The Marzetti Company (MZTI) Q4 2020 Earnings Report, Transcript and Summary

Good morning. My name is Megan 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 2020 Fourth Quarter Conference Call. Conducting today's call will be Dave Ciesinski, President and CEO and Tom Pigott, CFO. All lines have been placed on mute to prevent any background noise. After the speakers have completed their prepared remarks, there will be a question-and-answer period. [Operator Instructions] Thank you. And now to begin the conference call, here is Dale Ganobsik, Vice President of Investor Relations and Treasurer for Lancaster Colony Corporation.

Thank you, Megan. Good morning everyone and thank you for joining us today for Lancaster Colony's fiscal year 2020 fourth quarter conference call. Our discussion this morning may include forward-looking statements which are subject to the Safe Harbor provisions of the Private Securities Litigation Reform Act of 1995. These statements are subject to a number of risks and uncertainties that could cause actual results to differ materially and the company undertakes no obligation to update these statements based upon subsequent events. A detailed discussion of these risks and uncertainties is contained in the company's filings with the SEC. Also, note that the audio replay of this call will be archived and available on our company's website lancastercolony.com later this afternoon. For today's call, Dave Ciesinski, our President and CEO will begin with a business update and highlights for the quarter. Tom Pigott, our CFO, will then provide an overview of the financial results. Dave will then share some comments regarding our outlook for fiscal ‘21. At the conclusion of our prepared remarks, we’ll be happy to respond to any questions you may have. Once again, we appreciate your participation this morning. I’ll 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 fourth quarter results for fiscal year 2020. I'd like to begin by extending a sincere thank you to the entire Lancaster Colony team for their tremendous efforts during the past five months, as we confronted the impact of the COVID-19 pandemic. From the front line workers at our plants and distribution centers, to all the associates and leaders throughout our business, I am extremely proud of how we pulled together and worked in common cause to meet the shifting demands of our business. From the onset of the coronavirus pandemic, we’ve remained steadfast that our mission is fixed. First, to provide for the health, safety and welfare of our teammates; and second, to ensure that we continue to play our role in our country's vital food supply chain. Despite all the uncertainty and obstacles that COVID-19 has imposed on our business, we completed fiscal year 2020 with record net sales of over $1.3 billion and record gross profit of $358 million. In our fiscal fourth quarter, excluding [Audio Gap] sales, consolidated net sales grew 70 basis points. Net sales in our retail segment grew 24.5%, while our food service segments reported net sales declined 24.1%. Retail net sales benefited from higher demand as the impacts of COVID-19 drove increased at-home food consumption. We were pleased to see that our recent new product introductions contributed about 4.5 percentage points to our retail segments Q4 sales growth. Notable contributors to growth included our single bottle offering of Buffalo Wild Wings sauces and separately Chick fil-A sauces that we are selling in a regional pilot test in Florida. Both the Buffalo Wild Wings and Chick-fil-A sauces are being sold under exclusive license agreements. Following a strong third quarter, retail sales trends remained robust in the fourth quarter for our New York bakery frozen garlic bread, Sister Schubert's frozen dinner rolls and Olive Garden dressings. In our food service segment, excluding all omni-baking sales, fourth quarter net sales declined 22.2%. The food service segment was adversely impacted by COVID-19, particularly in the month of April, but recovered notably in May and June led by the quick service restaurant customers within our national account base. Despite the unfavorable influences of COVID-19, we grew our fourth quarter consolidated gross profit by $10.9 million or 13.9% to a fourth quarter record $89.1 million. The gross profit improvement was driven by the favorable sales mix, our cost savings programs and improved net price realization in retail. Notable offsets to gross profit attributed to COVID-19 included much deserved weight rate increases for our frontline employees, and in keeping with our top priority, investments to promote safe operations at all of our facilities. I'll now turn the call over to Tom Pigott, our CFO for his commentary on our Q4 financial results.

