Dale Ganobsik - Director, Investor Relations Jay Gerlach - Chairman and Chief Executive Officer John Boylan - Vice President, Treasurer and Chief Financial Officer

Michael Halen - Sidoti & Company Greg Halter - Great Lakes Review

Thank you, Jennifer. Good morning everyone and thank you for joining us today for Lancaster Colony’s fiscal 2014 second quarter conference call.

Let me begin by reminding 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 detailed discussion of these risks and uncertainties is contained in the company’s filings with the SEC. With that said, I will now turn the call over to Lancaster Colony’s Chairman and CEO, Jay Gerlach.

Jay?

Good morning and thank you again for joining us. We are pleased to review our second quarter results issued earlier this morning and a divestiture of our remaining non-food business, Candle-lite, completed yesterday.

For perspective, the divestiture of Candle-lite will cause the historic results of our Glassware and Candle segment to be reclassified as discontinued operations beginning in the current third quarter. Thus, that segment remains included as part of the second quarter results we are reporting today.

On that basis, we saw total consolidated net sales increased by 3% and operating income improved by 13%, setting records – record totals for the quarter. All the growth came from our Specialty Food segment.

For the Glassware and Candle segment, our second quarter results reflected a sales and operating income decline of 19% and 43% respectively, largely due to weaker market conditions and anticipated lower seasonal sales. Earnings per share increased 12.5% to $1.44 versus last year’s $1.28.

Our food segment had a 7% sales increase that was all volume mix as there was no price inflation during the quarter. The quarter benefited from some seasonal business shifting from the first to the second quarter.

Good seasonal demand helped our Sister Schubert’s and New York brand frozen breads into a smaller degree, the cold weather has helped our Reames frozen noodle sales. Newer products continue to contribute to growth as well including Marzetti’s Simply Dressed refrigerated salad dressing and New York brand garlic knots.

Foodservice channel sales also grew nicely both by new items with existing customers, new customers and successful limited time offer participation. Given the strong seasonal benefit to our retail channel business, our mix moved to 56.4% retail versus 55.5% last year and 45% – 49% in the first quarter.

Segment operating income improved approximately 18% benefiting from improved volume, stronger mix and trade spending levels comparable to a year ago. Material costs were also favorable in the quarter at about 1% of sales helped by favorable soybean oil, sweetener and egg costs.

Segment performance for the first half shows net sales up 3.6% and operating income up 6.2% with operating margins at 18.3%, up about 45 basis points. Recapping our key category performance at retail shows the following for the 12 weeks ended December 29 from IRI.

The refrigerated dressing category was up 2.8%. We were down 1.1%.

I would comment that our Simply Dressed product line continues to grow. Declines were seen in our classic refrigerated dressings.

Croutons, the category was up 2.2%, we were up 4.6%. Veggie Dips continues to struggle with the category down 6.2%, our Marzetti brand down 7.7%.

Frozen Garlic Breads category was up just a tenth of a percent. Our New York brand was up 2.6% and Frozen Dinner Rolls, the category was down 2.8% and Sister Schuberts brand was down 2.7%.

Now I would like John to make a few comments.

Thank you, Jay. Let me begin today by noting that my remarks reflect the presentation of our balance sheet and cash flows as inclusive of our candle operations through December 31.

As was earlier referenced by Jay and also noted in today’s release, effective with our third quarter reporting our Glassware and Candle segment will be reported as discontinued operations and result in a recasting of prior period presentations including that of the balance sheet and cash flows. You may find the pro forma information filed yesterday on Form 8-K to be of some value in the interim.

Let’s now review some of the more noteworthy changes in our consolidated balance sheet. First, our net accounts receivable as of December 31 totaled approximately $87 million, which compared to $70 million at June 30.

The seasonality of our candle sales was largely responsible for this increase, as has typically been the trend this time of year. Compared to the year ago December our receivables decreased about $4 million due to the year’s lower sales of candles is partially offset by a volume driven increase in food related receivables.

