The Marzetti Company (MZTI) Q2 2018 Earnings Report, Transcript and Summary

Good morning. My name is Leandra 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 2018 Second Quarter Conference Call. Conducting today's call will be Dave Ciesinski, President and CEO and Doug Fell, Vice President, Treasurer and CFO. [Operator Instructions] Thank you. Now to begin the conference call, here is Dale Ganobsik, Director of Investor Relations for Lancaster Colony Corporation.

Thank you, Leandra. Good morning, everyone and thank you for joining us today for Lancaster Colony's Fiscal 2018 second 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 will now turn the call over to Lancaster Colony's President and CEO, Dave Ciesinski. Dave?

Thanks Dale, and good morning everyone. It's a pleasure to be here with you today as we review our second quarter results for fiscal year 2018. Doug and I will provide comments on the quarter and our outlook and following that we will be happy to respond to any of your questions. For the quarter consolidated net sales decreased 2.2% to $319.7 million versus $326.8 million last year. Retail net sales grew declined 1.9% to $179.3 million at continued growth for all Garden dressings a full quarter of sales contribution from Angelic Bakehouse, reduced trade spending and lower coupon expenses were more than offset by the impact of disruptions and supply of our New York bakery frozen garlic bread due to the production interruption at a co manufacturing facility. And the slowdown in late December outbound shipments due to insufficient break capacity. Excluding the negative effects from the supply disruption in garlic bread and reduced in the quarter shipments we estimate the retail net sales would have increase about 1% versus prior year quarter. Good service net sales decreased 2.5% driven by the ongoing challenges that diminish customer traffic and lower same store sales in the United States restaurant industry. Sales to our national chain restaurant accounts including limited time offer programs were below the prior year amount, partially offset by inflationary pricing. Consistent with the retail segment late December outbound shipments of products to good service customers were slowed by insufficient freight capacity as well. Excluding the decline of limited time offer programs and reduced end of quarter shipments we estimate the food service net sales would have been near flat compared to prior year quarter. Consolidated gross profit declined 9.8% to 83.9 million driven by the impact of notably higher commodity and freight cost and lower sales volume. More specifically the increases in commodity and freight cost for the quarter were about 2% and slightly less than 1% of consolidated net sales respectively. Savings realized from our Lean Six Sigma program and the inflationary foodservice pricing served to partially offset these cost, note that the prior year results reflect the benefit of significantly lower ingredient cost with only a modest offset from deflationary pricing which combined with lower freight cost lead to last year's record high gross profit. Selling and general administrative expenses increased 2.3% driven by increased amortization and other recurring noncash charges attributed to Angelic Bakehouse, continued investments in our growth initiatives and a favorable nonrecurring item in the prior year's quarters, corporate expenses related to a closed business operation. Consolidated operating income declined $47.3 million from $59.4 million in the prior year on lower gross profit and increased SG&A expenses. Retail and Foodservice segments were unfavorably influenced by the factors reference above resulting and operating margin client from 23.5% to 20.8% in retail and from 13.3% to 9.6% in food service. Net income was $45.9 million, or $1.67 per diluted share, compared to $39 million, or $1.42 per diluted share, last year and was favorably influenced by the tax cuts and drawback of 2017. Doug will cover the cash related matters more comprehensively in his commentary. The regular quarterly dividend paid on December 2019. 2017 was $0.60 per share a $0.05 or 9% increase over last year amount. Turning our attention to retail sell-through data from IRI for the 12 weeks ending December 31, 2017 we maintained our share leadership position in all six of our key categories. During the quarter we were able to increase our share position in two out of the six categories and we saw a modest pull back in the reminder due to our targeted trade reduction activities and the adverse impact from our supply disruption in the frozen garlic bread category. During the quarter total consumption for refrigerated salad dressing business one which we updated you on in the past was up 1.5% our base business or dollars generated at full price was up 3.4%, our incremental business or dollars generated on promotion was down 13.3%. During the same period of time we also expanded distribution of our new simply 60 dressing and this continued our simply dress lights all of which will help strengthen our refrigerated dressing business on a go forward basis. With that, I’d like to now turn it over to Doug to make some comments about the balance sheet and related items.

