Lancaster Colony Q2 2025 Earnings Report

Lancaster Colony EPS Results

• Actual EPS: $2.22
• Consensus EPS: $1.94
• Beat/Miss: Beat by +$0.28
• One Year Ago EPS: $1.87

Lancaster Colony Revenue Results

• Actual Revenue: $509.30 million
• Expected Revenue: $495.43 million
• Beat/Miss: Beat by +$13.87 million
• YoY Revenue Growth: +4.80%

Lancaster Colony Announcement Details

• Quarter: Q2 2025
• Date: 2/4/2025
• Time: Before Market Opens
• Conference Call Date: Tuesday, February 4, 2025
• Conference Call Time: 10:00AM ET

Lancaster Colony (NASDAQ:LANC) is a leading specialty food manufacturer known for its portfolio of branded and private‐label products. Headquartered in Columbus, Ohio, the company operates across multiple segments, including retail, foodservice and industrial channels. Lancaster Colony’s retail lineup features well‐recognized names such as Marzetti® salad dressings and dips, Newman’s Own® sauces, Sister Schubert’s® rolls and New York Style® frozen bread products. Its private‐label and foodservice operations supply a broad range of customers, from national restaurant chains to regional grocery chains, with customized dressings, sauces, baked goods and dessert mixes.

Rooted in a family‐oriented culture, Lancaster Colony traces its origins to the mid‐20th century in Lancaster, Pennsylvania. The company’s expansion into food production began with the acquisition of Marzetti in 1964, and over subsequent decades it supplemented its core dressing offerings with baked breads, dessert toppings, vinaigrettes and dips. By combining internal product development with strategic acquisitions, Lancaster Colony has built a diversified product portfolio that addresses evolving consumer tastes and lifestyle trends.

Operations span multiple manufacturing facilities across the United States, each dedicated to specialized production processes—from cold‐fill dressings and sauces to yeast‐based breads and frozen items. Lancaster Colony distributes its products through an extensive network of regional and national distributors, as well as direct shipments to retailers, foodservice operators and institutional customers. In addition to its strong domestic presence, the company exports select products to Canada and other international markets, adapting recipes and packaging to meet local preferences.

Under the leadership of President and Chief Executive Officer Marc J. Bomgaars, Lancaster Colony emphasizes quality, innovation and operational efficiency. The company invests in state‐of‐the‐art manufacturing technologies, rigorous food safety protocols and continuous product development to enhance its competitive position. Guided by a commitment to sustainable practices and community engagement, Lancaster Colony continues to pursue balanced growth while maintaining the family‐inspired values that have shaped its history.

Lancaster Colony Q2 2025 Earnings Call Transcript

Key Takeaways

• Record Q2 financials with consolidated net sales up 4.8% to $509.3 million, gross profit rising 9.3% and operating income increasing 15.1% year-over-year.
• Retail net sales grew 6.3% (8.4% ex-exited lines) driven by volume gains from licensing and own brands, notably strong demand for Texas Roadhouse dinner rolls and market share gains across key categories.
• Diluted EPS fell 4.8% to $1.78, as a one-time $14 million pension settlement charge (–$0.39/share) and $1.6 million of acquisition integration costs (–$0.05/share) offset operating income growth.
• Pending acquisition of an Atlanta sauce and dressing facility aims to boost capacity and efficiency with expected long-term margin benefits despite near-term integration overheads.
• Balance sheet strength with no debt, $203.1 million cash on hand and a 6% dividend increase—marking 62 consecutive years of annual dividend growth.

Presentation

[Operator]

Good morning. My name is Carmen, and I will be your conference call facilitator today. At this time, I would like to welcome everyone to the Lancaster Colony Corporation Fiscal Year 2025 Second Quarter Conference Call. Conducting today's call will be Dave Sosinski, President and CEO and Tom Pigott, CFO. All lines have been placed on mute to prevent any background noise.

[Operator]

After the speakers have completed their prepared remarks, there will be a question and answer period. Thank you. And now to begin the conference call, here is Del Gonapczyk, Vice President of Corporate Finance and Investor Relations for Lancaster Colony Corporation.

[Dale Ganobsik, Vice President of Corporate Finance, Investor Relations & Treasurer at Lancaster Colony]

Good morning, everyone, and thank you for joining us today for Lancaster Colony's fiscal year 2025 Q2 conference call. Our discussion this morning may include forward looking statements, which are subject to the Safe Harbor provisions of the Private Securities Litigation Reform Act of 1995. These statements are subject to a number of risks and uncertainties that could cause actual results to differ materially, and the company undertakes no obligation to update these statements based upon subsequent events. A detailed discussion of these risks and uncertainties is contained in the company's filings with the SEC. Also note that the audio replay of this call will be archived and available at our company's website lancastercolony.com later this afternoon.

[Dale Ganobsik, Vice President of Corporate Finance, Investor Relations & Treasurer at Lancaster Colony]

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.

[Dale Ganobsik, Vice President of Corporate Finance, Investor Relations & Treasurer at Lancaster Colony]

I'll now turn the call over to Lancaster Colony's President and CEO, Dave Sysinski. Dave?

