All right. Thank you all for coming to the session for Lancaster Colony Corporation. Lancaster is a manufacturer and marketer of specialty food products for the retail and food service channels. I'm happy to have Dave Ciesinski, President and CEO, and Tom Pigott, CFO, to my far left. Thanks for coming this morning.
Pleasure to be here.
I guess, just because in the audience we might have some that are less familiar with your brand and company, I thought you could start off with an overview of the brand and the company.
Sure. Thanks, Drew. Lancaster Colony is a manufacturer and marketer especially food products, about $2 billion in sales, evenly split between retail and food service. We're a food company that you probably interact with regularly if you eat out, and you just had no idea. On the food service side of our business, three-quarters of our sales go to large national chain restaurant accounts led by Chick-fil-A, which is about 43% or 45% of that business, but followed up then by the likes of Domino's and Taco Bell, and a whole host of others. On the retail side of our business, we're known for our Marzetti salad dressings and dips that are sold in the refrigerated section, specialty bakery items such as Sister Schubert's and Texas Toast.
More recently, the last six years, we've really experienced a lot of exciting growth behind taking restaurant brands that you know, like Chick-fil-A and Olive Garden and Buffalo Wild Wings, and taking their eponymous products and moving those into retail, where we've created about a $500,000,000 retail business and retail sales behind long-term strategic partnerships and licenses that have allowed us to really be a big disruptor in the retail segment. Our most recent licensed partner is Texas Roadhouse, who I understand Drew is going to be presenting here later today. We've taken those rolls that they're known for with the cinnamon butter spread that are just unbelievable, and we're selling those in retail now in partnership. So, that's a little bit about us.
Yeah. Maybe touch on a little bit of the historical growth rates that you've spoken about on your public conference calls. I know you mentioned the last six years have been really strong growth. Maybe just any touch on any top-line growth metrics or targets.
Yeah. If you look at us over the last handful of years, we've been pretty consistently growing in the low to mid-single-digit top-line range, led by volume. During the COVID period, like everybody else, we had some pricing, but t he exciting thing about what we've done is we've essentially doubled the size of the business in the last eight years or so behind volume-led growth. Some of which has been Chick-fil-A, which, if you look at them, they've been growing about 11% on a compounded basis now to about $24 billion in sales or so. And then on the retail business, like I said, growing our own brands, Marzetti, Texas Toast, and Sister Schubert, but taking those licensed products and going after those billions of dollars of addressable opportunity in sauces, which we think are just an exciting place.
Yeah, that's great. I wanted to start off on the food service side of the business. We were speaking about this a little bit in the hall. The industry started with a few months of some choppy, I would say, performance from a traffic perspective early in the calendar year. I think you've spoken about sequential improvement through the quarter since then. I guess what's your outlook now as you near the end of your fiscal year that ends June 30th, and as we look ahead to fiscal 2026?
Yeah. What we've talked about is that we do see some very modest improvement. If you look at the traffic data, we're looking at the same information. We're still seeing, on average, restaurant same-store sales are probably down 100-200 basis points, which albeit is better than it had been. We expect that to continue for the foreseeable future. We think there's line of sight for us to do marginally better than that based on our book of business. Our call, when we had our most recent earnings call, was to the outlook was for flat volume with a couple of points of pricing as we look in the immediate outlook. As you look intermediate and longer term, we believe that the industry has space, and we have space with our collection of customers to be a low single-digit volume-led player in the space.
Yeah. Embedded in that outlook, I guess, what do you foresee as the biggest challenges or the opportunities on the food service side of the business in the year ahead?
Yeah. You know what really excites us, Drew, and I think you have a front-row seat to this, is if you look at menu importance over the last five or six years, it has really shifted. More and more growth attention is being focused on chicken. Initially, it was the chicken sandwich, and everybody wanted to get behind the chicken sandwich. Then it was nuggets. Most recently, it' s tenders and wings. You are seeing that really power an entire cohort of restaurants that are delivering exciting growth, among them Chick-fil-A, our partner, but also Cane's and Wingstop, and a whole host of others.
