Q4 2022 Lancaster Colony Corp Earnings Call
Good morning.
And I will be your conference call facilitator today.
At this time I would like to welcome everyone.
Colony Corporation's fiscal year, 2022 fourth quarter conference call.
Conducting today's call will be Dave.
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'll be a question and answer period.
If you'd like to ask a question. During this time. Please press Star then the number one on your telephone keypad and questions will be taken in the order they are received.
If you would like to withdraw your question. Please press Star then two thank you.
And now to begin the conference call here.
They'll get object, Vice President of corporate Finance and Investor Relations for Lancaster Colony Corporation.
Thank you operator, good morning, everyone and thank you for joining us today for Lancaster colony's fiscal year 2022 fourth quarter conference call. Our discussion. This morning May include forward looking statements, which are subject to the safe Harbor provisions of the private Securities Litigation Reform Act of 1095.
These statements are subject to a number of risks and uncertainties that could cause actual results to differ materially and the company undertakes no obligation to update these statements based upon subsequent events.
Discussion of these risks and uncertainties is contained in the Companys filings with the SEC.
Also note that the audio replay of this call will be archived and available at our company's website Lancaster colony Dot Com later this afternoon.
For today's call, Dave <unk>, our president and CEO will begin with a business update and highlights for the quarter Tom.
Tom Pigott, our CFO will then provide an overview of the financial results.
Dave will then share some comments regarding our current strategy and outlook.
At the conclusion of our prepared remarks, we'll be happy to respond to any of your questions.
Once again, we appreciate your participation. This morning, I'll now turn the call over to Lancaster, colony's President and CEO , Dave <unk> Dave.
Thanks, Dale and good morning, everyone. It's a pleasure to be here with you today as we review our fourth quarter results for fiscal year 2022.
Look forward to fiscal year 2023.
Before I cover our results I'd like to provide you with a brief update on our ERP initiative project ascent.
As planned on July one we executed the first wave of project ascent the implementation of our new SAP <unk> Hana ERP system I am happy to share that the cutover went very well and in line with our expectations.
For context wave one was the most complex wave of project ascent, encompassing all financial transactions, and all customer and supplier facing business processes.
This included order to cash trade promotion management procure to pay the general Ledger and an Edr re platform.
Wave one also converted two of our manufacturing plants, one large distribution center and all of our third party warehouses onto the new ERP system.
Customer fulfillment levels remained strong before and after the system cutover with no unplanned disruptions in receiving orders producing products sure.
Shipping orders or receiving payments.
I'd like to extend my sincere thanks to our teammates who put forth a tremendous effort to reach this important project and company milestone I'll have more to say about the strategic importance of this later in my comments.
Moving onto our financial results for our fiscal fourth quarter ended June 30, we were pleased to report record sales and gross profit despite the difficult operating environment.
Consolidated net sales increased 17, 3% to 452 million, while consolidated gross profit improved one 8% to $98 4 million.
Retail segment net sales grew eight 8% in the quarter driven by our pricing actions and incremental sales attributed to advanced ordering by our customers near the end of Q4 ahead of our ERP go live.
From a brand perspective, New York Bakery sister Schubert's in Olive Garden, all reported solid growth in the quarter.
Retail sales volumes measured in pounds declined, 2%, which comped to solid volume growth of 9% in last year's Q4.
This was in line with our expectations based on pricing actions and product rationalization decisions that we have executed during the past year.
IRI data for our fourth quarter showed share gains for sister Schubert dinner rolls with a pick up 300 basis points.
Each pushed our leading share in frozen rolls up to 54, 2%.
Our <unk> refrigerated dressings posted a share gain of 140 basis points growing our share to our category, leading 24, 8%.
In summary, Q4 top line results for our retail segment were driven by our pricing actions advanced ordering ahead of our July 1st ERP go live and solid sales volume gains on New York Bakery sister, Schubert's, an olive garden dressing.
In our foodservice segment net sales grew over 28% with pricing accounting for over 24% of the sales increase.
Customers in our mix of national accounts and higher demand for our branded foodservice items were also noted contributors to this sales growth.
Foodservice sales volumes measured in pounds increased 2% in the quarter, which was in line with our expectations and compares to a significant growth of 29% in last year's Q4.
During Q4, we continued to experience high levels of inflation for raw materials packaging and freight.
