Good morning. My name is Sarah, and I will be your conference call facilitator today. At this time, I would like to welcome everyone to the Lancaster Colony Corporation's Fiscal Year 2022 Fourth Quarter Conference Call. Conducting today's call will be Dave Ciesinski, President and CEO, and Tom Pigott, CFO. Thank you. And now to begin the conference call, here is Dale Ganobsik, Vice President of Corporate Finance and Investor Relations for Lancaster Colony Corporation.

Thank you, Operator. Good morning, everyone, and thank you for joining us today for Lancaster Colony's fiscal year 2022 fourth 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 on our company's website, lancastercolony.com later this afternoon. For today's call, Dave Ciesinski, our President and CEO, will begin with the 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 current strategy and outlook. At the conclusion of our prepared remarks, we'll be happy to respond to any of your questions. Once again, we appreciate your participation this morning. I'll 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 fourth quarter results for fiscal year 2022, and look forward to fiscal year 2023. Before I cover our results, I'd like to provide you with a brief update on our ERP initiative, Project Ascent. As planned, on July 1st, we executed the first wave of Project Ascent, the implementation of our new SAP S/4 HANA ERP system. I'm happy to share that the cutover went very well and in line with our expectations. For context, wave one was the most complex wave of Project Ascent, encompassing all financial transactions and all customer and supplier-facing business processes. This included order to cash, trade promotion management, procure to pay, the general ledger, and an EDI re-platform. Wave one also converted two of our manufacturing plants, one large distribution center, and all of our third-party warehouses, onto the new ERP system. Customer fulfillment levels remain strong before and after the system cutover, with no unplanned disruptions in receiving orders, producing products, shipping orders, or receiving payments. I'd like to extend my sincere thanks to our teammates who put forth a tremendous effort to reach this important project and company milestone. I'll have more to say about the strategic importance of this later in my comments. Moving on to our financial results for our fiscal fourth quarter ended June 30. We were pleased to report record sales and gross profit, despite the difficult operating environment. Consolidated net sales increased 17.3% to $452 million, while consolidated gross profit improved 1.8% to $98.4 million. Retail segment net sales grew 8.8% in the quarter, driven by our pricing actions and incremental sales attributed to advanced ordering by our customers near the end of Q4, ahead of our ERP go-live. From a brand perspective, New York Bakery, Sister Schubert’s, and Olive Garden, all reported solid growth in the quarter. Retail sales volumes measured in pounds declined 2%, which compares to solid volume growth of 9% in last year's Q4. This was in line with our expectations based on pricing actions and product rationalization decisions that we have executed during the past year. IRI data for our fourth quarter showed share gains for Sister Schubert’s dinner rolls, with a pickup of 300 basis points, which pushed our leading share in frozen rolls up to 54.2%. Our Marzetti refrigerated dressings posted a share gain of 140 basis points, growing our share to a category-leading 24.8%. In summary, Q4 topline results for our Retail segment were driven by our pricing actions, advance ordering ahead of our July 1 ERP go-live, and solid sales volume gains on New York Bakery, Sister Schubert’s, and Olive Garden dressings. In our Food Service segment, net sales grew over 28%, with pricing accounting for over 24% of the sales increase. Select customers in our mix of national accounts, and higher demand for our branded Food Service items, were also noted contributors to this sales growth. Food Service sales volumes measured in pounds, increased 2% in the quarter, which was in line with our expectations, and compares to significant growth of 29% in last year's Q4. During Q4, we continued to experience high levels of inflation for raw materials, packaging, and freight. That said, we were encouraged by our progress of improving our PNOC, pricing net of commodities. This progress is reflected in our Q4 gross margin, which showed sequential improvement of 480 basis points versus our fiscal third quarter. We also acknowledge there's more work to be done. We remain focused upon improving our financial performance through productivity gains in our supply chain, and revenue growth management. Overall, I'm pleased with the improvement in our financial performance in our fiscal fourth quarter, as we completed a fiscal year characterized by record inflation and a challenging operating environment. I'm also delighted to have started fiscal year 2023 with a successful go-live on ERP. I'll now turn the call over to Tom Pigott, our CFO, for his commentary on our fourth quarter results.

