Good morning. My name is Ursula and I will be your conference call facilitator today. At this time, I would like to welcome everyone to the Lancaster Colony Corporation Fiscal Year 2020 Third Quarter Conference Call. Conducting today's call will be Dave Ciesinski, President and CEO, and Tom Pigott, CFO. All lines have been placed on mute to prevent any background noise. After the speakers have completed their prepared remarks, there will be a question and answer period. Thank you. And now to begin the conference call, here is Dale Ganobsik, Vice President of Investor Relations and Treasurer for Lancaster Colony Corporation. Please go ahead, sir.

Thank you, Ursula. Good morning everyone and thank you for joining us today for Lancaster Colony's fiscal year 2020 third quarter conference call. 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. For today's call, Dave Ciesinski, our President and CEO, will begin with a business update and highlights for the quarter. Tom Pigott, our CFO, will then provide an overview of the financial results. Dave will then share some comments regarding our outlook for our fiscal fourth quarter. At the conclusion of our prepared remarks, we will be happy to respond to any of your questions. Once again, we appreciate your participation this morning. I will now turn the call over to Lancaster Colony's President and CEO, Dave Ciesinski. Dave?

Thanks Dale and good morning everyone. It's a pleasure to be here with you today as we review our third quarter results for fiscal year 2020. I’d like to begin by sharing some comments regarding the Coronavirus pandemic, and its impact on our business. But before I do, on behalf of all of us at Lancaster Colony, I’d like to thank all the healthcare workers and first responders for their tireless efforts to keep us safe. From the onset of the Coronavirus pandemic, we have been steadfast, and our mission is fixed. First, provide for the health, safety and welfare of our teammates. And second, ensure that we continue to play our role in our country’s vital food supply chain. Thanks to the diligence and care of our teammates, I believe we’ve remained true to both elements of our mission. All the while, we have fortified and sustained our business. I’d like to extend a very sincere thank you to our frontline teammates, including those that work in manufacturing, distribution, transportation, and retail merchandising for the incredible work they do every day to keep our business operating. Through it all our business continues to source ingredients, manufacture products, and ship them to our customers. We've done this all while having implemented safety protocols as outlined by the CDC, OSHA, FDA, and local government authorities to ensure that we continue to operate safely. I would also like to extend a special thank you to our office-based teammates for embracing this change and sustaining our business during this unprecedented time. Collectively, they've conducted countless Microsoft Teams meetings with customers, suppliers, partners, and each other. Our sales teams have conducted virtual category reviews with our customers. Our marketers have launched marketing campaigns, procurement team has brought on board new suppliers. Our transportation team has conducted carrier bids and our finance team has closed the books and helped us prepare our third quarter filings. Moving on to fiscal third quarter financial results, our reported consolidated net sales grew by 1.1% excluding all Omni Baking sales; consolidated net sales grew 1.9%. Net sales in our retail segment increased 10.7%, while net sales in our food service segment declined 7.8%. Retail net sales benefited from higher demand, as the COVID-19 outbreak led to increased consumer demand that built upon solid base business performance. Third quarter sales also benefited from new product offerings, including Buffalo Wild Wings sauces in single bottles and a promising start for a regional pilot of Chick-fil-A sauces that we are supplying to grocery stores. Both Buffalo Wild Wings and Chick-fil-A sauce are sold under exclusive license agreements. Separately, sales trends for our New York Bakery frozen garlic bread products remain favorable, as the brand continued to gain share. All of our garden dressings posted share gains for the quarter and our Sister Schubert's brand of frozen dinner rolls achieved significant sales growth in the quarter as well. It's notable that prior to the impact of COVID-19, our quarter-to-date retail sales were up about 4% due to the contributions from our new product introductions and growth from our core retail business. In our food service segment, excluding all Omni Baking sales, net sales declined 6.6%. Food service channel demand was adversely impacted by COVID-19 beginning in mid-March, as restaurant dine-in purchases were eliminated, and consumer purchase options were limited to carry-out, delivery and drive-through. These service restrictions in the food service industry combined with the stay-at-home orders led to reduced consumer demand and lower sales for our food service segment. Despite the unfavorable influences of the COVID-19 pandemic, we grew our fiscal third quarter consolidated gross profit by $1.6 million or 2.1% as we benefited from the favorable sales mix shift to the retail channel along with our ongoing cost savings program. Gross profit was reduced by a $4.5 million inventory write-down, resulting from an abrupt slowdown in food service orders in mid-March due to the COVID-19 impacts. It was further reduced when we paid out $1 million in bonuses to frontline employees in our factories and distribution network in gratitude for their work in helping meet the shifting demand within our business. I'll now turn the call over to Tom Pigott, our CFO, for his commentary on our Q3 financial results.

