Q1 2024 Lancaster Colony Corp Earnings Call
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Good morning, My name is Lauren 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 'twenty 'twenty four first quarter conference call conducting today's call will be David Osinski, President and CEO and Tom to get CFO.
All lines have been placed on mute to prevent any background noise. After the speakers have completed their prepared remarks, there will be a question and answer period. If you would like to ask a question. During this time simply press star one one on your telephone keypad and questions will be taken in the order that they are received if you'd like to withdraw your question Press Star one.
One again thank you.
And now to begin the conference call here is Dale can object, Vice President of corporate Finance and Investor Relations for Lancaster Colony Corporation.
Good morning, everyone and thank you for joining us today for Lancaster colony's fiscal year 2024 first quarter conference call.
Our discussion. This morning May include forward looking statements, which are subject to the safe Harbor provisions of the private Securities Litigation Reform Act of 1095.
These statements are subject to a number of risks and uncertainties that could cause actual results to differ materially and the company undertakes no obligation to update these statements based upon subsequent events.
A detailed discussion of these risks and uncertainties is contained in the company's filings with the SEC.
Also note that the audio replay of this call will be archived and available on our company's website.
<unk> 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 Pigott. Our CFO will then provide an overview of the financial results.
Dave will then share some comments regarding our current strategy and outlook.
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 first quarter results for fiscal year 2024.
In our fiscal first quarter, which ended September 30, consolidated net sales increased eight 5%.
First quarter record $462 million, while gross profit increased nine 8% to $108 7 million.
As a reminder, last year's first quarter sales were unfavorably impacted by an estimated $25 million and net sales that had shifted into the quarter ended June 32022.
In advance of our ERP go live.
Lower sales reduced last years Q1 gross profit by an estimated $5 million.
In our retail segment net sales growth of eight 5% was led by continued strong performance of our successful program for license sauces, and dressings and another solid quarter for our New York bakery frozen garlic bread products, excluding the impact of the sales shift that reduced.
Retail sales in the prior quarter retail segment sales volume measured in pounds shipped increased one 4%.
So Sarah Connor retail scanner data showed our licensed SaaS products continue to perform very well during the quarter as Chick Fil a sources were up 17, 6% to $41 4 million.
Olive garden dressings were up nine 6% to $39 million and Buffalo Wild wings sauces were up 25, 9% to $20 8 million.
Our category, leading New York Bakery and sister Schubert brands also increased their market share during the quarter.
New York Bakeries, leading share of the frozen garlic bread category grew 400 basis points to 44, 3%, while sister Schubert share of the frozen dinner roll category increased 80 basis points to 54, 1%.
I'm also happy to report that Chick Fil, a refrigerated salad dressings, which we launched nationally last may are also performing well with $10 million in retailer sales during the quarter.
When combined with our <unk> brand, our refrigerated dressing sales have grown to represent a category leading share of 28, 3%.
In the Foodservice segment net sales grew eight 4% on increased demand for many of our national chain accounts. In addition to solid sales growth for our branded foodservice products.
Excluding the impact of the sales shift that reduced foodservice sales in the prior year quarter Foodservice segment sales volumes advanced one 4%.
We are pleased to report our Q1 gross profit increased $9 7 million or nine 8%.
Our Q1 gross profit margin of 23, 6% reflects a sequential improvement up 310 basis points over the prior quarter as we move past some of the temporary cost associated with strategic investments and increased capacity at our facility in horse Cave, Kentucky, and our new ERP network.
Our focus on supply chain productivity value engineering and revenue management remains core to further improving our financial performance.
I will now turn the call over to Tom Pigott, our CFO for his commentary on our first quarter results.
Thanks, Dave the results for the quarter reflect continued topline growth and improved gross margin performance.
First quarter consolidated net sales increased by eight 5% to $461 $6 million.
<unk> the revenue performance revenue was favorably impacted by approximately 600 basis points from last year's sales shift.
Higher net pricing contributed approximately 140 basis points of growth.
The remainder was driven by volume.
