Lancaster Colony Corp
NASDAQ:LANC
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Lancaster Colony Corp
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[00:00:03] Good morning. My name is Joanne, and I'll be your conference call facilitator today. At this time, I would like to welcome everyone to the Lancaster Colony Corporation fiscal year 2021 first quarter conference call. Conducting today's call will be Dempster's Inskeep, President and CEO and Tom Pickett, CFO. All lanes have been placed on to prevent any background noise after the speakers have completed their prepared remarks. There'll be a question and answer period if you would like to ask a question during this time since faster than the number one on your telephone keypad and questions will be taken in order that they are received. If you would like to withdraw your question, Press Dipankar. Thank you. And now to begin the conference call here is Dale Ganobsik. Vice President of Investor Relations and Treasurer of Lancaster Colony Corporation.
[00:00:54] Thank you. And good morning everyone, and thank you for joining us today from Lancaster County fiscal year 2021 first 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. If the company undertakes no obligation to take these statements based upon such a detailed discussion of these risks and uncertainties, is contained in the company's filings with the FCC. Also note that the other replay of this call will be archived and available at our company's Web site, like after college dotcom later this afternoon. For today's call, this is NPR president and CEO will begin with a business update and highlights for the quarter. Time to get our CFO will then provide an overview of the financial results. They will then share some comments regarding our current outlook and strategy at the conclusion of our prepared remarks. We'll be happy to respond to your questions. Once again, we appreciate your participation this morning. And I'll turn the call over to guests recolonize president and CEO Dave.
[00:02:02] Thanks, Dale, and good morning, everyone, it's a pleasure to be here with you today as we review our first quarter results for fiscal year 2021. I'd like to begin by extending a sincere thank you to the entire Lancaster Colony team for their tremendous effort during the past eight months as we confronted the impact of the covid-19 pandemic from the front line workers at our plants and distribution centers to all the associates and leaders throughout our business. I'm extremely proud of how we pulled together and worked in common cause to meet the shifting demands of our business throughout the coronavirus. We've remained steadfast that our mission is fixed first to provide for the health, safety and welfare of our teammates, and second, to ensure that we continue to play our role in our country's vital food supply chain. Despite the uncertainty, we completed our fiscal first quarter with consolidated net sales growth of three point six percent, net sales in our retail segment grew sixteen point six percent, while net sales in our food service segment declined nine percent. Excluding Omni baking sales, consolidated net sales grew 5.2 percent and food service net sales declined six point four percent. Retail sales benefited from higher demand as the impact of covid-19 drove higher at home food consumption, frozen garlic bread, Olive Garden dressings and frozen generals were the biggest contributors to the increase in retail net sales based on IRS data consumption during the period, outpacing shipments in a few categories. We are already seeing shipments catch up as we move through our second quarter.
[00:03:49] Her ayari notable highlights for the quarter include the following sales of Mazetti refrigerated salad dressings grew over 12 percent. New York bakery frozen garlic bread grew almost 15 percent, branded croutons advanced over 21 percent. Sister Schubas frozen generals' increased 24 point five percent and Olive Garden dressings grew a very strong 45 percent. We were also pleased to see that our recent new product introductions added about four percentage points to our retail segment Q1 sales growth as the Chick fil A and Buffalo Wild Wings sources continue to perform very well in late October. We began the long anticipated regional rollout of Chick fil A's offices in the south east region. The news was officially announced on October 22nd by our strategic partner, Chick fil A, on their social media platform, The Chicken Wire. By week's end, the news had garnered millions of media impressions as previously outlined. We will be expanding distribution of these items across the United States during the remainder of our fiscal year. Overall, we were thrilled with the top line growth of our retail business and we're bullish about the long term outlook. However, as you will hear later in my comments, this growth came at a substantial cost due to inefficiencies that are likely to persist in this pandemic environment and our food service segment. The upward trend from the lows we encountered this past April continued throughout the quarter. National account, quick service restaurants and pizza chain customers led the way.
