WESTERVILLE, OHIO — Higher marketing spending, integration costs and increased investments in personnel cut into third-quarter operating income growth at Lancaster Colony Corp. Boosted by recent grain-based acquisitions, sales were sharply higher with gains strongest in the company’s food service business.
In the third quarter ended March 31, Lancaster Colony net income was $30,604,000, equal to $1.11 per share on the common stock, up 11% from $27,621,000, or $1.01 per share, in the third quarter last year. Net sales were $317,882,000, up 7% from $296,174,000.
Investors were disappointed with the company’s financial results. In trading April 25 after the quarterly results were issued, Lancaster Colony shares traded as low as $141.42, down $12.14, or 8%, from the April 24 close of $153.56.
A lower effective tax rate in the fiscal 2019 quarter accounted for most of the 11% earnings gain. Income before taxes was up 1.6%.
Half of the 7% sales gain in the third quarter was attributed to the acquisitions of Bantam Bagels and Omni Baking Co., transactions completed in the second quarter of fiscal 2019. Retail sales during the quarter were flat while Foodservice sales rose 7%, excluding the impact of Bantam and Omni.
In Retail, sales of frozen garlic bread grew during the quarter, but flatbread sales gave ground. The Foodservice strength was attributed to stepped-up business with national chain restaurant accounts and strong demand for the company’s frozen pasta products.
Over the course of fiscal 2019, Foodservice has eclipsed Retail in terms of sales contribution (Foodservice accounted for 52% of third-quarter sales) but remains a smaller contributor of operating income (42%, excluding corporate expenses).
“We were pleased to report record net sales for the quarter led by our Foodservice segment,” said David A. Ciesinski, chief executive officer of Lancaster Colony. “Our Lean Six Sigma program completed another successful quarter with cost savings that helped to offset the higher costs we had anticipated for the integration of the Omni Baking operations and incremental expenditures for product placement and brand marketing in support of increased retail distribution for Bantam Bagels. The higher amount of S.G.&A. (selling, general and administrative) expenses also reflects our continued investment in strategic initiatives and personnel to drive the long-term growth of our business. Looking ahead to our fiscal fourth quarter, we expect packaging and certain commodity costs to be modestly inflationary. Our supply chain team will continue in their efforts to offset those costs, including the pursuit of ongoing cost-out initiatives in strategic procurement and savings opportunities in distribution and warehousing. In addition to the contributions from the Bantam Bagels and Omni Baking acquisitions, our fiscal fourth-quarter sales will also benefit from the later Easter holiday.”
During an April 25 call with investment analysts, Mr. Ciesinski expressed enthusiasm about Lancaster Colony’s most recent acquisitions but cautioned that the new businesses could weigh on results for the balance of the fiscal year.
“We are extremely bullish on both Bantam Bagels and the Omni Baking acquisitions,” he said. “Case in point, in the 13 weeks ended March 31 Bantam Bagels finished No. 1 in sales in their retail category of frozen bagels. Having said that, as we outlined during the Q2 call, we expect both Bantam and Omni to remain a modest drag on earnings for another few quarters as we continue to strategically invest in these businesses for our future.”
In the nine months ended March 31, Lancaster Colony net income was $116,539,000, or $4.28 per share, up 14% from $102,927,000, or $3.75. Net sales were $984,117,000, up 8% from $914,755,000.
Year-to-date net income for both years feature significant unusual items. For the current fiscal year, the company recorded a $7.4 million gain associated with an acquisition-related contingent consideration for Angelic Bakehouse, Inc.
Lancaster Colony acquired Angelic, a baker of sprouted grain-based foods based near Milwaukee, in November 2016. In addition to $35,847,000 in cash, Lancaster Colony committed to as much as $13,872,000 in earn out payments tied to performance-based conditions. In the company’s fiscal 2018 annual report, Lancaster Colony said the earn out will be based on a “predetermined multiple of the defined adjusted EBITDA of Angelic for fiscal 2021.” The gain reflected a downward adjustment in the prospective payment for Angelic.
The one-time benefit in the year-ago period was a $9.3 million re-measurement of the company’s long-term tax liability, associated with the Tax Cuts and Jobs Act of 2017.