Lancaster Colony Corporation (NASDAQ:LANC) Q3 2024 Earnings Call Transcript

Lancaster Colony Corporation (NASDAQ:LANC) Q3 2024 Earnings Call Transcript May 2, 2024

Lancaster Colony Corporation misses on earnings expectations. Reported EPS is $1.03 EPS, expectations were $1.42. 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 Tawanda 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 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 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. You may begin.

Dale Ganobsik: Good morning, everyone, and thank you for joining us today for Lancaster Colony’s Fiscal Year 2024 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 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 strategy and outlook. At the conclusion of our prepared remarks, we’ll be happy to answer any questions you may have. 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 2024. In our fiscal third quarter, which ended March 31st, we were pleased to report record net sales and gross profit as consolidated net sales increased 1.4% to $471.4 million and gross profit grew 10.9% to $104.5 million. Operating income increased 19.5% to $35.1 million, driven by solid growth in the underlying performance of the business. This was partially offset by the impact of charges arising from the decision to exit our perimeter of the store bakery product lines, specifically Flatout and Angelic Bakehouse, which reduced operating income by $14.7 million. In our retail segment, net sales growth of 30 basis points was driven by volume gains for our successful licensing program, led by Chick-fil-A sauces and dressings, Olive Garden dressings, and our newly introduced Subway sandwich sauces and Texas Roadhouse steak sauces.

Retail segment volume measured in pound shipped increased 1.5% driven by the growth from licensed items and investments in trade spending that drove household penetration gains across our portfolio. Excluding the impact of product down weighting initiatives and sales attributed to Flatout and Angelic Bakehouse product lines that we exited, Q3 retail sales volume increased 2.8%. Circana retail scanner data for the 13 week period ending March 31st shows our brands, including licensed items, performed very well, with consumption measured in pounds growing 5.6%. The increased consumption was driven by three primary factors. First, we successfully invested in promotional activity to drive trial and household penetration across a range of our brands.

Second, our consumer-relevant licensed brands continued to deliver strong consumption behind notable gains for Chick-fil-A dressings and sauces, Olive Garden dressings, in addition to new contributions from the launches of Subway and Texas Roadhouse sauces. And finally, we experienced a modest benefit in retail consumption attributed to the shift in Easter timing for holiday favorites, such as Sister Schubert Rolls and Marzetti Dips. Circana’s retail scanner data for the quarter showed Chick-fil-A sauces up 8.3% to $42.8 million, Olive Garden dressings up 7.5% to $41.3 million, Buffalo Wild Wings sauces were down 2.6% to $26.1 million, but compared to a strong quarter last year when sales increased 47.9%. New York Bakery garlic bread was up 5.8% to $94.7 million, resulting in a category-leading market share of 44.3%.

Sister Schubert’s brand was up 13% to $35 million and extended its leading share to 55.5% in the frozen general category. And finally, we were pleased to share that Chick-fil-A refrigerated salad dressings, which we launched nationally last May, continue to perform well with Circana’s data showing sales of $10.8 million and a 7.9% share of the category. When combined with the sales of our Marzetti brand salad dressings, our refrigerated dressing market share has grown over 5 percentage points to a category leading 28.7%. In the food service segment, net sales growth of 2.6% was led higher by demand from several of our national chain restaurant accounts and volume gains for our branded food service products. Food service sales volume measured in pounds shipped increased 3.9%.

As anticipated, the food service segment net sales growth was adversely impacted by pass-through price decreases during the quarter due to commodity cost deflation. During Q3, we were pleased to deliver record gross profit of $104.5 million and a gross margin increase of 190 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, as well as the beneficial impacts of our cost savings initiatives and volume growth. Our focus on supply chain productivity, value engineering, and revenue management all remain core elements to further improve our financial performance. Before I turn it over to Tom, I would like to share a few additional comments regarding Lancaster Colony’s recent decision to exit our perimeter of the store bakery lines, specifically Flatout and Angelic Bakehouse.

Both brands were typically sold in the deli section of the grocery store. Unfortunately, due to a lack of scale and direct-to-store distribution capabilities, we were not able to achieve the required operational or financial performance for these product lines, and subsequent efforts to sell these product lines were unsuccessful. I can assure you this was a very difficult decision with 80 of our employees impacted by the closures of our Flatout facility in Saline, Michigan and the Angelic Bakehouse facility in Cudahy, Wisconsin. Since the announcement of the plant closures on March 12th, we’ve provided financial assistance and outplacement support for the impacted employees. I extend my sincere thanks to all of them for their dedication and commitment to our business during their time with us.

