Earnings Call Transcript - MZTI Q4 2025

Operator, Operator

Good morning. My name is Liz, and I will be your conference call facilitator today. At this time, I would like to welcome everyone to The Marzetti Company's Fiscal Year 2025 Fourth Quarter Conference Call. Conducting today's call will be Dave Ciesinski, President and CEO; and Tom Pigott, CFO. Thank you. And now to begin the conference call, here is Dale Ganobsik, Vice President of Corporate Finance and Investor Relations for The Marzetti Company.

Dale N. Ganobsik, VP of Corporate Finance and Investor Relations

Good morning, everyone, and thank you for joining us today for The Marzetti Company's Fiscal Year 2025 Fourth Quarter Conference Call. Formerly known as Lancaster Colony Corporation, our business rebranded as The Marzetti Company effective June 27. This rebranding honors the 130-year history of our flagship Marzetti brand and signals our future as a food company with an ongoing commitment to delivering high-quality flavorful products that make every meal better. While Lancaster Colony will always be an important part of our heritage, we believe the Marzetti name is critical to positioning our business in today's food industry and communicating the value we deliver to all of our stakeholders. Please note 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 review 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 website, investors.marzetticompany.com, later today. For today's call, Dave Ciesinski, our President and CEO, will begin with the business update and highlights for the quarter. Tom Pigott, our CFO, will then provide an overview of the financial results. Dave will then share some comments regarding our current strategy and outlook. At the conclusion of our prepared remarks, we'll be happy to respond to any of your questions. Once again, we appreciate your participation this morning. I'll now turn the call over to The Marzetti Company's President and CEO, Dave Ciesinski. Dave?

David A. Ciesinski, CEO

Thanks, Dale, and good morning, everyone. It's a pleasure to be here with you today as we review our financial results and provide you with an update on our business. Before I provide comments on our fiscal fourth quarter results, I am pleased to share that we completed fiscal year 2025, which ended June 30, with record high net sales, gross profit, and operating income. I want to extend a sincere thank you to all of our teammates throughout our business for their countless contributions to this achievement, as well as their continued commitment to our ongoing success. Moving on to our results for our fiscal fourth quarter, which ended June 30, we are pleased to report that consolidated net sales grew 5% to a fourth quarter record $475.4 million, and gross profit advanced 8.7% to a fourth quarter record $106.1 million. In our Retail segment, net sales increased 3.1% to $241.6 million, driven by growth from both our licensing program and our own brands. During the quarter, we increased our marketing investments with proven strategy and noted improved household penetration trends for our brands in several key categories. In licensing, sales growth was led by expanding distribution for our popular Texas Roadhouse dinner rolls and new club channel sales for Chick-fil-A sauces. Buffalo Wild Wings sauces also added to the growth of our licensed items. Our category-leading New York Bakery frozen garlic bread remained a key contributor to the growth of our Retail segment, driven by contributions from our recently introduced gluten-free Texas Toast. Our Sister Schubert's brand, frozen dinner rolls also performed well, including the benefit of the later Easter holiday that shifted some sales into the fiscal fourth quarter. Excluding all sales attributed to the perimeter-of-the-store bakery items that we exited in fiscal year 2024, the Retail segment's fourth quarter net sales increased 3.6% and Retail sales volumes measured in pounds shipped increased 2.9%. Circana scanner data for the quarter ending June 30 showed strong results with both sales dollars and volume for our branded products up 5.5%. In the frozen dinner roll category, our own Sister Schubert's brand and our licensed Texas Roadhouse brand combined to grow 52.4%, resulting in a market share increase of 690 basis points to a category-leading market share of 63.8%. In the frozen garlic bread category, our New York Bakery brand continues to perform very well as sales grew 10% versus a 3.5% increase for the category, driving New York Bakery's market share up 260 basis points to a category-leading 43.3%. In the shelf-stable sauces and condiments category, sales of Chick-fil-A sauce grew 17.2%, with market share up 30 basis points as we introduced the popular sauce into the club channel during the quarter. In the produce dressing category, sales of Chick-fil-A dressings grew 2.6%. When combined with our Marzetti brand dressings, our market share totaled a category-leading 27.6%. In the Foodservice segment, excluding noncore sales attributed to a temporary supply agreement, sales improved 1.4%, while sales volume declined 1.7%. In addition to the benefit of inflationary pricing, Foodservice segment net sales reflect increased demand from some of our national chain restaurant account customers, as well as sales gains for our own Marzetti branded Foodservice products. Our focus on supply chain productivity, value engineering, and revenue management all remain core elements to further improve our margins and financial performance. I'll now turn the call over to Tom Pigott, our CFO, for his commentary on our fourth quarter results. Tom?

