Operator:.

Good morning. My name is Carmen and I will be your conference call facilitator today. At this time, I would like to welcome everyone to the Lancaster Colony Corporation's Fiscal Year 2022 Second Quarter Conference Call. Presenting 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. Thank you. And now, to begin the conference call, here is Dale Ganobsik, Vice President of Corporate Financial and Investor Relations for Lancaster Colony Corporation..

Thank you, Good morning everyone, and thank you for joining us today for Lancaster Colony's fiscal year 2022 second 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 web site, 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 respond to 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?.

Thanks, Dale, and good morning, everyone. It's a pleasure to be here with you today as we review our second quarter results for fiscal year 2022. In our fiscal second quarter which ended December 31, consolidated net sales grew 14.2% to a record $428 million, with retail net sales up 10.1% and Foodservice net sales up 20.3%.

Retail net sales growth of 10% was driven by pricing across the portfolio and volume led by the expansion of our licensing program and strong performance on Sister Schubert's frozen dinner rolls. This compares to very strong Retail sales growth of 19.5% during the same period last year.

Retail sales volumes measured in pounds advanced 4% on top of the 12% volume growth last year. Notably, our licensing program continued to perform well in the period led by distribution gains for Buffalo Wild Wings sauces and increased household penetration and strong repeat rates for Chickfil-A sauces.

In the aggregate these two licensed sauces combined for over 10% of our net sales growth in the quarter. For the quarter versus prior year, IRI data showed strong share gains for our frozen breads with Sister Schubert’s dinner rolls up 150 basis points to 54.1% and New York Bakery garlic bread up 230 basis points to 42.5%.

With sales of $61.6 million Q2 was Sister Schubert’s strongest holiday performance ever, thanks to great retail execution in a difficult environment.

On a two-year stack basis, for the quarter IRI retail scanner data shows strong sales growth in share gains for several of our branded products, including Marzetti produced dressings, Sister Schubert’s frozen dinner rolls, New York Bakery garlic bread, and Reames frozen noodles.

Of particular note, during the same two-year stack period, our licensed sauce platform has grown from $22 million in sales to $78 million in sales, an increase of 250%. Based on the aforementioned growth, I'm pleased to share that in January IRI named Lancaster Colony Marzetti, one of a handful of CPG growth leaders for calendar year 2021.

Credit to our Retail and R&D teams for all their efforts in this achievement. In summary, our Retail top line performance in the quarter was driven by passive pricing, and volume growth driven by consumer relevant brands and great store level execution.

In our Foodservice segment, net sales growth of 20% was driven by inflationary pricing, volume growth with our quick-service restaurant or QSR customers, and a rebound in demand for our branded products. Foodservice volumes measured in pounds, advanced 7%.

Per NPD CREST, our sales to the QSR channel continued to pace well ahead of the industry driven by our strong relationships with national account customers and our outstanding culinary team.

Turning to our margin performance, our gross margin decline in the second quarter reflects unprecedented inflation, cost incurred to support the shifting and growing demands of our business and a wide array of supply chain disruptions. During the period, we made significant investments in labor and warehousing to improve customer service levels.

And while pricing actions served to offset significant commodity cost inflation and higher freight rates, we were not able to fully recover the other industry wide cost pressures such as elevated wage rates in the periods.

Finally, our margins were also adversely impacted by our decision to significantly increase our utilization of co-manufacturers in the period to help satisfy the growing demand of our bottled sauces business.

While costly in the short term, the decision to outsource production has not only enabled the strong retail growth we delivered, but also eliminated the immediate need for us to look at acquiring, addressing a sauce manufacturer to support this rapid growth.

In response to these operating and cost pressures, we're implementing discrete actions that should help us improve our margin profile. First, leveraging our recently completed sauce capacity expansion project at one of our Columbus based facilities to better optimize throughput and reduce cost.

Second, adding a new Columbus based warehouse location and pursuing other initiatives to reduce material handling costs, decrease transportation costs, minimize third party warehouse needs, and improve inventory management throughout our distribution network.

Third, leveraging productivity improvements to enable us to increase the utilization of our own facilities, while moderating our reliance on co-manufacturing, and finally implementing the next phase of our revenue growth management strategy to recover increased labor cost.

