Good morning. My name is Andrea and I will be your conference facilitator today. At this time, I would like to welcome everyone to the Lancaster Colony Corporation Fiscal Year 2021 Q4 Conference Call. Conducting 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. And questions will be taken in the order they are received. Thank you. I would now like to hand the call to Dale Donofsky, Vice President of Investor Relations and Treasurer for Lancaster Colony.
Good morning, everyone, and thank you for joining us today for Lancaster Colony's fiscal year 2021 Q4 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 Conference Call. 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 website lancastercolony.com lead this afternoon.
For today's call, Dave Ciesinski, our President and CEO, will begin with a business update and highlights Quarter. Tom Pigott, our CFO, will then provide an overview of the financial results. Dave will then share some comments regarding our current outlook and strategy. At the conclusion of our prepared remarks, we'll be happy to respond to any of your questions. Once again, we appreciate your participation this morning.
I'll now turn the call over to Lancaster Colony's President and CEO, Dave Szitczynski. Dave?
Thanks, Dale, and good morning, everyone. It's a pleasure to be here with you today as we review our Q4 and full year results for fiscal year 2021 and look ahead to fiscal year 2022. I'd like to begin by extending a sincere thank you to the entire Lancaster Colony team for their exceptional efforts and countless contributions throughout fiscal year 2021. The record sales of 1,500,000,000 And record gross profit of $387,000,000 reflects the commitment and resolve of our associates to overcome the many challenges posed by the impacts of COVID-nineteen. Throughout the pandemic, we've remained steadfast that our mission is fixed.
1st, to provide for the health, Safety and Welfare of our teammates and second, to ensure that we continue to play our role in our country's vital food supply chain. We continue to monitor the protocols and guidelines provided by government health authorities and make necessary adjustments to promote safe operations at all of our plants and Distribution Centers. In our fiscal Q4, which ended June 30, consolidated net sales grew 20.2% to a record $386,000,000 Net sales in our retail segment grew 11.4%, Well, net sales in our Foodservice segment surged 33.3%. The 11.4 as the impact of the pandemic drove increased at home food consumption. Retail net sales in this year's fiscal Q4 was driven by our licensing program led by Chick Fil A and Buffalo Wild Wing sauces.
Chick The retail channel reached national distribution near the end of April. Per IRI data, the household penetration and repeat rates for Chick Fil A sauces continue to meet or exceed our expectation. From a sales standpoint, IRI scanner data showed that total U. S. Sales reached $38,100,000 for the 13 week period ended June 27.
We remain extremely excited about the outlook for Chick Fil A sauces in the retail channel. With respect to our own brands, per IRI data, we continue to grow market share in several retail categories during the quarter. This includes market share increases of 480 basis points for New York Bakery Frozen Garlic Bread, 60 basis points for Marzetti produce dips and 75 basis points for our branded croutons. I'd also like to note That compared to 2 years ago, our 4th quarter retail sales were up in nearly all of our product categories. When compared to our Q4 ended June 30, 2019, excluding all license program sales, our 4th Quarter retail sales were up over 10%.
In our Foodservice segment, the significant 33.3% increase in net sales resulted from volume gains throughout our customer base. Sales to leading QSR and pizza chain customers remained robust, While sales to mid scale and casual dining concepts recovered notably as we lapped last year's weak demand attributed to the impacts of COVID-nineteen. NPD data for foodservice industry shows that while traffic was lower, industry wide sales for the month ended June of this year had recovered above pre pandemic levels, exceeding sales for June of 2019 by 8%. 4th quarter consolidated gross profit increased 8.5% to a record $96,700,000 driven by the strong sales growth and our ongoing cost savings program. I'll now turn the call over to Tom Pigott, our CFO, for his commentary on our Q4 results.
Tom?
Thanks, Dave. Overall, the results for the quarter exceeded our expectations. As Dave highlighted, the strong top line Performance in both segments allowed the company to drive improved bottom line performance. 4th quarter consolidated net sales increased by 20.2 percent $385,600,000 Consolidated gross profit increased by $7,600,000 or 8 0.5 percent to $96,700,000 The growth was primarily driven by higher sales volume in both segments and improved change that we discussed last quarter. Offsetting this favorability were higher raw material costs as well as labor and freight inflation.