Turning to our inventories, we saw our December balances total about $93 million, which represented a decline of roughly $17 million or 15% since June. This decrease was consistent with the seasonal reduction we often experienced between these periods.

Compared to last December’s levels inventories also declined by about $8 million or 8% with improvements coming from both segments. Turning to our current balance sheet capitalization, we continued to remain debt free at December 31 with cash and equivalents exceeding $176 million.

We believe this balance sheet posture continues to provide us considerable flexibility to ensure our long-term growth and support long-term shareholder returns. Obviously, yesterday’s transaction involving our candle operations will further enhance our balance sheet and near-term cash positions.

This improvement is to be derived from the receipt of both the sales proceeds and the related tax benefit on the loss. We will remain consistent in prioritizing our future cash utilization to first help grow our existing business and acquiring good fitting food businesses at reasonable values and then returning cash to shareholders through the repurchasing of shares or cash dividends.

Looking now at some relevant cash flow totals for the most recent six months period, cash flows provided from operations totaled about $84 million which well exceeds the $68 million reported in the prior year’s comparable period. Comparatively favorable working capital improvements as well as our higher net income led to this increase.

Other six months cash flow amounts of note included dividends totaling $22.933 million, capital expenditures of $4.370 million and depreciation and amortization of $10.649 million. With that I want to thank you for listening today and I will turn the call back over to Jay so he can conclude our prepared remarks.

Thanks John. Looking ahead to our third and fourth quarters, we are excited to be bringing some new branded retail products to market at the end of March.

Taking advantage of a food service capability, we will be introducing a freezer to table microwavable pasta products that is high quality and very easy to prepare. It will be offered in both individual serving and family sizes.

We also have a new frozen garlic bread product that we feel will be unique to the category in both form and taste. We will also have some line extensions including a whole grain version of our New York Texas toast and additional salad toppings to complement our Crouton offering.

We do expect some seasonal impact on third quarter sales as much of Easter-related sales will move to the fourth quarter this year versus the third last year. Our estimate of the sales shift is roughly $4 million to $5 million.

Our outlook for food service channel sales is positive given our mix of customers, new product addition and planned limited time offers for the second half. Recent weather extremes and state of the overall economic recovery will likely have some impact on demand.

We anticipate ingredient costs to be favorable through the second half. We are pretty well covered on soybean oil and flour through June.

Our capital investment for the year has been off to a slow start with $4.4 million invested through the first half and full year spending estimated at roughly $15 million. Our biggest project this year is expanding our salad dressing and sauce capacity.

This project is just beginning and is expected to be completed in early fiscal 2015. Acquisition deal flow has definitely picked up, particularly with better-for-you products.

We continued to evaluate these opportunities in the market as well as developing and pursuing our own specific targets. Branded retail with category leading positions remains our priority.

We were pleased to increase our quarterly dividend rate 10% beginning with the December payment. This was the second increase of our quarterly dividend within calendar year 2013.

Given our strong balance sheet and the proceeds from our Candle business sale, we will continue evaluating our opportunities to further invest and return capital to shareholders. Jennifer, we are ready to take questions.

Good morning. So with the cash from the sale of the Candle segment in the tax benefit, cash is going to accumulate pretty rapidly here in the next few quarters.

Should we expect it to be more aggressive with dividend increases or maybe share buybacks? Can you please just prioritize your usage for excess cash for us?

Yes. Mike, we don’t have any specific plans to announce this morning, but we will continue, as John touched on, with the priorities we have consistently had and investing in our existing business to support growth opportunities, looking for good fitting, appropriately valued acquisition opportunities, and then share repurchases and dividends.

So we will continue with that priority. Hopefully, we will see an acquisition opportunity that will develop in the – sometime in the future here, not too distant.

Okay, that’s helpful. Thank you.

And just one more in terms of the new products, the microwavable pasta and the frozen garlic bread, do they fall into the better-for-you category, are they gluten free or whole grain pastas or anything like that?

We are not quite – no, they wouldn’t fall in there. One of the pasta items is a whole grain one, but no, I wouldn’t generally describe them as that.