That said, we were encouraged by our progress improving our Penang pricing net of commodities there.
This progress is reflected in our Q4 gross margin, which showed sequential improvement of 480 basis points versus our fiscal third quarter.
We also acknowledge there is more work to be done we remain focused upon improving our financial performance through productivity gains in our supply chain and revenue growth management.
Overall I'm pleased with the improvement in our financial performance in our fiscal fourth quarter as we completed our fiscal year characterized by record inflation and a challenging operating environment. I'm also delighted to have started fiscal year 2023 with a successful go live on ERP.
I'll now turn the call over to Tom Pigott, our CFO for his commentary on our fourth quarter results.
Thanks, Dave overall, the results for the quarter reflected strong topline growth and improvements in our gross margin performance are successfully implemented pricing actions have begun to offset the unprecedented levels of inflation impacting our business.
Fourth quarter consolidated net sales increased by 17, 3% to $452 $4 million. The growth was driven by pricing actions taken in both segments and the customer pull forward a shift of shipments in advance of our ERP go live.
Customers increase their orders for deliveries near the end of the quarter to ensure they had adequate inventory prior to our SAP implementation on July one.
We estimate these shipments contributed $25 million in incremental sales to the fourth quarter results.
Decomposing, our 17, 3% revenue growth 15, one percentage points were driven by pricing.
The customer pull forward of shipments accounted for six five percentage points and.
And a volume decline that was in line with our expectations accounted for the balance.
Consolidated gross profit increased by $1 7 million to $98 $4 million.
Gross profit margin declined by 330 basis points the.
The increase in our gross profit reflected the pricing actions implemented in both segments.
In addition, we estimate the gross profit benefited from an incremental $5 million due to the advanced sales prior to our ERP go live.
These items were offset by the unprecedented inflation and increased supply chain costs.
Inflation for commodities and packaging materials was up nearly 30% 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.
The increase in our 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.
Second our manufacturing costs were up due to operating challenges in this environment. Our cost savings program has been hampered by efforts to react to external supply and demand volatility at our facilities.
Third we had higher freight and warehousing costs due to wage and fuel inflation.
We continue to work to improve our operations with initiatives focused on increasing productivity, including a new value engineering program.
Selling general and administrative expenses decreased two 8% or $1 6 million.
This decrease was due to reductions in consumer spending and incentive compensation costs and.
Expenditures for project ascent, our European initiative totaled $11 million in the current year quarter versus $10 3 million in the prior year quarter.
Restructuring and impairment charges of $10 $5 million, primarily reflect the unfavorable impact of an $8 8 million noncash impairment charge related to the angelic bakehouse business.
Consolidated operating income declined $7 2 million to $33 7 million to the restructuring and impairment charges, partially offset by the benefit from the advanced sales are ahead of our ERP go live and the underlying performance of the business.
Our tax rate for the quarter up 44% reflected the benefit from a lower state tax rate due to the impact of nonrecurring adjustments.
We estimate our fiscal year 'twenty three tax rate to be 24%.
Fourth quarter diluted earnings per share decreased nine to $1 six.
The decrease was driven by the restructuring impairment charge, partially offset by the benefit from the advanced sales ahead of our ERP go live the lower tax rate and the underlying performance of the business.
EPS impact of the restructuring and impairment was 29 <unk> per share benefit from the advanced sales was <unk> 15 per share and the lower tax rate at <unk> 10 per share.
Costs related to project ascent reduced EPS by <unk> 31 per share this quarter versus <unk> 28 per share in the prior year quarter.
With regard to capital expenditures full year payments for property additions totaled $132 million. This result was below our previous expectations, primarily due to timing of payments for our horse cave capacity expansion.
Spending for the horse Cave project totaled $72 million in fiscal year 'twenty two for.
For fiscal year 'twenty, three we are forecasting total capital expenditures of approximately $100 million.
This forecast includes approximately $50 million that remain for the completion of the horse cave expansion project.
In addition to investing in our business. We returned to also return funds to shareholders. Our quarterly cash dividend of <unk> 80 per share paid on June 30 represented a 7% increase from the prior year amounts.
Our enduring streak of annual dividend increases currently stands at 59 years.
Our financial position remains very strong as we finished the year debt free was $60 million of cash on the balance sheet.