With our exit from these product lines now complete, we intend to direct even greater focus towards categories where we believe we have strategic scale such as dressings and sauces and focus scale such as frozen bakery. 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. This quarter, the company was able to achieve top-line growth, improved gross margin performance, and higher operating income despite the impacts of the product line discontinuations that Dave mentioned. The net sales and gross profit results set fiscal third quarter records. Third quarter consolidated net sales increased by 1.4% to $471.4 million. Decomposing the revenue performance, approximately 2.9 percentage points was driven by volume mix. This growth was partially offset by deflationary pricing in our food service segment and promotional trade spending investments in our retail segments. These reductions in revenue were funded through commodity input cost favorability. Consolidated gross profit increased by $10.3 million or 10.9% versus the prior year quarter to $104.5 million.

Gross margins expanded by 190 basis points to 22.2%. The gross profit growth was primarily driven by favorable PNOC performance, the company’s cost savings initiatives, and volume growth. These drivers were partially offset by a $2.6 million inventory write-down recorded in our cost of goods sold, resulting from our decision to exit the Flatout and Angelic product lines. Commodity costs were deflationary versus the prior year, but remained elevated versus historical levels. Selling, general, and administrative expenses decreased 11.8% or $7.6 million to $57.2 million. The decrease reflects reduced expenditures for Project Ascent, our ERP initiative. Costs related to the project continued to wind down, totaling $1.9 million in the current year quarter versus $7.6 million in the prior year quarter.

In addition, we had lower legal expenditures this quarter versus a heightened level in the prior year quarter. As Dave mentioned, the company chose to exit the Flatout and Angelic product lines during the quarter. As a result, we recorded restructuring impairment charges of $12.1 million related to these exits, as well as the $2.6 million write-down of inventories recorded in our cost of sales. The restructuring impairment charges, which consisted of impairment charges for fixed assets and intangible assets, one-time termination benefits, and other closing costs were not allocated to our two reportable segments due to their unusual nature, whereas the $2.6 million write-down of inventories was recorded in our retail segment. The non-cash portion of these charges totaled $10.7 million.

The Flatout and Angelic product lines combined reported $15.5 million in net sales through the first three quarters of the year and did not have a significant impact on profitability. Consolidated operating income increased $5.7 million or 19.5% due to the gross profit improvement and the SG&A reduction, partially offset by the exit costs I previously mentioned, which totaled $14.7 million. Our tax rate for the quarter was 23.2%. We estimate our fiscal Q4 tax rate to be 23%. Third quarter diluted earnings per share increased $0.14 or 15.7% to $1.03. The exit cost drove a $0.41 decline in EPS, $0.34 of which was charged for restructuring impairment and the remaining $0.07 was charged to cost of goods sold. The reduction in Project Ascent cost drove a $0.16 increase in EPS.

The remaining $0.39 of EPS growth was driven by the underlying performance of the business. With regard to capital expenditures, our year-to-date payments for property additions totaled $52 million. For fiscal 2024, our forecasted total capital expenditures are estimated to be approximately $65 million. This forecast reflects a decline versus the previous year’s spending with the Horse Cave expansion now complete. In addition to investing in our business, we also return funds to shareholders. Our quarterly cash dividend of $0.90 per share paid on March 29th 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 third quarter was $75.9 million, a $32.2 million increase versus a prior year quarter.

Our financial position remains strong with a debt-free balance sheet and $164.8 million in cash. So, to wrap up my commentary, our third quarter results reflected record top line in gross profit performance. Operating income also grew nicely despite the charges I mentioned and we took action to streamline our product offerings to provide more focus for future 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 three simple pillars of our growth plan. So, one, accelerate core business growth. Two, to 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. Looking ahead to our fiscal fourth quarter, we project retail net sales will continue to benefit from our expanding licensing program, including incremental growth from the recent additions of Subway and Texas Roadhouse sauces. In the food service segment, we expect continued volume growth from select QSR customers and our branded food service products.

Deflationary pricing is projected to remain a headwind for food service segment net sales. With respect to our gross profit, we anticipate reduced PNOC favorability in fiscal Q4 when compared sequentially to Q3 as commodity deflation becomes less pronounced. Gross profit will continue to benefit from our ongoing cost savings program. In closing, I would 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 this past quarter. 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: Thank you. [Operator Instructions] Our first question comes from the line of Brian Holland with D.A. Davidson. Your line is open.