Consolidated gross profit increased by $9 7 million or nine 8% versus the prior year quarter to $108 $7 million.
The gross profit growth was driven by the favorable impact of Comping to the prior year shifting customer orders, which we estimate to have been an approximate $5 million tailwind.
Favorable pricing net of commodities performance higher volumes and the improved supply chain performance Dave mentioned.
<unk> costs were consistent with the prior year.
Selling general and administrative expenses increased four 4% or $2 2 million.
The increase reflects investments to support the growth of the business as well as higher personnel costs.
The investments to support the growth of the business included higher consumer spending and increased brokerage costs consumer.
Spending increase to be more in line with historical levels versus a low comparative period as our product supply position has improved.
Expenditures for project ascent, our ERP initiatives were down partially offsetting these increases.
Costs related to the project totaled $3 $8 million in the current year quarter versus $9 2 million in the prior year quarter.
Consolidated operating income increased $7 5 million or 15, 2% due to the gross profit improvement, partially offset by the higher SG&A expenses I mentioned.
Our tax rate for the quarter was 23, 7%, we estimate our tax rate for the remainder of fiscal 'twenty four to be 23%.
First quarter diluted earnings per share increased 23, or 16, 9% to $1 59.
The net impact of the reduction in project percent expenses was favorable by 15.
With regard to capital expenditures, our full year payments for property additions totaled $18 $3 million.
For fiscal 'twenty four we are forecasting total capital expenditures of $70 million to $80 million.
This forecast reflects a decline versus the prior year spending with the horse cave expansion now substantially complete.
In addition to investing in our business. We also turned to funds to shareholders. Our quarterly cash dividend of <unk> 85 per share paid on September 30th represented a 6% increase from the prior year's amount.
Our enduring streak of annual dividend increases stands at 60 years.
Our financial position remains strong with a debt free balance sheet and $73 $7 million in cash.
So to wrap up my commentary our first quarter results reflected continued topline increases improved gross profit performance and investments to support further growth.
Now I'll turn it back over to Dave for his closing remarks. Thank you.
Thanks, Tom as we look ahead Lancaster colony will continue to leverage the combined strength of our team our operating strategy and our balance sheet in support of the three simple pillars of our growth plan.
To one accelerate core business growth to simplify our supply chain to reduce our cost and grow margins and three expand our core with focused M&A and strategic licensing.
In our fiscal second quarter, we anticipate retail sales will continue to benefit from our expanded.
Licensing program, including incremental growth from new products flavors and sizes, we introduced in fiscal 2023.
In the Foodservice segment, we anticipate continued volume growth from select customers in our mix of national chain restaurant accounts.
Regarding inflation, while our input costs remain high in total we do not anticipate a significant impact from inflationary cost in the upcoming quarter versus the prior year period.
With respect to our ERP initiative project ascent. Following the successful completion of our final implementation wave in August we are now devoting our attention to leveraging the capabilities of the new system to strengthen our execution and support our continued growth.
In closing I'd like to thank the entire Lancaster colony team for all their hard work this past quarter and their ongoing commitment to our business. This concludes our prepared remarks for today and we'd be happy to take any questions you might have.
At this time I would like to remind everyone in order to ask a question. Please press star one on your telephone keypad, one moment for the first question.
Your first question comes from Kim <unk> of Stephens.
Hey, guys. Good morning, Thanks for taking my question.
Good morning.
Yes.
Yes, I wanted to ask about your visibility.
Into consumer restaurant traffic as we kind of exit 2023 and move into calendar 2020 for.
Should we take the commentary around the select restaurant volume growth to mean that overall restaurants or kind of cautiously optimistic moving forward.
I think Jim that we were talking about it more in the context of our our relationships with our customers. What I would tell you is if we look at some of the more recent traffic data.
What I would tell you is <unk> 52 traffic across all restaurants were flat out 12 restaurants were down 100 basis points and that was true.
In the most recent four weeks as well when you look at <unk>, our traffic it was growing modestly and I think what we're seeing in the most recent period is that traffic is.