I'll now turn the call over to Tom Pigott, our CFO for his commentary on our second quarter financial results..

Thanks, Dave. Overall, the results for the quarter reflected strong top line performance offset by higher costs resulting from significant inflationary impacts, several supply chain challenges, and investments made to facilitate growth. Second quarter consolidated net sales increased by 14.2% to $428.4 million.

This growth was driven by consolidated volume growth of approximately 6% in pricing actions taken in both segments. Consolidated gross profit decreased by $10.2 million to $96.6 million. Gross margins declined by 600 basis points. The key drivers of the gross profit decline were the high commodity inflation and increased supply chain costs.

Inflation for commodities and packaging materials was approximately 23% consistent with our expectations. The majority of the commodities we utilized were priced at or near 10-year highs. Our significant exposure to soybean oil, which was up notably, drove our inflationary impact higher than many of our peers.

The increase in supply chain costs resulted from a number of factors. First, we experienced a high level of inflation on our factory labor and other manufacturing costs. The labor inflation was driven by our decision to raise wages to ensure we had adequate staffing to serve our customers in this tight labor market.

Other indirect input costs on things like pallets and supplies were also highly inflationary. Second, our manufacturing costs were also up due to operational challenges in this environment, including supply disruptions at our facilities, lower overhead absorption at some facilities, additional personnel, and other costs we incurred to support growth.

Third, we had higher freight and warehousing costs due to wage and fuel inflation, and higher levels of inventory we built to improve service. Last, our co-manufacturing costs were up as we outsourced production to meet our growing demand. As Dave highlighted, we are taking several actions to address these increases and improve our operations.

As a result to pricing we continue to execute against our revenue growth management program. We benefited from a second round of pricing in our Foodservice segment that was effective at the beginning of the quarter and our first retail pricing action that was effective at the end of the first quarter.

Those actions to serve to offset the vast majority of the commodity and freight cost inflation we experienced during the quarter on a dollar basis. Additional actions are planned or have been implemented in an effort to recover the remainder of the commodity and freight cost increases as well as the higher labor inflation.

We also benefited from strong volume growth in both segments with Retail shipments growing 4% and Foodservice growing 7% behind the programs Dave discussed. Selling, general, and administrative expenses increased 6.8% or $3.3 million. This increase was driven by a higher level of investments to support the continued growth of our business.

These investments included a supply chain optimization study, higher brokerage costs attributed to the increased sales, a modest resumption of consumer spending and IT infrastructure improvements. Expenditures for Project Ascent, our ERP initiative, totaled $8.6 million in the current year quarter versus $8.5 million in the prior year quarter.

The company recorded two special items this quarter related to the Bantam Bagels business. First, we re-valued the contingent consideration liability to the sellers using fair value accounting.

Based on that analysis we reduced the current value of the projected payout by $2.2 million creating the income you see on the contingent consideration line of the P&L. We recorded $1.3 million of this adjustment in our Foodservice segment and $0.9 million of this adjustment in our Retail segment.

Second, we re-valued the intangible assets on the balance sheet for this business which resulted in an impairment charge of $0.9 million. This item was recorded in our Retail segment. In addition, the company announced its plans to close our frozen garlic bread facility in Baldwin Park, California.

Production at the facility ceased in January of 2022 and the Mamma Bella brand's frozen garlic bread product line was discontinued based on its small size and low profitability. We recorded restructuring impairment charges of $1 million related to this closure. This adjustment was not allocated to two reportable segments.

Consolidated operating income declined $13.3 million or 22.7% versus the prior year to $45.3 million. Operating Income declined primarily due to the inflationary impacts and supply chain challenges I described. These items were partially offset by the pricing actions taken and the volume growth the company achieved.

Our effective tax rate was 24.3% this quarter, versus a tax rate of 23.8% in the second quarter of fiscal 2021. We estimate that the tax rate for fiscal 2022 will be 24%. Second quarter diluted earnings per share decreased $0.37 to $1.25. The decrease was primarily driven by the operating income decline.

The EPS benefit for the change in contingent consideration of $0.06 per share was nearly offset by the restructuring impairment charge of $0.05 per share. Costs related to Project Ascent reduced the EPS by $0.24 per share this quarter and $0.23 in the prior year quarter.

