Dale Ganobsik - Director of IR David Ciesinski - President & CEO Doug Fell - VP, CFO & Treasurer.

Frank Camma - Sidoti Alton Stump - Longbow Research Brett Hundley - Vertical Group Michael Gallo - CL King Jason Rodgers - Great Lakes Review.

Good morning. My name is Joey 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 2018 First Quarter Conference Call. Conducting today's call will be Dave Ciesinski, President and CEO and Doug Fell, Vice President, Treasurer and CFO.

[Operator Instructions] Now to begin the conference call, here is Dale Ganobsik, Director of Investor Relations for Lancaster Colony Corporation..

Thank you, Joey. Good morning, everyone, thank you for joining us today for Lancaster Colony's Fiscal 2018 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 website, lancastercolony.com, later this afternoon. With that said, I will now turn the call over to Lancaster Colony's President and CEO, Dave Ciesinski.

Dave?.

Thanks Dale, and good morning everyone. It's a pleasure to be here with you today as we review our first quarter results for fiscal year 2018. Doug and I will provide comments on the quarter and our outlook and following that we will be happy to respond to any of your questions.

During the first quarter, the company completed changes to our organization structure as I succeeded Jay Gerlach, as Chief Executive Officer effective July 1. This change has resulted in modifications to have the company manages our business, and allocate our resources.

Consequently, the company's segment reporting structure has been amended to align with these changes and our specialty food segment results will now be presented as two reportable segments Retail and Foodservice.

Additional details regarding this change in reporting structure are provided in the company's 8-K filing this morning in conjunction with our fiscal first quarter earnings results. For the quarter we're pleased to report consolidated net sales increase 2.6% to a first quarter record of $298.9 million versus $291.4 million last year.

Retail net sales grew 6.2% to $162.1 million as organic sales advanced 4% and sales from Angelic Bakehouse acquired in November 2016 added 2.2%. Organic sales growth was led by volume gains from Sister Schubert's frozen dinner rolls, Marzetti caramel dips, Olive Garden dressings and New York Bakery frozen garlic bread products.

Net sales of Marzetti produce dressings also showed a slight uptick in the quarter as competitive promotional practices in the category have started to abate. Overall trade spending and coupon expenses as a percentage of net sales were flat compared to the prior-year quarter.

Foodservice net sales decreased 1.4%, reflecting continued overall softness in the restaurant industry. Sales volumes to our national chain restaurant accounts were below the prior-year amount, partially offset by a modest level of inflationary pricing.

Sales attributed to limited-time-offer programs with our national chain customers were nearly equal to last year. Consolidated gross profit declined $5.1 million to $75.5 million driven by the impact of increased commodity costs, most notably soybean oil, dairy ingredients, eggs, garlic and higher freight costs.

Supply chain cost savings realized from our Lean Six Sigma program and the inflationary foodservice pricing served to partially offset the higher freight and commodity costs in the quarter. Also note, that the historically high gross margins reported in the prior-year quarter reflect the benefit of unusually low commodity and material costs.

This is particularly true in our Foodservice segment where the timing of input costs and related price recovery to our national customers will often lag and overlap each other and occasionally will give rise to larger than normal margins than a given quarter.

Such was the case during the second half of our fiscal year '16, our first half - a second half of fiscal year '16 and first half of our fiscal year '17.

Selling and general administrative expenses rose $1.3 million due to the incremental amortization expense and other recurring noncash charges attributed to Angelic Bakehouse, along with recent investments in business initiatives and personnel dating back to our third fiscal quarter of last year.

Consolidated operating income declined $44.3 million to $50.8 million in the prior year on lower gross profit and increased SG&A expenses. Both Retail and Foodservice segments were unfavorably influenced by the higher freight and commodity costs referenced above.

Retail operating margin decreased from 22.8% to 20.3%, including the full impact of Angelic Bakehouse noncash charges totaling $800,000. Foodservice operating margin dropped 14.4% to 10.7%. The prior-year margin reflects a significant benefit from lower ingredient costs that were only partially offset by deflationary pricing.