So to wrap up my commentary on our fourth quarter results reflected in strong pricing driven revenue growth offsetting significant commodity inflation the revenue and gross profit performance also benefited from the advanced customer purchases prior to our SAP go live.
In the coming year, we will continue to address the inflationary cost increases with our revenue growth management program and are implementing plans to improve our supply chain performance I will now turn it back over to Dave for his closing remarks. Thank you.
Thanks, Tom and fiscal year 2023, we expect to continue to deliver industry, leading sales growth and retail we expect strong sales growth from pricing. In addition to some incremental volume on new items, such as the launch of a new larger size of Chipotle sauce.
National distribution of Chick Fil, a barbecue and sweet and spicy sriracha sources are new Olive garden Caesar dressing flavor and the addition of RBS horsey sauce and RV sauce.
Just for reference we are also planning a very limited regional tests, particularly refrigerated salad dressings during our fiscal second quarter.
Consumer demand elasticity and the impact of product rationalization initiatives, we implemented in fiscal year 2022 will pose a headwind to volume gains in fiscal year 2023.
In foodservice, we anticipate sales growth fueled by pricing and momentum at select <unk> customers will be partially offset by a slowing economy and any potential diminution and consumer sentiment.
Also note that our first quarter sales will be unfavorably impacted by the ERP advanced ordering which pulled an estimated $25 million of sales into the fiscal fourth quarter of fiscal year 2022, as Tom mentioned in his comments.
In fiscal year 2023, we're forecasting another year of significant inflation in late Q4 of fiscal year 2022, we implemented another round of list price increases on retail dressings and sauces. These increases became effective in early August and are already reflected on the shelf.
In our foodservice segment, we will continue to realize offsets to increased commodity and freight costs through contractual based inflationary pricing our cost savings programs and ongoing initiatives and revenue growth management will also offset the unfavorable impacts of inflation in the year ahead.
Turning to our supply chain strategy, our significant expansion at our dressing and sauce facility in horse Cave, Kentucky is progressing as planned production is scheduled to begin later this fall.
With regard to project ascent the implementation phase will continue throughout fiscal year 2023, as we add additional plants and warehouses to our new ERP network.
Stepping back and placing this in context project ascent and our horse cave expansion represent capstone initiatives and a major strategic transition.
Lancaster Colony Corporation was founded over 60 years ago, and our evolution to date can be organized into two distinct phases are first phase Lancaster colony. One no began with our founding in 1961 five decades that followed were characterized by numerous acquisitions and rapid growth as a conglomerate.
Listing of three segments glass and candles automotive and food.
In January of 2014, Lancaster colony sold the last of our non food assets. The sale of the candle business in 2014 marked the end of Lancaster colony, one point out in the beginning of the next phase of our evolution as a food pure play Lancaster colony to point out.
Notable highlights of Lancaster Colony 2.0 haven't included the development and implementation of our better food company growth plan, which is focused on three simple pillars accelerating core business growth simplifying our supply chain to reduce our cost and grow our margins and expanding our core with focused M&A and strategic <unk>.
<unk>.
Drain Lancaster colony to point out that the company has also invested in the assets and capabilities to grow and support the next phase of our future. These investments have included but not been limited to constructing a new innovation center consolidating several older office locations into our new headquarters and numerous plant level.
Automation initiatives.
The capstone investments of Lancaster colony to point out had been the horse cave expansion and the implementation of SAP as for Hana.
Scalable ERP platform that will enable us to pursue existing and new pathways to growth.
During the quarters ahead, we will complete the construction at horse cave and the implementation of project ascent.
This will mark the end of Lancaster colony to point out in the beginning of Lancaster colony three <unk>.
Whereas the focus in Lancaster colony, two <unk> has been on growth and rebuilding critical infrastructure. The focus of Lancaster colony, three <unk> will be on leveraging our new scalable infrastructure to pursue existing and new organic and nonorganic pathways to growth.
Bringing things closer in I'd once again like to thank the entire Lancaster colony team for all their resilience hard work and ongoing commitment to our business during fiscal year, 2022, and helping us with completing this strategic transition.
I look forward to working together with everyone in the coming year as we continue our journey to be the better food companies.
This concludes our prepared remarks for today and we'd be happy to answer any questions that you might have.
Operator over to you.
Thank you at this time I would like to remind everyone in order to ask a question. Please press star one on your telephone keypad.