With regard to capital expenditures, second quarter payments for property additions totaled $36.5 million. For our fiscal year 2022, we are forecasting total capital expenditures between $170 million and $190 million.

This forecasting includes approximately $105 million for the Horse Cave expansion project that will help meet the growing -- increasing demand for our dressing and sauce products. In addition to investing in our business, we also returned funds to shareholders.

Our quarterly cash dividend of $0.80 per share, paid on December 31, represented a 7% increase from the prior year amount. Our enduring streak of annual dividend increases currently stands at 59 years. Our financial position remains very strong as we finished the quarter debt free with $114 million of cash on the balance sheet.

So to wrap up my commentary, this quarter featured strong top line growth, as well as the unfavorable impacts from significant inflation, supply chain challenges, and investments.

We are addressing the inflationary costs increases with our revenue growth management program and as David shared, we have other discrete action plans in place to address the supply chain issues. In addition, we're continuing to invest in the long term potential of the business. I'll now turn it back over to Dave for his closing remarks. Thank you..

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 number one, accelerate our core business growth. To number two, simplify our supply chain to reduce our cost and grow our margins.

And number three to expand the quarter with focused M&A and strategic licensing. Looking ahead to our fiscal third quarter, sales volume drivers are expected to remain our licensing program and retail and our QSR customers and branded products and Foodservice.

Pricing actions will continue to add to total net sales in the face of commodity and packaging cost inflation, and higher freight cost. We also expect cost pressures attributed to higher warehousing cost, supply chain disruptions, increased labor cost, and higher manufacturing costs to remain a headwind to our fiscal third quarter results.

As a reminder, our future financial results and expectations remain subject to the impacts of COVID-19, including shifts in consumer demand between Retail and Foodservice, ongoing supply chain challenges and disruptions, and increased cost to produce our products and service our customers.

Beyond the discrete actions I shared with you earlier, that are underway to improve operations, we also made the decision to engage an outside consultant to assist us with planning for our supply chain network.

While it's too early to share any of the preliminary findings of the study, we are very encouraged about the potential opportunities that have been identified. These opportunities are fully aligned with the first and second pillars of our growth plan. I'd also like to update you on two important initiatives currently in progress.

First, our significant investment in production capacity at our dressing and sauce facility in Horse Cave is going well with the target completion timeframe in the first half of fiscal 2023. Second, the implementation phase of our ERP initiative Project Ascent remains on track to begin in the first quarter of fiscal year 2023.

Turning to growth, I'm excited to announce that we will be adding barbecue sauce to the exciting and consumer relevant Chick-fil-A platform. As with other Chick-fil-A sauces, we will plan by executing a small regional pilot in the March and April timeframe that will inform our broader rollout plans.

Taking a step back, while our second quarter financial performance fell short of our expectations, actions are underway to help us overcome the many challenges of the current supply chain environment.

Longer term, I'm confident that our business remains very well positioned for the future, with category leading retail brands, a rapidly growing and consumer centric retail licensing program, and a Foodservice business that supplies many of the leading and fastest growing national chain restaurants across the country.

When combined with the investments in capacity and infrastructure, we have a strong and unique platform to deliver profitable growth for years to come.

In closing, I'd like to express my sincere thanks for the ongoing efforts of the entire Lancaster Colony team, as we've navigated through unprecedented cost inflation, demand fluctuations and supply disruptions.

Our focus remains on the health, safety and welfare of our employees continuing to play our role in the country's vital food supply chain and preparing our business for the future. This concludes our prepared remarks for today and we'd be happy to answer any of your questions..

Thank you. Our first question is from Tom Brooks with The Benchmark Company. Your line is open..

Hey, good morning, gentlemen.

How are you doing?.

Good morning, Todd..

Good morning, Todd..

Few questions, if I may.

Leading off just with the top line strength that we saw in the quarter, can we talk through where the strength was in Foodservice to see that type of increase in pounds, you talked about maybe some of the branded products coming back, but also strength with your QSR and pizza customers and I know that plays into your customer mix.

So if we could talk through the strength there, that'd be great?.

Yes, yes, absolutely Todd. First of all, again, good morning. On the branded side, as you'll remember, same time ago, last year, we were pretty deeply in the throes of COVID, and that part of the business was soft.

