking with you then.

Speaker 1: Thank you, ladies and gentlemen. This concludes today's conference. You may now disconnect.

Thank you ladies and gentlemen. This concludes today's conference you may now disconnect have a wonderful day.

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Speaker 1: Good morning. My name is Carmen and I will be your conference call facilitator today. At this time, I would like to welcome everyone to the Lancaster Colony Corporation fiscal year 2022 second quarter conference call.

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

At this time I would like to welcome everyone to the Lancaster Colony Corporation fiscal year 2022 second quarter Conference call.

Speaker 1: Conducting today's call will be Dave Suszynski, President and CEO , and Tom Pickett, CFO . All lines have been placed on mute to prevent any background noise. After the speakers have completed their prepared remarks, there will be a question and answer period.

Today's call will be dates Osinski, president and CEO 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.

Speaker 1: If you would like to ask a question during this time, simply press star, then the number one on your telephone keypad.

I would like to ask a question. During this time simply press Star then the number one on your telephone keypad.

Speaker 1: and questions will be taken in the order that they are received.

Questions will be taken in the order that they are received.

Speaker 1: If you would like to withdraw your question, press the pound key. Thank you.

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

Speaker 1: And now to begin the conference call, here is Del Ganovsic, Vice President of Corporate Finance and Investor Relations for Lancaster Colony Corporation.

And now to begin the conference call here is Dell Ganassi, Vice President of corporate Finance and Investor Relations for Lancaster Colony Corporation.

Speaker 2: Thank you. Good morning, everyone, and thank you for joining us today for Lancaster Colony's fiscal year 2022 second quarter conference call.

Thank you good morning, everyone and thank you for joining us today for Lancaster colony's fiscal year 2022 second quarter conference call our discussion this.

Speaker 2: 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 1995.

<unk> may include forward looking statements, which are subject to the safe Harbor provisions of the private Securities Litigation Reform Act of 1095.

Speaker 2: 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.

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.

Speaker 2: A detailed discussion of these risks and uncertainties is contained in the company's filings with the SEC.

A detailed discussion of these risks and uncertainties is contained in the companys filings with the SEC.

Speaker 2: Also note that the audio replay of this call will be archived and available at our company's website LancasterColonA.com later this afternoon.

Also note that the audio replay of this call will be archived and available at our company's website Lancaster colony Dot Com later this afternoon.

Speaker 2: For today's call, Dave Sosinski, our President and CEO , will begin with a business update and highlights for the quarter.

For today's call, Dave <unk>, our president and CEO will begin with a business update and highlights for the quarter.

Speaker 2: Tom Bigot, our CFO , will then provide an overview of the financial results.

Tom Pigott, our CFO will then provide an overview of the financial results.

Speaker 2: Dave will then share some comments regarding our current strategy and outlook.

Dave will then share some comments regarding our current strategy and outlook.

Speaker 2: At the conclusion of our prepared remarks, we'll be happy to respond to any questions you may have.

At the conclusion of our prepared remarks, we'll be happy to respond to any questions you may have.

Speaker 2: Once again, we appreciate your participation this morning, and I'll turn the call over to Lancaster County's President and CEO , Dave Suszynski. Dave.

Once again, we appreciate your participation. This morning, I'll now turn the call over to Lancaster, colony's President and CEO , Dave <unk> Dave.

Speaker 3: Thanks Dale and good morning everyone. It's a pleasure to be here with you today as we review our second quarter results for fiscal year 2022.

Thanks, Dale and good morning, everyone. It's a pleasure to be here with you today as we review our second quarter results for fiscal year 2022.

Speaker 3: In our fiscal second quarter, which ended December 31st, consolidated net sales grew 14.2% to a record 428 million, with retail net sales up 10.1% and food service net sales up 20.3%.

In our fiscal second quarter, which ended December 31, consolidated net sales grew 14, 2% to a record $428 million with.

With retail net sales up 10, 1% and foodservice net sales up 23%.

Speaker 3: Retail net sales growth of 10% was driven by pricing across the portfolio and volume led by the expansion of our licensing program and strong performance on Sister Schubert's frozen dinner rolls.

Retail net sales growth of 10% was driven by pricing across the portfolio and volume led by the expansion of our licensing program and strong performance on sister Schubert frozen dinner rolls.

Speaker 3: This compares to very strong retail sales growth of 19.5% during the same period last year.

This compares to very strong retail sales growth of 19, 5% during the same period last year.

Speaker 3: Retail sales volumes measured in pounds advanced 4% on top of the 12% volume growth last year.

Retail sales volumes measured in pounds advanced 4% on top of the 12% volume growth last year.

Speaker 2: Notably, our licensing program continue to perform well in the period, led by distribution gains for Buffalo Wild Wing Sauses, and increase household penetration and strong repeat rates for Chick-fil-A Sauses.

Notably our licensing program continue to perform well in the period led by distribution gains for Buffalo Wild wings sauces, and increase household penetration and strong repeat rates for Chick Fil a sources in.

Speaker 3: In the aggregate, these two licensed SOS's combine for over 10% of our net sales growth in the quarter.

In the aggregate. These two license sources combined for over 10% of our net sales growth in the quarter.

Speaker 3: For the quarter versus prior year, IRI data showed strong share gains for our frozen breads with sister Schubert dinner rolls of 150 basis points to 54.1%. In New York Bakery, garlic bread of 230 basis points to 42.5%.

For the quarter versus prior year IRI data showed strong share gains for our frozen breads with sister Schubert dinner rolls up 150 basis points to 54, 1% and New York bakery, garlic bread up 230 basis points to 42, 5%.

Speaker 3: with sales of $61.6 million to two with sister Schubert's strong as holiday performance ever. Thanks to great retail execution in a difficult environment.

With sales of $61 6 million Q2, with sister Schubert's strongest holiday performance ever thanks to great retail execution in a difficult environment.

Speaker 3: On a two-year stack basis for the quarter, IRI Retail Scanner data shows strong sales growth and share gains for several of our branded products, including Marzetti Produce Dressings, Sister Schubert Frozen Dinner Rolls, New York Bakery Garlic Bread, and Reem's Frozen Noodles.

On a two year stack basis for the quarter IRI retail scanner data shows strong sales growth and share gains for several of our branded products, including March Eddie produced dressings sister, Schubert frozen dinner Rolls, New York bakery, garlic bread and reames frozen noodles.

Speaker 3: A particular note during the same two-year stack period, our licensed sauce platform has grown from 22 million in sales to 78 million in sales and increase of 250%.

Of particular note during the same two year stack period are licensed SaaS platform has grown from $22 million in sales to $78 million in sales an increase of 250%.

Speaker 3: Based on the aforementioned growth, I'm pleased to share that in January IRI named Lancaster Colony Marzetti one of a handful of CPG growth leaders for calendar year 2021.

Based on the aforementioned growth I'm pleased to share that in January IRI named Lancaster Colony Mars, Eddie one of a handful of CPG growth leaders for calendar year 2021.

Speaker 3: credit to our retail and R&D teams for all their efforts in this achievement.

Credit to our retail and R&D teams for all their efforts in this achievement.

Speaker 3: In summary, our retail top line performance in the quarter was driven by pass-through pricing and volume growth driven by consumer relevant brands and great store-level execution.

In summary, our retail top line performance in the quarter was driven by pass through pricing and volume growth driven by consumer relevant brands and great store level execution.

Speaker 3: In our food service segment, net sales growth of 20% was driven by inflationary pricing, volume growth with our quick service restaurant or QSR customers, and a rebound in demand for our branded products.

In our foodservice segment net sales growth of 20% was driven by inflationary pricing volume growth with our quick service restaurant are <unk> customers and a rebound in demand for our branded products.

Speaker 3: Food service volumes measured in pounds advanced 7%.

Foodservice volumes measured in pounds advanced 7%.

Speaker 3: Per NPD Crest, our sales to the QSR Channel continue to pace well ahead of the industry driven by our strong relationships with national account customers and our outstanding culinary team.

Per NPD crest or sales to the <unk> channel continued to pace well ahead of the industry driven by our strong relationships with national account customers and our outstanding culinary team.

Speaker 3: Turning to our margin performance, our gross margin decline in the second quarter reflects unprecedented inflation, cost incurred to support the shifting and growing demands of our business, and a wide array of supply chain disruption.

Turning to our margin performance, our gross margin declined in the second quarter reflects unprecedented inflation cost incurred to support the shifting and growing demands of our business and a wide array of supply chain disruptions.

Speaker 3: During the period, we made significant investments in labor and warehousing to improve customer service levels.

During the period, we made significant investments in labor and warehousing to improve customer service levels.

Speaker 3: And while pricing actions served to offset significant commodity cost inflation and higher freight rates, we were not able to fully recover the other industry-wide cost pressures such as elevated wage rates in the period.

And while pricing actions served to offset significant commodity cost inflation and higher freight rates, we were not able to fully recover the other industry wide cost pressures such as elevated wage rates in the periods.