[00:05:31] Despite the pandemic, we continue to partner closely with key national accounts on a range of new sources that have and will continue to be featured on their menus in the weeks and months ahead. Despite the relatively strong topline results, consolidated, gross profit for the quarter was essentially flat at ninety two point seven million versus ninety two point one million last year. The benefits from the heavier retail sales mix were offset by the aforementioned higher manufacturing costs due to covid-19 increased commodity cost and increased freight costs. As Tom will detail later in the call, the higher manufacturing costs consisted of both hard costs for items such as hazard pay, production, higher gas and PPE, and soft costs such as manufacturing inefficiencies resulting from our efforts to keep up with the increased demand and maintain adequate service levels. Before I pass it over to Tom. I would also like to briefly update you on our Barnham bagel business. Late in Q1, we were notified by Starbucks that due to the impact of the coronavirus pandemic on the breakfast business, they were planning a range of menu changes, including the discontinuation of the Barnham line in the restaurants. As Tom will point out, this resulted in two non-cash adjustments during the period. We were disappointed by the decision. We remain pleased with the Bantam acquisition and we're very bullish about its future. I'll now turn the call over to Tom Piguet, our CFO, for his commentary on our Q1 financial results.
[00:07:09] Thanks, Dave. Overall, the results for the quarter reflected strong growth in our retail segment, higher costs primarily related to the covid-19 outbreak, as well as some accounting adjustments on the Barnham business. First quarter consolidated net sales increase three point six percent to three hundred and forty nine point two dollars million, excluding omni bacon sales of two point eight dollars million in the current year quarter and seven point nine dollars million in the prior year quarter, consolidated net sales increased by 5.2 percent. As you recall, omni baking sales are attributed to a temporary supply agreement. The supply agreement came to an end in late October. As planned, consolidated gross profit increased half a million dollars to ninety two point seven dollars million, and margins declined by 80 basis points to favorable revenue. Growth in the retail segment was offset by higher manufacturing costs, including costs related to covid-19 and higher commodity and distribution costs. The covid-19 related items included about four million dollars in incremental frontline worker pay and other hard costs of about one point five million for shift separations and expenditures for personal protective equipment as we invested to ensure the safe operation of our facilities. We also incurred incremental Tsakos totaling an estimated three million dollars. These costs were driven by the increased demand and mix changes related to covid-19. More specifically, these expenses included increased overtime pay, internal freight and distribution costs and utilization of some less efficient production lines to help feed demand. Note that compared to our fiscal fourth quarter ended June 30th, the total pounds produced increased more than 20 percent. Selling general administrative expenses increased eight point seven dollars million, or twenty two point two percent.
[00:08:59] There were three main drivers of the increase. First was the investment we're making on Project percent in support of our ERP implementation and related initiatives, which account for five point six dollars million. That increase the remaining three point one dollars million increase was driven by higher spending for digital marketing to attract and retain new customers, as well as incremental IT infrastructure costs. The company reported two special items this quarter related to the Banten bagel's business as a result of the discontinuation dimension. First, we revalued the contingent consideration or earn out liability to the sellers of bantams using fair value accounting based on this analysis. We reduced the current value, the projected or not pinioned by five point seven dollars million, creating the income you see under contingent consideration line of the PNL. Second, we evaluated the intangible assets of this business, which resulted in an impairment charge of one point two dollars million. Both items were recorded in the food service segment results. Consolidated operating income declined 2.8 million dollars to forty eight point nine dollars million, this results. This result reflects the items I mentioned earlier, most notably the higher expenditures for projects and the unfavorable impacts of covid-19, partially offset by the change in the turnout projection, excluding all these items. The key driver of operating income growth was a strong line performance, strong top line performance for the retail segment. Our effective tax rate was twenty four point three percent this quarter versus a tax rate of twenty three point three percent in the first quarter of fiscal 2010, we estimate that our tax rate for the remainder of this fiscal 2011 to be 24 percent.
[00:10:42] For first quarter, diluted earnings per share decreased 13 cents to a dollar and 35 cents, the judgment to contingent consideration increased earnings per share by 16 cents. Higher expenditures for project defense accounted for 15 cents on the decline. EPS was also impacted by the impairment charge, lower interest income on our cash holdings and the increase in the effective tax rate. With regard to capital expenditures, first quarter payments for property additions to fourteen point four dollars million for fiscal year 2001, we are forecasting total capital expenditures between 70 and 90 million dollars based on plans currently in place. We're in the process of evaluating additional and potentially significant investments to meet the growing demand for our dressing in glass products. These investments will be added to this forecast. In addition to investing our business, we also return funds to shareholders. Are quarterly cash dividend paid on September 30th, the 70 cents per share an eight percent increase over the prior year. About our long standing streak of annual dividend increases reach 57 years last December. Even with the investments we are making and the increased dividend payments, our financial position remains very strong as we finished the quarter debt free with 186 million dollars cash on the balance sheet. So to wrap up my commentary, this quarter reflected strong growth in our retail segment and improving trends for the Foodservice segment. We continue to monitor and adjust to the impacts of the covid-19 upgrade. But overall, the health of the business remains strong. I'll now turn it back over to Dave for his closing remarks. Thank you.