[David Ciesinski, President and Chief Executive Officer at Lancaster Colony]

Thanks, Dale, and good morning, everyone. It's a pleasure to be here with you today as we review our Q2 results for fiscal year 2025. In our fiscal Q2, which ended December 31, we reported record highs for net sales, gross profit and operating income. Consolidated net sales increased 4.8 percent to $509,000,000 gross profit improved 9.3% to $133,000,000 and operating income grew 15.1 percent to $76,000,000 In our Retail segment, net sales increased 6.3% driven by volume growth from both our licensing program and our own brands. In licensing, we saw very strong consumer demand for the recently introduced Texas Roadhouse dinner rolls along with solid contributions from Buffalo Wild Wings sauces, Subway sauces and Olive Garden dressings.

[David Ciesinski, President and Chief Executive Officer at Lancaster Colony]

I'm also pleased to share that our Marzetti branded caramel dips and refrigerated dressings also performed well. Excluding the perimeter of the store bakery lines we exited last March, retail segment net sales increased 8.4% and retail segment volume measured in pound shift grew 7.4%. SIRCONA scanner data for the quarter ending December 31st showed strong performance for several of our licensed items and core brands. In the frozen dinner roll category, our own sister Schubert's brand and our licensed Texas Roadhouse brand combined to grow 15.9% resulting in a market share increase of 4 40 basis points to a category leading 60.8%. In the produce dressing category, our Marzetti brand grew sales 1.4% and increased market share about 30 basis points.

[David Ciesinski, President and Chief Executive Officer at Lancaster Colony]

Sales of our Marzetti brand produce dips advanced 2% with a market share gain of 110 basis points. In the frozen garlic bread category, our New York bakery brand grew sales 2.8% adding 40 basis points of market share resulting in a category leading share of 41.7%. In the shelf stable sauces and condiments category, Buffalo Wild Wing sauces were up over 11% and Chick Fil A sauce sales grew 1.1%. In the shelf stable dressings category, sales of Olive Garden dressings were up 3.3% further improving their market share in the shelf stable dressing category. It's worth noting that it's been more than a decade now since we formed our license agreement with Darden and Olive Garden Restaurants to sell their eponymous salad dressing.

[David Ciesinski, President and Chief Executive Officer at Lancaster Colony]

Since those early days we've expanded this amazing brand from 1 SKU in the club channel to a growing multi SKU, multi channel brand platform with over $160,000,000 of scanner sales. I believe the long term performance of this brand and others such as Chick Fil A, Buffalo Wild Wings and most recently Texas Roadhouse is a testament to the strength, the potential and the enduring consumer relevance of our licensing program. In the Foodservice segment, net sales grew 3% led by higher demand from several of our core national chain restaurant accounts and increased sales for our branded Foodservice products. Foodservice segment volume measured in pounds shipped advanced 1.5%. Finally, we are pleased to report record 2nd quarter gross profit of $133,000,000 When compared to last year's Q2, gross profit margin improved 110 basis points to 26.1%.

[David Ciesinski, President and Chief Executive Officer at Lancaster Colony]

The $11,000,000 increase in gross profit was driven by the higher sales volumes, more favorable sales mix, the positive impacts of our ongoing cost savings initiatives and some modest cost deflation. Our focus on supply chain productivity, value engineering and revenue management all remain core elements to further improve our margins and financial performance. I'll now turn the call over to Tom Pigott, our CFO for his commentary on our Q2 results. Tom?

[Thomas K. Pigott, VP, Assistant Secretary & CFO at Lancaster Colony]

Thanks, Dave.

[Thomas K. Pigott, VP, Assistant Secretary & CFO at Lancaster Colony]

Overall, the results for the quarter exceeded our expectations. The company delivered strong top and bottom line results. 2nd quarter consolidated net sales increased by 4.8% to $509,300,000 Breaking down the revenue performance, higher volume in product mix contributed 580 basis points of core growth. This growth was partially offset by the exit of our perimeter of the store bakery product lines, which reduced revenue by 110 basis points. A slightly higher level of net pricing makes up the balance.

[Thomas K. Pigott, VP, Assistant Secretary & CFO at Lancaster Colony]

Consolidated gross profit increased by $11,300,000 or 9.3 percent versus the prior year quarter to $132,800,000 and gross margin expanded by 110 basis points. The gross profit growth was driven by higher volumes and favorable sales mix, our cost savings initiatives and some modest cost deflation. Selling, general and administrative expenses increased $1,400,000 or 2.5%. The increase reflects $1,600,000 for integration costs for the planned acquisition of the Atlanta based manufacturing facility we recently announced. These costs are primarily comprised of IT and legal expenses.

[Thomas K. Pigott, VP, Assistant Secretary & CFO at Lancaster Colony]

Consolidated operating income increased $9,900,000 or 15.1 percent driven by the gross profit improvement partially offset by the integration costs I mentioned. Excluding the acquisition integration costs, operating income grew by $11,500,000 or 17.5%. During the quarter, the company chose to transfer its remaining legacy pension plan assets and liabilities to a 3rd party. This transfer effectively terminated the company's pension plans. It's important to note that these plans were frozen and relate to plant operations that were closed many years ago. The plan's participants will either continue to receive their benefits from the 3rd party insurance company or elected to take a lump sum benefit payment in December of 2024. As a result of the termination, the company recorded a $14,000,000 non cash pension settlement charge to recognize all the unamortized costs associated with the plans.