Thank you, Dave. Overall, our balance sheet remains strong and I will comment on some of the larger line items within our balance sheet compared to last year. I will make some comments on the impact of tax reform as well. From a high level prospective the increase in our cash balances of nearly 36 million since June can be summarized as follows. Cash provided by operating activities of nearly $84 million, offset by regular dividends of $32 million, treasury stock repurchases of $1 million and property additions of $15 million. In general, consistent with past quarters our accounts receivable remained in line with expectations and our collections and aging remain solid. Similar to accounts receivable our inventory balances are in line with our expectations as we exhibit the seasonally high retail shipping period of our second quarter. The increase of nearly 7 million in ever current assets since June reflects the timing of federal estimated payments and the favorable impacts of the tax act which occurred in last December. Consequently, as of December 31, we have a larger prepaid federal income tax balance than normal. This line item should normalize over the balance of our fiscal year as we adjust our future estimated federal tax payments. As I mentioned, cash expenditures for property additions totaled 15 million in our first half. This level of spend is line with our estimated annual CapEx of 30 million for fiscal '18. Consistent with our past communications the largest amounts have been spent on new processing equipment to accommodate growth and plant improvement projects to enhance productivity. The expansion of our warehousing and production capacity at Bakehouse continues to remain on schedule. The ware housing phase of this project is expected to be largely completed during Q3. Depreciation and amortization expense totaled $13 million for first half and we expect similar levels for the second half of fiscal 2018. The significant decline in our other noncurrent liabilities and differed income taxes since June 30, largely reflects the onetime benefit of 9 million resulting from the tax act mentioned in our earnings release earlier today. With respect to our balance sheet capitalization, we continue to have no debt and over $621 million in total shareholder’s equity. We ended the quarter with nearly $179 million in cash and equivalents and we continue to have available borrowing capacity under our credit facility of nearly $150 million. Finally, and broadly speaking, our income tax provision for Q2 was favorably impacted by the tax act in two ways, first a $9 million onetime benefit resulting from the re-measurement of our net differed tax liability as of December and second a lower blended effective tax rate. In consideration of all the significant elements of the tax act, and excluding the one-time benefit for our differed tax re-measurement we estimate a blended effective tax rate will be 20.3% for fiscal '18. As previously reported in our Q1 commentary, our effective tax rate was then 34.2%. Consequently, our tax provision for Q2 was effectively only 22.5% to adjust for the over provision in Q1. As noted in our earnings release, the total impact of the Tax Act on our second quarter net income was approximately $14.5 million or $0.53 per diluted share. Of this total, $9 million or $0.33 per share reflects the one-time deferred tax benefit mentioned previously, while the remaining $5.5 million or $0.20 per share resulted from lower tax rates. Nearly half of this amount related to the overprovision in Q1. Looking forward, at this time, we estimate our effective tax rate for fiscal ‘19 to be approximately 24%. We estimate the Tax Act will serve to lower our annual income taxes and in turn raise our annual cash flows in the range of $15 million to $20 million. Thanks for your participation with us this morning. I will now turn the call back over to Dave for concluding comments. Dave?