Thanks Dave. Overall the quarter's results exceeded our expectations. After a challenging April the business recovered strongly. The performance is reflective of the many actions taken by employees to address the impacts of the COVID-19 outbreak and the focus they maintained on our key objectives. Fourth quarter consolidated net sales decreased 90 basis points to $320.9 million. Excluding Omni Baking sales of $2.8 million in the current year quarter, and $7.7 million in the prior year quarter, consolidated net sales increased by 70 basis points. As your recall, Omni Baking sales are attributed to a temporary supply agreement. These sales will continue to decline as a supply agreement comes to an end during our fiscal second quarter. Consolidated gross profit increased $10.9 million or 13.9% to $89.1 million, and gross margins grew by 360 basis points. The increase was driven by the strong revenue growth in the retail segment, our cost savings programs, improved net price realization in retail and lower commodity costs. These favorable impacts were partially offset by the COVID-19 related items, including nearly $3 million in incremental frontline worker pay, as well as other costs, ensuring the safe operation of our facilities. Selling, general and administrative expenses increased $8.9 million or 22%. There were two main drivers behind the increase. First, was the investment we're making in our ERP program entitled Project Ascent, which accounted for $3.8 million of the increase. The second main driver was a $3.2 million write-off of previously capitalized engineering costs related to our decision to cancel the Horse Cave expansion project. As we discussed in our Q3 call, we elected to cancel this project and reassess our longer term capacity needs given the rapid change in demand we are seeing. Note that expansion project with a different design remains a strong possibility for the future, and we'll have more to share on these plans in an upcoming call. Consolidated operating income declined $3.1 million versus the prior year to $40.2 million. It’s important to note that the prior results included a $7.4 million favorable adjustment to contingent consideration and the current year results include the incremental $3.8 million in ERP expenses and the COVID-19 items mentioned above. Key drivers of the strong operating income growth excluding these items include the top line performance, favorable mix and cost savings programs. Our effective tax rate was 24.6% this quarter versus the tax rate of 25.4% in the fourth quarter of fiscal 2019. We estimate our tax rate for fiscal ‘21 to be 24%. Fourth quarter diluted earnings per share decreased $0.10 to $1.10. Increased expenditures for Project Ascent accounted for the $0.10 of the decline. The prior year fourth quarter benefitted from the change in contingent consideration, which totaled $0.21 per share. With regards to capital expenditures, our fiscal ‘21 payment for property additions totaled $82.6 million. Our investment in fiscal ‘20 included expenditures for our frozen dinner roll capacity expansion project and the purchase of the Omni-Baking facility that was previously leased. Looking forward to fiscal year ’21, we are forecasting total capital expenditures between $65 million and $85 million based on plans currently in place. We are in the process of evaluating additional and potentially significant investments to meet the rapid growth in demand for our products. These projects will be added to this forecast. We’ll provide you with future updates on our plans once they are more fully developed. In addition to investing in the business, we also returned funds to shareholder. Our quarterly cash dividend paid on June 30 was $0.70 per share, an 8% increase from the prior year amount. Our longstanding streak of annual dividend increases reached 57 years this past December. Despite the higher level investment and increased dividend payments, our financial position remains very strong as we finished the quarter debt free with $198 million of cash on the balance sheet. So to wrap up my commentary, this quarter featured strong underlying performance, highlighted by increased consumer demand for our retail products and improving sales trends in our food service segment. The business continues to monitor and adjust to the impacts of the COVID-19 outbreak, while investing for longer term growth. I will now turn it back over to Dave for his closing remarks. Thank you.