Speaker 3: Finally, our margins were also adversely impacted by our decision to significantly increase our utilization of co-manufacturers in the period to help satisfy the growing demand of our bottled sauces business.

Finally, our margins were also adversely impacted by our decision to significantly increase our utilization of co manufacturers in the period to help satisfy the growing demand of our bottled sauces business, while costly in the short term the decision to outsource production has not only enabled a strong retail growth we delivered.

Speaker 3: While costly in the short term, the decision to outsource production has not only enabled the strong retail growth we delivered, but also eliminated the immediate need for us to look at acquiring a dressing and sauce manufacturer to support this rapid growth.

<unk>, but also eliminated the immediate need for us to look at acquiring addressing and source manufacturer to support this rapid growth.

Speaker 3: In response to these operating and cost pressures, we're implementing discrete actions that should help us improve our margin profile.

In response to these operating and cost pressures, we're implementing discrete actions that should help us improve our margin profile.

Speaker 3: First, leveraging our recently completed soft capacity expansion project at one of our Columbus-based facilities to better optimize throughput and reduce cost.

First leveraging our recently completed source capacity expansion project at one of our Columbus based facilities to better optimize throughput and reduce cost.

Speaker 3: Second, adding a new Columbus-based warehouse location and pursuing other initiatives to reduce material handling costs, decrease transportation costs, minimize third-party warehouse needs, and improve inventory management throughout our distribution network.

Second, adding a new Columbus based warehouse location and pursuing other initiatives to reduce material handling costs decreased transportation costs minimize third.

Our party warehouse needs and improve inventory management throughout our distribution network.

Speaker 3: Third, leveraging productivity improvements to enable us to increase the utilization of our own facilities while moderating our reliance on co-manufacturing. And finally, implementing the next phase of our revenue growth management strategy to recover increased labor cost. I'll now turn the call over to Tom Piggott, our CFO , for his commentary on our second quarter financial results.

Third leveraging productivity improvements to enable us to increase the utilization of our own facilities, while moderating our reliance on co manufacturing.

And finally implementing the next phase of our revenue growth management strategy to recover increased labor cost I'll now turn the call over to Tom Pigott, our CFO for his commentary on our second quarter financial results.

Speaker 4: Thanks, Dave. Overall, the results for the quarter reflected strong top-line performance, offset by higher costs resulting from significant inflationary impacts, several supply chain challenges, and investments made to facilitate growth. Second quarter consolidated net sales increased by 14.2% to $428.4 million. This growth was driven by consolidated volume growth of approximately 6% in pricing actions taken in both segments.

Thanks, Dave overall, the results for the quarter reflected strong topline performance offset by higher costs, resulting from significant inflationary impacts several supply chain challenges and investments made to facilitate growth second quarter consolidated net sales increased by 14, 2% to 428.

$4 million.

This growth was driven by consolidated volume growth of approximately 6% and pricing actions taken in both segments consolidated gross profit decreased by $10 2 million to $96 $6 million gross margins declined by 600 basis points. The key drivers of the gross profit decline, where the high commodity and <unk>.

Speaker 4: Consolidated gross profit decreased by $10.2 million to $96.6 million. Gross margins declined by 600 basis points.

Speaker 4: The key drivers of the gross profit decline were the high commodity inflation and increased supply chain costs.

<unk> and increased supply chain costs.

Speaker 4: Inflation for commodities and packaging materials was approximately 23 percent, consistent with our expectations.

Inflation for commodities and packaging materials was approximately 23% consistent with our expectations. The majority of the commodities, we utilized were priced at or near 10 year highs our significant exposure to soybean oil, which was up notably drove our inflation or inflationary impact higher than many of our peers.

Speaker 4: The majority of the commodities we utilized were priced at or near 10-year highs. Our significant exposure to soybean oil, which was up notably, drove our inflationary impact higher than many of our peers.

Speaker 4: The increase in supply chain costs resulted from a number of factors. First, we experienced a high level of inflation on our factory labor and other manufacturing costs. The labor inflation was driven by our decision to raise wages to ensure we had adequate staffing to serve our customers in this tight labor market.

The increase in supply chain costs resulted from a number of factors first we experienced a high level of inflation on our factory labor and other manufacturing costs. The labor inflation was driven by our decision to raise wages to ensure we had adequate staffing to serve our customers in this tight labor market.

Speaker 4: Other indirect input costs on things like pallets and supplies were also highly inflationary.

Other indirect input costs on things like palettes and supplies were also highly inflationary.

Speaker 4: Second, our manufacturing costs were also up due to operational challenges in this environment, including supply disruptions at our facilities, lower overhead absorption at some facilities, additional personnel, and other costs we incurred to support growth.

Second our manufacturing costs were also up due to operational challenges in this environment, including supply disruptions at our facilities lower overhead absorption at some facilities additional personnel and other costs, we incurred to support growth.

Speaker 4: Third, we had higher freight and warehousing costs due to wage and fuel inflation and higher levels of inventory we built to improve service.

Third we had higher freight and warehousing costs due to wage and fuel inflation and higher levels of inventory rebuild to improve service.

Speaker 4: Last, our co-manufacturing costs were up as we outsourced production to meet our growing demand.

Last our co manufacturing costs were up as we outsourced production to meet our growing demand.

Speaker 4: As Dave highlighted, we are taking several actions to address these increases and improve our operation.

As Dave highlighted we are taking several actions to address these increases and improve our operations.

Speaker 4: As a result to pricing, we continued to execute against our revenue growth management program. We benefited from a second round of pricing in our food service segment that was effective at the beginning of the quarter and our first retail pricing action that was effective at the end of the first quarter. Those actions served to offset the vast majority of the commodity inflate cost inflation we experienced during the quarter on a dollar basis.

As a results to pricing, we continue to execute against our revenue growth management program. We benefited from a second round of pricing in our foodservice segment that was effective at the beginning of the quarter and our first retail pricing action that was effective at the end of the first quarter.

Those actions to served to offset the vast majority of the commodity inflate cost inflation, we experienced during the quarter on a dollar basis.

Speaker 4: Additional actions are planned or have been implemented in an effort to recover the remainder of the commodity and freight cost increases as well as the higher labor inflation.

Additional actions are planned or have been implemented in an effort to recover the remainder of the commodity and freight cost increases as well as the higher labor inflation.

Speaker 4: We also benefited from strong volume growth in both segments, with retail shipments growing 4% and food service growing 7% behind the programs discussed.

We also benefited from strong volume growth in both segments with retail shipments growing 4% in foodservice growing 7% behind the program States discussed.

Speaker 4: selling general administrative expenses increased 6.8% or $3.3 million. This increase was driven by a higher level of investments to support the continued growth of our business.

Selling general and administrative expenses increased six 8% or $3 $3 million. This increase was driven by a higher level of investments to support the continued growth of our business.

Speaker 4: These investments included a supply chain optimization study, higher brokerage costs attributed to the increased sales, a modest resumption of consumer spending, and IT infrastructure improvement.

These investments included a supply chain optimization study higher brokerage costs attributed to the increased sales a modest reduction resumption of consumer spending in it infrastructure improvements.

Speaker 4: Expenditures for Project Ascent, our ERP initiative, totaled $8.6 million in the current year quarter versus $8.5 million in the prior year quarter.

Expenditures for project ascent, our ERP initiative totaled $8 $6 million in the current year quarter versus $8 5 million in the prior year quarter.

Speaker 4: The company recorded two special items this quarter related to the Bantam Bagels business. First, we revalued the contingent consideration liability to the sellers using fair value accounting. Based on that analysis, we reduced the current value of the projected payout by $2.2 million, creating the income you see on the contingent consideration line of the P&L. We recorded $1.3 million of this adjustment in our food service segment and $0.9 million of this adjustment in our retail segment.

The company recorded two special items this quarter related to the Bantam bagels business.

First we revalued the contingent consideration liability to the sellers using fair value accounting based on that analysis, we reduced the current value of the projected payout by $2 $2 million, creating the income you see on the contingent consideration line of the P&L, we recorded $1 $3 million of this adjustment in our foodservice segment and <unk>.

$9 million of this adjustment in our retail segment.

Speaker 4: Second, we revalued the intangible assets on the balance sheet for this business, which resulted in an impairment charge of $0.9 million. This item was recorded in our retail segment. In addition, the company announced its plans to close our frozen garlic bread facility in Baldwin Park, California. Production at the facility ceased in January of 2022, and the Mama Bella brand frozen garlic bread product line was discontinued based on its small size and low profit.

We revalued the intangible assets on the balance sheet for this business, which resulted in an impairment charge of $9 million.

This item was recorded in our retail segment in.

In addition, the company announced its plans to close our frozen garlic bread facility in Baldwin Park, California production at that facility ceased in January of 2022, and the Mama Bella brand frozen garlic bread product line was discontinued based on its small size and low profitability.

Speaker 4: We recorded restructuring impairment charges of $1 million related to this closure. This adjustment was not allocated to two reportable segments.

We recorded restructuring and impairment charges of $1 million related to this closure. This adjustment was not allocated to two reportable segments.