Thanks, Doug. Looking ahead to the second half of our fiscal year, we are implementing corrective actions to recover and to meet demand for our frozen garlic bread products. Nonetheless, we expect the sales to be somewhat constrained by supply till the end of our third quarter. With regard to commodity and freight costs, while we anticipate some reduction from the very high levels we experienced in the second quarter, we expect those to remain high or remain above last year’s level for the balance of the fiscal year. We’re actively working with active carriers and brokers to rebid shipping lanes wherever possible. Early in our fiscal third quarter selective price increases took effect in both retail and food service segments in response to higher commodity and freight costs. Additional retail price increases are planned for early in the fourth quarter of our fiscal year. We project that these price increases will serve to offset the higher commodity and freight costs through the back half of our fiscal year. We will also generate cost savings -- continue to generate cost savings from our Lean Six Sigma program at or above level of mid 7 figure level achieved through the first two quarters of our fiscal year. On the sales volume front, we’ll address our challenges through improved execution and new product introductions. For example, late in our fiscal second quarter, we’re excited to introduce the 3-pack of wing sauces to the retail club store channel under our license agreement with Buffalo Wild Wings. To-date the product is performing exceptionally well. In the coming months we will continue to add to our Olive Garden dressings with the launch of Parmesan Ranch and other products that we’re extremely excited about. Our fiscal third quarter will also benefit from a shift in timing of Easter holiday sales. In light of the initiatives we now have in place, our current outlook for freight and commodity cost when compared to fiscal year 2017, we expect our consolidated results to show a pick-up in both gross margins and operating margins for the last two quarters of fiscal year 2018. Before I close, I would like to expand a bit on the recent Tax Reform legislation. As Doug outlined, excluding the one-time benefit for our deferred tax re-measurement, we expect to see about a 600-basis point reduction in our effective tax rate for fiscal year ‘18 and about 1000 basis point reduction beginning in fiscal year ‘19. Independent of the new tax legislation, our business priorities remain the same. In mid fiscal year ‘17 we launched our growth plan which consisted the following three priorities. Accelerating our base business growth, growing our margins through supply chain optimization, and expanding our core focused M&A. During the past year we’ve rolled out key elements of that growth plan such as category management capabilities and Lean Six Sigma. Both of these initiatives are already generating meaningful value. Concurrently we have been performing a comprehensive assessment of our supply chain and business infrastructure to identify opportunities to improve the competitiveness and scalability of Lancaster Colony. The lower tax rate and accelerated depreciation for capital expenditures that the new legislation provides will make the returns on these initiatives all the more compelling. However, we're continuing to work through this assessment with our board and we look forward to sharing the findings with you later this year and early into the next year. That concludes our prepared remarks for today and we will be happy to answer any question.

[Operator Instructions] And your first question comes from the line of Brett Hundley with the Vertical Group. Your line is open.

Can you please remind me what percentage of your frozen garlic bread is outsourced from a production standpoint, I think it’s the one product in your portfolio that has fairly meaningful proportion of production outsourced.

I don’t think that necessarily dimension it but it is a meaningful amount and it may be worthy of benefit for the group to expand about this a bit here while we may, during the most recent quarter we had a supply disruption due to a fire in this facility, this facility has been a long-term partner of ours for more than 20 years, as our businesses grown, they have grown with us. They had the disruption we put in place, corrective actions including our maintenance people and our engineers in the factory to work with them to get it online, we've also gone out and secured incremental co-man facility until we're completely back online with production. But what's complicating the matter is this is a seasonal business where consumption spikes during the particular period of time and that’s similar to let's say catchup during July 4th or Memorial Day. So, the disruption took place at the very timely and one of the building inventory going into a peak season which in turn depleted the inventory and its made it challenging because even though we have the factory up and online its difficult just to keep up with the demand because the seasonal nature of the spiking when it takes life. Rest assured we have everything up against this and we expect itself to begin to be resolve, but it had a measurable impact in the quarter.

And one of my recent concerns about co-manufactured products, relates to one of the nation's largest retailers out there really focusing hard on working capital accounts, customer service levels and things like that and I have been worried about those producers out there that they have co-manufactured products being at a relative disadvantage to captive producers out there and frankly with the way you guys are positioned, I expected that to be a relative competitive advantage for you because of the fact that you do produce most of your stuff in house. Can you give us a sense for your exposure to customers that are really focused on customer service levels right now within your frozen garlic bread, so in other words this production impact that you're seeing, is that leveraged to retailers like that? And are you at risk of seeing longer term business disruptions related to that? I hope that question makes sense.