We think that trend has really long-term potential. Chicken is nutritious. Chicken is also cheaper as a source of protein than beef and pork. It is also environmentally sustainable. Overall, we are bullish on chicken. One of the unique features of chicken is that chicken tastes like, well, chicken. It begs for sauces. We make sauces. We think that, that trend of chicken growth really lines up with who we are and the potential for long-term growth.
Yeah. You' re kind of alluding to it there. I believe Chick-fil-A represents close to half of your food service sales.
That's right.
You're also growing your relationship there, moving them into retail. Maybe just touch on or share some insights for the audience on your direct relationship with Chick-fil-A, and maybe the growth opportunity ahead.
Sure. We have been working for Chick-fil-A for more than 40 years now, believe it or not. We sold our first case in 1984. It was mayo that they used when they used to make their own coleslaw in the back of house. Over those 40 years, multiple decades, we have evolved from selling that mayo to helping them develop a salad program and develop their own salad dressings, and then the sauce program to include Chick-fil-A. We did not invent Chick-fil-A sauce. One of their operators did, but we helped them test it and commercialize it at scale throughout the restaurants. We are on their Supplier Advisory Council, their Innovation Council, and we are with them monthly. Multiple levels of the relationship. Tom was with them a couple of weeks ago. I am with them usually quarterly. They are an amazing group of people.
I would say as they're growing domestically, we're moving with them. As they're expanding internationally, for example, into Canada, they're up to 20 stores now. We're doing all of that formulation work for them and producing that product. As they're expanding into the U.K., we're doing that with them as well. Really, in every sense, it's a partnership with the retail expansion being the newest component of that.
Yeah. If I'm correct, I believe, and I'm jumping ahead to the retail discussion, but you've recently expanded into Club, the Club Channel, correct, with Chick-fil-A?
Yeah.
I guess maybe touch on that and how that experience has gone so far.
Yeah. It's exciting. We are in Sam's, Costco, and BJ's. It's a product that they've been asking for for quite some time. We are encouraged by the velocity of the items that are moving through the channel. Importantly, for Chick-fil-A, they see the potential for retail to be a really material component of their business overall. I think what you'll appreciate is that these products in retail don't cannibalize the restaurant experience. If you look at any concept, most loyal consumers might visit a restaurant 10 times a year, 11 times a year. That leaves all sorts of meal occasions where people aren't going to the restaurant. What retail affords these operators, be it Buffalo Wild Wings or Olive Garden, or Chick-fil-A, who we're talking about here, is to engage with consumers on a far more regular basis.
If you think of that Chick-fil-A sauce and you're talking about families, which is their core consumer, that sauce is coming in and out of that fridge multiple times a week. Every one of those opportunities is a chance to remind the consumer to go and visit a restaurant. The same is true with Buffalo Wild Wings, and n ow with Texas Roadhouse, we're seeing that same trend play out.
Yeah. That's great. I mean, I think you touched on a lot of this. I was going to move over to the retail segment holistically and ask you to talk about the licensing program that's been a nice growth engine for you guys across all these brands that you just mentioned: Chick-fil-A, Buffalo Wild Wings, Olive Garden. Maybe just speak to how those relationships have evolved and maybe the outlook that you see for maybe each of those or the retail segment overall going forward.
Yeah. If you'd allow me, maybe I'd like to talk about why they make sense for us.
Yeah.
Since we're a material food service operator, over the years, we've developed this amazing ability from culinary to product development to make all sorts of sauces. We had a narrow range of brand platforms to move into these categories. The unlock for us was we said, Why don't we form a partnership with a food service operator that allows us to match their brand with these products that we can make and sell them in retail? It gives us the ability then to play in literally billions of dollars of categories. What I would say has evolved is they've gone from, let's say, a test-and-see mindset more than a dozen years ago, with concern that they might cannibalize restaurants, to a belief that if they're in retail, it actually inures to the benefit of food service. Their consumers have a more favorable perception of the brand.
