Earnings Call Transcript - MZTI Q1 2026

Operator, Operator

Good morning. My name is Kathy, 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 2026 First 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. Please go ahead.

Dale Ganobsik, Vice President of Corporate Finance and Investor Relations

Good morning, everyone, and thank you for joining us today for The Marzetti Company's Fiscal Year 2026 First 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 an audio replay of this call will be 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 answer any of your questions. Once again, we appreciate your participation this morning. I'll now turn the call over to Marzetti Company's President and CEO, Dave Ciesinski. Dave?

David Ciesinski, President and CEO

Thanks, Dale, and good morning, everyone. It's a pleasure to be here with you today as we review our first quarter results for fiscal year 2026. In our fiscal first quarter, which ended September 30, consolidated net sales increased 5.8% to a record $493 million. Excluding noncore sales attributed to a temporary supply agreement, or TSA, adjusted net sales increased 3.5% to $483 million. I am also happy to report that we achieved first quarter records for gross profit, which reached $119 million and operating income, which grew to $59 million. In our Retail segment, net sales increased 3.5%. This was led by our category-leading New York Bakery frozen garlic bread products, including notable contributions from the delicious gluten-free Texas Toast that we launched last fall. Volume gains for our successful licensing program also contributed to the increase in Retail segment sales, driven by Chick-fil-A sauces, Buffalo Wild Wings sauces, and Olive Garden dressings. Circana scanner data for the quarter ending September 30 showed strong performance for several of our core brands and licensed items. In the Frozen Dinner Roll category, our own Sister Schubert's brand in our licensed Texas Roadhouse brand combined to grow 27.4%, resulting in a market share increase of 650 basis points to a category-leading 66.5%. In the Frozen Garlic Bread category, our New York Bakery brand grew sales 8.6%, adding 350 basis points of market share for a category-leading share of 44.1%. In the Produce dips category, sales of Marzetti brand increased 4.1%, adding 220 basis points of market share for a category-leading 82.1%. In the Shelf Stable Sauces & Condiments category, sales of Chick-fil-A sauces grew 9.6%, well ahead of the category's 0.2% growth rate, resulting in 17 basis points of share growth. Chick-fil-A sales benefited from both expanded distribution into the club channel that began during our fiscal fourth quarter and increased sales of the iconic sauces with traditional retailers. In the Foodservice segment, excluding the noncore TSA sales, adjusted net sales grew 3.5%, while volume measured in pound shifts increased 0.5%. In addition to the benefit of inflationary pricing, the increase in Foodservice segment sales reflects increased demand from several of our core national account customers. During the period, we are pleased to report a 7.2% increase in gross profit to a first quarter record of $119 million. 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 first quarter results. Tom?

Thomas K. Pigott, CFO

Thank you, Dave. Overall, the company delivered against this growth algorithm. Both the top line and gross margin performance improved and investments were made to continue to drive growth. First quarter consolidated net sales increased by 5.8% to $493.5 million. Breaking down the revenue performance, higher core volume and product mix drove a 210 basis point increase. Net pricing was accretive by 140 basis points. In addition, the company reported $10.7 million or 230 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 conclude during the quarter ended March 31, 2026. Consolidated gross profit increased by $8 million or 7.2% versus the prior year quarter to $118.8 million and reported gross margin expanded by 30 basis points. The gross profit growth was driven by our ongoing cost savings programs and volume growth. Note that excluding the $10.7 million in sales from the temporary supply agreement, which did not contribute meaningfully to gross profit, adjusted gross margin expanded by 80 basis points. Selling, general, and administrative expenses grew $3.5 million or 6.3%. The increase reflects a higher marketing spend as we invested to support the continued growth of our Retail brands, higher brokerage expenses as well as increased compensation and benefits. During the quarter, the company recorded $1.1 million in restructuring and impairment charges. The charges are attributed to the planned closure of our sauce and dressing facility in Milpitas, California that we previously announced. This closure was part of our ongoing initiative to optimize our manufacturing network. Production at that facility has concluded and the property is currently being marketed for sale. Consolidated reported operating income increased $3.4 million, driven by the strong gross profit performance, partially offset by the higher SG&A expenses and the restructuring and impairment costs. Excluding the restructuring and impairment charges, adjusted operating income grew by 8.1%. Our tax rate for the quarter was 22.4% versus 22.8% in the prior year quarter. We estimate our tax rate for fiscal '26 to be 23%. First quarter diluted earnings per share increased $0.09 or 5.6% to $1.71. The restructuring impairment charges I mentioned reduced diluted earnings per share by $0.03 in the current year quarter. With regard to capital expenditures, our payments for property additions totaled $15.6 million for the quarter. 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 September 30 represented 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 over $182 million in cash. During the quarter, the company generated $69.5 million in operating cash flow, an increase of $49.6 million versus the prior year quarter. To wrap up my commentary, our first quarter results demonstrate strong execution across a number of areas that drove top line and bottom line growth in a difficult operating environment. In addition, we continued 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 Ciesinski, President and CEO

