Lancaster Colony Corporation (NASDAQ:LANC) Q4 2023 Earnings Call Transcript

Lancaster Colony Corporation (NASDAQ:LANC) Q4 2023 Earnings Call Transcript August 23, 2023

Operator: Good morning. My name is Tanya, 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 Fourth Quarter Conference Call. Conducting today’s call will be Dave Socinski, 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 2023 fourth 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 for fiscal 2024. 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 fourth quarter results for fiscal year 2023. In our fiscal fourth quarter, which ended June 30, consolidated net sales increased 50 basis points to a fourth quarter record $455 million, while gross profit declined $5.2 million to $93.2 million. As a reminder, last year’s fourth quarter included an estimated $25 million in incremental net sales or 6% of the total, which were attributed to advanced orders ahead of our ERP go-live on July 1, 2022. These incremental sales added about $5 million to last year’s Q4 gross profit. In our retail segment, net sales increased 1.3%, driven by the favorable impact of pricing actions to offset inflation and continued growth from our licensing program.

Excluding the prior year advanced ordering ahead of our ERP go-live, retail sales volumes measured in pounds shipped increased 1.7%. Given these period-on-period shifts, it’s informative to look at retailer scanner data as a barometer of our retail business. During the quarter ending June 30, retailer consumption for our branded products measured in pounds was up 4.7%, led by growth in our licensing program. Circana data, formerly IRI, showed notable share gains in the quarter for our category-leading New York Bakery and Sister Schubert brands. New York Bakery’s leading share of the frozen garlic bread category grew 180 basis points to 42.3%, and Sister Schubert’s leading share of the frozen dinner roll category increased 200 basis points to 56.1%.

Our licensed products also continued to perform very well during the quarter as Chick-fil-A sauces were up 28% to $43.7 million, Olive Garden dressings were up 15.8% to $42.6 million, and Buffalo Wild Wings sauces were up 43.1% to $20.7 million. I’m also happy to report that Chick-fil-A sauces were recently recognized by Circana as a new product pay setters. In calendar year 2022, Chick-fil-A sauces were the fastest-growing retail food item in the food and mass channels, generating more than $140 million in retail sales. In the Foodservice segment, net sales were essentially flat at $218 million and compared to a significant increase of 28% in last year’s fourth quarter. In addition to the impact of last year’s advanced ordering, which comprised about 8%, foodservice sales also reflect a modest slowdown in traffic for some of our national chain customers.

During Q4, we continued to experience high levels of inflation for raw materials and packaging. Although we did note a considerable decline in the rate of inflation compared to the first 3 quarters of fiscal year 2023. Through the benefit of our pricing actions, our Q4 PNOC, or pricing net of commodities was favorable versus the prior year. This is a continuation of the trend that began in Q1 of fiscal year 2023, whereby we are recovering some of the prior year’s negative PNOC. Q4 gross profit fell short of our expectations as we incurred some temporary costs associated with our long-term strategic investments in production capacity and our ERP network. These issues have since been resolved, and we look forward to the many benefits these investments will provide our business in years ahead.

Our focus on supply chain productivity, value engineering and revenue management will also remain core elements to improve our financial performance during fiscal year 2024 and beyond. I’ll now turn the call over to Tom Pigott, our CFO, for his commentary on our fourth quarter results.

Lisovskaya Natalia/Shutterstock.com

Tom Pigott: Thanks, Dave. The results for the quarter reflected continued top line growth and favorable pricing net of commodities performance versus the prior year quarter. These positive contributions were offset by 3 items; comping to the prior year quarter’s customer pull forward of shipments in advance of our SAP go-live. Short-term challenges we experienced in our gross profit performance that Dave mentioned and a noncash impairment charge we recorded in our flat-out business. Fourth quarter consolidated net sales increased by 50 basis points to $454.7 million. Decomposing the revenue performance, revenue was unfavorably impacted by approximately 5.9 percentage points from the pull forward, while higher pricing contributed 6.4 percentage points of growth.

Consolidated gross profit declined by $5.2 million or 5.3% to $93.2 million versus the prior year quarter. The gross profit decline was driven by comping to the prior year’s pull forward of customer orders, which we estimate to have been an approximate $5 million headwind, start-up costs at our recently expanded Horse Cave dressings and sauce facility, interim inefficiencies at facilities we recently added to our SAP network and costs related to a discontinued product line. These unfavorable impacts were partially offset by favorable pricing net of commodity performance. Our commodity inflation was approximately 9% this quarter, reflecting some moderation in the level of year-over-year inflation we experienced. Selling, general and administrative expenses increased 4.7% or $2.6 million.

The increase reflects investments to support the growth of the business as well as higher IT and personnel costs. The investments to support the growth of the business included higher consumer spending and increased brokerage costs. Consumer spending increased in the second half as our product supply position has improved. Expenditures for Project Ascent, our ERP initiative, were down, partially offsetting these increases. Costs related to the project totaled $5.6 million in the current year quarter versus $11 million in the prior year quarter. During the quarter, we recorded a $25 million noncash impairment charge to reduce the carrying value of our flat out, flatbread businesses and tangible assets. The impairment charge was reflected in our Retail segment.

In the prior year quarter, restructuring impairment charges totaled $10.5 million. Consolidated operating income decreased $22.2 million to $11.5 million due to the impact of the impairment charge as well as the lower gross profit and higher SG&A costs I mentioned. Our tax rate for the quarter was 26.4%, the tax rate was impacted by lower pretax income due to the impairment charge. We estimate our tax rate for fiscal ’24 to be 23%. Fourth quarter diluted earnings per share decreased $0.73 to $0.33. The year-over-year impact of the restructuring and impairment charges was unfavorable by $0.41 per share. The net impact of the reduction in Project Ascent expenses was favorable at $0.15. With regard to capital expenditures, our full year payments for property additions totaled $90.2 million.