Speaker 4: Consolidated operating income declined $13.3 million or 22.7 percent versus the prior year to $45.3 million. Operating income declined primarily due to the inflationary impacts and supply chain challenges I described.

Consolidated operating income declined $13 3 million or 22, 7% versus the prior year to $45 3 million operating income declined primarily due to the inflationary impacts and supply chain challenges I described.

Speaker 4: These items were partially offset by the pricing actions taken and the volume growth the company

These items were partially offset by the pricing actions taken in the volume growth the company achieved.

Speaker 4: Our effective tax rate was 24.3% this quarter versus the tax rate of 23.8% in the second quarter of fiscal 21. We estimate that the tax rate for fiscal 22 will be 24%.

Our effective tax rate was 24, 3% this quarter versus the tax rate of 23, 8% in the second quarter of fiscal 'twenty one we.

We estimate that the tax rate for fiscal 'twenty, two will be 24%.

Speaker 4: Second quarter diluted earnings per share decreased $0.37 to $1.25.

Second quarter diluted earnings per share decreased 37 to $1 25 to.

Speaker 4: The decrease was primarily driven by the operating income decline. The EPS benefit for the change in contingent consideration of $0.06 per share was nearly offset by the restructuring impairment charge of $0.05 per share. Costs related to Project Ascent reduced EPS by $0.24 per share this quarter and $0.23 in the prior year.

The decrease was primarily driven by the operating income decline.

<unk> benefit for the change in contingent consideration of <unk> <unk> per share was nearly offset by the restructuring and impairment charge of <unk> <unk> per share costs related to project ascent reduced EPS by <unk> 24 per share this quarter and 23 in the prior year quarter.

Speaker 4: With regard to capital expenditures, second quarter payments for property additions totaled $36.5 million. For our fiscal year 22, we are forecasting total capital expenditures between $170 and $190 million.

With regard to capital expenditures second quarter payments for property additions totaled $36 $5 million for our fiscal year 'twenty. Two we are forecasting total capital expenditures between $170 million $190 million.

Speaker 4: This forecasting includes approximately $105 million for the Horse Cave Expansion Project that will help meet the increasing demand for our dressing and sauce products.

This forecast includes approximately $105 million for the horse cave expansion project that will help meet the growing increase in demand for our dressing and sauce products.

Speaker 4: In addition to investing in our business, we also return funds to shareholders. Our quarterly cash dividend of $0.80 per share, paid on December 31st, represented a 7% increase from the prior year amount. Our enduring streak of annual dividend increases currently stands at 59 years.

In addition to investing in our business. We also returned funds to shareholders. Our quarterly cash dividend of <unk> 80 per share paid on December 31 represented a 7% increase from the prior year amounts are enduring streak of annual dividend increases currently stands at 59 years, our financial position remains very strong as we finished the quarter debt.

Speaker 4: Our financial position remains very strong as we finish the quarter debt-free with $114 million of cash on the balance.

<unk> was $114 million of cash on the balance sheet.

Speaker 4: So, to wrap up my commentary, this quarter featured strong top-line growth as well as the unfavorable impacts from significant inflation, supply chain challenges, and investment.

So to wrap up my commentary this quarter featured strong topline growth as well as the unfavorable impacts from significant inflation supply chain challenges and investments we are addressing the inflationary cost increases with our revenue growth management program and as David shared we have other discrete action plans in place to address the supply chain issue.

Speaker 4: We are addressing the inflationary cost increases with our Revenue Growth Management Program. And as Dave has shared, we have other discrete action plans in place to address the supply chain issue.

Speaker 4: In addition, we're continuing to invest in the long-term potential of the business. I'll now turn it back over to Dave for his...

In addition, we are continuing to invest in the long term potential of the business I'll now turn it back over to Dave for his closing remarks. Thank you.

Speaker 3: 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.

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 and supported the three simple pillars of our growth plan.

Speaker 3: To number one, accelerate our core business growth. To number two, simplify our supply chain to reduce our cost and grow our margins. And number three, to expand the core with focused M&A and strategic licensing.

To number one accelerate our core business growth <unk>.

And number two simplify our supply chain to reduce our cost and grow our margins and number three to expand the corner with focused M&A and strategic licensing.

Speaker 3: Looking ahead to our fiscal third quarter, sales volume drivers are expected to remain, our licensing program and retail, and our QSR customers and branded products and food

Looking ahead to our fiscal third quarter sales volume drivers are expected to remain our licensing program and retail and our <unk> customers and branded products in foodservice pricing actions will continue to add to total net sales in the face of commodity and packaging cost inflation and higher freight cost.

Speaker 3: Pricing actions will continue to add to total net sales in the face of commodity and packaging cost inflation and higher freight costs.

Speaker 3: We also expect cost pressures attributed to higher warehousing costs, supply chain disruptions, increased labor costs, and higher manufacturing costs to remain a headwind to our fiscal third quarter results.

We also expect cost pressures attributed to higher warehousing costs supply chain disruptions increased labor costs and higher manufacturing costs to remain a headwind to our fiscal.

Fiscal third quarter results.

Speaker 3: As a reminder, our future financial results and expectations remain subject to the impacts of COVID-19, including shifts in consumer demand between retail and food service, ongoing supply chain challenges and disruptions, and increased costs to produce our products and service our customers.

As a reminder, our future financial results and expectations remain subject to the impacts of COVID-19, including shifts in consumer demand between retail and foodservice ongoing supply chain challenges and disruptions and increased cost to produce our products and service our customers.

Speaker 3: Beyond the discrete actions I shared with you earlier that are underway to improve operations, we also made the decision to engage an outside consultant to assist us with planning for our supply chain network. While it's too early to share any of the preliminary findings of this study, we are very encouraged about the potential opportunities that have been identified. These opportunities are fully aligned with the first and second pillars of our growth plan.

Beyond the discrete actions I shared with you earlier that are underway to improve operations. We also made the decision to engage an outside consultant to assist us with planning for our supply chain network.

While it's too early to share any of the preliminary findings of this study we are very encouraged about the potential opportunities that have been identified.

These opportunities are fully aligned with the first and second pillars of our growth plan.

Speaker 3: I'd also like to update you on two important initiatives currently in progress. First, our significant investment in production capacity at our dressing and sauce facility in horsecape is going well with the target completion time frame in the first half of fiscal 2023.

I'd also like to update you on two important initiatives currently in progress.

First our significant investment in production capacity at our dressing and sauce facility in horse cave is going well with the target completion timeframe in the first half of fiscal 2023.

Speaker 3: Second, the implementation phase of our ERP initiative, Project Ascent, remains on track to begin in the first quarter of fiscal year 2023.

Second the implementation phase of our ERP initiative project ascent remains on track to begin in the first quarter of fiscal year 2023.

Speaker 3: Turning to growth, I'm excited to announce that we will be adding barbecue sauce to the exciting and consumer-relevant Chick-fil-A platform. As with other Chick-fil-A sauces, we will plan by executing a small regional pilot in the March and April timeframe that will inform our broader rollout plan.

Turning to growth I'm excited to announce that we will be adding barbecue sauce to the exciting and consumer relevant Chick Fil a platform as with other Chick fillet sources, we will plan by executing a small regional pilot in the March and April timeframe that will inform our broader rollout plans.

Speaker 3: Taking a step back while our second quarter financial performance fell short of our expectations

Taking a step back while our second quarter financial performance fell short of our expectations.

Speaker 3: Actions are underway to help us overcome the many challenges of the current supply chain environment.

Actions are underway to help us overcome the many challenges of the current supply chain environment.

Speaker 3: Longer term, I'm confident that our business remains very well positioned for the future with category-leading retail brands, a rapidly growing and consumer-centric retail licensing program, and a food service business that supplies many of the leading and fastest-growing national chain restaurants across the country. When combined with the investments in capacity and infrastructure, we have a strong and unique platform to deliver profitable growth for years to come.

Longer term I am confident that our business remains very well positioned for the future with category, leading retail brands are rapidly growing and consumer centric retail licensing program and our foodservice business as supplies many of the leading and fastest growing national chain restaurants across the country when combined with.

The investments in capacity and infrastructure, we have a strong and unique platform to deliver profitable growth for years to come.

Speaker 3: In closing, I'd like to express my sincere thanks for the ongoing efforts of the entire Lancaster Colony team as we've navigated through unprecedented cost inflation, demand fluctuations, and supply disruptions. Our focus remains on the health, safety, and welfare of our employees, continuing to play our role in the country's vital food supply chain, and preparing our business for the future.

In closing I'd like to express my sincere. Thanks for the ongoing efforts of the entire Lancaster colony team as we've navigated through unprecedented cost inflation demand fluctuations and supply disruptions.

Our focus remains on the health safety and welfare of our employees continuing to play our role in the country's vital food supply chain and preparing our business for the future.

Speaker 3: This concludes our prepared remarks for today, and we'd be happy to answer any of your questions.

This concludes our prepared remarks for today and we'd be happy to answer any of your questions.