[Thomas K. Pigott, VP, Assistant Secretary & CFO at Lancaster Colony]

Our tax rate for the quarter was 22.5% versus 23.4% in the prior year quarter. We estimate our tax rate for the remainder of fiscal 2025 to be 23%. 2nd quarter diluted earnings per share decreased $0.09 or 4.8 percent to $1.78 as the growth in operating income was offset by the pension settlement charge. This charge reduced EPS by $0.39 per share. In addition, the acquisition integration costs reduced EPS by $0.05 per share.

[Thomas K. Pigott, VP, Assistant Secretary & CFO at Lancaster Colony]

With regard to capital expenditures, our payments for property additions totaled $28,700,000 for the fiscal year to date period. For fiscal 2025, we are forecasting total capital expenditures of $70,000,000 to $80,000,000 We continue to invest in both cost savings projects and other manufacturing improvements as well as the planned acquisition of the Atlanta based manufacturing facility. In addition to investing in our business, we also returned funds to shareholders. Our quarterly cash dividend of $0.95 per share paid on December 31 represented a 6% increase from the prior year's amount. Our enduring streak of annual dividend increases stands at 62 years.

[Thomas K. Pigott, VP, Assistant Secretary & CFO at Lancaster Colony]

Our financial position remains strong with a debt free balance sheet and $203,100,000 in cash. We expect to deploy $75,000,000 towards the purchase of the Atlanta manufacturing facility. We also will spend an additional $10,000,000 in capital expenditures on the facility which is included in the fiscal 2025 forecast I provided. To wrap up my commentary, our 2nd quarter results reflected strong top line growth, improved gross margin performance and double digit operating income growth. In addition, we're continuing to make investments to support further growth in cost savings.

[Thomas K. Pigott, VP, Assistant Secretary & CFO at Lancaster Colony]

I will now turn it back over to Dave for his closing remarks. Thank you.

[David Ciesinski, President and Chief Executive Officer at Lancaster Colony]

Thanks, Tom. As we look ahead, Lancaster Colony will continue to leverage the combined strength of our team, our operating strategy and our balance sheet in support of the 3 simple pillars of our growth plan to 1, accelerate core business growth 2, simplify our supply chain to reduce our cost and grow our margins and 3, to expand our core with focused M and A and strategic licensing. Looking ahead to our fiscal Q3 and the remainder of the fiscal year, we anticipate retail segment sales will continue to benefit from our expanded licensing program and growth from investments in innovation for our own brands.

[David Ciesinski, President and Chief Executive Officer at Lancaster Colony]

We are very excited to share the beginning this spring we'll be expanding distribution for Chick Fil A sauces into the strategic club channel. On the foodservice side of the business, we anticipate continued growth from select customers in our mix of national chain accounts along with ongoing contributions from our branded foodservice products. We anticipate external factors including U. S. Economic performance and consumer behavior will continue to impact demand for the foodservice industry overall.

[David Ciesinski, President and Chief Executive Officer at Lancaster Colony]

With respect to input cost in aggregate, we do not anticipate significant impact from commodity cost inflation or deflation in the remainder of the year. Before I conclude, I would like to comment briefly on the pending acquisition of the Atlanta based sauce and dressing facility that we announced last November. We remain on track to complete this transaction during this current quarter which ends March 31. The facility is an important strategic addition to our manufacturing network that will benefit our core sauce and dressing operations through improved operational efficiency, incremental capacity and closer proximity to certain core customers, all the while enhancing our manufacturing network from a business continuity standpoint. We evaluated several strategic scenarios to support the continued growth of our sauce and dressing operations and identified this opportunity as the most practical and cost effective solution for our long term business needs.

[David Ciesinski, President and Chief Executive Officer at Lancaster Colony]

We very much look forward to welcoming the plant's employees to our Marzetti team. In closing, I'd like to thank the entire Lancaster Colony team for all their hard work this past quarter and their ongoing commitment to our business. This concludes our prepared remarks for today and we'd be happy to answer any questions you might have. Operator?

[Operator]

Thank you. And it comes from the line of Jim Salazar with Stephens. Please proceed.

[Jim Salera, Research Analyst at Stephens Inc]

Hey, good morning, Dave. Good morning, Tom. Thanks for taking our questions.

[David Ciesinski, President and Chief Executive Officer at Lancaster Colony]

Hey, Jim. Good morning.

[Thomas K. Pigott, VP, Assistant Secretary & CFO at Lancaster Colony]

Good morning, Jim.

[Jim Salera, Research Analyst at Stephens Inc]

I wanted to start off with the performance of retail because really strong results certainly ahead of our expectations. And you mentioned some of the drivers there on the license side of the business. You just give us a little more detail as to which of the license products you called out had the biggest impact? And then if I could maybe tag on a part 2 to that question, with the expansion of Chick Fil A into club and then no more laps from the perimeter exit, is it fair to say that retail sales should kind of continue to accelerate as the year moves on?

[David Ciesinski, President and Chief Executive Officer at Lancaster Colony]

Yes. Well, give us a chance and we'll hit both of those questions in sequence. First, what was it that impacted the current quarter then what our outlook is. But as pertains to retail and licensing in particular, what I would tell you, it was a combination of different brands. First, it's the introduction of the Texas Roadhouse rolls, which are available today only in Walmart.

[David Ciesinski, President and Chief Executive Officer at Lancaster Colony]

And if you look at scanner sales, that accounted for an important component of that growth. The second is Buffalo Wild Wing sauces. This is an item that's been around now about 6 years. It was up about 12% in terms of pounds. So it had a really good period as well.