Thanks Tom. As we look ahead to fiscal year 2021, sales for both our retail and food service segments will remain subject to the shifts in demand resulting from COVID-19. The extent and duration of the pandemic related impacts are unpredictable and contingent upon the future spread of the virus and the resulting effects on consumer behavior. That said, we anticipate continued top line growth in the retail segment from shelf-stable dressings and sauces sold under license agreements, most notably Chick-fil-A sauces, Buffalo Wild Wings sauces and Olive Garden® dressings. In food service, the heavier mix of our business towards quick service restaurant, which represents over 60% of food service segments total sales will remain a positive in the current environment. On the commodities front, we're projecting a moderate rise in the coming year following a favorable year in fiscal 2020. We expect that our cost savings programs and favorable net price realization will help offset commodity cost inflation. With respect to our ERP initiative, Project Ascent, we recently completed the design and build phase as planned and are now into the test phase. We expect to finish the test phase near the end of fiscal 2021 followed by the deployment phase. Strategically, as we look ahead to fiscal 2021, we will continue to leverage the combined strength of our team, our operating strategy and our balance sheet in support of the three simple pillars of our growth plans. Number one, to accelerate our base business growth; number two, to simplify our supply chain, to reduce our cost and grow our margins; and number three, to identify and execute complementary M&A to grow our core. Before opening up the call to questions, I'd like to take a few moments now to share with you some information regarding discrete actions that we, in keeping with our vision to be the better food company, have underway here at Lancaster Colony to do our part to eradicate racism and commit to diversity, inclusion and belonging, both in the workplace and in the communities where we operate. First, we established a new position within the organization, Vice President of Corporate Affairs and Government Relations to provide leadership and developing and executing plans to drive our company's engagement in state and local government, corporate citizenship, social responsibility and sustainability initiative. I'm pleased to announce the hiring of Clarence Mingo to this position effective August 17. Clarence’s role will also include oversight of our diversity and inclusion programs. Second, I'm happy to share that Lancaster Colony has formally adopted a diversity hiring statement, otherwise known as the Rooney Rule, which reinforces our commitment to including highly qualified women and minority candidates, as well as highly qualified candidates with diverse backgrounds, skills and experiences in the pool of candidates we consider for new leadership positions. Third, I'm excited to announce that we've entered into a partnership with Cristo Rey High School here in Columbus Ohio. Cristo Rey provides a work study model of education for students from low income families, whereby corporate partners provide tuition support and work study mentorship for their students. Cristo Rey High School was established in 2013, and it's been nursing the growth of students and sponsors alike since its inception. Finally, in support of our team members here at Lancaster Colony, we will be establishing an Employee Relief Fund. The purpose of this program will be to assist our employees that encounter tragic life events that result in financial hardship. While the company plans to make an annual contribution to this fund, our employees will also have the opportunity to support the fund through their personal donations. In closing, I would again like to thank the entire team here at Lancaster Colony for all they have done to help make fiscal 2020 a success, despite all of the unprecedented challenges. I would also like to thank our shareholders and other stakeholders, including our customers and suppliers for their ongoing support. We look forward to partnering with them to pursue the opportunities that lie ahead in fiscal 2021 and beyond. This concludes our prepared remarks for the day and we'd be happy to answer any questions you might have.

[Operator Instructions] Our first question is from Brian Holland with D.A. Davidson and Company. Your line is open.

Thanks. Good morning and congratulations!

Good morning Brian.

Hey Brian! Good morning.

So, quickly on food service to start, down 24% in 4Q. Can you provide some context around how those trends progressed for the quarter? Maybe where that segment is sort of trending today?

Yeah, you know that’s a great question. So you know Brian if you look at April, across all of away-from home dining, April was a very, very tough month. If you look across all segments QSR midscale casual dining, it was probably down 40%. As May and June progressed, it improved notably. Probably coming out of June we were looking at transaction volumes from MPD Crust [ph] that were down somewhere in the order of, let's say 12%. As we’ve continued to March through the remainder of June and into July and early August, what we're seeing now is transaction volume again from MPD Crust [ph] is running probably down around 10%. Now if you layer onto that, that’s transaction. It doesn't include the size of the check. What we're looking at is sales are slightly better than that and there are some customers notably Pizza QSR, Chick fil-A and a handful of others that are actually posting positive comps and in some cases record sales. So that was sort of a continuum. It started very, very low in April and then rebounded nicely thereafter. But we're still pacing on the transaction level down, you know let's say somewhere in the single digits, the high single digit.

Okay, so down high single digit dollars maybe slightly better than that and then if I'm thinking about your business, you know one of the key things that I think has been clear and evidence today is you've got more favorable exposure than you know if you look at the broader food service landscape given the QSR mix and more notability the national chain. So fair to assume that you're trending maybe even a little bit better than what you're just referring to from an industry level?