Speaker 1: Thank you. And at this time, I would like to remind everyone, in order to ask a question, please press star one on your telephone keypad.

Thank you and at this time I would like to remind everyone in order to ask a question. Please press star one on your telephone keypad.

Speaker 1: Our first question is from Tom Brooks with the Benchmark Company. Your line is open.

Our first question is from Tom Brooks with that bench Mark Company. Your line is open.

Speaker 5: Hey, good morning, gentlemen. How you doing?

Hey, good morning, gentlemen, how are you doing good morning.

Speaker 5: A few questions, if I may, leading off just with the top line strength that we saw in the quarter. Can we talk through where the strength was in food service to see that type of increase in pounds? You talked about maybe some of the branded products.

A few questions if I may.

Leading off just with the top line strength that we saw in the quarter can we talk through where the strength was in.

Foodservice to see that type of increase in pound you talk about maybe some of the branded products.

Speaker 3: coming back, but also strength and with your QSR and pizza customers, and I know that plays into your customer mix. So, if we could talk through the strength there, that'd be great. Yeah, absolutely, Todd. First of all, again, good morning.

Coming back, but also strength in with your <unk> pizza customers and I know that plays and then do.

Your your customer mix. So if we could talk to the strength there that'd be great.

Absolutely Todd first of all again good morning.

Speaker 3: On the branded side, as you remember, same time ago last year, we were pretty deeply in the throes of COVID, and that part of the business was soft. And as we rolled through Q1 and Q2, that segment of the business, which supports concepts up and down the street, but also to a lesser degree, K-12 education and higher education started to post.

On the branded side as you remember same time ago last year, we were pretty deeply in the throes of Covid in that part of the business was soft and as we roll through Q1 and Q2 in that segment of the business, which supports concepts up and down the street and also to a lesser.

Degree K to 12 education, and higher education started to post sequential strength, so that was a material contributor to that growth.

Speaker 3: strength. So that was a material contributor to that growth.

Speaker 3: The other side, though, was really, we continued to see our QSR customers, you know, some of them by name, Chick-fil-A, Domino's, and others, really continued to perform well all the way through, you know, the majority of that December time frame. Once we got to the very last week of December , we did start to see a pullback because of Omicron that we...

The other side, though was really we continued to see our <unk> customers.

Some of them by name Chipotle, Domino's and others really continued to perform well all the way through the majority of that December timeframe. Once we got to the very last week of December we did start to see a pullback because of omicron that we've seen really continue through.

Speaker 3: really continue through the remainder of January and we can talk about that in a separate context. But really to summarize, you know, we were waiting with winners on the food service side in terms of concepts and then the brand.

The remainder of January and we can talk about that separate context, but really to summarize.

We were winning with winners on the foodservice side in terms of concepts and then and then the brands.

Speaker 5: That's great. Why don't we tackle Omicron now and I want to do it from a higher level. If you look at kind of what the margin pressures were running on the business kind of through that.

That's great, but why don't we tackle.

Now in.

I wanted to do it from a higher level. If you look at kind of what the margin pressures were.

Running on the business kind of through that.

Speaker 3: let's say, even middle of December before we really saw the spike in Omicron. How much did the inflation reality change for you with the onset of the variant? And any way you can size what margin pressures were running versus what they-what you saw once the variant really took hold? Sure. Well, I would tell you, Todd, in Q2, I don't think that we could really point to Omicron as a contributor to our margin.

Let's say even middle of December before we really saw the spike in <unk>.

How much did the inflation reality changed for you with the onset of the variant.

Way you can size what margin pressures were running versus what the what you saw.

Once the variant really took hold sure well I would tell you Todd in Q2, I don't think that we could really point to omicron as a contributor to our margin per se.

Speaker 3: You know, when we go in and we look at MPD CREST data, for example, you know, what I can tell you is that QSR as a...

When we go in and we look at NPD crest data for example, what I can tell you is that <unk> as a whole when we look at transaction data was probably right and this is all <unk> was running depending on the week.

Speaker 3: When we look at transaction data, it was probably, and this is all QSR, was running depending on the week to, you know, up a point to down a point or so. I can tell you once we got into the January time frame, though, that started to slow down where these concepts in transactions, now this isn't sales, this is transactions.

Upper point to down a point or so I can tell you once we got into the January time frame, though that started to slow down where these concepts in transactions. Now. This is in sales. This is transactions were down in the mid single digits. When you look at all foodservice in the aggregate that same thing is true obviously because of the <unk>.

Speaker 3: or down in the mid-single digits. When you look at all food service in the aggregate, that same thing is true, obviously, because of the size of QSR, where the concepts across the board were, let's say.

<unk>.

Speaker 3: you know, up a point on the aggregate to down a point, sort of vacillating there. We've seen a pullback of about 600 basis points in January . So really, I can't point.

The concepts across the board, where let's say.

Up a point on the aggregate down a point toward vacillating there we've seen a pullback of about 600 basis points in January so really I can't point to <unk> as a contributor on the margin side as we look at our Q2 results.

Speaker 3: to Omicron as a contributor on the margin side as we look at our Q2 results.

Speaker 5: Yeah, Dave, let me let me follow up because I might not have been clear and how I asked the question. I was talking more than overall Lancaster level. If you looked at the cost of doing business in the last

Yes, Dave Let me, let me follow up because I might not have been clear in how I ask the question I was talking more than overall Lancaster level. If you looked at the cost.

Of doing business in the latter parts of two.

Speaker 3: December , how did that change with Omicron, whether it was employee call-outs, friction in your distribution, and just additional costs there? Yeah. Thanks. You know, so we did – really, it was the week-ending –

December how how did that change with omicron, whether it was employee call outs friction in your distribution and just additional costs there yeah. Thanks.

So we did really was the week ending.

Speaker 3: December 28 is probably where we started to see the biggest spike. And I can tell you, like every place else in the country, it took off. By the first week or so of January , we were seeing case rates that were as high as we had seen at any other point in time during the course of the pandemic. We were seeing call-offs, but I can tell you we continue to operate.

December 2008 is probably where we started to see the biggest spike and I can tell you.

I can't replace house in the country. It took off by the first week or so of January we were seeing case rates that were as high as we had seen at any other point in time during the course of the pandemic.

We're seeing call offs.

Speaker 3: without really a lot of disruptions because of either leaning into overtime or by virtue of the fact that the pressure that you've seen in our margins, we were carrying a little bit heavier labor going into the fall because of not only an anticipation of a spike in COVID, but the fact that we were seeing a higher level of resignations on the hourly side. So as far as our ability to produce.

But I can tell you we continue to operate.

Without really a lot of disruptions because of either leaning into over time or by virtue of the fact that the pressure that you've seen in our margins, we were carrying a little bit heavier labor going into the fall because of not only in anticipation of a spike in COVID-19 , but the fact that we were seeing a fair a higher level.

Of resignations on the on the hourly side, so as far as our ability to produce not a lot of pressure.

Speaker 3: Not a lot of pressure, maybe a small uptick that we're going to see in overtime costs. And then December had some other noise in it. For example, we didn't get into it, but there was the tragic tornado that struck across all of Kentucky.

Maybe a small uptick that we're going to see and overtime costs and then other December had some other noise in it for example, we didn't get into it but there was the tragic tornadoes that struck across all of Kentucky.

Speaker 3: Fortunately, it didn't impact our facility in a material way, but it did impact a number of our employees, and it resulted in a bit of a slowdown in December , but not enough for us to call out and mention by name.

Unfortunately, it didn't impact our facility in a material way, but it did impact a number of our employees and it resulted in a bit of a slowdown in December but not enough for us to call often mentioned by name.

Speaker 4: Yeah, Todd, some of the other impacts, you know, beyond Omicron, we did see a number of supply disruptions in our start supply, packaging material disruptions. And some of our suppliers had difficulty staffing in this environment to provide us with the raw material. So, so there was a number of disruptions, not necessarily specific to Omicron that did impact our margins in the quarter.

Yeah, Todd some of the other impacts beyond Omicron, we did see.

A number of supply disruptions in our starts supply packaging material disruptions in some of our suppliers had difficulty staffing in this environment.

To provide us with the raw materials. So so there was a number of disruptions not necessarily specific to omicron that did impact our margins in the quarter. Yes. If you want to talk more broadly about interruptions, Tom exactly right starches and guns as a particular category of supply we are a challenge for us letting for foodservice was a particular.

Speaker 3: Yeah, if you want to talk more broadly about interruptions, Tom's exactly right. Starches and gums as a particular category of supply were a challenge for us.

Speaker 3: Lidding for food service was a particular challenge for us. Transportation inbound from our suppliers with truckers calling off continued to be a problem for us. I mean, it's really the usual suspects that you're seeing in a range of our other partners. I think the ones that were unique pressure points to us were probably more a function of the products that we make. So starches and gums that go into sauces and dressings.

The challenge for us.

Transportation inbound from our suppliers with truckers, calling off continued to be a problem for us.