We also incurred higher co manufacturing costs as we outsource production to meet our growing demand. Gross margins declined by 2 70 basis points versus the prior year quarter, primarily due to the higher commodity costs in advance of our pricing actions and the mix shift to our Foodservice segment. COVID-nineteen related costs were consistent year over year. Selling, general and mid-1000000 dollars or 14.2%, primarily driven by higher spending per project spending and increased our IT investments. These items were partially offset by the lapping of the original Horse Cave expansion write off that occurred in the prior year quarter.
Consolidated operating income Increased by $742,000 or 1.8 percent to $40,900,000 The key driver of the operating income growth The first quarter was a strong top line performance, offset by the investment we are making on Project Ascent. Our effective tax rate was 22.4% this quarter versus a tax rate of 24.6 percent in the Q4 of fiscal 2020. This quarter's tax rate benefited We estimate the tax rate for the fiscal year 2022 to be 24%. Incorporated, offset by the investment we're making in Project Ascent. The Project Ascent investment reduced EPS growth by $0.15 per share.
With regard to capital expenditures, Fiscal year payments for property additions totaled $88,000,000 This amount was lower than expectations due to the timing of payments for The Lancaster Colony includes approximately 100,000,000 project that will help us meet the increasing demand for our dressings and sauce brands. In addition to investing in our business, we also returned funds to shareholders. Our quarterly with $0.75 per share from the prior year amount. Our long standing streak of annual dividend in December. Even with the investments we're making and the increased Dividend payments, our financial position remains very strong as we finished the quarter debt free with $188,000,000 Strong growth in both segments and solid execution of our strategies across the business.
We continue to monitor and adjust to the impacts of the COVID-nineteen outbreak, while investing in the long term potential of the business. I will now turn it back over to Dave for his closing remarks.
Thanks, Tom. As we look ahead, Lancaster Colony will continue to leverage the combined strength of our team, 1, to accelerate our core business growth 2, to simplify our supply chain to reduce our costs and grow our margins and 3, to Identify and execute complementary M and A to grow our core. In fiscal year 2022, Our retail segment will have tough comparisons to the strong growth of our licensing program and our foodservice segment, we anticipate increased consumer demand for in restaurant dining will lead to higher sales in the coming
Commodity Costs, but particularly
higher packaging, labor and freight cost will also pose a headwind to help mitigate these rising cost. We have pricing initiatives in place for our retail segment. From a timing standpoint, Pricing in retail will begin to take effect in late September early October. With respect to our Foodservice segment. As many of you are aware, the contracts with our foodservice customers are written to allow for periodic price adjustments to offset changes in commodity and freight cost.
Our ongoing cost savings programs will also help partially offset the unfavorable impact of inflation in the coming year. Note that our projected financial results and expectations for fiscal year 2022 remains subject to the impacts of COVID-nineteen, including shifts in consumer demand between retail and food service channels and potentially higher cost to produce our products and service our customers. Moving on to our supply chain strategy, our significant investment in production capacity, our dressing and sauce facility in Horse Cape, Kentucky is moving forward as planned with a target completion timeframe in the Q1 of fiscal year 2023, a smaller group. That project will provide some additional capacity needed to support the growing demand for dressing and sauce products in our foodservice segment. Additionally, because of the robust Demand we are experiencing across our portfolio, we are evaluating additional ways to expand our supply footprint.
To date, we've increased our use of co manufacturing. Going forward, we're also evaluating other alternatives. Given the supply chain, we've elected to defer implementation for Project Ascent, our ERP initiative to the start of fiscal year 2023. This will allow us to prioritize servicing the shifting demands and growth of our business. In closing, I would once again like to thank the entire Lancaster Colony team for all that they have done to make fiscal year 2021, a great success.
I look forward to working together with everyone in the coming year as we continue our journey to be the better food company. This concludes our prepared remarks for today, And we'd be happy to take any questions you may have.
Your first question comes from the line of Todd Brooks with C. L. King and Associates.
Hey, good morning everybody. Congrats On the revenue results in both segments, good to see the foodservice lift that we did in the quarter certainly.
Hey, thank you, John.