[00:12:22] Thanks, Tom. As we look ahead, we will continue to leverage the combined strength of our team, our operating strategy and our balance sheet in support of the three simple pillars of our growth plan. First, to accelerate our base business growth. Second, to simplify our supply chain, to reduce our cost and grow our margins. And third, to identify and execute complementary M&A. To grow our core. Our base business is expected to continue to grow in this this difficult environment. Looking forward to our fiscal second quarter. Historically, our biggest sales quarter of the year sales for both our retail and food service segment will remain subject to the shifts in demand resulting from covid-19. We expect our retail segment sales will benefit from the continued growth of frozen bread products and dressings and sauces. The licensing platform in particular, is poised to provide stronger growth in the second half as we expand distribution nationally on both Buffalo Wild Wings and Chiclet sources. And food service, we anticipate our quick service restaurant and pizza chain customers will remain a positive for us. We foresee inflationary headwinds from commodity and freight costs for the remainder of the fiscal year.
[00:13:41] We also expect we'll continue to incur higher operating costs to keep up with the demand and maintain service levels in this challenging pandemic environment. We expect our cost savings programs and favorable net price realizations will help to partially offset these cost increases specific to our supply chain strategy. We're in the final stages of evaluating a significant investment in production capacity to address the increasing demand for dressing and Soss products. We intend to have more to share with you on this in the future. Project Essent. Our ERP initiative remains on track as we've now completed the design and build phases and we are in the testing phase. We expect to continue our testing in preparation through the remainder of this fiscal year, followed by the commencement of the deployment phase and early fiscal 22. In closing, I would like to once again thank the entire Lancasters colony team for all that they have done during this quarter to fulfill our mission, despite all the unprecedented challenges. This concludes our prepared remarks for today, and we'd be happy to answer any questions you may have. Joanne, over to you.
[00:14:58] At this time, I would like to remind everyone in order to ask a question, please, press star one on your telephone keypad. Your first question comes from the line of Brian Holland from Davidson Co. Your line is now open.
[00:15:13] Thanks. Good morning, everyone. A few quick hitting ones here. Can you give us an update on how much new products contributed in the quarter?
[00:15:24] Yes, there's four percentage points to the retail business, is what it did.
[00:15:30] I'm sorry if I missed that when you did that, right.
[00:15:33] Great question. A pivotal moment to give you just a little bit heavier towards Buffalo Wild Wings as the Chick fil A sauce, for all intents and purposes, was really just isolated to Florida. We didn't start to shift that into the southeast region until the very end of October.
[00:15:52] Ok, that's OK, that's very helpful and good to know. And then just quickly on the Bantam business, you know, two part question here. One, can you quantify the drag from the loss of Starbucks to revenues over the next 12 or so months as you lap this? And then, you know, as we look across broader food service here, you see risk of similar menu rationalization across the balance your portfolio.
[00:16:23] Well, we'll hear maybe in sequence, I'll hit the second question first, we don't quite see anything quite like the phantom item because most of what we're doing are our key menu items that if it's a sauce, let's say it's usually helping to hero some sort of protein that's on the menu. So i.e. they're featuring some sort of a hamburger build or a chicken sandwich build and our thought and our sauce would be central to that. We have seen them work to simplify what they're doing. We haven't seen a downside to that. Really, the bigger impact we're seeing in food service is moving the movement away from both packaging to portion control. So case in point, you know, if you look at our cryovac business and food service for the period it was off, you know, probably to the tune of somewhere around 20 percent. But our portion control part of the business is very, very strong. So we're seeing those sort of things. But in this particular case, I think what's happened is across all the food service, the breakfast occasion has been hit particularly hard because people continue to work from home. Right. So do you think about that morning routine? It continues to be impacted. And I think as Starbucks has watched their businesses evolve, they took the opportunity to step back and say, you know, what needs to be true for us to simplify our breakfast assortment, to make sure that we're running as efficiently as possible. The unfortunate thing is the velocity on the items in the stores that were open remain very, very strong. It just it was a decision that they've made.
[00:18:01] You know, as far as the impact, I would prefer not to get into that. You know, I would tell you that it was the higher seven figures. It's probably the way I would categorize it, but I would flip that with. We also have a real long pipeline of new opportunities that were in the process of JASIEK. We had actually sort of tapped the brakes on chasing new opportunities just because of capacity limitations on that business. So that's why we remain really bullish about where it's going.