Your first question comes from Brian Holland with Cowen. Please go ahead.
Yes, thanks, good morning.
I guess, if I could.
We all win.
Just kind of thinking about the puts and takes into fiscal 'twenty three.
Nice sequential gross margin improvement.
Just trying to think about magnitude going forward can we expect that kind of sequential lift.
As we look into the first half of the year or are we kind of range bound with Q4.
And maybe just looking out to fiscal 'twenty three gross margin full year. Obviously, you can go back to 2021, yet 26 gross margin.
Somewhere in that mid <unk> range.
Much of that do you think you can get back in fiscal 'twenty. Three that is that a is that a viable kind of year end range for you as we think about pricing catching up.
Well Rick.
Covered a lot of water there maybe I'll start with the basics, we feel really good about the top line of our algorithm and driving sales growth, but the way we're going to get there Brian is going to be a little bit different than let's say several years ago, where it was all driven by volume now what youre going to see and we tried to outline that in our press release and our prepared comments is that obviously.
We're pushing through a lot of pricing on <unk>, which really kind of gets into that margin question. We feel like we're turning the corner right, particularly in our retail business. We mentioned the fact that.
In Q4, we had half a quarter of pricing on our frozen business. The frozen bakery business and we took another price increase that just became effective in early August on our dressings and sauces. So what I would tell you is we feel good about our P knock that were turning.
<unk>.
If you look at sort of sequentially as we go through the quarters youre going to see a little bit of noise and.
As we go forward now bearing in mind that we had the shift in timing of some of that volume and we also had plants down for the first five days of the month of July because of this cutover.
As you might expect we literally shutting down do a physical inventory we pour.
All of the data from the old systems into the new systems, and then we start things back up.
To your broader question then how do we feel about fiscal year 'twenty three as a whole I think what youre going to see is continued improvement, but im going to offer a caveat that if you look at between fiscal year 'twenty, two and 'twenty three and the magnitude of the pricing that we're taking you are going to see some diminution on margin just because of that spread right.
We pass on price for the cost not not the margin percentages, so youre going to see some.
Some some.
Wait against overall margin recovery, but wouldn't you should see is improvement in gross profit as we continue to push forward.
What I would tell you is unlike in years past, the external situation and I'm going to touch wood here seems to be stabilizing in terms of supply the pandemic is dying down.
And thats, allowing us to put greater focus in areas of productivity and we're also adding value engineering thats. Another important initiatives. So as you think about what's our pathway to get margins back to historical levels, It's first and foremost Penang and like I said, we're turning the corner on that and then it's going to be focusing on productivity.
Initiatives and value engineering over the course of time, not just to be restoring gross profit growth and profitability, but building those margins back to where you and we want them to be and Tom I don't know if you'd want to offer anything else into that yes, no and Brian as you model. It I think.
The key focus for us Penang, but as you do your model.
We're looking at similar levels of inflation and pricing in fiscal 'twenty three as we had in fiscal 'twenty. Two so in fiscal 'twenty, two where we looked at slightly over 200 basis points of dilution going into it we're looking at it in a similar way in terms of the percentage.
But from a <unk> perspective.
They've indicated we feel like we've turned the quarter and we are starting to go positive.
Okay, that's great I appreciate the color.
And maybe we can put the gross profit versus gross margin question.
At least relative to my model I think.
We're clearly in retrospect I Miss modeled was the magnitude of pricing coming through still on the foodservice side.
I would imagine you start to lap a little bit heavier.
More of that pricing as we get into deeper into the first half of 2023 is that the right way to think about it we just have other rounds of pricing such that.
That could support that level of increase I'm, just trying to make sure I understand order of magnitude on pricing in foodservice.
Right, what I would offer Brian is.
That is how I would think about it with maybe a caveat, we arent seeing prices necessarily fall back what we're seeing is the rate of increase in our inflation is slowing down.
So there's a little bit of nuance, there, we would need to see a more dramatic pullback.
In order for us to actually see.
For the pricing that we put into start to unwind.
So if we can go into those categories, if you want but Tom yes at foodservice.
Kind of looking at pricing in the first half of mid Twenty's and then it gets into the mid teens in the second half based on our current outlook. So that so you are right in terms of your projections.
Okay, Perfect and then last one for me I guess, a two parter one.
Do we have how.
How much license sources contributed in the quarter.