You know maybe ever so slightly better than that. I think the stats that I give you also provide for the fact that QSRs, just over development within food service at large and then our region [ph] food gets a lot of that benefit.

Okay, perfect. I appreciate the color. On the retail side, I think you mentioned 4.5% contribution from new products. I just want to be clear, because you have a myriad of new products coming through market and channel expansion initiatives, etcetera. So does that comment refer specifically to the licensed products, most notably Buffalo Wild Wings and Chick fil-A or are there other contributors to that mix that you're referencing?

It’s the ones you mentioned, Buffalo Wild Wings, its Chick fil-A sauces and then smaller contributions from this great item we launched called Bibibop and some of our own items like Tastefully Dressed. Maybe what I'll do is even then kind of step back and provide just a little broader context on the retail segment. So over the same period of time, as we saw the food service segment really back off in April, obviously we saw retail really recognize a spike. We enjoyed that spike as well. Now as you sort of proceed forward, what we're seeing now from the multi-outlet data for all food categories in IRI. So again, all food this would include retail plus mass merchants etcetera, etcetera. What we're seeing is food these days is running plus about 10%, maybe 11% and given the categories that we are playing in, we are performing better than that, and you saw that in our scanner data, I don't have to necessarily take you through that. As we look forward, one of the great questions that we're trying to sort of predict and so are our peers in the industry is, you know when and how does the industry began to revert to something that’s a little bit more in keeping with traditional norms, i.e., retail backs off a little bit, food service picks up a little bit. What we expect is the strength of our new items, particularly behind Chick fil-A sauces, BWW and honestly just continued organic growth of Olive Garden is going to continue to give us a nice tailwind as we look out across the next year.

Okay, I appreciate that. Last one from me and then I’ll hop back in the queue. Just kind of big picture here, because there’s been a lot of conversation in the market around Chick fil-A and the Buffalo Wild Wings in particular. I know there are other items there. The context that’s always out there is Olive Garden is a $100 million brand which I think progressed over a period of about eight years and folks are wondering, you know the pace at which you can maybe replicate that, as you talk to both of these brands have potential to be as big or bigger than Olive Garden given that the category characteristics, the brand awareness etcetera. So can you just kind of walk through the puts and takes behind, you know specifically the pace at which you think these can go or continue to build using maybe that $100 million marker and reasons that it would happen faster or materially faster or at about the same pace as Olive Garden?

Sure, it’s a great question and, your exactly right. Maybe we’re just building on Olive Garden. It was $100 million business; it’s actually been larger than that with the benefits of COVID. We're finding that we're continuing to capture new users and that business is growing very nicely, strong double digits. Now to the second and more important question that you had on the table around Chick-fil-A and Buffalo Wild Wings, we absolutely – everything that we've seen in our fiscal fourth quarter, and today in the first quarter, continue to affirm our belief that both of those items have the potential to be at least as big and quite possibly bigger than Olive Garden, and the timing will likely be faster. I don't know if I would necessarily project. I would tell you that we've been in the Olive Garden space about seven years. It started first in club, then it moved into retail, expanded through retail and now we're taking it into some of the dollar channels and drug channels and places like that. I think what you can expect is now that we understand the opportunity more completely, we're going to look to capitalize on that growth more quickly. I think the other thing that's played out, is that it's really two fold. One, food service operators are seeing the power of their brands in retail to generate another source of revenue. But the other is, our retail partners are seeing the strength and the relevance that these brands have, and the way that they move off the shelf. Brian, I know that you’re big into data and one of the points that I would point to is if you look at the velocity on those items, there are considerably, all of them are considerably higher than the other items in the category, which gives us a lot of optimism about the potential if we can execute on it.

Thanks. I appreciate it. Best of luck.

Thanks Brian.

Thank you, Brian.

Your next question is from Ryan Bell from Consumer Edge Research. Your line is open.

Good morning, everyone.

Good morning, Ryan.

Good morning, Ryan.