Thanks, Dave. Overall, we are pleased with the underlying business performance and the many actions taken by our employees to address the COVID-19 outbreak during the quarter. Consolidated net sales increased 1.1% to a third quarter record of $321.4 million excluding Omni Baking sales at $5.3 million in the current year quarter and $7.9 million in the prior year quarter. Consolidated net sales increased by 1.9%. As you recall, Omni Baking sales are attributed to a temporary supply agreement. These sales will decline from the current level in coming quarters with the expectation that the supply agreement will end by December of 2020. Consolidated gross profit increased $1.6 million or 2.1%, to $77 million, and gross margins grew by 20 basis points. The increase was driven by favorable product mix as revenues shifted from food service to retail, our cost savings programs, lower commodity costs, and improved net price realization. These improvements were offset by the $4.5 million inventory write-down and the $1 million spent on the frontline bonuses. These two items reduced our gross margin growth by 170 basis points. Selling, general and administrative expenses increased $8.9 million or 24%. The largest driver of the increase was our ERP program, which accounted for $4.9 million in SG&A costs for the quarter. Other drivers to the increase included higher spending on information technology and increased consumer promotional spending, as well as a $0.5 million increase in our allowance for doubtful accounts related to the impact of COVID-19. Consolidated operating income declined $7.3 million or 20%, due in part to the COVID-19 items I mentioned, which totaled $6 million, and the ERP investment of $4.9 million. These two items reduced our operating income growth by 29 percentage points. Key drivers of the operating income performance excluding these items include the top line performance, favorable mix and cost savings programs. Our effective tax rate increased to 27% this quarter from 21% in the third quarter of fiscal 2019. This increase reflects an adjustment to our estimated foreign derived intangible income tax credit, higher state taxes and a lower tax benefit from stock-based compensation activities. We estimate the tax rate for the fiscal fourth quarter to be 24%. Third quarter diluted earnings per share decreased $0.30 to $0.81. The decline was due to the COVID-19 items, the investment in ERP and the higher tax rate, partially offset by the underlying business performance. With regard to capital expenditures, we project our fiscal year 2020 expenditures will be approximately $90 million. Our year-to-date payments for property additions of $72 million include investments for the capacity expansion project at our frozen dinner roll facility in Horse Cave, Kentucky that we recently completed and the purchase of the Omni Baking facility that was previously leased. Separately, specific to our ERP initiative, we also capitalized $4 million in expenditures in our fiscal third quarter for application development stage activities. In addition to investing in our business, we also return funds to shareholders. Our quarterly cash dividend paid on March 31st was $0.70 per share, an 8% increase from the prior year amount. Our long-standing streak of annual dividend increases has reached 57 years this past December. Despite the higher level of investments and increased dividend payments, our financial position remains very strong as we finished the quarter debt free, with $178 million of cash on the balance sheet. The company also replaced its revolving line of credit during the quarter, which remains at the same size of $150 million. The facility was replaced in the ordinary course of business and not prompted by the impacts of COVID-19. The term of the previous facility was set to expire in April of 2021. We have no borrowings against the facility. So, to wrap up my commentary, the quarter featured strong underlying performance as well as some significant impacts from COVID-19. The business continues to monitor and adjust to the COVID-19 outbreak while investing for longer-term growth. Now, I'll turn it back over to Dave for his closing remarks. Thank you.

