Lancaster Colony: Reports Q4 and Fiscal Year Results

Westerville / OH. (lc) Lancaster Colony Corporation reported results for the fourth quarter and fiscal year ended June 30, 2019. Highlights are as follows:

Fourth Quarter Results

• Consolidated net sales increased 5.0 percent to a fourth quarter record USD 323.7 million versus USD 308.2 million last year. Excluding net sales attributed to Bantam Bagels and Omni Baking Company, both of which were acquired during our fiscal second quarter, consolidated net sales increased 1.3 percent.
• Retail net sales declined 1.4 percent to USD 154.5 million. Excluding the incremental contribution from Bantam Bagels, Retail net sales declined 2.2 percent. Reduced sales volumes were driven by declines in flatbread wraps, refrigerated dips and the ongoing impact of our decision to selectively exit some low-margin private-label business. Partial offsets to the sales decline included volume gains for our frozen dinner rolls which benefited from this year’s later Easter holiday and continued growth for shelf-stable dressings and sauces sold under license agreements along with improved net price realization.
• Foodservice net sales grew 11.7 percent to USD 169.1 million. Excluding the impact from the Bantam Bagels and Omni Baking acquisitions, Foodservice net sales increased 4.8 percent. The segment’s 4.8 percent gain in organic net sales follows the strong growth of 11.6 percent achieved in last year’s fourth quarter. Higher Foodservice sales resulted from volume gains throughout the segment including national chain restaurant accounts, branded products and frozen pasta products. The incremental net sales from the Bantam Bagels and Omni Baking acquisitions totaled USD 2.8 millionand USD 7.7 million, respectively. The sales for Omni Baking are attributed to a temporary supply agreement that is expected to end no later than November 2020.
• Consolidated gross profit improved USD 2.0 million to USD 78.2 million driven by the increased sales volumes in Foodservice, lean six sigma program cost savings in transportation, manufacturing and procurement, and improved net price realization in Retail. Gross profit was unfavorably impacted by costs attributed to the Omni Baking operations in addition to investments to support expanding retail distribution of Bantam Bagels.
• SG+A expenses increased USD 7.0 million including USD 1.8 million in spend for our ERP initiative, increased investments in personnel, incremental costs attributed to Bantam Bagels and startup costs for our newly-opened innovation center.
• The change in contingent consideration includes the favorable impact of a USD 7.4 million non-cash reduction to the fair value of the acquisition-related contingent consideration for Angelic Bakehouse as of June 30, 2019. The USD 7.4 million adjustment was partially offset by a USD 0.7 million increase in the fair value of the acquisition-related contingent consideration for Bantam Bagels.
• The restructuring and impairment charge of USD 1.6 million is the result of our decision to close our frozen bread facility in Saraland, Alabama. Production at that facility ceased in mid-July and was subsequently moved to other facilities within the company’s manufacturing network.
• Consolidated operating income increased USD 0.6 million to USD 43.3 million as influenced by the factors referenced above. Retail segment operating income increased USD 2.4 million to USD 32.3 million including the favorable impact of the USD 7.4 million non-cash change in contingent consideration for Angelic Bakehouse. Retail segment operating income was unfavorably impacted by the lower sales volumes, ongoing costs for the Omni Baking operations and higher levels of trade spending and coupon expenses, some of which were targeted towards expanded retail distribution for Bantam Bagels. Foodservice segment operating income increased USD 2.4 million to USD 18.4 million as the segment benefited from the higher sales volumes and cost savings generated by our lean six sigma program, partially offset by incremental costs attributed to Omni Baking.
• Net income totaled USD 33.0 million, or USD 1.20 per diluted share, compared to USD 32.4 million, or USD 1.18 per diluted share last year. In the current-year quarter, the change in contingent consideration for Angelic Bakehouse increased net income by USD 5.7 million or USD .21 per diluted share while spend for the ERP initiative decreased net income by USD 1.4 million or USD .05 per diluted share and the restructuring and impairment charge reduced net income by USD 1.3 millionor USD .05 per diluted share.
• The regular quarterly cash dividend paid on June 28, 2019 was maintained at the higher amount of USD .65 per share set in November 2018.