Thomas K. Pigott, CFO

Thanks, Dave. Overall, this quarter, the company delivered improved top line and gross margin performance and continued to invest to drive growth. Fourth quarter consolidated net sales increased by 5% to $475.4 million. Breaking down the revenue performance, higher core volume and product mix drove a 190 basis point increase. Net pricing was accretive by approximately 60 basis points. In addition, the company reported $12.2 million in sales or 270 basis points of growth that resulted from a temporary supply agreement with Winland Foods, the seller of the Atlanta-based manufacturing facility that we acquired in mid-February. We entered into this agreement to facilitate the closing of the transaction. It's important to note that these temporary and noncore sales are expected to end by March '26. And finally, last year's exit of the perimeter-of-the-store bakery product lines accounted for a 20 basis point decline. Consolidated gross profit increased by $8.5 million or 8.7% versus the prior year quarter to $106.1 million, and gross margin expanded by 70 basis points. The gross profit growth was driven by higher volume and mix in our Retail segment and our ongoing cost savings programs. Note that excluding the $12.2 million in sales from the temporary supply agreement, which did not contribute to gross profit, gross margin expanded by 130 basis points. Selling, general and administrative expenses grew $8.9 million or 16.7%. This increase reflects a higher marketing spend in our Retail segment to drive growth, higher personnel costs, increased legal spend, and costs related to the integration of the Atlanta facility. During the quarter, the company reported $5.1 million of restructuring and impairment charges. $4.5 million of the charges are attributed to the planned closure of our sauce and dressing facility in Milpitas, California, that we announced last quarter. This closure is part of our ongoing initiatives to optimize our manufacturing network. Production at that facility is expected to conclude during the quarter ended September 30. In our prior year quarter, restructuring impairment charges of $2.7 million were attributed to our decision to exit our perimeter-of-the-store bakery product lines. Consolidated operating income decreased $2.8 million due to higher SG&A expenses and increased restructuring impairment costs, partially offset by the improved gross profit performance. Our tax rate for the quarter was 19.7% versus 20.5% in the prior year quarter. We estimate our tax rate for fiscal '26 to be 23%. The fourth quarter diluted earnings per share decreased to $0.08 or 6.3% to $1.18. The restructuring impairment charges I mentioned reduced EPS by $0.15 in the current year quarter and $0.08 for the prior year quarter. In the current year quarter, we also incurred the last of our Atlanta facility integration costs in the SG&A line, which accounted for $0.01 per share. With regard to capital expenditures, our payment for property additions totaled $58 million for the full year. In addition, we invested $78.8 million to acquire the Atlanta-based dressing and sauces facility. For fiscal '26, we are forecasting total capital expenditures of between $75 million and $85 million. We will continue to invest in both cost savings projects and other manufacturing improvements as well as the newly acquired Atlanta facility. In addition to investing in our business, we also returned funds to shareholders. Our quarterly cash dividend of $0.95 per share paid on June 30 represents a 6% increase from the prior year's amount. Our enduring streak of annual dividend increases stands at 62 years. Our financial position remains strong with a debt-free balance sheet and $161.5 million of cash. In regard to the full year results, overall, the company delivered against its growth algorithm. Net sales grew 2%, primarily driven by volume. Gross margins expanded by 80 basis points due to cost savings initiatives and some modest cost deflation. Reported operating income grew 10.5%. When you adjust operating income for restructuring impairment costs recorded in both years, the current year's acquisition costs, as well as last year's inventory write-down for the business exit, operating income was up 5.7%. This growth was driven by higher volumes and gross margin expansion. To wrap up my commentary, our fourth quarter and full year results demonstrate strong execution across a number of areas in a more difficult operating environment. In addition, we continue to make investments to support further growth and cost savings. I will now turn it back over to Dave for his closing remarks. Thank you.