Thanks, Tom. As we progress through our fiscal fourth quarter, we're going to continue to focus on delivering against our mission. First, provide for the health, safety, and welfare of our teammates. Second, ensure that we continue to play our role in the country's vital food supply chain, and we will add one additional priority to leverage the combined strength of our team, our operating strategy and our balance sheet to seek opportunities to better position ourselves for future growth. During the month of April, our business overall continued to be impacted by the same factors in retail and food service that shaped our fiscal third quarter results. In retail, this is supported by IRI data. And in food service, this is supported by NPD transaction data. Looking forward to the remainder of Q4, we anticipate net sales in our retail segment will continue to benefit from increased demand due to the stay-at-home orders and other changes in consumer behavior attributed to COVID-19. We also expect our recent new product introductions and channel expansion into dollar and drug channels will remain important contributors to our retail segment's sales growth. Separately, we expect the food service industry overall will continue to be negatively impacted by COVID-19. We expect the negative impact to be most pronounced on the casual dining and midscale segments and the impact to be more muted on the QSR segment. For reference, prior to the impact of COVID-19, our food service segment customer mix was approximately two-thirds QSR, which has and will continue to help soften the impact on our business. I'll now provide an update on a couple of notable projects for our business. During our fiscal second quarter earnings call back in February, I referenced our plans for a major capacity expansion project at one of our dressing facilities. Based on the impact of COVID-19 and related near-term uncertainties, we have decided to cancel this project. We will continue to invest in capacity as required to support the growth of our business. However, we felt it was prudent to halt this project until we had a better feel for the near- and intermediate-term outlook. With respect to our ERP initiative project, Ascent, due to the current work environment including stay-at-home orders and travel restrictions, we are delaying the implementation timeframe for the project until the back half of fiscal year 2021 or early 2022. In closing, while the impacts of COVID-19 have unfavorably influenced our short-term results, we remain very confident in the future of our business. Excluding the COVID-19 impacts, we delivered another quarter of solid financial results. We entered the COVID-19 pandemic from a position of financial and competitive strength, and we expect to emerge the same way with opportunities to grow both organically and through acquisitions. In the interim, as the food service segment and our national chain customers face deep challenges, we are focusing our efforts to support them through this period of uncertainty and offer our assistance as they develop plans to return to full service. In the retail segment, we will continue in our pursuit of growth through new product introductions and channel expansion. This concludes our prepared remarks for today. And we'd be happy to answer any questions you may have. Ursula, over to you.

Your first question comes from Brian Holland with D.A. Davidson.

Thanks. Good morning, gentlemen.

Good morning, Brian.

So, I guess first question on the food service side. Can you give us a sense of how much of your food service business is down, say 50% or more due to stay-at-home orders or maybe doors closing? And I know you have high exposure to national chains, but just have you had customers go out of business and if so, can you maybe quantify any contribution from those?

Sure. So maybe starting with the breakdown, Brian, as we said during the prepared remarks, two-thirds of our food service business is QSR. Among that, and across all of our various product types, QSR is the segment that seems to be least impacted by this. If I had to ballpark it for you, I would say traffic at QSRs was probably down on average about 30%, with some doing better than that. Notably, many of these customers are experiencing larger rings for each transaction. So, chances are their sales through, let's say, April were probably down somewhere closer to 20%, maybe even closer to flat or up in some cases. In April, the mid-April period looked like the low watermark. If March 8 is a line of demarcation where sales suddenly dropped off, we found that the end of the second week of April was the low, and trends have been getting better with each passing week in April into the first week of May. To your question about other segments, two-thirds of our business is QSR, which I noted. The part that’s down hardest is casual dining, and that will vary a little bit by segment—some of those chains are probably operating closer to 50% and a couple are off a little bit harder than that. The segments that are absolutely hardest hit are the non-commercial segments tied to schools and venues, because they are shut down. Other venues that have been hit hard are the mom-and-pop shops that don't have drive-through, and they may not have had the balance sheet to withstand this. But we have not had any big customer go bankrupt on us to date. It just hasn't happened. And to the best of my knowledge, there's one national chain that has announced something, but they're not one of our customers.

