LANC
#Thanks, <UNK>.
Good morning.
We appreciate you joining us today.
<UNK> and I will provide comments on the quarter and our outlook, with <UNK> joining us to respond to your questions.
We are pleased to report record first quarter earnings with net income of $33.4 million and earnings per share of $1.22, a 21% increase from last year's first quarter.
The primary drivers of this improvement were lower ingredient costs, a more favorable sales mix and lower freight costs.
Segment operating margins reached 18.8%, versus 15.3% last year.
While sales comparisons became challenging, as expected, we were pleased to see retail channel sales grow almost 3%.
Our licensed Olive Garden brand salad dressings, our New York Bakery and Sister Schubert frozen breads, and Marzetti caramel apple dips were all good contributors to our retail growth.
We continue to see a very competitive refrigerated salad dressing category, as newer entrants help create a more active promotional environment.
Food service channel sales declined almost 5%, with our customer rationalization efforts and lower selling prices both key factors in the decline.
We also saw less limited-time offer promotional activity this quarter versus last year.
Our resulting sales mix was 52.4% retail, a 190 basis point increase from a year ago.
From a new retail product perspective, we're pleased with the early demand for our New York Bakery Bake & Break garlic bread and the acceptance of the more recently introduced Sister Schubert Shareable dinner rolls.
Under the Olive Garden label, we've added a red wine balsamic dressing, which is now arriving on retailer shelves.
The retail channel also saw more investment in consumer promotional spending, including the increased emphasis on digital marketing and higher coupon redemption costs.
Based on IRI sell-through data for the 12 weeks ended October 2nd, we remain the leader in our six key retail categories, and we are outgrowing the category in four of those.
The IRI data did indicate some share decline for our business in the refrigerated dressings and refrigerated produce dips categories.
Let me now turn to <UNK> to make a few comments.
Thank you, <UNK>.
Similar to our past commentary, our balance sheet continues to remain strong.
I will comment on some of the larger line items within our balance sheet that have changed since June 30th.
From a high level perspective, the increase in our cash balance of nearly $28 million since June can be summarized as follows ---+ cash provided by operating activities of $45 million offset by regular dividends of nearly $14 million and property additions of $4 million.
In general, the increase in our accounts receivable balance reflects higher sales volume.
Consistent with past quarters, we continue to see our overall agings remain solid.
The increase in our inventory since June largely reflects the seasonal build in our retail inventories each fall in advance of the seasonal sales increase we see in our second quarter on certain product lines, such as Sister Schubert's.
In general, our inventory levels remain in line with our expectations, and we continue to place emphasis on this important element of our working capital.
As mentioned above, cash expenditures for property additions totaled $4 million in Q1, with the largest amount spent on new packaging equipment to accommodate growth.
Presently, we still anticipate capital expenditures to be in the range of $20 million to $22 million for fiscal 2017, and will include projects to increase capacity and productivity.
Depreciation and amortization expense totaled approximately $6 million for Q1 of fiscal 2017, and we expect an annualized amount of approximately $24 million for the current fiscal year.
The increase in our accrued liability since the June balance sheet date largely reflects an increase in accrued income taxes due to the timing of our first quarter estimated payments occurring in October.
With respect to our balance sheet capitalization, we continue to have no debt and nearly $535 million in total shareholders' equity.
We ended the quarter with nearly $146 million in cash and equivalents, and we have available borrowing capacity under our credit facility of nearly $150 million.
Our capital allocation initiatives continue to be focused on funding future organic growth initiatives, acquisition opportunities, continued dividends, and opportunistic share repurchases.
Finally, our overall effective tax rate of 34.3% for the first quarter is consistent with our expectations and previous guidance.
At this time, we would expect a similar effective rate, plus or minus a few tenths, for the balance of fiscal 2017.
<UNK>, I will now turn the call back over to you for your concluding comments.
Thanks, <UNK>.
Turning ahead to our second quarter, usually our strongest of the year, we will face a comparison to a strong quarter a year ago.
We expect our food service channel to experience continued sales headwinds from customer rationalization and deflationary price adjustments.
We are somewhat optimistic, however, on our core chain account business and feel we could see some improved limited-time offer promotional activity as well.
Retail channel sales should see continued contribution from the new products I mentioned earlier and everyday sales and marketing execution.
We feel good about our product placement and promotional plans for the fall holiday season.
Sister Schubert's will be an important factor in our potential growth with the new Shareable Bread product and the focus on their core SKUs and their strongest markets.
We expect the refrigerated dressing category to stay competitive, and we will be adjusting our promotional efforts as necessary to support our brands and the premium positioning of the category.
From a supply chain perspective, we will continue to see lower ingredient costs, although with a declining benefit from that of our first quarter.
We presently anticipate these costs to be comparable to the prior year as we enter the second half of the fiscal year.
Freight costs should also be lower in the quarter, although we will anniversary this reduction as we move into the second half.
We continue with our focus on operational excellence, as progress is being made in that area, with still more to be realized.
Our efforts in searching for the right acquisition opportunities continue, with a focus on branded retail, on-trend products, merchandise in the perimeter of the store.
At our upcoming November board meeting, we will give thorough consideration to our cash dividend rate.
Suzanne, we're ready to take questions.
The customer rationalization and price deflation will linger into the third quarter some, <UNK>, so it's not quite finished yet, but certainly by late in that quarter, it should be behind us.
Honestly, <UNK>, we are at the high end of what we talked about, of the mid to upper teens kind of segment of operating margin range.
The sustainability is a challenge as we move forward given the declining kind of ---+ the lower input costs, so I'd say we are at the high end of that range.
Right at the moment, <UNK>, I wouldn't say we've really worked any other products into that space.
It is a priority, though, as we think about both acquisition opportunities and longer-term innovation, but nothing that is having a material impact at this point.
You're welcome.
Thank you, <UNK>.
The primary benefit is coming out of ingredients.
I don't know that I can give you an exact breakdown, but the strong majority is that, and then I think we'd follow it with mix benefit, which is always a little hard to measure, and then freight following up in third place.
Well, it was related to closed operations, and I would like to think it's limited to the quarter, but as we've commented in the past, those costs sometimes can fluctuate quarter to quarter.
This was an unusual quarter in that we had a little more costs related to those expenses than we've seen in a more typical quarter, so ---+
We hope that's it.
Yes, I think the ballpark of it is kind of in the low mid-seven-figure investment, and I'd let <UNK>, if he'd like, to comment on some of the things we're doing.
Sure.
Some of that was out in support of new product launches, that <UNK> described earlier in the call, so some slotting in particular, and we had couponing that was also out there in support of those items, and then just traditional marketing and advertising costs were up as well, all in support of new item launches and other seasonal items.
I think you said mid ---+
That mid ---+ kind of a low to mid seven-figure increase.
Yes, so we're in the millions there, so that was a meaningful increase for us.
I don't have an exact percentage for you, but meaningful.
It was.
Well, yes, we'll be anniversarying that as we move forward.
We do a little bit this quarter, more so next quarter, so, yes, it's just a year-over-year comparison.
But, no, we don't see those costs ---+ barring some shock like we did experience in the recent past, don't see those changing much.
Well, they're both probably always open for discussion, but I was really referring to the regular cash dividend.
Having just done a special dividend a year ago, it's not something that we feel we have a practice of doing on a frequent basis.
You're welcome.
Thanks, <UNK>.
Well, thank you again.
We appreciate you joining us this morning.
We look forward to talking to you late January with our second quarter results.