[David Ciesinski, President and Chief Executive Officer at Lancaster Colony]

And then both Olive Garden and Chick Fil A sauces continued to grow as well. But I think that's sort of the ranking and sequence of how these things contributed to the period. Then what I would also shift focus to is even our own core brands continue to perform relatively well in terms of pound growth. Our New York bakery in terms of consumption pound sales were up 3.8%. Our Marzetti produce dressing was up 4%.

[David Ciesinski, President and Chief Executive Officer at Lancaster Colony]

We had a really good season for Caramel Dip and Sister Schubert continued to grow as well. And what you don't see in Sister Schubert is we made the decision to exit a channel that created a bit of a headwind on that because the margins were low. But we are able to overcome that, still deliver some incremental growth and improve our margin profile. So I think net net, it was balanced between licensing and our own brands with licensing growing a little bit more. Now your second question is an important one.

[David Ciesinski, President and Chief Executive Officer at Lancaster Colony]

How do we think about the outlook? We're bullish about our new product pipeline. We're continuing to be optimistic about how our core brands are holding up. So we're looking at probably mid to low single digit growth just depending on how things play out with consumers. But certainly, we're pleased with how things are going.

[Jim Salera, Research Analyst at Stephens Inc]

Okay, great. And then maybe if I could just sneak in a question on foodservice.

[David Ciesinski, President and Chief Executive Officer at Lancaster Colony]

And Jim, by the way, that's all pound driven, just so you know. There's no assumption in pricing on that.

[Jim Salera, Research Analyst at Stephens Inc]

Okay, great. So that's helpful. On Foodservice, you mentioned kind of the core national accounts being the drivers there. I know in QSR in particular, there's been a lot of focus on kind of, let's just say, value centric messaging, price points versus kind of LTOs and flavor extensions. Do you just have any sense in the conversations you're having with your foodservice partners if we're going to see kind of a return to the more experiential focused messaging as the consumer gets a little bit better as the year progresses?

[David Ciesinski, President and Chief Executive Officer at Lancaster Colony]

In the conversations that we're having with them, they can continue to be somewhat circumspect. I don't think they're expecting a miracle recovery. I think generally the consensus is that the summer was probably going to be the low point and then we're going to see modest sequential improvement as we push forward. If you look at our most recent results, the business was up 3 points. It was 1.5 of volume.

[David Ciesinski, President and Chief Executive Officer at Lancaster Colony]

It was 1.5 of pricing that gets you to that 3%. If you look at our specific mix of customers, obviously, Chick Fil A is continuing to contribute to our pound growth because of new store openings and their execution. But we have a range of other very important customers that are winning in this environment, one of which is Domino's, which is playing in value in Pizza QSR and we're winning effectively with them. As far as their positioning, their menus going forward, if pass is prologue Jim, what we typically see is that they focus on value until they real and it brings more traffic back into the restaurant, but it really doesn't help them with margins and it doesn't help with their franchisees profitability overall. So I think what I would expect to see is certainly not a more intense focus on value.

[David Ciesinski, President and Chief Executive Officer at Lancaster Colony]

You may begin to see that start to wean down a little bit more and just more focus on delivering great food.

[Jim Salera, Research Analyst at Stephens Inc]

Awesome. I appreciate all the detail guys. I'll hop back in the queue.

[David Ciesinski, President and Chief Executive Officer at Lancaster Colony]

Thanks Jim.

[Thomas K. Pigott, VP, Assistant Secretary & CFO at Lancaster Colony]

Thanks Jim.

[Operator]

Thank you. Our next question comes from the line of Alton Stump with Loop Capital. Please proceed.

[Alton Stump, MD - Equity Research at Loop Capital Markets LLC]

Great. Thank you. Good morning and I appreciate you taking my questions. David and Tom, I guess, I want to ask about Texas Roadhouse. Obviously, of course, the first introduction was of the sauces and then us came out shortly thereafter, mid last year with the frozen dinner rolls.

[Alton Stump, MD - Equity Research at Loop Capital Markets LLC]

It sounds like the dinner rolls for them had become an even bigger business than your sauces. 1, is that accurate? And 2, how much of a surprise has it been given the fact that once again that that was a secondary offering that came after you first introduced our sauces last year?

[David Ciesinski, President and Chief Executive Officer at Lancaster Colony]

Yes. It's a great question, Alton. What I would tell you and I know you're very familiar with the restaurant space and you visited Texas Roadhouse and for anybody like you that has, you know those roles are iconic. That's one of the reasons that people visit those restaurants. And one of the teams that we're pleased about and our partners at Texas Roadhouse are pleased about is that we've done a really nice job of really mirroring the taste of that roll that's available in the restaurant.

[David Ciesinski, President and Chief Executive Officer at Lancaster Colony]

So we've got it so far into Walmart, 4,000 of their stores and it's performing exceptionally well. If you look at the scanner data sales when we can keep it in stock, it's running somewhere between $1,500,000 per week. So it's really performing well. But I think it goes back to the lesson that we've learned with Olive Garden, with Buffalo Wild Wings and with Chick Fil A. When you can take an iconic product from a strong restaurant property with a loyal following, there's just a lot of consumer upside for those products in retail.

