The Marzetti Company (MZTI) Q4 2017 Earnings Report, Transcript and Summary

Good morning. My name is Mike and I will be your conference facilitator today. At this time, I would like to welcome everyone to the Lancaster Colony Corporation Fiscal Year 2017 Fourth Quarter Conference Call. Conducting today's call will be Dave Ciesinski, President and CEO, 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 be a question and answer period. [Operator Instructions] Thank you. Now to begin the conference call, here is Dale Ganobsik, Director of Investor Relations for Lancaster Colony Corporation.

Thank you, Mike. Good morning, everyone, and thank you for joining us today for Lancaster Colony's Fiscal 2017 Fourth 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 Web-site, lancastercolony.com, later this afternoon. Before Dave Ciesinski, our new CEO, effective July 1, shares his commentary this morning, Dave's predecessor, CEO for 20 years and now the Company's Executive Chairman, Jay Gerlach, would like to share some opening remarks. But before I pass it on, I'd also like to thank you, Jay, for your tremendous leadership you've supplied to the Company during your long tenure here as CEO. Jay?

Good morning. Thank you for being with us today. I'm pleased to be here in my new role and delighted to welcome Dave Ciesinski to his first call as our Chief Executive Officer. Upon joining us 16 months ago, Dave brought broad packaged foods industry experience, strong strategic and leadership skills to our business. We're particularly pleased to have Dave move into the CEO role and feel confident he is the right person to move our business forward in today's dynamic environment. Dave, I'll turn it over to you.

Thanks, Jay, and good morning everyone. It's a pleasure to be here with you today as we review our fourth quarter and fiscal year end 2017 results. Fiscal year 2017 was a year of significant change at Lancaster Colony as we took a number of major steps to position ourselves for future growth. Doug and I will provide comments on the quarter, the full year, and the outlook for 2017, with Jay joining us for Q&A. Fourth quarter net sales increased 1.9% to $289.9 million. Earnings per share for the quarter were $1.04 versus $1.12 last year. Retail net sales for the quarter grew 6.1%, with Olive Garden dressings, Sister Schubert's frozen dinner rolls, and New York Bakery frozen garlic bread, all noted contributors to organic sales growth of 4.1%. Incremental sales from Angelic Bakehouse, our newly acquired producer of sprouted grain bakery products, provided the balance of our retail sales growth. Gross to net adjustments were nearly flat as the impact of slightly higher trade spending and coupon expenses were offset by reduced product placement costs. Changing to foodservice, sales decreased 2.5% as the restaurant industry continue to be challenged by declining same-store sales and overall lower store traffic. Beyond the industry-wide headwinds, our foodservice sales for the quarter were also weighed down by residual [indiscernible] second-sourcing initiative by one of our customers, and the exit of some low-margin business. Limited time offerings with our national account customers were flat versus prior year. The quarterly trends notwithstanding, we remain optimistic about the long-term trends and prospects for our foodservice business. When taken in the aggregate, retail sales mix for the quarter grew 210 basis points to 53.2% of total sales for our Company. For the quarter, gross profit declined $2.7 million or 3.6% to $72.5 million, driven by increased commodity costs, higher freight and deflationary pricing in foodservice. Operating income for the quarter declined from $46.6 million to $42.6 million, and operating margin declined 190 basis points to 15.6%. This was due to lower gross profit and incremental investments to support our new growth strategy. For the full year, net sales increased 90 basis points to a record $1.2 billion. Retail net sales grew 3.6%, led by Olive Garden dressings, Sister Schubert's dinner rolls, New York Bakery garlic bread, and the addition of Angelic Bakehouse. During the same period, foodservice net sales declined 2%, driven by our targeted customer rationalization effort, deflationary pricing, and the overall restaurant industry trends. Operating income for the full year declined from $184.6 million to $174.7 million. Excluding the third quarter pre-tax charge of $17.6 million resulting from the withdrawal of an underfunded multiemployer pension plan, fiscal year 2017 operating income increased 4.2%. Turning our attention to retail sell-through data from IRI for 52 weeks ending July 2, we maintained our leadership position in all six of our key categories and we were able to increase our share position in four out of six of those categories. With that, I would like to now turn it over to Doug to make some comments on our balance sheet and related items.

