Lancaster Colony Corporation (NASDAQ:LANC) Q2 2023 Earnings Conference Call February 2, 2023 10:00 AM ET Company Participants Dale Ganobsik - Vice President, Investor Relations & Treasurer David Ciesinski - President & Chief Executive Officer Tom Pigott - Chief Financial Officer Conference Call Participants Andrew Wolf - CL King Brian Holland - Cowen Todd Brooks - The Benchmark Company Connor Rattigan - Consumer Edge Research Operator Good morning. My name is Anita, and I will be your conference call facili ...

PART I – FINANCIAL INFORMATION This section presents the company's unaudited financial statements and management's analysis of its financial performance [Item 1. Condensed Consolidated Financial Statements](index=4&type=section&id=Item%201.%20Condensed%20Consolidated%20Financial%20Statements) This section presents unaudited condensed consolidated financial statements and notes on accounting policies, debt, and segments [Condensed Consolidated Balance Sheets](index=4&type=section&id=Condensed%20Consolidated%20Balance%20Sheets) This section provides a snapshot of the company's financial position at specific points in time Condensed Consolidated Balance Sheets (Amounts in thousands) | (Amounts in thousands) | December 31, 2022 | June 30, 2022 | | :--------------------- | :------------------ | :------------ | | Cash and equivalents | $95,487 | $60,283 | | Receivables | $126,919 | $135,496 | | Total inventories | $139,413 | $144,702 | | Total current assets | $373,636 | $351,781 | | Total Assets | $1,137,171 | $1,090,374 | | Accounts payable | $131,688 | $114,972 | | Total current liabilities | $180,171 | $165,585 | | Total shareholders' equity | $879,550 | $844,687 | - Cash and equivalents increased by **$35.2 million** from June 30, 2022, to December 31, 2022[10](index=10&type=chunk) - Total assets increased by **$46.8 million**, and total shareholders' equity increased by **$34.9 million** during the six-month period[10](index=10&type=chunk) [Condensed Consolidated Statements of Income](index=5&type=section&id=Condensed%20Consolidated%20Statements%20of%20Income) This section details the company's financial performance over specific reporting periods Condensed Consolidated Statements of Income (Amounts in thousands, except per share data) | (Amounts in thousands, except per share data) | Three Months Ended Dec 31, 2022 | Three Months Ended Dec 31, 2021 | Six Months Ended Dec 31, 2022 | Six Months Ended Dec 31, 2021 | | :-------------------------------------------- | :------------------------------ | :------------------------------ | :---------------------------- | :---------------------------- | | Net Sales | $477,394 | $428,427 | $902,931 | $820,483 | | Cost of Sales | $375,292 | $331,825 | $701,774 | $631,514 | | Gross Profit | $102,102 | $96,602 | $201,157 | $188,969 | | Operating Income | $51,327 | $45,306 | $100,625 | $85,817 | | Net Income | $39,973 | $34,370 | $77,565 | $65,025 | | Basic EPS | $1.45 | $1.25 | $2.82 | $2.36 | | Diluted EPS | $1.45 | $1.25 | $2.81 | $2.36 | - Net Sales increased by **11%** for the three months ended December 31, 2022, and **10%** for the six months ended December 31, 2022, compared to the prior year[12](index=12&type=chunk) - Net Income increased by **16%** for the three months and **19%** for the six months ended December 31, 2022, year-over-year[12](index=12&type=chunk) [Condensed Consolidated Statements of Comprehensive Income](index=6&type=section&id=Condensed%20Consolidated%20Statements%20of%20Comprehensive%20Income) This section details total change in equity from non-owner sources, including net income and other comprehensive income Condensed Consolidated Statements of Comprehensive Income (Amounts in thousands) | (Amounts in thousands) | Three Months Ended Dec 31, 2022 | Three Months Ended Dec 31, 2021 | Six Months Ended Dec 31, 2022 | Six Months Ended Dec 31, 2021 | | :--------------------- | :------------------------------ | :------------------------------ | :---------------------------- | :---------------------------- | | Net Income | $39,973 | $34,370 | $77,565 | $65,025 | | Other Comprehensive Income, Net of Tax | $95 | $41 | $190 | $83 | | Comprehensive Income | $40,068 | $34,411 | $77,755 | $65,108 | - Other comprehensive income, net of tax, increased for both the three-month (**$95 thousand** vs **$41 thousand**) and six-month (**$190 thousand** vs **$83 thousand**) periods ended December 31, 2022, primarily due to defined benefit pension and postretirement benefit plans[14](index=14&type=chunk) [Condensed Consolidated Statements of Cash Flows](index=7&type=section&id=Condensed%20Consolidated%20Statements%20of%20Cash%20Flows) This section outlines the cash inflows and outflows from operating, investing, and financing activities Condensed Consolidated Statements of Cash Flows (Amounts in thousands) | (Amounts in thousands) | Six Months Ended Dec 31, 2022 | Six Months Ended Dec 31, 2021 | | :--------------------- | :---------------------------- | :---------------------------- | | Net cash provided by operating activities | $140,440 | $41,980 | | Net cash used in investing activities | $(55,776) | $(66,608) | | Net cash used in financing activities | $(49,460) | $(49,416) | | Net change in cash and equivalents | $35,204 | $(74,044) | | Cash and equivalents at end of period | $95,487 | $114,011 | - Net cash provided by operating activities significantly increased to **$140.4 million** for the six months ended December 31, 2022, compared to **$42.0 million** in the prior-year period, primarily due to changes in net working capital[17](index=17&type=chunk)[99](index=99&type=chunk) - Cash used in investing activities decreased to **$55.8 million**, reflecting a lower level of payments for property additions[17](index=17&type=chunk)[100](index=100&type=chunk) [Condensed Consolidated Statements of Shareholders' Equity](index=8&type=section&id=Condensed%20Consolidated%20Statements%20of%20Shareholders'%20Equity) This section details changes in the company's equity, including net income, dividends, and stock transactions Condensed Consolidated Statements of Shareholders' Equity (Amounts in thousands) | (Amounts in thousands) | Balance, June 30, 2022 | Net Income (6 months) | Cash Dividends (6 months) | Purchase of Treasury Stock (6 months) | Stock-based compensation expense (6 months) | Balance, December 31, 2022 | | :--------------------- | :--------------------- | :-------------------- | :------------------------ | :------------------------------------ | :------------------------------------------ | :------------------------- | | Common Stock Amount | $137,814 | - | - | - | $5,264 | $140,660 | | Retained Earnings | $1,485,045 | $77,565 | $(45,529) | - | - | $1,517,081 | | Accumulated Other Comprehensive Loss | $(11,172) | - | - | - | - | $(10,982) | | Treasury Stock | $(767,000) | - | - | $(209) | - | $(767,209) | | Total Shareholders' Equity | $844,687 | $77,565 | $(45,529) | $(209) | $5,264 | $879,550 | - Total shareholders' equity increased from **$844.7 million** at June 30, 2022, to **$879.6 million** at December 31, 2022, driven by net income, partially offset by cash dividends and treasury stock purchases[19](index=19&type=chunk) - Cash dividends paid for common stock totaled **$45.5 million** for the six months ended December 31, 2022[19](index=19&type=chunk)[17](index=17&type=chunk) [Notes to Condensed Consolidated Financial Statements](index=10&type=section&id=Notes%20to%20Condensed%20Consolidated%20Financial%20Statements) This section provides detailed explanations and disclosures supporting the condensed consolidated financial statements [Note 1 – Summary of Significant Accounting Policies](index=10&type=section&id=Note%201%20%E2%80%93%20Summary%20of%20Significant%20Accounting%20Policies) This note outlines the key accounting principles and methods used in preparing the financial statements - The financial statements are prepared in accordance with U.S. GAAP for interim financial information and SEC Article 10 of Regulation S-X, reflecting all necessary normal recurring adjustments[24](index=24&type=chunk) - Property, plant and equipment are recorded at cost (or fair value for business combinations) and depreciated using the straight-line method[25](index=25&type=chunk) Construction in progress in Accounts Payable (Amounts in thousands) | December 31, | 2022 | 2021 | | :----------- | :-------- | :-------- | | Construction in progress in Accounts Payable | $15,062 | $26,080 | - EPS is computed using the two-class method, with unvested restricted stock considered participating securities[27](index=27&type=chunk) Net Income Per Common Share Calculation (Amounts in thousands, except per share data) | (Amounts in thousands, except per share data) | Three Months Ended Dec 31, 2022 | Three Months Ended Dec 31, 2021 | Six Months Ended Dec 31, 2022 | Six Months Ended Dec 31, 2021 | | :-------------------------------------------- | :------------------------------ | :------------------------------ | :---------------------------- | :---------------------------- | | Net income available to common shareholders | $39,855 | $34,272 | $77,333 | $64,840 | | Weighted average common shares outstanding – basic | 27,471 | 27,443 | 27,460 | 27,451 | | Weighted average common shares outstanding – diluted | 27,493 | 27,464 | 27,476 | 27,490 | | Net income per common share – basic | $1.45 | $1.25 | $2.82 | $2.36 | | Net income per common share – diluted | $1.45 | $1.25 | $2.81 | $2.36 | - There were no changes to significant accounting policies or recently issued/adopted accounting standards impacting the consolidated financial statements[31](index=31&type=chunk)[32](index=32&type=chunk) [Note 2 – Fair Value](index=12&type=section&id=Note%202%20%E2%80%93%20Fair%20Value) This note defines fair value and details the valuation hierarchy and contingent consideration adjustments - Fair value is defined as the exit price, with a three-level hierarchy: Level 1 (observable inputs), Level 2 (indirectly observable inputs), and Level 3 (unobservable inputs)[34](index=34&type=chunk)[35](index=35&type=chunk) - The fair value of Bantam's contingent consideration, initially **$8.0 million**, was written down to zero at March 31, 2022, after a **$2.2 million** reduction at December 31, 2021, due to lower projected EBITDA[37](index=37&type=chunk) Bantam Contingent Consideration (Amounts in thousands) | (Amounts in thousands) | Three Months Ended Dec 31, 2022 | Three Months Ended Dec 31, 2021 | Six Months Ended Dec 31, 2022 | Six Months Ended Dec 31, 2021 | | :--------------------- | :------------------------------ | :------------------------------ | :---------------------------- | :---------------------------- | | Contingent