David A. Ciesinski, CEO

Thanks, Tom. Going forward, The Marzetti Company 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 plan: one, accelerate core business growth; two, simplify our supply chain to reduce our costs and grow nuestro márgenes; and three, expand our core with focused M&A and strategic licensing. Looking ahead to fiscal year 2026, we anticipate retail segment sales will continue to benefit from volume growth with contributions from both our licensing program and our core Marzetti, New York Bakery, and Sister Schubert's brands. The popular Texas Roadhouse dinner rolls will begin shipping nationally to all major retailers this fall, and we also have some new items planned for our core brands that we'll launch in the year ahead. In the Foodservice segment, we expect sales to be supported by growth from select QSR customers and our mix of national chain restaurant accounts as our culinary team continues to provide our Foodservice partners with a wide range of innovation initiatives and favorable flavors to help them drive menu excitement and ultimately drive traffic growth. Like many of you, we continue to monitor external factors, including U.S. economic performance and consumer behavior that may impact the demand for our products. With respect to input costs, in the aggregate, we anticipate a modest level of cost inflation in 2026 that we plan to offset through contractual pricing and our cost savings programs, as we remain focused on continued margin improvement in the year ahead. We also look forward to incorporating our newly acquired Atlanta-based sauce and dressing plant into our manufacturing network. When combined with the closure of our sauce and dressing facility in Milpitas, California that we announced last quarter, we believe our supply chain is well positioned to cost-effectively support the growth of our key customers in fiscal year 2026 and beyond. This concludes our prepared remarks for today, and we'd be happy to answer any questions that you might have.

Operator, Operator

Your first question comes from Jim Salera with Stephens.

James Ronald Salera, Analyst

Dave, I want to start with some thoughts around Foodservice because there's a lot of noise right now around the consumer. It seems like some QSR platforms are really focusing on value, while others continue to perform well despite the backdrop. A lot of the menu innovation appears to be more centered around chicken, which I would expect benefits your business. Can you walk us through your expectations for the QSR industry traffic as a whole for fiscal year 2026? Additionally, what can you share about innovation for the accounts that you service, and how does this all come together to shape expectations for the Foodservice business in 2026?

David A. Ciesinski, CEO

Great question, Jim. To frame it, if you look back about 18 months, the industry was dealing with inflation and adjusting prices, which created value challenges for many consumers, especially those with lower incomes, leading them to trade down. Now, most operators have moved past those pricing issues. Our core operators are not burdened by the same pricing pressures they faced earlier. Overall, it seems that commercial foodservice has remained steady or has seen slight improvements in recent months. When I say slight, I mean very close to flat. However, there are variations, particularly in segments like casual dining, which are facing more challenges. You may have noticed that casual dining chains like Chili's and Applebee's are starting to perform better by simplifying their menus and improving their operations to provide more value to consumers. In the QSR space, many have struggled over the last few quarters with pricing but are now seeing their traffic stabilize. While it's still below historical levels, it is showing modest improvements. Moving forward, we don't anticipate any major downturns or significant improvements; rather, we expect to continue operating within the current macro environment. Now, looking at where we can find growth opportunities, several themes are emerging. Operators will focus on presenting value. In casual dining, chains like Chili's will likely continue to offer meals around the $15 mark to attract customers and add incremental items. In QSR, I wouldn’t be surprised to see others follow McDonald's lead with snacking options, particularly chicken, which is performing better than categories like hamburgers. This trend could present growth opportunities for us as we innovate with these operators. I also want to mention Pizza QSR, which will remain significant as they concentrate on their pricing strategies. Ultimately, consumers are trying to manage their cash flow and are seeking affordable ways to feed their families while finding joy in meals. Foodservice will continue to play a role in that, and it's up to us to help these operators present their offerings effectively and grow their businesses.