Thanks Dave. Overall, the results for the quarter reflected strong topline growth and improvements in our gross margin performance. Our successfully implemented pricing actions have begun to offset the unprecedented levels of inflation impacting our business. Fourth quarter consolidated net sales increased by 17.3% to $452.4 million. The growth was driven by pricing actions taken in both segments and the customer pull-forward of shipments in advance of our ERP go-live. Customers increased their orders for deliveries near the end of the quarter to ensure they had adequate inventory prior to our SAP implementation on July 1. We estimate these shipments contributed $25 million in incremental sales to the fourth quarter results. Decomposing our 17.3% revenue growth, 15.1 percentage points were driven by pricing. The customer pull-forward of shipments accounted for 6.5 percentage points, and a volume decline that was in line with our expectations accounted for the balance. Consolidated gross profit increased by $1.7 million to $98.4 million. Gross profit margin declined by 330 basis points. The increase in our gross profit reflected the pricing actions implemented in both segments. In addition, we estimate the gross profit benefited from an incremental $5 million due to advanced sales prior to our ERP go-live. These items were offset by the unprecedented inflation and increased supply chain costs. Inflation for commodities and packaging materials was up nearly 30%. The majority of the commodities we utilized were priced at or near 10-year highs. Our significant exposure to soybean oil, which was up notably, drove our inflationary impact higher than many of our peers. The increase in our supply chain costs resulted from a number of factors. First, we experienced a high level of inflation on our factory labor and other manufacturing costs. Second, our manufacturing costs were up due to operating challenges in this environment. Our cost savings program has been hampered by efforts to react to external supply and demand volatility at our facilities. Third, we had higher freight and warehousing costs due to wage and fuel inflation. We continue to work to improve our operations, with initiatives focused on increasing productivity, including a new value engineering program. Selling, general and administrative expenses decreased 2.8% or $1.6 million. This decrease was due to reductions in consumer spending and incentive compensation costs. Expenditures for Project Ascent, our ERP initiative, totaled $11 million in the current year quarter, versus $10.3 million in the prior year quarter. Restructuring and impairment charges were $10.5 million, which primarily reflect the unfavorable impact of an $8.8 million non-cash impairment charge related to the Angelic Bakehouse business. Consolidated operating income declined $7.2 million to $33.7 million, due to the restructuring and impairment charges, partially offset by the benefit from the advanced sales ahead of our ERP go-live, and the underlying performance of the business. Our tax rate for the quarter of 14.4% reflected the benefit from a lower state tax rate due to the impact of non-recurring adjustments. We estimate our fiscal year 2023 tax rate to be 24%. Fourth quarter diluted earnings per share decreased $0.09 to $1.06. The decrease was driven by the restructuring and impairment charge, partially offset by the benefit from the advanced sales ahead of our ERP go-live, the lower tax rate, and the underlying performance of the business. The EPS impact to the restructuring and impairment was $0.29 per share. The benefit from the advanced sales was $0.15 per share, and the lower tax rate added $0.10 per share. Costs related to Project Ascent reduced EPS by $0.31 per share this quarter, versus $0.28 per share in the prior year quarter. With regard to capital expenditures, full year payments for property additions totaled $132 million. This result was below our previous expectations, primarily due to timing of payments for our Horse Cave capacity expansion. Spending for the Horse Cave project totaled $72 million in fiscal year ’22. For fiscal year ’23, we are forecasting total capital expenditures of approximately $100 million. This forecast includes approximately $50 million that remains for the completion of the Horse Cave expansion project. In addition to investing in our business, we also returned funds to shareholders. Our quarterly cash dividend of $0.80 per share paid on June 30, represented a 7% increase from the prior year amount. Our enduring streak of annual dividend increases currently stands at 59 years. Our financial position remains very strong as we finish the year debt-free, with $60 million of cash on the balance sheet. So, to wrap up my commentary, our fourth quarter results reflected strong pricing-driven revenue growth, offsetting significant commodity inflation. The revenue and gross profit performance also benefited from the advanced customer shipped purchases prior to our SAP go-live. In the coming year, we’ll continue to address the inflationary cost increases with our revenue growth management program, and are implementing plans to improve our supply chain performance. I will now turn it back over to Dave for his closing remarks. Thank you.