consideration at beginning of period | $— | $3,470 | $— | $3,470 | | Change in contingent consideration included in operating income | $— | $(2,170) | $— | $(2,170) | | Contingent consideration at end of period | $— | $1,300 | $— | $1,300 | [Note 3 – Long-Term Debt](index=12&type=section&id=Note%203%20%E2%80%93%20Long-Term%20Debt) This note describes the company's revolving credit facility, outstanding borrowings, and financial covenants - The company has an unsecured revolving credit facility of up to **$150 million**, expiring March 19, 2025, with a variable interest rate tied to SOFR[39](index=39&type=chunk) - As of December 31, 2022, there were no outstanding borrowings under the facility, but **$2.8 million** in standby letters of credit were outstanding[42](index=42&type=chunk) - The facility includes financial covenants for interest coverage ratio (not less than **2.5 to 1**) and consolidated leverage ratio (not greater than **3.5 to 1**), with which the company was in compliance[40](index=40&type=chunk) [Note 4 – Commitments and Contingencies](index=13&type=section&id=Note%204%20%E2%80%93%20Commitments%20and%20Contingencies) This note addresses various claims and litigation matters arising in the ordinary course of business - Various claims and litigation matters arising in the ordinary course of business are not expected to have a material effect on the consolidated financial statements[43](index=43&type=chunk) [Note 5 – Goodwill and Other Intangible Assets](index=13&type=section&id=Note%205%20%E2%80%93%20Goodwill%20and%20Other%20Intangible%20Assets) This note provides details on the company's goodwill by segment and other identifiable intangible assets Goodwill by Segment (Amounts in thousands) | Segment | December 31, 2022 | June 30, 2022 | | :---------- | :---------------- | :------------ | | Retail | $157,400 | $157,400 | | Foodservice | $51,000 | $51,000 | Identifiable Other Intangible Assets (Amounts in thousands) | (Amounts in thousands) | December 31, 2022 | June 30, 2022 | | :--------------------- | :---------------- | :------------ | | Tradenames (net) | $28,048 | $28,715 | | Customer Relationships (net) | $1,211 | $1,480 | | Technology / Know-how (net) | $1,807 | $2,128 | | Total net carrying value | $31,066 | $32,323 | - An impairment charge of **$0.9 million** was recorded in the prior year (Q3 2021) related to Bantam's Retail customer relationships intangible asset due to lower projected cash flows[44](index=44&type=chunk) Amortization Expense (Amounts in thousands) | (Amounts in thousands) | Three Months Ended Dec 31, 2022 | Three Months Ended Dec 31, 2021 | Six Months Ended Dec 31, 2022 | Six Months Ended Dec 31, 2021 | | :--------------------- | :------------------------------ | :------------------------------ | :---------------------------- | :---------------------------- | | Amortization expense | $628 | $1,260 | $1,257 | $2,401 | Estimated Annual Amortization Expense for Next Five Years (Amounts in thousands) | Fiscal Year | Estimated Amortization Expense | | :---------- | :----------------------------- | | 2024 | $2,514 | | 2025 | $2,212 | | 2026 | $1,610 | | 2027 | $1,426 | | 2028 | $1,334 | [Note 6 – Income Taxes](index=14&type=section&id=Note%206%20%E2%80%93%20Income%20Taxes) This note provides a breakdown of the company's prepaid federal, state, and local income taxes Prepaid Income Taxes (Amounts in thousands) | (Amounts in thousands) | December 31, 2022 | June 30, 2022 | | :--------------------- | :---------------- | :------------ | | Prepaid federal income taxes | $2,300 | - | | Prepaid state and local income taxes | $800 | $1,900 | [Note 7 – Business Segment Information](index=14&type=section&id=Note%207%20%E2%80%93%20Business%20Segment%20Information) This note details the company's financial performance across its Retail and Foodservice operating segments - The company operates in two reportable segments: Retail and Foodservice, with integrated procurement, manufacturing, warehousing, and distribution activities[48](index=48&type=chunk)[51](index=51&type=chunk) Net Sales by Segment (Amounts in thousands) | (Amounts in thousands) | Three Months Ended Dec 31, 2022 | Three Months Ended Dec 31, 2021 | Six Months Ended Dec 31, 2022 | Six Months Ended Dec 31, 2021 | | :--------------------- | :------------------------------ | :------------------------------ | :---------------------------- | :---------------------------- | | Retail | $258,763 | $245,085 | $481,979 | $468,974 | | Foodservice | $218,631 | $183,342 | $420,952 | $351,509 | | Total | $477,394 | $428,427 | $902,931 | $820,483 | Operating Income by Segment (Amounts in thousands) | (Amounts in thousands) | Three Months Ended Dec 31, 2022 | Three Months Ended Dec 31, 2021 | Six Months Ended Dec 31, 2022 | Six Months Ended Dec 31, 2021 | | :--------------------- | :------------------------------ | :------------------------------ | :---------------------------- | :---------------------------- | | Retail | $49,352 | $49,606 | $92,252 | $97,784 | | Foodservice | $26,696 | $18,309 | $58,625 | $34,134 | | Corporate Expenses | $(24,721) | $(21,583) | $(50,252) | $(45,075) | | Total | $51,327 | $45,306 | $100,625 | $85,817 | Net Sales Disaggregated by Product Class (Amounts in thousands) | (Amounts in thousands) | Three Months Ended Dec 31, 2022 | Three Months Ended Dec 31, 2021 | Six Months Ended Dec 31, 2022 | Six Months Ended Dec 31, 2021 | | :--------------------- | :------------------------------ | :------------------------------ | :---------------------------- | :---------------------------- | | **Retail** | | | | | | Shelf-stable dressings, sauces and croutons | $94,711 | $87,334 | $185,749 | $177,861 | | Frozen breads | $117,424 | $110,379 | $190,282 | $185,098 | | Refrigerated dressings, dips and other | $46,628 | $47,372 | $105,948 | $106,015 | | **Foodservice** | | | | | | Dressings and sauces | $160,855 | $136,038 | $311,915 | $260,797 | | Frozen breads and other | $57,776 | $47,304 | $109,037 | $90,712 | Foodservice Net Sales by Customer Type (Amounts in thousands) | (Amounts in thousands) | Three Months Ended Dec 31, 2022 | Three Months Ended Dec 31, 2021 | Six Months Ended Dec 31, 2022 | Six Months Ended Dec 31, 2021 | | :--------------------- | :------------------------------ | :------------------------------ | :---------------------------- | :---------------------------- | | National accounts | $171,814 | $141,753 | $332,006 | $267,881 | | Branded and other | $46,817 | $41,589 | $88,946 | $83,628 | [Note 8 – Stock-Based Compensation](index=15&type=section&id=Note%208%20%E2%80%93%20Stock-Based%20Compensation) This note outlines the types of stock-based compensation and associated expense and unrecognized compensation Stock-Based Compensation Expense (Amounts in thousands) | (Amounts in thousands) | Three Months Ended Dec 31, 2022 | Three Months Ended Dec 31, 2021 | Six Months Ended Dec 31, 2022 | Six Months Ended Dec 31, 2021 | | :--------------------- | :------------------------------ | :------------------------------ | :---------------------------- | :---------------------------- | | SSSARs compensation expense | $700 | $1,000 | $1,400 | $2,000 | | Restricted stock compensation expense | $1,500 | $1,300 | $2,800 | $2,400 | | Performance units compensation expense | $600 | $300 | $1,100 | $500 | - As of December 31, 2022, unrecognized compensation expense totaled **$1.8 million** for SSSARs (over 1 year), **$7.9 million** for restricted stock (over 2 years), and **$5.6 million** for performance units (over 2 years)[55](index=55&type=chunk)[56](index=56&type=chunk)[57](index=57&type=chunk) [Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations](index=16&type=section&id=Item%202.%20Management's%20Discussion%20and%20Analysis%20of%20Financial%20Condition%20and%20Results%20of%20Operations) This section provides management's analysis of financial performance, condition, and future outlook, covering segments and liquidity [OVERVIEW](index=16&type=section&id=OVERVIEW) This section provides a general introduction to the company's business, strategies, and prevailing market trends [Business Overview](index=16&type=section&id=Business%20Overview) This section describes the company's core business, product channels, and strategic growth initiatives - Lancaster Colony Corporation manufactures and markets specialty food products for retail and foodservice channels, with over **95%** of sales in the United States[60](index=60&type=chunk)[62](index=62&type=chunk) - Growth strategies include new product introductions, expanded distribution, leveraging Retail brands, strategic licensing, Foodservice product development, and complementary acquisitions[62](index=62&type=chunk) - The company is implementing Project Ascent, an integrated SAP S/4HANA ERP system, which began in July 2022 and is scheduled for completion in fiscal 2024[63](index=63&type=chunk) [BUSINESS TRENDS](index=17&type=section&id=BUSINESS%20TRENDS) This section discusses key market dynamics and cost pressures impacting the company's operations - COVID-19 initially shifted consumer demand towards at-home food consumption, positively impacting Retail and negatively impacting Foodservice, but this volatility subsided near the end of 2022[65](index=65&type=chunk) - The company experienced significant inflationary costs for commodities (soybean oil, flour, eggs), packaging, freight, warehousing, and labor throughout 2022 and into the first half of 2023[66](index=66&type=chunk) [RESULTS OF CONSOLIDATED OPERATIONS](index=17&type=section&id=RESULTS%20OF%20CONSOLIDATED%20OPERATIONS) This section provides a detailed analysis of the company's overall financial performance, including sales, profit, and expenses Consolidated Financial Highlights (Amounts in thousands, except per share data) | (Amounts in thousands, except per share data) | Three Months Ended Dec 31, 2022 | Three Months Ended Dec 31, 2021 | Change (%) | Six Months Ended Dec 31, 2022 | Six Months Ended Dec 31, 2021 | Change (%) | | :-------------------------------------------- | :------------------------------ | :------------------------------ | :--------- | :---------------------------- | :---------------------------- | :--------- | | Net Sales | $477,394 | $428,427 | 11% | $902,931 | $820,483 | 10% | | Cost of Sales | $375,292 | $331,825 | 13% | $701,774 | $631,514 | 11% | | Gross Profit | $102,102 | $96,602 | 6% | $201,157 | $188,969 | 6% | | Gross Margin | 21.4% | 22.5% | - | 22.3% | 23.0% | - | | Selling, General and Administrative Expenses | $50,775 | $51,538 | (1)% | $100,532 | $103,394 | (3)% | | Operating Income | $51,327 | $45,306 | 13% | $100,625 | $85,817 | 17% | | Operating Margin | 10.8% | 10.6% | - | 11.1% | 10.5% | - | | Net