Two questions, if I may. One's around, if we can put a little color on maybe the pricing success that you've had at retail and how we should Kind of boil that success down and like you mentioned the pass through nature of the foodservice segment from a cost pressure standpoint. Can you dimensionalize it a little bit for us with the success that you had as far as what we should be thinking for fiscal 2021?
Yes, most certainly, I'd be happy to do that. First, if you remember when we did our Q3 call, we said, hey, inflation is on the horizon. One of the things that we're planning for is pricing. One of the things you're going to want to monitor is our ability to price and We're happy to report that following that call, we had conversations with our retail partners, dimensionalize the inflation, a pass through price increases and those have been successfully received. And as I mentioned in the script, we expect in retail for those changes to be reflected on the shelf Agency.
We have a process built into our contracts that sort of marks to market. As we see the inflation, we Go back and work with them to pass through the commodities and transportation and that fully remains in place as well. So the good news is from a structural perspective, all of that is firmly in place. And I think in the long term, that's going to allow us to and in the intermediate term to work past the impact of inflation. As it pertains to the impact in gross margin, maybe there's one other Nuance that I'd like to add for you that I'd like to just dimensionalize on the call the magnitude of the inflation that So if you look at our business, our COGS are about $1,000,000,000 60% of which are commodities, Raw Materials and Packaging.
When we look at our basket of for fiscal year 2022 going forward. We're looking at inflation of roughly 20% for that basket of goods. A little bit more than half of that is soybean oil. And I mentioned soybean oil because I know you cover lots of other Companies and every company has a little bit different profile in terms of what drives their business. And with us, soybean oil is an important thing that you're going to want to track, seed oils in general, but soybean oil in particular.
Now with this, the reason why I pivoted to cost and now I'll come back to pricing is because when we see that pricing, The inflation come to us. We're passing that along the dollar for dollar back into the business back to our retailers. What we're not doing is pricing To protect margins, we're pricing to protect the cost inflation that comes in. And on the retail side, what happens with that is we end up with Some modest dilution against margins. So we fully expect in the short term and in the intermediate term to see some margin dilution against the business for a couple of reasons, but one of which, the most significant of which is this fact that when we do see inflation of this That we are going to see some modest dilution
in the business.
That's very helpful, Dave. Thanks. And just a follow-up there in And I don't think the story has been written yet for kind of transitory versus some permanent pressure on costs. If you look historically and maybe there's not an analog to compare this to, your success in taking price, How sticky is that if we do see supply chain related improvements that do allow cost to Come down relatively quickly as we move through fiscal 2022.
I think it's I've thought a lot about this, Todd. It's a great question. I think we almost have to go back to the 70s early 80s We used to look at inflation that was of this magnitude. And if you look at it, that period of time was the heyday for consumer packaged goods companies for the precise reason that they did see inflation and they were able to pass that inflation along. If past is prologue, Given the nature of what we do that we mark to market, it's conceivable that if we see a pullback in some of these areas, on the inflation, We would obviously adjust our prices down and it would go the other way, but right, it's just as we pass I said through dollar for dollar on the way up, we would pull it out dollar for dollar on the way down and that's for the national account piece.
But All indications are so far that the first step has fallen into place that we've had the conversations with retailers across the board. They're seeing it in their own private label and they've been supportive of the conversations.
That's great. And then my final question, if you look at And there's lots of evidence of Lancaster chasing a historically strong demand rebound and then Just demand growth from not just the licensed products, but success in market share gains. As we look across 2022 and 2023, What's your roadmap for some of the actions you've had to take, whether it's reaching out to co manufacturers or Maybe delaying growth in other verticals like drug and discount to service this kind of surge in demand that you're seeing now. How do you see that unfolding? Kind of if you can give us a map to okay, we're going to be in a place to service this level of demand in 'twenty three with Horse Cave, it's going to take more than that.
Can you kind of just Help walk us through internalizing some of this outsourced manufacturing that you're needing right now. Thank you.
Sure. I'd be more than happy to. And first, I think I would start with the overall assumption that we're thrilled with the strength of the demand for our products, both in retail and in foodservice. Some of the actions that were taken are unique to this Particular point in time, given COVID and the labor uncertainty. So maybe what I would say is, let's take COVID and labor uncertainty and let's move that to the side For a second, and let's just talk about the actions that we're putting in place to support the short term, intermediate term and long term growth in our business.