[00:18:33] So in other words, it sounds like you have some degree of confidence that that lost capacity, if you will, you can find another home there just based on customer interest that you had.
[00:18:46] Yeah, exactly. We have a strong team working against it. We have a strong pipeline of new product introductions, some of which are going to take us into the occasion, like snacking like a pizza by sort of an item. So there's a whole range of really exciting activity there and a team that just and then chinstrap extra and we're just pushing forward.
[00:19:08] Ok, and then maybe just to get the latest high level, you know, food service industry thoughts, you know, I guess what's particularly noteworthy here, the second wave concerns with covid-19. So maybe just kind of what you're seeing, you know, kind of since quarter. And if we're seeing a plateau in trend, then he pulled back anything that you're looking at one way or the other.
[00:19:33] Yeah, it's a great question. And I'll sort of hone in on transaction data. You know, if we look at we'll start with Foodservice first, Brian. If you look at really all transaction data, all national accounts for the month of August, September and October, those three months, they were running roughly down 10 percent on transactions. However, the transaction size were bigger, so they weren't down as much. When you look at the QSR segment, the QSR segment was probably running somewhere down like let's say about maybe eight and a half. The casual dining segment was actually doing quite well. It was probably running somewhere down around 10 to 11 points. And midscale is the segment that really continued to drag. Right. They were having a harder time with off premise dining sort of solutions. And they were off in the mid 20s. Here's my thesis, right, that what we foresee happening here and we've been talking about this really for maybe the last month or so, you know, we have predicted that there was going to be a spike. We believe that it's the combined effect of the fact that the weather is getting colder in the Midwest and in the Northeast and other parts of the country.
[00:20:54] People are heading indoors, combined with the fact that we think that there's just an overall covid weariness where people are maybe letting down their guard. So we fully anticipate that there's going to be a spike in cases. Here's what I think is likely to happen. I think the QSR segment has done a tremendous job of pivoting to solutions like their drive through and into delivery solutions and pickup. And I think if I had to guess, you may see them pull back slightly, but very much I would be surprised if we saw that pull back maybe more than a couple of points. I think even casual dining, if you look at concepts like Buffalo Wild Wings and a range of others have done a really nice job of breaking the code on off prem dining. I think where you're likely to see this impact most severe is on the mom and pops up and down the street that haven't broken the code on off from dining. It is conceivable that you could see schools shut down parts of the country, which might have an impact, although that's probably a tough one to forecast. And I would say areas in particular that are heavy into the breakfast occasion, if I had to speculate, will be impacted.
[00:22:07] Now, the flip side of that, we're already you know, so I would say that across the industry, you're going to see a couple of points of pull back that's going to be biased against the midscale and then casual with a lesser effect on QSR on the retail side. We're already starting to see a small home where it's picking up a couple of points. And I do expect that you're going to see that likely to continue. I think the case is, you know, we can check in with each other a few months down the road, but I would speculate that they're going to continue to grow through November into December, and then you'll see them begin to gradually work their way down as a result probably of some more stringent lock down state by state. And then hopefully in the spring, you know, people are starting to talk about better therapeutics or maybe even a vaccine. So we're anticipating we're going to be wrestling with this through the remainder of our fiscal year and. Appreciate all the time. A short question, I apologize for that.
[00:23:09] No, no, no, no. That was great. I appreciate the call. If I could just make it one more than a half hour, really just want to understand kind of you know, I think aside from the phantom business update, the thing that stood out the most was obviously the margins were from the quarter. Yeah, I think if I had time, right, about eight and a half billion of costs tied to collect some heart, some saw if I if I you know, if I pair that with your commentary, it sounds like we should expect similar magnitude of headwind over or at least until you start to lap some of that maybe around Q4. But what I want to make sure that I understand on the rest of the business is, you know, how big of an impact were commodities and freight? How much of an offset were able to get there? I I'm trying to conventionalized what you were able to offset, what you couldn't offset. And then it also sounded like some of the margin pressure came from maybe running hot on capacity constraints, given, you know, obviously what you have to do to maintain employee safety and facilities in the demand. So if you could just help us understand that, because that's not necessarily, you know, you know, you know, that's an issue in the near term. But it may be a sign of underlying strength here when you're running that hot. But maybe you can help clear that up for me.