It's now closer to flat full service restaurants to include <unk>.
Even some of the quick casual concepts are seeing their traffic under more pressure.
I mean, thats sort of industry wide when you bring it in and you look at our strategic relationships.
Our <unk> customers on balanced sort of consistent with broader trends performing in line with what I described and then we have customers like Chick Fil, a which are continuing to buck the trend and seeing their traffic remained even stronger so as we sort of bring it in and we talk about how do we see things I think we're going to obviously experience.
What everybody else's in the industry, but I think our partnership with <unk> and maybe a couple of others provides us a little bit of a tailwind.
Just because of what they are seeing from a traffic perspective.
Great that's very helpful color.
Maybe shifting to retail could you just give us some context around what the promotional environment looks like have you seen retailers coming to you guys asking for maybe more discounting or more pricing competition across some of the other peer groups in your categories.
So another great question, we're seeing two things we are seeing request.
For increased promotional support but what I will tell you is it's not been manifest in the pharma you need to reduce our prices because of deflation I think what what they're seeing in the marketplace. It's the same thing that we are that our basket of goods from an inflation perspective has normalized right. We're no longer seeing the inflation.
That we were before but we're not seeing deflation to the point, where it feels like they can squeeze us for trade. We are seeing some of our peers start to increase but I think what we're looking at more closely is what's going to happen with private label.
Okay, Great. That's all very helpful I'll jump back in the queue.
One moment for our next question.
Our next question comes from Connor <unk> of consumer edge. Your line is now open.
Hey, good morning, Thanks for the question.
Hey, good morning Connor.
Yeah. So so obviously impressive volume growth for both businesses, even when adjusting for the pull forward and I guess, just kind of as we look forward with compares kind of getting tougher, especially in retail I guess just sort of what is what is your visibility going forward volume growth.
I guess can you sort of expect that sustained low single digit volume growth going forward for the rest of the year.
It's a great question, because we're all watching the same macro information start to roll in for all of the food and discretionary spending in <unk>.
And all outlet channels.
We still feel opt.
Optimistic that we're in a position to deliver low single digit growth.
And that's principally going to be coming in the form of volume.
Because we have a little bit of price in Q1, but youre going to see the impact of that price sort of work itself out as we go forward. So we see it right now we continue to feel that we can deliver low single digit growth led by volume.
Awesome. Thanks, guys and then also just to quickly follow up on Jim's question as well.
I guess, there's been some concern that 2020 for margins will just be I guess, we'll call. It flat to modestly up right. I mean, I guess, just trying to get a sense for sort of how you guys feel on margins sort of coming out of the out of out of <unk> I mean it.
It doesn't really sound like you've seen much relief on the cost front I mean, I guess do you guys feel like Youre at a good place to really make progress on margins this year.
Yeah, Great question, So I think.
The overall outlook is consistent with what you said.
To slightly up on margins from.
A tailwind standpoint, we've got a nice productivity program, we're kicking in our value engineering program and so that should help us.
But.
On the commodity basket has neutralized, we're not seeing the inflation now we're not seeing deflation yet when we look at the total basket.
So the key watch outs for us as we hit on already earlier in the call is kind of the pressure to spend back.
And Thats, a TBD for us overall, but I think overall, we are we've got a lot of <unk>.
Initiatives to try to drive more margin growth, but we're cautious about our outlook given kind of some of the macro trends we've hit on.
Got it makes sense thanks, guys.
Thank you.
One moment for our next question.
Our next question comes from Andrew Wolf of C. L. King Your line is now open.
Thank you good morning.
Also Andrew.
Hi.
I would like to follow up.
On pricing and promotional outlook.
So maybe a different way.
Ask about it is it.
Things are finally hitting normal.
First are there how has wage rate inflation, which I guess is that.
Leave is the second biggest factor cost.
That's still normal just as we kind of think about.
Regardless of the pricing power, what's going on with your cost structure.
Any other input.
Alright.
Energy or anything else and the cost structure.
