Lancaster Colony Corporation

Good morning. My name is Josh, 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 2022 Third Quarter Conference Call. Conducting today's call will be Dave Sosinski, 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. If you would like to ask a question during this time, simply press star, then the number one on your telephone keypad, and questions will be taken in the order that they are received. If you would like to withdraw your question, press the pound key. Thank you. And now, to begin the conference call, here is Dale Ganopsit, Vice President of Corporate Finance and Investor Relations for Lancaster Colony Corporation.

Good morning, everyone, and thank you for joining us today for Lancaster Colony's fiscal year 2022 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 on our company's website, LancasterColony.com, later this afternoon. For today's call, Dave Szczesinski, our president and CEO, will begin with the business update and highlights for the quarter. Tom Piggott, 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 County's President and CEO, Dave Suszynski. Dave?

Thanks, Dale, and good morning. It's a pleasure to be with you today. In our fiscal third quarter, ended March 31st, consolidated net sales grew 12.9%. to a record $403 million, with retail net sales up 7.4% and food service net sales up 19.8%. Net sales growth in the retail segment was driven by pricing across the portfolio, continued volume gains for our licensing program, and strong sales for our Sister Schubert dinner rolls. The 7.4% net sales growth in retail compares to robust sales gains of 17.1% in last year's third quarter. Retail sales volume measured in pounds declined 2%, but comps to strong volume growth of over 12% in the prior year quarter, and moreover, reflects the decision to exit select non-core products. Excluding these rationalizations, our third quarter retail net sales volume grew 5%. Notably, our licensing program continued to perform well in the period, led by distribution gains for Buffalo Wild Wing sauces and Chick-fil-A sauces. In the aggregate, these two licensed sauces combined to account for over eight percentage points of retail net sales growth. For the quarter, we were pleased with our overall share performance. IRI data showed share gains for our Sister Schubert dinner rolls were up 200 basis points to a share of 51.5%. And our Marzetti brand refrigerated dressings were up 90 basis points to a share of 23.3%. On a two-year stack basis for the quarter, IRI retail scanner data shows several of our branded products continue to perform well, with double-digit sales growth and market share gains reported for Sister Schubert's frozen dinner rolls New York Bakery frozen garlic bread, New York Bakery croutons, and Marzetti refrigerated dressings. On the same two-year stack basis for the quarter, sales at retail for our licensed sauce platform has more than tripled, growing from 29 million to 89 million. But as I will discuss later in my comments, achieving this rapid growth in licensed sauces has resulted in incremental co-manufacturing cost and margin pressure. In summary, our retail top line performance in the quarter was driven by our pricing actions, volume growth from our licensing program, and strong store level execution. In our food service segment, net sales growth of nearly 20% was driven by inflationary pricing and increased demand for our branded products. Total food service volume measured in pounds decreased 2 percent as influenced by industry-wide operator challenges due to a tight labor market and a weakening consumer environment. Turning to our margin performance, our gross margin decline in the third quarter reflects unprecedented inflation of nearly 30 percent for raw materials, packaging, and freight. Costs for all three categories increased sequentially in the quarter, pacing well ahead of our previous expectations. While we passed along incremental pricing in the period, the net impact of our pricing actions lagged these extraordinary levels of inflation. Our margin results were also adversely impacted by higher labor costs, supply chain disruptions, and continued volatility in food service customer demand. Finally, as stated above, our lower margins in retail also reflect an increased reliance on co-manufacturers to help satisfy rapid growth for our bottled sauces. As we outlined last quarter, we continue to pursue a focused list of discrete actions that will enable us to reduce our cost and improve our margin profile. First, during the quarter, we completed construction and startup for our sauce capacity expansion project at one of our Columbus-based facilities and expect the benefits of improved operating efficiencies and reduced costs for that facility to begin this quarter ending June 30. Second, during the quarter, we also opened our new Columbus-based warehouse location. The site is now fully operational and delivering the intended benefits of reducing both our material handling cost and our need for third-party warehouses. Third, we continue to optimize our use of co-manufacturers by increasing the use of our internal manufacturing facilities where our capacity situation allowed. While we made progress, most of these savings will not be realized until next fiscal year when the construction of our horse cave facility is complete, and we've gone live on the first few waves of SAP. Our fourth key initiative is revenue growth management. Given the magnitude and the rate of inflation that our business is experiencing, pricing remains our single most important leverage. During the quarter, our retail segment implemented an additional round of pricing on frozen bread and pasta products that became effective in late April. Given the continued run-up on edible oils and other broad-based sources of inflation, we'll soon be pursuing another round of pricing actions on our dressings, sauces, and dips categories. In our food service segment where pricing is tied to contracts for commodity and freight inflation, We implemented an additional round of pricing in the quarter as well. Like our peers, we also continue to carefully monitor the impact of inflation on our retail consumers and our food service customers. To date, their behavior has not materially changed. When and if it does, there are other revenue management tactics that we can deploy. Finally, given the magnitude, rate, and broad raging nature of inflation, We're aggressively activating supply chain productivity and product value engineering projects. These projects will further reduce our cost and improve our margin profile over the long term. Before I turn it over to Tom, I'd also briefly like to comment on our decision to exit Bantam Bagels. Early during the pandemic, the food service industry was severely impacted by store closures and traffic declines. During this period, numerous restaurant operators made choices to streamline their menus for operating efficiencies. And during this period, Bantam Bagels was discontinued at their largest customer for precisely this reason. This discontinuation and the sustained impact of the pandemic changed the economics of the business. Despite investments to support the growth of Bantam Bagels in the retail segment, In our best efforts to replace the loss of the major customer in the food service segment, we were unable to identify a credible pathway to profitability for the business. Consequently, we made the prudent but difficult decision to exit the business. I'll now turn the call over to Tom Piggott, our CFO, for his commentary on our third quarter financial results.