Income | $39,973 | $34,370 | 16% | $77,565 | $65,025 | 19% | | Diluted Net Income Per Common Share | $1.45 | $1.25 | 16% | $2.81 | $2.36 | 19% | - Consolidated net sales reached a second-quarter record of **$477.4 million**, an **11%** increase, driven by pricing actions to offset inflationary costs, despite a **4%** decrease in sales volumes (pounds shipped)[69](index=69&type=chunk) - Gross profit increased by **$5.5 million**, as pricing actions, improved manufacturing efficiencies, and a more stable operating environment effectively offset significant inflationary costs[72](index=72&type=chunk) - SG&A expenses decreased by **1%** for the three months and **3%** for the six months, primarily due to lower professional fees, reduced consumer promotions, and decreased Project Ascent expenditures[74](index=74&type=chunk)[75](index=75&type=chunk) - Operating income increased by **13%** for the three months and **17%** for the six months, benefiting from higher gross profit and lower SG&A expenses[80](index=80&type=chunk)[81](index=81&type=chunk) Effective Tax Rate (Six Months Ended December 31) | Factor | 2022 | 2021 | | :---------------------------------------- | :---- | :---- | | Statutory rate | 21.0% | 21.0% | | State and local income taxes | 2.4% | 3.3% | | Net windfall tax benefits - stock-based compensation | (0.4)% | — | | Other | 0.1% | — | | Effective rate | 23.1% | 24.3% | - Diluted net income per share increased to **$1.45** for the second quarter and **$2.81** for the six months, despite Project Ascent expenditures reducing EPS by **$0.21** and **$0.47**, respectively[83](index=83&type=chunk)[84](index=84&type=chunk) [RESULTS OF OPERATIONS - SEGMENTS](index=20&type=section&id=RESULTS%20OF%20OPERATIONS%20-%20SEGMENTS) This section analyzes the financial performance of the company's distinct Retail and Foodservice operating segments [Retail Segment](index=20&type=section&id=Retail%20Segment) This section details the financial performance of the company's Retail segment, including sales and operating income Retail Segment Performance (Amounts in thousands) | (Amounts in thousands) | Three Months Ended Dec 31, 2022 | Three Months Ended Dec 31, 2021 | Change (%) | Six Months Ended Dec 31, 2022 | Six Months Ended Dec 31, 2021 | Change (%) | | :--------------------- | :------------------------------ | :------------------------------ | :--------- | :---------------------------- | :---------------------------- | :--------- | | Net Sales | $258,763 | $245,085 | 6% | $481,979 | $468,974 | 3% |\ | Operating Income | $49,352 | $49,606 | (1)% | $92,252 | $97,784 | (6)% | | Operating Margin | 19.1% | 20.2% | - | 19.1% | 20.9% | - | - Retail net sales increased **6%** for the three months and **3%** for the six months, driven by inflationary pricing and growth in licensing programs (Buffalo Wild Wings, Arby's sauces)[87](index=87&type=chunk) - Retail sales volumes decreased **4%** for the three months and **9%** for the six months, primarily due to price elasticity and the exit of less profitable product lines[87](index=87&type=chunk) - Retail operating income decreased **1%** for the three months and **6%** for the six months, impacted by lower sales and production volumes, despite pricing actions and reduced consumer promotions[88](index=88&type=chunk)[89](index=89&type=chunk) [Foodservice Segment](index=20&type=section&id=Foodservice%20Segment) This section details the financial performance of the company's Foodservice segment, including sales and operating income Foodservice Segment Performance (Amounts in thousands) | (Amounts in thousands) | Three Months Ended Dec 31, 2022 | Three Months Ended Dec 31, 2021 | Change (%) | Six Months Ended Dec 31, 2022 | Six Months Ended Dec 31, 2021 | Change (%) | | :--------------------- | :------------------------------ | :------------------------------ | :--------- | :---------------------------- | :---------------------------- | :--------- | | Net Sales | $218,631 | $183,342 | 19% | $420,952 | $351,509 | 20% | | Operating Income | $26,696 | $18,309 | 46% | $58,625 | $34,134 | 72% | | Operating Margin | 12.2% | 10.0% | - | 13.9% | 9.7% | - | - Foodservice net sales grew **19%** for the three months and **20%** for the six months, driven by inflationary pricing and volume gains from quick-service restaurant customers[90](index=90&type=chunk)[91](index=91&type=chunk) - Foodservice sales volumes decreased **5%** for the three months and **6%** for the six months, impacted by the decision to exit less profitable SKUs and advance ordering ahead of the ERP go-live[90](index=90&type=chunk)[91](index=91&type=chunk) - Foodservice operating income significantly increased by **46%** for the three months and **72%** for the six months, as pricing actions effectively offset inflationary costs, supported by a favorable sales mix and a more stable operating environment[92](index=92&type=chunk)[94](index=94&type=chunk) [Corporate Expenses](index=21&type=section&id=Corporate%20Expenses) This section outlines the trends and drivers behind the company's unallocated corporate operating expenses Corporate Expenses (Amounts in thousands) | (Amounts in thousands) | Three Months Ended Dec 31, 2022 | Three Months Ended Dec 31, 2021 | Six Months Ended Dec 31, 2022 | Six Months Ended Dec 31, 2021 | | :--------------------- | :------------------------------ | :------------------------------ | :---------------------------- | :---------------------------- | | Corporate Expenses | $24,700 | $21,600 | $50,300 | $45,100 | - Corporate expenses increased due to increased investments in personnel and IT, partially offset by a decline in Project Ascent expenses[95](index=95&type=chunk)[96](index=96&type=chunk) [LOOKING FORWARD](index=21&type=section&id=LOOKING%20FORWARD) This section discusses the company's future outlook, including sales volume expectations and cost management strategies - Retail sales volumes are expected to benefit from licensing program growth, but consumer demand elasticity will remain a headwind[97](index=97&type=chunk) - Foodservice sales volumes will continue to be impacted by SKU rationalization but expect benefits from quick-service restaurant customer growth[97](index=97&type=chunk) - Pricing actions and cost savings initiatives are anticipated to offset ongoing cost inflation in the fiscal third quarter[98](index=98&type=chunk) - Project Ascent ERP implementation is on schedule for completion in fiscal 2024, with the Horse Cave facility being integrated in Wave 3[98](index=98&type=chunk) [FINANCIAL CONDITION](index=21&type=section&id=FINANCIAL%20CONDITION) This section assesses the company's liquidity, capital resources, and cash flow generation [Cash Flows](index=21&type=section&id=Cash%20Flows) This section analyzes the company's cash generation and usage across operating, investing, and financing activities - Net cash provided by operating activities increased significantly to **$140.4 million** (vs. **$42.0 million** prior year) due to favorable changes in net working capital and higher net income[99](index=99&type=chunk) - Cash used in investing activities decreased to **$55.8 million** (vs. **$66.6 million** prior year) due to lower payments for property additions, despite ongoing capacity expansion projects[100](index=100&type=chunk) - Cash used in financing activities remained flat at **$49.5 million**, with higher dividend payments and tax withholdings offset by lower share repurchases[101](index=101&type=chunk) [Liquidity and Capital Resources](index=22&type=section&id=Liquidity%20and%20Capital%20Resources) This section evaluates the company's ability to meet its short-term and long-term financial obligations - The company has a **$150 million** unsecured revolving credit facility with no outstanding borrowings and **$2.8 million** in standby letters of credit as of December 31, 2022, and is in compliance with all covenants[102](index=102&type=chunk)[103](index=103&type=chunk) - Management believes cash from operating activities, existing cash, and the credit facility will be adequate to meet liquidity needs for the next 12 months and beyond[105](index=105&type=chunk)[106](index=106&type=chunk) - Projected capital expenditures for fiscal 2023 are between **$90 million** and **$110 million**, including **$50 million** for the Horse Cave, Kentucky dressing and sauce facility expansion[105](index=105&type=chunk) [CRITICAL ACCOUNTING POLICIES](index=22&type=section&id=CRITICAL%20ACCOUNTING%20POLICIES) This section confirms no changes to the critical accounting policies disclosed in the prior annual report - There have been no changes in critical accounting policies from those disclosed in the 2022 Annual Report on Form 10-K[108](index=108&type=chunk) [RECENT ACCOUNTING PRONOUNCEMENTS](index=22&type=section&id=RECENT%20ACCOUNTING%20PRONOUNCEMENTS) This section addresses the impact of recently issued accounting standards on the financial statements - Recent accounting pronouncements and their impact are disclosed in Note 1 to the condensed consolidated financial statements, indicating no material impact[109](index=109&type=chunk)[32](index=32&type=chunk) [FORWARD-LOOKING STATEMENTS](index=22&type=section&id=FORWARD-LOOKING%20STATEMENTS) This section highlights the inherent uncertainties and risks associated with future-oriented statements - The report contains forward-looking statements subject to various risks and uncertainties, including inflationary pressures, customer reactions to pricing, supply chain disruptions, IT system implementation complexities, and geopolitical events[110](index=110&type=chunk)[111](index=111&type=chunk) - Management believes these statements are reasonable but cautions against undue reliance, and undertakes no obligation to update them except as required by law[110](index=110&type=chunk)[111](index=111&type=chunk) [Item 3. Quantitative and Qualitative Disclosures About Market Risk](index=23&type=section&id=Item%203.%20Quantitative%20and%20Qualitative%20Disclosures%20About%20Market%20Risk) This section states that there have been no material changes to the company's market risks since the disclosure in its 2022 Annual Report on Form 10-K - No material changes to market risks have occurred since the 2022 Annual Report on Form 10-K[111](index=111&type=chunk) [Item 4. Controls and Procedures](index=23&type=section&id=Item%204.