Dale Ganobsik – Director, IR Jay Gerlach – Chairman, CEO and President Doug Fell – VP, Treasurer and CFO

Phil Terpolilli – Longbow Research

Thank you, Erica. Good morning, everyone, and thank you for joining us today for Lancaster Colony’s fiscal 2015 first quarter conference call.

Let me remind everyone that our discussion this morning may include forward-looking statements, which are subject to the Safe Harbor provisions of the Private Securities Litigation Reform Act of 1995. These statements are subject to a number of risks and uncertainties that could cause actual results to differ materially and the company undertakes no obligation to update these statements based upon subsequent events.

A discussion of these risks and uncertainties is contained in the company’s filings with the SEC. With that said, I’ll now turn the call over to Lancaster Colony’s Chairman and CEO, Jay Gerlach.

Jay?

Thanks Dale, and let me add my welcome and thank you for joining us this morning. We are pleased to report record first quarter sales of $260 million, up almost 5% from last year’s first quarter.

Sales grew in both our retail and foodservice channels with dressings, dips and garlic bread contributing to retail growth and our national chain restaurant sales helping the foodservice channel. Sales mix for the quarter was 49.4% retail, up about 40 basis points from last year.

Earnings remained under pressure from new product introductory costs and higher costs related to our tight capacity situation in salad dressings. Earnings per share were $0.83 versus $0.88 last year.

Our sales growth for the quarter was volume mix driven, as continued price deflation in our foodservice channel of about $1.7 million offset large share of our $3 million ingredient cost savings. Soybean oil and sweeteners continued to be the primary savings, with dairy showing a noticeable increase.

We invested heavily in the quarter to get distribution and provide support for our new product launches from the fourth quarter, New York Brand soft pull-apart rolls and whole grain Texas Toast, Presto Pasta and new salad toppings. Higher operating costs driven by very high dressing capacity utilization, continued to be a significant cost drag in the form of high overtime costs, general operating inefficiencies and high shuttle freight costs.

Collectively, these had a negative cost impact of over $3 million. Non-shuttle freight costs were up as well in the quarter.

The net result was segment operating margin down 150 basis points to 14.4%. Looking at our five key retail categories from a sell-through perspective based on 12-week IRI data through October 5, we maintained our leadership positions in each with our frozen categories growing – with our non-frozen categories growing and our frozen bread categories showing some continued softness.

Competitive pressures in the form of promotional spending and price discounting were not significant in the quarter. We have seen continued growth of new entrants into the refrigerated salad dressing category and gaining some share.

For the 12-week period, our Marzetti Simply Dressed and classic lines showed growth. I’d now like to ask Doug to make a few comments.

Thank you, Jay. Relative to the balance sheet information contained within this morning’s release, let me comment on some of the larger line items.

Turning first to our accounts receivable, these increased modestly from the June level and in general reflect a strong sales volume for September. We continue to see our overall aging remain solid.

With respect to our inventories that totaled about $79 million at September 30, we saw an increase of about 5% since June. This growth largely reflects an increase of frozen inventories on certain retail product lines and preparation for our seasonal shipping patterns in the second quarter.

The net balance of property, plant and equipment remained comparable to the June total with our current quarter capital expenditures totaling nearly $8 million. Our largest expenditure this quarter related to the ongoing expansion of our dressing and sauce capacity at our Kentucky plant.

The expansion project is progressing as planned, and we still expect this project to be completed in the later part of our second quarter. As mentioned in our previous quarter’s commentary, not only will this expansion provide us some much needed capacity to support future growth, it will also allow us to gain better efficiencies and reduce a variety of incremental cost that affected our results in the current quarter.

With respect to our balance sheet capitalization, we continue to have no debt and over $540 million in total shareholders’ equity. We also ended the quarter with over $227 million in cash and equivalents as we benefited from continued strong operating cash flows.

Given our balance sheet posture, we continued to possess considerable flexibility to address foreseeable cash requirements, including those supportive of our future organic growth initiatives, acquisition opportunities, continued dividends and share repurchases. Turning to our first quarter cash flows.

Cash flows for the current quarter totaled $16 million, up nearly $6.3 million from the prior year quarter. Cash flows from operating activities totaled approximately $35.9 million, which is up $9.4 million from the first quarter of last year.

In general, improvements in working capital more than offset the decline in net income. Cash outflows relating to capital expenditures increased nearly $5.8 million from the prior year period, which principally reflects the ongoing capacity expansion project at our dressing and sauce plant in Kentucky.

Lastly, cash outflows relating to regular dividends during the current quarter increased $1.1 million, reflecting the 10% increase in the dividend rate from $0.40 to $0.44 per share. However, the current quarter cash flows benefited by the absence of share repurchases, which totaled nearly $3 million in the prior year quarter.

Finally, our current quarter effective tax rate of 34% remained consistent with that of the prior year quarter and consistent with the guidance we previously provided for fiscal ‘15. Thanks again for your participation with us this morning.

And I will now turn the call back over to Jay for our concluding comments.

