Corrected Transcript

04-May-2021

Lancaster Colony Corp. (LANC)

Q3 2021 Earnings Call

Total Pages: 15

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Lancaster Colony Corp. (LANC)

Corrected Transcript

Q3 2021 Earnings Call

04-May-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

William Newby

Analyst, D. A. Davidson & Co.

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MANAGEMENT DISCUSSION SECTION

Operator: Good morning. My name is Casey, 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 2021 Third 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' remarks, after the speakers have completed their prepared remarks, there'll be a question-and-answer period. [Operator Instructions] Thank you. And now, we begin the conference call. Here's Dale Ganobsik, Vice President of Investor Relations and the Treasurer for Lancaster Colony Corporation. Please go ahead, sir.

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Dale N. Ganobsik

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

Thank you, Casey. Good morning, everyone, and thank you for joining us today for Lancaster Colony's fiscal year 2021 third 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.

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

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Lancaster Colony Corp. (LANC)

Corrected Transcript

Q3 2021 Earnings Call

04-May-2021

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 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 third quarter results for fiscal year 2021. I'd like to begin by extending a sincere thank you to the entire Lancaster Colony team for all their contributions and hard work during this past quarter. The record sales and strong financial results are a testament to our team's ability to adapt and deliver despite the 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 and our country's vital food supply chain. In our fiscal third quarter ended March 31, consolidated net sales grew 11.2% to a third quarter record $357 million. Net sales in our retail segment grew 17.1% while net sales in our food service segment advanced 4.6%.

Excluding Omni Baking consolidated net sales increased 13% and Foodservice net sales grew 8.4%. Retail net sales benefited from higher demand as the impact of the pandemic helped increase at home food consumption. Our licensing program continued to grow and we advanced in our efforts to attract and retain new customers for our core brands. The growth was led by Chick-fil-A sauces, Olive Garden dressings and Buffalo Wild Wings sauces.

These products which we sell under exclusive license agreements accounted for nearly 13 percentage points of growth in our retail segment during our fiscal third quarter. Chick-fil-A sauces alone accounted for about 8 percentage points of growth in our retail segment. Our regional roll-out of Chick-fil-A sauces into the retail channel continued as planned during the quarter as we further expanded distribution into the south-eastern and south central United States, adding 11 more states from Texas to the mid-Atlantic.

Per IRI data, the velocity, buy rates and repeat rates for Chick-fil-A sauces continue to meet or exceed our expectations, and we remain very excited about the opportunities that lie ahead. With respect to our own brands, IRI data shows that we grew sales and increased market share in several of our key retail categories during the quarter.

Sales of Marzetti refrigerated salad dressings grew 9% and added 40 basis points of market share. New York Bakery frozen garlic bread grew 10.7% and gained 290 basis points of market share. Sister Schubert's frozen dinner rolls increased 7.6% and gained 10 basis points of market share. These results demonstrate the positive impact of our digital marketing programs that we have put in place to attract and retain new users.

As we emerge from the pandemic and our retail segment begins to lap the demands attributed to greater at-home consumption, we believe our portfolio of retail product offerings has us well-positioned for continued growth. In our food service segment, sales to national account, QSR and pizza chain customers remained a source of strength, representing over 60% of our total Foodservice sales in the third quarter.

NPD Crest data and our firsthand observations suggest that the increasing number of vaccinations and the economic stimulus programs are driving much higher demand for restaurants. Encouragingly this includes strong growth for many of the casual dining concepts in our mix of national account customers as well.

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Lancaster Colony Corp. (LANC)

Corrected Transcript

Q3 2021 Earnings Call

04-May-2021

The base business for the QSR concepts we supply, continues to be robust and we are seeing a notable uptick in their limited time offer menu offerings. Our top tier culinary team and the collaborative approach we take with our customers to develop new menu items remains a key component of the growth and success of our food service segment.

Despite the higher manufacturing costs related to the impacts of COVID-19, our third quarter gross profit grew 17.7% to $90.6 million. This was driven by double-digit sales growth and a more favorable sales mix. As with prior quarters, we continue to follow protocols and guidelines provided by government health authorities.

We also continue to make the necessary investments to promote safe operations at all of our plants and distribution centers. I'll now turn the call over to Tom Pigott, our CFO for his commentary on our third quarter financial results.