Thanks, Tom. In fiscal year 2023, we expect to continue to deliver industry-leading sales growth. In retail, we expect strong sales growth from pricing, in addition to some incremental volume on new items, such as the launch of a new, larger size of Chick-fil-A Sauce, a national distribution of Chick-fil-A Barbecue and Sweet and Spicy Sriracha Sauces, a new Olive Garden Caesar dressing flavor, and the addition of Arby's Horsey Sauce and Arby’s Sauce. Just for reference, we are also planning a very limited regional test for Chick-fil-A refrigerated salad dressings during our fiscal second quarter. Consumer demand elasticity, and the impact of product rationalization initiatives we implemented in fiscal year 2022, will pose a headwind to volume gains in fiscal year 2023. In Food Service, we anticipate sales growth fueled by pricing and momentum at select QSR customers, will be partially offset by a slowing economy and any potential diminution in consumer sentiment. Also note that our first quarter sales will be unfavorably impacted by the ERP advance ordering, which pulled an estimated $25 million of sales into the fiscal fourth quarter of fiscal year 2022, as Tom mentioned in his comments. In fiscal year 2023, we’re forecasting another year of significant inflation. In late Q4 of fiscal year 2022, we implemented another round of list price increases on retail dressings and sauces. These increases became effective in early August, and are already reflected on the shelf. In our Food Service Segment, we will continue to realize offsets to increase commodity and freight costs through contractual-based inflationary pricing. Our cost savings programs and ongoing initiatives in revenue growth management will also offset the unfavorable impacts of inflation in the year ahead. Turning to our supply chain strategy, our significant expansion at our dressing and sauce facility in Horse Cave, Kentucky, is progressing as planned. Production is scheduled to begin later this fall. With regard to Project Ascent, the implementation phase will continue throughout fiscal year 2023, as we add additional plants and warehouses to our new ERP network. Stepping back and placing this in context, Project Ascent and our Horse Cave expansion represent capstone initiatives in a major strategic transition. Lancaster Colony Corporation was founded over 60 years ago, and our evolution today can be organized into two distinct phases. Our first phase, Lancaster Colony 1.0, began with our founding in 1961. The five decades that followed were characterized by numerous acquisitions and rapid growth as a conglomerate consisting of three segments, glass and candles, automotive, and food. In January of 2014, Lancaster Colony sold the last of our non-food assets. The sale of the candle business in 2014 marked the end of Lancaster Colony 1.0, and the beginning of the next phase of our evolution as a food pure-play, Lancaster Colony 2.0. Notable highlights of Lancaster Colony 2.0 have included the development and implementation of our better food company growth plan, which is focused on three simple pillars: accelerating core business growth, simplifying our supply chain to reduce our costs and grow our margins, and expanding our core with focused M&A and strategic licensing. During Lancaster Colony 2.0, the company has also invested in the assets and capabilities to grow and support the next phase of our future. These investments have included, but not been limited to, constructing a new innovation center, consolidating several older office locations into a new headquarters, and numerous plant-level automation initiatives. The capstone investments of Lancaster Colony 2.0 have been the Horse Cave expansion and the implementation of SAP S/4 HANA, a scalable ERP platform that will enable us to pursue existing and new pathways to growth. During the quarters ahead, we will complete the construction at Horse Cave and the implementation of Project Ascent. This will mark the end of Lancaster Colony 2.0 and the beginning of Lancaster Colony 3.0. Whereas the focus in Lancaster Colony 2.0 has been on growth and rebuilding critical infrastructure, the focus of Lancaster Colony 3.0 will be on leveraging our new scalable infrastructure to pursue existing and new organic and inorganic pathways to growth. Bringing things closer in, I'd once again like to thank the entire Lancaster Colony team for all their resilience, hard work and ongoing commitment to our business during fiscal year 2022, and helping us with completing this strategic transition. I look forward to working together with everyone in the coming year, as we continue our journey to be the better food company. This concludes our prepared remarks for today, and we'd be happy to answer any questions that you might have. Operator, over to you.

Thank you. Your first question comes from Brian Holland with Cowen. Please go ahead.