The pasta products as I mentioned is one that’s really bringing convenience to the consumer that we think is very unique to that space at retail at this point in time.

Okay, great. Thank you very much.

You are welcome.

Thanks. Good morning.

Good morning, Phil.

Just a couple of quick questions. Maybe just building off the last caller a little bit, can you just remind us with M&A or you certainly have more cash now, just kind of the range of business you would be interested in size wise and then some of the categories you might be interested in?

Phil, we have kind of typically thought that a good size range for us from a revenue standpoint would be in the $50 million to $100 million range, but certainly open-minded the opportunities that would be smaller than that. And historically, our deals have been smaller than that.

And I think we would also be willing to go above that range a little bit for the right fitting opportunity. We certainly like the space we have got in the produce department of the supermarkets of things that might also fit there, would be of interest to us as well as the frozen case, particularly in the bread or around that bread category in the frozen case, but we don’t view ourselves as limited to just those two departments of the supermarket, we would be willing to look really across the store with just a few exceptions, probably of things we are not particularly interested in getting into.

Sure. That’s very helpful.

And if I could just ask about Specialty Foods operating margins kind of going forward here, you definitely saw nice tailwind in the quarter. Is it fair to say that could accelerate a little bit, I think you made some comments at the end and I missed just regarding soybean oil.

So just any update of how you’re thinking about 3Q and 4Q from a benefit standpoint, any more color?

Well, so, as you recall, the second quarter is usually our strongest margin quarter given the mix primarily that’s shifted to retail. So we come off of that strong retail mix going through the balance of the year.

So while we expect to still see some favorable ingredient costs in both the third and fourth quarter, the mix shift will likely bring those margins back down a little bit from what we saw in the second quarter.

Okay. That’s very helpful.

And then just going back to Candles, any change to the kind of longer term gross margin going forward from that divestiture or does that impact the gross margin line?

I think the food gross margins are slightly better than what we’ve seen out in the Candle business and you can get a sense of that Phil from the pro forma information that was filed yesterday, from that information you can see what a standalone food margin would look like going forward. And it’s just looking at the 12 months ended June 13 the gross margins are somewhat more than a 1% higher with food only compared to the consolidated margins that were originally reported.

Okay, perfect. That’s helpful.

And just two more things if I could. I want of Simply Dressed, I think we’ve talked about this in the past, but it seems like it’s been such a great success in that category for you guys.

Are you seeing any increased competition from more competitors trying to do something similar or maybe not copycat so to speak but definitely more competition maybe buying for space or introducing products there?

So we have seen that particularly from a Litehouse who was in the last several months maybe six months as it introduced a Greek yogurt-based product that they are selling under the (indiscernible) brand, so you might see that out at retail so that is a new entry into the space. Bolthouse continues to be another strong player in that refrigerated dressing space as well, again utilize of a Greek yogurt-based product.

Sure. Have you noticed any changes with Bolthouse under their new owner?

No, I wouldn’t say we have.

Okay, that’s fair. And just the last question, I think you talked about weather maybe benefiting a couple of your product categories and it’s maybe premature to talk about the current quarter, but is it fair to see you’re seeing an impact in weather recently to the negative or how should we think about that?

I think we are – seen that a little bit in January I know some of our restaurant customers are definitely seeing lower store traffic as we’ve seen these storms in these very cold temperatures impacting that a bit. We even saw a little bit just late this week from a shipping standpoint trying to go into the Southeast I know that’s a material impact.

But yes I think the weather is having a little bit of a negative impact overall. We have one particular product line I commented on, we don’t usually talk about but our Reames brand frozen noodles that does seem to actually benefit from particularly cold weather.

So it’s having a little bit better winter season than we’ve seen in the last few years.

Sure, okay. Lastly..

Frankly, overall it’s I think an unfavorable impact.

Okay. Yes that makes sense.

And actually one more if I could. I was just reading through the release again and you had mentioned your outlook you might see improved distribution in the second half of the year because of steam products.