It's really the the usual suspects that you are seeing at a range of our other partners I think the ones that were unique pressure points to us we're probably more a function of the products that we make so starches and gums that go into sauces and dressings.

Speaker 3: It's probably highest among the list and then some of the packaging.

Probably highest among the list and then some of the packaging items that are unique.

Speaker 5: Okay great and then one more and I'll jump back in queue. If you look at the realities that you just talked about dealing with kind of...

Okay, Great and then one more and I'll jump back in queue.

If you look at the reality is that you just talked about dealing with kind of.

Speaker 5: Q4 and then some of the Omicron realities and Q1, but you did highlight revenue management actions that you're taking. We are seeing favorable trends with Omicron and kind of the speed of this normalizing seems to be encouraging, not would. We look at this gross margin performance in this quarter and think of this as a kind of a basing of where gross margins should

Q4, and then some of the realities into Q1, but you did highlight.

Revenue Management Act.

Actions that you're taking.

We are seeing favorable trends with <unk> kind of the speed of this normalizing seems to be encouraging knock wood.

Can we look at this gross margin performance in this quarter and think of this as a.

Kind of a basing of where gross margins should.

Speaker 5: kind of settle out from these pressures in the near term because we do have these positive levers that you're pulling against it going forward.

Kind of settle out from these pressures in the near term because we do have these positive levers that you're pulling against that going forward.

So maybe I'll comment on <unk> first.

Speaker 3: I'm pleased to report that even, I looked at the data today, we're seeing things return back to normal in terms of our cases and our plans. They're down substantially in the number of.

<unk> reported that <unk> bin I looked at the data today, we're seeing things return back to normal in terms of our cases in our plants. They are down substantially and the number of call offs that we're seeing are down substantially as well.

Speaker 3: So Omicron itself I think should begin to normalize across the country.

On crime itself I think should begin to normalize across the country.

Speaker 4: You know, as far as the other pressures are concerned on margins, maybe Tom, I'll turn it over to you to give an outlook. So yeah, and Todd, I'll start by saying it's difficult to give specific guidance given some of the disruptive impacts we experienced in the quarter. As you look at some of the headwinds, we do, you know, we had over 200 basis points of dilution due to the commodity.

As far as the other pressures are concerned on margins, maybe Tom I'll turn it over to you to give an outlook. So yes.

I'll start by saying, it's difficult to give specific guidance given some of the disruptive impacts we experienced in the quarter.

As you look at some of the headwinds we do we had over 200 basis points of dilution due to the commodity impacts on our raw materials and certainly we price to cover a lot of that but naturally as you raise prices and have higher costs, you have natural dilution thats going to hit your P&L and that that we expect.

To continue.

202, a little over 200 basis points going forward.

Some of the other headwinds we're expecting as continued labor and other inflation. We do expect some of these disruptions to continue now in terms of tailwind.

Speaker 4: inflation, we do expect some of these disruptions to continue. Now, in terms of tailwinds, the retail segment took another pricing action on the dough-based products recently, and the food service segment took another pricing. And the goal from a dollar basis is to offset the inflationary impacts. And then in terms of the supply chain challenges we experienced, you know, as Dave highlighted, we have some discrete actions in place. So a lot of headwinds and some tailwinds, difficult to give you a specific kind of ongoing impact. But certainly that commodity inflation piece, we expect to stay with us. That two-to-two.

The retail segment took another pricing action on the DAU based products recently and the foodservice.

Segment took another pricing and the goal from a dollar basis is to offset the inflationary impacts.

Speaker 4: And then in terms of the supply chain challenges we experienced, as Dave highlighted, we have some discrete actions in place.

And then in terms of the supply chain challenges, we experienced as Dave highlighted we have some discrete actions in place.

Speaker 4: So, a lot of headwinds and some tailwinds. Difficult to give you a specific kind of ongoing impact, but certainly that commodity inflation piece we expect to stay with us.

So a lot of headwinds and some tailwind difficult.

Difficult to give you a specific kind of ongoing impact, but certainly that commodity inflation piece, we expect to stay with us that too.

Speaker 4: 250 basis points of dilution given the natural higher prices and higher costs that will flow through the P&L.

250 basis points of dilution.

Given the natural higher prices and higher costs that will flow through the P&L.

Speaker 5: I'll pass it along and drop back into the video. Thanks.

Okay great.

I'll pass it along and jump back into the queue. Thanks.

Speaker 1: Our next question comes from Ryan Bell with Consumer Edge Research. Your line is open. Morning, everyone.

Our next question comes from Ryan Bell with consumer Edge Research. Your line is open.

Good morning, everyone.

Speaker 6: So, just trying to touch a little bit more on the food service industry trends, it seems like from what your commentary was that you're gaining share, going ahead of the category overall. Maybe, could you touch a little bit more on the category growth and then sort of your relative performance? It seems, you know, some of the drivers are what your mix is, but outside of that, I just wanted to see maybe if you could provide any additional context.

Good morning, Good morning, Ryan.

So just trying to touch a little bit more on the foodservice industry trends.

It seems like from your commentary was that Youre gaining share growing ahead of the category.

<unk>, maybe could you touch a little bit more on the category growth and then sort of your relative performance.

It seems some of the drivers or what your mix is but outside of that I. Just wanted to see maybe if you could provide any additional context.

Speaker 3: So, you know, if we were maybe to take a real wide-angle look at this, if you go back to the summer through the middle of January and you looked at all food service.

Sure so.

Sure.

Maybe just take a real wide angle look at this if you go back to the summer through the middle of January and they looked at all foodservice.

Speaker 3: all concepts. I mean, what we would see is that the industry overall in transactions is just down modestly. If you then click in and you look at the QSR space, what you would have seen on transactions, again, is that the QSR space would have been, let's say, you know, up 50 basis points, so modest growth in transactions with their sales growth supported more by pricing overall, right?

Concepts I mean, what we would see is that the industry overall and transactions is just down modestly. If you then click any youll look at the <unk> space and what you would've seen on transactions again.

Is that the <unk> space would have been lets say 50 basis.

<unk> points of modest growth in transactions with their sales growth supported more by pricing overall.

Speaker 3: But in transactions, they would have been up modestly. If you look at our business, then, and you click into that line, what you're going to find is that within that mix, there are a handful of customers that are outperforming the rest.

<unk>.

But in transactions they would have been up modestly.

If you look at our business, then and you click into that Ryan what Youre going to find is that within that mix. There are a handful of customers that are outperforming the rest.

Speaker 3: Some of the QSRs, Chick-fil-A is one that we mentioned by name, and then Pizza QSR is another area subset that's performed well. So when you look at our performance versus the industry as a whole.

Some of the <unk> Chipotle is one that we mentioned by name and then Pizza <unk> is another area subset that's performed well. So when you look at our performance versus the industry as a whole typically we're performing to the tune.

Speaker 3: Typically, we're performing to the tune of, you know, historically it was a couple hundred basis points, better than the industry, we're performing even better than that.

Historically, it was a couple of hundred basis points better than the industry, we're performing even better than that just because of the strength of the concepts that were aligned with what I wouldn't tell you is that we're gaining share with the concepts that we're working with but we're positioned with the concepts that are growing in the market that when you compare our business versus the <unk>.

Speaker 3: just because of the strength of the concepts that we're aligned with. Now what I wouldn't tell you is that we're gaining share with the concepts that we're working with.

Speaker 3: But we're positioned with the concepts that are growing in the market, that when you compare our business versus the market, it's going to show that we're growing faster.

Market is going to show that were growing faster.

Speaker 6: Thanks. That's helpful. Could you also touch a little bit more on the details behind the capacity expansion efforts and what sort of the impact would be from the increase in co-manufacturing usage? And I'm not sure if I picked up on this correctly, but in terms of the co-manufacturing increase and uptick, you know, the duration of that and when can some of that be brought in-house and sort of the margin implications?

Thanks.

Paul.

Could you also touch a little bit more on the details behind the capacity expansion efforts.

What's sort of the impact would be from the increase in co manufacturing usage and I'm not sure if I picked up on this correctly, but.

In terms of the co manufacturing increase in uptick.

The duration of that and when can some of that be brought in house in terms of the margin implications there.

Speaker 3: No, and I think this is, you take all of the challenges associated with COVID, and if it's possible, you move them aside for a second. One of the things that's happened in the last two years is that we've grown our business by almost 25% when you look at consolidated net sales. When you look at our retail business, it's grown by almost a third over that same period of time. And then really, you kind of screw in two clicks deeper, as I mentioned in my transcript, when you look at our licensed sauces,

I think this is you take all of the challenges associated with Covid.

If it's possible you move them aside for a second one of the things that's happened in the last two years.

We've grown our business by almost 25% when you look at consolidated net sales when you look at our retail business has grown by almost a third over that same period of time, and then really you kind of screw in two clicks deeper as I mentioned in my transcript when you look at our license sources.

Speaker 3: We did $22 million in sales for us.

In Q2 of fiscal year 'twenty.

Speaker 3: In Q2 of this year, we did almost $80 million of sales.