Yes, thanks. Good morning. I guess if I could start off with just kind of thinking about the puts and takes into fiscal ’23, nice sequential gross margin improvement. Just trying to think about magnitude going forward. Can we expect that kind of sequential lift as we look into the first half of the year? Are we kind of range-bound with Q4? And maybe just looking out to fiscal ‘23 gross margin full year, obviously if you go back to 2021, you had a 26 gross margin, somewhere in that mid-20s range. How much of that do you think you can get back in fiscal ‘23? Is that a viable kind of year-end range for you as we think about pricing catching up?

Well, you covered a lot of water there. Maybe I'll start with the basics. We feel really good about the topline of our algorithm and driving sales growth, but the way we're going to get there, Brian, is going to be a little bit different than, let's say, several years ago, where it was all driven by volume. Now what you're going to see, and we tried to outline that in the press release and our prepared comments, is that obviously we're pushing through a lot of pricing. On PNOC, which really kind of gets into that margin question, we feel like we're turning the corner, particularly in our retail business. We mentioned the fact that in Q4, we had half of a quarter of pricing on our frozen business, and we took another price increase that just became effective in early August on our dressings and sauces. So, what I would tell you is, we feel good about PNOC that we're turning a corner. As you look at sort of sequentially as we go through the quarters, you're going to see a little bit of noise, and as we go forward, bearing in mind that we had the shift in timing of some of that volume, and we also had plants down for the first five days of the month of July because of this cutover. As you might expect, we literally shut things down, do a physical inventory. We poured all the data from the old systems into the new systems, and then we start things back up. But to your broader question then, how do we feel about fiscal year ‘23 as a whole? I think what you're going to see is continued improvement, but I'm going to offer a caveat that if you look at between fiscal year ‘22 and ‘23 and the magnitude of pricing that we're taking, you are going to see some diminution on margin just because of that spread. We pass on price for the cost, not the margin percentages. So, you're going to see some weight against overall margin recovery. But what you should see is improvement in gross profit as we continue to push forward. And what I would tell you is, unlike in years past, the external situation, and I'm going to touch wood here, seems to be stabilizing in terms of supply. The pandemic is dying down, and that's allowing us to put greater focus in areas of productivity. And we're also adding value engineering as another important initiative. So, as you think about what's our pathway to get margins back to historical levels, it's first and foremost PNOC. And like I said, we're turning the corner on that. And then it's going to be focusing on productivity initiatives and value engineering over the course of time, not just to be restoring gross profit growth and profitability, but building those margins back to where you and we want them to be. And Tom, I don't know if you'd want to offer anything else into that.

Yes. No. And Brian, as you model it, I think the key focus for us is PNOC, but as you do your model, we're looking at similar levels of inflation and pricing in fiscal ‘23 as we had in fiscal ‘22. So, in fiscal ‘22, where we looked at slightly over 200 basis points of dilution going into it, we’re looking at it in a similar way, in terms of the percentage diminution, but from a PNOC perspective, as Dave indicated, we feel like we've turned the quarter and we're starting to go positive.

Okay, that's great. I appreciate the color. And maybe speaking to the gross profit versus gross margin question, at least relative to my model, I think where clearly in retrospect I mismodeled was the magnitude of pricing coming through still on the Food Service side. I would imagine you start to lap a little bit heavier more of that pricing as we get into deeper into the first half of 2023. Is that the right way to think about it, or do we just have other rounds of pricing such that that could support that level of increase? I'm just trying to make sure I understand order of magnitude on pricing in Food Service.

Right. What I would offer, Brian, is that is how I would think about it, with maybe a caveat. We aren't seeing prices necessarily fall back. What we're seeing is the rate of increase in our inflation is slowing down. So, there's a little bit of nuance there. We would need to see a more dramatic pullback in order for us to actually see—for the pricing that we’ve put to start to unwind. And we can go into some of those categories if you want, but Tom.

In Food Service, you're kind of looking at pricing in the first half of mid-20s, and then it gets into the mid-teens in the second half based on our current outlook. So, that—so you're right in terms of your projections.