Brian Holland: Yes, thanks. Good morning. Dave, [Multiple Speakers] Typically in the press release, you make reference to kind of below the top line, whether that’s PNOC and the favorability there or just commodity cost inflation. So forgive me if I missed that somewhere, but if not, maybe just an update on kind of where you see that going into 4Q? And maybe more broadly the balance of calendar year 2024?

Dave Ciesinski: Okay. So, I want to make sure I understand your question, Brian. Are you asking just for our view on PNOC through Q4 and then the remainder of the calendar year?

Brian Holland: Yes, yes.

Dave Ciesinski: Yes. So as you noticed, in the most recent quarter, PNOC was an important contributor in Q3. And we expect PNOC to be a contributor into Q4, but it’s ultimately going to be diminishing as we’re lapping more and more of those price increases and we’re seeing commodities flatten out. Tom, I don’t know if you want to provide[Multiple Speakers]

Tom Pigott: I think that — so Brian, this quarter we saw some nice deflation as we get into Q4. We don’t expect as much PNOC favorability. That said, we do expect nice contributions from our cost savings initiatives, which is also driving the margin growth you saw in the quarter. And we expect that to be — continue to help us drive margin as we get out into the future.

Brian Holland: Okay, thanks. That’s helpful. And then maybe skipping right into kind of a bigger picture question, but if I pair the perimeter bakery exit that you disclosed this morning and you’re coming out of this period of heavy capital investment. I mean — we talk about refocusing –reallocating resources, increased focus elsewhere. Maybe update on kind of what the pipeline looks like from an M&A standpoint. I guess, one thing that I would sort of take from this is, are these guys clearing the deck to do something? Which I understand you can’t announce beforehand, but just kind of curious — that’s my takeaway. So I don’t know if that’s something you want to throw cold water on that’s not possibly related or maybe just a sense of what the M&A backdrop and pipeline look like for you all in what is obviously a challenging environment for food right now?

Dave Ciesinski: Yeah. So, maybe Brian — I appreciate that question. I’ll start by just providing a little bit more texture about the decision regarding Angelic Bakehouse and Flatout. So, those two businesses were purchased in 2015 and 2016, respectively, predicated on assumptions of growth in the perimeter of the store. And the reality is, as we worked our way through those businesses, what we found is that, one, they lacked scale, and three, we lacked the capabilities that we believe you really need to win in that part of the store, which is, direct to store distribution capabilities. And as it sort of played out from period to period, in spite of our very best efforts, one day you’re on display exactly where you’re supposed to be and it looks awesome, and the next day some of your items are near the cat litter.

As we looked at those businesses versus a lot of our others, for example, that are more tightly planogrammed in frozen or in dry grocery or even in produce. The combination of the fact that they lack the right scale, we didn’t have the right capabilities, just made it a really tough situation. And our view was discretion is the better part of valor. We’ve given it a good try, let’s back away from this and let’s move on and really focus on our core. What this wasn’t was a grand review of our whole portfolio as much as it was us just looking at these two businesses that we liked a lot, but we just couldn’t get to work and we moved on. So, as far as our view on M&A, maybe I’ll turn it over to Tom. Tom, if you want to talk about where we intend to focus on a go-forward basis.

Tom Pigott: Absolutely. So Brian, I think, over the last few years we’ve evolved our M&A strategy to really focus in on our core competencies and dressings and sauces. So certainly we feel like we’ve got good culinary expertise in that space, really good manufacturing with the Horse Cave expansion, and then a strong retail selling arm to enable us to really to do better in that space on M&A should the right opportunities come to us. In addition, from a deployment of capital, we continue to look at cost savings initiatives, things that can reduce our reliance on labor, as well as opportunistically, how can we continue to support the growth algorithm. With Horse Cave behind us, we’re starting to look at kind of the next phase of expansion and could there be potential brownfield sites or other opportunities for us to support continued growth, providing good returns to shareholders?

Brian Holland: Great. Appreciate all that color. I’ll leave it there for now. Thank you.

Dave Ciesinski: Okay. Thanks, Brian.

Operator: Please stand by for our next question. Our next question comes from the line of Alton Stump with Loop Capital. Your line is open.

