Yahoo Finance 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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