Yes, no, it does. I would backup may be just a second inning, address the first question. All things being equal as an operator, I would prefer to own my facility so that -- company too, so that we can have direct control over the circumstances. Having said that, I have been involved in situations that most of companies have been in the past, where they have long-term co-packer relationships, and this is factor in one of these relationships. And this factor literally integrates into our distribution centers and everything else. So, to-date they have been a great cost effective and service friendly operator for us to work with. Having said that, I go back to my first comment that we would rather control it at the end of the day. Moving forward and beyond that, you ask a question about how do we take in and consider the long-term implications of what’s taking place? If you think about the way it flows through the P&L, the first thing that we did is we ran, we promote -- we pulled promotional events as you would expect and we also pulled back on the advertising so that we weren’t chocking demand that at time we didn’t necessarily want to. So, when you look at the business in more detail, you are going to see a slowdown in the aggregate, maybe you are going to see a greater slowdown in promotion versus base business. As we get on the other side of this and production gets back to where we wanted it, smashing the lead time the demand side, what we would begin to do is resume those activities sort of in the normal course. You are likely to see a couple of effects, on the downside you’re going to see a little bit a constrained situation on supply that impacts demand. On the other side, what you are likely to see is we’ve depleted the pipeline in the business. So, once we are back in business you’re going to see basically retail inventory start to build back. So that’s why we believe this is going to have somewhat a little impact in Q3 and then like I said resolve itself thereafter.

Okay, okay. That’s really helpful. My last question is just on pricing. You talked about selective price increases that you’ve taken, previously today, future ones that you’re going to be looking to allocate to complete raw material cost basket. And I hear that selectively with some other companies trying to look at the cost basket as a whole to include energy, logistics et cetera. You guys sound pretty confident with your commentary on taking that pricing to market and having those discussions with your customers. Can you just color that a little bit for us and may be talk to your category leadership, your market positioning, your portfolio, whatever it is and your views on that?

So, I will take it in two tranches. The first tranche that I will speak to Brett is food service. So as most -- you and most of the other folks on the phone are familiar with, we have contracts that have escalators and de-escalators. So, on our food service national accounts, the escalators are going into effect, mainly into effect this month. And the second side of that business is what we call our branded business, which are things that are sold under our brands to smaller operators or to non-comp segments like colleges, university and healthcare. Those price increases have also gone into effect and they are rolling out the door. On the retail side, as you’ll recall, when we were together on the phone in the fall, we talked about implementing price increases, and we said hey, given the rapid acceleration that we saw in commodities, we felt like we could not get there by pulling trade alone, so we felt and take the price increase. We had these conversations and we find that we're after some push back getting price realization in those categories. I think the difference versus prior periods is every one of the retailers that were talking to are expecting a lot of information about how we're justifying these. And as a case in point, we have a new VP of Procurement that joined us probably about eight months ago now, a gentleman that was a long-term Nestle executive and then was at Craft and then Craft Time subsequently has been actively involved in going out on sales calls with our sales folks meeting with buyers to walk through the underlying cost assumption. So, I think once we get to that level of granularity and they don’t like it, some customers actually do OTEZLA after little push back, I think they are happy to see it, but there are some other that don’t. So, net, net I think it's just the onus is on us to be able document what's happening and to go out. One piece that’s new in this quarter and I know we are sort of the front end of the earnings calls the season is what's happened in freight and most of you probably saw the article on the front page of the journal today that talked about this. What we're seeing on freight which is broken out from our commodity cost really an unprecedented spike that happened in this quarter and it was driven, it started at the last quarter with the two hurricanes but really it jumped up almost an order of magnitude thereafter in sort of a one, two, three punches. The first was the bomb cyclone that took effect, the second thing was the fact that it got incredibly cold bomb cyclone notwithstanding in the North East between Christmas and New Year and then the last was the implementation of the ELD, the electronic log. That in turn combined for to get very difficult for us to get trucks, particularly refrigerated trucks, we usually don’t dimension like this but just to put in the order of magnitude we have 60 trucks between retail and food service that were standing between that period of time because we couldn’t get drivers any, independent of what we're going to pay, we still seeing that normalize and we're continuing to see the up charges come in but we're not having the difficulty getting drivers that we saw. So that was a particularly pinch point that happened in that window for us between Christmas and New Year.