And as we rolled through Q1 and Q2, that segment of the business, which supports concepts up and down the street, but also to a lesser degree, K to 12 education, and higher education started to post sequential strength. So that was a material contributor to that growth.

The other side, though, was really we continued to see our QSR customers, some of them by name, Chick-fil-A, Domino's, and others really continued to perform well, all the way through the majority of that December timeframe.

Once we got to the very last week of December, we did start to see a pullback because of Omicron that we've seen really continue through the remainder of January, and we could talk about that in a separate context. But really to summarize, we were winning with winners on the Foodservice side in terms of concepts, and then the brands..

That's great. Why don't we tackle Omicron now and I want to do it from a higher level.

If you look at kind of what the margin pressures were running on the business kind of through that, let's say even middle of December, before we really saw the spike in Omicron, how much did the inflation reality change for you with the onset of the variant? And anyway you can size what margin pressures were running versus what they -- what you saw, once the variant really took hold?.

Sure. Well, I would tell you, Todd, in Q2, I don't think that we could really point to Omicron as a contributor to our margins, per se.

You know what, when we go in and we look at MPD press data, for example, you know, what I can tell you is that QSR as a whole, when we look at transaction data was probably running, this is all QSR was running, depending on the week to, you know, up a point to down a point or so.

I can tell you once we got into the January timeframe though, that started to slow down were these concepts and transactions. Now, this isn't sales, this is transactions, we're down in the mid single digits.

When you look at all Foodservice in the aggregate, that same thing is true, obviously, because of the size of QSR where the concepts across the board were let's say, up a point on the aggregate to down a point sort of vacillating there, we've seen a pullback of about 600 basis points in January.

So really, I can't point to Omicron as a contributor on the margin side, as we look at our Q2 results..

Yes, Dave, let me follow up, because I might not have been clear in how I asked the question.

I was talking more than overall Lancaster level, if you looked at the cost of doing business in the latter parts of December, how did that change with Omicron, whether it was employee callouts, friction in your distribution, and just additional costs there? Thanks..

Yes, so we did really it was the week ending, December 28, is probably where we started to see the biggest spike. And I can tell you, you know, like everyplace else in the country it took off. By the first week or so of January, we were seeing case rates that were as high as we had seen at any other point in time during the course of the pandemic.

We were seeing call offs, but I can tell you we continue to operate without really a lot of disruptions because of either leaning into overtime, or by virtue of the fact that the pressure that you've seen in our margins, we were carrying a little bit heavier labor going into the fall because of not only an anticipation of a spike in COVID but the fact that we were seeing a fair, a higher level of resignations on the hourly side.

So as far as our ability to produce not a lot of pressure, maybe a small uptick that we're going to see an overtime cost. And then other, December had some other noise in it. For example, we didn't get into it, but there was the tragic tornado that struck across all of Kentucky.

Fortunately, it didn't impact our facility in a material way, but it did impact a number of our employees and it resulted in a bit of a slowdown in December, but not enough for us to call out and mention by name..

Yes Todd, some of the other impacts beyond Omicron, we did see a number of supply disruptions in our starts supply, packaging material disruptions, and some of our suppliers had difficulty staffing in this environment to provide us with the raw material.

So there was a number of disruptions, not necessarily specific to Omicron that did impact our margins in the quarter..

Yes, if you want to talk more broadly about interruptions, Tom is exactly right. Starches and gums as a particular category of supply were a challenge for us. Lidding for Foodservice was a particular challenge for us. Transportation inbound from our suppliers with truckers calling off continued to be a problem for us.

I mean, it's really the usual suspects that you're seeing at a range of our other partners, I think the ones that were unique pressure points to us, were probably more a function of the products that we make.

So starches and gums that go into sauces, and dressings, probably highest among the list, and then some of the packaging items that are unique..

Okay, great. And then one more, and I'll jump back in queue. If you look at the realities that you just talked about dealing with kind of Q4 and then some of the Omicron realities into Q1, but you did highlight revenue management actions that you're taking.

We are seeing favorable trends with Omicron and kind of the speed of this normalizing seems to be encouraging, knock wood.

Just can we look at this gross margin performance in this quarter and think of this as a kind of a base thing of where gross margins should kind of settle out from these pressures in the near term, because we do have these positive levers that you're pulling against it going forward?.