Thank you, Dave. Overall, our balance sheet continues to remain strong and not much has changed since our last earnings call. I will comment on some of the larger line items within our balance sheet compared to last year. From a high-level perspective, the increase in our cash balances of $25 million since last year can be summarized as follows. Cash provided by operating activities of $144 million, offset by regular dividends of $59 million, cash paid for the Angelic Bakehouse acquisition of $35 million, and property additions of $27 million. In general, accounts receivable and inventory balances remained in line with sales volumes and our expectations. Consistent with past quarters, we continue to see our overall accounts receivable agings remain solid. As I mentioned, cash expenditures for property additions totaled $27 million in fiscal 2017, with the largest amount spent on our new office move and new packaging equipment to accommodate growth and planned improvement projects to enhance productivity. At the present time, we anticipate capital expenditures to be in the range of $30 million for fiscal 2018, and in general we'll focus on projects to increase capacity and productivity. A notable project will involve increasing our warehousing and production capacity at Angelic Bakehouse. This project is just getting underway and is projected to wrap-up towards the end of fiscal 2018. Depreciation and amortization expense totaled $25 million for fiscal 2017 and we expect slightly higher levels for fiscal 2018. The increase in our other assets and non-current liabilities largely reflects the impacts of Angelic Bakehouse, as mentioned in our previous earnings calls and quarterly filings. With respect to our balance sheet capitalization, we continue to have no debt and over $575 million in total shareholders' equity. We ended the quarter with $143 million in cash and equivalents and we have available borrowing capacity under our credit facility of nearly $150 million. Given our balance sheet posture and overall liquidity, we continue to possess considerable flexibility to address our foreseeable cash requirements. In general, our plans for capital allocation in fiscal 2018 are expected to remain consistent with our past practices. Finally, the slightly lower effective tax rate of 33.7% for the fourth quarter was favorably influenced by year-end provision adjustments relating to state taxes and certain tax credits. The effective rate of 34.3% for fiscal 2017 is consistent with our expectations and previous guidance. We would expect a similar effective rate in fiscal 2018. Thanks again for your participation with us this morning and I will now turn the call back over to Dave for our concluding comments. Dave?