Okay, got it, that's very helpful. So, I guess sort of spinning forward on your breakdown of the food service channel, I would imagine even though you're seeing better trends coming off the mid-April trough, they are still probably down. Just trying to think forward here: should we expect food service sales to be materially worse in Q4 than they were in Q3 on a year-over-year basis? And if not, what would you point to as confidence?

I would say they are going to be worse, Brian, although I won't dimension them precisely today. If you think about it, Q3 really only captured the last couple of weeks of the impact. In the U.S., store closings and restrictions were really in the back half of March, so we expect to see more of a financial impact through the entirety of Q4. I do think you will see the lowest point in April, and as states begin to open, you're going to continue to see sequential improvement.

Okay. And then just operating expenses, for how long should we anticipate—or do you anticipate—those sorts of costs remaining elevated specific to COVID-19? Is that another quarter, do you see drag beyond Q4?

Well, here's what I would say. I'll let Tom comment on the inventory charge we took; I view that as more transitory. We initially granted a $300 bonus for the month of April. Then for our frontline employees, we implemented a $2 an hour increase tied to state stay-at-home orders, with the idea that once a local government authority lifts its stay-at-home orders, we intend to pull back that $2 an hour increase. It will vary state by state and jurisdiction by jurisdiction. My guess is we probably have at least another quarter—meaning into the fourth quarter—and we'll see what it looks like into the first quarter of next fiscal year.

Okay. And then I'll just one last one for me, on the retail side. You referenced in your prepared remarks the 4% growth prior to the COVID-19 demand surge. You had big channel expansion plans and initiatives underway. Any impact to the timing or your ability to get all of those plans in place—specifically club and dollar channels and the other channels—or any impact going forward?

So far, no. We were fortunate to begin shipping those products in January and in some cases February, so those pipelines were already building. Future product introductions may be more impacted because retailers are focusing narrowly on execution right now. But the items you mentioned have been out there. The same is true for Buffalo Wild Wings and Chick-fil-A sauce: customers are excited about them and have been taking them even in spite of everything that's going on.

Appreciate the color as always, I’ll get back in the queue.

Hey Brian, one thing I would note that wasn't in my prepared comments, but may help you understand the labor dynamic: we've done two things. One, we put in place bonuses and incentives for frontline workers. Two, we enacted a voluntary furlough program at select locations, allowing employees with underlying health concerns or of an age to opt out. We're taking the savings from that voluntary furlough program and using it to fund the incremental $2 an hour that we're paying other employees. So, if you're modeling labor, it's essentially a push— the voluntary furlough program is funding the incremental bonus.

Yeah, Brian, I'll just add a little more color to our margin outlook. From how we look at it today, you have a favorable tailwind to mix that Dave talked about, but you also have a reduction in food service volume which will impact our factory overhead absorption since there's less volume to spread fixed factory overhead across. You have the incremental pay that Dave mentioned, offset in part by the furlough program. There are also items to ensure we operate safely—shift separation, enhanced sanitation and other procedures—that demand resources. So, there are a number of tailwinds and headwinds as we look at Q4 and beyond.

Thanks, Dave and Tom, appreciate that context.

Your next question comes from Ryan Bell of Consumer Edge Research.

Hi, everyone. Do you see your current environment helping to create more opportunities to bring food service products to retail in the short term and then maybe in the medium term?

Certainly over the intermediate term, I think it will. I wouldn't say it's an immediate windfall for new deals right this instant, because food service operators are focused on their core business. But over the long run, this trend helps create a diversified stream of revenue and profit for operators, which can help them sustain their businesses through challenges. It creates another source of revenue and strength for their business, which is beneficial.

Great, thanks. And during a recessionary environment, did you speak about your thoughts of the puts and takes between food at home and food away from home consumption, especially as you have two business units that operate in each?

Yes. Ordinarily they are a natural hedge. If you go back to the Great Recession and other periods, consumers pulled back on spending away from home and shifted to QSR when they did spend away from home, which benefited our QSR-exposed business. They also spent more at home, which benefited our retail business. So historically that shift is a natural hedge for us. What makes this situation unique is that it's not just an economic slowdown—it's in many cases a full stop on some channels. As we come out of stay-at-home orders and if the environment looks more like an ordinary recession, I would expect those historical patterns to come back into focus.