[David Ciesinski, President and Chief Executive Officer at Lancaster Colony]

And I think we're going to continue to see that story unfold. Our plans on this product are to as we bring online more capacity, which we're having to do, to begin to roll it out into all of retail, first in 4 states and then early into our next fiscal year to actually launch it across all channels in all stores, not club, but all channels in retail and mass. And then we'll revisit club at some point in the future. But this is it's been an exciting development. It's exceeded our expectation enough so that we've had to actually take one of our bakery plants and add not just 1 to 2 more shifts to keep up with the demand.

[Alton Stump, MD - Equity Research at Loop Capital Markets LLC]

Got it. Great. Well, that's very helpful. Couple. Thanks for that, Dave.

[Alton Stump, MD - Equity Research at Loop Capital Markets LLC]

And then I guess one question, I'll hop back in queue. On the foodservice side, kind of back to the last question about restaurant space. Clearly, everybody's trying to, if they can, can, to get traffic back. There's been a lot of pricing, of course, across the Russian industry last couple of years that have primarily driven their comp growth. That's now all but gone away.

[Alton Stump, MD - Equity Research at Loop Capital Markets LLC]

So given that environment where you're going to have a lot of focus on new products, collaborations, I would think that would fit well into what you guys do with your partners, whether it is developing new sauces and or similar items, how much of a benefit do you think that could be to you as you kind of look at the course of calendar 2025 if we do indeed see an increased focus from your major QSR customers on picking new products to drive traffic?

[David Ciesinski, President and Chief Executive Officer at Lancaster Colony]

Yes. So our outlook for the industry is that it's probably and this is traffic, not sales, but traffic alone is that it's likely to continue down, let's say, 1 or 2 points. Our view on our business in foodservice is that will be flattish. So we believe that based on this composition, the customers will be able to overcome those trends. To the degree to which the consumer gets stronger and traffic improves on restaurants, I'm fully confident that we'll be able to enjoy that and we'll be able to give you guys an indication that sales would trend back into the mid single low to mid single digit range.

[David Ciesinski, President and Chief Executive Officer at Lancaster Colony]

But for now, predicated on the macroeconomic outlook, I think we're holding fast at sort of flattish on this business, but poised to recover when the industry recovers.

[Alton Stump, MD - Equity Research at Loop Capital Markets LLC]

Got it. Okay. Thanks so much, Dave. I appreciate it. I'll hop back in the queue.

[David Ciesinski, President and Chief Executive Officer at Lancaster Colony]

Thank you.

[Operator]

Thank you. Our next question comes from the line of Brian Holland with D. A. Davidson. Please proceed.

[Brian Holland, MD - Research Analyst at D.A. Davidson]

Thanks. Good morning and congratulations on the strong results. If I could just maybe just quickly on the gross margin and specifically the input cost outlook. Obviously, I think you called out modest deflation in the quarter, if I have that right. Just extrapolating that out forward, because I think that's obviously an improvement maybe from where we've been.

[Brian Holland, MD - Research Analyst at D.A. Davidson]

So just as we tease that out over the second half of the year, what's your view on how that dynamic shakes out?

[Thomas K. Pigott, VP, Assistant Secretary & CFO at Lancaster Colony]

Yes. Hi, Brian. This is Tom. Thank you. So you're right.

[Thomas K. Pigott, VP, Assistant Secretary & CFO at Lancaster Colony]

We did have a little bit of deflation. That was a bit of a tailwind for this quarter's results. As we look at the second half, we're projecting more flattish on commodity costs. We don't expect to have that tailwind that we experienced this quarter. And really what's behind that is and I'm sure you've read about it, we've seen a lot of inflation in terms of eggs prices and that's an key input cost for us.

[Thomas K. Pigott, VP, Assistant Secretary & CFO at Lancaster Colony]

But we're getting the benefit from lower soybean oil and grain costs. So when you net it all together, we're looking at a flat outlook for the second half.

[Brian Holland, MD - Research Analyst at D.A. Davidson]

Thank you. That's helpful. And then maybe and forgive me to the extent that this may have been addressed and I missed it. With the new facility in Atlanta, maybe just sort of discern between this opens up more revenue capacity implying that demand has increased, there's more innovation opportunities, etcetera, etcetera versus strategic optionality kind of looking at your manufacturing network. So the first one is probably to some extent self explanatory, but on the second one, do we think about margins the ability of this plant to expand your margins over time, picking up some more cost synergies through optimization, etcetera.

[Brian Holland, MD - Research Analyst at D.A. Davidson]

And maybe just kind of I appreciate you probably wouldn't want to quantify that, but maybe just timeline for when we might start to see those benefits flow through?

[David Ciesinski, President and Chief Executive Officer at Lancaster Colony]

Sure. So, why don't I I'll address the first part of the question and then let Tom expand on margins. So, the first part, as we said in our commentary upfront, we expect to close this quarter. Really what this plan is going to afford us is several things. It's going to give us a capacity to make products that are both cooked and non cooked.

[David Ciesinski, President and Chief Executive Officer at Lancaster Colony]

And just to give you a background, things like barbecue sauce and honey mustard require cooking whereas things like a ranch dressing for example don't you're just mixing ingredients and then packaging on those. So this plant importantly provides us both cooked and non cooked which gives us a lot of options to play both in sauces and in dressings. And then as far as their particular packaging abilities, they have a high speed packaging line, they have dip capacity down there as well. And then they have a range of different foodservice manufacturing platforms that we're going to be able to use. Over time, what you can expect to see us do is to begin to put in some of our system specific product packaging platforms.