Thanks Doug. As I mentioned earlier, fiscal year 2017 was a year of significant change for Lancaster Colony, as we took a number of major steps to strengthen our business and position ourselves for future growth. During the course of the last 12 months, we successfully negotiated two union agreements, exited one significantly underfunded multiemployer pension plan, and acquired and integrated Angelic Bakehouse and consolidated 250 employees from three different locations into one. This past year we also launched our growth strategy. In summary, we believe Lancaster Colony is positioned to win. We're big enough to have focused scale in our niche categories, but small enough to be nimble and move fast. We have a solid retail presence in both the perimeter and the center of the store, and a strong position in foodservice, excellent R&D capabilities and a track record of successful innovation. But as with any strategy, winning will require careful choices. In the retail channel, the first choice was where we are going to play our portfolio. We have organized our retail portfolio around growth brands with category dynamics that position NIM for stronger top line growth, and foundation brands that are positioned for stronger operating income and cash flow. I have come to appreciate in my short time in Columbus, Ohio that life here revolves around Ohio State football. We view our growth brands as our skill positions, quarterbacks, receivers and running backs, and the foundation brands as the offensive line. And as with any good football team, or the Buckeyes here in Ohio, you have to have both if you are going to win. Correspondingly, in the foodservice channel we have some customers and channels with a bent towards growth and others that we consider more foundational. The second strategic choice is how we'll win. We intend to focus our efforts. In order to focus our efforts, we have launched three strategic imperatives that are each tied to one or more operating priorities. Number one, at the top of the list, is accelerating our base business growth. Number two is simplifying and optimizing our supply chain and improving our margins. And then, number three is expanding our core through focused and disciplined M&A. In order to accelerate our base business growth, we are focusing around three priorities; launching new innovation platforms; renovating our existing brands to ensure they maintain their relevance; and finally, ensuring that we have the right tools and capabilities that are necessary to win at the shelf, whether that's a real shelf or a virtual shelf. Our second imperative is to optimize and simplify our supply chain and improve our margins throughout our entire operations. In order to accomplish this, we are focusing on the following; launching Lean six Sigma; implementing integrated business planning; and enhancing our supply-chain capabilities as we simplify it. Our third imperative is to expand our core with focused M&A. This work is nothing new at Lancaster Colony. In fact, we have a strong track record of buying businesses and growing them. It's in our DNA. During the last two quarters, we have made a number of additions in refining the store leadership team in order to implement our new growth strategy. I look forward to updating you on our progress in future earnings calls. Shifting our attention towards fiscal year 2018, we expect retail sales will benefit from the full year of Angelic Bakehouse and contributions from new product introductions that are planned for launch throughout the year. On the foodservice side, we have several initiatives planned to support profitable growth with both our existing customer base and new business relationships. In the first half of the fiscal year, we'll continue to see a modest increase in SG&A expenses compared to the prior year until we lap the investments in new personnel and strategic programs. We will also see the incremental amortization and non-cash charges related to the Angelic Bakehouse business. We also expect a slightly higher level of retail trade spend and consumer marketing expense for certain retail brands in the first quarter. Commodity costs are projected to be modestly unfavorable during the course of fiscal 2018, particularly in the first half of the year. Our supply chain team's recent Lean Six Sigma initiative, with Black Belts and Green Belts now in place, will be focusing on cost savings opportunities and improved efficiencies throughout operations. We expect the results of these efforts to be more pronounced in the second half as they gain momentum. On a final note, I'd like to recognize and thank Jay for his support that he has provided to me and the broader team throughout the last 12 months. Over the course of the last 20 years as the CEO of Lancaster Colony, Jay has had a tremendous run, no matter how you calculate it. He has been an equally gracious coach during the last 12 months. I look forward to collaborating with Jay in his new capacity as the Executive Chairman. And Mike, with this, we're happy to take questions at this time.

[Operator Instructions] Your first question comes from Brian Holland from Consumer Edge Research.

Just quick, circling back on the quarter here in the foodservice channel, are you able to quantify the impact of that second-sourcing initiative that you called out, that seems to be the one incremental thing relative to maybe what I was forecasting for the quarter? And then just sort of going forward, how do we think about some of these rationalization initiatives that you took on within the foodservice, that you've taken, all within the foodservice segment over I think about the last year or so. I mean is that an ongoing process or do we have a point where we kind of fully lap that and we sort of move forward, how do we think about that in the model?

I guess I'd start by setting context maybe for those that haven't been with us on the journey here. The rationalization process was driven around the idea that we had tight capacity and we had a number of different customers with low-margin businesses. So, rather than investing in incremental capacity and not being able to get the returns on the capacity, we elected instead to begin sort of a disciplined process of rationalizing that. As you'll recall, Brian, we had a tranche that we've cycled through in the last year and we are sort of working through the last of those customers right now, and I believe you'll see a residual of that really through probably the first three quarters of this upcoming fiscal year.

And then is there any color you can give around the impact of that second-sourcing initiative? Was that a meaningful callout as we think about that, and maybe how long does that remain a drag, is that just a one-off there in Q4?

That too will sort of cycle on a limited basis through the first three quarters. It's not highly unusual. The way it ordinarily works is the bigger and the more meaningful our source of supply becomes to a customer, they reach a point as they grow where they love to start to create redundancy in their supply-chain. And with one of our customers, we hit one of those growth thresholds. But I wouldn't expect it to be something that goes on beyond the first let's say in two to three quarters.