So maybe I'll comment on Omicron first. I'm pleased to report that even I looked at the data today, where we're seeing things return back to normal in terms of our cases and our plants, they're down substantially and the number of call offs that we're seeing are down substantially as well.

So Omicron is now I think should begin to normalize across the country. As far as the other pressures are concerned on margins, maybe Tom, I'll turn it over to you to give you an outlook..

Yes, and Todd I will start by saying it's difficult to give specific guidance given some of the disruptive impacts we experienced in the quarter. As you look at some of the headwinds, we do, you know, we had over 200 basis points of dilution due to the commodity impacts on our raw materials and certainly we priced to cover a lot of that.

But naturally, as you raise prices and have higher costs, you have natural dilution that's going to hit your P&L. And that that we expect to continue about 200 a little over 200 basis points going forward. Some of the other headwinds we're expecting is continued labor, and other inflation. We do expect some of these disruptions to continue.

Now in terms of tailwinds, the Retail segment, took another pricing action on the dough based products recently, and the Foodservice segment took another pricing and the goal from a dollar basis is to offset the inflationary impacts.

And then in terms of the supply chain challenges we experienced, as Dave highlighted, we have some discrete actions in place. So a lot of headwinds, and some tailwinds.

Difficult to give you a specific kind of ongoing impact, but certainly that commodity inflation piece, we expect to stay with us that 250 basis points of dilution, given the natural higher prices and higher costs that will flow through the P&L..

Okay, great. I'll pass it along and jump back into the queue. Thanks..

Our next question comes from Ryan Bell with Consumer Edge Research. Your line is open..

Good morning..

Good morning, Ryan..

Good morning, Ryan..

So just trying to touch a little bit more on the Foodservice industry trends.

It seems like from your commentary was that you're gaining share going ahead of the category overall, maybe could you touch a little bit more on the category growth and then sort of your relative performance? It seems some of the drivers are what your mix is, outside of that I just wanted to see if maybe you could provide any additional context?.

Sure. So, if we were, maybe to take a real wide angle look at this, if you go back to the summer through the middle of January, and you looked at all Foodservice concepts, I mean, what we would see is that the industry overall and transactions is just down modestly.

If you then click in and you'll look at the QSR space, and what you would have seen on transactions, again, is that the QSR space would have been, let's say, 50 basis points of modest growth and transactions with their sales growth supported more by pricing overall. Right? But in transactions, they would have been up modestly.

If you look at our business then and you click into that, Ryan, what you're going to find is that, within that mix, there are a handful of customers that are outperforming the rest. Some of the QSR is Chick-fil-A is one that we mentioned by name, and then pizza QSR is another area subset that's performed well.

So when you look at our performance versus the industry as a whole, typically we're performing to the tune of historically it was a couple of 100 basis points better than the industry, we're performing even better than that, just because of the strength of the concepts that we're aligned with.

Now, what I wouldn't tell you is that we're gaining share with the concepts that we're working with. But we're positioned with the concepts that are growing in the market, that when you compare our business versus the market is going to show that we're growing faster..

Thanks. That's helpful.

Could you also touch a little bit more on the details behind the capacity expansion efforts? And what sort of the impact would be from the increase in co-manufacturing usage? And I'm not sure if I picked up on this correctly, but in terms of the co-manufacturing increase and uptick the duration of that, and when can some of that be brought in house and sort of the margin implications there?.

No, and I think this is, you take all of the challenges associated with COVID and if it's possible, you move them aside for a second, one of the things that's happened in the last two years, is that we've grown our business by almost 25% when you look at consolidated net sales.

When you look at our Retail business, it's grown by almost a third over that same period of time. And then really, you kind of screw in two clicks deeper, as I mentioned in my transcript, when you look at our licensed sauces, in Q2 of fiscal year 2020, we did $22 million in sales roughly. In Q2 of this year, we did almost $80 million of sales.

Right? So if you think this is during COVID, we've taken a business that might have been operating at a run rate of about $90 million or so, and we've taken it up to a run rate now that's closer to $320 million. Right? So and that's the sort of order of magnitude of growth that we're talking on a run rate with these licensed sauces.

And we've done it, we've continued growth on Olive Garden, so with the growth now of Chick-fil-A, which on a run rate, and this is scanner data, this is all the stuff that's publicly available, Chick-fil-A is bigger than Olive Garden already and it hasn't been in the market in a year yet.

