Good morning. My name is Suzanne and I will be your conference facilitator today. At this time, I would like to welcome everyone to the Lancaster Colony Corporation's fiscal year 2017 second quarter conference call. Conducting today's call will be Jay Gerlach, Lancaster Colony Chairman and CEO, Dave Ciesinski, President and COO and Doug Fell, Vice President, Treasurer and CFO. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question-and-answer period. [Operator Instructions]. Thank you. And now, to begin the conference call, here is Dale Ganobsik, Director of Investor Relations for Lancaster Colony Corporation. Please begin.

Thank you, Suzanne. Good morning everyone and thank you for joining us today for Lancaster Colony's fiscal 2017 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. Also note that the audio replay of this call will be archived and available at our company's website, lancastercolony.com, later this afternoon. With that said, I will now turn the call over to Lancaster Colony's Chairman and CEO, Jay Gerlach. Jay?

Thanks Dale. Good morning. We are pleased you can join us today. We saw total net sales growth in our second quarter of 0.6% with our retail channel sales growing approximately 3%, offsetting a 2% decline in our foodservice channel sales. Earnings per share reached $1.42, a 14% increase over last year's $1.25. Our retail channel sales benefited from continued growth of the licensed Olive Garden brand, shelf-stable salad dressing, New York Bakery frozen garlic breads, a good holiday season for our Sister Schubert's frozen rolls, a strong quarter for Reames frozen noodles and growth in our Flatout flatbreads. Volume mix was the growth driver in this channel with pricing being flat in the quarter. This quarter also saw additional investment in trade promotions and slotting to support our recently introduced New York Bakery Bake & Break Garlic Loaves and Sister Schubert's Shareable bread. IRI data for the 12 weeks ended December 25 shows we continue to be the share leader in each of our key categories. We gained share in four of the six with croutons unchanged from the prior year. In the price competitive refrigerated dressing category, we saw a decline in share of about 1.6 points. We are pursuing tactics to reverse this decline. Foodservice channel sales were primarily influenced by both the year-over-year impact of lower ingredient costs, primarily eggs being passed through in lower selling prices and our customer rationalization efforts. We did see mixed results from our national chain restaurant customers with several performing well and some benefit from an increase in limited time offer promotions versus the prior-year period. The quarter saw a nice improvement in segment operating margin of 190 basis points. Key drivers were lower ingredient costs, a favorable sales mix shift of 100 basis points to the retail channel and good operations. We continue to invest in consumer marketing to support our brands, seasonal opportunities and new products. During the quarter, we acquired Angelic Bakehouse, a producer of great tasting sprouted grain bread products. We are excited about the growth potential of this specialty bread product primarily merchandised in the deli area of the supermarket similar to our Flatout brand. While not impacting the second quarter, I did want to comment on the $17.7 million third quarter expense referenced in our 8-K filing earlier this week. This expense which is all cash and will be paid in the fourth quarter came from our success in negotiating a complete withdrawal from a multiemployer pension plan we have participated in for many years at our New York Bakery facility in Bath Bedford Heights, Ohio. While there will be a modest annual savings after the significant expenditure this year, we feel the primary benefit is greatly reducing our exposure to future liability on this underfunded plan and offering our workforce a more transparent and attractive retirement benefit. Let me now turn to Doug for his comments.

Thank you, Jay. Similar to our past commentary, our balance sheet continues to remain strong. I will comment on some of the larger line items within our balance sheet that have changed since June 30. From a high-level perspective, cash remained relatively flat as our year-to-date cash provided by operating activities of $76 million was offset by the cash paid for the Angelic Bakehouse acquisition of $35 million as well as year-to-date regular dividends of $29 million and property additions of $12 million. In general, the increase in our accounts receivable and inventory balances reflects higher sales volume and the seasonal lift in volumes we experience in the second quarter on certain retail product lines. The incremental receivable in inventory assets acquired from Angelic were not material to these working capital accounts. Excluding those fixed assets acquired via the Angelic acquisition, cash expenditures for property additions totaled $8 million in Q2 with the largest amount spent on new packaging equipment to accommodate growth and buildout cost relating to our planned office relocation in Q3. Presently, we anticipate capital expenditures to be in the range of $20 million to $25 million for fiscal 2017 and will include projects to increase capacity and productivity. The fixed assets related to the Angelic acquisition totaled $5 million. Depreciation and amortization expense totaled approximately $6 million for Q2 of fiscal 2017. We expect such amounts for the second half of fiscal 2017 to be approximately $6.5 million per quarter, including the impacts of Angelic. The increase in other assets of approximately $40 million since June primarily reflects the preliminary values assigned to the identifiable intangible assets and goodwill relating to the Angelic acquisition, which will be further detailed in our second quarter 10-Q. The increase in other noncurrent liabilities largely reflects contingent consideration relating to…