Okay. On the retail side, you called out higher level of trade spending and consumer marketing expense in Q1 of 2018. Can you sort of give us a sense of where that's going to be focused and what that's in response to, is that a pocket of opportunity that you are attacking or is it in response to elevated competitive dynamics? Obviously we know what the salad dressing category has been for a little while now. Just help us understand how you are thinking about that.

That's going to be slightly higher surrounding some product launch activity that we have going on. And then part of the other dynamic was that Q1 of last year was at a historic low. So part of what we are doing is, for the quarter just getting back to more of a normalized rate.

Okay, thanks. And I'll get out of here with this one. You talked a lot about innovation. Can you give us a sense, obviously there's a couple of things here, you've got a build that – I'd like to understand how you think about your innovation pipeline where it is today relative to where you'd like it to be, and maybe like what's anticipated for 2018, do you expect innovation to be a greater contributor than what it's been in the past, is that how this lineup is or this next wave of innovation is? And maybe, is there any sense, can you give us historically kind of how much innovation has contributed on an annualized basis to sales, and then going forward whether we could expect more or about the same level of contribution, how that builds over time? I understand you don't give guidance, so I want to be sensitive to that, but to the extent that you can sort of give commentary around that to help us think about it?

Sure. What I would say is, for the upcoming year you're going to really start to see it take hold. The first of the items are coming out in Q2. Actually we have one that's going to be coming out later here in Q1, the majority of the items are really going to start to hit in Q2, Q3, and thereafter, sort of building as we work our way through the year. Historically, if you were to look at our level of gross sales that are coming from retail products that's running in the order of let's say 3% on average, there might have been periods historically that were a little bit higher or a little bit lower, we would expect that to be increasing over time.

Okay. Thanks a lot for the color. Best of luck, gentlemen. And Jay, my congratulations.

Your next question comes from Brett Hundley from the Vertical Group.

Dave, I'm sorry, just as a point of clarification, you just said 3% of your retail top line had come from innovation, or that was kind of your average over time and you would expect that to creep higher?

That was average over time retail-only and we expect that to go higher.

Okay, all right. Thank you. So I had a couple of questions surrounding the gross profit line. So, your gross margin usually gets a nice seasonal lift in Q4 relative to Q3, and we didn't really see that as much this quarter, and you guys have talked to higher commodities and freight. I wanted to see if you could just go through this a little bit further and talk about whether or not there were any additional contributors to maybe gross margin performance in the way of mix or anything like that, and whether or not there was a fair amount of incremental investment dollars on that line in addition to the SG&A line? I'm just trying to understand the relative performance there compared to what I had expected. '

So why don't I'll take the first shot at that and then I'll look to Doug maybe to fill in the lines thereafter. So, I mean if you were to look at the gross profit line, the first thing I would do, without giving you a specific guidance, is I would sort of lean and say that the majority of the gross margin decline was driven by the foodservice business. I would start with that. And then the second thing that I would say, maybe I'll even back up a click farther, if you look at the retail side of the business, our trade spending was on or about flat. It was modestly up for the quarter. So, we weren't really sweating down between gross to net for retail. Then if you go down to the next line item, for both businesses, both retail and foodservice, you should see that the bigger part of the decline was driven by our foodservice business. We spend a fair amount of time here as a team internally figuring out how we communicate this to you guys so you could get an understanding of our business, update your models, without giving you guidance per se. But if you go down and you look at the foodservice side of the business, Brett, what's happened in the last couple of years, if you could go back to sort of 2015, there has been this rise in our gross margins. Initially there was a decline driven by inflation, and then a rise, and last year if you look, essentially in our Q3 and Q4 we had very, very high gross margins, particularly in our foodservice business, that was driven by the fact that we had pricing that had elevated because of the escalators in agreement and commodity costs, principally eggs, had driven. So we had this sort of naked situation with pricing and low commodities. What's happened now as we have moved 12 months forward is the commodity costs have – the pricing has come back down, as they sort of chased the egg prices down, and we've seen a very, very modest uptick in commodities. But I'd say that in that as we sort of think about where we were in 2015 and where we've been in this journey, if you were to look at it, sort of chart it, you would see that our gross margins initially went down, they went up, they hit a high watermark last year about this time, so it would have been Q3, Q4, and Q1 and Q2 of this current year, and what you're going to begin to see is those margins are coming back down. So this was a quarter of it. You're going to likely see the first quarter is going to reflect an element of this, as well the second quarter of this current fiscal year to a lesser degree. And I don't know, Doug, if you'd want to offer more than that.