The next question comes from Michael Gallo with CL King. Your line is open.

My question is just on the food service side of the business, obviously it's been for several quarters now you've had some weak restaurant sales and some of the national customers as well. We're seeing things show some signs of improvement in the fourth quarter and obviously you have some large new launches going on at some major national chain accounts on the soft side that I would think would help you somewhat. So, I guess you just start to look at the second half of the year and you begin to launch that as well as having may be a better alignment of pricing, would you expect that we should actually see the food service business starting to return to more normalize growth. Thanks.

Here’s how I would think about it Michael, first selling on the pricing, the pricing is in a fact and for the first time we’re going to start to see positive price realization on this business after in some cases, deflationary pricing, so it's actually unwinding last year around the same time the other way. So now it’s coming in to the positive. That’s the first data that’s going to create a tailwind. In this particular quarter, we had an unusually high amount of limited time offerings. I don’t think we’ve -- if I’m looking at Doug, we haven’t traditionally dimensional zed these but just to give you an idea, if you go back and you look at let’s say the previous 12 or 14 quarters, this was the second highest that we had over that period of time. So, we were lapping that and the LTOs that we had this period around were lower which resulted in a more negative offset. The other thing that happened in this business is the 60 trucks that I described, 30 of them were tied into this business. You put all that together, normalized trucking, you put into the fact that the LTO comp that we have in this upcoming quarter is lower and the fact as you’re pointing out we’re seeing in some selective ponds of life, we would expect to see this business start to get better. I am not going to go all the way over Michael and say that we’re going to expect see normalized growth but I think you’re going to see a down top of where we were this quarter and start to turn towards growth.

And then in terms of just the issues at New York Bakery, I mean it sounds the plant is back up and running, you are trying to catch up, the demand is obviously good. I guess as we look beyond the third quarter is there any reason we shouldn’t expect to see that return to kind of the normalized growth rate kind of Q4 and beyond and might there be even a catch up where at some point you are shipping more product or will there just be some share shift and those shipments are kind of lost forever?

So here is the way we’ll looking at it right now, there are a couple of things that we believe are going to happen that I would be happy to share with you. The first is as we look our way through this, there’s a big de-load of retailer inventory. Not only this gets tight within our supply chain, it constrained our ability to ship but it even resulted in limited out-of-stocks on retailer shelves. So, what we expect to see is as we’re able to produce more than the near demand, we have the opportunity to go back and replenish trade inventory. So that’s going to provide a tailwind for the business. The other thing that we’re going to do is resume the normal levels of marketing and promoting against the business. And then we also have some new item news that we’re planning for launch into the next fiscal year. So, at this point, I don’t expect to see this result in a structural dislocation in the business. It was obviously an unfortunate case of bad execution on our part that we’re pushing to resolve and get on the side of it.

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

Hey. Good morning, guys. A couple questions, just a clarification on the tax rate, you gave a lot of good detail there. But you said 24% for fiscal 2019 and I think you gave sort of a blended rate for ‘18. But is it safe to assume that your next two quarters you report that 24% since it’s now in that calendar year or how do we model that I guess?

Good question Frank and sorry for not being a little bit clearer on that. For the balance of fiscal ‘18, we are using 28.3%.

Okay, great. The other question is, in the past -- I know it obviously changes year-to-year but in the past, you’ve sort of given us a range of what you expect when those are in early Easter. Any changing give us just sort of a rough idea of what that means for the shift in sales for Q3 this year.

In terms of just a rough ball park figure, you know as a percentage of the retail sales, it's going to be about 1%.