Thanks Doug. We have begun our fiscal third quarter with a reminder that Easter shipments will move primarily to the fourth quarter this year from the third last year. We ballparked the sales shift in the neighborhood of $5 million. Also there remain some headwinds from lower pricing in our foodservice channel as we have not fully lapped our pass-through pricing primarily on eggs. We are optimistic our core retail and foodservice channel sales will grow in the back half of our fiscal year, but the impact is likely to yield modest overall growth. Angelic will provide an incremental sales benefit. With no notable new products scheduled for introduction this quarter, we will be looking for our recently introduced New York Bakery and Sister Schubert's frozen bread items to build on their early acceptance. We do feel we are improving the overall sales mix of our business and making steady progress in our operating efficiencies. The recently strong benefit of lower input cost is likely to be near flat in the second half of our fiscal year. We will also be watching our promotional spending carefully as we move through the third and fourth quarters. We continue our search for attractive acquisition opportunities focused on branded retail products that are on trend with the consumer today and offer a good strategic fit. Deal flow is not particularly strong but we continue with our everyday development efforts. Suzanne, we are ready to take questions.

[Operator Instructions]. Your first question comes from the line of Alton Stump of Longbow Research. Your line is open.

Good morning to you all.

Good morning.

Yes. A couple of questions. Just first off on the retail business, certainly a full streak of, as you mentioned, in your release across quite a few different categories. As you look out, what do you think are the two or three key areas that you think will drive growth in retail over next, call it, six to 12 months period?

Well, generally I think we would kind of expect similar to what we have seen recently, continued decent growth in the in the frozen bread side of the business. Our challenge, as we mentioned, is over in the refrigerated dressing and dip space where we have been working hard to adjust our tactics that hopefully get that business back on a growth path. Dave, would you want add anything there?

No, the only thing I would add is, our Olive Garden business in affordable dressing section remains strong as does Reames. So really, I would continue to expect to see strong performance in those brands.

That's helpful. And then, I know foodservice side of business was in the release. Jay, you mentioned that you expect casual dining in particular to be soft in the back half of fiscal 2017. Is that kind of what you are hearing from your customers? Or is it just of expectation that it will be obviously be a soft casual dining area a few months here, particularly that would just continue into the back half of the year for you guys.

Yes, I think it's kind of all of the above and what we are currently seeing on the demand side, what we have experienced recently but also just the feedback and general conversation in the industry.

Thanks. And then one last question and I will hop back in the queue here. But just on the commodity outlook, if I recall last quarter, you said that you thought we would see flat commodity impact in the back half of the year and then in the release said flat to potentially up slightly. Is there anything that has sort of changed over the last months as you look at the overall basket? What that would impact in the back half of the year here?

Alton, probably the number one thing I would comment on is a slight uptick in garlic pricing and that's the item, the single one item that's causing some inflationary pressure as we work right through the back half.

Very helpful. Thank you guys.

Your next question comes from the line of Brett Hundley of Vertical Group. Your line is open.

Thank you so much. Good morning gentlemen.

Good morning Brett.

I wanted to stay on that line of questioning with deflation and inflation on the raw material side. So just so I am sure, you guys talk to eggs as far as maybe continued pass-through decline into the back half of the year. When I think about that deflation on the foodservice topline, are there other impacts that play there? The reason I am asking this is just I have seen oils pricing move higher in recent months. We obviously know what's happening with eggs. You guys just named garlic, but just putting it all together, I am trying to marry your language about overall commodity costs rising, becoming flat and then rising or being unfavorable, I think you said, in the back half of the year with continued deflation on the foodservice topline.

Yes. Well, first off Brett, just a reminder we are comparing it to last year. So not necessarily quarter-over-quarter kind of trends or sequential quarter trends. So we do have a little bit of a misalignment, I think, between the timing of anniversarying the big decline we have seen in egg costs, which has pretty much ended as we speak with still some unfavorable pricing comparisons imply as we move through this quarter. Those should anniversary generally as we finish this quarter on the pricing side of things.

Okay. That's clear. And I was thinking the same thing, I was looking at things year-on-year and perhaps we are not just getting credit to is just that there is that delay as it relates to the trade side where you are passing along changes in your raw materials.