The reduction in corporate expenses is primarily to non-recurring costs incurred in the prior-year quarter related to closed business operations. Net income was $29.4 million, or $1.07 per diluted share, compared to $33.4 million, or $1.22 per diluted share, last year.

The regular quarterly cash dividend was continued at the higher level of $0.55 per share set in November 2016.

Turning our attention to retail sell-through data from IRI for the 12 weeks ending October 1, 2017 we maintained our leadership position in all six of our key categories and we were able to increase our share in three out of six of those categories.

With that, I’d like to now turn it over to Doug to make some comments on the balance sheet and other related items..

Thank you, Dave. Overall, our balance sheet continues to remain strong and not much has changed since our last earnings call. I will comment on some of the larger line items within our balance sheet compared to last year. From a high-level perspective, the increase in our cash balances of $40 million since June can be summarized as follows.

Cash provided by operating activities of nearly $39 million, offset by regular dividends of $50 million, treasury stock repurchases of nearly $1 million and property additions of $8.5 million. In general, accounts receivable remained in line with expectations and largely reflect increased sales volumes for the quarter.

Consistent with past quarters our collections and agings remain solid. The increase in our inventory balances since June reflects stronger sales volumes for the quarter, as well as the newbuild of seasonal inventories which shipped during our second fiscal quarter.

As I mentioned, cash expenditures for property additions totaled 8.5 million in Q1 with the largest amounts spent on new processing equipment to accommodate growth, and planned improvement projects to enhance productivity.

At the present time, we anticipate capital expenditures to be in the range of $30 million for fiscal '18 and in general we'll focus on projects to increase capacity and productivity. As we mentioned in our prior commentary, a notable project will involve increasing our warehousing and production capacity at Angelic Bakehouse.

This project is now underway and progressing as scheduled. It is projected to wrap up towards the end of fiscal 2018. Depreciation and amortization expense totaled $6.4 million for Q1 and we expect similar quarterly levels for the balance of fiscal 2018.

With respect to our balance sheet capitalization, we continue to have no debt and over $590 million in total shareholder’s equity. We ended the quarter with $157 million in cash and equivalents and we have available borrowing capacity under our credit facility of nearly $150 million.

Given our balance sheet posture and overall liquidity, we continue to possess considerable flexibility to address our foreseeable cash requirements. In general, our plans for capital allocation in fiscal 2018 are expected to remain consistent with our past practices.

Finally while our effective tax rate of 34.2% for the current quarter is in line with the prior year of 34.3%, we do wish to point out the adoption of the new accounting standard for the tax treatment of equity awards lowered our effective tax rate by 20 basis points in the current quarter.

As we further described in the fitness to our financial statements looking forward the adoption of the standard could create some level of volatility in our quarterly effective tax rate. Excluding it impacts, we expect our effective tax rate to be in the range of 34.4% for fiscal 2018. Thanks again for your participation with us this morning.

And I will now turn the call back over to Dave for concluding comments.

Dave?.

Thanks Dough. Building upon our growth and retail segment sales this past quarter, we will continue to rely upon our strengths and investments in innovation and product development to drive topline growth.

A recent example of this is our new Marzetti Simply 60 line of refrigerated dressing with only 60 calories per serving made with simple ingredients such as real buttermilk and extra virgin olive oil. Although this new product line is only been in the market six weeks early data shows an encouraging start.

We look forward to sharing additional information with you about Marzetti Simply 60 and other new retail and foodservice products in the quarter ahead.

Looking ahead to our fiscal second quarter historically our biggest sales quarter of the year we expect higher freight costs to persist due to higher freight premiums resulting from constrained capacity in the aftermath of the recent hurricanes in the Southern U.S.

We also anticipate commodity costs to remain a headwind with eggs, soybean oil, dairy ingredients and garlic showing notable cost increases over the prior year and even since our last call with you.