We did $22 million in sales for ethylene.

In Q2 of this year, we did almost $80 million of sales.

Speaker 3: right? So if you think this is during Kobe, we've taken a business that might have been operating at a run rate of about 90 million or so, and we've taken it up to a run rate now that's closer to 320 million.

So if you think this is during COVID-19 , we've taken a business that might have been operating at a run rate of about $90 million or so and we've taken it up to a run rate now.

Speaker 3: right? So, and that's the sort of order of magnitude of growth that we're talking on a run rate with these licensed sauces. And we've done it, you know, with continued growth on Olive Garden, but with the growth now of Chick-fil-A, which on a run rate, and this is scanner data, this is all the stuff that's publicly available, Chick-fil-A

Closer to $320 million right. So.

And that's the sort of order of magnitude of growth that we're talking on a run rate with these license sources and we've done it with continued growth on olive garden, but with the growth now a chipotle, which on a run rate in this the scanner data. This is all the stuff thats publicly available Chick Fil a is bigger than olive garden.

Speaker 3: is bigger than Olive Garden already, and it hasn't been in the market in a year yet, right? And then we've also been working to expand up Buffalo Wild Wings. So part of what's happening here is that we've had to make some some moves.

Already and it hasnt been in the market in a year yet right and then we've also been working to expand Buffalo Wild wings. So part of what's happening here is that we've had to make some moves pretty aggressive moves in order to bring online the capacity fast enough to facilitate this growth and there is a strategic.

Speaker 3: pretty aggressive moves in order to bring online the capacity fast enough to facilitate this growth.

Speaker 3: And there's a strategic reason why we had to do it. When we go out, we talk to key partners like a Kroger or like a Walmart, and we say, hey, look, we want you to cut in eight facings or 12 facings on a shelf for the product.

Reason why we had to do it when we go out we talked of key partners like a kroger or like a Walmart and we say hey look we want you to cut in <unk> facings or 12 facings on a shelf for the product if were not there to deliver on the promise of the next time, we come back with an opportunity to expand they're going to say talk to us next time.

Speaker 3: If we're not there to deliver on the promise, the next time we come back with an opportunity to expand, they're going to say, talk to us next time.

Speaker 3: Right? So we have one chance to get it on the shelf and demonstrate that it works. And we wanted to make sure, for the purposes of our long-term growth algorithm, that we didn't miss that opportunity. Now, to capitalize on that growth, it's coming at a cost, not a price. We're not buying down the price in order to get it to turn on the shelf. Quite the contrary. But what we are having to do is pay a material upcharge based on the strength of the item.

Right. So we have one chance to get it on the shelf and demonstrate that it works and we wanted to make sure for the purposes of our long term growth algorithm that we didn't miss that opportunity now to capitalize on that growth is coming at a cost not a price we're not buying down the price in order to get it to turn on the shelf quite contrary, but.

What we are having to do is pay a material up charge based on the strength of the items to get co Packers to bring.

Speaker 3: get co-packers to bring, you know, to allow us to rework our mix of business. And what I would tell you is we're pushing our, a range of products out, a lot of our own products, like Simply Dressed, et cetera, to make room within our own capacity to meet the needs of the business. Now, flipping over to the capacity expansion, our biggest facility in our dressing network is our horse cave facility.

To allow us to rework our mix of business and what I would tell you, we're pushing or a range of products out a lot of our own products like simply dressed et cetera to make room within our own capacity.

To meet the needs of the business now flipping over to the capacity expansion our biggest facility in our dressing network as our horse cave facility, it's about 251000 square feet.

Speaker 3: And this expansion that we're bringing online is about another 200,000 square feet. So from a production perspective, it's going to be a material increase in the size of the facility with a couple of bottling lines and then also capacity to meet the needs.

And this expansion that we're bringing online is about another 200000 square feet. So from a production perspective, it's going to be a material increase in the size of the facility with couple of bottling lines and then also capacity to meet the needs of our foodservice business as I pointed out that project.

Speaker 3: As I pointed out, that project is slated to be done in the first half of fiscal year 23. So, you know, within the next year, we expect that project to come online. And then sequentially, we're going to be starting up kitchens and lines to allow us to gradually rework the balance of what we have out in COPAC.

<unk> is slated to be done in the first half of fiscal year 'twenty three so within the next year, we expect that project to come online and then sequentially, we're going to be starting up kitchens in lines to allow us to gradually rework the balance of what we have out in co Packers now maybe with the footnote you heard.

Speaker 3: Now, maybe with a footnote, you heard one of the things that I mentioned in my comments today is that we were excited to announce that we're expanding our partnership with Chick-fil-A now to also include barbecue sauce.

One of the things that I mentioned in my comments today.

Is that we were excited to announce that we're expanding our partnership with Chipotle now to also include barbecue sauce, and so part of our decision to pull back versus leave out is going to be predicated on our ability to drive this growth right.

Speaker 3: And so, part of our decision to pull back versus leave out is going to be predicated on our ability to drive this growth, right? If we find that we continue to have more and faster opportunities, we will continue at least at some level to lean on these great COPAC partners. And they are great partners. They're helping us accommodate this growth in this environment. To the degree to which our growth rate starts to, let's say, moderate.

If we find that we continue to have more and faster opportunities. We will continue at least at some level to lean on these great co pack partners and they are great partners. They are helping us accommodate this growth in this environment.

To the degree to which our growth rate starts to let's say moderate at some point in the future. Obviously, we start to think about a different algorithm and let's say our strategy for using our co manufacturers, but really what we're focusing on here is what we feel like is a really unique opportunity by virtue of our.

Speaker 3: at some point in the future, obviously we start to think about a different algorithm and well, let's say a strategy for using our co-manufacturing.

Speaker 3: But really, what we're focusing on here is what we feel like is a really unique opportunity by virtue of our strategy around food service to retail licensing.

Speaker 3: And the speed of these things has forced us to go out and lean hard into co-packers to capture the opportunity.

<unk> around foodservice to retail licensing.

And the speed of these things that's forced us to go out and lean hard into to co Packers to capture the opportunity.

Speaker 6: I appreciate the context on that and then some of the details about sort of the push out for the Chick-fil-A barbecue product. And then just from a general sense, I understand it's a tough environment to try to predict what's going to happen in terms of pricing, but if, say, the pricing environment overall or cost side overall sort of stabilized.

Thanks, I appreciate the context on that and then some of the details that sort of the push out for.

Took play Bbq product.

And then just from a general sense I understand it's a tough environment to try to predict what it's going to happen in terms of pricing.

The pricing environment overall or cost side overall sort of stabilized.

Speaker 6: What do you think about the cadence or the movement sequentially of your gross margins over the balance of the years, the pricing that's currently in effect and plan to go into effect enough to tip the scales so that it might move upward on a year-over-year basis or at least the decrease starts to ameliorate somewhat?

What do you think about the cadence or the movement sequentially of your.

Gross margins over the balance of the year as the <unk>.

<unk>. That's currently in effect and plan to go into effect enough to tip. The scales. So that might move upward on a year over year basis or at least decrease starts to ameliorate somewhat.

Speaker 3: So maybe I'll hit it sequentially, and then I'll turn it over to Tom to cover the points that I don't make. You know, really, for the last handful of years, we've talked about our PNOC strategy.

So maybe I'll hit it sequentially and then I'll turn it over to Tom to cover the points that I don't make.

Really for the last handful of years, we've talked about our <unk> strategy.

Speaker 3: which is pricing net of commodities. At Historic, when we launched it, we were just looking at commodities. Within about a year or so, we started to also include freight in our net PNOC.

Which is pricing net of commodities and historic when we launched it we were just looking at commodities within about a year or so we started to also include freight in our and our net P. Knock.

Speaker 3: conversation. And then, you know, most recently now with the labor changes, we started to track

Conversation.

And then most recently now with the labor changes, we started to track wages in that peanuts conversation. So what I would tell you Ryan to date, when we look at our Penang, we with the pricing actions. We've taken we've largely recovered the commodity component and the freight component.

Speaker 3: wages in that PNOC conversation. So what I would tell you, Ryan, to date, when we look at our PNOC, with the pricing actions we've taken, we've largely recovered the commodity component and the freight component. Where we're lagging is in the wage rate adjustments that we've made.

Where we are lagging is in the wage rate adjustments that we've made.

Speaker 3: and we're in conversations on the food service side to recover those and we have pricing actions that are in flight and retail to cover those. So I would expect from a PNOC perspective that as we go through Q3 and Q4, PNOC should become net neutral again.

And we're in conversations on the foodservice side.

We recover those and where we have pricing actions that are in flight and retail to cover those so I would expect from a PR perspective that as we go through Q3 and Q4, Penang should become net neutral.

Speaker 3: right? So that's how I would view that. And then what I would tell you is that there are other, let's just call them temporary points of dislocation in supply chains that we're all facing. Things like truck drivers and inbound supplier issues because of their own issues. But I think we're just going to have to wait and see how they work their way through. What I would tell you is that...

Right.