Correct.

Okay. And then I wanted to ask you about competitiveness in refrigerated dressings. Do you guys think that that's something that's frankly just here to stay for a while given consumer trends towards the outside of the grocery store and the attractiveness of that category? Is that something that you believe that you will be dealing with for a while? And kind of related, I am sure you guys don't want to talk about what tactics you are taking. I think we can guess some of them, but as you adjust your tactics, can you give us a sense of maybe when you believe that you can recoup some lost share in that category? So just first part of it, should we just count on that staying for a while? And then secondly, when do you think we can think about you recouping share there?

Yes. It's a great question. What I would tell you is and this is Dave, what we are seeing is that the category trends, as a whole, are slowing down. So I think our sense is that as retailers look at the impact, what they are going to note is that the aggressive pricing across the board is slowing down what's been really a high single-digit, if not in some cases low double-digit, category. And as we pump the pricing and you are seeing that slow down. So just on the base of my experience in the category is that, as the category slows down for the retailers they are going to take a step back and say, does this really makes sense? So I don't think this is here to stay. I think it's going to be competitive but I wouldn't expect to see the pricing compression in this to the degree to which we have because nobody is going to lose, especially the retailers. As far as the timing on this, I can tell you that we are thinking of this in terms of really quarters that we are working away through this. So the first phase of our action plan is being put in place and that's really driven around optimizing our trade spend, not incremental spend, because if you are looking closely at the IRI data, what you will note is that the spending has increased, but it's not really driving incrementality to the reason that I describe before. So really what that requires and is going to click deeper and to figure out how do you optimize what you are spending and then going beyond that to address some of the fundamentals that I won't get into. But I can assure you that we are thinking about this in terms of, zero to six months, not settling in for a long-term situation here.

That's helpful. I will follow up on that offline. I just have one last related question. I may have been incorrectly hoping for more of a retail sales lift in Q2 relative to what you guys put up. Still a nice performance, but I think I was looking for a little bit more. And I think one of the reasons I was looking for more was just following the growth from Q1 that you guys put up on a very strong comparison from the prior year. And so I just wanted to check that with you guys and see if there was any customer inventory deloading again this year that I wasn't aware of or anything else that would have kind of pulled that growth down a little bit that I would have expected? I can't remember when Flatout got moved around the store last year, but just wanted to check that with you guys and benchmark myself.

Brett, I think the Flatout issue you bring up does seem to be largely behind us. So we were generally pleased with what we saw with Flatout in the quarter. We certainly can always do better but it was showing some improvement. The one thing you have got to keep in mind and we reference that we don't quantify it, but that is some of the promotional spend and including introductory costs come out of the gross to net sales adjustment. So when we were spending slotting on things like our new Bake & Break or Shareable breads and maybe putting some additional trade spend behind those as new items, that's impacting that topline at the net sales level where gross sales might have been a little bit higher than that.

Got you. Thanks so much for taking my questions guys.

You are welcome.

Your next question comes from the line of David Stratton of Great Lakes Review. Your line is open.

Hi. Thanks for taking the questions.

You are welcome.

I am wondering if you talk a little bit about the rationalization efforts, how those are progressing? And maybe a little color is if it's all behind you at this point and we are just seeing the effects? Or if it's still ongoing and will continue going forward?

David, it's largely behind us. We are always may be subject to some tweaks that could finalize over time, but it is largely behind us and we are just working through the anniversary period of those changes.

All right Thank you. And then in the CapEx comments, you mentioned the new facility, your office building and I wonder if you give a little more color on that also?

Yes, sure. We have historically had, as you may or may not be aware, a corporate headquarters and operated in a holding company fashion here in Columbus with the food segment of our business also being headquartered in Columbus in a separate location. Since we have divested all of our nonfood businesses, one of our goals has been to get those two teams together and we are going to do that here in February in some additional or some new space for everybody involved which is leased space in a multitenant building. So our investment is in leaseholds and furniture, fixtures, equipment, those kind of things.

All right. Thank you very much.

Sure.

And your next question comes from the line of Eric Gottlieb of D.A. Davidson. Your line is open.

Good morning everyone. Thanks for taking my questions. A lot of mine have been answered but I am going to jump around a little bit. SG&A, I know some of that increase was due to transaction bank fees from Angelic. How much exactly, what went into the increase? How much were those costs? And what were some of the other things?