I appreciate that there are a lot of moving parts right now, but could you speak a bit more about your fiscal 2021 outlook. What your expectations would be for the retail business, the cadence of the food service recovery and then could you highlight in a little bit more detail some of the negative commodity pressures that you're expecting?

So, why don’t I take the first part, and I’ll pivot to Tom for the second part on the commodity outlook. So Ryan, you know in keeping with our tradition, we don't provide guidance, but maybe what I'll share with you is just anecdotally some of what we’re seeing right now. I know your tracking the same scanner data, a lot of the same scanner data that we are and you’ll not that multi-outfit for all food is running around plus 10; it’s been running there for quite some time. Well, it’s a little bit higher. It's sort of moderated into about 10. You know we've been running stronger than that and our view is as long as we continue to see you know the COVID outlook the way it is, with people continuing to eat more at home, we continue to see those trends that we've seen to date to continue. The big thing that we just quite simply can't predict is when do we start to see something like a therapeutic or a vaccine that allows people to return to the workplace more aggressively, return to eating out more aggressively and do we begin to see the retail trends start to moderate. Our belief is though, as they do start to moderate, just given the strength of the new items and the size of the opportunity of those new items, it's going to continue to provide us a very nice tailwind for top line growth in retail. Maybe I'll turn it over to Tom and he’ll… [Cross Talk].

Yeah, I’ll talk a little bit about the margin outlook. So Q4, that certainly benefited from the mix shift to retail, which was a key driver of that margin growth we experienced and certainly the outlook, a lot depends on how long that growth continues in the retail segment. Certainly we feel really good about the new product pipeline we've got and some of the spending we are doing to try to convert some of the new users to repeat users. You know in terms of the headwinds, we do have – we do expect commodities to be more inflationary. We see it in the oil, a little bit in sweeteners, based on kind of some of the hedging positions we took previously where we did not feel a lot of the unaffordability that other companies felt in last fiscal year. As that coverage wears off, we do expect higher costs there. That said, we do have you know some cost savings programs and revenue and management initiatives to help offset the impact of those commodities. And then going forward, the other piece I’ll mention is, we do expect to have some higher COVID related expenses continuing into this fiscal year.

Thanks for the color. And maybe drilling a little bit more into the food service business, we’ve seen better recovery of QSRs and seemed to be exposed pretty heavily to the QSRs with this business. Can you talk about the percentage of your sales in the food service business that come from QSRs and maybe what the margin differences might be between the QSR parts of your business and the other parts that might be recovering a little bit slower?

Sure, well why don’t we just talk about you know the food service business in general and the trend. So if you look at our food service segment, which coming into this period was roughly half of the business, 60% of that is in QSR and that would include traditional QSR, as well as Pizza QSR and most of those concepts are performing quite well, some of which are posting record numbers. Pizza QSR chains, a lot of them are, as well as folks like Chick fil-A. That really is a significant sort of benefit for our food service business. As we look at the other pieces, there's about 20% of our – let me back up, there's about another 15% of our business that’s in other national accounts, which would include mid-scale and casual dining. Casual dining actually is rebounding pretty nicely as well. As you look at folks like Buffalo Wild Wings and a range of others, they are also performing quite well under the circumstances and really it's an amazing testament to the leaders in those organization and the managers that run their local sites, that they are figuring out how to operate and deliver food or to provide pick up and to do it in a way where they can keep their businesses, not just floating, but in many cases now growing. Now there’s a portion of a – smaller portion of our business. It's probably somewhere in the 20% range, that we would sort of categorize as branded. That tends to be schools, universities, non-commercial stuff like that. That's a part of the business that honestly just has not really began to recover, and then the last piece is industrial where we’re selling products to likely other food manufactures in the industry and that's remained quite robust. So there's 80% of our business and probably simply said, maybe even a little higher, 85% that's doing very, very well. There's 15% that's not, but to put that together, it continues to again leave us you know relatively bullish about even food service. We're going to continue to see headwinds, but not nearly at the rate that we did back in April or even early May.