We intend to address this inflation with supply chain cost savings realized from our new Lean Six Sigma program, inflationary pricing in foodservice and net pricing initiatives now underway in retail as we continue to leverage our recent investments in trade optimization and category management.

Joey, we can now take any questions from the call participants..

[Operator Instructions] Your first question comes from Frank Camma with Sidoti. Your line is open..

Appreciate the color on the second quarter that you gave there. I was wondering if could talk a little bit about the cadence of the second half though since then some of these commodity costs will be built into pricing of the foodservice side.

So if you could just walk us through that and how we should think about?.

So I guess I would probably think of it Frank as three drivers, the first of which is the fact as mentioned in the comments in release earlier.

For this quarter and in Q2 we’re going to continue to lap that record high level of gross margins that we had in prior period in case and point if you looked at this quarter last year we would have been up 22% driven by this sort of precipitous drop this quarter we're down 11.

And the last period of that we’re going to lap is next is upcoming quarter Q2, so that's the first thing that you going to want to sort of look and if you go back to our segment results and you look at the last few years I think you'll get an idea of what's going on there.

The second thing that you're going want to factor into the equation is inflation and probably the newest news of inflation for Q2 versus the back half of the year as we've seen a pretty steep increase in egg cost you may heard it from others that recovery, there's an issue with supply in Europe that’s driving a lot of export demand here from the U.S.

which we're factoring in. And then the last question is how are we going to be addressing things with pricing. We do have foodservice inflation that pricing is underway and now there's going to be a second tranche of that that becomes effective at the very beginning of Q3.

And then finally we're also actively participating pricing and trade rationalization efforts on the retail business, the early of which are beginning right now actually and there will be another tranche that go out in the not too distant future..

So you are being able to push through some of this price increasing on to retail which is obviously interesting.

Can you talk about sort of like you really haven't been impacted by this but obviously with the Amazon buying whole foods but sort of trends there the competitive environment pushback you're seeing from your major customers on the retail side on pricing?.

We’re in the very earlier stages of that, so it's a TVD what we would tell you at the end of the day is that management team we have three levers to address that list price increases, net price realization by trade reduction and then ultimately taking cost out.

We’re going to work all three levers but given the magnitude and the steepness of the increases that we're seeing particularly in core commodities like eggs, like diary, butter, garlic, wheat and transportation. When they start to move like this you have no choice, but to take the list price increase and have those conversations..

My last question and then I’ll hop back is, Sister Schubert's was that surprising how strong it was given I know you had some innovations there, but it's really not on trend per se in the frozen category and sort of not growing particularly healthy living et cetera, so I just wondering if you make some comments on that?.

That's a great question and it’s a great story actually. I won’t say I am surprised because I've been watching the team that’s been working on this for the year plus that I've been here. And they've really done a terrific job, they have done a couple of things. They’ve gone to the market, consumer relevant innovation one.

They have also done a great job of simplifying the range of products. They prove nonperforming SKUs focusing on seven items and getting retail execution right. And candidly if you look at our portfolio of brands that maybe the very most beloved brand that we have in our portfolio.

It’s growing in retail and parenthetically it's also growing in foodservice we usually don't break it out and talk about but it’s actually a strong performer in our foodservice..

Well it’s very convenient I guess to take out the rolls and do it that why. So, well congratulations..

Well thank you and I think the only other thing I’ll note on that is what we’ll find is this - you look at the ingredient panel on that it's actually pretty clean. There isn’t a lot of bad stuff in that and the consumer particularly in the South was the strongest, it is very much a beloved brand..

Your next question comes from Alton Stump from Longbow Research. Your line is open..

I don’t know how your freight costs and how quickly looking at foodservice business in particular are you able to pass through all the contractual arrangements for that help offset from a cost pressure coming from higher freight?.

I guess I would answer it in a couple of ways there is one question Alton which is how long do we think that the increases are likely to persist particularly driven by the two hurricanes that we have seen and clearly was an impact in the latter part of our first quarter and we expected to be an impact into the second quarter and then really and taper anticipate thereafter.