Those were probably in the low six figure area, low to mid six figures on those kind of cost. The other spend there was also included back again, the consumer marketing investment. So supporting your ongoing brand support efforts as well as again the new product introductions where we have spent some consumer marketing dollars behind that. On the G&A side, we have also invested in some additional resources in the form of people and some new process initiatives, all designed to support future growth of the business.

Got it. And then can we talk about weakness in casual dining? Like how much weakness are we talking about here/ Is it incrementally worse than what you thought before? Or this is just a continuation?

Yes. It seems to be trending softer, I think is how I might describe. But I want to see if Dave would like to add anything to that.

Yes. What I offer is that, if you look at the fall the trends were soft, when we got into December the trends seemed to get really soft and there are a number of theories that are running around. One is that with the advent of more online shopping, there are fewer people in malls hitting casual dining places. We are encouraged to see that January has seemed to rebound some and we are sort back to the trends we were looking at in the fall. But that's the general story of it.

Got it. And what percentage of your foodservice is specifically is casual dining?

We really couldn't quantify that for you, Eric. It's a smaller share than the quick service side of things, but don't have a number for you there.

Okay. And then since you brought it up, are there any other areas of foodservice that seem to be outperforming or can make up this weakness?

I would say, the single strongest segment remains the quick service component where you continue to have sort of a bifurcation. I won't get into some of the names but you know, there are a handful that continue to outpace the rest. And if you look at our portfolio, we feel vis-à-vis the industry, we are positioned in an advantageous way. But you are starting to get bifurcation in the same way that you move away from our foodservice customers into traditional retail where you are seeing the same trends. And what I would sort of put forth is that we are seeing maybe the early stages of a shift within the foodservice segment that's been taking place in retail.

Got it. Okay. With that, I will pass it on. Thank you.

Thank you.

Your next question comes from the line of Jeffrey Thomison of Hilliard Lyons. Your line is open.

Thanks. Good morning, everybody.

Good morning, Jeff.

Just a couple of quick questions and I may have missed these earlier here in the call. But could you go over the swing in the other category as we go to other income from other expense a year ago? What was the driving factor behind that swing?

Yes. Sure, Jeff. The prior year had a little bit of FX running through there that was a little bit of a headwind. In the current year, we didn't have that headwind, somewhat of a neutral environment there on the FX. And we also had an uptick in interest income. So there were the drivers.

Okay. Anything unusual affect those figures for the second half of the year? Or should they look like a year ago?

You know, it's kind of tough to predict for great certainty, but sitting here, I would tell you I would expect it to be similar to second quarter.

Okay. And then I guess the March quarter will be the first full quarter of Angelic business. Does that business have much seasonality? And did you disclose a revenue run rate when you bought it? I can't remember.

Yes. We talked about a $12 million a year run rate when we acquired it. I don't think significant seasonality in the business.

Okay. And then just lastly, Jay. I didn't catch your comment that you made earlier in the call. If you could repeat or clarify something about a $5 million sales headwind perhaps?

That's the Easter shift from --

Easter, okay.

Third to fourth quarter this year.

Okay. I just didn't hear the Easter part. Okay. Thanks a bunch. I may follow-up later.

Okay. You are welcome. Thank you Jeff.

Your next question comes from the line of Colin Radke of Wedbush Securities. Your line is open.

Hi. Thanks. I just wanted to ask on Angelic. You talked about the run rate when you purchased the business, but I believe that is growing pretty strongly. I just wanted to get your thoughts, if you had any, any sort of targets or expectations for what that might contribute for the full year? Or maybe beyond that, just broadly any internal goals in terms of the distribution you want to achieve by the end of this year or looking out to next year?

Colin, we have got some of those things, but we are not disclosing any of that publicly, at least not at this time. We do have that $12 million run rate. Certainly as we move through the second half of the fiscal year, we would expect to build on that as we move through that period, but haven't quantified that externally at this point.

Okay. And just in terms of the manufacturing capabilities at Angelic. What sort of capacity are you running at currently? And at what point would you need to may be spend some CapEx in order to broaden the manufacturing capabilities there and maybe penetrate some of the larger accounts?

Like a lot of capacity questions, it depends on the mix of product you need to have made. Having said that, there will be some capacity expansion needs for the business that we likely will start to address toward the end of this fiscal year as we move into next fiscal year.

Okay. And maybe just lastly, I know you don't want to foreshadow too much of your promotional tactics, but could you maybe just talk about broadly, I think a couple of quarters in a row you have referenced increased trade promotions and some product placement costs. Just maybe broadly, what sort of takeaways have been in terms of what's been working, what hasn't been working and the spend you expect that to continue going forward?

