Lancaster Colony : Fiscal Year 2021 Fourth Quarter Conference Call

Corrected Transcript

26-Aug-2021

Lancaster Colony Corp. (LANC)

Q4 2021 Earnings Call

	Total Pages: 13
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Lancaster Colony Corp. (LANC)	Corrected Transcript
Q4 2021 Earnings Call	26-Aug-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

Todd M. Brooks	Ryan Blaze Bell
Analyst, C.L. King & Associates, Inc.	Analyst, Consumer Edge Research LLC

Gregory Pendy

Analyst, Sidoti & Co. LLC

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MANAGEMENT DISCUSSION SECTION

Operator: Good morning. My name is Andrea, and I will be your conference facilitator today. At this time, I would like to welcome everyone to the Lancaster Colony Corporation Fiscal Year 2021 Fourth Quarter Conference Call. Conducting today's call will be Dave Ciesinski, 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. [Operator Instructions] Thank you.

I would now like to hand the call to Dale Ganobsik, Vice President of Investor Relations and Treasurer for Lancaster Colony.

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Dale N. Ganobsik

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

Good morning, everyone, and thank you for joining us today for Lancaster Colony's Fiscal Year 2021 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 1995. 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, lancastercolony.com, later this afternoon.

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Lancaster Colony Corp. (LANC)	Corrected Transcript
Q4 2021 Earnings Call	26-Aug-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 outlook and strategy. 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 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 fourth quarter and full year results for fiscal year 2021 and look ahead to fiscal year 2022.

I'd like to begin by extending a sincere thank you to the entire Lancaster Colony team for their exceptional efforts and countless contributions throughout fiscal year 2021. The record sales of $1.5 billion and record of gross profit of $387 million reflects the commitment and resolve of our associates to overcome the many challenges posed by the impacts of COVID-19. Throughout the pandemic, we've remained steadfast that our mission is fixed: first, to provide for the health, safety and welfare of our teammates; and second, to ensure that we continue to play our role in our country's vital food supply chain. We continue to monitor the protocols and guidelines provided by government health authorities and make necessary adjustments to promote safe operations at all of our plants and distribution centers.

In our fiscal fourth quarter, which ended June 30, consolidated net sales grew 20.2% to a record $386 million. Net sales in our Retail segment grew 11.4%, while net sales in our Foodservice segment surged 33.3%. The 11.4% growth in our Retail net sales comps to a strong fourth quarter last year when Retail net sales grew 24.5% as the impact of the pandemic drove increase at home food consumption.

Retail net sales in this year's fiscal fourth quarter was driven by our licensing program led by Chick-fil-A and Buffalo Wild Wings sauces. Chick-fil-A sauces alone accounted for over 14 percentage points of Retail sales growth. As planned, our rollout of Chick-fil-A sauces into the Retail channel reached national distribution near the end of April. Per IRI data, the household penetration and repeat rates for Chick-fil-A sauces continue to meet or exceed our expectations. From a sales standpoint IRI scanner data showed that total US sales reached $38.1 million for the 13-week period ended June 27. We remain extremely excited about the outlook for Chick-fil-A sauces in the Retail channel.

With respect to our own brand, per IRI data, we continue to grow market share in several Retail categories during the quarter. This includes market share increases of 480 basis points for New York Bakery frozen garlic bread, 60 basis points for Marzetti produce dips and 75 basis points for our branded croutons. I'd also like to note that compared to two years ago, our fourth quarter Retail sales were up in nearly all of our product categories. When compared to our fourth quarter ended June 30, 2019, excluding all licensed program sales, our fourth quarter Retail sales were up over 10%.

In our Foodservice segment, the significant 33.3% increase in net sales resulted from volume gains throughout our customer base. Sales to leading QSR and pizza chain customers remained robust, while sales to midscale and casual dining concepts recovered notably as we lap last year's weak demand attributed to the impacts of COVID-19. NPD data for foodservice industry shows that while traffic was lower, industry-wide sales for the month ended June of this year had recovered above pre-pandemic levels, exceeding sales for June of 2019 by 8%.

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Lancaster Colony Corp. (LANC)	Corrected Transcript
Q4 2021 Earnings Call	26-Aug-2021

Fourth quarter consolidated gross profit increased 8.5% to a record $96.7 million, driven by the strong sales growth and our ongoing cost savings programs.

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

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Thomas K. Pigott

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

Thanks, Dave. Overall, the results for the quarter exceeded our expectations. As Dave highlighted, the strong top line performance in both segments allowed the company to drive improved bottom line performance. Fourth quarter consolidated net sales increased by 20.2% to $385.6 million. Consolidated gross profit increased by $7.6 million or 8.5% to $96.7 million. The growth was primarily driven by higher sales volume in both segments and improved cost absorption.

