Lancaster Colony Corporation (NASDAQ:LANC) Q2 2024 Earnings Call Transcript

Lancaster Colony Corporation (NASDAQ:LANC) Q2 2024 Earnings Call Transcript February 1, 2024

Lancaster Colony Corporation beats earnings expectations. Reported EPS is $1.87, expectations were $1.66. Lancaster Colony Corporation isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).

Operator: Good morning. My name is Diade [ph], 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 Second 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] 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 second quarter conference call. Our discussion this morning may include forward 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 second quarter results for fiscal year 2024. In our fiscal second quarter, which ended December 31, we are pleased to report record financial results, as consolidated net sales increased 1.8% to $485.9 million. Gross profit grew 19% to $121.5 million and operating income increased 28.1% to $65.8 million. I’m very thankful for the effort and commitment by all of our teammates throughout Lancaster Colony that enabled us to deliver these strong results. In our retail segment, net sales growth of 2% was driven by carryover pricing, volume gains for our successful licensing program, continued strong performance for our New York Bakery frozen garlic bread, and increased demand for our Reames frozen egg noodles.

Retail segment sales volume measured in pounds shipped declined 1.9%. Excluding the impact of a product down weighting initiative and our reduced commitment to private label bread, retail sales volume increased 1.2%. Specific to our licensed product, retail scanner data for the quarter showed Chick-fil-A sauces up 6% to $38.7 million and Olive Garden dressings up 2.1% to $34.4 million. Buffalo Wild Wings sauces were about flat at $19.3 million, which compares to a strong quarter last year when sales increased over 26%. Our category-leading New York Bakery frozen garlic bread saw sales growth of 4% to $88.7 million for a share of 43.1. Sales of our Reames frozen egg noodles increased 17.9% to $16.5 million to capture a 70.3 share of the frozen pasta noodle category.

I’m also happy to report that Chick-fil-A refrigerated salad dressings, which we launched nationally last May are also performing well, with scanner data showing $9.4 million in sales during the quarter. When combined with the sales of our Marzetti brand dressings, our refrigerated dressing sales have grown to represent a category-leading 27.7%. In the food service segment, sales growth of 1.5% and was led higher by demand from several of our national chain restaurant accounts along with volume growth for our brand and foodservice products. Foodservice sales volume measured in pounds shipped increased 4.6%. During the period, Foodservice segment net sales were adversely impacted by pass-through price decreases, which resulted from commodity deflation.

During Q2, we were pleased to deliver gross profit of $121.5 million and a gross margin of 25%, an increase 360 basis points versus last year. This increase was driven by favorability in our pricing net of commodities or PNOC following two years of unprecedented inflation, along beneficial impacts of our cost savings initiatives. Our focus on supply chain productivity, value engineering and revenue management remain core elements to further improve our financial performance. I’ll now turn the call over to Tom Pigott, our CFO for his commentary on our second quarter results. Tom?

Tom Pigott: Thanks, Dave. This quarter featured continued top line growth, improved gross margin performance and higher operating income. The gross profit and operating income results exceeded our expectations and set a second quarter record for the company. Second quarter consolidated net sales increased by 1.8% to $485.9 million, decomposing the revenue performance approximately 1.5 percentage points was driven by volume mix and the remainder was driven by pricing. Pricing was favorable in the retail segment, but deflationary in the Foodservice segment due to lower commodity prices. Consolidated gross profit increased by $19.4 million or 19% versus the prior year quarter to $121.5 million. Gross margins expanded by 360 basis points to 25%.

The gross profit growth was primarily driven by favorable PNOC performance and the company’s cost-saving initiatives. Commodity costs were deflationary versus the prior year, remained elevated versus historical levels. Selling, general and administrative expenses increased 9.7% or $4.9 million. The increase reflects investments to support the growth of the business including higher consumer spending and increased brokerage costs. Consumer spending increased versus a low comparative period to support retail segment growth initiatives. Reduced expenditures for Project Ascent, our ERP initiative, partially offset these increases. Costs related to the project continued to wind down, totaling $2 million in the current year quarter versus $7.5 million in the prior year quarter.

Consolidated operating income increased $14.4 million or 28.1%, due to the gross profit improvement, partially offset by the higher SG&A expenses I mentioned. Our tax rate for the quarter was 23.4%. We estimate our tax rate for the remainder of fiscal ’24 to be 23%. Second quarter diluted earnings per share increased $0.42 or 29% to $1.87. The net impact of the reduction in Project Ascent expenses was favorable by $0.15 versus the prior year. With regard to capital expenditures, our year-to-date payments for property additions totaled $37.1 million. For fiscal ’24, our forecasted total capital expenditures remain at $70 million to $80 million. The forecast reflects a decline versus the prior year spending with the Horse Cave expansion project now substantially complete.