Thanks, that's very helpful. And on that sort of branded portion, the smaller part, is there any way you could give a little bit of detail about the magnitude of the declines we’re still seeing. I think that's the part that we’d have a little bit less visibility from other data that's out in the market?

Yeah, you know they are still off double digits. You know I would say probably somewhere in the 20% range. And the big X-factor is you know when and if do schools begin to open, how do those mom and pop operators begin to be affected. But Ryan, I'll share with you what we're also seeing anecdotally, which is interesting. As those mom and pop operators are affected and in some cases struggling to open, what we're finding is that their demand is actually flowing back out to national chains. One of the hypothesis that we have is as we are digging into the data, is that you know just as we are seeing in retail, as consumers go back to trusted brands, we're finding that a lot of away from home diners, if in the event their neighborhood place is struggling to stay open, are going back to a bigger chains and as a consequence we're seeing that as a tail wind into places like Olive Garden, Buffalo Wild Wings, Applebee's® and a range of others. So as you look at that, I would maybe caution you against looking at that segment as static and what you're likely to see is that the demand is somewhat fungible and it's moving back into chains.

Thanks. I appreciate the color on the food service business. That’s it from me.

Okay, thank you.

Thank you, Brian.

Your next question is from Todd Brooks with C.L. King & Associates. Your line is open.

Hey, good morning guys. Congratulations on the quarter.

Thank you, Todd.

A few questions for you. First of all, if you can talk about gross margin performance in the quarter, which was well above our expectations and I know there’s a mix element to that with retail versus food service, but at the same time, I guess I believe you expected friction in the quarter as you are balancing production between the rising retail business and maybe the temporarily impaired food service business and just trying to service that spike in retail. If you can talk about, what's the right way to think about Lancaster's gross margin potential in fiscal ‘21 as we're not dealing with that sort of friction as mix, and we have to make an assumption for how to normalizes between retail and food service. But then you also just structurally keep delivering cost savings and I just want to understand really where you’re think – if we’re taking a step up in the gross margin potential for this business.

Yeah I – so this is Tom, excellent question. So you know you mentioned the – you know we talked about unabsorbed overheads in our Q3 call and certainly at that point we were seeing outsized demand reductions in food service and in the month of April we felt that. It was an item in April. But then as the food service business began to recover and then food service and retail revenue growth remained strong, that friction kind of went away towards the end of the quarter and we don't really see the unabsorbed overheads being an item going into our next fiscal year. So then the key items to look at really as you project us out into fiscal ’21, it's really how the retail growth, because of the margin differential between retail and food service is a key driver. And then in terms of cost savings initiatives, the teams that have done an outstanding job in that week, so that we continue at consistent levels into the next fiscal year. Commodities as I mentioned do become more inflationary, but we're certainly focused on offsetting that with revenue management. So overall, we feel very good about our margin prospects going forward, really driven by the retail revenue growth and the new items they had mentioned.

That’s great, that’s great. Secondly on food – I mean on the retail category more broadly, you talked about restaurant partners wanting to develop alternate revenue streams and that that desire is maybe magnified out of the pandemic. You did add the insight during the call today that relaters want these products as well. The velocity is better, the brands to some extent promote themselves with customer awareness. Can you talk about your pipeline from a development standpoint? Are you seeing other either existing kind of foodservice partners coming to you to build a retail type of offering or potentially are you seeing outside customers that you are not doing business with now, kind of recognizing the expertise that Lancaster has developed in bringing these products to market and expectations for this growth engine going forward.

I guess the short answer is yes and yes. We are seeing both, new concepts that have reached out to us over the course of the last quarter, to express interest in looking at opportunities. But then as we look closer in, just at the brands that we have these partnerships with, you could think of them as being able to grow sort of laterally and vertically. You know laterally the opportunity exists for us to move into other channels of trade and then beyond that vertically to introduce new flavors. One of the things that's exciting particularly about Buffalo Wild Wings and Chick fil-A sauce is just the range of different flavors that they can play in and as you think about it, it allows us to move into different occasions. So it's an exciting time and to your point, I think you know a fair amount of credit for this goes to the team at Darden restaurants that saw this opportunity early on and was willing to lean forward and take a chance that it wasn't going to cannibalize their business and they were open minded and we partnered together. We agreed on the data that we wanted to look at to make sure that it was beneficial to all of their business, both the restaurant business and then this opportunity in retail and it played out, and I think as it continued to play out and the restaurants have benefited, and the company at large has, it's given other operators out there more confidence to play in the space.