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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. Third quarter consolidated net sales increased by 11.2% to $357.2 million.

Excluding Omni Baking sales of $5.3 million in the prior year quarter, consolidated net sales increased by 13%. Omni Baking sales were attributed to a temporary supply agreement. The supply agreement ended on October 31, 2020 as planned. Consolidated gross profit increased by $13.6 million or 17.7% to $90.6 million, the margins expanded by 140 basis points.

The growth was driven by higher sales volume in both segments. Gross profit growth also benefited from lapping of the prior year Foodservice finished goods inventory charge of $4.5 million. In addition, we experienced approximately $3.5 million in lower benefit costs in our cost of goods sold through the quarter.

These lower costs were driven by two factors. First, medical benefit costs were down by approximately $2 million. This decline was driven by reduced claims during the period, as well as a more efficient medical benefits plan. We also made our revision to our vacation policy to make it consistent across facilities.

This change benefited gross profit by approximately $1.5 million. We expect the vacation policy change will continue to provide about that level of favorability for each of the next three quarters and then costs will return to historical levels.

Partial offsets to gross profit growth for higher manufacturing costs including costs related to the impact of COVID-19 as well as the increased costs for outsourced production at co-manufacturers in commodity cost inflation. The COVID-19 related items included about $3.5 million in frontline worker pay and other hard costs for shift separations, expenditures for personal protective equipment and sick leave expenses.

We also incurred staff costs totaling an estimated $1 million. These costs were driven by increased demand and mix changes related to COVID-19. More specifically, these expenses included higher internal freight and distribution costs and utilization of some less efficient production lines to help meet demand.

For your reference, we incurred approximately $1 million in COVID hard costs in the prior year quarter. Selling, general and administrative expenses increased. $6.3 million or 13.3%, driven by higher, primarily by higher spending for Project Ascent. Consolidated operating income, increased by $7.4 million or 24.7% to $37.4 million.

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Lancaster Colony Corp. (LANC)

Corrected Transcript

Q3 2021 Earnings Call

04-May-2021

The key driver of the operating income growth for the quarter was the strong top line performance and the resulting gross profit improvement. Our effective tax rate was 22.6% this quarter versus a tax rate of 27% in the third quarter of fiscal 2020. This quarter's rate benefited from an increase in our research and development tax credit. We estimate the tax credit, tax rate for the fourth quarter to be 24%.

Third quarter diluted earnings per share increased $0.24 to a $1.05. The increase was driven by the underlying performance of the business and a lower tax rate offset by the investment we're making in Project Ascent and lower interest income on our cash holdings. The Project Ascent investment reduced EPS growth by $0.17 per share.

With regard to capital expenditures, first fiscal year-to-date payments for property additions totaled $55.6 million. For our fiscal year ending June 30, we are forecasting total capital expenditures of $110 million. This forecast includes spending related to the expansion project at our Horse Cave, Kentucky facility. This expansion will allow us to meet the fast growing demand for our dressings and sauce products.

The total costs for the expansion is estimated at approximately $130 million with expenditures of $30 million planned for this fiscal year. In addition to investing in our business, we also return funds to shareholders. Our quarterly cash dividend paid on March 31 was $0.75 per share, a 7% increase from the prior-year amount. Our longstanding streak of the annual dividend increase has reached 58 years in December.

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 $211 million cash on the balance sheet. 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 for the long-term potential of the business. Now I'll 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 cost and grow our margins.

And number three, to identify and execute complementary M&A to grow our core. In our fiscal fourth quarter we expect to continue to drive net sales growth. As the country comes out of the pandemic, we anticipate a shift in our net sales mix from retail to food service.

Nonetheless, we expect our retail net sales will continue to benefit from growth in our licensing program. We are also making great progress with expanding distribution of Chick-fil-A sauces in the retail channel. And are pleased to share that last week we began shipping Chick-fil-A sauces to retail locations nationwide.

The impacts of COVID-19 will remain a headwind for our manufacturing cost in our fiscal fourth quarter while commodity costs are projected to remain on an upward trend. We expect our net price realization efforts and ongoing cost savings programs will help to offset these higher cost.

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Lancaster Colony Corporation published this content on 04 May 2021 and is solely responsible for the information contained therein. Distributed by Public, unedited and unaltered, on 04 May 2021 19:24:02 UTC.