Thanks Dave. The only other thing I would comment on, Brett, is just maybe looking at it through a slightly different lens as well, is that for the past several quarters, as Dave has mentioned, we have enjoyed in general deflationary pricing on our ingredients, and many of these were moving towards their lower quartile, if you view that over a period of time or history. And now we are beginning to see some of those bounce off of those historic lows and we are now beginning to see some inflationary trends in some of our key commodities. And so that put pressure on the fourth quarter as well, and as Dave has mentioned in his commentary, we expect to see some continued pressure in the first half of the fiscal year, of fiscal 2018.

Okay.

So it was probably one of the bigger drivers, along with Dave's commentary on the foodservice trends, influencing the Q4 results.

Okay. And so, if we stay with commodities for a minute maybe, and I don't know if you want to structure this across your business segments or just talk to commodities as a whole, but when I think about your view maybe into calendar 2018 and the type of coverage that you've historically been able to put in place, can we discuss a little bit about how you expect things to evolve into the forward calendar year, and then to the point you are comfortable talking about it, how are you guys maybe covered on commodities?

Sure. We'll provide you with some high-level commentary there, Brett. As you are probably well aware of in our past conversations, we are able to cover our most significant commodities, flour and oil, through the futures market, and we leverage that on the oil side through a very structured laddering program. And so, in that regard, we have coverage in pretty good amounts all the way through certainly the first half of 2018 and to somewhat of a declining level in the back half of the fiscal year. But that said, even with that laddering approach, over time there has been a slight uptick in the overall oil markets compared to where they were going back a year or two. So again, that goes back to that low-low periods of commodity pricing and now a little bit of a bouncing off of that as we work forward. Flour is the other commodity that we take advantage of the futures markets and go out as far as we can, and what we feel comfortable with in securing our needs. We are largely covered with our flour needs through the first half of the fiscal year and into the second half of the fiscal year, with some levels of exposure as we work through the final quarter of fiscal 2018 and beyond.

Okay, I appreciate that. And I'll jump back in the queue, just can we expect, as we think about modeling pricing and volume for this Company, given the backdrop of what we just talked about, do you think it's appropriate for us to expect positive pricing during fiscal 2018?

That's I think a little bit of to-be-determined. I think we have certainly been talking a lot about that internally and hopefully we can give you some additional guidance on that as we get into the Q1 call.

And maybe I'll [answer] [ph] the second half of your question, which part one was pricing, and I think what you're trying to understand is sort of how we are thinking about sales for the Company in the aggregate when you put this altogether, and I think what we are thinking is it's going to remain at the low single-digit range in the aggregate.

For the sales line?

Yes, for the sales line, correct.

All right, thank you, guys.

The next question is from Frank Camma from Sidoti.

As the prices laps, so I know it's always a lag, I'm just trying to figure out on foodservice side, since obviously it's [indiscernible] margins, when do those, on average when will those contracts start to re-price to the higher commodities?

I think what you're going to see, Frank, is that that impact is going to wash through by the end of Q2.

By the end of Q2, okay.

If I may just go back to really kind of building off the comment I was trying to make with Brett, as you are looking at it, what you're going to find is we sort of work our way through this journey, from 2015, through 2016 and 2017, into 2018, that really what we're seeing is that we expect our margins in general to kind of work their way back to where they were slightly above those levels at that point in time. And then really I think what you're going to expect to see is, commodities and all the other things that go on in the business notwithstanding, our plan is for sequential improvement driven by the simplification initiatives and efficiency initiatives we have in our supply-chain.