For fiscal ’24, we are forecasting total capital expenditures of $70 million to $80 million. This forecast reflects a decline versus the prior 2-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 June 30 represented a 6% increase from the prior year’s amount. Our full year dividend payments were $92.4 million and our enduring streak of annual dividend increases stands at 60 years. The company was able to fund the capital investments and dividend payments through its operating cash flow generating ability. Operating cash flow totaled $226 million on the year. Our financial position remains strong with a debt-free balance sheet and $88.5 million in cash.

So to wrap up my commentary, our fourth quarter results reflect a continued investment in the company as well as some short-term challenges we incurred as we position the company 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 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 fiscal year 2024, we anticipate retail segment sales will continue to benefit from volume growth led by our licensing program, including incremental growth from new products, flavors and sizes we introduced in fiscal year 2023. We’re also very excited to share our plans to add Texas Roadhouse Steak sauces to our licensing program with a spring launch date.

Finally, we foresee continued positive momentum for our New York Bakery frozen garlic bread, which is a tasty complement to everyday meal occasions. In Foodservice, we expect sales volumes to be led by growth from select QSR restaurant customers in our mix of national accounts. Suffice it to say, external factors, including U.S. economic performance and potential changes in consumer sentiment may impact Foodservice segment demand. Finally, consolidated net sales will also continue to benefit from pricing actions taken in fiscal year 2023. We project the impact of inflationary cost to subside notably in the coming year. The pricing actions we have implemented, along with our cost savings initiatives will help to offset remaining inflationary cost.

With respect to our ERP initiative, Project Ascent, we are pleased to announce that as planned, we completed the final wave of implementation, and we’ll devote our attention to leveraging the capabilities of the new system to strengthen our execution in fiscal year 2024. Turning to our supply chain. We are very excited about the opportunities ahead under the leadership of Luis Viso, our new Chief Supply Chain Officer. Luis has built a long and successful career with nearly 40 years of experience in supply chain operations, innovation and R&D. His extensive experience in the food and beverage industry at Kraft Foods, Coca-Cola and Monster Beverage as well as his strong people-oriented leadership will benefit our organization tremendously as we continue to execute our growth strategy into fiscal year 2024 and beyond.

In closing, I’d like to thank the entire Lancaster Colony team for all their hard work and ongoing commitment to our business during fiscal year 2023. I look forward to working together with everyone in the coming year as we continue our journey to be the better food company. This concludes our prepared remarks for the day, and we would be happy to answer any questions you might have.

See also 20 Most Consumed Candies in the US and 15 Countries That Own the Most U.S. Debt.

Q&A Session

Operator: [Operator Instructions] And our first question is coming from Todd Brooks of the Benchmark Company. Your line is open.

Todd Brooks: Two quick questions, if I may, to start off. One, I think, Dave, at one point as we were thinking about Horse Cave and the incremental unlock that facility may have been for the licensed branded product. I think you have been sized somewhat the $100 million range, but that was over a couple year period. Can we maybe either speak to what the incremental unlock was in fiscal ’23, so we can start to bake in, thinking for what the incremental potential is from license branded products, the capacity and the product line expansions in ’24. And then maybe if we can lay over the top of it, the thinking about Texas Roadhouse and just talk more broadly about your thoughts for growth in the license branded products in fiscal ’24.

Dave Ciesinski: Sure. So Todd, when we talked about what Horse Cave have afforded us, we framed it in the context of we thought somewhere in the range of 3 to 5 and even upwards of 7 years of growth for both retail and foodservice with 5 years of growth being sort of the target that we thought that it would afford us. So going back. So it would be definitely north of $100 million of capacity to grow in retail behind bottles. We won’t go into exact numbers of that. But we’d love to take you down there to show you the facility to give you an appreciation for the scale and capabilities. But as you think about it, based on what we see and the way it’s running today, it’s definitely going to give us 5 years of growth, maybe a little bit longer, maybe a little bit shorter, but it definitely gives us capacity on bottles to grow.

Now how do we think about this platform going forward? You’ve been following us long enough to remember we saw it as literally billions of dollars of addressable opportunities if you put in dipping sauces, marinades barbecue sauces, things like ranch dressing and other categories, you could size it somewhere between probably 6 and upwards of even $10 billion of addressable opportunity. And you see us sort of sequentially working our way through that. First, in the portable salad dressing category, which is north of several billion dollars in the center of the store, and we’re adding to that, behind Olive Garden with our new addition in Caesar, which we couldn’t be more excited about. Then you move on to other areas, building on to the platform with new sauces behind Chick-fil-A, the barbecue and the sweet and spicy sriracha, also in the period adding bigger sizes on Chick-fil-A, which we’re thrilled to see how it’s performing, and then finally, expanding behind Buffalo Wild Wings.

What Texas Roadhouse is going to give us is a solution for really the red meat occasion or if you look at the majority of our sauces right now, they tend to play around chicken and things like fish, but we really haven’t had a red meat solution and what Texas Roadhouse is going to give us is, first of all, just an iconic a restaurant brand that’s been one of — consistent and one of the fastest-growing restaurant brands out there that’s kind of under the radar because of the way that they advertise and the ability to go after a couple of other entrenched competitors that are out there. So we couldn’t be more excited. Texas Roadhouse has been a great partner to work with and we think this platform has nice big shoulders.

Todd Brooks: Thanks for that Dave. And Tom, my second question, and I’ll jump back in queue. If we look at and it may be an assumption on my part that there’s not a lot of future pricing actions coming over the next 12 months. Can you walk through what the pricing waterfall looks like for each segment as prior increases lap, just so we can get a sense of the dynamic between volume and pricing as we go across fiscal ’24?