Both controllable scaling up horse cave, and perhaps not controllable.
Input costs.
Yes, when you so.
When you look at the other drivers we.
From our perspective.
We're still seeing higher than historic labor inflation, but not like we saw.
Couple of years ago, or a year ago. So that's that's moderated to low to mid single digit and then as we look at the rest of the basket.
We're looking at similar rates of inflation impacting our P&L and that's where.
Our cost savings program kicks in and the only other.
One off is the depreciation from the horse cave expansion, which just started to hit our P&L.
And we will continue to be.
Amortized over the future years.
Got it so.
Can you just sort of the normalization theme.
So it sounds like your own spending consumer spending direct spendings.
Normal.
Getting there.
Just could you frame your pricing conversations with.
The retailers in particular.
Yes.
In that sense I mean can you go to them with your cost structure.
Do you have in the past and said, yes commodity costs are flat, but we still got this or are they how are they kind of nomura to hear that given.
Where the volume has been for the industry.
And lastly, just kind of revisit your your own view on promotion.
Promotional.
You want to be.
With the advent.
On the shelf with the retailers.
Sure.
<unk> got a couple of things here I wanted to make sure I got my notes strike Andrew.
Your first question was how are we thinking about inflation and the need to pass on pricing and maybe to build on Tom's point, what we're seeing as you look at our basket of commodities Theyre essentially flattening out we are seeing some modest inflation on labor, that's a little bit harder higher excuse me than normal, but we feel like we're able to offer.
Set that with our productivity program. So if you put this together, we don't expect margin headwind per se from inflation be it the commodity.
The basket or from things like labor.
So then you start pressing forward and you think about the retailers won't we don't think that there's a need for us to go in and to talk about elevated pricing and for reasons that I'll get into here in a second we think that it could probably be disadvantageous and maybe the way I would frame. This is that I think our economy, we think are.
Economy right now is at a transition point not an inflection point, but a transition point, that's really being brought about by the end of the era of free money I think all of us have been doing it long enough that we can remember back when interest rates were at normalized level and so I think what we're looking at the context that we're framing this whole situation.
And is this idea of at the end of the era of free money.
And what we're seeing then is manifest in the form of resumption of elevated interest rates on credit card debt and other things that people are buying on time that the resumption of student loans. The end of emergency pandemic benefits such as child tax credits and enhanced snap benefits in <unk>.
When you put all of that together for our consumers. This end of this era.
A free money I think what we're finding is that families are sitting down and their reworking their sources and uses of cash and they're having to make trade offs and I think what we're starting to see now is depending on where they sit in the economic strata its starting to bite some consumers and families before others, but I think all of them are starting to sit down and look at <unk>.
And uses.
For some of those families that are saying, hey, I want to work more hours to be able to cover that cost up let's say student loan resumption in the case of others. They may be saying I want to do that and by the way I also need to start to think about making choices and trade offs across everything that theyre spending on from experiences to food to discretionary items.
Now this brings us into your question on promo I think the way we're thinking about it.
Is that in this environment now, it's a transition environment from where we are to where we're going it's going to be really imperative that for us managing brands every one of our brand leaders our sales folks need to be looking at there their consumer value equation. The features the benefits the brand right over the <unk>.
Just to make sure that in this new environment that we're transitioning to that we continue to bring a relevant value proposition.
Consumers are in the process they are not talking about it but they're doing this right now and I think for everybody that place in our space, we need to be stepping back and asking ourselves some of those fundamental questions and to the degree to which we see our value proposition is under pressure then we'll think about using things like trade or or marketing.
Or even things like shopper marketing in store.
Our price pack architecture, and things like that but the way we're really thinking about this we're trying to take maybe a little bit more of a strategic view because we don't.
Don't really think this is going to be a one year or a one quarter thing I would submit that what we're working our way into again isn't an inflection point like 2007 and 2008. This is a transition point, where we just need to make sure that we're continuing to offer a relevant value proposition.
Great I guess that's really.
Helpful.
Wood.
Youre earlier, Dave you mentioned private label I assume that.
