Fiscal Year 2022 First Quarter Conference Call

Corrected Transcript

03-Nov-2021

Lancaster Colony Corp. (LANC)

Q1 2022 Earnings Call

	Total Pages: 11
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Lancaster Colony Corp. (LANC)	Corrected Transcript
Q1 2022 Earnings Call	03-Nov-2021

CORPORATE PARTICIPANTS

Dale N. Ganobsik	Thomas K. Pigott
Vice President-Investor Relations & Treasurer, Lancaster Colony Corp.	Vice President, Chief Financial Officer & Assistant Secretary, Lancaster
David A. Ciesinski	Colony Corp.
President, Chief Executive Officer and Director, Lancaster Colony Corp.

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OTHER PARTICIPANTS

Ryan Blaze Bell

Analyst, Consumer Edge Research LLC

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MANAGEMENT DISCUSSION SECTION

Operator: Good morning. My name is Cheryl 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 First Quarter Conference Call. Conducting today's call will be Dave Ciesinski, President and CEO; and Dave Pigott (sic) [Tom Pigott] (00:22),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. [Operator Instructions] Thank you.

And now, to begin the conference call, here is Dave Ganobsik, Vice President of Corporate Finance and Investor Relations for Lancaster Colony Corporation.

Ladies and gentlemen, this is the operator for today's call. We apologize for the inconvenience. However, Lancaster Corporation's conference call has been delayed. This call is expected to resume momentarily. Until that time, your lines will again be placed on hold. Thank you for your patience.

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Dale N. Ganobsik

Vice President-Investor Relations & Treasurer, Lancaster Colony Corp.

Good morning and sorry for the delay. Thank you, everyone, for joining us today for Lancaster Colony's Fiscal Year 2022 First quarter Conference Call.

Our discussion this morning may include forward-looking statements, which are subject to the Safe Harbor provisions of the Private Securities Litigation Reform Act of 1995. These statements are subject to a number of risks and uncertainties and could cause actual results to differ materially, and the company undertakes no obligation to update these statements based upon subsequent events. A detailed discussion of these risks and uncertainties is contained in the company's filings with the SEC.

Also note that the audio replay of this call will be archived and available on our company's website, lancastercolony.com, later this afternoon.

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Lancaster Colony Corp. (LANC)	Corrected Transcript
Q1 2022 Earnings Call	03-Nov-2021

For today's call, Dave Ciesinski, 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. At the conclusion of the prepared remarks, we'll be happy to respond to any of your questions. Once again, we appreciate your participation this morning.

I'll now turn the call over to Lancaster Colony's President and CEO, Dave Ciesinski. Dave?

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David A. Ciesinski

President, Chief Executive Officer and Director, Lancaster Colony Corp.

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 2022. I'd like to begin by expressing my sincere and heartfelt thanks to everyone here at Lancaster Colony for their tremendous efforts and ongoing commitment to servicing our customers and growing our business.

In our first fiscal quarter ended September 30, consolidated net sales grew 12.3% to a record $392 million. Net sales in our Retail segment grew 15.6%, while net sales in our Foodservice segment advanced 8.1%. As expected, we experienced significant cost inflation during the quarter that reduced our profit before our pricing initiatives took full effect. The 15.6% growth in Retail net sales comps to a strong first quarter last year, when Retail net sales grew 16.6% as the impacts of COVID-19 drove increased at-home food consumption.

Retail sales growth in this year's first fiscal quarter was driven by our licensing program, led by Chick-fil-A sauces and Buffalo Wild Wings sauces. The sales for those two product lines combined to account for nearly 13 percentage points of growth for the Retail segment in the quarter. IRI scanner data for the 13-week period ending September 26 showed total US food sales of Chick-fil-A sauces at $35.1 million, and sales of Buffalo Wild Wings sauces at $13 million.

Olive Garden dressings remains another bright spot in our licensing program, as it continues to gain market share in the $2.1 billion shelf-stable dressing category. Per IRI, Olive Garden dressings grew their category share to 6.3% during the quarter.

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

In our Foodservice segment, excluding the Omni Baking sales attributed to a temporary supply agreement that ended October 31 last year, net sales increased 10.1%. The increase in net sales was driven by inflationary pricing and volume growth for our branded Foodservice products.

Excluding inflationary pricing, sales volumes to our national chain restaurant customers were similar to last year. Foodservice operators industry-wide are facing the challenges of a tight labor market, product supply issues, and rising costs. NPD CREST data for US Foodservice industry shows that weekly transactions for the quarter ending September 30 were pacing ahead of last year through mid-August, and then fell slightly below prior-year levels for the remainder of the quarter.

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

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Lancaster Colony Corp. (LANC)	Corrected Transcript
Q1 2022 Earnings Call	03-Nov-2021

Thomas K. Pigott

Vice President, Chief Financial Officer & Assistant Secretary, Lancaster Colony Corp.

