Good morning. My name is Scott, and I will be your conference facilitator today. At this time, I would like to welcome everyone to the Lancaster Colony Corporation's Fiscal Year 2017 Third Quarter Conference Call. Conducting today's call will be Jay Gerlach, Lancaster Colony Chairman and CEO; Dave Ciesinski, President and COO; and Doug Fell, Vice President, Treasurer and CFO. All lines have been placed on mute to prevent any background noise. After the speakers remarks there will a question and answer period. [Operator Instructions] Now to begin the conference call, here is Dale Ganobsik, Director of Investor Relations for Lancaster Colony Corporation.

Thank you, Scott. Good morning, everyone, and thank you for joining us today for Lancaster Colony's Fiscal 2017 Third Quarter Conference Call. Let me begin by reminding everyone that 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. With that said, I'll now turn the call over to Lancaster Colony's Chairman and CEO, Jay Gerlach. Jay?

Thanks, Dale. Good morning, we appreciate you joining us today. Our third quarter had one major unusual item, plus the impact of the Angelic Bakehouse acquisition, but first let me comment on the performance of the core business. We were pleased to see both the retail and foodservice channels of the business grow in the quarter, with retail channel sales up just under 1% and foodservice channel sales of just over 1%. The primary organic growth contributors, for the retail channel were New York Bakery Garlic Breads, Reames sour noodles and Sister Schubert's dinner rolls, continued softness in the refrigerated dressing and veggie dips and the loss of some private-label business, partially offset these gains. We also feel the Easter shift to the fourth quarter was a $3 million to $4 million unfavorable impact on retail channel sales. The Angelic Bakehouse acquisition provided about 2% growth to the channel, enabling it to reach almost 3% growth overall. Retail sales mix improved 50 basis points with the help of Angelic. From a retail sell-through perspective, based on ROI data for the 12 weeks ended March 19, five of our six key categories had overall sales declines. Our branch had growth in three categories and market share gains in four of six. We underperformed the category in refrigerated dressings which saw continued competitive activity, croutons also underperformed with some of our sales in this category shifting to private-label. In the foodservice channel, we saw good volume growth from several of our national chain customers that more than offset the impact of our customer rationalization efforts and cost related deflationary pricing. Absent a $17.7 million multi-employer pension plan exit costs, segment operating income declined 160 basis points. Compared to recent quarters, we lost the lower ingredient cost benefit with the flat comparison in…

Thank you, Jay. Similar to our past commentary, our balance sheet continues to remain strong. I will comment on some of the larger line items within our balance sheet that have changed since June 30. From a high-level perspective, cash increased slightly as our year-to-date cash, provided by operating activities of 105 million was offset by cash paid for the Angelic Bakehouse acquisition of 35 million as well as year-to-date regular dividends of nearly 44 million dollars and property additions of 20 million. In general, the increase in our accounts receivable and inventory balances reflect higher sales volume. The incremental receivable and inventory assets, acquired from Angelic were not material to these working capital accounts. The aging of our accounts receivable remained very solid. Cash expenditures for properties additions totaled 8 million in Q3 with the largest amount spent on new packaging and processing equipment to accommodate growth and final build out cost relating to the recent relocation of our company headquarters. For fiscal '17, we anticipate capital expenditures to be approximately 25 million. For Q3 of fiscal '17, depreciation and amortization expense, which includes the impacts of Angelic totaled 6.4 million. We expect a similar amount for Q4 as well. The increase in other assets of 40 million since June, primary reflects the preliminary values assigned to the identifiable and tangible assets and goodwill relating to the Angelic acquisition, which are further detailed in our quarterly 10-Q filings. The increase in accrued liabilities of 17 million reflects the liability relating to our withdrawal from the multiemployer pension plan as indicated in our earnings release in 8-K filings in January. This liability was paid in early Q4. The increase in other noncurrent liabilities largely reflects contingent consideration relating to the Angelic acquisition, which is also further discussed in our quarterly 10-Q filings. With respect to our balance sheet capitalization, we continued have no debt and over 559 million in total shareholders' equity. We ended the quarter with nearly 125 million in cash and equivalents and we have available borrowings capacity under our credit facility of nearly 150 million. Our capital allocation initiatives remain consistent with that of past quarter, with focus on funding future organic growth initiatives, acquisition opportunities, continued dividends and opportunistic share repurchases. Our overall effective tax rate of 34.7% for the third quarter was slightly higher than that of last year as influenced by a higher effective state tax rate. At this time, we would expect an effective rate of approximately 34.5% for fiscal '17. Jay, I will now turn call back over to you for your concluding comments.