Okay. And just a clarification on the timing of Easter and how that like flowed through, because one of the things you called out was Sister Schubert's, which I think typically benefits from Easter, right, so is that part of that benefit? I'm just wondering.

Yes, and I can give you some flavor on that. So if you think about it, ordinarily Easter is about a $5 million event for the Company roughly. I think that's the way that we have characterized it. As we watched the way Q3 unfolded this year, we were able to track about $1.5 million of that $5 million that actually moved into Q3, with $3.5 million balance impacting us in Q4.

Okay. So that's in line with what you said last earnings call I believe [indiscernible] Q3 to Q4, okay.

Correct, yes.

And can you just give us a sense, this is my last question, on Angelic, like what stage are you in rolling that for your distribution, just so we can get a sense of how big this can be over time?

Sure. So we are actively in the process of selling it to customers. We're building distribution by the week, both in the specialty channels as well as in traditional classes of trade. I would expect to see some marquee customers that you're going to be able to interact with probably over the next couple of customers. At the same time, what we're doing is we are investing in increasing the warehousing and freezer capacity for the business. So we broke ground there about a month ago and we expect that to be wrapping up in this current year. So, the business is on track. Ironically, just yesterday after our Board meeting, I spent the afternoon with James Marino, the Founder of the business, the sales leader of that business, and the marketing leader, and we spent the rest of the afternoon and the evening hitting stores together and talking about our plans to grow the business. So, we remain very bullish about it.

Are there any natural sort of revenues introduced between Angelic and Flatout or is it just different because it's generally in different area, can you talk about that a little bit?

No, there are. The buyer is the exact same buyer. So if you think about the selling process, oftentimes we're in there selling Flatout and it's the exact same buyer that we are talking to for Angelic. So, there are a lot of synergies in that sense, all the way down to retail execution. So, among other things that we're looking at are developing racks that are going to have Angelic on one side and Flatout on the other, that allows us to amortize the cost of that rack across two different brands.

Sure, it makes sense. Thanks, guys.

The next question is from Michael Gallo from C.L. King.

I congratulate Jay on his new role. My question, Dave, I know you alluded to in the prepared remarks about some of the opportunities and cost savings, improved efficiencies. supply-chain, which I think you noted you expect to see a bigger impact to that in the second half, but I was wondering if you can give us some further idea in the long run of where some of the bigger opportunities are, how big those opportunities could be, and how we should think about where longer term gross margins could be relative to now, assuming commodity prices didn't change?

Absolutely. I guess I'd start with some benchmarking. It's the work that we did internally where we compared our gross margins and operating margins versus our peers in the industry. And when you unpack the business and you look at it that way, what you will note is that our gross margins are down towards the fourth quartile of the peer group and our operating margins historically have been sort of the top of the second quartile or bottom of the first quartile. And as we sort of went into the business and we tried to uncover, are there intrinsic drivers for why our margins should be lower, we really didn't find them. And if you spend time and you look at our factories and things like that, you could see it that there are a number of different opportunities in there. So, as we think about this, our goal over a period of time is first to work those gross margins towards the average of the peer group, and then to see where we can get thereafter. So how do we think about that then in terms of timing? As you have heard in some of the previous discussions, we've hired Black Belts. We have initiated training in Green Belts. Our second class of Green Belts is getting ready to graduate here in about two weeks, and we are starting our third class of Green Belts. So, they will put us up to close to 50 people that we've run through the program, all of which are in our 16 factories located across the country. The first area of focus that we are going after is essentially waste, and as waste can be played out in any one of a number of areas, but you could think of overfill that's in packaging. So, the package says it should have 12 ounces, then it should have 12 ounces, not 13, and it shouldn't have 11 or 11.5. So the first area that we are looking at is yield and waste and things like that. The second tranche of work that we are looking at – and by the way, none of that work requires any sort of investment in capital, and the reason why we are focusing on that upfront is because you can get at that very, very quickly, and that's sourcing the savings that you are likely to see really in Q1, Q2 of this current year. The next tranche that we are focusing on are things that require light automation, opportunities where we can take manual labor, unskilled labor, and start to automate things, be it case packers and palletizers, and work like that, that really serves two purposes. One, it helps reduce workers' comp costs because of repetitive motion injuries. The other thing it does is it helps us get our arms around increasing labor cost. So that's sort of the second tranche, but given that it requires capital, we won't really see big savings attributable to that probably until more like the Q4 timing of this year, and then you can expect the long string of that over the course of really the next couple of years as we work our way through factories looking for opportunities to do this. Longer term what we're looking at are where are opportunities to ask deeper questions about the structure of our supply-chain in general. We feel like there's a lot of opportunity to work our way back to the peer average candidly by just going after the stuff that's closer in, and then considering the more structural change as longer-term opportunities that we are contemplating.