The first thing that we're doing obviously is adding incremental shifts to our own facilities to make sure that they can run. The second thing that we've done that We shared with you is that we put in place capital expansion projects, the most significant of which is the Horse Cave project that's about a year out. And then to bridge that gap, what we put in place was an expanded use of co manufacturing partners. And all three of those pieces are coming along exactly as we intended. What we're beginning to see now, Todd, is as we look across the horizon, we look at the strength of the velocity on the Chick Fil A item, the strength of the demand for Buffalo Wild Wings and just the continued growth of our produce dressing, of our produce dips and other items within our portfolio.
As I mentioned in my prepared remarks, we could see that we would be potentially tight again. So when I That we would want to even be longer term, not necessarily a shorter intermediate term But do we look for a strategic relationship with a co manufacturing partner? What we're also looking at candidly is brownfield scenarios and even Potentially purchasing a Coman should that opportunity present itself. So but I would sort of frame this in the context This is all sort of predicated on the fact that we're looking at the performance of these items. We're looking at the strength of the demand in our foodservice business, and it's an exciting time for us.
What we want to do is just make sure that we're taking those actions with enough forethought and enough time to make sure that we just allow for seamless growth as long as this is presented before us, But also thinking about contingencies if in the event it were to slow down off of this galloping pace that we're at.
That's great. Thanks, Dave. And then I'll pass it along to the Thanks. Thanks,
Todd. Thank you, John.
Your next question comes from the line of Greg Pendy with Sidoti.
Hi, guys. Thanks for taking my questions. Just the first one, can you just give
us any color on repeat purchases in Chick Fil A?
Yes, it's been extremely strong. So if you look at the markets where we've Maybe I would predicate with the following. If you look at the national launch, it's only been in place since April. So we really don't have on a national basis This strong repeat information is just too early in the purchase cycle. But if we look in areas like the Southeast, what we're seeing is repeats Are in the high double digits in the 40% to 50% range, and we're seeing household penetrations that are also in the double digits.
Great. And then just as you talked about inflation, you're probably not alone. But just when you look at your portfolio of brands, Where do you think the risks or opportunity to see these sticker shocking higher prices across the board? Is it people trading into private label Or are there sort of other areas where people might either trade up or down within your portfolio?
You look at our portfolio, things like soybean oil are going to be impacting everybody because of the formulas that people use, right? And if you look at other alternative oils, they're actually more expensive, not less. I would say the bigger elasticity as those prices go up, how do the consumers What do they do, right? And it could come as a result of trading down or trading out. All of that's baked into our volume assumptions and planning assumptions that we have.
Final one, just on the CapEx, was there a shift from 4Q next year in terms of your plans? You seem to come in a little light in CapEx on 4Q.
Yes, that's
correct. On the Horse Cave project, some of The project is broadly on track, but some of the payments shifted into Q1.
Okay. That's helpful. Thanks a lot guys.
Of course. Thanks, Greg.
Your next question comes from the line of Ryan Bell with Consumer Edge Research.
Hi, Ryan. Good morning, everyone.
Good morning.
And maybe highlight without meaning from a cost standpoint in terms of the implementation during 20 2 and also what the impact might be in terms of the potential impact on cost savings.
Maybe starting with the reason for deferring and I think it's everything that you're seeing out there in the news today, Ryan. It's the amalgam of labor uncertainty and broad global supply chain uncertainty end to end volatility and demand that's Coming by way of our customers, one period they're way up and another period they're backing off. And all of that, That uncertainty and the fact that our foodservice customers, in particular like a Chick Fil A, rely on us in many cases exclusively. We felt that it wasn't prudent to lean in and help us with the market and make sure that we're able to get the right way to look at our clients' finances where we couldn't supply our customers. So really after Some pretty extensive consultation with our customers and our internal team.