That's sort of the big event.
Completely unknown, but the degree to which those private label substitution.
<unk> is a big driver of some of the responses.
Yeah. So I think it's really it's a watch out so if you look at some of the most recent data what youre seeing is that the private at the growth of share.
Private label is still somewhat modest right. So youre not seeing a big run to private label and I would go back to the fact that this transition away from free money is starting to by consumers in certain.
Mcgrath <unk> segments more than others and they are making trade offs in some cases. They just may be go into shop in different outlets, where they feel like they can get value in some cases. They may start to look at things like private label for us as we think about our brands.
The stuff that we've done.
All of us that have been doing it a wireless I can remember brands like <unk>, where we knew we had to have certain price gaps versus private label, because if we crept above those price gaps are brand was under pressure right. So that was the and this is now we need to be doing the same thing on our brands all of our brands within the context of this environment to make sure the value proposition is.
In the absolute but it's also right versus those other substitutes, whether it's private label or another brand.
Alright, Thank you I appreciate it.
Of course.
One moment for our next question.
Your next question comes from Todd Brooks of the Benchmark Company. Your line is open.
Hey, Thanks, good morning, gentlemen.
Good morning, Todd.
Wanted to dig in on the licensed branded product a little bit first I was wondering if you have at your fingertips arby's.
Number for Q1, you talked about the other three key brands.
Give me a second here.
Dale if you get a fuller I do feel free.
Yes.
Yes.
Yes, so for.
For the quarter, Todd It was about $3 million.
Okay, great. Thanks Daryl.
Sure.
Follow up and why I needed that data point.
Don't think maybe understood about the business I wanted to explore is.
Is there a certain seasonality to demand for these products between.
The September quarter in the June quarter, because I know, we saw last year, but I thought some of that may have been around.
Horse cave interest ramping into the new facility, but again with FEMA.
A sequential downtick of about.
Hi, My estimate.
Almost $7 million.
Here in the September quarter.
Can we talk about seasonality for those products and then I've got a follow up along that same line of questioning.
My my intuition is that this really is a seasonal business.
Our seasonal business.
<unk> is a great example of a highly seasonal business, where we're going to see a spike over Thanksgiving and Christmas and another spike over Easter we're going to see if we were talking about gravy in the old days that would be a business with a big seasonal spike.
With most of our sources.
I think youre going to see that it's more level loaded across periods. I think what you are likely to see that may be driving periods, where it's higher and periods. When it's lower a couple of things one when we launched the items a lot of time, we get a lot of elevated display end caps that will drive a spike so when we lap that it could come across as as something.
That's unique that's going on but really it's we're just lapping a period of launch and now it's just selling off of the shelf.
I do think that you may see brands like Buffalo Wild wings that that you'll see more focus on around March madness and football than you will in others like barbeque items I think it'll move maybe more consistent with that olive garden dressing I wouldn't expect that to be terribly seasonal.
Let's say a.
A year round business, there's a little bit of a spike on salads. After the first of the year when everybody decides to go on a diet.
But again thats, a little bit of a one off there that I would point to.
Okay, Great and then my follow up.
Is can.
Can you.
Dave or Tom can you snapshot for us if we look at the.
Licensed branded product portfolio.
Entering the end of this year versus the end of <unk>.
And the last calendar year and 'twenty two.
Can we review how much broader the offerings are.
Whether it's pack size flavors, but also distribution.
<unk> allows you to open up.
Different channels of distribution and then maybe we can segue into a discussion of.
Growth outlook for these products across full fiscal 'twenty four.
Sure. So why don't I try to do it I think when you look at the business overall.
The change that we're talking about in Q1 for all of our licensing was about $26 million and about 30% 30% of growth. So we continue to feel pretty good about the growth from the proposition.
Overall.
Now, bringing it into some of the specific products I'll try to work on that for you off the top of my head here.
I think if you go back into the spring period of last year, we launched <unk>.
It would've been fall of last year, we launched 24 ounce size.