Okay great and my last question is more of a big picture question on given that Amazon hopefully is now together in online, I mean still not big your categories but it does seem to be growing pretty quickly. Given that it's not a physical location it's hard to, its different on the way you promote these things. How do you approach promoting your products, your brands in that category given where its likely to be around next several years and in tremendous growth and the investments behind, how do you look at that capture that growth?

I will address that Frank, what we're doing today is we're really focusing our activity close in on retailer's online activities, so if you will think of progress quick list program and there is a whole range of other retailers that have comparable programs and that’s really, we're devoting the lion share of our time today. We're doing sales on a more limited basis with Amazon particularly in some of our dry products and we’re in the process of figuring out how we can do that at scale and make sure that we’re doing it profitability.

And is it something that you can be more promotional with given the way at work, how do you view that or you still sort of -- obviously pull back on promotions overall this quarter, so that help profits but like, I guess how do you view that like as far as, you already number one market share in all these categories.

I will just share with you, sort of a long-term view for not only us but everybody in the industry is in a situation like this where more and more the business starts to go to online and then in our category its particularly things like frozen and refrigerated which has been the slowest to adopt, but having just sort of setting that aside and saying any brand, unique CPG company, the real risk is you become "below the full", that is the retail starts to present options to consumers, you're below that fold, no different thing Amazon results like if you're shopping something at home and I think that’s the area that we’re focusing on. Today the retailers revolving in a way that they are tying in their online promotions with them in-store promotion and most retailers their run is almost two separate marketing arms. I think as they start to integrate their online business more into what they are doing in store, I think we're going to see more and more of that but I think that’s ultimately for us in the industry the big watch out is that you essentially land below the fold and you become somewhat disintermediate.

Your next question comes from the line of Alton Stump with Longbow Research.

I guess just ask about the food service business, you mentioned in the press release about overall the industry volumes being down, we had heard that things were getting better, particularly during the early parts. Of calendar 4Q some of that weather related, is being seasonally warm, I guess was it a case of the overall industry being down or was it more about like just your particularly major customers may be.

If I can sort of look you through it, if you looked at almost the flow of our business from October, November into December, the latter half of December was particularly tough for us and we don’t know if it was a big slowdown because of the bomb cyclone and the cold weather but we did see a pretty significant slowdown in December. What I can tell you on the other side is that we’re looking at orders on a go forward. They seem to have resumed on more of a normalized level. But that change in traffic patterns into restaurants then exacerbated by the fact that we are having -- we’re getting trucked out of our own docks into combined to put pressure on the business so. I think if you were to look across the scope of let’s say the last 18 months, I don’t know if I am in a position to say, wow looks like it’s getting a lot better, but I don’t believe it’s getting worse.

That makes sense. It’s helpful. And then I guess just back on the retail side of things, anything noteworthy from a competitive environment standpoint that you are seeing particularly in core addressing this business?