If you look at prior year hurricane that's essentially the pattern that is taken. As it pertains to our ability to pass along those increases that stuff that we’re trying to affect right now went into the marketplace, so we’re hoping to recover some of those costs into Q2.

And we'll see how we are able to do with that and if you're thinking about the overall magnitude of the increase here, I would think of it in terms of a high six figure approaching seven figure number..

And then I guess just want to follow-up as 4% organic growth retail quite impressive, I was kind of look out to kind of rest full year 2018 but into coming years are there may be certainly handful of categories that you see has been the key growth drivers whether its frozen breads which is - and of course has been well for quite some time now or other sort of categories you could see trying to come at big players as far as driving overall growth in retail?.

We take across the waterfront the way we talked about our growth algorithm on the topline historically has been low mid single-digits and that's typically the target that we're going after.

We’re seeing balance growth to-date, back to Frank's earlier question if you look at dinner rolls several years ago 18 months ago the category as a whole was down probably 100 basis points maybe 150 basis points. Now the category overall is probably closer to up 50 basis points if not more than that and we’re leading that overall category growth.

Frozen garlic bread is another one of those that continues to grow.

I think if you look over a longer period of time, we would expect to see and even greater amount of growth coming from the parameter particularly dressing and dips and fresh bakery items like Flatout and angelic but if you’re sort of modeling across the next 18 months I would look for balance growth across all those segments..

So our next question comes from Brett Hundley from Vertical Group. Your line is open..

I actually wanted to follow on to that line of questioning that was just asked, we've been doing some store checks here in our market and have noticed a fair amount of assortment changes in numerous stores.

So we're seeing some space being taken away from center of the store condiments for instance and we’re seeing space expanded in the produce section fresh we’re seeing space expanded in frozen to an extent beverages and some other areas.

And I'm curious kind of what you guys are seeing or experiencing if you're seeing any assortment changes further the specific categories that you play in either positive or negative?.

So Brett I guess I start by answering your question from a macro perspective and then I'll drill it in closer to maybe our business. If you look at things in the aggregate, we also are seeing the very same things that you're reflecting in the marketplace particularly at the retailers as you’re talking about.

And others and I think if you also sort of look over the range of what they next two to five years, I think you’re going to see the center of the stores shrink in particular categories and you’re going to see incremental space devoted to the parameter.

Having said that, as we look and plan year-end we still have in a lot of our retailers for linear feed for example on produce dressings and that hasn't really changed for years.

So as we’re seeing these things happen what we haven't necessarily seen is greater incremental space devoted to things like produce dressing our hope is that eventually we see that. We anticipate over time that we will see that.

Having said that bringing it closer into where we are today and how we think about managing its probably a two part question one is we’re trying to line up our strategies so that we’re able to participate in that growth so making incremental strategic investments and things like Angelic Bakehouse, Flatout in dressings and dips because we feel like that's just going to become more relevant as more traffic runs around the racetrack.

But as we managed the business day in and day out in execution what we’re really focusing on is just getting the right assortment having very clear what we call mass or gold standards for what we want shelves to look like ensure that we have the right items on the shelf.

One of the things you'll know if you look at our data Brett is that we’re actually down in GDPs in some of our categories and some of this work is of our own doings.

We talked about Sister Schubert for example that’s a category where our business for us that probably 12, 18 months ago we started actually proven the number of skiers because we had a number of slow movers and focus on the what we call the Sisters Seven which were the top items and making sure that we were just nailing what the shelf needed to look like on those.

And as a consequence we've seen the business work. So one thing we will see in our business over time and we're actually addressing this now in our dressing business as we’re going to be bold and go after underperforming SKUs in clip those before the retailers do, we believe it creates enhanced credibility for us.

And then come back with items that we think are winners and are going to grow our business in the category..

I want to ask you a follow on to that related to M&A, but just real quick. Just to make sure I understand this correctly, the higher freight in Q1 that was partially called out related to hurricane activity that continues in Q2, you said that affect, I think you said with high six figures approaching seven figures.