Fiscal Year Results

• Consolidated net sales increased 6.9 percent to a fiscal year record USD 1,308 million versus USD 1,223 million last year. Excluding net sales attributed to the acquisitions of Bantam Bagels and Omni Baking, consolidated net sales increased 4.5 percent.
• Retail net sales increased 1.0 percent to USD 656.6 million. Excluding the incremental sales from Bantam Bagels, Retail net sales improved 0.5 percent as influenced by volume gains for shelf-stable dressings and sauces sold under license agreements, improved net price realization and lower coupon expense. Notable offsets to Retail sales growth included volume declines in flatbread wraps and our decision to selectively exit some low-margin private-label business.
• Foodservice net sales advanced 13.7 percent to USD 651.2 million. Excluding contributions of USD 7.3 million from Bantam Bagels and USD 19.4 million from Omni Baking, Foodservice net sales grew 9.1 percent. The sales for Omni Baking are attributed to a temporary supply agreement that is expected to end no later than November 2020. Consistent with the fiscal fourth quarter, organic sales growth for the fiscal year period was widespread throughout the segment with national chain restaurant accounts, branded products and frozen pasta products all contributing.
• Consolidated gross profit increased USD 22.7 million or 7.5 percent to USD 326.2 million driven by the increased sales volumes in Foodservice, cost savings from our lean six sigma program and improved net price realization. Gross profit was unfavorably impacted by incremental costs for the Omni Baking operations, investments to support expanding retail distribution of Bantam Bagels and higher warehousing costs.
• SG+A expenses increased USD 19.9 million to USD 149.8 million driven by increased investments in personnel and business initiatives to support future growth, including our ERP initiative, and the impact of our two acquisitions.
• The change in contingent consideration includes the favorable impact of a USD 17.1 million non-cash reduction to the fair value of the acquisition-related contingent consideration for Angelic Bakehouse. The USD 17.1 million adjustment was partially offset by a USD 0.9 million increase in the fair value of the acquisition-related contingent consideration for Bantam Bagels.
• Consolidated operating income increased USD 19.4 million to USD 190.9 million as influenced by the factors referenced above. Retail segment operating income increased USD 8.7 million to USD 135.1 million including the favorable impact of the USD 17.1 million non-cash change in contingent consideration for Angelic Bakehouse. Incremental costs for the Omni Baking operations, investments to strengthen the Retail leadership team and spending to support expanding distribution of Bantam Bagels were the notable offsets to the favorable USD 17.1 million fair value adjustment. Foodservice segment operating income improved USD 15.4 million to USD 73.8 million with the higher sales volumes, cost savings generated by our lean six sigma program and some inflationary pricing among the notable contributors.
• Net income totaled USD 150.5 million, or USD 5.46 per diluted share, compared to the prior-year amount of USD 135.3 million, or USD 4.92 per diluted share last year. In the current year, the change in contingent consideration for Angelic Bakehouse increased net income by USD 13.1 million or USD .48 per diluted share while spend for the ERP initiative decreased net income by USD 1.4 million or USD .05 per diluted share and the restructuring and impairment charge reduced net income by USD 1.3 million or USD .05 per diluted share. In the prior year, the Tax Cuts and Jobs Act of 2017 resulted in a favorable one-time deferred tax benefit of USD 9.5 million or USD 0.35 per diluted share.
• The regular quarterly cash dividend was increased for the 56th consecutive year.
• The company’s balance sheet remained strong, with no debt outstanding and over USD 196 million in cash and equivalents as of June 30, 2019.

Fiscal 2019 Commentary

CEO David A. Ciesinski stated, «We were pleased to report record net sales for fiscal 2019 driven by strong organic growth in our Foodservice segment and the two acquisitions we completed in our fiscal second quarter. Our supply chain team completed another successful year of reducing costs and improving operational efficiencies. Specific examples include numerous end-of-line automation projects, the launch of our new transportation management system, improved material yield and process controls, and tactical procurement initiatives including should-cost modeling and more extensive competitive bidding. The recent closure of one of our frozen bread facilities will also result in a better-optimized manufacturing footprint going forward.»

«While the financial results for our Retail segment did not meet our expectations this past year, I am confident that the leadership changes and other strategic initiatives completed in fiscal 2019, including our new innovation center, have positioned the Retail segment for improved performance going forward.»

Fiscal 2020 Outlook

Ciesinski continued, «Looking ahead to fiscal 2020, Retail sales will benefit from new product introductions planned for launch throughout the year, including our New York BRAND Bakery® 3-Cheese Cheese Sticks and Sister Schubert’s®sweet rolls in a variety of new flavors including Pumpkin Spice and Lemon Blueberry. Our Marzetti® refrigerated dip lineup will also be reformulated to offer new great-tasting dips with fewer preservatives. We also anticipate continued growth from shelf-stable dressings and sauces sold under license agreements in addition to incremental sales from the Bantam Bagels acquisition. In the Foodservice segment, we will maintain our focus on strengthening customer relationships through our culinary expertise in the preparation of custom-formulated dressings and dipping sauces, frozen breads and rolls, and frozen pasta while leveraging the added benefits of our new innovation center. Based on our current assessment, following a year in which overall commodity costs were generally flat, we anticipate an uptick in commodity costs for fiscal 2020. Pricing initiatives, in addition to ongoing savings from our lean six sigma program and other cost-out projects planned by our supply chain team, will help to offset these increased costs.»

«In the coming year, we will also continue to invest in our business for the long term as we complete a significant capacity expansion project for our Sister Schubert’s frozen dinner roll facility in Horse Cave, Kentucky. Our ERP initiative is another forward-looking commitment aimed to better position us for growth and operational improvements well into the future.»