%20Controls%20and%20Procedures) This section details the evaluation of disclosure controls and procedures, concluding their effectiveness, and discusses changes in internal control over financial reporting related to the ongoing Project Ascent ERP implementation [Evaluation of Disclosure Controls and Procedures](index=23&type=section&id=Evaluation%20of%20Disclosure%20Controls%20and%20Procedures) This section confirms the effectiveness of the company's disclosure controls and procedures as of the reporting date - Management, including the CEO and CFO, concluded that the company's disclosure controls and procedures were effective as of December 31, 2022[112](index=112&type=chunk) [Changes in Internal Control Over Financial Reporting](index=23&type=section&id=Changes%20in%20Internal%20Control%20Over%20Financial%20Reporting) This section discusses updates to internal controls due to the ongoing implementation of the Project Ascent ERP system - The implementation of Project Ascent, a new SAP S/4HANA ERP system, began in Q1 fiscal 2023, leading to necessary updates in internal controls[113](index=113&type=chunk)[114](index=114&type=chunk) - The company does not expect this ERP implementation to have a material adverse effect on its internal control over financial reporting[114](index=114&type=chunk) PART II – OTHER INFORMATION This section includes legal proceedings, risk factors, equity sales, and a list of exhibits [Item 1. Legal Proceedings](index=25&type=section&id=Item%201.%20Legal%20Proceedings) This section confirms that there are no environmental legal proceedings to disclose, based on a $1 million materiality threshold - No environmental matters requiring disclosure were identified, using a **$1 million** materiality threshold[117](index=117&type=chunk) [Item 1A. Risk Factors](index=25&type=section&id=Item%201A.%20Risk%20Factors) This section states that there have been no material changes to the risk factors previously disclosed in the company's 2022 Annual Report on Form 10-K - No material changes to the risk factors disclosed in the 2022 Annual Report on Form 10-K[118](index=118&type=chunk) [Item 2. Unregistered Sales of Equity Securities and Use of Proceeds](index=25&type=section&id=Item%202.%20Unregistered%20Sales%20of%20Equity%20Securities%20and%20Use%20of%20Proceeds) This section provides details on common stock repurchases during the second quarter of fiscal 2023, primarily for tax withholding obligations related to stock-based compensation, and the remaining authorization for future repurchases - As of December 31, 2022, **1.22 million** common shares remained authorized for future repurchases under a program approved in November 2010[119](index=119&type=chunk) Common Stock Repurchases (Q2 FY2023) | Period | Total Number of Shares Purchased | Average Price Paid Per Share | | :---------------- | :------------------------------- | :--------------------------- | | October 1-31, 2022 | 167 | $177.65 | | November 1-30, 2022 | 51 | $204.46 | | December 1-31, 2022 | 430 | $197.30 | | Total | 648 | $192.80 | - Repurchases were primarily made to satisfy tax withholding obligations from the vesting of restricted stock granted to employees[119](index=119&type=chunk) [Item 6. Exhibits](index=25&type=section&id=Item%206.%20Exhibits) This section lists all exhibits filed with the Quarterly Report on Form 10-Q, including an amendment to the credit agreement, CEO and CFO certifications, and XBRL documents - Exhibits include Amendment No. 1 to Credit Agreement, CEO and CFO certifications under Sections 302 and 906 of Sarbanes-Oxley Act, and various XBRL documents[122](index=122&type=chunk)[123](index=123&type=chunk) SIGNATURES This section contains the official signatures of the registrant's authorized officers, confirming the due filing of the report [SIGNATURES](index=27&type=section&id=SIGNATURES) This section contains the official signatures of the registrant's authorized officers, confirming the due filing of the report - The report was signed on February 2, 2023, by David A. Ciesinski (President, Chief Executive Officer, and Director) and Thomas K. Pigott (Vice President, Chief Financial Officer, and Assistant Secretary)[127](index=127&type=chunk)

Lancaster Colony Corporation (NASDAQ:LANC) Q1 2023 Results Conference Call November 3, 2022 10:00 AM ET Company Participants Dale Ganobsik - Vice President, Investor Relations and Treasurer Dave Ciesinski - President, Chief Executive Officer Tom Pigott - Vice President, Chief Financial Officer Conference Call Participants Brian Holland - Cowen and Company Connor Rattigan - Consumer Edge Research Andrew Wolf - CL King Operator Good morning. My name is Rocco, and I will be your conference call facilitator tod ...

PART I – FINANCIAL INFORMATION [Condensed Consolidated Financial Statements](index=4&type=section&id=Item%201.%20Condensed%20Consolidated%20Financial%20Statements) These statements present the company's financial position, results of operations, and cash flows for the three months ended September 30, 2022, highlighting increased assets, sales, net income, and improved operating cash flow [Condensed Consolidated Balance Sheets](index=4&type=section&id=Condensed%20Consolidated%20Balance%20Sheets) Total assets increased to **$1.131 billion** as of September 30, 2022, driven by higher inventories and property, plant, and equipment, with a corresponding rise in liabilities and shareholders' equity Condensed Consolidated Balance Sheet Highlights (in thousands) | Account | September 30, 2022 | June 30, 2022 | | :--- | :--- | :--- | | **Total Current Assets** | $377,801 | $351,781 | | **Total Inventories** | $165,939 | $144,702 | | **Property, plant and equipment-net** | $468,086 | $451,368 | | **Total Assets** | **$1,131,233** | **$1,090,374** | | **Total Current Liabilities** | $190,915 | $165,585 | | **Total Shareholders' Equity** | $862,071 | $844,687 | | **Total Liabilities and Shareholders' Equity** | **$1,131,233** | **$1,090,374** | [Condensed Consolidated Statements of Income](index=5&type=section&id=Condensed%20Consolidated%20Statements%20of%20Income) Net sales increased **8.5%** to **$425.5 million** for the quarter, driving a **21.7%** rise in operating income and a **22.6%** increase in net income to **$37.6 million** Consolidated Income Statement Highlights (in thousands, except per share data) | Metric | Q1 2023 (ended Sep 30, 2022) | Q1 2022 (ended Sep 30, 2021) | Change (%) | | :--- | :--- | :--- | :--- | | **Net Sales** | $425,537 | $392,056 | +8.5% | | **Gross Profit** | $99,055 | $92,367 | +7.2% | | **Operating Income** | $49,298 | $40,511 | +21.7% | | **Net Income** | $37,592 | $30,655 | +22.6% | | **Diluted EPS** | $1.36 | $1.11 | +22.5% | [Condensed Consolidated Statements of Cash Flows](index=7&type=section&id=Condensed%20Consolidated%20Statements%20of%20Cash%20Flows) Operating cash flow significantly improved to **$50.9 million** for Q1 fiscal 2023, driven by higher net income and favorable working capital changes, while investing and financing cash uses decreased Cash Flow Summary (in thousands) | Cash Flow Activity | Three Months Ended Sep 30, 2022 | Three Months Ended Sep 30, 2021 | | :--- | :--- | :--- | | **Net cash provided by (used in) operating activities** | $50,864 | $(1,172) | | **Net cash used in investing activities** | $(23,481) | $(30,093) | | **Net cash used in financing activities** | $(23,447) | $(26,701) | | **Net change in cash and equivalents** | $3,936 | $(57,966) | - The **significant increase** in operating cash flow was driven by **higher net income** and **smaller negative impacts** from changes in inventories and receivables compared to the prior year[17](index=17&type=chunk)[79](index=79&type=chunk) [Notes to Condensed Consolidated Financial Statements](index=9&type=section&id=Notes%20to%20Condensed%20Consolidated%20Financial%20Statements) These notes detail financial statement presentation, segment performance, and accounting policies, highlighting **Foodservice sales growth** and a **$15 million** capital commitment for facility expansion - The company has a remaining commitment of approximately **$15 million** for a capacity expansion project at its dressing and sauce facility in Horse Cave, Kentucky[42](index=42&type=chunk) - Goodwill was stable at **$157.4 million** for the Retail segment and **$51.0 million** for the Foodservice segment as of September 30, 2022[43](index=43&type=chunk) Segment Net Sales (in thousands) | Segment | Q1 2023 (ended Sep 30, 2022) | Q1 2022 (ended Sep 30, 2021) | Change (%) | | :--- | :--- | :--- | :--- | | Retail | $223,216 | $223,889 | -0.3% | | Foodservice | $202,321 | $168,167 | +20.3% | | **Total** | **$425,537** | **$392,056** | **+8.5%** | Segment Operating Income (in thousands) | Segment | Q1 2023 (ended Sep 30, 2022) | Q1 2022 (ended Sep 30, 2021) | Change (%) | | :--- | :--- | :--- | :--- | | Retail | $42,900 | $48,178 | -11.0% | | Foodservice | $31,929 | $15,825 | +101.8% | | Corporate Expenses | $(25,531) | $(23,492) | +8.7% | | **Total** | **$49,298** | **$40,511** | **+21.7%** | [Management's Discussion and Analysis of Financial Condition and Results of Operations](index=15&type=section&id=Item%202.%20Management%27s%20Discussion%20and%20Analysis%20of%20Financial%20Condition%20and%20Results%20of%20Operations) Management discusses record Q1 net sales driven by pricing actions offsetting cost inflation, strong Foodservice growth, improved operating income, and ongoing ERP and capacity expansion projects [Business Trends](index=16&type=section&id=Business%20Trends) The company continues to face **significant inflationary cost pressures** from commodities, packaging, freight, and labor, though demand volatility between Retail and Foodservice segments has subsided - The company experienced **unprecedented inflationary costs** for commodities (soybean oil, flour), packaging, freight, warehousing, and labor during fiscal 2022, which continued into Q1 2023[63](index=63&type=chunk) - **Demand volatility between Retail and Foodservice segments has subsided**, leading to a **more predictable and stable operating environment** compared to the prior two years[62](index=62&type=chunk) [Results of Consolidated Operations](index=16&type=section&id=Results%20of%20Consolidated%20Operations) Consolidated net sales increased **9%** to **$425.5 million**, despite a **10%** volume decline, with operating income surging **22%** due to effective pricing, improved efficiencies, and reduced SG&A Consolidated Operations Summary (in thousands) | Metric | Q1 2023 | Q1 2022 | Change (%) | | :--- | :--- | :--- | :--- | | Net Sales | $425,537 | $392,056 | 9% | | Gross Profit | $99,055 | $92,367 | 7% | | Operating Income | $49,298 | $40,511 | 22% | | Net Income | $37,592 | $30,655 | 23% | - Consolidated sales volumes, measured in pounds shipped, **decreased 10%** for the quarter[65](index=65&type=chunk) - SG&A expenses **decreased 4% to $49.8 million**, driven by lower consumer promotions, with Project Ascent (ERP initiative) expenses totaling **$9.2 million**[67](index=67&type=chunk) [Results