Okay, great. And then two more quick ones for me. One, you talked about moving into the testing phase for Project Ascent. Is there any color you can give us on what the cost during this kind of year-long phase for fiscal ‘21 should look like for ERP?

Sure. So maybe I'll start and just give you a couple of overview comments and I’ll turn it over to Tom and he can give you maybe a little bit more info about the financial outlook. You know first what I would tell you, it's great credit is due to this team and to our integration partners Capgemini, because as you might expect, they've had to go back to the drawing board and figure out how do you do any ERP design and build in the throes of a pandemic, right. Ordinarily these people would be clustered closely together partnering within functional verticals in our business, designing the functionality and traveling regularly to our site to make sure that they were ready to take on this technology. They had to step back and figure out how to do this work safely without being able to travel extensively or work very, very closely and they've done exactly that. So during the course of this past year and the course of everything else, we did complete the design, we did complete the build and now we've moved into the testing and you can expect to see us take a couple of small pieces of the business that aren’t related to the core, that won't jeopardize the operations of the core live during the fiscal year itself. They're going to provide us a bit of a test blueprint to see how the company at large handles it and then our plan is to go-live on the system whole on order to cash very closely after the beginning of the next fiscal year. But I really wanted to just say that the team deserves a great amount of credit for figuring out how to do this remotely, and they're doing that same thing on testing now. Now Tom, as far as the pacing of the spend, maybe I’ll let you speak to that.

So as you look at Q4, the gross spend was a little over $9 million. A portion of that was capitalized and $5.5 million hit the P&L. As you go into the next fiscal year, what we’d capitalize is the design of the system and with the design work being done, we won't be capitalizing as much. The spend will go up slightly, so you'll see a bigger, slightly higher P&L charge going into the next fiscal year on ERP as we've completed the design phase and we’re moving towards implementation.

Okay, great, that's helpful, thank you. And then the final question, and this is maybe just so we can maybe – expectations that as we look out to fiscal ’21. The obvious success of the pilot of the Chick-fil-A sauces in the Florida market, can we talk about how that program goes from here as far as regional rollouts, national timing. But then also you talked about broadly touching more category, you talked about launching more points of distribution than the initial launch of Olive Garden. So as we’re starting to think about how meaningful this business can be, kind of fiscal ’21, fiscal ’22, anywhere – anyway that you can help maybe right size this on our expectation for this launch would be great. Thank you.

So first I'll just talk about sort of the pacing of how we're going to go-to-market and maybe help you think about dimentionalizing it. So next month we're going to begin a national roll out of a catering bottle that they're going to have in their restaurants. You know in a lot of the restaurants today they have tubs, in some locations they have bottles. In partnership with them we're converting their take away business, their catering, their off-site business to bottles; that’s an initiative that they're very excited about. And towards the end of October we’re going to begin the first roll out in regions in the south east, and then on the heels of that about eight weeks later what you can expect to see is that we’re going to take a bigger swap of the south east and roll it out there with our retail partners. And then after the beginning of the calendar year, we’re going to take it out across another swap of the United States, so that by the end of the fiscal year, we’ll have it in full national distribution across all of retail. So it’s going to be a relatively fast ramp up given what we’re doing to make the comparison with Olive Garden. We wouldn’t club for probably the first two to three years with Olive Garden before we’ve been into retail, at least two years before we’ve been into retail. So we’re going to be going after the bigger opportunity here, which is retail, considerably faster and then looking at Club and other points of distribution thereafter.

Okay, great. Thanks for the color and congratulations again.

Thank you.

If there are no further questions, we will now turn the call back to Mr. Ciesinski for closing comments.

Thank you, Megan, and thank you everyone for participating this morning. We look forward to sharing our first quarter results with you in early November.

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