They visit the restaurants more frequently, and they become an additional source of revenue for that restaurant concept. I think as a consequence, they view them now much more strategically than they did in the past, so much so that with all of these partners that are beginning to look at, Okay, we sell X, Y, and Z in a restaurant. But the brand doesn't necessarily have to be limited to X, Y, and Z in retail. It needs to be close. As a case in point, with Olive Garden, they sell an amazing Caesar dressing in retail today that's not available in a restaurant.
And what we're seeing is, they get more strategic about these brand platforms in retail. They're becoming much more open-minded to we can play in any one of a number of places as long as it's in keeping with their traditional brand promise. It's exciting. I would say their partnerships, their multi-year exclusive relationships, where we're mutually committed to growing their brand and profit for both parties.
Great. Can you touch on how the operating margins differ or if they're similar amongst those licensed items relative to the broader holistic retail channel?
And that's it. An important component. Actually, those are at or better than our own brand items. Part of the reason why we did that is we did not want to see growth in licensing cannibalize the margins on our own brand. The easiest way to think about it is Tom and I spent time together working on Kraft's portfolio business. I was at Heinz before that. A traditional CPG brand has a marketing budget. In this case, instead of paying marketing, we pay a license fee to the brand owner. At the end of the day, it settles out, and the margins are about the same. Within our company, they are at or better than our retail margins. The easiest way to think about a P&L on a brand is strip out the marketing spend, insert the license.
The reason why that's important for us is at the end of the day, we're a billion-dollar retail business. We're relatively small. If you look at the brands that we have, there are tens of billions of dollars of sales in some of these brands. They have millions of first-party data on their consumers by way of their apps. We're able to capitalize on their marketing muscle as a means by which to drive household penetration and engagement that allows our little company, with these big brands, to punch substantially above our weight. We can go up against, in let's say, barbecue sauce, with the likes of Buffalo Wild Wings, against any of the leaders that are in these categories. We can go into other sauces or dressings and do the same thing with Olive Garden's marketing muscle.
Yeah. That's great. Maybe can you talk about the current retail environment with respect to consumer behavior, pricing, private label competition, maybe just alluding to those licensing brands or your own private brands, Marzetti, New York Bakery, Sister Schubert's, et cetera?
Yeah. You look at 52-week, 13-week, four-week data. Essentially, what you're seeing are sales continuing to grow in the low single digits, but units are becoming sequentially softer in all edibles. This is the entire grocery store. There are, in fact, pockets of growth within there. Generally, what we're seeing, Drew, is that your middle-income and lower-income consumer is feeling the pressure of the broader economy. In those cases, they're trading down to private label. In some cases, they're just trading out, looking for altogether different substitutes.
I think the overall outlook for all retail, all edibles is it's still, I would say, a soft headwind that most are going up against. Within our categories, we're seeing some of the same. I think, that's why we're excited, because we see opportunities to continue to grow by way of our own brands and licensing in the face of that. Our call is still to be able to achieve low single-digit volume-led growth behind our innovation, even in spite of those headwinds.
Maybe speak to what's fueling that low single-digit volume growth, and maybe if there's any new products you're bringing to market within the Retail segment.
Right, innovation. In the case of Texas Toast, you would think, wow, Texas Toast is growing in this environment. We would say, yeah, it's growing both volume, sales, and we're continuing to pick up share. It's a very affordable meal complement in a tough economy. That item is growing. Caramel, believe it or not, caramel dip, which we sell, still growing. Again, people are looking for a tasty, affordable luxury at home, and apples and caramel seems to be hitting that spot. I think the bigger driver of what we have going on is behind our new items. We took Chick-fil-A into Club, which is providing for more expansion. Those Texas Roadhouse rolls are in the process of being rolled out, and they're just crushing it.