James Ronald Salera, Analyst

That's great. Tom, could you provide some insights on the commodity side? It seems you have a strong productivity program in place as you move into fiscal year 2026. We've heard some discussions specifically about soybean oil and a possible supply shortage due to some domestic production being directed toward biofuels. While I'm not an expert in commodities, I've noticed that the spot price for soybean oil has increased significantly year-to-date, with a recent spike following the EPA's announcement regarding biofuels. Could you share your thoughts on your visibility in soybean oil pricing? How much of your commodity basket does it represent, and are you hedged? Any insights on potential variability as we approach the new year, especially with this biofuel demand that could impact supply?

David A. Ciesinski, CEO

That's a great question, Jim. It's a significant element of our commodity basket. I'll start, and then Tom can provide more specifics. Over the last seven to eight years, we've seen soybean oil take on a larger role in renewable diesel. Towards the end of the Biden administration, there was some uncertainty about the volume of Renewable Volume Obligations as it pertains to renewable diesel. Earlier this summer, the EPA released guidelines that increased the diversion of soybean oil to renewable diesel, which resulted in a price spike. Prior to that, it was trading in the mid-40s, but then it rose to the mid-50s, reaching as high as $0.55. Right now, it has eased slightly, and this morning it was around $0.51. There are still a couple of unresolved areas in this sector that could influence where the price ultimately settles. Typically, exceptions are made for small refiners, and if those exceptions continue, we could see commodity costs for soybean oil decline a bit further. Overall, this aligns with our expectations, so we do not anticipate it being a near-term obstacle for our business. We also hedge with our suppliers on this. With that, I’ll hand it over to Tom for more details.

Thomas K. Pigott, CFO

Yes, I think Dave mentioned the broader market indicators. I want to share that we utilize a consultant to help us analyze this complex market. We also have a team that takes positions when we see them as advantageous. Currently, soybean oil accounts for about 10% of our total cost as a percentage of our COGS, depending on the market conditions at the time. Looking ahead to next year, based on our internal cost projections, current market trends, and our hedging strategies, we do not expect significant challenges or benefits from this factor.

David A. Ciesinski, CEO

Yes. We've been layering in on this for a while, Jim, anticipating this. So these changes aren't anything new. Just to give you an idea, if we went back seven years ago, took a bean and you crushed it. The meal went to be essentially chickens and cattle and hogs and everything else, and the oil then would be diverted into the food supply. Now virtually half of that oil is being directed into renewable diesel. So this is sort of a phenomenon that we've been watching here very carefully. And not only do we buy for ourselves, but we sit down on a regular basis with all of our big customers in the QSR space, and we advise them and work with them to take positions as well so we can create an element of predictability with this important commodity.

Operator, Operator

Your next question comes from Todd Brooks from The Benchmark Company.

Todd Morrison Brooks, Analyst

Two questions for me as well. First, if we look at the G&A spend, I know we talked about some incremental marketing investment behind the retail operation. I think you called out about $500,000 of one-time costs related to the new facility. I'm just wondering, I'm seeing a kind of a 140 basis point uptick year-over-year, how much of that was the marketing spend? And were there some other one-time items around the corporate name change or anything that didn't get called out in the release? And how should we think about maybe a normalized type of percent of sales spending for G&A as we think about fiscal '26?

Thomas K. Pigott, CFO

Great question, Todd. The increase in spending was due to three factors. One was marketing, which accounted for nearly half of the rise, and I'll let Dave discuss that. The other two factors were the integration in Atlanta and legal costs, which we believe are more temporary and won't continue. Additionally, some costs from Q3 carried over into Q4. Overall, we do not anticipate that expense line to grow beyond inflation, and we are pleased with the reinvestment in marketing. I'll hand it over to Dave to elaborate on that.