[00:24:31] Yeah, yeah. That's a pretty good assessment. So the you know, as we look at the hard costs, those are those are things that we're doing to run safely and to reward our employees for working during this difficult environment. And that was the five and a half million or 150 basis points of margin degradation. But what we saw in this quarter that we didn't really experience too much of in the fourth quarter was the soft cost we talked about. So we're running the factories much harder to keep up with demand and producing a lot more pounds of product, which you can see we're positioning our inventory a little bit and a little bit stronger position than we've been in the past to try to keep up with this demand. So as we look at it, as we go into Q2, certainly the hard costs will continue. And in this case, we do expect the soft costs to continue. Now, as time progresses, we have some actions in place to try to mitigate some of the soft costs. And over time, as you think about it, over the longer term, as Dave mentioned, we are going to be making some more investments in capacity to set ourselves up to drive margin growth over the longer term.
[00:25:44] Brian and I can even try to put maybe an illustrated with an example, Tom mentioned that if you look at Q4 to Q1, our towns and our factories were up 20 percent. That's obviously a pretty big increase just in pounds, but what that doesn't really highlight is the mix of the pounds. We have parts of the business like Cryovac, which were down 20 percent. And then we had Olive Garden, which we highlighted was up 45 percent. We had a month where pounds were up 60 percent on that business. And it's those sorts of swings within our network that are putting a lot of stress and strain on stuff. We're running, for example, bottled items in lines that weren't necessarily optimized to run those. And we're running with them to keep up with service levels to make sure that we're not disappointing our customers and incurring fees. So they're as you pointed out, this was a bit of an extraordinary set of circumstances that are bringing this together. And we do have an aggressive range of actions in place that we think will help us begin to bend the curve on these items. Maybe even I think we'll see these actions take effect late in Q2 and we'll start to see the greater manifestations of them in Q3, particularly around increasing our own internal capacity and bringing lines online as a cofactors.
[00:27:06] Appreciate all that color, as always. Best of luck on foot. Thank you. Thanks, Brian.
[00:27:13] Your next question comes from Todd Brooks from C.L. King and Associates. Your line is now open.
[00:27:19] Hey, good morning, everybody. Just a few questions for you, looping back to some of that discussion that Brian just ticked off on the on the gross profit side in talking about a couple of line items did call out as far as freight costs and some commodity inflation to get some more color there on the headwinds that they created in the quarter. And I know some commodities. We're seeing very spiky behavior versus trend behavior where you're seeing pressure. Is it more of a spike in nature due to covid-19 or is this trend behavior due to demand? And do you expect this will have a tail for multiple quarters?
[00:28:00] So maybe I'll lead off with a quick answer that can give you more texture. There's a big part of this that is related to Kobe. And in particular, what's happened is that it's being driven by an imbalance or supply and demand shortage on drivers. In all of our analysis, since the outbreak of covid, fucking schools have either slowed down or shut down. And as a result of what you're seeing in the industry is a shortage of drivers. And intuitively speaking, it kind of makes sense if you're a candidate and wants to learn to drive a truck about the last thing you want to do is to climb in a cab of a truck with somebody that you don't know and spend much time on the road. So I would say really what catalyzing it isn't a shortage of assets, but its drivers. And we think that's going to resolve itself on the other side of the pandemic. But, Tom, if you wanted to mention. Yeah, yeah.
[00:28:51] So, you know, the freight costs, we're in the low seven digit numbers, commodity inflation as well. But what I would tell you on those items, you know, the certainly the commodities, the Piñon program is working. We did dial back the trade spending to offset that impacts of really you know, as we look at the quarter, the degradation on the margins is really the cold, hard and soft costs.
[00:29:18] Fair enough. Thank you. And then if we think about as China, the GAAP costs and it looks like if you back out from both quarters, we were up about 30 basis points year over year in the fourth quarter. Thoughts on those other drivers of digital marketing spend incremental like infrastructure costs. If you're looking at this expense line, how does the kind of eleven and a half percent experience in the first quarter compare to what you're expecting over the balance of the year?
[00:29:49] So, yeah, it's when you take out the project, except costs were up nine percent in the quarter in terms of the investment in consumer and digital marketing to retain new customers. We feel very good about the spend. The Nielson metrics or the IRS metrics we get back suggests we're being we're being successful in attracting and retaining new customers to our retail franchise, which will benefit us for the longer term so that investment will continue into the remaining quarters of the year. The I.T. infrastructure costs there. We're investing to kind of shore up our overall infrastructure and making some investments around cybersecurity. We expect some of that to mitigate towards the second half of the year. But overall, from a percentage increase, we do expect the first half of the year to be heavier than the second half in terms of the level of the increases.
