Lancaster Colony Corporation (NASDAQ:LANC) Q3 2023 Earnings Call Transcript May 6, 2023

Operator: Good morning. My name is Carmen, 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 2023 Third Quarter Conference Call. Conducting today’s call will be Dave Ciesinski, President and CEO; and Tom Pigott, CFO. [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 2023 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 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 third quarter results for fiscal year 2023. In our fiscal third quarter, which ended March 31, and we were pleased to report both record sales and higher profits. Consolidated net sales increased 15.2% to 465 million, while consolidated gross profit improved 37.9% and to 94.2 million. Operating income reached 29.4 million compared to an operating loss of 7.6 million last year. Prior year operating income included a restructuring and impairment charge of 22.7 million. The Retail segment reported Q3 net sales of 247 million, up 16% and driven by the favorable impact of pricing actions to offset inflation and strong volume growth of 6%.

The volume growth measured in pounds shipped was driven by the continued success of our licensing program and double-digit growth for our New York Bakery frozen garlic bread products. In licensing, Buffalo Wild Wings sauces, RV sauces, Chick-fil-A sauces and Olive Garden dressings, all contributed to volume growth. IRI data for our fiscal third quarter showed sales gains from marquee retail brands and notable share gains for our category-leading New York Bakery and Sister Schubert brands. New York Bakery’s leading share of the frozen garlic bread category grew 350 basis points to 43.5%. In Sister Schubert’s leading share of the frozen dinner roll category increased 150 basis points to 53.1%. In our Foodservice segment, net sales grew over 14% to 218 million, driven by pricing actions, volume gains for several national account customers and higher demand for our branded foodservice products.

In total, Foodservice segment volume increased less than 1%. Excluding the sales of some less profitable product lines that were discontinued during the past year, foodservice volume was up over 4%. During Q3, we continued to experience high levels of inflation for raw materials and packaging. That said, through the benefit of our pricing actions, PNOC or pricing net of commodities was favorable versus the prior year. This is a continuation of the trend that began in Q1 of this year in which we were recovering some of the negative PNOC we experienced last year. We also benefited from another quarter of sequential improvement in cost savings attributed to productivity gains. In the quarters ahead, we will maintain our focus on supply chain productivity, value engineering and revenue management to improve our financial performance.

Before I turn it over to Tom, I’d like to extend my sincere thanks to the entire Lancaster Colony team for their ongoing commitment and contributions to our improved operational and financial performance. I’ll now turn the call over to Tom Pigott, our CFO, for his commentary on our third quarter results. Tom?

Tom Pigott: Thanks, Dave. Overall, the results for the quarter reflected continued top and bottom line growth driven by pricing actions that offset inflationary costs, improved supply chain performance and strong volume growth versus the prior year quarter. Third quarter net sales increased by 15.2% to $464.9 million, this growth was driven by pricing and volume, decomposing the 15.2% increase in revenue, 11.3 percentage points were driven by pricing with the remaining 3.9 percentage points driven by volume and a more favorable sales mix. Consolidated gross profit increased by $25.9 million or 37.9% to $94.2 million. The increase in gross profit reflected favorable PNOC improved supply chain performance and higher volume. If you recall, in Q3 of fiscal ‘22, we had negative PNOC as we [indiscernible] the rapid run-up in costs.

We continue to recover those losses – while our commodity inflation was approximately 20% this quarter our pricing actions offset this increase and the prior year shortfall. As it relates to the improved supply chain performance, in the prior year quarter, we experienced a high level of supply chain disruption resulting in higher costs. This quarter, execution improved, and the company generated cost savings that contributed to the improved gross profit performance. Finally, both segments reported volume growth despite the impact of the product discontinuations. Selling, general and administrative expenses increased 18.9% or $10.3 million. The increase reflects higher incentive compensation, investments to support the growth of the business and charges resulting from the settlement of lawsuits.