Okay, thanks very much.

The next question is from Jason Rodgers from Great Lakes Review.

Just to follow up on that last question, what is the peer average that you are targeting for the gross margin, what is that number?

What we are finding is that somewhere on or around the 30 range with the nuance which you will notice is that certain peers handle S&D cost differently. But in general, what we are seeing as a peer average is something on or around 30.

And how much on a dollar basis did Angelic contribute to sales in the quarter?

I'd have to pull out that exactly.

It was 2%, I think as we commented on it. So it's right around $3 million.

All right. And [indiscernible] given update on the refrigerated salad dressings category, you talked about increased competition over the last few quarters. I wonder if there's been any change there, if you made any inroads in improving your position in that market.

Sure. So first on the category what we're finding is that the category growth trends overall on sales are pretty stable. For 52 weeks, the growth of the category was 104 index, and for the most recent 12 and 4 weeks it's around that same sort of a range. Over that same period of time, for 52 weeks, our sales were in more like a 98 index if you look at the IRI measured channel data, and we have been able to increase that back up to closer to flat or above for the most recent period. As far as the promo activity, encouragingly what we are starting to see is, as of 52-week data promo activity and pricing for the category is improving and getting better. So, we are somewhat encouraged by that.

And then finally, I wonder if you could talk about the M&A environment, what opportunities you are seeing in the deal flow, if you expect to close on any for fiscal 2018? Thanks.

So we have a number of different opportunities that are in our guidepost right now, we're actively courting, but it's like any other courting process, but we are working our way through it. When we look at deals, we tend to look at them in three different tranches; real large transformative deals that are obviously highly opportunistic; midsized deals, and that's where we would more often than not compete against big strategics; and then smaller deals, more in line with the Angelic Bakehouse. And if we had to sort of describe it, obviously we are scanning, looking for everything within our growth categories in particular, but where we are seeing the most exciting opportunities tend to be in the smaller deals where they are often times small enough that they are not on the radar screen of the big strategics and more times than not we are competing against top tier P/E firms. So, there's still a fair amount of activity in there. Prices are high, which just means that we have to feel comfortable there's a path to value.

The next question is from Colin Radke from Wedbush Securities.

Congratulations again to Jay, tremendous run. And congratulations to you as well, Dave, on the new role. Just to follow-up on the foodservice, I appreciate you don't want to get too granular in terms of the guidance, but given that a lot of lost sales from the customer rationalization initiatives have been lapped at this point, it would seem like maybe we're at a point where that segment could start to return to growth. I mean is that a realistic assumption or is the weakness you're seeing across the industry going to preclude any sales increases over the next few quarters?