[00:30:47] Ok, great. And then finally, if we can move back around to Chick fil A, you talked about the southeastern region rollout that started at the end of October, and you guys are giving your minds around to mentalising the opportunity here. Can you maybe talk to the maybe the institutional capability to handle this magnitude of the potential launch, either experience that was brought from other launches of this magnitude or expectations for what you need to build internally to handle this size opportunity? And can we talk? I know there was some talk about the inventory growth being stronger in the quarter as you're trying to catch up with some of this outsized demand. But is there within the 25 million of growth in inventory, is there an element of that that was building towards this Chick fil A launch in the southeast in the upcoming fiscal quarter? Thank you.
[00:31:45] The answer to the first question on inventory was, yes, part of it was preparing for that launch and part of that was just a seasonal build, because as we go into our second quarter with items like the laying of the bread products, you know, seasonally we see more consumption. So that was a deliberate action on our part to prepare for what's coming up ahead of us. As far as just preparations on infrastructure, maybe I'll start first with the people.
[00:32:10] And I think I would probably characterize our team as consisting of as a lot of veterans from other big CPG firms. I spent a lot of years at Kraft and at times where I manage their U.S. portfolio at Heinz in the grocery business. And Kraft, if you look at the person who leads our retail business and he's a veteran of GE, where he worked on Old Spice or head of sales, was a 25 year Kraft veteran. And we have a lot of CPG veterans throughout our whole supply chain.
[00:32:42] So I do I feel very good about the team that we have in place. The second piece of that is, is the infrastructure. You probably caught in Tom's comments and my comments that we did highlight the fact that we're in the late stages of evaluating a capacity expansion project and that's tied specifically to these items. And it's also tied to growth that we have in flight in Foodservice to support our food service, Chick fil A business. It was a project that we had initiated.
[00:33:16] We had approved by our board, but we've tactically paused as covid broke out just to see where things were going to go, you know, predicated on what we're seeing now as we're in covid and the outlook on the Chappellet items in Buffalo, Wild Wings, where we initiating that project and going forward, that's going to create a bit of a bridge in between where we are today and where we'll go longer term once that other capacity comes online. And what we're planning to do there is the same thing that we've done in other places where we've worked, which is to utilize compactors and to basically get more throughput through existing lines. So we have one new line internally in our own network that's going to be coming up and it'll start production in January. We have some initiatives that'll speed up throughput on existing lines by changing colors and things like that that will also come in line in January. And it'll be a combination of those. So those are all the things that we're doing on the supply side. And we'll tell you also is we've been very deliberate about throttling things on the demand side. If we had just gone out and worked with Chick fil A and made the grand announcement and tried to do this nationally, it would have blown us up.
[00:34:27] It is it's a big item. I would submit that really even having worked at Kraft and Heinz, it could potentially have blown them up. It's just it's a big item right now. And it's not like anybody is sitting around with that sort of capacity. So that's part of the reason why we've elected to do a test in the markets to calibrate how big it is, work with our partners, our customers, so they can figure out how much holding power they need on a shelf and then take those learnings and take those to other customers out in the marketplace and put together a regional rollout, starting with the Southeast into the Midwest and up into the Northeast and then eventually out into the West. So that allows us to match the supply and demand. So really, if you get a sense, we do have a very detailed plan to bring online the capacity to keep up with this. But we're also trying to manage our own destiny by being smart on the demand side.
[00:35:23] Very, very helpful things to have, appreciate it. You're most welcome.
[00:35:29] Your next question comes from the line of Ryan Bell from Consumer Edge Research. Your line is now open.
[00:35:36] Thank you. Morning, everyone said that the. He said that the impact in a full year basis for Banten, given the Starbucks discontinuation of something in the seven figures, and I called something about you saying you're implying that it's reasonable to believe that the Banten business should find a new home from some of the existing interactions you've had with him, food service. Is there anything we should think about in terms of potential timing? Probably, and potentially the magnitude of the replacement of the demand that had been lost due to the Starbucks discontinuation?
[00:36:14] I'm not sure about this, but, yeah, I think with in terms of kind of the outlook on Starbucks, I think it's a little premature for us to come out and give you the specific flow in terms of how things will come back. I think, as they mentioned, there's a good pipeline of initiatives and products. But in you know, as the discontinuation occurs towards the end of the calendar year, we will we will definitely feel it in the near term. The longer term, we feel good about the outlook for that business.