Right? And then we've also been working to expand Buffalo Wild Wings. So part of what's happening here is that we've had to make some moves, pretty aggressive moves in order to bring online the capacity fast enough to facilitate this growth. And there's a strategic reason why we had to do it.

When we go out we talk to key partners like a Kroger or like a Walmart and we say, hey, look, we want you to cut in eight facings or 12 facings on a shelf for the product. If we're not there to deliver on the promise, the next time we come back with an opportunity to expand, they're going to say talk to us next time.

Right? So we have one chance to get it on the shelf and demonstrate that it works. And we wanted to make sure for the purposes of our long-term growth algorithm that we didn't miss that opportunity.

Now to capitalize on that growth, it's coming at a cost, not a price, we're not buying down the price in order to get it to turn on the shelf, quite the contrary. But what we are having to do is pay a material up charge based on the strength of the items to get co-packers to bring, to allow us to rework our mix of business.

And what I would tell you is, we're pushing a range of products out, a lot of our own products like Simply Dressed, et cetera to make room within our own capacity to meet the needs of the business. Now, flipping over to the capacity expansion, our biggest facility in our dressing network is our Horse Cave facility. It's about 250,000 square feet.

And this expansion that we're bringing online is about another 200,000 square feet. So, from a production perspective, it's going to be a material increase in the size of the facility with a couple of bottling lines and then also capacity to meet the needs of our Foodservice business.

As I pointed out, that project is slated to be done in the first half of fiscal year ’23. So, within the next year, we expect that project to come online and then sequentially we're going to be starting up kitchens in lines to allow us to gradually rework the balance of what we have out in co-packers.

Now maybe with the footnote, you've heard one of the things that I mentioned in my comments today is that we were excited to announce that we're expanding our partnership with Chick-fil-A now to also include barbeque sauce. And so, part of our decision to pull back versus leave out is going to be predicated on our ability to drive this growth.

Right? If we find that we continue to have more and faster opportunities, we will continue at least at some level to lean on these great co-pack partners and they are great partners, they're helping us accommodate this growth in this environment.

To the degree to which our growth rate starts to let’s say moderate at some point in the future, obviously we start to think about a different algorithm. And well, let's say a strategy for using our co-manufactures.

But really, what we're focusing on here is what we feel like is a really unique opportunity by virtue of our strategy around Foodservice to Retail licensing and the speed of these things that’s forced us to go out and lean hard into co-packers to capture the opportunity..

Thanks, I appreciate the context on that and then some of the details, sort of a push out for Chick-fil-A barbeque product.

And then just from a general sense I understand and it's a tough environment to try to predict what’s going to happen in terms of pricing, but if say the pricing environment overall or costs side overall sort of stabilized, what do you think about the key to insert the movement sequentially, if your gross margins over the balance of the year is the pricing that’s currently in effect and plan to go into effect enough to tip the scales so that it might move upward on a year-over-year basis or at least the decrease starts to ameliorate somewhat?.

So maybe I’ll hit it sequentially and then I’ll turn it over to Tom to cover the points that I don't make. Really for the last handful of years we talked about our PNOC strategy, which is pricing net of commodities. And historically when we launched it we were just looking at commodities.

Within about a year or so we started to also include freight in our net PNOC conversation. And then most recently now with the labor changes, we started to track wages in that PNOC conversation.

So what I would tell you Ryan, today when we look at our PNOC, we -- with the pricing actions we've taken, we've largely recovered the commodity component and the freight component.

Where we’re lagging is in the way trade adjustments that we’ve made and we're in conversations on the Foodservice side to recover those and we have pricing actions that are in place and Retail to cover those. So, I would expect from a PNOC perspective that as we go through Q3 and Q4, PNOC should become net neutral.

Right? So that's how I would view that. And then what I would tell you is that there are other, let's just call them temporary points of dislocation in supply chains that we're all facing, things like truck drivers and inbound supplier issues because of their own issues.

So I think we're just going to have to wait and see how they work their way through. What I would tell you is that and Tom and I pointed out, we’re taking a range of actions to creep into our suppliers where we have to, to make sure that we can assure more stable supply, so we can make our factories run more predictably.

And Tom, I don't know if there's any else left..