Alton Stump: Great. Thank you and good morning. Thanks for taking my questions. I guess the first I want to ask — I apologize if I missed this time, but did you mention what your overall basket as far as commodities, how much they were down during the quarter?

Dave Ciesinski: Yes, they were — I didn’t mention it, but they were down in the mid to high single digits on a percentage basis.

Alton Stump: Okay, great. And then, I guess, I just kind of look ahead to fourth quarter or even to next year. I mean, any kind of ballpark range as far as where you think that’s [indiscernible]?

Dave Ciesinski: Yes. So right now in Q4, we do expect it to be deflationary, but not as deflationary as it was in Q3. So as we mentioned, we don’t expect as big a PNOC contribution in Q4. That said, into the future, we continue to focus on driving margins through our productivity initiatives and we feel good about the pipeline there. From a fiscal 2025 commodity outlook, we’re right now looking at a flattish profile.

Alton Stump: Okay, great. Thank you. And then, I just want to ask you about the Horse Cave plan, obviously, it’s been up and running now, I guess here for the last eight, nine months. So that now that you are further along in that process, how are things going there? Are you up to full, kind of operational capabilities yet or just kind of what has been your learning curve over the last couple of quarters since opening that facility?

Dave Ciesinski: Yes. So Alton, really two things. If you go back to a little more than a year ago, not only did we stand up the facility, but we also installed SAP, as you remember. So we really put that facility, our flagship, through an intense period of change, and we’re pleased to report that the factory is running very well, that we’re seeing the volumes run through there that we would like to see. We’re seeing very high engagement from the employees. It continues to be a big area of focus from our supply chain leadership team, just because of the magnitude of the promise that that facility affords us. In some of my earlier comments during the script, I mentioned the idea that by exiting the perimeter of the store, it allowed us to focus in a couple of areas.

One, our center of the store bakery business where we have focused scale, particularly around dinner rolls and things like garlic toast, but also focus on areas where we believe we have strategic scale, where I would put our capabilities, our ability to source and manufacture and ship against many of the very biggest players in CPG. So we can’t compete against them across the board, obviously. But when you talk about those categories, dressings and sauces, which for lots of reasons we could talk about maybe a little bit later on the call, we believe are really relevant today and into the future, that plant is really a cornerstone of our ability to deliver on that strategic scale, and it’s coming along very much in line with our expectations.

Alton Stump: Great, thank you so much, Tom and Dave. I’ll hop back in the queue.

Operator: Thank you. Please stand by for our next question. Our next question comes from the line of Connor Rattigan with Consumer Edge. Your line is open.

Connor Rattigan: Hey, guys. Good morning.

Tom Pigott: Good Morning.

Dave Ciesinski: Good morning, Connor.

Connor Rattigan: Yes. So, I guess I’m curious what you’re seeing as it relates to food service traffic. So, we’ve heard commentary on the peers and even the restaurant reporters. It just seems like traffic is really down across the board. I guess, are you guys seeing the same thing in your business? And if no, I suppose that may be driven by your Chick-fil-A exposure. And if you are, I guess what gives you the confidence that you can continue to deliver that volume growth in food service over the coming quarters?

Dave Ciesinski: I’m glad you asked this, Connor. It’s an important question. So we subscribe to a range of different syndicated data sources. And when you look at the whole industry broadly and you look at it 52 weeks, 12 weeks, four weeks, you can see a very modest slowdown and it’s across the board. You see full-service restaurants have pulled back modestly, QSR has pulled back modestly, these are our single digit pull backs that we’re looking at here. And it’s really impacting all of our customers. Everybody in the mix is being impacted by this. It’s kind of step back and say, what is it that’s driving this? Our view is that, consumers are continuing to work their way through a period of transition. Not an inflection, but a period of transition, driven by the combined effects of higher interest rates, but importantly, inflation, which is continuing to bite.

And whether you’re talking retail or food service, what really happens in these times is, consumers are really — they go off autopilot instead of just going to the store and grabbing what they’ve always bought because they’ve always bought that or pulling into the restaurant because that’s the place that they’ve always gone, they start to think about these choices. And consequently, sometimes they might buy, and sometimes they might consider buying somebody else. So if you look at it very, very broadly, we are seeing that modest single-digit slowdown across the portfolio. Foods — full service impacted more than quick service, but across the board. Now as far as our view, what we’ve seen in these times is our business has really two hedges built in.