David A. Ciesinski, CEO

Yes. As Tom noted, a significant portion was allocated to marketing. We're currently seeing positive progress under our new marketing leader, who is effectively analyzing our data and utilizing our digital tools. We invested in targeted programs that enhanced our household penetration. Our market share increased in five out of our seven categories. For instance, our Texas Toast brand ended the quarter with a 43% market share, and its household penetration rose by 8 points, with a nearly 60% repeat rate. We believe that strategic marketing investments at reasonable costs can boost household penetration, which in turn helps retain consumers and supports sustained business growth. We applied this strategy across various products in a targeted way, and alongside innovation, we see it as crucial for achieving profitable volume growth.

Todd Morrison Brooks, Analyst

That's great. And then just a follow-up on that, Tom, before I get to the other question. When we talk about kind of growth in line with inflation for '26, what's the normalized base that we should be thinking about growing that off of?

Thomas K. Pigott, CFO

I would take the reported number, pull out the Atlanta integration costs, and that would be your base.

Todd Morrison Brooks, Analyst

Okay. Perfect. For my second question, you mentioned this as one of your offsets for the moderate inflation expected in fiscal '26. Can we discuss the cost savings that the team achieved in '25? Additionally, what is the outlook for '26 regarding cost savings, particularly considering the significant opportunities related to the Milpitas exit and adjusting that volume to the appropriate locations, along with the rest of the sauce and dressing production system?

Thomas K. Pigott, CFO

Yes. The team performed exceptionally well in '25 by focusing on several key areas: achieving procurement savings, negotiating better contracts, and implementing value engineering to enhance product efficiency and reduce production costs. We also gained valuable insights into our costs thanks to the SAP implementation. Looking ahead to '26, we will add the network reset to our cost-saving initiatives. This involves closing the Milpitas facility and increasing operations at College Park, which will provide additional opportunities for cost savings. Currently, we are in the midst of this transition, decommissioning lines in California and commissioning new ones in Atlanta, while also shifting volume to Horse Cave. There's significant change happening in our networks, and we are managing it well. As we move into the latter half of fiscal '26, we expect to start seeing more benefits reflected in our margins as the year goes on.

Operator, Operator

Your next question comes from Alton Stump from Loop Capital.

Alton Kemp Stump, Analyst

Just to clarify, from a modeling perspective, of course, you mentioned, Tom, that the temporary supply agreement will go through March, obviously, the first three fiscal quarters. Should we think about the revenue contribution from that similar to what it was in most recent 4Q?

David A. Ciesinski, CEO

And you're referring to the temporary supply agreement that we have and the rate of sales on that?

Alton Kemp Stump, Analyst

Yes, consistent throughout the first three quarters. Yes.

David A. Ciesinski, CEO

So our preference would be that you exclude that revenue from your model just because it's temporary and noncore and project off of a more organic number, which would exclude that revenue.

Alton Kemp Stump, Analyst

Got it. Okay. Okay. Thank you for that on the modeling front. And then I guess just fundamentally, there's obviously a lot of mixed signals as far as the consumer. You guys, of course, have a good view of things because, of course, your Foodservice business kind of benefits when consumers eat more at home and whereas obviously Retail - sorry, vice versa that Foodservice benefits and people are eating out more, whereas Retail benefits when they're staying at home and eating more. So I guess, as you kind of look at the overall dynamic, how do you think the consumer environment will impact each of your businesses separately?

