Lancaster Colony Corporation (NASDAQ:LANC) Q1 2024 Earnings Call Transcript

Lancaster Colony Corporation (NASDAQ:LANC) Q1 2024 Earnings Call Transcript November 2, 2023

Lancaster Colony Corporation beats earnings expectations. Reported EPS is $1.59, expectations were $1.54.

Operator: 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 2024 First 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. And now to begin the conference call, here is Dale Ganobsik, Vice President of Corporate Finance and Investor Relations for Lancaster Colony Corporation.

Dale Ganobsik: 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 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 at our company’s website, lancastercolony.com, later this afternoon.

For today’s call, Dave Ciesinski, our President and CEO, will begin with the 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 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?

Dave Ciesinski: 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 30th, consolidated net sales increased 8.5% to a first quarter record $462 million, while gross profit increased 9.8% to $108.7 million. As a reminder, last year’s first quarter sales were unfavorably impacted by an estimated $25 million in net sales that had shifted into the quarter ended June 30, 2022, in advance of our ERP go-live. The lower sales reduced last year’s Q1 gross profit by an estimated $5 million. In our retail segment, net sales growth of 8.5% 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 1.4%. The Circana Retail Scanner data showed our licensed sauce products continue to perform very well during the quarter as Chick-fil-A sauces were up 17.6% to $41.4 million. Olive Garden dressings were up 9.6% 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 Bakery’s leading share of the frozen garlic bread category grew 400 basis points to 44.3%. While Sister Schubert’s 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 Marzetti brand, our refrigerated dressing sales have grown to represent a category-leading share of 28.3%. In the Foodservice segment, net sales grew 8.4% on increased demand from 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 food service sales in the prior year quarter, Foodservice segment sales volumes advanced 1.4%. We are pleased to report our Q1 gross profit increased $9.7 million or 9.8%. Our Q1 gross profit margin of 23.6% reflects a sequential improvement of 310 basis points over the prior quarter.

As we move past some of the temporary costs 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 remain core to further improving our financial performance. I’ll now turn the call over to Tom Pigott, our CFO, for his commentary on our first quarter results.

Tom Pigott: Thanks Dave. The results for the quarter reflect continued topline growth and improved gross margin performance. First quarter consolidated net sales increased by 8.5% to $461.6 million, decomposing 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 9.8% 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 shift in customer orders, which we estimate to have been an approximate $5 million tailwind and favorable pricing net of commodities performance, higher volumes and the improved supply chain performance Dave mentioned.

Commodity costs were consistent with the prior year. Selling, general, and administrative expenses increased 4.4% 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 increased 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 2024 to be 23%. First quarter diluted earnings per share increased $0.23 or 16.9% to $1.59. The net impact of the reduction in Project Ascent expenses was favorable by $0.15. With regard to capital expenditures, our full year payments for property additions totaled $18.3 million. For fiscal 2024, 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 returned funds to shareholders. Our quarterly cash dividend of $0.85 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 remained 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. I’ll now turn it back over to Dave for his closing remarks. Thank you.

Dave Ciesinski: 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, accelerate core business growth; two, simplify our supply chain to reduce our cost and grow margins; and three, expand our core 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 costs 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.

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Q&A Session

Operator: [Operator Instructions] Your first question comes from Jim Salera of Stephens.

Jim Salera: Hi guys. Good morning. Thanks for taking our question.

Dave Ciesinski: Good morning.

Jim Salera: I wanted to ask about your visibility into consumer restaurant traffic as we kind of exit 2023 and move into calendar 2024. Should we take the commentary around the select restaurant volume growth to mean that overall restaurants are kind of cautiously optimistic moving forward?

Dave Ciesinski: I think, Jim, we were talking about it more in the context of 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 L52 traffic across all restaurants were flat. L12 restaurants were down 100 basis points, and that was true in the most recent four weeks as well. When you look at QSR traffic, it was growing modestly. And I think what we’re seeing in the most recent period is that traffic is now closer to flat. Full-service restaurants to include — even some of the quick casual concepts are seeing their traffic under more pressure. I mean that’s sort of industry-wide. When you bring it in and you look at our strategic relationships, we’re seeing our QSR customers on balance, 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 remain 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 is in the industry. But I think our partnership with Chick-fil-A and maybe a couple of others provides us a little bit of a tailwind just because of what they’re seeing from a traffic perspective.

Jim Salera: Great. That’s very helpful color. Maybe shifting to retail. Can 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?

Dave Ciesinski: So, another great question. We’re seeing two things. We are seeing requests for increased promotional support. But what I will tell you is it’s not being manifested in the form of you need to reduce your prices because of deflation. I think what they’re seeing in the marketplace is 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 a 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.

Jim Salera: Okay, great. That’s all very helpful. I’ll jump back in the queue.

Operator: Our next question comes from Connor Rattigan of Consumer Edge. Your line is now open.

Connor Rattigan: Hey, good morning. Thanks for the question.

Dave Ciesinski: Hey good morning Connor.

Connor Rattigan: Yes. So, obviously, impressive volume growth for both businesses even when adjusted for the pull forward. And I guess just kind of as you look forward with compares kind of getting tougher, especially in retail, I guess just sort of what is your visibility going forward on volume growth? I mean, I guess should we sort of expect this sustained low single-digit volume growth going forward for the rest of the year?