[David Ciesinski, President and Chief Executive Officer at Lancaster Colony]

For example, Hatia, which we use for Chick Fil A, they're not a supplier today. You can expect in due course for us to put that down there and it will provide a benefit for both us and for Chick Fil A by way of where it's located. So I would say the single biggest thing that it gives us, Brian, is a great mix of cooked and non cooked, a range of different packaging platforms and it's in a highly cost effective location for us in terms of proximity to customers. Now what I'll let Tom talk to you is then how does this sort of feather into our outlook on things like margins and things like that in due course. I'll turn it over to you Tom.

[Thomas K. Pigott, VP, Assistant Secretary & CFO at Lancaster Colony]

Great. Thanks, Dave. So, from a top line basis, as we look at our long term growth algorithm, we've said we're going to continue to grow in the low mid single digits. This facility allows us to continue to grow without additional greenfield option. So it supports our growth over the next 5 years as we've modeled it out, which is a very efficient use of capital for us.

[Thomas K. Pigott, VP, Assistant Secretary & CFO at Lancaster Colony]

So then turning now into the margins, what I would caution is that the Q1 or 2 as we get into that facility and start to ramp it up, we do expect a modest headwind as we have some unabsorbed overheads that we'll be incurring. But over time, as you get into fiscal 'twenty six, we do expect to see some nice margin accretion from this business. As you mentioned, we're probably not ready to quantify the specifics on that, but it's projected to provide nice growth and margin accretion for us. The one thing I want to make sure we highlight for you and we mentioned this in the initial release in the 8 ks is that for a period of time we're going to be manufacturing costs manufacturing products for the seller of the facility. So we'll be picking up some of their business and we agreed to do that to facilitate the transaction.

[Thomas K. Pigott, VP, Assistant Secretary & CFO at Lancaster Colony]

We'll be splitting out that revenue separately. We don't expect it to have a significant profit impact, but we'll want you to take that out because we don't we view it as non core and short term in nature. So, overall, we feel very good about this acquisition and we expect it to have a nice return for our shareholders. And as we get further in, we'll share more with you.

[Brian Holland, MD - Research Analyst at D.A. Davidson]

Thanks, Tom and Dave. That's very helpful. Maybe just last question, just because I probably had left some things incomplete in that first question with respect to input costs, good color there thinking about the balance of the year specific to input costs. But if we broaden that out and talk about gross margin, I would presume that throughput benefits on the volume was the primary driver of the gross margin expansion in 2Q. And if we expect volumes to sustain, then margins should be higher over the second half of the year.

[Brian Holland, MD - Research Analyst at D.A. Davidson]

I just want to clarify and separate that point from the fact that input costs would be closer to flat. Tom, if you could help there.

[Thomas K. Pigott, VP, Assistant Secretary & CFO at Lancaster Colony]

Yes. I think, as we look at the second half, we do expect our cost savings initiatives to contribute further to our margin growth, while we won't have the commodity tailwind. So as we look at it, we expect to be able to grow our margins in the second half at similar levels to the first half, maybe in the 50 to 100 basis point range as we get greater cost savings initiatives. And the only headwind that could be an impact to that is the integration of the Atlanta manufacturing facility, the ramp up and how that all goes. But certainly, we'll give you those impacts as they occur.

[Brian Holland, MD - Research Analyst at D.A. Davidson]

Fantastic. Leave it there. Thanks.

[Operator]

Thank you. Our next question is from Scott Marks with Jefferies. Please proceed.

[Scott Marks, Equity Research Analyst at Jefferies]

Hey, good morning guys. Thanks so much for taking the question.

[David Ciesinski, President and Chief Executive Officer at Lancaster Colony]

Yes.

[Scott Marks, Equity Research Analyst at Jefferies]

Just want to follow-up on some of the conversation there on the gross margin side. If my numbers are correct, the gross margin that you guys put up in Q2 was the best in 4 years that it's been, obviously going through the cost inflation cycle and everything else that's happened over the past few years. I know you spoke to some of the drivers why that's the case, but wondering if you could maybe give a little bit more detail about kind of the journey that you've been on and how you've got to this 26% level and kind of how you think you can sustain it moving forward?

[David Ciesinski, President and Chief Executive Officer at Lancaster Colony]

Yes. So maybe I'll start with a little bit of context. One of the features of COVID for our business in particular is that we had 20% inflation 2 years in a row. And as you might imagine, Scott, that math is our costs go up to 20% and we pass it on dollar for dollar into our pricing, I. E.

[David Ciesinski, President and Chief Executive Officer at Lancaster Colony]

Our sales. But that in and of itself drove several 100 basis points of margin compression in the early part of COVID. And then what you've seen in the period thereafter is you've seen us we've been able to hold on to pricing as we've seen a little bit of deflation and Tom has talked about that. But the other thing that's happened is a lot of the noise in the business is behind us. Our ERP implementation is behind us.

[David Ciesinski, President and Chief Executive Officer at Lancaster Colony]

The construction of the Horse Cave facility is behind us. And we have a team now that's just really focused on good end to end execution and productivity. And we're getting back to more of the ordinary course. So as Tom pointed out, as we think about the outlook going forward, we don't expect some big tailwind from commodities. If get it great, then you can expect to see that reflected in margin.