[00:36:47] Yeah, I would say that the impact of that is going to be felt as we're bringing online a lot of growth from our licensed products as we expand that capacity. So, you know, the earlier question is just think about this. It's really due to it's going to be hit in Q2 and Q3 when we're really starting to see the impact of those licenses expand. And that's why as we look out over the horizon, we dimensionless did for you. But I don't think it's going to be a material impact in that period because, as know, the growth that we're bringing online.
[00:37:21] Ok, thank you, that's very helpful. Going to provide a little bit of context about the food service industry with respect to relocation exposure. Obviously that. Is there any way you could talk about how the occasion makes impacting your business overall?
[00:37:43] Yeah, absolutely. I would love to. So if you look at what we've seen is historically breakfast was a big occasion. Obviously, lunch was a big occasion post covid. What we've seen is breakfast is the occasion that's been most severely impacted. And we've seen lunch and really a generation that grew. And if you looked at transactions, transactions have trended down. You can think about, you know, lots of individual stuffing, let's say their favorite coffee shop or wherever to get something to eat on the way to work. Those occasions are down. And what you're seeing are occasions where people are going through a drive through and instead of buying for one, they're buying for four or five. So but breakfast netnet is the occasion that's most severely impacted, really. We don't play very heavily in the breakfast space. If you think about the products that we make, garlic bread, garlic sticks, we make dinner rolls, these schools, Parker house rolls and then the dressings and sauces they tend and salad dressings, they tend to play more heavily as lunch and dinner where we do have exposure and breakfast to areas. One was obviously the bantam business at Starbucks. The other occasion that we have or the other customer is this Chick fil A where we make an item as their business tends to be a stand out, that it has resumed growing again, albeit not at the same rate it was before. But there are positive on a breakfast. So as you're looking at sort of case indication shift, I don't think this is likely to result in a material impact to our business just because of the products that we're supplying at this point in time.
[00:39:23] Thank you. And I think probably one of the last things for me to discuss their positioning in food service relative to some of your key competitors, obviously the buzz on this new retail business has been helping to offset the softer trends in food service. Could you maybe comment on the potential impact your competitors might be experiencing and ultimately what that might mean in terms of capital allocation decision?
[00:39:50] Yeah, so, you know, if you think about it, I'm going to focus most on dressings and sauces and maybe cut it this way. If you look at our business, you know, about two thirds of our business is in national accounts and a much smaller percentage of our business is in what we call branded a business up and down the street, even within the national account business that two that's three quarters, 75 percent, more than 60 percent of that, about two thirds of that is tied to the QSR. So just because of how our business is configured and within QSR, both QSR and Pizza QSR, so you can kind of go through the roster of Chick fil A, a Taco Bell's, you know, Domino's, Papa John's, folks like that. That's really where the center of gravity of our business is and food service. And the reason why we played there and we played there well over time is because of the way we partner R&D to R&D with these folks. So we have one of our you know, even in a combat environment, one of our strategic QSR customers is coming in this Friday to do a top to top and a menu development project with us. And we had another very important one that we worked with, albeit over Microsoft teams last Friday. So a lot of that work is continuing. And I think we're somewhat unique in the industry that we are heavily biased towards national accounts.
[00:41:21] And within that QSR and we sell our data R&D, a number of our other competitors tend to either play in commodity oriented products, you know, let's say Mayo or Mostert, where there isn't customization that might make them a little bit more susceptible to bidding or they're more heavily developed in the branded piece of the business. Right. So that would include K-12 education, higher education, things like health care. It would include smaller restaurants and then, you know, entertainment venues, everything from stadiums to concert venues and things like that. That's a part of our business where we are. You know, honestly, it's been an opportunity area for us that if you've been listening to our calls over the last handful of years, I've called out and said that I think there's room for us to be strategic about which segments we go after. But for right now, it's serving us well because we're biased on the other side. So as far as our positioning, I would definitely take our positioning for a couple of reasons. One, because we're customers, but the second part of it is because of how we partner with those customers. They don't really just us as a commodity and a cost. But we were marketing to marketing R&D, to R&D, and they gave us as a means by which they can create signature items and break through the noise that's out there today and attract customers.
[00:42:52] Great, thanks for the color there. That's it for me.
[00:42:58] Thanks Ryan.
[00:42:59] Thanks for your next question comes in line of Todd Brooks from CL King and Associates. Your line is now open.
[00:43:08] Hey, just one follow up question, if you talk about the work that needs to be done to launch a product of the magnitude of Chick fil A while simultaneously launching a product of the magnitude of the Buffalo Wild Wings, single serve sauces or single bottle sources, can you talk about the kind of front end of your licensed product pipeline? New partners approach a new willingness to engage in those discussions and take them on capability to. Maybe with the proper lead times, add more meaningful products to this roster of licensed products that's about to really expand with Chick fil A in Buffalo Wild Wings.