Didn't see anything that would allow me to back into it but but.
But I may have missed it.
And then and then obviously, what we saw in the quarter was the slowdown in the growth rate.
I know that we've talked about some of the merchandising that was done at the launch.
Sense of how that building obviously, the most recent data out earlier this week.
License portfolio looks like backup.
In the low double digit range. So it looks like it's getting back on track but.
I guess I mean, the inflationary environment and a lot of heavy pricing what we're hearing from a lot of companies is pulling.
Pulling back on some of the media spend.
Where we're not really going to get the return we're focus on the pricing. This is something we are obviously trying to drive visibility towards so just help us think about the investment that's going to go into that category.
Mindful of the current environment we're in.
So maybe first I'll start with the contribution of those brands.
I'll give you the IRI numbers here.
Directionally.
If you look at Chipotle sources about $34 million in retail scanner sales Olive garden was about $36 million of scanner sales and BW Debbie was about $12 million in scanner sales of what we had on the net sales line give me a second here.
It's.
It's probably more like.
Pushing 70 somewhere in that range is where we work on those and Thats just total sales not necessarily incremental but total sales in those items.
In the quarter.
As we think about sort of how we're focusing on driving the business.
We went back and we looked at our marketing spend and we've got a couple of things that the leader of our retail team and the marketers that he works with step back in and looked at one the size of the spend but also how we're spending and we've elected to make a bit of a strategic shift and that we're moving away from.
Traditional and we're starting to double down more in digital we're also focusing more on in store and point of purchase where we feel like we can get better leverage so in the aggregate we produced it modestly, but we haven't historically been a big advertiser like some of the others I think the other thing that may be worth consideration Brian is given.
The growth that we've had and licensed businesses and given the marketing spend that those organizations like olive garden, and Buffalo Wild wings, and Chick placement on their own marketing it doesn't necessitate the same level of spending that would on one of our traditional brands. So as you look at our marketing spend as a percentage of our total sales over time don't be surprised.
If you see that moderate slightly what we're doing essentially is looking at the level of spend by brand and our view is on a licensed brand because we're paying a license we shouldnt have to spend as much.
That's great I can leave it there I appreciate all the color best of luck.
Thanks, Brian .
Your next question comes from Todd Brooks with Benchmark Company. Please go ahead.
Hey, good morning, guys and congrats on the.
Gross gross profit improvement in the quarter nicely done.
Thank you Scott.
Quick question, Dave you outlined a bunch of incremental product opportunities that youre looking at for fiscal 'twenty three.
On the licensed branded product side is there a way to dimensionalize, either youre thinking across the total <unk>.
<unk> opportunities or if you wanted to break it into.
And the Chick Fil a large size versus.
The incremental flavors just is there a way you could dimensionalize the incremental benefit from licensed product introductions that you're expecting in 2003.
Yes.
Well, let's let's see first maybe I would I would put it in some context.
If you go back and you just look at Chick Fil a sauce for example in retail sales over the course of a little more than a year, it's become a business that does about 100.
$35 million $140 million in sales or thereabouts right. So.
If you look at what we've done with licensing just in the last.
18 months, there's been a pretty big step up in our sales so.
What I want to share is don't expect necessarily to see something like that but.
As we look at the items that we have there in the portfolio I think it's reasonable to assume that we might be able to achieve something more.
One third of that kind of range right and it's going to be mixed coming across the large size, it's going to be an RV sources and then the new variance like Chipotle barbecue in the sweet and spicy Sriracha and then.
Have garden Cesar.
And that sort of as you're thinking in the current year now bear in mind that these items early a ship for select customers, who is going to be October but the majority of these customers arent going to begin to take these items more until the spring when they start to do there.
Shelf resets.
So these new early adopters will cut it in but before you really see all of these items in grocery stores and everyone in the country, it's going to be more on the in.
On the other side of calendar year 2023, but that's why we.
Comment to maybe Bryan's question earlier in your question now as you look at our overall algorithm. We continue to have confidence we feel like we're teamed up with winning foodservice operators.
And we really we cherish that a partnership and we feel like between our own brands and then what we're doing in licensing we were set up to continue to deliver really solid if not industry, leading top line growth.
That's great that's helpful. Thanks, Dave.
If we can talk about.