I don't – I'm sure a lot of you guys are tracking what's happening in the foodservice and what we are watching carefully is both sales in this sector as well as traffic continues to decline, which is going to continue to put downward pressure. As we are thinking about the business and setting goals, our goal is to outperform the rest of the sector by 100 or 200 basis points, and we believe that given our mix of customers, we are positioned to do that. But at some level, it's sort of like the laws of gravity, we are all going to be tied somewhat to what's happening in traffic. I will offer maybe one other point of qualification on this, Colin, and that is we're looking at the industry shift rather than just sitting back and tying our fortunes to whatever happens to customers. We are starting to look at the business through a slightly broader lens. We're much more aggressively looking at for example the perimeter of the store in salad bars and prepared food and grocery stores, where we see growth. We are also looking at what are called non-commercial segments, for example colleges and universities and healthcare. We are increasingly starting to see a lot of focus on better food. To that end, one item that we have launched, it's going out the door right now, it's shipping, is a 32-ounce foodservice bottle in Simply Dressed that you're going to see in the perimeter of the store and grocery store salad bar. So, we are working through an agreement. It's going to be in 400 of the big chains' stores and we're just continuing to build on that. So, as the world around us shifts in foodservice, we are continuing to focus on the customers we believe are best positioned to grow and we are diversifying our focus. We are looking for other sources of growth, and that includes some of the meal kit companies as well.

Got it. And then just in terms of some of the weakness that you saw in the quarter, you referenced a few pressures. I mean could you just help us understand the magnitude of each, between the industry weakness, the deflationary pricing, customers' rationalization, second-sourcing? And then in terms of the restaurant weakness, is that still primarily casual dining, are you seeing more broader based across QSR and fast casual?

First, as far as the allocation of the source of variance on the period, I'll look at Doug.

Colin, the majority of the pressure was on volume. There was some element, as we have talked about, on the deflationary pricing, but the bulk of it came through on the volume side.

Got it. And then just in terms of within the restaurant industry, is that still primarily casual dining, are you seeing incremental weakness across QSR and fast casual?

It continues to be somewhat broad, with probably casual being hardest hit.

Got it. Okay, thanks guys.

The next question is from Alton Stump from Longbow Research.

Actually Brittany Whitman on for Alton this morning. The restaurant industry trends, the challenges in same-store sales and store traffic, just wanted to see if you were seeing that from any particular space within the restaurant industry, any sort of segment there that would be notable?

As we mentioned earlier, it appears as though the pressure in the industry is pretty broad, with maybe casual dining being hardest hit among the segments. What I may do is answer your question slightly differently in terms of what are the characteristics that the winners are sharing in common, and I would point to the following. The winning concepts are focused on fresher. So, not the freshest food, but I would say they are understanding how do we put a fresh spin or a slightly healthier spin on convenient food. The second thing they are really focused on is how do they make their food as convenient as possible and take it to the consumers, and not wait for the consumers to come to the restaurant. So, number one, make it slightly fresher, number two, how do they break the code and make it more convenient. So, if you sort of unpack a number of the winners that are out there, they are all working really hard on food delivery, they are working really hard on catering, and they are working really hard on takeout food, food that you can pick up. And the winners, the ones that seem to be doing best in terms of top line, are really nailing both. So, as we're looking at folks that we are dealing with, part of what we're doing is taking it all the way down to that level and looking at things like how do we make our, let's say, dressings more convenient for them in terms of portion control. As they are growing their takeaway business, we should be making it easier for them to do it.

Got you. And do you have any expectations for any of these trends to improve maybe over the course of 2018?

In foodservice, I don't know if I would necessarily try to project. As we are looking at it, our internal objective is to try to outperform the sector by a couple of hundred basis points, is maybe the way that we're thinking about it. But it's really tough to tell. As you might expect, we look at the data regularly and we are interacting with customers. So, I'm going to be out with a very large customer next week on Monday. Usually a couple of times a month I'm out meeting with a big foodservice operator. And what you are seeing in terms of trends are pretty broad and I don't think necessarily they have broken the code on what's going to happen to the industry. I think the winners are focusing internally to figure out what can they do to win, and by and large the ones that I've seen that seem to be outperforming the peer group are focusing on food that goes to consumers and making their food a little more fresh and healthy.

Great. Thanks so much.

There are no further questions. I will now turn the call back over to Mr. Ciesinski for concluding remarks.

Mike, thank you very much, and thank you to everybody on the call. I look forward to meeting with you guys along with Doug and Dale in about three months as we share our first quarter results. Have a great day.

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