Is in that the entire effect across Q1 and Q2? And if so can you give us a sense of maybe what was in Q1 or was that just the effect in Q1?.

That was the Q1 effect that we are talking about there. And if you think about that there is just core inflation as it pertains to transportation cost that are in excess of that. But if you try to peel apart and you isolate that which we can attribute more towards the hurricane, that gives us, the hurricane that gets us closer to the six figures.

And what happening is when we have a disaster like this FEMA basically goes and secures all sorts of trucks and drivers. And they pay huge premiums because obviously they are not planned for. And it puts a ripple effect through the entire industry as we all go out and we try to secure transportation.

And often times you would expect, I mean intuitively let’s say the hurricane is over wire within the premiums, what happens is often times to load those tractor-trailers with all sorts of the late supplies and they remain parked down there for months if not quarters.

So it takes a while for that sort of capacity to enter back into the general distribution and that's why you see a bit of this tail..

My last question is, all of you before, is just on your balance sheet. You know cash continues to build. You guys continue to maintain zero debt and I really wanted to ask you Dave or Doug, two part question here. So number one, kind of goes back to the assortment discussion we were just having and I wanted to ask you about the M&A market.

And perhaps you know both opportunities, small and large that you might be seeing and how you feel the need to react or position Lancaster Colony against that changing retail/consumer environment that that we've been talking about? So that’s kind of the first part that I wanted to get an update on.

And secondly I wanted to get a sense of how mindful you guys are against public valuation changes and the need to manage return for shareholders, right? So, this has been a tough year for packaged food investors both on an absolute and a relative basis.

I'm curious how you balance this dynamic alongside the internal external asset investment dynamic that you have to maintain of course?.

Well absolutely. So why don’t I start with the first question about M&A and what I would tell you there is, I would submit that we are as active as we’ve been and probably more active than we've been in any number of years, with a number of things in the pipeline, both I would say small and medium-sized.

So suffice it to say very, very active and you know continuing to look at a range of opportunities. It seems like often times just when you get close, things started to slip away a little bit.

Sometimes it’s driven by value but sometimes it’s just driven by the intrinsic nature of the business and you can then find things about it that don’t necessarily make strategic sense for one reason or another. But what I would assure you is that we’re extremely active and committed to the M&A market.

Your second question is how do we think about leveraging our balance sheet overall and I think historically what we have said is, priority one is M&A, priority two is CapEx against the business, three would be dividend and then four would be normal, either repo or a special dividend.

And that general guidance remains true as you have seen compression in our valuation, we have started to entertain things like stock buyback and one of that is that, I can talk to Doug. As you know looking at a lot of our peers, most of our peers are leveraging their balance sheet as a means by which to do buybacks and things like that.

With that I'll turn it over to Doug to help you think about think about how we frame this internals, Doug?.

Thanks Dave. Brett, I think in the past we've shared with everyone that we tend to be opportunistic with our share repurchases and we will continue that policy as we move forward.

We did see during the quarter, a little bit of a dip in the price and we felt that was based on our internal modeling, a price that was opportunistic for us and so we did take advantage of that. We will continue to monitor that in the future.

And the Board has authorized us to purchase a fair number of shares and I think that number is about $1.4 million so we still have that available to us looking out into the future..

Your next question comes from Michael Gallo from CL King. Your line is open..

Just two follow up questions, first I was wondering Dave if you can give us your view on how you plan to expand your presence within the dips category as you kind of broaden how you think about that category in terms of what kind of items you’re selling.

And then also if you can give us an update on how we should expect the increased capacity at Angelic to start to roll through the numbers and how you should expect us to think about? Thanks.

So why don’t we first on dips now we’re thinking about it and we’re really going on two separate tracks one is an aggressive track on organic innovation and we’re ready in some pretty exciting items in this space that would help us move into some of the more contemporary dips that are out there things like, hummus they are not exactly hummus but moving in that direction very exciting they will move us out of Gary dips and those are relatively close in as things lineup we would expect to be in position to talk about that in the back half of this of coming year.