What is that related to or can you just talk a little bit more about that?

I think that just continues with our added distribution again of Simply Dressed.

Okay.

From the Sister Schubert’s f side of things as well as continue to expand our New York frozen brand out into the Western markets.

Okay, perfect. I appreciate it.

Thanks, Phil.

You’re welcome.

Thanks. Good morning and good quarter guys.

Good morning, Jeff. Thank you.

Hi, Jeff.

Thanks. My questions basically were just asked, but I’ll kind of rephrase it to see if you want to add any color.

And the first question is just in the past you had mentioned the expansion potential with certain products in the Western portion of the U.S. So, I’m just going to ask about if you had any color to add on where things stand now and has there been much penetration in the first half of the fiscal year and what potential remains for the second half of the year.

And then the second question is just a general one and that is what do you see is biggest challenge to the business over the next 12 months?

I think as it relates to the geographic expansion Jeff it does continue I can’t give you any real specific data on that, but we are making incremental progress I think through the first half and we would expect to continue that a bit through the second. So I think that is a little bit of a positive.

The biggest challenge for the business I think as it has been maybe is throughout the industry is just moving the top line. We have had a pretty good second quarter on the top line obviously following a little bit of slower first quarter.

But that will continue to be a challenge we are hoping with the product innovation that we are bringing the end of this quarter, we will start to see some further growth from new product as we move on into the fiscal ‘15.

And then just before I hang up, could you go back to maybe a comment in the press release about what we should expect on the fourth quarter as a result of the Easter timing?

That we are ballpark in roughly $4 million to $5 million in sales moving from the third to fourth versus a year ago.

Okay.

Just because of that timing shift.

Okay. Okay, I will follow up later today.

Thanks.

Yes, good morning guys and congratulations on the – I think the third best food operating margins since the year 2000.

Thanks Greg.

Good morning Greg.

If you stripped out the candle business, I am coming up to about $1.36 in EPS, does that sound about right?

That is correct, Greg.

Okay. And Jay you mentioned about the covered on soybean oil and flour through June and I think since year end the - at least the futures contracts for both of those have continued to go down and I just wonder how the company is positioning itself to take advantage of that and lock-in even further out or just waiting to see what happens relative to get closer to June?

I mentioned we are pretty well covered through June. We actually do have flour coverage that largely goes for most of our flours out through September.

Greg and then on the soybean oil side we just continue with our practice of going out 12 months, stair stepping the coverage down as we go out. We have not veered much from that.

We have up-ticked a little bit in some of our coverage, but not dramatically so.

Okay. Any share repurchase in the quarter?

No, there were no shares repurchase.

Alright and relative to the candle business I know you have the CDSOA benefits that the companies received over years, what happens - I know there are some lawsuits there, are those going with the buyer or do those stay with Lancaster, if there was any negative that came out of those suits?

Greg, relative to rights to any future CDSOA distributions technically those have remained with us, but we believe the probability of being able to make a claim without current candle manufacturing is problematic. And then since we have been the past recipient of these disbursements, the outcome of that litigation conceptually would still potentially affect us although as we have indicated in our past disclosures, we believe the possibility of an adverse ruling is remote.

Okay and one last one for you. You have would mentioned the tax benefits where will that show up going forward I mean is it in the actual rate that we will see and what do you expect your tax rate to be going forward on just the food business?

With respect to where the tax benefit on the WASP will be placed within the income statement. If you think forward what will occur, we will be reclassifying the Glassware and Candle results as discontinued operations and the tax benefit geographically within the income statement will fall within discontinued operations.

Obviously, the cash benefit stays to the consolidated cash total in the balance sheet. With respect to the go forward effective tax rate, we still need to do a little bit of work as to the follow-on consequences of not having the Candle assets with us, but we believe it will probably still be in the ballpark of 34%.

Okay, great. Thank you.

You’re welcome.

Well, again, thank you for joining us this morning. We will look forward to talking to you again with our third quarter results.

Have a great day.