The investment to support the growth of the business included higher consumer spending and increased brokerage costs. Consumer spending is increasing in the second half to drive volume growth as our product supply position has improved. Expenditures for Project Ascent, our ERP initiative, were down as the project progressed into its later stages. Costs related to the project totaled $7.6 million in the current year quarter versus $10.3 million in the prior year quarter. Consolidated operating income increased $37 million to $29.4 million. In the prior year quarter, we recorded noncash restructuring impairment charges and a benefit for changes in contingent consideration. Together, they netted to a $21.4 million expense. Excluding these items, operating income increased due to strong gross profit growth of the business, partially offset by the higher SG&A costs.

Our tax rate for the quarter was 18.2% versus 40.2% in the prior year quarter. We estimate our tax rate for the fourth quarter to be 23%. Third quarter diluted earnings per share increased $1.06 to $0.89. The increase was primarily driven by the 2 noncash charges in the prior year that I mentioned, which totaled $0.59 and the improvement in the underlying performance of the business. The reduction in project Ascent expenses contributed $0.08 to the EPS growth versus the prior year quarter. With regard to capital expenditures, payments for property additions in the third quarter totaled $22.4 million. For fiscal year ‘23, we are forecasting total capital expenditures of approximately $100 million. This forecast includes approximately $55 million for the completion of the Horse Cave expansion project.

In addition to investing in our business, we also returned funds to shareholders. Our quarterly cash dividend of 0.85 per share paid on March 31 represented a 6% increase from the prior year’s amount. Our enduring streak of annual dividend increases stands at 60 years. Our financial position remains strong as we are debt-free with $82.9 million of cash on the balance sheet. So to wrap up my commentary, our third quarter results reflected improved performance in several areas, resulting in very strong profit 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 – to: one, accelerate core business growth; two, simplify our supply chain to reduce our cost and grow our margins; and three, to expand our core with focused M&A and strategic licensing. In our fiscal fourth quarter, we anticipate retail sales to benefit from our licensing program incremental growth from new products, flavors and sizes that we introduced this fiscal year. And in foodservice, we expect continued volume growth from several of our national chain restaurant customers. It’s worth noting that our consolidated net sales will compare to last year’s fourth quarter that benefited from an estimated 25 million in incremental net sales attributed to the advanced customer orders ahead of our July 1 ERP go-live date for Wave 1.

Cost inflation will remain a headwind to our financial results, but we expect our pricing actions and cost savings initiatives to offset the increased cost. Finally, I’d like to provide you with an update on the implementation phase of our ERP initiative, Project Ascent. As we shared previously, this past July, we successfully completed Wave 1 of the implementation – and in October, we completed Wave 2. During our fiscal third quarter, we successfully completed Wave 3 of the implementation, adding our largest dressing and sauce production facility in Horse Cave, Kentucky to the new system. The implementation went as planned, but as expected, we did incur some incremental cost as production and service were unfavorably impacted by the ERP system cutover process.

I’m happy to report that the team has successfully addressed those issues. We expect to complete the final wave of Project Ascent in the coming months with the implementation phase scheduled to conclude during our fiscal first quarter. I would like to extend my sincere thanks to all of my teammates for their ongoing efforts on this important strategic initiative. This concludes our prepared remarks for today and we would be happy to answer any questions you might have.

Q&A Session

Operator: Thank you. [Operator Instructions] And it comes from the line of Todd Brooks with The Benchmark Company. Please go ahead.

Operator: Thank you. [Operator Instructions] And it comes from the line of Andrew Wolf with C.L. King. Please proceed.

Operator: Thank you. [Operator Instructions] And it comes from the line of Connor Rattigan with Consumer Edge. Please proceed.

Operator: [Operator Instructions] We have a question, one moment, please. We have a follow-up from the line of Andrew Wolf from C.L. King. Please proceed.

Operator: [Operator Instructions] I am not showing any further questions. I will turn the call back to Mr. Ciesinski for his concluding comments.

Dave Ciesinski: Thank you, operator and thank you everyone for your participation this morning. We look forward to sharing with you our fourth quarter results when we are back together in August. Have a great day.

Operator: Thank you again for participating and you may now disconnect.