Obviously, the pass through nature of the pricing that you've gotten in foodservice and Tom talk to maybe the cadence of how you see that playing out first half versus second half.
Q mind us with the August increase what we're running four kind of blended price increase now.
On the retail side of the business and maybe just what the tenor of those discussions were around the August increase.
Do you expect that you still have the ability to get further increases if needed or do we need to start to think about some of these increases rolling off as we anniversary them.
Sure. So if you go back Todd and you look at the last couple of years most of our portfolio now with this latest round of price increases is up probably 15% to 20% across the two price increases that we've taken.
So the high end of that again 15, the lower end would be a little bit lower in the most recent August price increases, we took down dressing and sauces and depth that range was 911%.
Just to give you an idea.
And then if you don't have any other questions on that I'll go and then to your question about sort of the discussion in how things went you'll remember I think we came out the last call. We had we shared that we were in the process of taking a price increase and that was on the heels of some tough earnings coming out with some of the the big merchants.
<unk> and Walmart.
You might have imagine those discussions were probably a little bit tougher than they had been before but what I would tell you is that.
They were fact base before and they were fact base now.
Ask us to document the reason for the increases and we laid out what was happening on input cost, particularly on oil in the case of our dressings and sauces and they became constructive their concerns are our concerns.
And we were able to work our way through it.
Now now we're just we're pressing forward I think it also helps with the fact that we continue to bring new news to the category.
In many cases, they're viewing us as sort of the innovation leader.
In dressings, and sauces because of what we've been able to do in some level that helps also.
Great and a final one for me and I know you've talked about increasingly over the last couple of quarter quarters, just a SKU rationalization journey, but you've started as youre looking out to fiscal 'twenty. Three are you looking to further rationalize the portfolio and is there anything that we should think about as kind of a.
Put on revenue growth related to further rationalize our SKU base.
Not really it's ironic that you pick that I was going through and looking at things that comparing to fiscal 2020 to fiscal 2020 to give you an idea. We started that journey with about 1400 little more than 4500, skus between retail and foodservice and we're down to a little more than 1100 on that right now to give you a magnitude so thats.
You're talking on the order of 25% of our reduction.
No. We don't expect big pruning a lot of this pruning Todd was all geared towards getting us ready for a nap cutover, we felt like we needed to simplify our business and really focus on our core if we wanted to ensure that this cut over was going to be successful and as we got deeper and deeper into <unk>.
<unk> and we had to focus on.
Optimizing the use of our capacity and making sure that we can service our customers that really sort of was a secondary driver for us to go back and look at some of the slower moving skus that.
That we had and go back and rationalized, but sort of where we sit today looking forward.
SKU rationalize rationalization activity, just isn't going to be a big area of focus will prune as we have commented up yes.
To give you a couple of numbers for your models.
As we look at the retail segment and the exit of Monovalent Proteus Packers.
That was about $7 million this quarter and is expected to be about the same level next quarter, and then it declines to $2 million to $4 million for the remainder of the fiscal.
Okay, great. Thanks, Tom.
Congrats again.
Thank you thanks, Tom.
Your next question comes from Andrew Wong.
C L. King. Please go ahead.
Hi, good morning.
Good morning, guys I wanted to ask a follow up on pricing.
Kind of a simple question, but.
Do you feel like if the.
No.
I think most economists and so on economists and so on and people in the trade or looking for some kind of disinflation at some point Ryan maybe.
Later in 2023, but.
If that doesn't happen.
And you need more pricing.
And a real basic.
Basic and the economy is slowing.
Do you think youre going to experience push back from.
And not not.
Lancaster is.
The industry do you have a sense from some of the bigger retailers.
We will accept more pricing or would you anticipate some pushback if its future pricing as needed.
It's a great question and one that we're spending a lot of time thinking about what.
What I would share with you Andrew.
On weekends.
Spend time at grocery stores do some of our own family shopping and just make it a point, sometimes with my kids to go through the stores.
And I work most of the aisles and what I would tell you is I mean, just beyond our categories. What surprises me is just the magnitude of the prices that you see on some of the items.
I have been worked on Heinz ketchup years ago, I always sort of look at where they are in.
I can remember where.
We used a promoted at 10 for 10 and now the items on the shelf for more than 350. They have sizes that are on there for more than eight bucks.
And you can see that same thing in a range of different areas.
Let's start maybe and just say like you.