Yes, I think you hit out Dave and I think there's one additional point to add in that. Our pricing has been well received by the retailers. I think the strength of our brands that we're seeing good reflection and the elasticity impacts are in line or lower than what we had originally projected.

So we feel good about overall our ability to price to recover these costs, but it will take some time to stay as outlined..

Thanks. One last one from me. Could you touch on some of the potential on marks once you implement the Project Ascent program in the beginning of 2023, just in terms of general productivity? And then obviously your balance sheet is quite flush, what that would mean in terms of your abilities to digest a larger acquisition..

Yes so, we're on the forefront of some exciting times.

If you remember, we did a pilot implementation of one of our factories that went into effect about a year ago now and it's proven to be very helpful and a lot of what we're seeing is just the speed to information that we would have had access to in the past, that’s helped us with things like staffing.

Within the next couple of months, it’s going to be taking the trade promotion management component live on the system and then finally when we go live, earlier in the next fiscal year with order to cash, procure to pay, and the other components, I think that's where we would likely to see an even larger benefit.

The benefits are likely to come in the usual places.

Procurement is going to offer an opportunity, but the bigger area is just going to be the speed of information in our factories to make sure that we're staffing right, and that we're sourcing right, and we're running right, and it's a little bit hard for us to estimate exactly what's that's going to look like in a COVID environment, and then longer term Ryan, what this is going to give us is the ability to do much more seamless acquisitions with cost synergies that we haven't been able to do in the past.

If you go back to the underlying reason why we did this, our current ERP system was installed in 1995, the vendor when out of business. When we installed it, we didn't really cascade it through the supply chain in areas like MRP, which had resulted in a business today that’s run pretty manually.

And when we look at acquisitions, it really precludes us from looking at cost synergies and we focus more on growth.

Not only is this going to give us a stable platform, but I think it's going to give us a scalable platform for us to look at acquisitions or for example bringing online licensing and other stuff where we can ramp up very quickly and very seamlessly in a way, we can today..

Thank you..

Thanks Ryan..

And we have a follow up from the line of Todd Brooks from The Benchmark Company. Please go ahead..

Hey thanks for the second crack here. Can we talk about Chick-fil-A barbeque, and I guess it seems like that probably hits on more categories of Retail competitively than Polynesian does.

Just any commentary that you can give us out of the Foodservice side about Barbeque popularity versus Polynesian popularity and kind of size where this falls between Chick-fil-A sauce and Polynesian from a revenue opportunity..

So, Chick-fil-A barbeque sauce is a category, about a, if I remember right $500 million category, maybe a little bit bigger than that. As you pointed out there are a range of competitors that play in this space.

If you look at it within Chick-fil-A’s line-up, it's probably one of their, it is probably their #3 sauce, so it’s a material contributor to what they do. And part of what this gives us, Todd as we think about our longer term brand what we're looking to do ultimately is to create a bigger and more substantial brand lock on the shelf.

So if we were to sort of say leaping forward what does the future look like here? I would say obviously Chick-fil-A original, Polynesian sauce, Barbeque and then some players to be named later that are in the works.

But the other thing that we're going to be focusing on is launching larger sizes that allow us to drive greater holding power on the shelf, greater holding power in the pantry. It really creates a road map. For example, the way we grew Ketchup when I was at Heinz and the way we thought about mac and cheese when Tom and I were at Kraft together.

It all becomes part of how you grow up, a really meaningful brand. Encouragingly when we look at the brand today, we continue to have extremely high velocities. Our trial is high, our repeat is high.

I believe even as of right now it's our #2 brand or so in household penetration really only trailing New York, but in due course we expect to see that quite possibly past New York as well. So it continues to be a very, very exciting platform. All of our retailers are excited about it.

And maybe bringing you around to the last point is, as you recall when we were trying to bracket this, we said that we thought it had the potential to be the same size as Olive Garden. And right now what we have essentially is two SKUs. We have a Retail 16 ounce in original and Retail 16 ounce that's in Polynesian.

And those two SKUs are already generating sales -- net sales in -- or excuse me, Retail sales that are in excess of what we're doing out there with Olive Garden with a lot of room to run..

So Dave, I'm drawing this kind of picture in my head of what Chick-fil-A will eventually look like as far as placement and breadth on the shelves at grocery.