So that's how I would view that and then what I would tell you is that there are other let's just call them temporary.

Since a dislocation in supply chain that we're all facing things like truck drivers and inbound supplier issues because of their own issues and I think we're just going to have to wait and see how they work their way through what I would tell you is that.

Speaker 3: As Tom and I pointed out, we're taking a range of actions to creep into our suppliers where we have to to make sure that we can assure more stable supply so we can make our factories run more predictably.

And Tom and I pointed out were taken at a range of actions to creep into our suppliers, where we have to to make sure that we can assure more stable supply. So we can make our factories run more predictably and Tom I don't know if theres anything else, yes, no I think I think you hit on it David I think there's one additional point to.

Speaker 4: And Tom, I don't know if there's anything else you want to add. I think you hit on it, Dave, and I think there's one additional point to add in that our pricing has been well-received by the retailers. I think the strength of our brand is that we're seeing good reflection, and the elasticity impacts are in line or lower than what we had originally projected. So we feel good about overall our ability to price to recover these costs, but it will take some time, as Dave outlined.

Add in that our pricing has been well received by the retailers I think the strength of our brands, but we're seeing good reflection and the elasticity impacts are in line or lower than what we had originally projected. So so we feel good about overall, our ability to price to recover these costs, but it will take some time as Dave outlined.

Speaker 6: Thanks. One last one from me. Could you touch on some of the potential unlocks? Once you implement the project-assigned program in the beginning of 2023, just in terms of general productivity, and then obviously your balance sheet is quite flush. You know what that would mean in terms of your abilities to digest the larger acquisition. Thank you.

Thanks, One last one for me could you touch on some of the potential unlocks once you implement the project ascent.

Program in the beginning of 2023, just in terms of general productivity and then obviously your balance sheet is quite flush what that would mean in terms of your ability to digest the larger acquisition.

Speaker 3: So we're on the forefront of some exciting times. If you remember, we did a pilot implementation of one of our factories that went into effect about a year ago now.

So.

We are on the forefront of some exciting times. If you remember we did a pilot implementation of one of our factories that went into effect about a year ago now.

Speaker 3: And it's proven to be very, very helpful. And a lot of what we're seeing is just the speed to information that we wouldn't have had access to in the past that's helped us with things like staffing. We're, within the next couple of months, going to be taking the trade promotion management component live on the system. And then finally, when we go live earlier in the next fiscal year with order to cash, procure to pay, and the other components, I think that's where we would likely to see an even larger benefit.

And it's proven to be very very helpful. In a lot of what we're seeing is just the speed to information that we wouldn't have had access to in the past that has helped us with things like like staffing.

We're within the next couple of months is going to be taking the trade promotion management component live on the system and then finally when we go live.

Earlier in the next fiscal year with order to cash procure to pay and the other components I think that's where we would likely to see and even larger benefit.

Speaker 8: Um, you know, the benefits are likely to come in.

The benefits are likely to come in the usual places procurement is going to offer an opportunity.

Speaker 3: Procurement is going to offer an opportunity. But the bigger area is just going to be the speed of information in our factories to make sure that we're staffing right and that we're sourcing right and we're running right. And it's a little bit hard for us to estimate exactly what that's going to look like in a COVID environment. And then longer term, Ryan, what this is going to give us is the ability to do much more seamless acquisitions with cost synergies than we haven't been able to do in the past.

But the bigger area is just going to be the speed of information in our factories to make sure that we're staffing right and that we're sourcing right and we're running right.

And it's a little bit hard for us to estimate exactly what that's going to look like in a COVID-19 environment and then longer term Ryan. What this is going to give us is the ability to do much more seamless acquisitions with cost synergies that we haven't been able to do in the past.

Speaker 3: If you go back to the underlying reason why we did this, our current ERP system was installed in 1995. The vendor went out of business. When we installed it, we didn't really cascade it through the supply chain in areas like MRP, which had resulted in a business today that's run pretty manually. And when we look at acquisitions, it really precludes us from looking at cost synergies and we focus more on growth.

If you go back to the the underlying reason why we did this our current ERP system was installed in 1995, the vendor went out of business. When we installed that we didn't really cascaded through the supply chain in areas like <unk>.

<unk>, which has resulted in a business today, that's run pretty manually and when we look at acquisitions. It really precludes us from looking at cost synergies and we focus more on growth.

Speaker 3: Not only is this going to give us a stable platform, but I think it's going to give us a scalable platform for us to look at acquisitions or, for example, bringing online licensing and other stuff where we can ramp up very quickly and very seamlessly in a way we can't today.

Not only is this going to give us a stable platform, but I think it is going to give us a scalable platform for us to look at acquisitions or for example, bringing online licensing and other stuff, where we can ramp up very quickly and very seamlessly in a way we could we can today.

Thank you.

Thanks, Brian .

Speaker 1: And we have a follow-up from the line of Todd Brooks from the Benchman Company. Please go ahead. Okay. Thanks for the second question.

And we have a follow up from the line of Todd Brooks from the Benchmark Company. Please go ahead.

Hey, Thanks for the second correct here.

Speaker 5: can we talk about Chick-fil-A barbecue? And I guess.

Can we talk about Chick Fil, a barbecue and I guess.

Speaker 5: it seems like that probably hits on more categories that retail competitively than Polynesian does. Just any any commentary that you can give us out of the food service side about

It seems like that probably hits on more categories at retail competitively than than Polynesian does just any any commentary you can give us out of the foodservice side about.

Speaker 3: barbecue popularity versus Polynesian popularity and kind of size where this falls between uh Chick-fil-a sauce and and Polynesian from a revenue opportunity. So in Chick-fil-a barbecue sauce is a category it's about a if I remember right 500 million dollar category maybe a little bit bigger than that as you pointed out there are a range of competitors that play the space.

Barbecue popularity versus Polynesian popularity in kind of a size where this falls between.

Truthfully I saw some in Polynesia from a revenue opportunity.

You Chick-fil-a barbecue sauces categories about if I remember right $500 million category, maybe a little bit bigger than that as you pointed out there a range of competitors that play in this space.

Speaker 3: If you look at it within Chick-fil-A's lineup, it's probably one of their, it's probably their number three sauce, so it's a material contributor.

If you look at it within Chick Fil A's lineup, it's probably one other it's probably there are a number of <unk>. So it's a material contributor to what they do.

Speaker 8: And part of what this gives us, Todd, as we think about our longer-term brand, what we're looking to do ultimately is to create a bigger and more substantial brand block on the shelf. If we were to sort of say, leaping forward, what does the future look like here? I would say, obviously, Chick-fil-A original.

And part of what this gives us Todd as we think about our longer term brand. What we're looking to do ultimately is to create a bigger and more substantial brand block on the shelf.

We were to sort of say leaping forward what does the future look like here I would say, obviously chipotle original Polynesian sauce barbecue and then some players to be named later that are in the works, but the other thing that we're going to be focusing on is Laurie is launching larger sizes.

Speaker 3: Polynesian sauce, barbecue, and then some players to be named later that are in the works. But the other thing that we're going to be focusing on is launching larger sizes.

Speaker 8: that allow us to drive greater holding power on the shelf, greater holding power in a pantry, and it really creates a roadmap for, for example, the way we grew ketchup when I was at Heinz and the way we thought about mac and cheese when Tom and I were at Kraft together. It all becomes part of how you grow a really meaningful brand. You know, encouragingly, when we look at the.

That allow us to drive greater holding power on the shelf greater holding power pantry and it really creates a roadmap for example, the way we grew catch up when I was at Heinz and the way, we thought about Mac and cheese, when Tom and I were at craft together. It all becomes part of how you grow up a really meaningful brand.

Speaker 3: We continue to have extremely high velocities. Our trial is high, our repeat is high. I believe even as of right now, it's our number two brand or so in household penetration. Really only trailing New York, but in due course we expect to see that quite possibly pass New York as well.

Encouragingly when we look at the brand today.

We continue to have extremely high velocities are trial is high our repeat is high I believe even as of right now it's our number two brand or so in household penetration.

Really only trailing New York, but in due course, we expect to see that quite possibly passed New York as well.

Speaker 3: So, you know, it continues to be a very, very exciting platform. All of our retailers are excited about it. And maybe bringing you around to the last point is, as you recall, when we were trying to bracket this, we said that we thought it had the potential to be the same size, the same size. So, you know, we're excited about it. We're excited about it.

So.

Continues to be a very very exciting platform all of our retailers are excited about it and may be bringing year round.

Last point is as you recall when we were trying to bracket. This we said that we thought it had the potential to be the same size as olive garden and.

Speaker 8: And right now, what we have essentially is two SKUs. We have a retail 16-ounce in original and a retail 16-ounce that's in Polynesian. And those two SKUs are already generating sales, net sales, or excuse me, retail sales that are in excess of what we're doing out there with Olive Garden.

And right now what we have essentially two skus, we have a retail 16 ounce and regional retail 16 ounce that's in Polynesian.

And those two skus are already generating sales net sales in our excuse me our retail sales that are in excess of what we're doing out there.