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

First quarter consolidated net sales increased by 12.3% to $392.1 million. This growth was driven by consolidated volume growth of approximately 5%, pricing primarily in our Foodservice segment, and favorable revenue mix.

Consolidated gross profit decreased by $300,000 to $92.4 million. Gross profit benefited from the volume and pricing actions. These benefits were offset by a significant amount of commodity inflation. Our raw material costs were up in the mid-teens on a percentage basis. This commodity inflation, in excess of our pricing, was the primary driver of the 290 basis point gross margin decline we reported in the quarter.

As we've shared, our planned retail pricing will be fully reflected in the second quarter. In addition, our Foodservice pricing lagged the commodity increase during the quarter. Beyond the significant commodity inflation, we incurred higher co-manufacturing costs as we outsourced additional production to meet our growing demand, as well as higher freight and warehousing costs and labor inflation. These increases were partially offset by reduced costs related to COVID-19 and our productivity initiatives.

Selling, general, and administrative expenses increased $3.7 million or 7.6%. The largest driver of the increase was Project Ascent, which was up $1.1 million. Other increases included investments in personnel and business initiatives to support growth.

Consolidated operating income declined $8.4 million or 17.2% versus the prior-year quarter to $40.5 million. The main driver of the reported operating income decline was the prior year's net $4.5 million benefit for the special items related to the Bantam Bagels business. These items included a $5.7 million favorable reduction in contingent consideration and a $1.2 million intangible asset impairment charge, as specified on our income statement. Excluding these items, our operating income was lower due to the modest gross profit decline and the increase in SG&A expenses.

Our effective tax rate was 24.4% this quarter versus a tax rate of 24.3% in the first quarter of fiscal 2021. We estimate the tax rate for fiscal 2022 to be 24%. First quarter diluted earnings per share decreased $0.24 to $1.11. The decrease was primarily driven by the prior-year favorable impact of the Bantam special items I mentioned previously. These items benefited prior-year EPS by $0.13 a share. In addition, costs related to Project Ascent reduced this quarter's EPS growth by $0.03 per share. The remainder of the decline related to the underlying performance of the business.

With regard to capital expenditures, first quarter payments for property additions totaled $30.2 million. For our fiscal year 2022, we are forecasting total capital expenditures between $170 million and $190 million. This forecast includes approximately $105 million for the Horse Cave expansion project that will help us meet the increasing demand for our dressings and sauce products. In addition to investing in our business, we also returned funds to shareholders.

Our quarterly cash dividend of $0.75 per share paid on September 30 represented a 7% increase from the prior- year amount. Our enduring streak of annual dividend increases currently stands at 58 years. Even with the investments we are making and the increased dividend payments, our financial position remains very strong, as we finish the quarter debt-free with $130 million in cash on the balance sheet.

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Lancaster Colony Corp. (LANC)	Corrected Transcript
Q1 2022 Earnings Call	03-Nov-2021

To wrap up my commentary, this quarter featured strong top line growth and significant inflationary impacts in advance of our full pricing actions. We continue to monitor and adjust for the inflationary cost increases we are forecasting this year while investing in the long-term potential of the business.

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

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David A. Ciesinski

President, Chief Executive Officer and Director, Lancaster Colony Corp.

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. Number one, to accelerate our core business growth; number two, to simplify our supply chain, to reduce our cost, and grow our margins; and number three, to identify and execute complementary M&A to grow our core.

In our fiscal second quarter, we expect our licensing program to remain an important source of growth in the Retail segment. Our Foodservice segment should continue to benefit from higher demand for our Foodservice products and growth from select QSR and pizza chain customers. We anticipate the inflationary environment will continue as we face higher commodity costs, particularly for soybean oil, along with increased costs for packaging, freight and labor. Inflationary pricing, including Retail segment pricing actions that took effect near the end of our first fiscal quarter, combined with additional pricing in the Foodservice segment, will help to partially offset the input cost inflation.

Our ongoing cost savings programs and other net price realization efforts will also serve to reduce the unfavorable impact of inflation in the quarter. Note that our projected financial results and expectations remain subject to the impacts of COVID-19, including shifts in consumer demand between the retail and Foodservice channels, industry-wide supply chain challenges and inefficiencies, and higher costs to produce our products and service to our customers.

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

Given the strong growth we are experiencing across our portfolio of products, we are continuing to evaluate other alternatives to add production capacity and grow our manufacturing footprint. Finally, consistent with the update that we shared with you in our fourth quarter earnings results back in August, the implementation phase of our ERP project, Project Ascent, is scheduled to begin in the first quarter of fiscal year 2023.

This concludes our prepared remarks for today, and we'd be happy to answer any questions you may have. Cheryl?

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