David A. Ciesinski, CEO

I’ll take a shot at addressing that. As we approach the end of this year and move into the next, assuming we don’t see a spike in inflation, there are two potential positive factors to consider. First, a decline in interest rates could be beneficial. Second, we're monitoring crude oil and gas prices, which have remained stable or decreased. If they continue to drop, that could give consumers more disposable income for dining out or spending more on meals at home. Additionally, with the OB3 initiative, there may be tax benefits for consumers in the upcoming year, potentially leading to increased discretionary spending. Looking ahead, we are cautiously optimistic about seeing some modest positive trends for consumers, provided inflation remains under control. Regarding our business, I expect to see continued improvement in the Foodservice segment for all our customers. In this value-driven market, there will be both winners and losers, and we believe we align more with the winners. For the Retail side, independent of the broader economic conditions, we are excited about the new products we’re introducing. We are just beginning to roll out Texas Roadhouse rolls in retail, which we anticipate will contribute to our growth. We also have various new items from Texas Toast and Sister Schubert's, along with a new offering from Olive Garden that will allow us to penetrate a category we currently do not serve, which we see as a growth opportunity. Overall, we see several avenues for low single-digit volume growth given the current environment. If conditions improve, particularly in Foodservice, we would be open to reassessing those growth expectations. As of now, consumers have proven to be resilient, and adaptable consumer packaged goods companies are responding effectively to their needs. The successful ones will find ways to grow.

Thomas K. Pigott, CFO

Yes. I'll just add, overall, I think we expect '26 just to be a continuation of our growth algorithm where we see revenue growing in the low single digit, really driven by volume in retail, and some pricing for the Ag commodity. Foodservice, I think we're looking at more of a flattish profile in '26. And then on the gross profit, we expect to continue to grow our margins probably in the around the 50 basis point range and SG&A, as I mentioned, growing with inflation. So that's kind of the broader outlook to how we're forecasting '26.

David A. Ciesinski, CEO

Which gets us overall to low single digit on the top line, mid-single digit on the bottom line, sort of a continuation of our outlook for this year.

Operator, Operator

Your next question comes from Scott Marks from Jefferies.

Scott Michael Marks, Analyst

I wanted to ask just one technical question. As it relates to the $5 million restructuring charges. Were those associated with the retail segment? Or are they kind of unallocated?

David A. Ciesinski, CEO

Those were unallocated, yes. The disclosure includes both segments in that facility.

Scott Michael Marks, Analyst

Okay. Understood. That leads me to my next question about the Retail segment, which has shown a strong top line number. However, it seems that profitability fell short of expectations. It appears there was some additional marketing expense contributing to that. How should we view the marketing investments you've mentioned? I recognize there's been a change in leadership in that area and some initial investments. Should we expect higher spending upfront with the idea that growth will follow later? I'm trying to understand the appropriate level of profitability for the segment moving forward.

Thomas K. Pigott, CFO

Yes. So it's an excellent question. And you're right, we did choose to take advantage of some good potential programs to invest in, in the quarter, and it did impact Retail's profitability. There are a couple of other things I'll mention, and then I'll let Dave talk a little bit about the marketing spend. The other thing on Retail is we had a very difficult comp this particular quarter. The prior year quarter was a record Q4 on operating income for the Retail segment. And the other thing that impacted the profitability was this particular quarter, PNOC was a little bit negative due to the ag inflation in time, we expect that PNOC to balance out. So that's kind of some additional color on the retail operating income line. I'll let Dave talk a little bit about the marketing spending and how we're thinking about it.

David A. Ciesinski, CEO

Yes. So Scott, bringing around it, we don't expect a reset on marketing for the Retail segment. We saw an opportunity in this period to raise it. And I think as we continue to generate cost savings in other areas of the P&L, I think we're going to look for opportunities to plow some back into the business longer term. And I think, to Tom's point on this business, I would expect our operating margins to remain in line here. So if you're looking at both gross margins and operating margins over the foreseeable future, we expect those to be flat or grow in line with our productivity programs.

Operator, Operator

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

David A. Ciesinski, CEO

Well, thank you, everybody, for joining us today. We look forward to being back together with you in November as we share with you our results for the first quarter of this fiscal year. We look forward to seeing you guys on the road. Take care.

Operator, Operator

This concludes today's conference call. Thank you for participating. You may now disconnect.