Yeah. Maybe touch on that a little bit further. Where are you in the distribution curve or growth with Texas Roadhouse? I mean, what sort of channels is it in today? Where do you see the opportunity going forward and maybe the cadence or pace at which you can get to if Club is a future opportunity for Texas Roadhouse? I mean, how long does it take to get to that point?
Sure. Today, it's available nationally at Walmart, Walmart alone, and we can talk about that separately if you're interested. It's available in four states: North Carolina, South Carolina, Kentucky, and Texas. We'll begin to ship it nationally into all retail or MULO in August. The item has moved with sufficient velocity that we've actually had to go back, make some refinements to our line to make it run faster, and actually add two shifts to be able to keep up with demand. It has quickly become one of the fastest-selling items in the frozen bakery section of grocery stores, even though it's just available at Walmart, and one of the top-selling items in all of frozen.
Yeah. I have a question from the audience on the iPad. As a reminder, if you have any questions, feel free to email session5@rwbaird.com. It was kind of an extension of the license commentary, asking about how do you go about category management and building out the shelf space on licensed products with your partners? I guess, how do you expand your shelf space? Does Lancaster have full control of that relationship or the launch? Or does the relationship, explain how that relationship works beyond that initial core launch or product?
Yeah. Are you saying the relationship with the retailer or with our partner?
With the retailer, I think. How do you expand? Or do you have control of expanding the shelf space, that sort of thing, with additional product extensions?
Sure. You know, I would characterize them as extremely collaborative. Maybe use Walmart as a case in point. Walmart actually played a critical role in helping spawn this. The frozen buyer, having watched what we were doing in the dry grocery section with sauces, said, hey, how do I get in on some of this growth? It was that frozen buyer who actually brokered an introduction between our company and Texas Roadhouse. We were able to take that forward, develop the product that very closely matched what they had in the restaurant, and then put it into a test in Walmart and predicated on the results that we saw. We saw Texas Roadhouse saw and Walmart saw. We were thrilled and said, let's expand it. We took it to more states, added more capacity, and then took it to Walmart across the country.
As we think about that partnership in particular, we sit with that buyer and we're thinking about the number of facings, the case counts, and everything else. We're beginning to talk about what might be some of those follow-up items that we can use. I would say it's absolutely collaborative in every sense in terms of how do we maintain the growth of the business and give their shoppers something to get excited about.
That's great. I think this is a more holistic question, maybe even bridges both food service and retail. How do you think about forward growth goals and what that mix might be between organic growth, acquisitions, or new partnerships? Maybe that's an extension of both segments, but maybe how would you address that holistically?
Since we've been together as a team, we laid out an aspiration to very consistently be in the top quartile of the food group overall. We believe that's somewhere in the, depending on the economy, low to mid-single-digit volume-led growth with some expansion at gross margin level by way of productivity that gets you to the mid or better on the bottom line. That's sort of our evergreen aspiration as a company. Tougher times, the numbers shift down to low. In better times, they can shift back up a little bit higher. That's really what we've laid out.
You know, if we look at the current environment that we're in, where we're still seeing food service headwinds and retail where the consumers are struggling, we're hanging into the low single-digit, volume-led growth with some gross margin improvement of productivity that gets us into the mid-single digit on the bottom line. No card tricks, strong cash flow, and away we go. I think the one new thing that we're thinking about with our algorithm is the last five years have really been driven behind organic growth and licensing. We're at a point in time now where we've reconfigured our supply chain. We ripped out our old COBOL-based system that was installed in 1996 and replaced it with SAP S/4HANA, which gives us a cost platform now that is highly scalable. We would, as a consequence, like to look at M&A as a component of our growth going forward.