Yes, well I will walk through some of them for you. We focused a lot on New York justifiably. Our Olive Garden business in the portable salad dressing continues to perform exceptionally well. We launched a 32-ounce item that we expected to net cannibalize the 24 ounces and the 16 ounces, what we’re finding that it’s not and the philosophy in that business remains very, very high. The brand continues to grow. So, we’re extremely excited about that. It remains a great growth story inside of the retail segment. I also mentioned in my segment -- my comments on that was we work closely with our partners at garden restaurants in Olive Garden and we have agreed to launch an Olive Garden Parmesan Ranch that we’ve co-developed with the restaurant folks. We’ve tested it in the restaurants as well as with consumers and it’s performed exceptionally well. And we are particularly excited about that because the parmesan, just the ranch segment is about 2.5 times the size of Italian. So, if we can achieve any measured growth that we’ve seen on the Italian side, we think we have the right to really continue to grow there. Moving over to Sister Schubert, we had a very good holiday season, Thanksgiving and Christmas both. We continue to expand distribution behind a 20-count size, again weren’t exactly sure how it’s going to perform in the marketplace, what we were looking for was this idea of expandable consumption that if we could get more into the freezer that consumers would consume it more often and that in fact is proving out. So that business continues to perform very, very well. On the refrigerated dressing side, I made some comments. A year ago, we were talking about excessive trade activities from a couple of competitors and we were following suite and we shared with you how we intended to go in and make some strategic changes to our lineup, to our packaging, and to adjust our trade strategy and we’ve worked our way through that on businesses I described for you. Our business is returning to growth. We are just below the category average now. Most of the competitors, except for one, have also pulled back trade. And we used this intervening period to club SKUs and to focus on higher performing SKUs. So, we remain pretty bullish about that category as well. I am going to knock on mic right here on the desk that I am sitting on and tell you that the worse is behind us and better times here to come and so I'm not going to, hopefully not change myself. The inflection over to dips, we had a good but not a great season and carnival season, our dips remains the next focal area for that team that I described on Marzetti, that they are going to focus on, we do have some new items that were readying for launch early into next but I think they are going to be very exciting and will change things up significantly. And then I will move around and talk about some of our lights are smaller, what we call specialty brands in the portfolio that really don’t get lot of attention. Our [indiscernible] and a range of other and there too, we're making packaging changes and we’re changing formulations on SKUs and those are going to be shipping here in the next few months as well so. If you look across the balance of the portfolio, we feel like a lot of the innovation activities are starting to take group, we just need to do more and do faster.

Your next question comes from the line of David Stratton with Great Lakes Review. Your line is open.

When we look at the impacts from the new tax bill on your CapEx and your expected expenditures particularly in areas where you see room for growth, has that adjusted your guidance for the year or do you have any plans in place at this point where that money might be allocated?

I will walk you through that, so we went into the year and I think the guidance we provided was that we expected to spend about $30 million and we remain on track to spend that $30 million. What's really one big slug of that was going to expand capacity at Angelic Bakehouse which is on time and on budget, we're getting ready to open up new freezer and be able to utilize that space within a week or so. And the other area where we said we were going to devote CapEx, was up against our Lean Six Sigma program which is really fully taking roots, I mentioned in my comments we are generating solid mid seven figure, net benefits against that, everything in the quarter, so we’re excited about that. As we think about things on a go forward basis really our expectation is to not use windfall to drive a change in strategy, we set a strategy around the items that I described earlier on David, accelerated in our base business growth, improving our supply chain and optimizing it and improving our margins and then looking for smart bolt-on acquisitions. Really the big change for us is that change in deductibility and how it's going to help improve the IRRs but honestly if a project was on the bubble, I don’t know if just a change in the tax rate would for us justify pushing it over the line, really what we're trying to do is just be very disciplined where we’re putting that money. I think it's been one of the hallmarks of Jay and the team here who had lead the business for really long-time and we expect to stay true to them

Great and then you mentioned potential acquisitions, is there anything on the horizon or can you kind of give us an update on landscape and what you see there/

We’re always out shopping, I can tell you that much for sure. We have a couple of things that we’re looking at but nothing necessarily that’s eminent. As far as prices and what's going on in terms of multiples, we haven't seen it necessarily trickle down into the way people are thinking about multiple expectations. I think the landscape largely remains the same, so I think good assets are expensive but not out of reach, it’s a lot of time just convincing the seller that the time is right to sell.

And your last question comes from the line of Brian Holland with Consumer Edge Research. Your line is open.

Thanks. Good morning, gentlemen. So most of my questions have been answered. I did want to ask housekeeping, and forgive my ignorance if you addressed this. Appreciate the color that you gave on the top-line impact from the production supply issues as well as the freight capacity. Did you give us a sense -- or if you didn’t quantify this, if you could, the impact on the operating margin line?

Of commodities or of freights you’re asking?

Just anything that -- I guess and you can give me it aggregates would be fine is what. Just everything outside of just normal commodity, I mean obviously commodity inflation you had but anything that you sort of would define as beyond unusual in the quarter that you wouldn’t think is sustainable beyond the next quarter or two?