You can't help but be.
Surprised that the prices on the shelf, but at the same time when you look at the magnitude of the input cost increases that we've seen.
It.
None of our peers in the food space or building margins through this and if anything were.
We're just passing along what we're seeing out into the trade generally I think that.
The trade remains constructive in the conversations consumers are continuing to spend, albeit theyre, making tradeoffs.
They're making they're pulling back in things like apparel and other hard lines. They are spending on food selectively.
I think what we're starting to see the early signs of our shifts so the shopping behavior of.
Lower income consumers are starting to show, maybe more erosion than middle consumers or more affluent consumers.
And I think merchants know this and I think what you can expect to see is I think we're all realistic.
Input cost if they do continue decline theres going to be a need to pass them on and I think what youre going to see is depending on the demographic segment, probably different areas of focus to create value.
So.
I don't see if costs go up I don't.
I think we're just going to be in the St. Luke We're in right. Now this is probably a long answer to a short question Youre asking as I think my way through it but I think what you're going to find is we'll just continue to move forward as is.
I'll add a little bit of color so.
As we think about it one of the key initiatives. We're working on is our value engineering program to to look at ways to optimize our products, maintaining a high level of quality, but being able to somewhat.
Offset.
What we're seeing in terms of this commodity inflation as well as some productivity projects in our factories to reduce our costs. So so we're all focused on trying to trying to mitigate those increases.
Broadly in this business historically as you get into more of a recessionary environment. If we get there we have seen tailwind in our higher margin.
Retail business, which.
As to our benefit, but certainly some headwinds on the foodservice side.
Thank you that was really thoughtful I appreciate it.
And then I wanted also to ask about the.
On the volume outlook.
Yes.
Is that sort of a sense of the cadence not to ask you to tell me, Hey, Q1, but.
Whether it's going to it sounds like it's well I'd like to get your sense of the cadence.
You just had was down a little in retail and you had obviously a tough compare.
And the lingering SKU rat, which you mentioned.
And then as you look forward.
You talked about SKU rat I don't know about the compares maybe you can help us with that and then on.
What do you think about elasticities, what are you seeing now.
And what are you what are you kind of anticipate.
In your model and your budget.
Sure.
Maybe I'll start Tom and then.
I would tell you that if.
If you look into Q1.
One thing I would tell you is youre going to have to take into consideration the volume that shifted between.
Q1 into Q4 as retailers pulled forward orders to get on the other side of the ERP.
So that's going to be an overarching volume adjustment and you can sort of do the math on that.
To your point on.
The fact that we've rationalized and exited a couple of businesses. We've provided you that that needs to be taken into consideration.
And then there's the elasticities.
That we shared with you so.
What we still feel confident of is we're going to continue to provide solid.
Not industry, leading top line growth, but getting there by way of pricing with.
With volume on the software side so.
That's probably how I would think about working the math, so youre going to see some diminution on volume and pricing driving the algorithm now is as we get deeper into the quarters, two and three obviously the pull forward it comes to non event.
And so that works its way out and even the rationalizations worked their way out so the only thing thats going to be left is is some of the.
The reduction in volume due to consumer elasticity, I think youll start to see it stabilize from.
Second third fourth quarter late second quarter third quarter fourth quarter.
Okay, and the reference to what Youre talking about on timing because the impact of the pricing you put in kind of recently will flow into the market and youll see what the elasticity is there.
Thanks.
Tracking every week and so far those elasticities are performing in alignment with our modeling.
<unk>.
Well I think that timing things that I would focus on would be just making sure you're capturing the shift between Q4 and Q1 that that Tom outlined in his comments.
The fact that we did exit a couple of businesses last year that we've talked about as well and making sure first and foremost you're adjusting for that and then the elasticity.
You can use your judgment.
Okay, well, thank you I appreciate.
Of course, thanks, Andrew.
Your next question comes from Connor <unk> with.
Consumer edge research. Please go ahead.
Hey, good morning, guys. Thanks for squeezing me in I appreciate it.
Of course.
Yes, just just one quick one here at the end of the call just to wrap up on the commodity front can.
Can you guys, maybe remind us about any any hedging policies or contracts you have in place.
Just given the soybean oil is about 20% off its high it seems like we should expect some relief on the inflationary front heading into fiscal 'twenty three but in the release it looks like youre expecting commodities to actually increase over the fiscal 'twenty three.