Okay, perfect. And then last one for me, I guess a two-parter. One, do we have a sense how much the licensed sauces contributed in the quarter? I didn't see anything that would allow me to back into it, but I may have missed it. And then, obviously what we saw in the quarter was the slowdown in the growth rate. And I know that we've talked about some of the merchandising that was done at the launch. Just a sense of how that's building. Obviously, in the most recent data out earlier this week, that license portfolio looks like back up in the low double-digit range. So, looks like it's getting back on track. But in an inflationary environment and a lot of heavy pricing, what we're hearing from a lot of companies is, pulling back on some of the media spend where we're not really going to get the return. We're focused on the pricing. This is something where you’re obviously trying to drive visibility towards. So, just help us think about the investment that's going to go into that category, mindful of the current environment we're in.

Maybe first, I'll start with the contribution of those brands. I'll give you the IRI numbers here. Directionally, if you look at Chick-fil-A Sauce, it was about $34 million in retail scanner sales. Olive Garden was about $36 million of scanner sales, and PWW was about $12 million in scanner sales of what we had. On the net sales line, give me a second here, it's probably more like pushing $70 million, somewhere in that range is where we were on those—and that's just total sales, not necessarily incremental, but total sales on those items in the quarter. As we think about sort of how we're focusing on driving the business, we went back and we looked at our marketing spend, and we've done a couple of things. A leader of our retail team and the marketers that he works with stepped back and looked at, one, the size of the spend, but also how we're spending, and we've elected to make a bit of a strategic shift in that we're moving away from traditional and we're starting to double down more in digital. We're also focusing more on in-store and point of purchase, where we feel like we get better leverage. So, in the aggregate, we've produced it modestly. But we haven't historically been a big advertiser like some of the others. I think the other thing that may be worth consideration, Brian, is, given the growth that we've had in licensed businesses, and given the marketing spend at those organizations, like Olive Garden, and Buffalo Wild Wings, and Chick-fil-A spend on their own marketing, it doesn't necessitate the same level of spending that it would on one of our traditional brands. So, as you look at our marketing spend as a percentage of our total sales over time, don't be surprised if you see that moderate slightly. What we're doing essentially is looking at the level of spend by brand. And our view is on licensed brands, because we're paying a license, we shouldn't have to spend as much.

That's great. I can leave it there. Appreciate all the color. Best of luck.

Your next question comes from Todd Brooks with The Benchmark Company. Please go ahead.

Hey, good morning, guys, and congrats on the gross profit improvement in the quarter. Nicely done.

Thanks, John.

Quick question. Dave, you outlined a bunch of incremental product opportunities that you're looking at for fiscal ’23 on the license branded product side. Is there a way to dimensionalize either if you're thinking across the total roster of opportunities, or if you wanted to break it into Chick-fil-A large size versus the incremental flavors? Just, is there a way you can dimensionalize the incremental benefit from licensed product introductions that you're expecting in ’23?

Well, let's see. First, maybe, I would put it in some context. If you go back and you just look at Chick-fil-A Sauce, for example, in retail sales over the course of a little more than a year, it's become a business that does about $135 million, $140 million in sales or thereabouts, right? So, as you look at what we've done with licensing just in the last 18 months, there's been a pretty big step-up in our sales. So, what I want to share is, don't expect necessarily to see something like that. But as we look at the items that we have there in the portfolio, I think it's reasonable to assume that we might be able to achieve something more in the one third of that kind of range. And it's going to be mixed. Coming across the large size, it's going to be in RB Sauces, and then the new variants like Chick-fil-A Barbecue and the Sweet and Spicy Sriracha, and then the Olive Garden Caesar. And that’s sort of, you're thinking in the current year. Now, bear in mind that these items, the earliest ship for select customers is going to be October, but the majority of these customers aren't going to begin to take these items more until the spring when they start to do their shelf resets. So, the early adopters will cut it in. But before you really see all these items in grocery stores everywhere in the country, it's going to be more in the other side of calendar year 2023. But that's why we—in the comment to maybe Brian's question earlier, and your question now—as you look at our overall algorithm, we continue to have confidence. We feel like we’re teamed up with winning food service operators. And we really, we cherish their partnership. And we feel like between our own brands and then what we're doing in licensing, we’re set up to continue to deliver really solid, if not industry-leading topline growth.