Yes, so a couple of things -- may be that I’ll look at Dale and Doug to jump in. May be hitting commodities first, I think the way we characterized it so if you’re thinking about your modeling, is on commodities, we said the amount was 2% of net sales, and by the way that’s a net number, that’s net of procurement activities that we had. The growth inflation that we had in this particular quarter was even higher than that. As we look at the outlook on inflation, we expect to see it start to moderate. So, as we look at eggs in particular, eggs were a high watermark in this particular quarter and we are starting to see that abate somewhat offset the of course by pricing activities and stuff like that. On the freight, I think the way we characterized that and this isn’t the disruption in timing but this is the cost increase that we incurred. I think we characterized that as slightly less than 1% of an up-charge just in transportation cost within the quarter. It’s the way we’ve explained that. We would expect that to remain higher than prior quarters but then start to come down. The real measure that we are looking at here is what we call PNOC which is pricing net of the commodity. So that would be -- if you look at commodities, both growth inflation and then net inflation after our let’s say procurement activities and things like Lean Six Sigma, and when we look at our pricing, and for the last four quarters -- in the last two quarters in particular we’ve had very negative PNOC where the commodities have significantly out swayed our ability to cover on pricing. As we swing into the back half, we’re going to start to see PNOCs run in our favor for the first time due to the Lean Six Sigma activities, procurement where we have been able to get out in front of this, some of this stuff as well. So that’s probably worthy of note.

Brian this is Doug. The one thing that Dave alluded to and I think is worthy of emphasis is the pricing of the eggs. And as he mentioned, they are beginning to come down but there’s still going to be at level still higher than that of the prior year. And we live in a bit of a delicate balance with the laying block and certainly the issues that were happening over in Europe. And so, I think a big piece of what Dave is conveying is the continued decline in the egg price that we anticipate seeing should there be an interruption in the supply of eggs somewhere around the globe that could certainly swing things the other way pretty quickly and promptly. So just a bit of caution on that.

Thank you for that tremendous color. Last question for me just kind a big picture, taking note of what we’re seeing in the scanner data for you guys. You talked a little bit about [indiscernible] last quarter and it is interesting when you sort of flush out the data, the kind of the growth that you're seeing on the other side of SKU rationalization efforts the tighter focus on your best performance SKUs I think that’s netting out for something like high single digit growth into year end, which is obviously very impressive. We're seeing total points of distribution, declines, accelerating for you, I think across crew times and dips for instance and I think you talked about being proactive in SKU rationalization last quarter as well. Maybe two things, one is that certainly, what we're seeing in data support and what you talked about last quarter with being proactive and obviously the second part of that is innovation, how long and how painful is this process in the near-term and if we look at Sister Schubert's is that a fair proxy of what you think you can do on certain of these brands where you tighten that focus here.

Yes, Sister Schubert is the role model, that’s the blue print that we're using. So, if you go back, we reduced the number of SKUs to what the team called Sister 7 and we focused all of their selling activities against getting that assortment right to ensure that instead of having items number one, number 14, number 15 and then number five, six and excreta that first and foremost you have items number one through seven. And then layering on top of that good innovation and that is the model, so that’s the model that’s been applied across the board. If you look at dips for example which you called out, if you look at where we're looking distribution or the matter of dips, mechanically just we are underperforming, so we discontinued that sublime and we have innovation that we're ready and this is going to coming behind it. At the same time, I want to be forthcoming with you guys as well though that a lot of this is intentional, that being said, I don’t like seeing the timing where we're dipping down before we're coming back up but like to see longer term is a tighter match of our timing between when we're making discontinuation decisions and when we're launching the new items. So, I think let's say that we're launching part of the blue book effectively or the play book effectively but we're not all the way there.

If there no further questions, we will now turn the call back to Mr. Ciesinski for his concluding remarks.

Thank you everybody on the call today for joining us. We look forward to talking with you this spring as we share our third quarter results and we hope to get a chance to see some of you on the marketplace early this year, we will talk to you guys later.

This concludes today's conference call, you may now disconnect.