We've also made some leadership changes on the retail side of our business, bringing in a person who we think is extremely talented to give us the ability now that we're a bigger business to be much more aggressively marketing some of our own brands to complement what we're doing on licensing so that the overall algorithm, if we look at the next five, six, 10 years, should be more balanced between licensing, own brand, and M&A growth.
Makes sense. Thanks for all that perspective. I was hoping you could share some insights regarding the R&D side of the business and how you think about innovation, maybe with your own brands or some of your license as a source of future growth, maybe within that organic umbrella.
Yeah. It's an important question because that is, in essence, who we are. We're a food company. If you reduced us, right, all the way down to the bottom, what's left? I would say it's our R&D capabilities. We have a team of chefs trained at the Culinary Institute of America and other places, and an extensive team of product developers. They literally specialize in rapid prototyping sauces or different items and bringing them to the market. We do it for restaurants by way of LTOs. We can do it to power our own retail business. I would submit that that capability is really what differentiates us in the marketplace, and it makes us so optimistic. No matter what, MAHA, tariffs, whatever, people are going to look for food that tastes great. That's who we are, and that's what we do.
You touched on, as a discussion point of the algorithm, some margin expansion. I think in recent years, especially the last two, you've had some nice margin expansion as inflation has moderated. I guess, what's your outlook for gross margins as we look ahead to fiscal 2026, and maybe discuss the key factors, maybe upward drivers or risks to that margin outlook?
I'll make sure I don't consume all the oxygen in here, Drew, all that time talking.
You're right, Drew. The last couple of years, as commodity markets have stabilized, we've been able to drive between 50 and 100 basis points of margin growth each year. As we get into next year, we expect to be able to deliver at that same level, excluding any commodity impacts. Key drivers behind that, one, as Dave mentioned, we finished the SAP integration. Now we have much better tools and data to analyze and to drive cost savings initiatives. Our procurement spend, we have total visibility, which we didn't have before, which allows us to negotiate better on that aspect of it. The other thing we've done is that we've done a complete network study.
We are exiting a plant in California that was less efficient for us, in the Silicon Valley. It's on a fairly high-value piece of real estate. We purchased a plant in Atlanta, Georgia, which matches our distribution, our customer base much better. This plant in Atlanta allows us to drive a lot of cost savings going forward because of its location and its capabilities. It was a plant that we were using as a co-manufacturer for us previously. That's going to be an aspect of the program. On top of that, we're doing value engineering where we look at our products and look at ways to make them less costly to customers, things like going from glass to plastic and looking at other packaging alternatives to drive cost savings. There are manufacturing efficiencies we can drive.
A lot of our legacy manufacturing network was very low in automation, and we continue to invest and have nice return projects behind that. A number of, and in terms of commodities, we have a nice revenue management program where we have a former Nielsen executive that helps us model out how to respond to different commodity equations. We have a number of initiatives that behind that margin, we're keenly focused on it. Most recent quarter, we were happy to grow margins even though our volume was down. Margins were up 70 basis points on a reported basis. It is a continued focus for us, and we feel like we have a lot of enablers to continue to drive it.
Obviously, tariffs have been in the headlines in recent months. Maybe can you touch on how tariffs impact your business and that margin outlook or more broadly? I know it kind of shifts every day, but maybe how are you thinking about it?
We're fortunate in that most of our raw materials are domestically sourced. We do not expect a material impact from tariffs. There was a point in time where we did think there was some risk to it, but most recently, based on the current outlook, not a material factor for us. We're fortunate to be one of the few players in the industry that does not have exposure.
Yeah. That's great. I think broadly stepping back in the restaurant industry and maybe even the consumer packaged goods, grocery channel, promotional activity has stepped up this year, broadly speaking, in 2025. I mean, what have you seen from your seat from a level of promotions or discounting? Do you see a need to elevate discounting activity from your seat to drive volume and support that volume growth? Maybe just touch on high-level kind of what you're seeing from promotional activity, discounting across channels?