That's great. That's helpful. Thanks, Dave. And then if we can talk about obviously the past sort of nature of the pricing that you've gotten in Food Service, and Tom talked to maybe the cadence of how you see that playing out first half versus second half. Can you remind us, with the August increase, what we're running for kind of blended price increase now on the retail side of the business, and maybe just what the tenor of those discussions were around the August increase. And do you expect that you still have the ability to get further increases if needed, or do we need to start to think about some of these increases rolling off as we anniversary them?

Sure. So, if you go back, Todd, and you look at the last couple of years, most of our portfolio now with this latest round of price increases, is up probably 15% to 20% across the two price increases that we've taken. So, the height of that, again, 15. The lower end would be a little bit lower. In the most recent August price increases we took on dressing, sauces and dips, that range was 9% to 11%, just to give you an idea. And then, if you don't have any other questions on that, I'll go in then to your question about sort of the discussion and how things went. You remember, I think we came out—the last call we had—we shared that we were in the process of taking a price increase, and that was on the heels of some tough earnings coming out with some of the big merchants, Target and Walmart. And as you might have imagined, those discussions were probably a little bit tougher than they had been before. But what I would tell you is that they were fact-based before, and they were fact-based now. They ask us to document the reason for the increases, and we laid out what was happening on input costs, particularly on oil in the case of our dressings and sauces, and they became constructive. Their concerns are our concerns, and we were able to work our way through it. Now we're just— we're pressing forward. I think it also helps with the fact that we continue to bring new news to the category. In many cases, they're viewing us as sort of the innovation leader in dressings and sauces because of what we've been able to do, and at some level that helps also.

Great. And a final one for me, and I know you've talked about it increasingly the last couple of quarters, just the SKU rationalization journey that you've started. As you're looking out to fiscal ‘23, are you looking to further rationalize the portfolio? Is there anything that we should think about as kind of a put on revenue growth related to further rationalizing the SKU base?

Not really. It's ironic that you picked that. I was going through and looking at things and comparing fiscal 2020 to fiscal 2022. To give you an idea, we started that journey with about 1,400, a little more than 1,400 SKUs between Retail and Food Service, and we're down to a little more than 1,100 on that right now, to give you a magnitude. So, that's—you’re talking in the order of 25% of a reduction. So, no, we don't expect big pruning. A lot of this pruning, Todd, was all geared towards getting us ready for an SAP cutover. We felt like we needed to simplify our business and really focus on our core if we wanted to ensure that this cutover was going to be successful. And as we got deeper and deeper into inflation and we had to focus on optimizing the use of our capacity and making sure that we could service our customers, that really sort of was a secondary driver for us to go back and look at some of the slower moving SKUs that we had, and go back and rationalize. But, sort of where we sit today looking forward, SKU rationalization activity just isn't going to be a big area of focus. We'll prune as we have to.

Todd, I'll just give you a couple of numbers for your model. So, as we look at the Retail segment and the exit of Mamma Bella and Produce Packers, that was about $7 million this quarter, and is expected to be about the same level next quarter, and then it declines to $2 million to $4 million for the remainder of the fiscal.

Okay, great. Thanks, Tom, and congrats again.

Your next question comes from Andrew Wolf with C.L. King. Please go ahead.

Hi. Good morning. Wanted to ask like a follow up on pricing, kind of a simple question, but do you feel like if the—I think most economists and so on, Ag economists and so on, and people in the trade are looking for some kind of disinflation at some point, maybe later in 2023. But if that doesn't happen and you need more pricing in a real basic sense and the economy is slowing, do you think you're going to experience pushback from—and not Lancaster as a—more the industry. Do you have a sense from some of the bigger retailers that they'll accept more pricing, or would you anticipate some pushback if future pricing is needed?