Thanks Doug. Looking ahead to the second quarter, we are entering our strong but seasonal quarter due to the holiday impact, particularly on our Sister Schubert line of frozen dinner rolls, but also having some benefit to other retail brands and products such as Marzetti produce dips.

This quarter will also be important for evaluating the consumer acceptance of our new products introduced in the spring. The quarter will see continued investment in sliding and promotional costs to support these new items.

While the foodservice channel overall seems to be expecting modest growth, we have been fortunate to have a customer mix that seems to be slightly outperforming the channel as a whole. We sell to 19 of the top 25 restaurant chains, including both every day and promotional items.

Unfortunately, we expect higher freight costs and the impact of inefficient operations to continue through the quarter as we work to complete and bring online our new capacity for dressings and sauces. We anticipate overall input cost to be close to neutral for the quarter, as we see the greatest unfavorable impact from high dairy costs being this quarter and less year-over-year benefit for lower sweetener cost.

Our negative foodservice price adjustments should start to decline from the levels of recent quarters. Overall, a challenging comparison to a very profitable second quarter of last year.

We did introduce our new line of Simply Dressed super grain and gluten-free croutons at a recent trade show and will begin shipping early in 2015. Efforts continue to develop new product in the better free use space as well as improving the nutritional values and ingredient decks in existing product, all in an effort to appeal to today’s consumers, while not giving up any of our taste profiles.

We continue to evaluate acquisition opportunities as a top use for our strong balance sheet and cash position. We will review our dividend at our upcoming November Board Meeting, with an eye toward extending our 51-year history of annual dividend increases.

We are looking forward to getting to a more normal production state, as we reach the second half of our fiscal year. Our capital investment estimate remains at about $20 million for the full-year.

Erica, we’re now ready to take questions.

Yes, good morning.

Good morning, Phil.

Thanks for taking the question. Just a couple of quick ones.

First on the product placement costs. I think that we had talked about last quarter, but I know it’s still early for some of those products, but can you just kind of give us a benchmark of maybe how they are doing versus your expectations?

And then, I think you mentioned certainly the holiday season is important overall for your entire portfolio, but any sort of kind of clarity in what you think would be kind of may be in line with your expectations or ahead, both this quarter and then looking ahead to the holiday season?

Phil, I think that what we might describe as the closer end new products, the New York Brand soft pull-apart rolls, the whole grain toast, salad toppings. I think reasonably close to expectations.

Presto Pasta is the one that concerns us at this point, but again looking forward to getting a little bit more into the frozen food season to see how that performs.

Sure, okay. And then I guess maybe just kind of a bigger picture question is, certainly we’ve seen kind of pressure in the frozen foods category and I think we’ve talked about that a lot, but on the refrigerated dressing side in particular, you’ve had quite a bit of success there.

I think you mentioned in the prepared remarks kind of incremental maybe pressure on the – just from a competitive standpoint. Is there incremental kind of versus what you’ve seen maybe over the last year or kind of similar to that, and you’re just calling it out again?

Yes, I would say it’s pretty similar, maybe a little bit more so than what we might have called out earlier. So it’s definitely a factor.

We are seeing some competitive activity, particularly from maybe the newest entrants picking up a little bit more share.

Right, okay. And then just two more.

One on the foodservice side, ongoing strength there, it’s been very successful. I know a lot of the customers maybe at the top of focused fairly publicly on maybe promoting and getting into the breakfast category more.

Are you benefiting from that at all, or maybe are you able to participate in those categories with those customers in anyway?

Yes. A little bit, Phil, not dramatically.

But we have a few items that would fit into a few different breakfast menus.

Okay, great. And then just last one, Jay.

On the dressing expansion coming on kind of at the end of 2Q. Is anyway to quantify what the potential basis point benefit could be from that, just kind of ballpark in terms of any potential operating margin benefit?

I really – I couldn’t do that for you. So we certainly expect to get back to a more normal operating level and moving forward with somewhat greater efficiencies as well, although not dramatically.

So in the sense of 100-plus basis points or something like that, but hopefully back to a more normal level, a little bit of improvement from that.

All right, okay. And then I think you mentioned, but kind of cost outlook, any kind of changes versus what we saw last quarter.

Anything changed in terms of what you’re seeing?

Well, from particularly an input cost standpoint, I think we anticipate moving from a savings as we’ve seen in the last several quarters to probably a pretty flat quarter on input costs. As we see move to the second half, that might start to move just slightly unfavorable.

As you know, we only can buy forward on a couple of our key ingredients, soybean oil and flour, which we have done, in fact we’ve been a little bit more aggressive on soybean oil with some of the more recent softness there to go out a little bit farther with a little bit heavier coverage, but those are only two of our ingredients. All the others are really bought at the spot market and certainly subject to more variability, not the least of which again is dairy where we’ve seen a pretty sizable spike up in the first quarter, and we expect it to be even more significant in the second, and then start to trend down as we move into the second half of the fiscal year.

Okay, great. Thanks Jay.

You’re welcome.

Well, I appreciate you joining us this morning. Thank you.

And we look forward to talking with you at the end of January with our second quarter results.