One is, as consumers become concerned about away from home dining and they eat at home, it typically endures to the benefit of our portfolio. As we look at what’s happening away from home though, importantly, as traffic starts to moderate at any one of our concepts, or really any operator’s concept period, they typically will back off and say, what do we need to do to drive traffic back into these stores? And it really creates an intense period of innovation for a lot of these operators. And if passed this prologue, we get those calls, and we work with them on signature items, signature sauces that they can advertise to drive traffic back into the store. What I would share with you, Connor, is that, we’re already starting to see that activity happen and we’re already engaged in those sorts of discussions with our operators.

So what I would tell you, our view on the business is, we believe that we’re always going to be positioned to have the chance to perform in the top quartile of our peer group. And we continue to believe that that’s true a year and a half ago, and we believe that it’s true going forward.

Connor Rattigan: Got it. Thanks for the color there. And then I guess just changing gears to pricing. So it looks like pricing was down roughly the same in food service and at retail. So I understand food services primarily pass through pricing and that was expected to be down year-over-year, but I guess, could you maybe give us some color on maybe what’s going on in retail [indiscernible] pricing down so much? Because I mean, in the data that [indiscernible] it looks like you’re dialing up too, too much promo. So I guess just trying to get a sense of where we should expect prices to trend in food service and retail over the coming quarters?

Dave Ciesinski: Yes. No, I’m glad you asked this question. They were down about the same amount, but it was more a coincidence, and it was necessarily a plan. We didn’t say, Okay, we’re going to back them up. A couple of things that we’ll share with you. Tom, I think nicely pointed out that we are seeing favorable PNOC as commodities have backed off. That’s given us the incremental firepower to step into the consumer part of the business, the retail business, and to do a couple of things. I mentioned the fact that in these times consumers take themselves off autopilot and they start to look at more carefully what they’re buying. In some cases it’s a price point, in other cases it might be a gap versus private label or even a promoted price point.

And what we’re doing is using the benefit that we’re seeing from the PNOC deflation to strategically invest back to make sure that as consumers come off autopilot and they’re making these choices, we’re still getting converted into the basket. So that was really one component of the spend. But the other thing is, really as you look longer term, we have some great brands in our portfolio, both our own core brands and our licensed brands that we think have the opportunity to drive significantly more household penetration. So some of the investment that we’re driving this period behind a range of brands to include things like Chick-fil-A and others were intended to help us drive household penetration, because if we can get it into the basket and we can get it at home and get consumers to try it, our repeat rates on these products are extremely high and we think it’s in our strategic best interest to continue to drive that process.

So really two components of what we’re doing ultimately funded by PNOC deflation. One part is just being really shrewd about managing our price points. But the second is, while we have the opportunity, let’s invest to drive that penetration, because we know once we get them converted, it becomes — if we treat them right, it becomes an annuity.

Connor Rattigan: Yes, it makes total sense to me. Thanks for the color. As always, I appreciate it.

Dave Ciesinski: Of course. Thank you.

Tom Pigott: Thank you.

Operator: Please stand by for our next question. Our next question comes from the line of Andrew Wolf with CL King. Your line is open.

Andrew Wolf: Hi, good morning.

Dave Ciesinski: Good morning.

Tom Pigott: Good morning, Andrew.

Andrew Wolf: I have a couple of follow-ups here. On the Subway and the Texas Roadhouse distribution, is that fully distributed? Was it fully distributed in the quarter or…

Dave Ciesinski: It was not.

Andrew Wolf: Okay. Can you give us [Multiple Speakers]

Dave Ciesinski: We started to ship it early on in the quarter, so it’s still building.

Andrew Wolf: Okay. And is it going to get the same similar ACV as the other licensed products, like Chick-fil-A and Olive Garden, or — I mean there’s two different…

Dave Ciesinski: It really remains to be — they’re different brands, they’re different occasions so it remains to be seen. So I don’t know if I can give you a firm answer there in that. We don’t necessarily –Texas Roadhouse for example plays in a much more narrow occasion, the steak sauces compared to, let’s say, an all-purpose sauce like some of the others that we have. So I think that’ll probably impact at some level. Certainly the TDPs that we’re able to generate behind these items, but they’ll be important.

Andrew Wolf: Thank you. And you mentioned cost savings a couple times, and I know in the past you talked about value engineering and just sort of reviewing some of your other things. I think strategic procurement, many companies, including yourselves, are focused on that. Could you just give us a sense how impactful these types of cost savings efforts were? Probably more importantly are some — what’s the runway like for them going out?