Thanks, Doug. Turning to our fourth quarter, we expect near flat pricing in both our retail and foodservice channels. Retail channel sales will benefit from Easter shift and the addition of Angelic Bakehouse, with key category performance expected to be somewhat similar to recent trends. We are making some tactical adjustments in our refrigerated dressing plans with the goal of returning to growth. With no significant retail product introductions this quarter, we will have limited slotting expense. Our overall trading consumers spend are anticipated to be up slightly due in part to this shift in Easter promotions. Foodservice channel sales will be challenged by the impact from our customer rationalization efforts in the overall industry softness. We are fortunate to have a national chain customer mix that generally outperforms the industry. On the foodservice innovation front, our branded distributer business is introducing a line of clean label Marzetti dressings that we think should be well received with certain customer segments. Ingredients cost are expected to increase in the fourth quarter with soybean oil dairy and garlic cost moving up. We will continue our focus on improving efficiencies and plan operations throughout our supply chain. We remain active in our search for good fitting acquisition opportunities, generally in the branded Better-For-You space. With that, we're ready to take questions.

[Operator Instructions] Your first question comes from Michael Gallo the CL King.

My question, I just wanted to drill in on the gross margin line. Correct me if I'm wrong in terms of the magnitude, but it looks like you saw a little bit of flattening of ingredient cost and you had deflationary pricing in the foodservice channel, which is really what drove the majority of that margin compressions. So first part of that question is, how much of the margin compression was because of the retail, particularly of Marzetti being more promotional, and how much was related to just foodservice pension? And as you get into Q4, you'll have some commodity inflation, but you'll have flattish pricing. Would you expect on a year-on-year basis that gross profit percentage will continue to be down or continue to be impacted by the same phenomena of having that spread, not exactly where you want it? How long do you think it takes to rectify that? Thanks.

Mike, I guess, I'll start with telling you we can't really give any specific guidance on the fourth quarter, but the big driver here was the price deflation on the foodservice channel of our business. And as we move into the fourth quarter, we see that generally flatten out yet ingredient costs moving up a little bit. The net result of all that, and other initiatives, including some of the new things that we're doing at the plant level, we would hope would enhance gross margins overall. There might benefit from a little bit of a mix shift again with Easter move into fourth quarter maybe driving a little bit higher retail mix than we would have seen in the year ago quarter.

So it sounds like though the deflationary issue versus spread and pricing is something you would expect to kind of work its way out overtime?

Yes. I think so. Barring further changes as we get through the fourth quarter hopefully there is material and mismatch between those as we've been seeing.

Your next question comes from Frank Camma with Sidoti. Your line is open.

Obviously, pleasantly surprised on the revenue here in some of the things you called out in particular on the retail side, the strength in the frozen categories. Why do you think consumers are -- given that those kind of off trend, what you think that you are capturing, what are you doing there, what in particular is driving that?