of Operations - Segments](index=18&type=section&id=Results%20of%20Operations%20-%20Segments) Foodservice segment sales grew **20%** with operating income surging **102%**, while Retail sales were flat and operating income declined **11%** due to volume and ERP impacts - Retail segment net sales declined slightly, unfavorably impacted by an estimated **$11 million** in advance ordering ahead of the ERP go-live and the exit from certain product lines[72](index=72&type=chunk) - Retail operating income **fell 11% to $42.9 million** due to lower sales and production volumes, which reduced overhead recovery[72](index=72&type=chunk) - Foodservice net sales **grew 20% to $202.3 million**, driven by inflationary pricing and volume gains from select quick-service restaurant customers[73](index=73&type=chunk) - Foodservice operating income **more than doubled to $31.9 million** as pricing actions effectively offset inflationary costs and benefited from a more favorable sales mix[74](index=74&type=chunk) [Looking Forward](index=18&type=section&id=Looking%20Forward) The company anticipates Q2 Retail sales to benefit from licensing but face demand elasticity, while Foodservice growth continues, with cost inflation offset by pricing and cost savings - In Q2, Retail sales volumes are expected to **benefit from the licensing program** but **face offsets from consumer demand elasticity and product rationalization**[76](index=76&type=chunk) - **Cost inflation will remain a headwind** in Q2, but **pricing actions and cost savings initiatives are expected to help offset it**[77](index=77&type=chunk) - The implementation of Project Ascent (ERP system) will **continue throughout fiscal 2023**, with **full deployment expected in fiscal 2024**[78](index=78&type=chunk) [Financial Condition](index=19&type=section&id=Financial%20Condition) The company maintains a strong financial condition with **$50.9 million** in operating cash flow, an undrawn **$150 million** credit facility, and projected **$90-110 million** in fiscal 2023 capital expenditures - The company has an unsecured revolving credit facility of up to **$150 million**, with **no borrowings outstanding** at September 30, 2022[82](index=82&type=chunk) - Capital expenditures for fiscal 2023 are expected to be **between $90 million and $110 million**[85](index=85&type=chunk) - A significant portion of 2023 capital spending, **approximately $50 million**, is for the capacity expansion at the Horse Cave, Kentucky facility, expected to be **completed in Q2 fiscal 2023**[85](index=85&type=chunk)[88](index=88&type=chunk) [Quantitative and Qualitative Disclosures About Market Risk](index=21&type=section&id=Item%203.%20Quantitative%20and%20Qualitative%20Disclosures%20About%20Market%20Risk) The company reports **no material changes** to its market risks compared to those disclosed in the 2022 Annual Report on Form 10-K - There have been **no material changes** to market risks from those disclosed in the 2022 Annual Report on Form 10-K[93](index=93&type=chunk) [Controls and Procedures](index=21&type=section&id=Item%204.%20Controls%20and%20Procedures) Management concluded that disclosure controls were **effective** as of September 30, 2022, with ERP system implementation ongoing and **no material adverse effect** on internal controls - The CEO and CFO concluded that disclosure controls and procedures were **effective** as of September 30, 2022[94](index=94&type=chunk) - During the quarter, the company **began implementing its new ERP system** (Project Ascent) and updated internal controls as necessary, with **no material effect** on internal control over financial reporting[95](index=95&type=chunk) PART II – OTHER INFORMATION [Legal Proceedings](index=22&type=section&id=Item%201.%20Legal%20Proceedings) The company reports **no material environmental legal proceedings** requiring disclosure for the period - Applying a disclosure threshold of **$1 million** for potential monetary sanctions in environmental proceedings, the company reports **no matters to disclose**[98](index=98&type=chunk) [Risk Factors](index=22&type=section&id=Item%201A.%20Risk%20Factors) There have been **no material changes** to the risk factors previously disclosed in the company's 2022 Annual Report on Form 10-K - **No material changes** to the risk factors disclosed in the 2022 Annual Report on Form 10-K have occurred[99](index=99&type=chunk) [Unregistered Sales of Equity Securities and Use of Proceeds](index=22&type=section&id=Item%202.%20Unregistered%20Sales%20of%20Equity%20Securities%20and%20Use%20of%20Proceeds) The company repurchased **533 common shares** at an average of **$149.58** for tax withholding, with **1,225,012 shares** remaining authorized for future repurchase - As of September 30, 2022, **1,225,012 common shares** remained authorized for future repurchase under a plan approved in November 2010[100](index=100&type=chunk) Share Repurchases in Q1 Fiscal 2023 | Period | Total Shares Purchased | Average Price Paid Per Share | | :--- | :--- | :--- | | July 2022 | 42 | $132.38 | | August 2022 | 412 | $147.46 | | September 2022 | 79 | $169.80 | | **Total** | **533** | **$149.58** | [Exhibits](index=22&type=section&id=Item%206.%20Exhibits) This section indexes exhibits filed with the Form 10-Q, including **CEO and CFO certifications** and XBRL data files - The report includes **required CEO and CFO certifications** under Sections 302 and 906 of the Sarbanes-Oxley Act[103](index=103&type=chunk)

Financial Performance & Growth - Lancaster Colony's FY22 net sales reached $1.7 billion, primarily in the U S [6] - The company has a history of increasing regular cash dividends for 59 consecutive years [6, 32] - From fiscal year 1972 through fiscal year 2022, the company achieved an 11% compound annual growth rate [17] - Retail sales accounted for 55% of total net sales, while foodservice sales made up 45% [8, 9] - Net sales increased by 14% from 2021 to 2022, reaching $1,676 390 thousand in 2022 [26, 34] - Diluted net income per common share decreased by 37% from $5 16 in 2021 to $3 25 in 2022 [34] Retail Segment & Licensing - Retail sales consist of 36% frozen breads, 23% refrigerated dressings, dips & other, and 41% shelf-stable dressings, sauces & croutons [8] - Sales of licensed dressings and sauces in the retail channel totaled $333 million for the 52-week period ended 6/26/2022, a 47% increase over the previous year [11] Market Share - Marzetti holds a 23 2% market share in refrigerated dressings with sales of $113 1 million [42, 43] - Marzetti dominates the dips market with an 80 1% share and sales of $135 3 million [42, 48] - New York Brand Bakery leads the frozen garlic bread market with a 41 5% share and sales of $283 9 million [42, 53] - Sister Schubert's holds a 53 0% market share in the frozen roll market with sales of $147 4 million [42, 58]

Financial Data and Key Metrics Changes - Consolidated net sales increased by 17.3% to $452 million, while consolidated gross profit improved by 1.8% to $98.4 million [6][9] - Gross profit margin declined by 330 basis points due to unprecedented inflation and increased supply chain costs [10][14] - Fourth quarter diluted earnings per share decreased by $0.09 to $1.06, impacted by restructuring and impairment charges [14] Business Line Data and Key Metrics Changes - Retail segment net sales grew by 8.8%, driven by pricing actions and advanced ordering by customers [6] - Food Service segment net sales grew over 28%, with pricing accounting for over 24% of the sales increase [7] - Retail sales volumes measured in pounds declined by 2%, compared to a solid volume growth of 9% in the previous year's Q4 [6] Market Data and Key Metrics Changes - Sister Schubert's dinner rolls gained 300 basis points in market share, reaching 54.2% in frozen rolls [6] - Marzetti refrigerated dressings posted a share gain of 140 basis points, growing to a category-leading 24.8% [6] Company Strategy and Development Direction - The company is focused on leveraging its new SAP S/4 HANA ERP system and the Horse Cave expansion as part of its strategic transition to Lancaster Colony 3.0 [20][22] - The strategy includes accelerating core business growth, simplifying the supply chain, and expanding through focused M&A and strategic licensing [22] - The company plans to continue addressing inflationary cost increases through revenue growth management and productivity initiatives [16][19] Management's Comments on Operating Environment and Future Outlook - Management expects continued industry-leading sales growth in fiscal year 2023, driven by pricing and new product launches [18] - The company anticipates another year of significant inflation and plans to implement further price increases to offset rising costs [19] - Management acknowledges potential headwinds from consumer demand elasticity and a slowing economy [18] Other Important Information - The company completed a successful ERP system cutover with no unplanned disruptions in operations [5] - Capital expenditures for fiscal year 2022 totaled $132 million, with a forecast of approximately $100 million for fiscal year 2023 [15] - The company remains debt-free with $60 million in cash on the balance sheet [15] Q&A Session Summary Question: Expectations for gross margin improvement in fiscal '23 - Management feels confident about topline growth but expects some margin dilution due to pricing adjustments [26][29] Question: Contribution of licensed sauces in the quarter - Chick-fil-A Sauce contributed approximately $34 million in retail scanner sales, while Olive Garden contributed about $36 million [34] Question: Pricing discussions with retailers - Recent price increases were fact-based and constructive discussions were held with retailers regarding input costs [44] Question: SKU rationalization plans - The company does not expect significant further SKU rationalization, having already reduced SKUs by about 25% [46] Question: Outlook on commodity inflation and hedging - Despite some moderation in soybean oil prices, the company expects overall commodity costs to increase due to basis costs and other factors [60][63] Question: Inorganic growth opportunities - Management sees potential for both organic growth through licensing and inorganic growth through acquisitions enabled by the new ERP system [66]

Table of Contents (Mark One) ☒ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended June 30, 2022 or ☐ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from to Commission file number 000-04065 UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 Form10-K (I.R.S. Employer Identification No.) (State or other jurisdiction of incorporation or organization) 380 Polaris Pa ...