Yeah. I mean, I think we've seen some of our peers get rather aggressive in promotions. What's nice about our categories is they tend to be more base volume-driven versus promotional volume-driven . We don't have to lean in as aggressively on promoted price points. There are different points where we will try to get into a little bit more aggressive to protect our position in the marketplace. Fortunately for us, we've maintained a fairly steady investment in promotions, and we expect to be able to continue to do that. We do do a lot of analytics, as I mentioned earlier, behind that spend and try to make sure it's optimized.
Yeah. That's great. Earlier, going back to the discussion around the algorithm, I know you kind of alluded to M&A as a potential part of the top-line growth going forward. I guess, what M&A targets would you be looking for in terms of key metrics or areas of focus that you would want to be involved with or that you would want to avoid? Maybe what are the financial metrics that you would focus on in terms of potential M&A targets?
It's a great question. As Dave mentioned, we have this core competency in our culinary ability in dressings and sauces. We do see segments of that market continuing to grow: Asian sauces, hot sauces, where we feel like we can bring a lot of value to a potential target in terms of our capabilities and our scale manufacturing. That's really where we're focused. We'll look broader than that, but that's the sweet spot of the M&A strategy. In terms of financial returns, we are kind of a discounted cash flow. We want a nice return for our shareholders. It's how we've always operated. That certainly is a factor in terms of how we evaluate potential targets.
Okay. That's very helpful. I know you have a strong debt-free balance sheet, maybe an extension to or an addition to M&A activity. Talk about your priorities with respect to capital allocation.
Number one is invest in the business. We've made a lot of the big investments we needed to make to build out the infrastructure, as Dave mentioned. We've put in SAP. That's behind us. We expanded our main manufacturing facility in Kentucky. We acquired the facility in Atlanta, Georgia. A lot of that's behind us. We're continuing to look at opportunities to invest in the base. M&A has now become more of a focus, as Dave mentioned. Beyond that, we have a long history of increasing the dividend. We're, I think, one of 12, 13 companies that have increased it more than 55-plus years in a row. Beyond that, we're starting to look at things like share repurchases as another way to return capital to our investors.
Yeah. I know a couple of times you mentioned the acquisition of the dress and saucing facility in Atlanta. I wanted to circle back to that and ask if you could talk about how that fits into your manufacturing strategy, if you see additional acquisitions or supply chain needs going forward. Maybe what are the potential benefits that just cost or top line from this acquisition?
Yeah. No, great question. I mentioned the cost efficiencies that we expect to get from it. On top of that, for a long period, we were strapped with our capacity. We had a high-class problem, as I like to call it. We could not keep up with the demand that was being generated. This Atlanta facility, as we look at our growth algorithm, which is low to mid-single digit growth over the long term, is the last piece that enables us to do that. We do not have a big need to invest.
The other thing I mentioned it was a really efficient use of capital for us. The cost per square foot, we compared it against the Horse Cave expansion we did, our main Kentucky expansion, and it was less than half. It was a really efficient use of capital to get us the capacity we needed in the opportune space to allow us to continue to grow and drive some cost savings.
That's great. We only have about 30 seconds left. I thought I'd just tee up one last question. I know one topic in the industry has been the weight loss drugs and their adoption across consumers here in the U.S. and likely abroad. I guess, can you comment on the potential impacts there or how you see that impacting your business going forward?
They really haven't been much of an impact to us. I mean, we're watching them carefully, like the rest of our peers, but we don't play in confectionery. We don't play in salty snacks. We don't play in beverage. I can't tell you we're completely immune, but we're nowhere near the bullseye. We're on the outer edge of the splash. I think GLPs, MAHA, tariffs, I think the point that Tom and I would like to make is that we're really not materially impacted by any of those trends. We see a line of sight to continue to do what we do, which is to innovate, partner, and grow even in this environment.
All right. We're out of time, so we'll leave it there. Let's thank the Lancaster team for being here this morning.