It's a great question and one that we're spending a lot of time thinking about. What I would share with you, Andrew, is, on weekends, I spend time at grocery stores. I do some of our own family shopping, and just make it a point sometimes with my kids to go through the stores. And I walk most of the aisles. And what I would tell you is, I mean, just beyond our categories, what surprises me is just the magnitude of the prices that you see on some of the items. Having worked on Heinz Ketchup years ago, I always sort of look at where they are. And I can remember when we used to promote it at 10 for 10, and now the item is on the shelf for more than $3.50. They have sizes that are on there for more than eight bucks. And you can see that same thing in a range of different areas. Let's start maybe, and just say, like you, you can't help but be surprised at the prices on the shelf, but at the same time, when you look at the magnitude of the input cost increases that we've seen, none of our peers in the food space are building margins through this. And if anything, we're just passing along what we're seeing out into the trade. Generally, I think that the trade remains constructive in the conversations. Consumers are continuing to spend, albeit they're making trade-offs. I think they're pulling back in things like apparel and other hard lines. They're spending on food selectively. I think what we're starting to see the early signs of, are shifts. So, the shopping behavior of lower income consumers are starting to show maybe more erosion than middle consumers or more affluent consumers. And I think merchants know this. And I think what you can expect to see is, I think we're all realistic. As is the input costs, if they do continue to climb, there's going to be a need to pass them on. And I think what you're going to see is, depending on the demographic segment, probably different areas of focus to create value. So, I don't see—if costs go up, I don’t—I think we're just going to be in the same loop we're in right now. This is probably a long answer to a short question you’re asking as I think my way through it. But I think what you're going to find is, we'll just continue to move forward as is.

I'll add a little bit of color. So, as we think about it, one of the key initiatives we're working on is our value engineering program to look at ways to optimize our products, maintaining a high level of quality, but being able to somewhat offset what we're seeing in terms of this commodity inflation, as well as some productivity projects at our factories to reduce our costs. So, we're all focused on trying to mitigate those increases. Broadly, in this business, historically, as you get into more of a recessionary environment, if we get there, we have seen tailwinds in our higher margin retail business, which is to our benefit, but certainly some headwinds on the Food Service side.

Thank you. That was really thoughtful. I appreciate it. And then I wanted also to ask about the—on the volume outlook, as a sense of the cadence, not to ask you to tell me, hey, Q1 is this, but whether it's going to—it sounds like it's—well, I'd like to get your sense of the cadence. I mean, the quarter you just had was down a little in retail, and you had obviously a tough compare and the lingering SKU rationalization, which you mentioned. And then, as you look forward, you talked about the SKU rationalization. I don't know about the compares. Maybe you can help us with that. And then on what you think about elasticities. What are you seeing now? And what do you kind of anticipate in your model—in your budget?

Sure. And maybe I'll start. What I would tell you is, if you look into Q1, the first thing I would tell you is, you're going to have to take into consideration the volume that shifted between Q1 into Q4 as retailers pulled forward orders to get on the other side of ERP, right? So, that's going to be an overarching volume adjustment, and you can sort of do the math on that. To your point on the fact that we've rationalized and exited a couple of businesses, we've provided you that. That needs to be taken into consideration. And then, there's the elasticities that we shared with you. So, what we still feel confident of is, we're going to continue to provide solid, if not industry-leading topline growth, but getting there by way of pricing, but with volume on the softer side. So, that's probably how I would think about working the math. So, you're going to see some diminution on volume and pricing driving the algorithm. Now, as we get deeper into the quarters two and three, obviously the pull-forward becomes a non-event. And so, that works its way out. And even the rationalizations work their way out. So, the only thing that's going to be left is some of the reduction in volume due to consumer elasticities. I think you'll sort of see it stabilize from second, third, fourth quarter or late second quarter, third quarter, fourth quarter.

Okay. And the reference to what you're talking about on timing, that's because the impact of the pricing you've put in kind of recently, will flow into the market and you'll see what the elasticities are. Is that how we should think about it?

Yes. And we track it every week. And so far, those elasticities are performing in alignment with our modeling. So, I think that the timing things that I would focus on would be just making sure you're capturing the shift between Q4 and Q1 that Tom outlined in his comments, and the fact that we did exit a couple of businesses last year that we've talked about as well, and making sure, first and foremost, you're adjusting for that. And then the elasticity, you can use your judgment.

Okay. Well, thank you. Appreciate it.

Your next question comes from Connor Rattigan with Consumer Edge Research. Please go ahead.

Good morning, guys. Thanks for squeezing me. I appreciate it. Yes. Just one quick one here at the end of the call, just to wrap up on the commodity front. Can you guys maybe remind us about any hedging policies or contracts you have in place? Just given that soybean oil is about 20% off the tie, it seems like we should expect some relief on the inflationary front heading into fiscal ‘23, but in the release, it looks like you're expecting commodities to actually increase over fiscal ‘23. Can you maybe help us sort of understand what's driving that expected step-up?