With olive garden.

Speaker 5: So Dave, I'm drawing this kind of picture in my head of what Chick-fil-A will eventually look like as far as placement and breadth on the shelves at grocery. Can you kind of level set us?

A lot of room to run.

So Dave I'm, drawing this kind of picture in my head of what.

AAA will eventually look like as far as placement and Brett.

On the shelf so grocery.

Speaker 5: How long after a horse cave opening does it take to fully realize the potential of Chick-fil-A at grocery retail? So not unlocking club or anything, but maximize that grocery potential.

Kind of level set us how long after.

The horse cave opening does it take to fully realize the potential of AAA at grocery retail, so not unlocking club or anything but maximize that grocery potential.

Speaker 3: Well, maybe going back to if you're thinking about how do we align this subsequentially, the factory is going to come online.

Well, maybe going back to if youre thinking about how do we align this up sequentially.

Speaker 3: in the second half of the next fiscal year. So it's going to be coming online, really, let's call it in the fall time period, with kitchens in line starting up thereafter. That's going to allow us.

Factory is going to come online.

In the second half of the next fiscal year, so it's going to be coming online really let's call. It in the fall time period with kitchens in line starting up thereafter, that's going to allow us to really start to expand more aggressively there to bottom lines there.

Speaker 8: really start to expand more aggressively. There are two bottle lines there with a number of kitchens that we're going to be able to grow into. But, you know, based on the modeling, we have a base case and we have an upside case that we're looking at here.

The number of kitchens that we're going to be able to grow.

Into.

But based on the modeling we have.

Speaker 8: We think that factory gives us capacity for a handful of years. In the upside case, it's quite possible that we're going to be looking for another facility either to buy or build. And if you go back to the comments that were in the script.

This case and we have an upside case that we're looking at here, we think that factory gives us capacity for a handful of years and the upside case, it's quite possible that we're going to be looking for.

Other facility either to buy or build and if you go back to the comments that were in the script.

Speaker 8: That was one of the things that we pointed out. We actually engaged a top tier consultancy to look at our growth algorithm and overlay our capacity footprint and then also begin to give thoughts to regionality and transportation in this and to start to think about, okay, what not only did the next two years look like but what did the next four and six years look like and how do we make sure that we grow but we're also growing margin as we push our way through.

That was one of the things that we pointed out we actually engaged a top tier consultancy to look at our growth algorithm and overlay our capacity footprint and then also begin to give thoughts to reach analogy in transportation and this and to start to think about okay. What is not only to the next two years look like but what does the next.

More than six years look like and how do we make sure that we grow but we're also growing margin as we push our way through this so.

Speaker 3: So, you know, hopefully that gives you some to think about. And then I would tell you, we continue conversations with other partners about other life.

Hopefully that gives you some to think about and then I would tell you. We continue conversations with other partners about other licenses that fit into this mix.

Speaker 8: I would say that continues to give us a measure of optimism in a complicated

Yes.

<unk> continues to give us a measure of optimism and a complicated.

Speaker 3: COVID environment is that our strategy around these licenses continues to hold, and our own brands continue to perform well in the environment. We just need to make sure that it's translating to profit.

Covid environment is that our strategy around these licenses continues to hold in our own brands continue to perform well in the environment, We just need to make sure that it's it's it's translating to profit.

Speaker 5: Yeah, that's helpful. And then it dovetails into the next question. I think last call, you may have talked about the license branding strategy and it's kind of evolved.

Yeah, that's helpful and then dovetails into.

The next question I think last call you might have talked about the license branding strategy.

Speaker 5: go deeper with the three existing partners at retail or

It's kind of evolved from a.

Speaker 5: look at other partners who want to work with us that we may have food service relationships with and we could help them get to retail as well. I think the last call you kind of debunked that a little bit and it's not as much of an either or as a both.

Go deeper with the three existing partners at retail or <unk>.

Look at other partners, who want to work with US that we may have foodservice relationships with and we can help them get to retail as well I think the last call you kind of bumped out a little bit so as much of an either or as a boat.

Speaker 5: So if you can talk about maybe depth of that pipeline, opportunities that might be outside of-are there opportunities that are outside of bottled dressings and sauces where capacity may exist to unlock some more momentum on the licensed branded products? And I'll leave it there. Thanks.

So if you could talk about maybe depth of that pipeline opt.

Opportunities that might be outside of our there are opportunities that are outside of bottled dressings, and sauces, where capacity may exist to unlock some more momentum on the licensed brand products and I'll leave it there. Thanks.

Speaker 3: So another good question, Todd and Per, earlier conversation, we don't view it as an either or, we view it ultimately as an and.

So.

Another good question Todd and per.

Earlier conversation, we don't view it as an either or we view it ultimately is in hand.

Speaker 3: We are looking at adding other licensed partners against dressings and sauces. We'd be very interested, and we are.

Looking at adding other licensed partners against dressings and sauces.

Be very interested and we are exploring opportunities around dips for example, and then also selectively in big categories, where we have the capabilities. So really we're looking at anywhere where we have capabilities and the opportunity to move into licenses and Thats, where we think this thing has.

Speaker 3: And then also selectively and bake categories where we have the capabilities. So really, we're looking at anywhere where we have capabilities and the opportunity to move into licenses.

Speaker 3: literally a number of years of legs.

Yes.

Literally a number of years of legs.

Speaker 8: If you look at the broader landscape, you look at the shelf and you look at the world that our consumers live in today, I think about when

And it's.

If you look at the broader landscape you look at the shelf and you look at the world that are consumers later on today.

I think about when I started in <unk> and marketing.

Speaker 3: consumer packaged goods at Heinz. I mean, typically you would generate an idea, you would test the idea, you would go out, you would put advertising behind the idea to try to break through to consumers and drive awareness and trial and get it on the shelf.

Consumer packaged goods and high end I mean, typically you would generate an idea you would test. The idea you would go out you would put advertising behind the idea to try to break through to consumers and drive awareness and trial and get it on the shelf.

Speaker 3: think about that world then, it seems quaint now in a world that's loaded with social media and in all sorts of distractions that consumers have and our ability to penetrate.

Do you think about that world than it seems quaint now in a world that is loaded with <unk>.

Social media and all sorts of distractions that consumers have and our ability to penetrate.

Speaker 3: you know that and to reach consumers minds is increasingly difficult and I think that's part of the reason why what you're starting to see

That and to reach consumers minds is increasingly difficult and I think thats part of the reason why what youre starting to see.

Speaker 3: are brands that have a different sort of a hook. So take body armor, for example. Who could have ever thought that somebody could have got on the other side of Gatorade, right? Well, body armor with the backing of Kobe Bryant back in the day was strong enough, obviously, to penetrate that. You've seen the same thing play out with brands like Honest.

Our brands that have a different sort of a hook. So take body armor for example, who could have ever thought that somebody could have got on the other side of Gatorade right well body armor with the backing of Kobe Bryant back in the day was strong enough obviously to penetrate that you've seen the same thing play out.

Speaker 3: Jessica Alba's backing and you've seen it play out in the spirits industry with Tres Amigos and with Aviation Gen.

With brands like honest with.

Jessica Alba backing and you've seen it play out in the spirits industry with Tres Amigos and.

Speaker 8: And so our view is rather than tying up with a particular partner, we would prefer to use really what we view as a core competency. Culinary skills and relationships with top tier and relevant food service partners to take their products onto the shelf. And in so doing it, it allows us to leverage their marketing muscle and their awareness in order to penetrate the consumer noise.

And with aviation Jen and.

Our view is rather than tying up with particular partner, we would prefer to use really what we view as a core competency culinary skills and relationships with with top tier and relevant foodservice partners to take their products onto the shelf.

And in so doing it it allows us to leverage their marketing muscle and their awareness in order to penetrate the consumer noise and.

Speaker 8: So I think that strategy seems to continue to hold at sort of a really high level, and when you bring it down to our little company here and the brands that we work with, we continue to believe that it's highly relevant.

So I think Thats strategy seems to continue to hold at sort of a really high level and when you bring it down to our little company here and the brands that we work at.

Speaker 3: great pathway to create value for us and our licensing partners.

Work with we continue to believe that it's highly relevant Dennis and Greg.

Pathway to create value for us and our licensing partners.

Okay, Great that was helpful. Thanks, Dave.

Speaker 1: And there is no further questions. I will turn the call back to Mr. Sosinski for his concluding comments.

Thank you.

And there is no further questions I will turn the call back to <unk> for his concluding comments.

Speaker 8: Thank you, everyone, for your participation this morning. We'll look forward to joining with you for our third car over results early in May. In the meantime, stay safe and we'll look forward to talking with you then.

Thank you everyone for your participation this morning.

Look forward to joining with you after our third quarter results early in May and in the meantime stay safe and we'll look forward to talking with you then.

Speaker 1: Thank you, ladies and gentlemen. This concludes today's conference. You may now disconnect.

Thank you ladies and gentlemen. This concludes today's conference you may now disconnect.

Okay.