I think it's a combination of good innovation, if you look at both Bake and Break in Sister Schubert shareable. Underpinned by just really good execution at the shelf, in both cases what we're seeing is that they're driving share growth in the mid-single digits, and it's underpinned by household penetration. In the case of Sister Schubert, I would go one further. Actually, we've gone in and we've simplified the range of skewers to really focus on what they call the Sisters 7, and in so doing they've been able sort of clean up the shelf, so that they have a better number of facings of the key items which has reduced, out of stocks and just overall generally driven that business. That's one that we're bullish about it. We think about it, strategy number one, you got to win the key season, which it looks like we did again this year at Easter. Thanksgiving, obviously, and Christmas are the other big holidays and then beyond that we're trying to figure out how do we continue to drive growth in creating new occasions and that shareable platform is exactly what that idea is about. Moving it from just the weekend dinner occasion or the holiday dinner occasion to an everyday dinner occasion. So that's just a combination of some good closing innovation and good execution at the shelf.

Can you just remind us where Angelic is currently distributed?

Angelic is placed principally in the premiers of the store, and that has been a big part of the strategy there. So although the product is made, it's a very clean ingredient panel and it's shipped frozen. Its slacked out and then it's actually merchandised in the perimeter and specialty deli. What we like about that is that it doesn't bring with it the supply chain requirements of ESD that allows us to play in that perimeter of the store.

And just a similar question for foodservice revenue. Jay, you mention at the end of the call, you expected a little bit of -- given what was going on, what your customers expect to sound like a little bit weakness in the fourth quarter, yet obviously, you did better than we expected in the third quarter and the press release says volumes, when you say volumes, do you mean that you -- you didn't necessarily pick up any new customers, just to clarify that first?

No new customers, but grows in unit volume of existing customers.

Obviously, either they're using more of your products in their mix or they're doing better than you expected. I just wonder if you can comment on that like is it --?

It's a little bit of both, probably a little bit more that we've got some customers that are doing reasonably well. As I mentioned, we've had the benefit, I think, of pretty decent mix of chain account customers for some time that seemed to outperform the industry generally overall, not wildly but somewhat. So when you read all the negative publicity about what's going on in the restaurant business, it's certainly out there, but I think our mix of customers haven't felt it to the degree you might see from the overall industry.

Okay. And final question, just on the acquisition market, if you could just update us, I mean I know that's obviously important strategy we know what you're looking, but do you tend to see more or less deal flow now than say a year ago, just wondering if you could on that?

Yes, I'd say maybe a little bit more. I wouldn’t say widely so, but certainly a little bit. I'm sure as you've all seen recently, we're seeing maybe a little bit of uptake in potential divestiture activity from some of the bigger guys. So maybe there is few more things to consider from that angle, but we do continue our service looking for those branded Better-For-You kind of opportunities.

Your next question comes from the line of Brett Hundley with Vertical Group. Your line is open.

Can you -- I am sorry if I missed it, but can you give us your pricing for the business, as a whole, for the quarter?

I don't think we did comment specifically on that, what that was, but its it's down in probably the mid-seven figures [Multiple Speakers].

Jay, I appreciate the color you gave on your SG&A rise during the quarter and it makes sense. I guess I wanted to grab a little extra from you on just why now question and see if was something that was more externally driven in your view by perhaps what's happening competitively at the peer set level or what might be happening competitively retail trade environment. Is it more internally driven from just a timing standpoint? Would love to just get some color from you on that?

Well Brett I'd say all of the above. We're trying to react to, but also take advantage of some of the changes going on in the marketplace, particularly in the retail channel of the business and changes that are going on there, the need for greater innovation, successful innovation. We think that there's opportunity for us to overtime, hopefully, drive the top line a little faster, shift the mix and at the same time, shift the mix to retail, but same time hopefully, be working on the cost of sales side of things and find some efficiencies there that combined can drive some greater gross margin of the business that gives us a continued opportunity to not only invest in some of these growth initiatives, but it also enhance the bottom line, the operating income side of things. Dave, would you add anything?