And then of course we’re also looking at M&A and this would be one of the prime spaces where we’re looking in M&A so whether we can get through M&A faster or whether we go there organically on our own we’re looking at both tracks.

Your second question is one around angelic Bakehouse and where do we stand on the build out of the plant, we broke ground the work is actively underway as Doug mentioned in some of his earlier comments we expect to be in a position to have that wrapped up by the end of this fiscal year that would more than double the capacity and give us optionality to increase it yet again with minimal investment just basically by changing the crewing that's in there.

To that end what we’re also doing is obviously continuing to sell. We have had a couple of new account wins, we got distribution in Hannaford, Shaws and a few other places in the Northeast and we’re continuing to work with other retailers.

So really near end we’re focusing on refining the selling presentation, we have hired a new sales leader for that business that has deep expertise in that channel.

We've engaged a new agency to work with us recently and as yesterday actually we have an innovation some were there with our core team and their team to develop new product ideas all the while in the backdrop will expand capacity..

Your next question comes from Jason Rodgers from Great Lakes Review. Your line is open..

I wondered if you could talk about the Six Sigma initiative the progress you're making there and if you could quantify a range of potential savings for the second half there? Thank you..

Great question, Jason it’s fully operational now up and running. So we have our black belts that are actively underway, we completed our second range of green belts so if we add those up we probably have 50 internal resources that we have trained on our own. We've added five people from the outside.

The other thing that we put in place is the means by which to track all of these initiatives that organized in three core buckets, an operation savings that are coming out of our factories, procurement savings through formula changes et cetera and then the last bucket would be savings that are coming through logistics and we’re getting yields from all three of those areas.

What we're expecting to see in all of the planning that we have in place that it’s just going to continue to grow sequentially as we continue to progress through the year.

In the most recent period it was a sort of low mid seven-figure number is what we’re looking at now sort of low mid-seven figure number and that's just going to continue to pickup pace as these projects come online..

That low seven figure number that’s the estimate for the second half is that right or is the full year number?.

No, that was just in our first quarter..

Okay great..

And so that was first quarter so if you think about it from a stand, so we really we started that kind of run back sequentially we actually engage to Ohio State University to help us develop a curriculum for green belt training and we hired our green belt and what would have been last year's let's call it a third quarter.

And we started to setup initiatives and means by which to track those initiatives in our fourth quarter and if you look at the first quarter benefit. So this is early days. These are projects that are just getting going that's in the, I would call the low mid seven figure range.

And as you might - and that's just the impact in the first quarter and then the impact of that will just continue to build a sequentially we go through other quarters..

Also you mentioned the IRI data of picking up share in three categories what were those categories?.

Sure, let me get those for you. They were produce dressings, and garlic bread and frozen dinner rolls..

A few other number questions, do you have the organic growth for the company in total in the quarter?.

It was 6.2 back out Angelic, it was 4.2 between the two I would assume..

On the retail side that is correct. And then if you total it all up it was largely all driven by volume, if you look at it in that way with Jason and so you're looking at it the overall what 2.6% think about it in terms of almost all of that same volume growth..

I was going to say I would just try to do some quick imputing in my mind if you wanted to back out Angelic out of the retail foodservice mix, Doug, correct my math if were 2.06 overall you back out Angelic and you say Angelic was 1.1 - a 0.5 of organic growth..

And then finally the Angelic Bakehouse, the charges outside of the amortization expense was that anything material in the quarter?.

I would say it’s the 800,000 that we described part of it is amortization and part of it is earn-out so we haven't placed for the sellers. Both are non-cash charges and we’ll begin to lap those as we go past the third quarter. So 800,000 is the number that we’re talking about..

If there no further questions, we will now turn the call back to Mr. Ciesinski for his closing remarks..

Thank you for joining the call today and we look forward to talking with you later this winter as we review our second quarter results..