Dave, would you like to comment?

Absolutely. So if you look at it, break it into component parts, the majority of our incremental spend has been against product placement costs. So new items that we are putting out in the marketplace. That seems to be front half loaded in the year and is performing well. The other component has been some incremental trade spending to support those items. And again, I would expect to see that begin to taper off a little bit. And then the part that was truly incremental was that as the refrigerated dressing category starting to get more aggressive we joined into the fray and as we have gone and done a more detailed analysis, what we are finding, from my earlier comments, is that it's really not paying out economically. So what you could expect to see us do there is probably refine the spending that we have in place to make sure that it's optimized, but not just continue to dump more money and do it. It is just not paying out economically.

Got it. Thank you very much.

You are welcome

Thanks Colin.

Your next question comes from the line of Frank Camma of Sidoti. Your line is open.

Hi guys. Good morning.

Good morning Frank.

Just really one quick one. Because I was a little confused with the SG&A answer, Jay and I think Doug has addressed this too, but just on corporate expenses sequentially, because they did typically pretty static, but they dropped pretty sharply and did I miss some comment on that?

No, we didn't comment on that, Frank. What we do, as I think you are aware, still have variety of expenses related to closed operations including past workforce and past still owned real estate in a few cases. So those expenses can fluctuate on occasion and we did have a favorable fluctuation this quarter. But I think roughly we see those being more typically what you been seeing in previous quarters.

That's what I thought. Okay. I will let you go. Thank you.

Thank you.

[Operator Instructions]. Your next question comes from the line of Brian Holland of Consumer Edge Research. Your line is open.

Thanks. Good morning, gentlemen. I just wanted to follow-up, I guess most of my questions have been answered but just to sort of confirm an earlier question about promotional effectiveness. For the first time in a few years, we did see the merchandise dollar growth in the scanner data exceed dollar growth. So again, just to confirm, that's something that we should see wind down as we move through 2017? Maybe you are looking at dialing back as you do some less effective spend. Is that the right way to characterize it? We should expect that to pare back in the back half?

Yes. What I would say is, when you are looking at a flow-through, we will continue to support items with any new item launches and slotting and support like that. But as we went in and we looked at the spending per se, where we increased it, we are not seeing the lift as we have looked at the elasticity. So you could expect to probably see that not increase, I will say that and probably moderate a little bit.

And then to clarify, is that more in the salad dressings category? Because it looked like you know frozen bread which you called out earlier has seen a nice bump here in the past few months. So is that primarily concentrated on salad dressings? Or is there anywhere else that we should be looking at?

Yes. Just get in general, but I would focus the comments more on the salad dressing, where I know you guys are looking at a lot of the IRI data that we are and what you see is that the category as a whole is slowing down there, which I think you play it forward when we are meeting with our buyers, there are buyers who are going to say that it's slowing down the growth rate of the category and they are going to call into question the efficacy of the spend. As you look at it more broadly in latest 12 weeks dollars sales, our New York Bakery is running at about a 108 index. Sister Schubert's had a great holiday season. It was again, per the IRI data, about 104. Olive Garden was a 132. So if you look at those components of our business week, we continue to feel very bullish about it. We bring spend in our challenge in dressings that we are getting on. But generally speaking, we feel that the rest of portfolio is healthy.

And how much do you think newer competitive offerings within the category have impacted over the 12 months? And maybe what are you seeing more recently? I think there was maybe some Greek dressing or Greek yogurt and cheese dressings or whatever. I am wondering what kind of, I think they had an impact earlier. I am wondering what you are seeing there and how much efforts behind those offerings might be driving some of the promotional ineffectiveness we are staying at a broader category level?

It's a good question. It's insightful, because this is a category, as you might imagine, that we are sort of taking apart and dissecting piece-by-piece. As it pertains to Greek, Greek doesn't seem to be the healthiest part sub-segment in the category. Other segments continue to be stronger. And we are going to use that inform how we think about assortment, for example. So I won't get into the specifics, but I can tell you in answer to your question that the Greek sub-segment there doesn't quite seem to be as healthy.

Thanks a lot gentlemen. I appreciate it.

You are welcome.

[Operator Instructions]. If there are no further questions, we will now turn the call back over to Mr. Gerlach for any concluding remarks.

Thank you, Suzanne. And thank you all for joining us this morning. We will look forward to talking to you in late April with our third quarter results.

Thank you. And this concludes today's conference call. You may now disconnect.