I think just to echo what Jay is saying, part of what we did, Brett is we benchmarked ourselves over a pretty long period of time versus our peers and what we found is, we've done well on top line and knowing the investments we're making are only intended to continue to drive that and begin to shift the mix towards accelerating growth in retail, while maintaining growth in the foodservice. And on the comp side, as Jay pointed out, we found that our gross -- things are near the [indiscernible] our peer group, so the area where we feel like, as we look across the next few years where there is a real opportunity for us, is just provides for a balanced growth. Maintain strong top line, but figure out where we can strip out non-value added cost and drive gross margin accretion. So the investments that we're making particularly, as were outlined by Jay or in the area of what we're calling Marzetti operational excellence in Lean Six Sigma, where we develop our own Lean Six Sigma black belt program. We're hiring black belts [technical difficulty] savings for green belt as a means by which to attack that gross margin line of our business and drive just structural improvement in that space. And to that same end, improving some of our planning processes because we believe across a range and there's also an opportunity to improve our working capital management. So these are not [technical difficulty] quarter event. This is really -- this is a new way of life that we're planning for here.

And I guess related to that, can we attach AMP spend and have a discussion about that because it's good to hear all the things that you're mentioning and again, against that backdrop, you have retail partners pushing for price concessions. And you have an environment where, I think, you, yourselves and your peer want to stay in front of the consumer need to secure ongoing shelf space, and so AMP spend probably becomes as important as it's ever been in this environment. So I guess related, it sounds like net-net you still believe you'll be able to drive benefits to the bottom line. But can you just attach to the discussion on AMP spend and where you think you are today on whatever metric, maybe as a percentage of sales? And whether or not you're comfortable there or if you think that larger increases are required relative to where you have been historically in order to continue to drive that top-line growth, alongside some of the updates that you are making now?

Absolutely, it's a great question. So back to the framework we discussed where our growth agenda is really focused on accelerating the topline, the bottom line. As it pertains to the topline, we're making the investments in innovation and the secondary, we're investing it in category management. So some of the cost that were included in this most recent quarter were for the purchase of tools from IRI for rational pricing. So really what we're bringing are a lot of the same tools that the big CPG folks are using as they're implementing revenue management to make sure that we're achieving optimal price points in terms of frequency, in terms of depth, et cetera , et cetera. So now we purchased the tools, but we've been spending time training our team of marketers and sales folks to use those tools. As we think about the algorithm longer-term, what I would tell you is, I don't see the need for a stepped-up increase. I think over a longer period of time what we'd like to do is figure out how we rework that mix, figure out how we can use the tools, the pricing tools, as a means by which gradually and pull back on trade and put that money against working dollars. As you look at it across a longer horizon of time, there may be off quarter-by-quarter period where we're bringing innovation to market place and we need a slot, but in terms of just working trade required to drive the business and advertising, I don't foresee a structural shift in the way we've invested in the past. Just a movement towards rebalancing that and the tools and the capabilities that we're investing in today, will enable us to do that.

That’s great and if I can just sneak one more in, I just wanted to ask you a question about refrigerated dressing. So we've seen some of the actions that you guys have taken in the marketplace in order to protect or regain share. We've also continued to see a lot of competitive actions out there from some of your peers in securing new space and things like that, so as you pointed to the space seems to remain competitive, you're out there with actions to try and regain that. Can you just update us as on maybe where you think you are, from an effectiveness standpoint, I know you've told us to expect these changes to happen over quarters, and not necessarily months, but if you can just touch on that. It would be helpful as we think about that important category going forward? Thank you.

Absolutely, it's also a great follow-up question. As you recall, a lot of this started because of increased competition driven by trade work, and as that started to happen what you start to see it shares start to deteriorates and TDP start to rose. True to what we told you about a few quarters ago, we have used the tools to go in and optimize our trade and what you're seeing is a movement towards a little bit shorter duration of events and a little bit deeper events where we're able to get better execution, but long-term this isn't a strategy to grow the business. If you look at this category, refrigerated dressings, it's not an expandable consumable. This is really -- it’s a short-term, intermediate-term, holding position and really what's ultimately going to restore the category for us, and our retailers to growth is just good old-fashioned innovation. And what you see in the marketplace right now, are those close-end movements where we're optimizing our trade spending to hold our place and what you can expect to see come out of the marketplace into the remainder of the calendar year are going to be initiatives intended to turnaround the category and restore the growth. I will mention, parenthetically that as you look at some of the competitors that really catalyze this early on, were starting to see their price movements back off and if look at the IRI data, you'll see that same thing they've gone from very aggressive to less aggressive and even walking away a little bit further back than that.