Thanks for the clarity. Do you see any opportunities that your strong balance sheet would afford as you get out of the primary uncertainty related to COVID-19?

We're certainly monitoring that. I mentioned we canceled a large capacity expansion project partly due to near-term uncertainty. We felt we had time to let this play out before committing. There's always the scenario an asset comes on the market that we can buy, which can be a faster and cheaper way to solve capacity needs. We started by focusing internally—keeping people safe and ensuring our factories continue to run safely—and now we're looking outward at opportunities where our balance sheet and competitive position might allow us to come out of this stronger and positioned for faster growth.

Great, thank you. That's it for me.

Your next question comes from Todd Brooks with C.L. King and Associates.

Hey, good morning, everybody. I hope you're all well.

Good morning, Todd.

Good morning, Todd.

A few quick questions. One, you talked about how retail was tracking prior to the onset of the COVID-19 outbreak. Do you have any data either through February or through when you think the outbreak start date was? How was food service tracking going into COVID-19 related to dressings?

Closer to flat.

That was flattish.

Yes. And that was more or less what we had foreshadowed in our Q2 earnings.

Okay, great. And I know you reviewed some of the new product successes at retail. There wasn't much discussion about the extension of Olive Garden into the drug and discount channel. Did that happen as planned and any early reads on success extending that brand into new channels of distribution?

It's a great question. Yes, it has, and the way I would characterize it is you're watching the velocity of the new item build on the depth chart. When it first got out there it was barely registering as it was building on the shelf, but we can already see it becoming one of the fastest growing Italian dressings in its segment. We have every confidence it'll continue to grow and pass leaders. Chick-fil-A has been a tremendous success so far at retail. The test is ongoing; in Florida consumer demand has been fantastic—we're having a very hard time keeping it on the shelf. We're excited about it and our partners at Chick-fil-A are very excited. We'll continue to nurture that and prepare for a national rollout.

Was the opportunity for Chick-fil-A similar to the Olive Garden dressing opportunity, or how are you thinking about the size of the Chick-fil-A opportunity based on early results out of the pilot?

I would say it's larger. If you look at the overall salad dressing category, it's north of $2 billion. Olive Garden predominantly plays in the Italian subsegment, which is smaller; ranch is the biggest subsegment at around $700 million and Italian is about half that size. Chick-fil-A sauce plays in dipping sauce occasions, which overlaps with ranch, ketchup, honey mustard and a range of dipping sauces. So, the addressable playing field could easily be north of a couple billion dollars. Our retail team and sales team have done a nice job sizing the opportunity; retailers believe similarly. We tend to believe the addressable opportunity begins larger than Olive Garden, and we'll see how much larger it becomes.

Great. And then my final one—some of my ignorance around manufacturing and efficiencies—if food service sales are down X percent, how does that volume drop in production facilities flow through to the margin standpoint? Just some color around how we should be thinking about the margin impact of that volume drop.

It's a great question. Overall, food service is two-thirds of our volume, and a portion of our factory costs is fixed. As volume goes down, there is a negative absorption impact to our margins because there's less volume to absorb fixed factory overhead. It's difficult to give a specific number now because it highly depends on food service volumes, which remain dynamic—beginning of the month down considerably and some recovery later. We're monitoring it and taking actions to manage incremental costs: reducing temporary labor and overtime, the voluntary furlough program, reducing hiring, and implementing other austerity measures to try to offset this potential impact.

So, not to get detailed, but is there any kind of rule of thumb you can give us that a 1% drop or a 5% drop in food service equates to some type of drop at the operating margin line? That way we can start to size.

Because the situation is so dynamic and we're taking numerous actions to minimize impact, I don't want to put a specific number out right now. As we get through this quarter, we'll have much better visibility and be able to share those impacts with you.

Okay, great. Thanks for the time.

If there are no further questions, we will now turn the call back to Mr. Ciesinski for his concluding remarks.

Thank you, Ursula. And thank you everyone for participating this morning. We look forward to sharing our fourth quarter results with you in August and in the meantime, we wish that each of you stay safe. Thank you.

Thank you. Thank you for participating in today's conference. You may now disconnect.