We sat back and we looked at sort of where we are as a country, just probably too volatile. I mean, you look at where we are right now and how the COVID, excuse me, how the Delta variant, the supply chain and you look and other manufacturers in terms of labor. All of that creates A pretty volatile mix and we're taking a view in our business that we want to win in the long term. We feel uniquely positioned With a strong P and L and a very strong balance sheet, a strong portfolio of customers, we want to make sure that we're leveraging all Not just a good quarter, a couple of good quarters, but really multiple years of a successful run. So that's really what set up the decision to take the horizon and say when does it make sense for us to park this And to take that decision.
So then with the At that time, we said, okay, now what do we want to do and how do we want to use this time incrementally and what we've periods and rework the sort of the deployment schedule to make sure that we're making optimal use of this time labor out into the business to manage through some of these We're seeing every day, but I guess what I would want to convey to you is we remain absolutely committed to the importance of the initiative and we feel like we're well positioned to put it in place. But as an old boss told me one There's no long term without the short term, and we wanted to make sure that we didn't set ourselves in a position where we made a bad choice. We Earned 1 or more of our customers and it really took us off our growth trajectory. As far as the as how we think about our algorithm in fiscal year 2022 and 2023, what I would share with There's just so much other volatility in the business right now that there are all sorts of other changes in the business that That are eclipsing what we would have seen in terms of the modest savings in the early periods of this go live.
So Does it defer some of those savings? Yes. Does it take them off the table? Long term? Absolutely not.
It's a great question.
And then when we're looking at some of the checkpoint trends in IRI, obviously, we're seeing really strong continued year over year growth. When you think
about the acquisition, at least from what
we can see, it seems like The ECB has plateaued in the low 60s. Is that sort of what you're seeing? And then also, I mean, obviously, The CV doesn't tell the full story. In terms of potential for new SKUs And further distributions across the shelf, what kind of opportunity you see for the brand going forward?
No, we feel pretty comfortable that we're achieving national distribution on this item. I guess I would want to cross Check with you the ACV number that did you say can you repeat for me the ACV number that you stated?
What I've seen with ACV in the low 60s?
Yes, our ACV is considerably higher than that. We have our ACV approaching national at a national level. So I guess that would be one that I would want to go back and maybe offline we can cross tab with you on the ECB number. Having All of that, we have full distribution across all the big guys, Walmart, Target, Kroger in all outlet, Albertsons, all of There are various banners, publics, and then all of the other players nationally. We'll see if we can pull up our ACV number while we're having the conversation.
But I through June and certainly through July, it was considerably higher than that. Having said all of that, The velocity trends have exceeded our expectation. The trial and repeat rates have exceeded our expectations. And our retailers are thrilled and we're thrilled. So there continues to be a lot of opportunity for us to grow this platform.
What we're starting to think about now, for example, if you look at other really big products on the shelf, Hidden Valley Ranch, Sweet Baby Ray's, Heinz Ketchup, all of those are selling in a considerably larger Sizes than we are in our platform today. So if you think about where do we go from here, it's going to be increasing the number of facings on the shelf to drive Holding power into consumers' pantries and into their refrigerators. And then also with Chick Fil A to go into other variants. Right now, we're constrained on capacity online. It's going to present to us that sort of next leg of growth
for this great platform. We're
going to see a very nice, very nice, very nice, very
nice, very nice, very nice, very
nice, very nice, very nice,
very nice, very nice, very nice, very nice, very nice,
very nice, very nice,
very nice, very nice, very latest 4 week period. So it's probably improved since the last time you looked at it. Okay.
Thanks for that clarification. And then in terms of the cost on the food service side. I know you're saying there's a pass through to costs, up and down. What kind of lag is there in terms of that? I know in the retail business, obviously,
The question was just the timing of the pricing and the lag.
Yes. So we'll Take it in 2 cards. So in food service, we generally Price slightly behind the commodities. So particularly in this quarter, you saw we had negative PNOC in Foodservice. Those pricing actions will be effective in the quarter.
And so After we get past the Q1, we expect neutral PNOC going forward.
Thanks. And then just the last one for me. And the Banten Vega business, have you found any luck in terms of finding new
incremental food service customers, but nobody at the scale of a Starbucks.
Okay. Thank you.
If there are no further questions, we will now turn the call back to Mr. Ciesinski for concluding comments.
Well, thank you, everybody. It was a pleasure to be here with you today. We look forward to joining you again as of the day and