[David Ciesinski, President and Chief Executive Officer at Lancaster Colony]

But our view is we're going to be able to build on the trends that you see sequentially because of just going back to our roots of driving productivity. Manufacturing and conversion productivity at the front and the back of our lines, procurement productivity and supply chain and logistics excuse me, transportation and logistics productivity. So we have a big catalog of initiatives that the team is running. They're doing a very nice job and I have every confidence that you'll see that continue to improve. So we don't think just to put a fine point on it that that was a one off.

[David Ciesinski, President and Chief Executive Officer at Lancaster Colony]

Clearly, it was a high watermark, but we expect to continue to build on every one of the quarters going forward.

[Scott Marks, Equity Research Analyst at Jefferies]

Appreciate that. Thank you. And next question for me, I know you called out some of the drivers of top line retail volume strength, including some of the licensed brands. You called out some of the Marzetti products, some of the New York brand products. Obviously, licensed products you're introducing, the subway Texas Roadhouse items more recently.

[Scott Marks, Equity Research Analyst at Jefferies]

But wondering if you can talk about why the improvement in some of the Lancaster owned brands, if you will. So you spoke to some of the Marzetti dips and the New York brand, products. Just wondering if you could speak to some of those trends and what you think the main drivers are?

[David Ciesinski, President and Chief Executive Officer at Lancaster Colony]

Well, I think we'll hit them each one at a time. In the case of our New York Texas toast, our garlic bread proposition is doing well, but we also launched a value side of our breadsticks that continue to crush it in the marketplace. So good core performance plus breadsticks is what's providing the tailwind on New York. And then I think our gluten free item is small, but it's providing incrementally to that as well. If you look at Sister Schubert, great execution in the holiday season, which is vital on this brand.

[David Ciesinski, President and Chief Executive Officer at Lancaster Colony]

Then I would add to that that our sweet rolls are doing well on that business. If you look at our Marzetti, our classics proposition has continued to perform well. And over the last, let's call it, year, we've restaged simply and that part of the portfolio has been performing better. Within Marzetti dressings and dips, we had a particularly good caramel season. When we can get that product with our key customers, Walmart, Kroger and the others out early in the season and merchandise near apples, it just performs well.

[David Ciesinski, President and Chief Executive Officer at Lancaster Colony]

And this is one of those years where our retailers were willing to really work with us. They got it out early and it really performed well for us. So really it's kind of a mix of in some cases the right SKUs like the value pack on sticks and in other cases it's just good retail execution by the selling organization, just good solid fundamentals.

[Scott Marks, Equity Research Analyst at Jefferies]

Got it. And then one last one for me. One of the things I don't think I've heard you speak much about is promotional activity. And obviously across the food landscape, that's been kind of a hot button topic. Just wondering if you can kind of share your perspective on what's happening in the promotional environment, maybe what you're hearing from retailers and maybe why that's not really applicable to some of your products?

[David Ciesinski, President and Chief Executive Officer at Lancaster Colony]

Yes. So if you unpack our trade spending, one of the things that we talked to you about is that we took up our level of trade spending in the back half of last year in retail modestly and that we intended to keep it up in the 1st and second quarter. We were going to take the overall spending rate and sort of level load it. So it's going to be a little bit higher in the 1st and second quarter and then marginally lower in the 3rd and fourth quarter. So our trade spending rate was modestly, I don't Tom, 100 basis points or something maybe if higher in the period.

[David Ciesinski, President and Chief Executive Officer at Lancaster Colony]

But as it pertains to promotions, what I would focus your attention on Scott is I just recently went through all of our updated elasticities with our retail team. And what we're finding is that heavy trade spending isn't really driving the incrementality that we would have expected. So as we think about trade spending going forward, we're going to be somewhat cautious about it. There are certain products where it seems to work better than others. If we can get feature and display particularly on things like our license sauces, get it on an end cap, it really helps us drive household penetration and performance.

[David Ciesinski, President and Chief Executive Officer at Lancaster Colony]

But we don't think that it's a lever that we're going to want to lean into in this environment outside of very point specific activities.

[Scott Marks, Equity Research Analyst at Jefferies]

Understood. Thanks so much. I'll pass it on.

[Operator]

Thank you. Our next question comes from the line of Andrew Wolf with CL King. Please proceed.

[Andrew Wolf, SVP & Senior Research Analyst at C.L. King & Associates]

Thanks. Good morning. Congratulations on really good looking quarter. I'd like to ask about the few questions on the Texas Roadhouse dinner rolls. How that I think you've said right now it's still only at Walmart.

[David Ciesinski, President and Chief Executive Officer at Lancaster Colony]

Correct.

[Andrew Wolf, SVP & Senior Research Analyst at C.L. King & Associates]

And can you talk about is that being featured there? Is that just sort of in their frozen aisle and just its movement is not being kind of promoted in any special way?

[Andrew Wolf, SVP & Senior Research Analyst at C.L. King & Associates]

And secondly, do you have any view yet from their data or your outgoing shipping data, however you look at it, about repeat sales from similar customers or if it's still sort of in the trial phase?

[David Ciesinski, President and Chief Executive Officer at Lancaster Colony]

Yes. So we'll hit those questions in sequence, Andrew. So first, just as context, it's one single SKU that we're moving that is available right now at Walmart only. And we were able to work with Walmart in this case to co develop this idea. So we afforded them a small period of exclusivity while we build capacity to launch it into the rest of retail.