In addition to investing in our business, we also returned funds to shareholders. Our quarterly cash dividend of $0.90 per share paid on December 29 represented a 6% increase from the prior year’s amount. Our enduring streak of annual dividend increases stands at 61 years. Net cash provided by operating activities for the second quarter was a robust $105.9 million, driven by the higher net income and reduced working capital. Our financial position remained strong with a debt-free balance sheet and $133.8 million in cash. So to wrap up my commentary, our second quarter results reflected continued top line increases, record gross profit and operating income performance and investments to support further growth. I will 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. The number one, accelerate core business growth; the number two, simplify our supply chain to reduce our cost and grow our margins; and number three, to expand our core with focused M&A and strategic licensing. Looking ahead to our fiscal third quarter, we project retail sales will continue to benefit from our expanding licensing program that will include contributions from the launch of Texas Roadhouse steak sauces. I am also excited to share that we have added Subway as a new partner to our retail licensing program with an initial offering of four different Subway sandwich sauces including their most popular Sweet Onion Teriyaki.

Both Texas Roadhouse steak sauces and Subway sandwich sauces will begin shipping to retailers later this month. In the Foodservice segment, we expect sustained volume growth from select quick service restaurant customers. Deflationary pricing is expected to remain a headwind for Foodservice segment net sales in the coming quarter. With respect to our gross profit, we anticipate some continued favorability in our PNOC. But a sequentially lower level compared to our fiscal second quarter. With respect to our ERP initiative Project Ascent, following the successful completion of the implementation phase during our fiscal first quarter, we are devoting our attention to leveraging the capabilities of this system to strengthen our execution and support our continued growth.

Finally, as we announced in December, we had a change in our Board of Directors effective January 1st of this year with the appointment of Alan Harris as our Chairman replacing Jay Gerlach. Alan has served as a Director on the Lancaster Colony Board since 2008 and was appointed lead Independent Director in 2018. While Jay is stepping down from his role as Executive Chairman, he will remain actively engaged as a Director. I would like to extend my deepest gratitude to Jay for his leadership and many years of dedication to Lancaster Colony both as an Executive and as the Chair of our Board. Jay was appointed to Lancaster Colony’s Board of Directors in 1985 and is the corporation’s longest serving director. I would also like to congratulate Alan on his new appointment.

Both Jay and Alan bring extensive leadership experience and strategic oversight to our Board, which will continue to benefit our company and our shareholders going forward. This concludes our prepared remarks for today and we’d be happy to answer 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, good morning guys. Congrats on a nice quarter. I wanted to start with the inflationary headwind on Foodservice. I think if we back in it’s like a 300 basis point headwind in the quarter. If we think about the back half of the year is that 300 basis point number a good sticking point to think about? Or is it going to increase, decrease as we progress through the year?

Tom Pigott: Hey, Jim. Yeah, it’s Tom. We expect it to increase a little bit. We’re in the 300 to 400 basis point for the back half on Foodservice deflationary.

Jim Salera: Okay. And is that…

Tom Pigott: And maybe Jim just a reminder on that that just as the way it went up when it goes down it’s a mark-to-market pass-through. So it’s no-harm event on gross profit that also drives modest margin accretion as we talked to you about in the past. It’s just one of the nuances of that business in our portfolio.

Jim Salera: Right. Great. Yes that’s helpful. So that’s broad-based across the portfolio. It’s not just like a few key accounts that’s just kind of the whole Foodservice…

Tom Pigott: No. And it’s really driven by our basket of commodities, so soybean oil first among them on that part of the business.

Jim Salera: Okay. Great. Maybe one other question. You guys got a nice lift from PNOC in the quarter obviously. Think about it stepping sequentially down. As we think about back half gross margins, should it be somewhere between kind of 1Q and 2Q’s level? Or do we expect it to step down below what 1Q as well. I think like 23 — 23.5 — first quarter.

Tom Pigott: So, yes. Jim, as we’re — I’ll answer your question kind of as versus prior year. So, if you look at the first half, we were up 200 basis points versus prior year on gross margins. As we look at the back half, we expect it to moderate or more in the 150 to 200, but this is very much dependent on the commodity basket and how things play through. From a tailwind perspective, we are seeing some commodity deflation in our forecast and we’re seeing some nice supply chain productivity results and those are baked into our outlook in the back half.

