Jay Gerlach - Chairman & CEO Doug Fell - Vice President, Treasurer and CFO Dale Ganobsik - Director, Investor Relations Dave Ciesinski - President & COO.

Frank Camma - Sidoti & Company Eric Gottlieb - D.A. Davidson.

Good morning. My name is Suzanne and I will be your conference facilitator today. At this time, I would like to welcome everyone to the Lancaster Colony Corporation's Fiscal Year 2017 First Quarter Conference Call.

Conducting today's call will be Jay Gerlach, Lancaster Colony Chairman and CEO, Dave Ciesinski, President and COO and Doug Fell, Vice President, Treasurer and CFO. [Operator Instructions]. Thank you. And now, to begin the conference call, here is Dale Ganobsik, Director of Investor Relations for Lancaster Colony Corporation. Please begin..

Thank you, Suzanne. Good morning, everyone and thank you for joining us today for Lancaster Colony's fiscal 2017 first quarter conference call.

Let me begin by reminding everyone that 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. With that said, I'll now turn the call over to Lancaster Colony's Chairman and CEO, Jay Gerlach.

Jay?.

Thanks, Dale. Good morning. We appreciate you joining us today. Doug and I will provide comments on the quarter and our outlook, with Dave joining us to respond to your questions. We're pleased to report record first quarter earnings with net income of $33.4 million and earnings per share of $1.22, a 21% increase from last year's first quarter.

The primary drivers of this improvement were lower ingredient costs, a more favorable sales mix and lower freight costs. Segment operating margins reached 18.8%, versus 15.3% last year. While sales comparisons became challenging, as expected, we were pleased to see retail channel sales grow almost 3%.

Our licensed Olive Garden brand salad dressings, our New York Bakery and Sister Schubert frozen breads and Marzetti caramel apple dips were all good contributors to our retail growth. We continue to see a very competitive refrigerated salad dressing category, as newer entrants help create a more active promotional environment.

Food service channel sales declined almost 5%, with our customer rationalization efforts and lower selling prices both key factors in the decline. We also saw less limited-time offer promotional activity this quarter versus last year. Our resulting sales mix was 52.4% retail, a 190 basis point increase from a year ago.

From a new retail product perspective, we're pleased with the early demand for our New York Bakery Bake & Break garlic bread and the acceptance of the more recently introduced Sister Schubert Shareable dinner rolls. Under the Olive Garden label, we've added a red wine balsamic dressing which is now arriving on retailer shelves.

The retail channel also saw more investment in consumer promotional spending, including the increased emphasis on digital marketing and higher coupon redemption costs. Based on IRI sell-through data for the 12 weeks ended October 2nd, we remain the leader in our six key retail categories and we're outgrowing the category in four of those.

The IRI data did indicate some share decline for our business in the refrigerated dressings and refrigerated produce dips categories. Let me now turn to Doug to make a few comments..

Thank you, Jay. Similar to our past commentary, our balance sheet continues to remain strong. I will comment on some of the larger line items within our balance sheet that have changed since June 30th.

From a high level perspective, the increase in our cash balance of nearly $28 million since June can be summarized as follows -- cash provided by operating activities of $45 million offset by regular dividends of nearly $14 million and property additions of $4 million.

In general, the increase in our accounts receivable balance reflects higher sales volume. Consistent with past quarters, we continue to see our overall agings remain solid.

The increase in our inventory since June largely reflects the seasonal build in our retail inventories each fall in advance of the seasonal sales increase we see in our second quarter on certain product lines, such as Sister Schubert's.

In general, our inventory levels remain in line with our expectations and we continue to place emphasis on this important element of our working capital. As mentioned above, cash expenditures for property additions totaled $4 million in Q1, with the largest amount spent on new packaging equipment to accommodate growth.

Presently, we still anticipate capital expenditures to be in the range of $20 million to $22 million for fiscal 2017 and will include projects to increase capacity and productivity.

Depreciation and amortization expense totaled approximately $6 million for Q1 of fiscal 2017 and we expect an annualized amount of approximately $24 million for the current fiscal year.

The increase in our accrued liability since the June balance sheet date largely reflects an increase in accrued income taxes due to the timing of our first quarter estimated payments occurring in October. With respect to our balance sheet capitalization, we continue to have no debt and nearly $535 million in total shareholders' equity.

We ended the quarter with nearly $146 million in cash and equivalents and we have available borrowing capacity under our credit facility of nearly $150 million. Our capital allocation initiatives continue to be focused on funding future organic growth initiatives, acquisition opportunities, continued dividends and opportunistic share repurchases.

Finally, our overall effective tax rate of 34.3% for the first quarter is consistent with our expectations and previous guidance. At this time, we would expect a similar effective rate, plus or minus a few tenths, for the balance of fiscal 2017. Jay, I will now turn the call back over to you for your concluding comments..

Thanks, Doug. Turning ahead to our second quarter, usually our strongest of the year, we will face a comparison to a strong quarter a year ago. We expect our food service channel to experience continued sales headwinds from customer rationalization and deflationary price adjustments.