Financial Data and Key Metrics Changes - Consolidated net sales grew 12.9% to a record $403 million, with Retail net sales up 7.4% and Foodservice net sales up 19.8% [5][21] - Consolidated gross profit decreased by $22.2 million to $68.3 million, with gross margins declining by 840 basis points due to significant inflationary impacts [22][34] - Third quarter diluted earnings per share decreased $1.22 to a loss of $0.17, driven by operating income decline and special charges related to Bantam Bagels [31][34] Business Line Data and Key Metrics Changes - Retail segment net sales growth was driven by pricing across the portfolio, with a 2% decline in retail sales volume compared to strong growth in the prior year [6][8] - Foodservice segment net sales growth of nearly 20% was influenced by inflationary pricing and increased demand, although total volume measured in pounds decreased by 2% [9][10] Market Data and Key Metrics Changes - Sister Schubert's dinner rolls gained 200 basis points in market share to 51.5%, while Marzetti brand refrigerated dressings increased by 90 basis points to 23.3% [7] - Licensed sauce platform sales at Retail more than tripled from $29 million to $89 million [8] Company Strategy and Development Direction - The company aims to accelerate core business growth, simplify the supply chain, reduce costs, and expand through focused M&A and strategic licensing [36][41] - Key initiatives include a sauce capacity expansion project and the opening of a new warehouse to improve operational efficiencies [12][13] Management's Comments on Operating Environment and Future Outlook - Management acknowledged ongoing inflationary pressures and supply chain challenges, indicating that pricing actions will continue to be a primary tool for managing costs [10][37] - The company expects to see continued sales gains in both Retail and Foodservice segments, despite anticipated headwinds from higher commodity and labor costs [37][41] Other Important Information - The company recorded a noncash restructuring and impairment charge of $22.7 million related to the Bantam Bagels business, which was not allocated to reportable segments [29] - Capital expenditures for the fiscal year are forecasted at approximately $150 million, including $90 million for the Horse Cave expansion project [32][34] Q&A Session Summary Question: Inflation outlook and repricing for fiscal 2023 - Management discussed the significant margin pressure due to rapid increases in freight and commodity costs, indicating that pricing actions will be necessary to manage these challenges [48][49] Question: Consumer elasticity and private label competition - Management noted that pricing actions have been accepted better than expected, with private label products also increasing in price, but consumers are still supporting branded products [58][59] Question: Volume trends in Foodservice and COVID impacts - Management explained that while transaction trends in Foodservice were affected by staffing challenges during the Omicron surge, overall sales continued to grow driven by pricing [63][64] Question: Opportunities in Retail business and licensing partnerships - Management highlighted upcoming product launches and expansions in licensing partnerships, particularly with Chick-fil-A and Buffalo Wild Wings, as key growth opportunities [68][70] Question: Margin outlook for Q4 and fiscal 2023 - Management indicated expectations for sequential improvement in margins for Q4, despite ongoing inflationary pressures [71]

PART I – FINANCIAL INFORMATION [Item 1. Condensed Consolidated Financial Statements (unaudited)](index=4&type=section&id=Item%201.%20Condensed%20Consolidated%20Financial%20Statements%20(unaudited)%3A) This section presents the company's unaudited condensed consolidated financial statements and accompanying notes [Condensed Consolidated Balance Sheets](index=4&type=section&id=Condensed%20Consolidated%20Balance%20Sheets%20%E2%80%93%20March%2031%2C%202022%20and%20June%2030%2C%202021) Condensed Consolidated Balance Sheet Highlights (Amounts in thousands) | Item | March 31, 2022 | June 30, 2021 | Change | % Change | | :-------------------------- | :------------- | :------------ | :------- | :------- | | Cash and equivalents | $67,085 | $188,055 | $(120,970) | -64.3% | | Total current assets | $361,579 | $423,481 | $(61,902) | -14.6% | | Property, plant and equipment-net | $438,289 | $364,622 | $73,667 | 20.2% | | Total assets | $1,103,624 | $1,101,285 | $2,339 | 0.2% | | Total current liabilities | $179,477 | $173,923 | $5,554 | 3.2% | | Total shareholders' equity | $838,622 | $843,147 | $(4,525) | -0.5% | [Condensed Consolidated Statements of Income](index=5&type=section&id=Condensed%20Consolidated%20Statements%20of%20Income%20%E2%80%93%20Three%20and%20Nine%20Months%20Ended%20March%2031%2C%202022%20and%202021) Condensed Consolidated Statements of Income Highlights (Amounts in thousands, except per share data) | Item | Three Months Ended Mar 31, 2022 | Three Months Ended Mar 31, 2021 | Change | % Change | | :---------------------------------- | :------------------------------ | :------------------------------ | :------- | :------- | | Net Sales | $403,494 | $357,249 | $46,245 | 12.9% | | Gross Profit | $68,332 | $90,550 | $(22,218) | -24.5% | | Operating (Loss) Income | $(7,617) | $37,388 | $(45,005) | -120.4% | | Net (Loss) Income | $(4,483) | $28,897 | $(33,380) | -115.5% | | Diluted Net (Loss) Income Per Common Share | $(0.17) | $1.05 | $(1.22) | -116.2% | | Item | Nine Months Ended Mar 31, 2022 | Nine Months Ended Mar 31, 2021 | Change | % Change | | :---------------------------------- | :----------------------------- | :----------------------------- | :------- | :------- | | Net Sales | $1,223,977 | $1,081,501 | $142,476 | 13.2% | | Gross Profit | $257,301 | $290,049 | $(32,748) | -11.3% | | Operating Income | $78,200 | $144,934 | $(66,734) | -46.0% | | Net Income | $60,542 | $110,606 | $(50,064) | -45.3% | | Diluted Net Income Per Common Share | $2.20 | $4.01 | $(1.81) | -45.1% | [Condensed Consolidated Statements of Comprehensive Income](index=6&type=section&id=Condensed%20Consolidated%20Statements%20of%20Comprehensive%20Income%20%E2%80%93%20Three%20and%20Nine%20Months%20Ended%20March%2031%2C%202022%20and%202021) Condensed Consolidated Statements of Comprehensive Income Highlights (Amounts in thousands) | Item | Three Months Ended Mar 31, 2022 | Three Months Ended Mar 31, 2021 | | :------------------------ | :------------------------------ | :------------------------------ | | Net (Loss) Income | $(4,483) | $28,897 | | Other Comprehensive Income, Net of Tax | $43 | $94 | | Comprehensive (Loss) Income | $(4,440) | $28,991 | | Item | Nine Months Ended Mar 31, 2022 | Nine Months Ended Mar 31, 2021 | | :------------------------ | :----------------------------- | :----------------------------- | | Net Income | $60,542 | $110,606 | | Other Comprehensive Income, Net of Tax | $126 | $282 | | Comprehensive Income | $60,668 | $110,888 | [Condensed Consolidated Statements of Cash Flows](index=7&type=section&id=Condensed%20Consolidated%20Statements%20of%20Cash%20Flows%20%E2%80%93%20Nine%20Months%20Ended%20March%2031%2C%202022%20and%202021) Condensed Consolidated Statements of Cash Flows Highlights (Amounts in thousands) | Item | Nine Months Ended Mar 31, 2022 | Nine Months Ended Mar 31, 2021 | Change | % Change | | :-------------------------------- | :----------------------------- | :----------------------------- | :------- | :------- | | Net cash provided by operating activities | $58,651 | $138,699 | $(80,048) | -57.7% | | Net cash used in investing activities | $(105,065) | $(56,162) | $(48,903) | 87.1% | | Net cash used in financing activities | $(74,556) | $(69,689) | $(4,867) | 7.0% | | Net change in cash and equivalents | $(120,970) | $12,848 | $(133,818) | -1041.6% | | Cash and equivalents at end of period | $67,085 | $211,121 | $(144,036) | -68.2% | [Condensed Consolidated Statements of Shareholders' Equity](index=8&type=section&id=Condensed%20Consolidated%20Statements%20of%20Shareholders'%20Equity%20%E2%80%93%20Nine%20Months%20Ended%20March%2031%2C%202022%20and%202021) Shareholders' Equity Changes (Nine Months Ended March 31, 2022, Amounts in thousands) | Item | Amount | | :-------------------------------- | :----- | | Balance, June 30, 2021 | $843,147 | | Net income | $60,542 | | Cash dividends - common stock | $(64,736) | | Purchase of treasury stock | $(7,485) | | Stock-based compensation expense | $7,384 | | Balance, March 31, 2022 | $838,622 | [Notes to Condensed Consolidated Financial Statements](index=10&type=section&id=Notes%20to%20Condensed%20Consolidated%20Financial%20Statements) [Note 1 – Summary of Significant Accounting Policies](index=10&type=section&id=Note%201%20%E2%80%93%20Summary%20of%20Significant%20Accounting%20Policies) This note outlines the basis of presentation and key accounting policies for the interim financial statements - The financial statements are prepared in accordance with **U.S. GAAP** for interim financial information and SEC Article 10 of Regulation S-X[24](index=24&type=chunk) Deferred Software Costs Capitalized (Nine Months Ended March 31, Amounts in thousands) | Year | Amount | | :--- | :----- | | 2022 | $1,600 | | 2021 | $3,200 | - An impairment charge of **$6.8 million** was recorded for property, plant and equipment related to the Bantam Bagels, LLC business[26](index=26&type=chunk) Net (Loss) Income Per Common Share (Diluted) | Period | 2022 | 2021 | | :-------------------------- | :----- | :----- | | Three Months Ended March 31 | $(0.17) | $1.05 | | Nine Months Ended March 31 | $2.20 | $4.01 | [Note 2 – Fair Value](index=12&type=section&id=Note%202%20%E2%80%93%20Fair%20Value) This note details the fair value hierarchy and the measurement of contingent consideration from the Bantam acquisition - Fair value is defined as the exit price, with a three-level hierarchy, and contingent consideration from the Bantam acquisition is measured at **Level 3**[34](index=34&type=chunk)[35](index=35&type=chunk)[38](index=38&type=chunk) Change in Bantam Contingent Consideration (Amounts in thousands) | Period | 2022 | 2021 | | :------------------------------------------------ | :----- | :----- | | Change in contingent consideration (3 months) | $(1,300) | $0 | | Change in contingent consideration (9 months) | $(3,470) | $(5,687) | | Contingent consideration at end of period (3 months) | $0 | $3,470 | | Contingent consideration at end of period (9 months) | $0 | $3,470 | - The **$1.3 million reduction** in Bantam's contingent consideration was due to lower projected sales for its Foodservice business[39](index=39&type=chunk) [Note 3 – Long-Term Debt](index=13&type=section&id=Note%203%20%E2%80%93%20Long-Term%20Debt) The company maintains a **$150 million** unsecured revolving credit facility expiring in March 2025 - The company has an unsecured credit facility allowing borrowings up to **$150 million**, expiring on March 19, 2025[44](index=44&type=chunk) - **No borrowings were outstanding** under the facility at March 31, 2022, or June 30, 2021[46](index=46&type=chunk) - The facility contains restrictive covenants, including an interest coverage ratio not less than **2.5 to 1** and a consolidated leverage ratio not greater than **3.5 to 1**[45](index=45&type=chunk) [Note 4 – Commitments and Contingencies](index=13&type=section&id=Note%204%20%E2%80%93%20Commitments%20and%20Contingencies) The company has routine legal matters and a significant capital commitment for a facility expansion - The company has a significant remaining commitment of approximately **$46 million** for a capacity expansion project in Horse Cave, Kentucky[48](index=48&type=chunk) - Various claims and litigation matters are **not expected to have a material effect** on the consolidated financial statements[47](index=47&type=chunk) [Note 5 – Goodwill and Other Intangible Assets](index=14&type=section&id=Note%205%20%E2%80%93%20Goodwill%20and%20Other%20Intangible%20Assets) This note details goodwill allocation and a **$12.3 million** impairment charge for Bantam's intangible assets Goodwill by Segment (Amounts in thousands) | Segment | March 31, 2022 | June 30, 2021 | | :-------- | :------------- | :------------ | | Retail | $157,400 | $157,400 | | Foodservice | $51,000 | $51,000 | - An impairment charge of **$12.3 million** was recorded to write off the net carrying value of Bantam's intangible assets[51](index=51&type=chunk) Total Net Carrying Value of Other Intangible Assets (Amounts in thousands) | Date | Amount | | :----------- | :----- | | March 31, 2022 | $41,969 | | June 30, 2021 | $58,766 | [Note 6 – Income Taxes](index=15&type=section&id=Note%206%20%E2%80%93%20Income%20Taxes) This note provides details on prepaid federal, state, and local income taxes included in Other Current Assets Prepaid Income Taxes (Amounts in thousands) | Type | March 31, 2022 | June 30, 2021 | | :-------------------- | :------------- | :------------ | | Prepaid federal income taxes | $6,500 | $5,100 | | Prepaid state and local income taxes | $1,700 | $1,100 | [Note 7 – Business Segment Information](index=15&type=section&id=Note%207%20%E2%80%93%20Business%20Segment%20Information) The company operates in two reportable segments, Retail and Foodservice, with both showing sales growth but declining operating income - The company's financial results are presented as two reportable segments: **Retail** and **Foodservice**[59](index=59&type=chunk) Segment Net Sales (Amounts in thousands) | Segment | Three Months Ended Mar 31, 2022 | Three Months Ended Mar 31, 2021 | Nine Months Ended Mar 31, 2022 | Nine Months Ended Mar 31, 2021 | | :---------- | :------------------------------ | :------------------------------ | :----------------------------- | :----------------------------- | | Retail | $213,128 | $198,358 | $682,102 | $614,653 | | Foodservice | $190,366 | $158,891 | $541,875 | $466,848 | | Total | $403,494 | $357,249 | $1,223,977 | $1,081,501 | Segment Operating Income (Amounts in thousands) | Segment | Three Months Ended Mar 31, 2022 | Three Months Ended Mar 31, 2021 | Nine Months Ended Mar 31, 2022 | Nine Months Ended Mar 31, 2021 | | :---------- | :------------------------------ | :------------------------------ | :----------------------------- | :----------------------------- | | Retail | $22,213 | $41,179 | $119,997 | $144,557 | | Foodservice | $18,556 | $21,088 | $52,690 | $66,845 | | Nonallocated Restructuring and Impairment Charges | $(22,723) | $0 | $(23,749) | $0 | | Corporate Expenses | $(25,663) | $(24,879) | $(70,738) | $(66,468) | | Total | $(7,617) | $37,388 | $78,200 | $144,934 | [Note 8 – Stock-Based Compensation](index=17&type=section&id=Note%208%20%E2%80%93%20Stock-Based%20Compensation) This note details stock-based compensation expenses and unrecognized costs for various equity awards Stock-Based Compensation Expense (Amounts in thousands) | Type | Three Months Ended Mar 31, 2022 | Nine Months Ended Mar 31, 2022 | | :-------------------------- | :------------------------------ | :----------------------------- | | SSSARs compensation expense | $900 | $2,900 | | Restricted stock compensation expense | $1,300 | $3,700 | | Performance units compensation expense | $300 | $800 | - An initial grant of performance units was made in **August 2021**, with a vesting period of **3 years**[67](index=67&type=chunk) - At March 31, 2022, unrecognized compensation expense totaled **$3.9 million** for SSSARs, **$7.3 million** for restricted stock, and **$2.9 million** for performance units[68](index=68&type=chunk)[69](index=69&type=chunk)[70](index=70&type=chunk) [Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations](index=18&type=section&id=Item%202.%20Management's%20Discussion%20and%20Analysis%20of%20Financial%20Condition%20and%20Results%20of%20Operations) This section provides management's perspective on the company's financial performance, condition, and future outlook [OVERVIEW](index=18&type=section&id=OVERVIEW) - Lancaster Colony Corporation manufactures and markets specialty food products, with **over 95% of products sold in the United States**[74](index=74&type=chunk)[76](index=76&type=chunk) - The company's growth strategy includes new products, distribution expansion, strategic licensing, and complementary acquisitions[76](index=76&type=chunk) - Significant investments include a capacity expansion in Kentucky and an ongoing ERP system replacement, **Project Ascent**[77](index=77&type=chunk) [RECENT EVENTS](index=19&type=section&id=RECENT%20EVENTS) - The company's two major priorities during the COVID-19 pandemic are **employee health and safety** and maintaining the food supply chain[80](index=80&type=chunk) - COVID-19 has shifted consumer demand towards **at-home food consumption**, impacting segment sales differently[82](index=82&type=chunk) - Operational results have been unfavorably impacted by **higher wage rates**, increased PPE costs, and lower efficiency due to COVID-19[82](index=82&type=chunk) [RESULTS OF CONSOLIDATED OPERATIONS](index=20&type=section&id=RESULTS%20OF%20CONSOLIDATED%20OPERATIONS) Consolidated Financial Performance (Amounts in thousands, except per share data) | Item | Three Months Ended Mar 31, 2022 | Three Months Ended Mar 31, 2021 | Change | % Change | | :---------------------------------- | :------------------------------ | :------------------------------ | :------- | :------- | | Net Sales | $403,494 | $357,249 | $46,245 | 13% | | Gross Profit | $68,332 | $90,550 | $(22,218) | (25)% | | Operating (Loss) Income | $(7,617) | $37,388 | $(45,005) | (120)% | | Net (Loss) Income | $(4,483) | $28,897 | $(33,380) | (116)% | | Diluted Net (Loss) Income Per Common Share | $(0.17) | $1.05 | $(1.22) | (116)% | | Item | Nine Months Ended Mar 31, 2022 | Nine Months Ended Mar 31, 2021 | Change | % Change | | :---------------------------------- | :----------------------------- | :----------------------------- | :------- | :------- | | Net Sales | $1,223,977 | $1,081,501 | $142,476 | 13% | | Gross Profit | $257,301 | $290,049 | $(32,748) | (11)% | | Operating Income | $78,200 | $144,934 | $(66,734) | (46)% | | Net Income | $60,542 | $110,606 | $(50,064) | (45)% | | Diluted Net Income Per Common Share | $2.20 | $4.01 | $(1.81) | (45)% | - Consolidated gross profit decreased due to **unprecedented inflationary costs** for commodities, packaging, freight, and labor[88](index=88&type=chunk)[89](index=89&type=chunk) - Operating income for Q3 2022 was negatively impacted by **$22.7 million in restructuring and impairment charges**[96](index=96&type=chunk)[98](index=98&type=chunk)[100](index=100&type=chunk) [RESULTS OF OPERATIONS - SEGMENTS](index=23&type=section&id=RESULTS%20OF%20OPERATIONS%20-%20SEGMENTS) [Retail Segment](index=23&type=section&id=Retail%20Segment) Retail sales grew due to pricing, but operating income declined significantly as cost inflation outpaced price increases Retail Segment Performance (Amounts in thousands) | Item | Three Months Ended Mar 31, 2022 | Three Months Ended Mar 31, 2021 | Nine Months Ended Mar 31, 2022 | Nine Months Ended Mar 31, 2021 | | :---------------- | :------------------------------ | :------------------------------ | :----------------------------- | :----------------------------- | | Net Sales | $213,128 | $198,358 | $682,102 | $614,653 | | Operating Income | $22,213 | $41,179 | $119,997 | $144,557 | | Operating Margin | 10.4% | 20.8% | 17.6% | 23.5% | - Retail segment sales were driven by pricing actions and volume gains for **Chick-fil-A sauces** and **Sister Schubert's rolls**[106](index=106&type=chunk) - Retail operating income decreased due to **increased commodity, packaging, freight, and labor costs**, with pricing actions lagging cost inflation[106](index=106&type=chunk)[107](index=107&type=chunk) [Foodservice Segment](index=23&type=section&id=Foodservice%20Segment) Foodservice sales grew from pricing and demand, but operating income fell due to higher costs and supply chain challenges Foodservice Segment Performance (Amounts in thousands) | Item | Three Months Ended Mar 31, 2022 | Three Months Ended Mar 31, 2021 | Nine Months Ended Mar 31, 2022 | Nine Months Ended Mar 31, 2021 | | :---------------- | :------------------------------ | :------------------------------ | :----------------------------- | :----------------------------- | | Net Sales | $190,366 | $158,891 | $541,875 | $466,848 | | Operating Income | $18,556 | $21,088 | $52,690 | $66,845 | | Operating Margin | 9.7% | 13.3% | 9.7% | 14.3% | - Foodservice net sales grew due to **inflationary pricing** and increased demand, despite a **2% decrease in sales volume** for the quarter[109](index=109&type=chunk) - Foodservice