Jim Salera: Okay. Great. Thanks, guys. I’ll pass it on.

Tom Pigott: Thanks, Jim.

Operator: Thank you. One moment for our next question. Your next question comes from Alton Stump of Loop Capital.

Q – Alton Stump: Great. Thank you. Good morning. I would also echo your comments Dave, as it pertains to Jay, having known him for almost 20 years. Great to hear, that he is taking his next step, but will still be involved with the company and also congrats on the quarter of course, as well.

Tom Pigott: Thank you.

Dave Ciesinski: Thank you. We’ll pass your regards on to Jay.

Q – Alton Stump: Thanks so much. I want to ask about the Subway announcement, which you kind of sit through there pretty quickly there Dave. I mean that’s obviously, it seems like pretty good news if not huge news, you’ve had several major announcements over the last couple of years. I know you talked about this before, but how much of an impact do you think the huge success you’ve had over the last few years with Chick-fil-A is having on whether it’s Texas Roadhouse, Subway Arby’s, et cetera. I would have to think that that has led to an increased incentive for these guys to reach out to you and take maybe something similar to what you’re doing within the Chick-fil-A. I guess maybe just some color on — of this recent snowball of, of course, new sign-ups you’ve got and how much of that you think if not directly certain, indirectly is a result of big success, you’ve had with Chick-fil-A?

Dave Ciesinski: Yes. Yes. I think as we — I’ve shared with a lot of the covering analysts on the phone and you Alton. Olive Garden, was our first foray into the space. And together with Darden Restaurants and Olive Garden, we learned our way through this. And what we learned first and foremost, is that the proposition in retail was relevant. And second, that the proposition could actually be net accretive to the Foodservice business in terms of the positive perception around the brand. Fast forward, as we’ve moved beyond Darden and obviously, continue to nourish that relationship but added Buffalo Wild Wings and Chick-fil-A. I think it’s just allowed us to demonstrate this proposition, a little bit more broadly, Texas Roadhouse was a collaborative conversation.

It was actually brokered by one of our big customers in retail. And then, Subway was one that was an inbound conversation as well. So, it’s an interesting time. And I think, it’s a manifestation of the fact that the lines between retail and Foodservice are blending. We’re seeing more occasions that are at home. And our partners out there in Foodservice are becoming increasingly, open to this idea. And on the retail side, I think our important partners be that Kroger Walmart or [indiscernible] or whoever like the idea of bringing relevant new items to these categories. So it’s — nothing — no tree grows to the moon, but I think our intention here is just to continue to work carefully to look for good partners, where we line up at the values level.

We’re looking for long-term relationships in this space. And we’re going to try to see, how far we can take this. We do have a pipeline of other folks that we’re talking to. We’re not ready to necessarily share with you now, because these conversations take time. And we’re even starting to look at categories, beyond things that are necessarily sold in the restaurant and maybe even other categories that we played in today. So, I would love to tell you, we have another Chick-fil-A on the hook, but I think we all know there’s just one Chick-fil-A out there. But I think this in conjunction, with how we’re thinking about organic innovation and M&A into the future hopefully, will give us a balanced sources of growth for our retail business that allows us to compete in the top quartile of our peer group, and that’s really our long-term aspiration.

Alton Stump: Great. Thanks for that color. And then I guess just as a follow-up on that obviously of course the Horse Cave facility is up and running now. it’s your biggest facility. Is that also playing a role in just being able to be more aggressive and signing new partners? Because obviously I think you had some pretty meaningful capacity constraints prior to that facility opening.

Dave Ciesinski: Well, that’s correct. We were constrained on retail bottle capacity. And then also just the SAP implementation created a lot of organizational noise. So one of the things that we’ve been happy to be able to focus on in fiscal year 2024 is just really getting back to basics of focusing on good execution. The theme for this fiscal year is execute to grow. And I think it captures the essence of both elements there, right? Good execution in our plan, focusing on our GMPs, be they safety and quality. Good execution in the plant around productivity and then making sure that we do this in a way that we can work our way through the external circumstances with where consumers are to achieve growth at the higher end of our peer group.

Alton Stump: Great. And then one last one and then I’ll hop back in queue. I guess this is probably for Tom. But Tom just to make sure on your comments on the gross margin front because if you look at the first half of the year the bulk of that as you mentioned a 200-plus basis point growth came here in 2Q. So, as I think by your comments about 150 to 200 basis points, you used to say that basically that you think that the back half could be similar to maybe a bit lower of an increase year-over-year versus the full first half of the year just not a huge increase obviously 350 basis points I think if my math is right that was all in 2Q. Am I right on that?