For Chick Fil, a and then on the heels of that we came out with the barbecue in the sweet and spicy sriracha that really started to go more broadly in distribution not in the fall, but in the spring in the spring for chip for life. We also launched the salad dressings and produce that we talked about the four flavors of those.
And I mentioned on the call there that we did for this quarter $10 million of retailer sales on those items as you go round on Buffalo Wild Wings. If my memory serves me we launched two items.
Incremental new flavors, there on Olive Garden, we launched our Caesar, which is we're very pleased with how it's doing in the marketplace.
And we.
We announced the launch of Texas Roadhouse on the last call, but obviously thats not into the marketplace, we don't expect that to be out.
Until later in this fiscal year as we had showcase for you. So you add all that together, what's that maybe seven or eight skus that we brought probably the hardest driver of those skus is that 24 ounce, where we're seeing very nice growth loyal consumers are trading up to the larger size, but all of them are our contribute.
In some measure so hopefully that kind of gives you an idea of what we're doing in terms of growth we brought to the marketplace phase between the fall and the spring in terms of capacity I would say at this point, we have enough capacity to continue to facilitate the growth of both our own brands and bottles and licenses.
So we have no limitations there.
We are limiting the number of shifts that we're.
Seen in some of these facilities. So in horse cave. So if we saw an opportunity really to go we would be able to add more shifts step to sell.
Just a minute.
Sorry, yes.
Yes, I mean overall, we feel really good about the platform. If you go back to 'twenty two.
We generated.
28% growth in terms of net sales we generated around 30 in 'twenty three and we expect to continue to drive strong growth behind this platform.
Enabled by all of those new items that Dave mentioned as well as the horse cave capacity expansion and as the base gets bigger obviously the size of the period on period growth numbers will get smaller we're not going to continue to grow at those sort of rates now that this is growing into it.
A material piece of business for us.
So with capacity stone horse.
<unk> opportunities around.
Channels that you may have differed before.
Club, maybe especially with some of the larger pack sizes, where do we stand on that.
And there was some work kind of.
Pre pandemic on the drug and dollar channels.
Don't know, where we are now for kind of reopening and revisiting those opportunities I think you had really good success drug with the quarter.
Olive garden SKU, if I remember correctly. So I was just wondering about distribution expansion as a source of growth.
Sure. It continues to be an opportunity, but one of the unique features of our licensed partnership is that our partners are able to weigh in and talk about what what channels. They want their their products and in what channels. They don't so we don't always have the same degree of latitude that we might like.
What I can point to more recently is olive garden has.
We are building distribution and the.
But the drug channel.
And it's continuing to perform well.
And in dollar as well Buffalo Wild wings were taken into club, we're going to have some rotations going on this fall that we're excited about.
With Costco and some of the others. So this is very much an active and ongoing discussion, but maybe the nuance here Todd is that we.
We have to bring our partners along in these discussions and each of them has maybe different feeling.
<unk> about.
Which channels they want their brand in maybe the.
Easiest way to describe it but this also becomes scenario, where our sales team and our marketing team works to educate these are restaurant operators are smart sophisticated people, but they are really not in the CPG space. So part of the idea of the partnership as we work with them to bring them along can't push them, but we work with them to bring them alone.
Okay.
Perfect very helpful. Thanks, guys.
Of course, thanks, Doug.
One moment for our next question.
Your next question comes from Alton Stump of loop capital. Your line is open.
Allison Your line is open.
Great.
How often might be having a technical difficulty so.
We could certainly bring them back if you'd like to go to the next caller operator, if theres anyone else want to ask a second round here.
Right.
Sure.
As a reminder to ask a question. Please press star one one on your phone.
Like we said.
Alright, if there are no further questions. We will now turn the call back to Mr. Stefanski for his concluding comments.
Thank you and thank you everybody for joining us. This morning, we know it's a busy time with lots of companies reporting so thank you for joining us.
We look forward to talking to you in February when we report our second quarter results have a great rest of the day.
Thank you for your participation in today's conference. This does conclude the program you may now disconnect.
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