[00:43:52] So generally, I'll give you an overview of the process and ordinarily. Today, it started with a long standing food service relationship and a partnership. So now we're with a supplier, but oftentimes we are working with them to collaborate on a new menu items. So they already have a lot of confidence in our organization. They have a lot of confidence in our supply chain. Organization is a new introduction that takes place as we introduce people within our retail business and in particular the people that lead the licensees. We got a great team of folks that do this work, so it's a food service and retail joint call where they go and they say conventionalized the opportunity, if this is the food service customers interests and obviously you advance the talks and you begin to talk about particular items and things like that, and we begin the work of analyzing how big is the opportunity that would be no different than any other retail launch that we were doing with any of our own brands. Advances from there to a discussion about the license and those negotiations. You know, once you turn that up, any advance into things like packaging design, one of the things that's very unique about our licensing model is that the products that we sell in retail are the exact same formula as the products that we sell. So take Buffalo Wild Wings in the exact same formula, the salad dressing for Olive Garden, both our branch and the account.
[00:45:21] It's the exact same store and Safeway source of those items that we're going to be offering the exact same item. So there are supply chain efficiencies on the back end. They don't worry about the formula and the stability and stuff like that they're familiar with, and they're in and out of our factories regularly performing their own Kuai checks. So that brings some measure of confidence as well. You know, beyond that, once you get into that work design package that you're ordering, change parts, change parts for the facility, and you're into the conversations with customers. And depending on how exciting the brand is, customers can get really excited and move to the front end of their seat. Obviously, a Chick fil A sauce and a buffalo wild wings sauce in Rose Garden would be those sorts of items. And then we work with our customers to dimensionally. How big is this item? Because a big part of this is figuring out how many bases that they need on the shelf and the holding power. And then we design the end supply chain with our customers to figure out how we make sure that we service this thing and we grow sequentially. So part of this part of it is, is the exact same work that we would do for any of our own internal items, maybe with one unique overlay. Whenever we're changing packaging, we're working with our partner on the food service side.
[00:46:39] We're securing their approval. And then we also work with them on the box because it's just not us announcing the item. Oftentimes they want to get involved in announcing the item and even talking about it in their own restaurant. Case in point, a Chick fil A chick fillet right now is offering viable products and all of their restaurants across the United States. And as we move into the holidays, they're going to be offering to sell those as a three pack. So they're here owning those items in their restaurants and they're going to be helping us sell them in retail. And obviously, we have together a mutual beneficial interest in this. So that's sort of how the process works in general. As you look at other customers, as we continue to evolve, this model of what we're seeing is more and more of our existing food service customers now are coming to us to explore these opportunities. And we're trying to be cautious and gave these making sure that we can service the growth and do well. You know, we're only as good as our last case that we've shipped. We're only as good as every one of these partnerships. So we're firm believers in let's go slow to go fast. Let's be deliberate because we think it's a cool model at a point in time where these licensed properties tend to play well in retail.
[00:48:00] Ok, great, that's very helpful and just a final if I take the process you just described in detail as this, an 18 month kind of start to finish or what's that window? So as we look at Chick fil A in Buffalo, Wild West, being at the tail end of the process, have you created capacity to start working with new partners in the front end of the process?
[00:48:21] You know, I would tell you that in one of the more recent ones, it was 18 months. You can probably even do it faster than that, depending on how big the item is. Right. So, you know, the we started having conversations with them in the middle of 2000 and 90s and those conversations quickly advanced. And then we ran the pilot, which we announced we've been calibrating based on the pilot to make sure that we thought very deliberately through our supply chain strategy. And here we are rolling out the region. So I would say a year would be very fast just to make sure that you can keep up with the item 18 months ago. And I think it's a very reasonable pace.
[00:49:09] OK, great, thanks, very helpful.
[00:49:14] There are no further questions. We will now turn the call back over to Mr. Sandusky for his concluding comments.
[00:49:20] Thank you, Joe, and thank you, everyone, for your participation this morning. We look forward to sharing our second quarter results with you in early February. In the meantime, we wish all of you guys happy holidays that are coming up that you keep safe, your families keep safe. And we look forward to joining you on the next call here soon. Take care.
[00:49:46] Ladies and gentlemen, this concludes today's conference call. Thank you for participating. You may now disconnect.