We're somewhat optimistic, however, on our core chain account business and feel we could see some improved limited-time offer promotional activity as well. Retail channel sales should see continued contribution from the new products I mentioned earlier and everyday sales and marketing execution.

We feel good about our product placement and promotional plans for the fall holiday season. Sister Schubert's will be an important factor in our potential growth with the new Shareable Bread product and the focus on their core SKUs and their strongest markets.

We expect the refrigerated dressing category to stay competitive and we will be adjusting our promotional efforts as necessary to support our brands and the premium positioning of the category. From a supply chain perspective, we will continue to see lower ingredient costs, although with a declining benefit from that of our first quarter.

We presently anticipate these costs to be comparable to the prior year as we enter the second half of the fiscal year. Freight costs should also be lower in the quarter, although we will anniversary this reduction as we move into the second half.

We continue with our focus on operational excellence, as progress is being made in that area, with still more to be realized. Our efforts in searching for the right acquisition opportunities continue, with a focus on branded retail, on-trend products, merchandise in the perimeter of the store.

At our upcoming November board meeting, we will give thorough consideration to our cash dividend rate. Suzanne, we're ready to take questions..

[Operator Instructions]. And your first question comes from the line of Frank Camma of Sidoti. Your line is open..

Just clarity on the food service comps here. So after the December quarter, does pretty much all your contracts reset, then, at that point as far as from the deflationary issues? Although, you may -- I guess you'll probably still have some culling from some particular contracts. I was just wondering if you could clarify that..

The customer rationalization and price deflation will linger into the third quarter some, Frank, so it's not quite finished yet, but certainly by late in that quarter, it should be behind us..

Okay. And obviously your margins are really strong from a historical perspective here and you called out some of the issues why.

Assuming sort of commodities stay favorable here which I don't really have any reason to doubt, I mean, is that a sustainable level? Would you look to maybe become a little more aggressive on the -- I mean, you did point out some of the promotional, but some factors are -- can you talk to just sort of the sustainability of those operating margins?.

Honestly, Frank, we're at the high end of what we talked about, of the mid to upper teens kind of segment of operating margin range. The sustainability is a challenge as we move forward given the declining kind of -- the lower input costs, so I'd say we're at the high end of that range..

Okay. And a final question for me and then I'll hop off. Just on the deli side of the flat out -- I mean, obviously you don't break it out anymore, but I was just wondering if you could talk about that area in particular.

Have you been able to work in other products that you can benefit from that particular acquisition or if there are any keyed up?.

Right at the moment, Frank, I wouldn't say we've really worked any other products into that space. It is a priority, though, as we think about both acquisition opportunities and longer term innovation, but nothing that is having a material impact at this point..

[Operator Instructions]. Your next question comes from the line of Eric Gottlieb of D.A. Davidson. Your line is open. .

First, I was wondering if we could break apart ingredients versus mix versus freight, how much of a benefit you received on each one..

The primary benefit is coming out of ingredients. I don't know that I can give you an exact breakdown, but the strong majority is that and then I think we'd follow it with mix benefit which is always a little hard to measure and then freight following up in third place..

And on corporate expense, how much was attributed to the closing of the business and were those costs limited to the quarter?.

Well, it was related to closed operations and I would like to think it's limited to the quarter, but as we've commented in the past, those costs sometimes can fluctuate quarter to quarter. This was an unusual quarter in that we had a little more costs related to those expenses than we've seen in a more typical quarter, so --.

Okay. Fair enough..

We hope that's it..

Sorry about that. How much were the investments in marketing and promotions? I know there was a little bit of an uptick there. And if you could describe the program a little bit, what you guys are doing..

Yes, I think the ballpark of it is kind of in the low mid-seven-figure investment and I'd let Dave, if he'd like, to comment on some of the things we're doing..

Sure. Some of that was out in support of new product launches, that Jay described earlier in the call, so some slotting in particular and we had couponing that was also out there in support of those items and then just traditional marketing and advertising costs were up as well, all in support of new item launches and other seasonal items..

Okay, so that's $700,000.

How does that relate to what you usually do? Is that right on par or more or less?.

I think you said mid--.

That mid -- kind of a low to mid seven-figure increase..

Oh, seven-figure..

Yes, so we're in the millions there, so that was a meaningful increase for us. I don't have an exact percentage for you, but meaningful..

It was..

Okay. Fair enough.

So if eggs are down and they probably will be for a while, why do you see commodity costs leveling off? You just see that once you lap that, that's over?.

Well, yes, we'll be anniversarying that as we move forward. We do a little bit this quarter, more so next quarter, so, yes, it's just a year-over-year comparison. But, no, we don't see those costs -- barring some shock like we did experience in the recent past, don't see those changing much..

Okay, fair enough.

And then on the dividend being addressed, were you talking regular, special or they're both kind of up for discussion?.

Well, they're both probably always open for discussion, but I was really referring to the regular cash dividend. Having just done a special dividend a year ago, it's not something that we feel we have a practice of doing on a frequent basis..

And there are no further questions. We will turn the call back over to Mr. Gerlach for any concluding remarks..

Well, thank you again. We appreciate you joining us this morning. We look forward to talking to you late January with our second quarter results..

Thank you and this concludes today's conference call. You may now disconnect..