Can you maybe help us sort of understand what's driving that expected step up.
Yes so.
It's a really good question. So what we're seeing actually even though theres couple of things to think about there is the board prices for soybean oil, which has started to moderate but then theres a basis cost.
Which you don't see.
Which is increasing so we don't get to see that full benefit of the savings.
And then the second aspect of it is we had some some good coverage on soybean oil in fiscal 'twenty two below market price and then as you go into fiscal 'twenty. Three we also have good coverage, but when you look at the Delta is we are looking at an increase in soybean oil year over.
Year, despite what youre seeing on the board.
But again, that's all factored into our Penang and how we're how we're managing our pricing relative to those costs.
Okay, all right got it. Thank you so much that's it for me.
Thanks, Ken currently the only other thing maybe I would add just quickly on that as the other new news. Besides oil with commodities was just the avian flu that hit later in the year and it created a subsequent headwind and we use.
And in a range of our dressings and dips and it's also included as an ingredient in some of our baked items.
Our next question is a follow up from.
From Brian Holland with Cowen. Please go ahead.
Hey, Thanks for letting me hop back on here Dave.
Mentioned in your prepared remarks about kind of leveraging the thinking about the link cast economy three point model.
As you know.
<unk> vehicle to leverage organic inorganic opportunities and I'm curious.
How the inorganic opportunities have evolved right because.
I would have thought about that in the context, three years ago of going out and doing more acquisitions.
Similar to what you've done historically, but maybe you could do them larger in scale.
For a number of reasons.
Including.
More human capital.
At your disposal to run such businesses, but more recently the success of the licensing program and some of the commentary you provided around that would suggest that maybe that the inorganic opportunity.
Yes.
You would define it that way I E, bringing on a new partner.
As a source of inorganic growth. So can you just help us think about the evolution of <unk>.
Inorganic catalysts as you learn more about the license business.
And the reason I ask is because that seems like a.
That seems like a less risky sort of it seems that there would be less execution risk about continuing that formula.
That may be going in and buying a new asset, but would love to get your perspective.
Okay.
Maybe first just providing you a little context with our old ERP system.
That was installed in 1990 $90 90, $419 95. It was such that we really struggled with any acquisition to be able to generate cost synergies as we looked at acquisitions ordinarily we're more inclined to focus on growth synergies.
So as we've gone onto this SAP.
As for Hana, which is an all cloud based system.
It's going to allow us the option obviously in a mandate, but allows us the option to think about bigger acquisitions should we choose and justify those with cost synergies and the other thing that it is going to allow us to do is to think about international as a component of growth.
Whereas in the past it would have been difficult because of the limitations of our some of our systems and processes now I'm going to take a big step and a half back from that and say we agree with you that we have been able to.
Enjoy a fair amount of growth with with licensing and we have no intention of backing away from that and as we think about 1.2 0.3 point out part of what we're trying to do is to create a platform.
Really for the long term just not the next year or two years or three years, but we we view both horse cave and that SAP system as generational investments that we're going to be able to grow on so.
Where we sit right now.
This summer I would tell you Brian we feel like we have near term opportunities to continue to grow in intermediate term opportunities to grow driving our existing strategy and we feel good about that.
We also feel like we could.
Take baby steps all of some of our foodservice operators to places like Canada, and execute that far more efficiently than we might've been able to do that in the past. So this isn't not because these are big risky moves.
As far as acquisitions are concerned.
Our view is.
We agree with you on the risk.
But in the past, we really haven't even.
It's been difficult to think about how we might even be able to take on something bigger now whether it's several years from now or longer we feel like at least the machine is set up to take on things like that and to do it well.
But the last thing we want to do is leave you with the impression that somehow we're going to make up a bulk pivot away from what we've done. This is all about generational investments to strengthen the platform. So that we can continue to grow efficiently.
Meet your needs and others that are out there.
Got it David I'll leave it there I appreciate all that color.
Absolutely thanks for asking thanks, Brian .
There are no further questions I will now turn the call back to Mr. Stevens for his closing comments.
Well, thank you and thank you everyone for participating this morning, we look forward to sharing our fiscal first quarter results with you in early November and hope you have a great rest of the summer and we will look forward to catching up with you then.
The conference has now concluded. Thank you for attending today's presentation you may now disconnect.