Yes. So, it's a really good question. So, what we're seeing actually, even though—there's a couple of things to think about. There's the board price for soybean oil, which has started to moderate, but then there's a basis cost, which you don't see, which is increasing. So, we don't get to see the full benefit of the savings immediately. And then the second aspect of it is, we had some good coverage on soybean oil in fiscal ’22, below market price. And then as we go into fiscal ‘23, we also have good coverage. But when you look at the deltas, we are looking at an increase in soybean oil year-over-year, despite what you're seeing on the board. But again, that's all factored into our PNOC and how we're managing our pricing relative to those costs.

Okay. All right. Got it. Thank you so much. That's all—that's it for me.

Thanks, Connor.

Connor, the only other thing maybe I'd add just quickly on that is the other new news besides oil with commodities was just the avian flu that hit later in the year, and it created a subsequent headwind, and we use egg in a range of our dressings and dips, and it's also included as an ingredient in some of our baked items.

Our next question is a follow-up from Brian Holland with Cowen. Please go ahead.

Hey, thanks for letting me hop back on here. Dave, you mentioned your prepared remarks about kind of leveraging the—or thinking about the Lancaster Colony 3.0 model as a vehicle to leverage organic and inorganic opportunities. And I'm curious how the inorganic opportunities have evolved, because I would have thought about that in the context three years ago of going out and doing more acquisitions, similar to what you've done historically, but maybe you could do them larger in scale for a number of reasons, including more human capital at your disposal to run such businesses. But more recently, the success of the licensing program and some of the commentary you provided around that would suggest that maybe that's the inorganic opportunity, if indeed you would define it that way, i.e., bringing on a new partner as a source of inorganic growth. So, can you just help us think about the evolution of inorganic catalysts as you learn more about the license business? And the reason I ask is because that seems like a less risky sort of—or there seems that there would be less execution risk about continuing that formula than maybe going in and buying a new asset, but would love to get your perspective.

Maybe first just providing you a little context. With our old ERP system that was installed in 1994, 1995, it was such that we really struggled with any acquisition to be able to generate cost synergies. So, as we looked at acquisitions, ordinarily, we were more inclined to focus on growth synergies. So, as we've gone on this SAP S/4 HANA, which is an all-cloud-based system, it's going to allow us the option, obviously not mandate, but allow us the option to think about bigger acquisitions should we choose, and justify those with cost synergies. The other thing that it's going to allow us to do is to think about international as a component of growth, whereas in the past, it would have been difficult because of the limitations of some of our systems and processes. Now, I'm going to take a big step back and say, we agree with you that we have been able to enjoy a fair amount of growth with licensing. And we have no intention of backing away from that. And as we think about 1.0 and 2.0 and 3.0, part of what we're trying to do is to create a platform really for the long term, just not the next year or two years or three years. But we view both Horse Cave and that SAP system as generational investments that we're going to be able to grow on. So, where we sit right now, this summer, I would tell you, Brian, we feel like we have near-term opportunities to continue to grow, and intermediate term opportunities to grow, driving our existing strategy, and we feel good about that. We also feel like we could take baby steps and follow some of our food service operators to places like Canada and execute that far more efficiently than we might have been able to do that in the past. So, this isn't—these aren't big, risky moves. As far as acquisitions are concerned, our view is, we agree with you on the risk. But in the past, we really haven't even—it’s been difficult to think about how we might even be able to take on something bigger. Now, whether it's several years from now or longer, we feel like at least the machine is set up to take on things like that and to do it well. But the last thing we want to do is leave you with the impression that somehow we're going to make a bold pivot away from what we've done. This is all about generational investments to strengthen the platform so that we can continue to grow efficiently and meet your needs and others that are out there.

Got it, Dave. I'll leave it there. I appreciate all that color.

There are no further questions. We will now turn the call back to Mr. Ciesinski for his closing comments.

Well, thank you. And thank you, everyone, for participating this morning. We look forward to sharing our fiscal first quarter results with you in early November. Hope you have a great rest of the summer, and we'll look forward to catching up with you then.

The conference has now concluded. Thank you for attending today’s presentation. You may now disconnect.