[Operator Instructions] Your next question comes from the line of Alton stump with Longbow Research. Your line is open.

Hey guys it's actually Britney Whitman on for Alton this morning. I think I missed this in the beginning of the call, can you just tell me what the percent of sales from retail was?

The exact percentage, we are going to look for that. It was up about 50 basis points from the prior year. 1.6% with Angelic.

And then I was wondering if you had any initial outlook as we move closer to fiscal '18 maybe for commodities or any other drivers of the business as a whole?

At this point, Britney, the commodity side of things, we're seeing some, as you may have heard, I'm not sure when you got on the call, but we're seeing a little bit of inflation coming out soybean oil. Dairy and garlic, we would anticipate, I think, that the garlic situation to carry through the calendar year. Dairy and oil, a little bit harder to predict, but at this point we don't see dramatic changes likely on the horizon. I think probably we'd say the same thing with the balance of our ingredient and packaging list.

Your next lesson comes on the line of Colin Radke with Wedbush Securities. Your line is open.

A question on the foodservice, I know -- I think you're starting to lapse some of the customer rationalization initiatives from last year. At what point or at what pace do you think you can start to replace that lower margin business with some of the higher margins through national chain accounts?

That's definitely a work in progress, and we are actively working day in and day out to do that. I think making some progress, but at the same time wouldn't want to put a specific clock on that but I do think we're moving forward. I think the impact -- the unfavorable impact of the rationalization starts to trail off pretty nicely in the fourth quarter. So hopefully, we've anniversaried the bulk of that at this point.

Okay. And then just in terms of Angelic. Looks like it's still running at a similar sales rates as when you initially acquired it. At what point could that start to ramp? Where are you with some of the bigger accounts and just some update on how that integration is going?

In terms [ph] of the integration, that's going exceptionally well. The team in Milwaukee and our team here in Columbus have fused seamlessly. We went live from a systems conversion on April 2nd, and we had no issues going forward and all of our focus has been placed exactly on what you outlined, driving the topline in the business. I won't go into specific account, but what I will assure you is that we've had -- our organization goes through several rounds of trainings on their product portfolio. We've set up appointments, we've had some meetings and without going into more details, that exactly how we're looking to drive this business just begin the ECB bill nationally. What I would also tell you is that we feel like our learnings in Flatout and the fact that we're already there in that part of the store has giving us sort of a solid working appreciation for where to go and how to drive the business, which is helping.

Maybe just last for you, in terms of the SG&A, I appreciate the detail in terms of the investments, the initiatives there. I just wanted to clarify in terms of the step up and the spend, looks like this quarter, there is around a 3 million range. I think you talk about maybe half of that being reoccurring going forward. So is that the right way to think about SG&A? Are we talking 1 million and 2 million type of increase that's going to continue to flow forward? Or is it maybe more than that? Just giving some of the other moving parts outlined?

Well, from that initiative, I think that component of it, yes I think that's a pretty good estimate. The other one of size is the amortization related non-cash expenses moving through the operating expense side of the income statement.

Your next question comes on the line of Jeffrey Thomison with Hilliard Lyons. Your line is open.

My question actually was on Angelic, which you just answered, so thanks for that and I will follow up later today.

There are no further questions in the queue at this time. Mr. Gerlach, I'll turn the call back over to you.

Thank you again we appreciate you for joining us today. We'll look forward to talking to you in August with our fourth quarter and full-year results.

This concludes today's conference call. You may now disconnect.