operating income decreased, reflecting **increased commodity, packaging, freight, and labor costs**[111](index=111&type=chunk)[112](index=112&type=chunk) [Corporate Expenses](index=24&type=section&id=Corporate%20Expenses) Corporate expenses increased due to higher investments in personnel and the company's ERP initiative, Project Ascent Corporate Expenses (Amounts in thousands) | Period | 2022 | 2021 | | :-------------------------- | :----- | :----- | | Three Months Ended March 31 | $25,663 | $24,879 | | Nine Months Ended March 31 | $70,738 | $66,468 | Project Ascent Expenses (Amounts in thousands) | Period | 2022 | 2021 | | :-------------------------- | :----- | :----- | | Three Months Ended March 31 | $10,300 | $10,800 | | Nine Months Ended March 31 | $28,300 | $27,600 | - The increase in corporate expenses reflects increased investments in **personnel** and higher expenditures for **Project Ascent**[113](index=113&type=chunk)[114](index=114&type=chunk) [LOOKING FORWARD](index=24&type=section&id=LOOKING%20FORWARD) - Net sales are expected to continue benefiting from **pricing actions** in both Retail and Foodservice segments[115](index=115&type=chunk) - The **inflationary environment** and broad-based supply chain challenges are anticipated to persist[115](index=115&type=chunk) - The impact of the **COVID-19 pandemic** on financial results remains difficult to forecast[116](index=116&type=chunk) [FINANCIAL CONDITION](index=24&type=section&id=FINANCIAL%20CONDITION) [Cash Flows](index=24&type=section&id=Cash%20Flows) Operating cash flow decreased significantly due to working capital changes and lower net income, while investing cash use increased Cash Flow Summary (Nine Months Ended March 31, Amounts in thousands) | Activity | 2022 | 2021 | Change | | :-------------------------------- | :----- | :----- | :----- | | Net cash provided by operating activities | $58,651 | $138,699 | $(80,048) | | Net cash used in investing activities | $(105,065) | $(56,162) | $(48,903) | | Net cash used in financing activities | $(74,556) | $(69,689) | $(4,867) | - The decrease in operating cash flow was primarily due to changes in **net working capital** and lower net income[117](index=117&type=chunk) - Increased cash used in investing activities reflects a higher level of payments for **property additions**, including capacity expansion projects[118](index=118&type=chunk) [Liquidity and Capital Resources](index=24&type=section&id=Liquidity%20and%20Capital%20Resources) The company believes existing cash, operating cash flows, and its credit facility are sufficient to meet liquidity needs - The company has an unsecured revolving credit facility of up to **$150 million**, with no outstanding borrowings[120](index=120&type=chunk) - The company was **in compliance with all applicable financial covenants** of its credit facility at March 31, 2022[121](index=121&type=chunk) - Liquidity is expected to be adequate for needs including projected capital expenditures of approximately **$150 million** for fiscal 2022[123](index=123&type=chunk)[124](index=124&type=chunk) [CRITICAL ACCOUNTING POLICIES](index=25&type=section&id=CRITICAL%20ACCOUNTING%20POLICIES) - There have been **no changes** in critical accounting policies from those disclosed in the company's 2021 Annual Report on Form 10-K[127](index=127&type=chunk) [RECENT ACCOUNTING PRONOUNCEMENTS](index=25&type=section&id=RECENT%20ACCOUNTING%20PRONOUNCEMENTS) - There are **no recently issued or adopted accounting standards** that will impact the company's consolidated financial statements[128](index=128&type=chunk) [FORWARD-LOOKING STATEMENTS](index=25&type=section&id=FORWARD-LOOKING%20STATEMENTS) - Forward-looking statements are subject to risks including the **COVID-19 pandemic**, inflationary pressures, and supply chain disruptions[129](index=129&type=chunk)[130](index=130&type=chunk) - The company undertakes **no obligation to update** such forward-looking statements, except as required by law[130](index=130&type=chunk) [Item 3. Quantitative and Qualitative Disclosures About Market Risk](index=26&type=section&id=Item%203.%20Quantitative%20and%20Qualitative%20Disclosures%20About%20Market%20Risk) The company's market risks have not materially changed from those disclosed in its 2021 Annual Report on Form 10-K - The company's market risks have **not changed materially** from those disclosed in its 2021 Annual Report on Form 10-K[130](index=130&type=chunk) [Item 4. Controls and Procedures](index=26&type=section&id=Item%204.%20Controls%20and%20Procedures) Management concluded that disclosure controls and procedures were effective, with no material changes to internal controls - Management concluded that the company's disclosure controls and procedures were **effective** as of March 31, 2022[131](index=131&type=chunk) - **No material changes** were made to the company's internal control over financial reporting during the most recent fiscal quarter[132](index=132&type=chunk) PART II – OTHER INFORMATION [Item 1. Legal Proceedings](index=27&type=section&id=Item%201.%20Legal%20Proceedings) The company has no environmental matters to disclose in this Form 10-Q - Applying a **$1 million threshold**, there are no environmental matters to disclose in this Form 10-Q[134](index=134&type=chunk) [Item 1A. Risk Factors](index=27&type=section&id=Item%201A.%20Risk%20Factors) There have been no material changes to the risk factors previously disclosed in the company's 2021 Annual Report - There have been **no material changes** to the risk factors disclosed in the company's 2021 Annual Report on Form 10-K[135](index=135&type=chunk) [Item 2. Unregistered Sales of Equity Securities and Use of Proceeds](index=27&type=section&id=Item%202.%20Unregistered%20Sales%20of%20Equity%20Securities%20and%20Use%20of%20Proceeds) The company repurchased 13,386 shares in February 2022 under its authorized share repurchase program - As of March 31, 2022, **1,226,096 common shares remained authorized** for future repurchases[136](index=136&type=chunk) Common Stock Repurchases (February 2022) | Period | Total Number of Shares Purchased | Average Price Paid Per Share | | :------------------ | :----------------------------- | :--------------------------- | | February 1-28, 2022 | 13,386 | $160.38 | [Item 6. Exhibits](index=27&type=section&id=Item%206.%20Exhibits) This section refers to the Index to Exhibits for a complete list of documents filed with the report - A complete list of exhibits is provided in the **Index to Exhibits**[137](index=137&type=chunk) [SIGNATURES](index=28&type=section&id=SIGNATURES) - The report was signed on **May 5, 2022**, by the CEO and CFO[141](index=141&type=chunk)[142](index=142&type=chunk) [INDEX TO EXHIBITS](index=29&type=section&id=INDEX%20TO%20EXHIBITS) - The index lists various exhibits, including **Sarbanes-Oxley certifications** and XBRL documents[144](index=144&type=chunk)

Financial Data and Key Metrics Changes - 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% [5][17] - Consolidated gross profit decreased by $10.2 million to $96.6 million, with gross margins declining by 600 basis points due to high commodity inflation and increased supply chain costs [18][26] - Diluted earnings per share decreased $0.37 to $1.25, primarily driven by the decline in operating income [27] Business Line Data and Key Metrics Changes - Retail net sales growth of 10% was driven by pricing and volume growth, particularly from the licensing program and Sister Schubert's frozen dinner rolls [6][11] - Foodservice segment net sales growth of 20% was driven by inflationary pricing and volume growth with quick-service restaurant (QSR) customers [12][22] Market Data and Key Metrics Changes - Strong share gains for 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% [8] - The licensed sauce platform grew from $22 million in sales to $78 million, an increase of 250% [10] Company Strategy and Development Direction - The company aims to accelerate core business growth, simplify the supply chain to reduce costs, and expand through focused M&A and strategic licensing [33] - Significant investments are being made in production capacity and infrastructure to support growth, including a major expansion at the Horse Cave facility [36][71] Management's Comments on Operating Environment and Future Outlook - Management acknowledged ongoing cost pressures from inflation, supply chain disruptions, and increased labor costs, but expressed confidence in the company's long-term positioning [34][38] - The company is implementing actions to improve margins and operational efficiency, including leveraging new warehouse locations and optimizing throughput [15][31] Other Important Information - The company plans to close its frozen garlic bread facility in Baldwin Park, California, due to low profitability, resulting in restructuring impairment charges [25] - The quarterly cash dividend was increased by 7% to $0.80 per share, maintaining a 59-year streak of annual dividend increases [29][30] Q&A Session Summary Question: Can you discuss the strength in Foodservice? - Management noted that the growth was driven by branded products and strong performance from QSR customers, particularly Chick-fil-A and Domino's [45] Question: How did Omicron impact margin pressures? - Management indicated that while Omicron did not significantly impact Q2 margins, there were increased costs related to labor and supply chain disruptions in January [46][53] Question: Can you elaborate on capacity expansion efforts? - The company is expanding its Horse Cave facility to increase production capacity, which is expected to be completed in the first half of fiscal 2023 [71] Question: What is the outlook for gross margins? - Management expects that pricing actions will help recover costs, and they anticipate that gross margins may stabilize as supply chain issues are addressed [75][76] Question: What are the implications of Project Ascent? - The implementation of Project Ascent is expected to enhance productivity and streamline operations, facilitating future acquisitions [78][80] Question: Can you provide details on the Chick-fil-A barbecue sauce? - The barbecue sauce is a significant category with a market size of approximately $500 million, and it is expected to contribute materially to the company's growth [85]