[David Ciesinski, President and Chief Executive Officer at Lancaster Colony]

But that one SKU at retail is not being featured. It's not getting incremental display. It did get a fair amount of viral support by way of social media once it became aware that the product was out there. And it's just pulling right off of the shelf. So there's really nothing incremental being done in terms of marketing and promotion to facilitate this.

[David Ciesinski, President and Chief Executive Officer at Lancaster Colony]

I think I mentioned the sales when we can keep it in stock, it's usually somewhere between $1,000,000 1,500,000 dollars per week. As we launch it into full retail, I would expect to see those numbers at Walmart start to pull down as it becomes available at other places. Now your last question about repeat is a really, really important question. And what we're seeing is the repeat on this item is actually quite high. The purchase cycle is actually somewhere in the range of like 13 days.

[David Ciesinski, President and Chief Executive Officer at Lancaster Colony]

So in many cases, we're seeing people come back twice a month to buy this item, which in a frozen category is faster than anything that I've seen. Sister Schubert tends to be a heavy holiday item and maybe a Sunday dinner item, where this item is an everyday item. If we look at it today, it's been the number one item available in frozen bread. And when you measure it across all of frozen, just the velocity of the items, it's a performing also. So I think that the more we see of this, the more we believe that it's just a it's a great tasting item that we think has a long term leg.

[David Ciesinski, President and Chief Executive Officer at Lancaster Colony]

So we're excited to share with you as we bring online that capacity, how it continues to perform in the marketplace. And importantly, how we take the platform of Texas Roadhouse and expand it into more SKUs and more channels and help this brand and this channel achieve all of its full potential.

[Andrew Wolf, SVP & Senior Research Analyst at C.L. King & Associates]

Got it. So the ACV outlook sounds quite promising, I would imagine.

[David Ciesinski, President and Chief Executive Officer at Lancaster Colony]

Yes.

[Andrew Wolf, SVP & Senior Research Analyst at C.L. King & Associates]

Whenever that exclude can you just speak to the exclusivity period or is that a trade secret?

[David Ciesinski, President and Chief Executive Officer at Lancaster Colony]

No secrets here. Beginning into April, we'll begin to ship it into 4 states into all channels. So it will be MULO. And then really beginning into August, once we're fully in capacity, we'll begin to ship it to the rest of retail. And then predicated on performance, we'll be evaluating incremental SKUs and then also channels like club and things like that.

[Andrew Wolf, SVP & Senior Research Analyst at C.L. King & Associates]

Got it. Just two quick housekeeping, if I can. On the pension plan retirements, is there an ongoing kind of cost savings that was running through the P and L?

[Thomas K. Pigott, VP, Assistant Secretary & CFO at Lancaster Colony]

We will get a modest savings in terms of fees and administrative costs from that exit. And the amortization of those losses will stop. So modest P and L benefit going forward.

[Andrew Wolf, SVP & Senior Research Analyst at C.L. King & Associates]

Okay. Thank you.

[Operator]

Thank you so much. All right. I don't see any further questions in the queue. I would like to turn the call back to Mr. Sosinski for his concluding comments.

[David Ciesinski, President and Chief Executive Officer at Lancaster Colony]

Thanks, operator, and thank you everybody for participating today. Before we wind up the call, I wanted to make just a couple of comments about all of the emerging discourse that's taking place out in the industry about Make America Healthy Again and particularly the focus on big food. And in moments like this, we believe it's important to ground ourselves on really key facts. And first, as our tagline, the better food company implies, we have and we always will comply with all state and federal food regulations. As a specialty food manufacturer's business has historically focused on supplying leading restaurants and competing in niche retail categories, very few of our products contain many of the chemical ingredients of concern that are receiving attention today.

[David Ciesinski, President and Chief Executive Officer at Lancaster Colony]

And then I want to assure you that to the degree to which any of our ingredients, those which are receiving some scrutiny today or anything else for that matter, come under scrutiny. We have every confidence that our industry leading culinary R and D team will enable us to adapt to the meet consumer needs and continue to grow a big, strong and relevant food company to supply our critical restaurant partners as well as consumers in the categories in which we compete. So a lot of interesting times in the food industry these days and I just want to assure you guys that are following us that we are keeping track of this discourse and we're plotting the strategy to ensure that we always serve safe food and relevant food and meet the needs of all of our stakeholders. So that ends our call today and our comments. We look forward to being with you guys in a few months where we go over our Q3 results.

[David Ciesinski, President and Chief Executive Officer at Lancaster Colony]

We hope you guys have a great rest of the day.

[Operator]

And thank you everyone for participating in today's conference and you may now disconnect.

Participants

Executives

• Dale Ganobsik, Vice President of Corporate Finance, Investor Relations & Treasurer
• David Ciesinski, President and Chief Executive Officer
• Thomas K. Pigott, VP, Assistant Secretary & CFO

Analysts

• Jim Salera, Research Analyst at Stephens Inc
• Alton Stump, MD - Equity Research at Loop Capital Markets LLC
• Brian Holland, MD - Research Analyst at D.A. Davidson
• Scott Marks, Equity Research Analyst at Jefferies
• Andrew Wolf, SVP & Senior Research Analyst at C.L. King & Associates