Can you kind of level set us how long after a Horse Cave opening, does it take to fully realize the potential of Chick-fil-A at grocery retail, so not unlocking club or anything, but maximize that grocery potential?.

Well, maybe going back to -- if you're thinking about how do we line this up sequentially, the factory is going to come online in the second half of the next fiscal year. So it's going to be coming online, really, let's call it, in the fall time period with kitchens and lines starting up thereafter.

That's going to allow us to really start to expand more aggressively. There are two bottom lines there with the number of kitchens that we're going to be able to grow into, but based on the modeling, we have a base case and we have an upside case that we're looking at here. We think that factory gives us capacity for a handful of years.

In the upside case, it's quite possible that we're going to be looking for another facility either to buy or build. And if you go back to the comments that were in the script, that was one of the things that we pointed out.

We actually engaged a top-tier consultancy to look at our growth algorithm and overlay our capacity footprint, and then also begin to give thoughts to regionality and transportation in this and to start to think about, okay, what not only do the next two years look like, but what do the next four or six years look like.

And how do we make sure that we grow, but we're also growing margin as we push our way through this. So hopefully, that gives you some to think about. And then I would tell you, we continue conversations with other partners about other licenses that fit into this mix.

So I would say another thing that continues to give us a measure of optimism in a complicated COVID environment is that our strategy around these licenses continues to hold and our own brands continue to perform well in the environment. We just need to make sure that it's translating to profit..

Yes, that's helpful and then it dovetails into the next question.

I think last call, you may have talked about the license branding strategy, and it's kind of evolved from a -- go deeper with the three existing partners at Retail or look at other partners who want to work with us that we may have Foodservice relationships with, and we could help them get to Retail as well.

I think the last call, you kind of debunked that a little bit, and it's not as much of an either/or, is a both.

So if you can talk about maybe depth of that pipeline, opportunities that might be outside of -- are there opportunities that are outside of bottled dressings and sauces, where capacity may exist to unlock some more momentum on the licensed branded products? And I'll leave it there, thanks..

So another good question, Todd and per earlier conversation, we don't view it as an either/or. We view it ultimately as an and. We are looking at adding other licensed partners against dressings and sauces.

We'd be very interested and we are exploring opportunities around dips, for example, and then also selectively in baked categories where we have the capabilities. So really, we're looking at anywhere where we have capabilities and the opportunity to move into licenses. And that's where we think this thing has literally a number of years of legs.

And it's -- if you look at the broader landscape and you look at the shelf and you look at the world that our consumers live in today, I think about when I started in marketing and consumer packaged goods at Heinz, I mean, typically you generate an idea, you would test the idea, you would go out, you would put advertising behind the idea to try to break through to consumers and drive awareness and trial and get it on the shelf.

When you think about that world then, it seems quite now in a world that's loaded with social media and all sorts of distractions that consumers have and our ability to penetrate that and to reach consumers' minds is increasingly difficult.

And I think that's part of the reason why what you're starting to see our brands that have a different sort of a hook. So take BodyArmor for example, who could have ever thought that somebody could have got on the other side of Gatorade.

Right? Well, BodyArmor with the backing of Kobe Bryant back in the day was strong enough obviously, to penetrate that. You've seen the same thing play out with brands like Honest with Jessica Alba's backing. And you've seen it play out in the spirits industry with Trace Amigos and with Aviation Gin.

And so, our view is rather than tying up with a particular partner, we would prefer to use really what we view as a core competency, culinary skills and relationships with top-tier and relevant food service partners to take their products on to the shelf.

And in so doing this, it allows us to leverage their marketing muscle and their awareness in order to penetrate the consumer noise.

And so I think that, that strategy seems to continue to hold at sort of a really high level and when you bring it down to our little company here and the brands that we work at, we can work with, we continue to believe that it's highly relevant and a great pathway to create value for us and our licensing partners..

Okay, great. That was helpful. Thanks Dave..

Thank you. And there is no further questions. I will turn the call back to Mr. Ciesinski for his concluding comments..

Thank you, everyone, for your participation this morning. We look forward to joining with you for our third quarter results early in May and in the meantime, stay safe, and we'll look forward to talking with you then..

Thank you, ladies and gentlemen. This concludes today's conference. You may now disconnect. Have a wonderful day..