In addition, we benefited from commodity driven pricing in our Foodservice segment and from savings related to our vacation policy change that we discussed last quarter. Offsetting this favorability were high raw material costs as well as labor and freight inflation. We also incurred higher co-manufacturing costs as we outsourced production to meet our growing demand.

Gross margins declined by 270 basis points versus the prior year quarter, primarily due to the higher commodity costs in advance of our pricing actions and the mix shift to our Foodservice segment. COVID-19 related costs were consistent year-over-year. Selling, general and administrative expenses increased $6.9 million or 14.2%, primarily driven by higher spending for Project Ascent. We also restored consumer spending and increased our IT investments. These items were partially offset by the lapping of the original Horse Cave expansion write-offs that occurred in the prior year quarter.

Consolidated operating income increased by $742,000 or 1.8% to $40.9 million. The key driver of the operating income growth for the quarter was the strong top line performance, offset by the investment we're making on Project Ascent.

Our effective tax rate was 22.4% this quarter versus a tax rate of 24.6% in the fourth quarter of fiscal 2020. This quarter's tax rate benefited from some reduction to our state tax rate. We estimate the tax rate for the fiscal year 2022 to be 24%.

Fourth quarter diluted earnings per share increased $0.05 to $1.15. The increase was driven by the underlying performance of the business and the lower tax rate, offset by the investment we're making in Project Ascent. The Project Ascent investment reduced EPS growth by $0.13 per share.

With regard to capital expenditures, fiscal year payments for property additions totaled $88 million. This amount was lower than expectations due to the timing of payments for projects we currently have underway. For our fiscal year 2022, we are forecasting total capital expenditures between $170 million and $190 million. This forecast includes approximately $100 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 return funds to shareholders. Our quarterly cash dividend paid on June 30 was $0.75 per share, a 7% increase from the prior year amount. Our longstanding streak of annual dividend increases reached 58 years in December. Even with the investments we're making and the increased dividend payments, our financial position remains very strong as we finished the quarter debt free with $188 million in cash on the balance sheet.

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Lancaster Colony Corp. (LANC)	Corrected Transcript
Q4 2021 Earnings Call	26-Aug-2021

So to wrap up my commentary, this quarter featured strong growth in both segments and solid execution of our strategies across the business. We continue to monitor and adjust to the impacts of the COVID-19 outbreak while investing in the long-term potential of the business.

I will 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: one, to accelerate our core business growth; two, to simplify our supply chain to reduce our costs and grow our margin; and three, to identify and execute complementary M&A to grow our core.

In fiscal year 2022 our Retail segment will have tough comparisons to the strong growth we experienced in fiscal year 2021. Nevertheless, we expect Retail sales will benefit from the growth of our licensing program and other new items. In the Foodservice segment, we anticipate increased consumer demand for in-restaurant dining will lead to higher sales in the coming year.

In fiscal year 2022 we are forecasting a notable increase across the board in commodity costs but particularly in soybean oil. Higher packaging, labor and freight costs will also pose a headwind to our financial results. To help mitigate these rising costs, we have pricing initiatives in place for our Retail segment. From a timing standpoint, pricing in Retail will begin to take effect in late September and early October.

With respect to our Foodservice segment, as many of you are aware, the contracts with our Foodservice customers are written to allow for periodic price adjustments to offset changes in commodity and freight cost. Our ongoing cost savings programs will also help to partially offset the unfavorable impact of inflation in the coming year.

Note that our projected financial results and expectations for fiscal year 2022 remain subject to the impacts of COVID-19, including shifts in consumer demand between Retail and Foodservice channels and potentially higher costs to produce our products and service our customers.

Moving on to our supply chain strategy. Our significant investment in production capacity, our dressing and sauce facility in Horse Cave, Kentucky is moving forward as planned with the target completion timeframe in the first quarter of fiscal year 2023. A smaller expansion project of one of our production facilities located in Columbus, Ohio is on track for completion this December. That project will provide some additional capacity needed to support the growing demand for dressing and sauce products in our Foodservice segment.

Additionally, because of the robust demand we are experiencing across our portfolio, we are evaluating additional ways to expand our supply footprint. To-date, we've increased our use of co-manufacturing. Going forward, we're also evaluating other alternatives.

Given the COVID-related volatility and demand and the tenuous disposition of the global supply chain, we we've elected to defer implementation for Project Ascent, our ERP initiative, to the start of fiscal year 2023. This will allow us to prioritize servicing the shifting demands and growth of our business.

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