Thanks, Tom. Suffice it to say, it's a dynamic and some might add challenging time in the food industry. Tariffs, stubborn inflation, GLPs, MAHA, and consumers under financial pressure often make it difficult to generate organic growth. Against this backdrop, I couldn't be more proud of our team at Marzetti, which continues to leverage our portfolio of trusted brands and our industry-leading innovation capabilities to make great-tasting, consumer-relevant products and deliver sustainable growth for our shareholders. As we look ahead, The Marzetti Company will continue to leverage the combined strength of our team, our operating strategy, and our balance sheet in support of the 3 simple pillars of our growth plan: one, accelerate core business growth; two, simplify our supply chain to reduce our cost and grow our margins; and three, expand our core with focused M&A and strategic licensing. Looking ahead to our fiscal second quarter and the remainder of our fiscal year, we anticipate Retail segment sales will continue to benefit from growth from our licensing program, including expanding distribution for the popular Texas Roadhouse Dinner Rolls and contributions from our own brands. In the Foodservice segment, we expect to benefit from sales to select quick-service restaurant customers in our mix of large national accounts. 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 the quarters ahead that we plan to offset through contractual pricing and our cost savings programs as we remain focused on continued margin improvement. In closing, I would like to thank the entire Marzetti Company team for all their hard work this past quarter and their ongoing commitment to grow our business. This concludes our prepared remarks for today, and we'd be happy to answer any questions that you may have.

Operator, Operator

Your first question comes from the line of Alton Stump from Loop Capital.

Alton Stump, Analyst

Great. Congrats on the quarter. Obviously, it was great to see volume growth exceed expectations in both of your segments during the quarter. I guess I want to ask you about the inflationary front on your Foodservice business specifically. Could you remind us sort of how the pass-through mechanism works in a segment? It's obviously different versus Retail operations. Just how much of a lag there is, if anything, when you're passing through what appears to be an inflating environment on the Foodservice side?

David Ciesinski, President and CEO

Yes, Alton, I'd be happy to answer the question. So as you recall, 75% of our business or so is tied to large national accounts. And every one of those customers have an agreement whereby on a quarterly basis, we sit down and we mark-to-market on their key ingredients. So usually, what we'll see happen is if, let's say, in said quarter, we start to see one of our commodities inflate, we'll sit down with them and document that. And that's passed along right into the price of the product. And it's true as we inflate and it's also true as we deflate. In the current environment, what we're seeing, Alton, is that we're seeing things like soybean oil back off a little bit. We're seeing eggs back off a little bit. Shelled eggs are moving up, but the eggs that we buy, which are yolks and whole eggs are backing off of some of their historical highs. So what we continue to see in this environment is modest inflation that we feel more than comfortable that we can cover by way of pricing and then value engineering work that we have.

Alton Stump, Analyst

That's great, Dave. And then I guess just one follow-up and I'll hop back in the queue. But just on a quick reference to Chick-fil-A sell-through data, being up almost 10%, I mean, obviously, this has been a huge home run for you guys when it first came out some years ago, but that I think is one of the bigger growth numbers that we've seen from Chick-fil-A over the last 2 quarters, as you obviously are up against, of course, tougher and tougher comparisons each year. And of course, you referenced the increased club channel distribution. Was that really the key driver of that? Or was there any sort of core underlying strength that you saw to drive that almost 10% sell-through number?

David Ciesinski, President and CEO

Yes. Great question. A lot of that was expanded distribution into club. And we did see some growth also in our core Retail business as well. And I think it's worth stepping back, it was in April of 2019 that we flew to Chick-fil-A and we met with that great partner. We talked about the idea of taking the product into Retail, and they very excitingly got behind it. And we did all the work necessary to bring in into the market. So here we are 5 years on. And if you combine the Retail sales of both the sauce and the dressings, we're talking a $200 million, $220 million in Retail sales business. So with a lot more that we both believe, we being The Marzetti team and Chick-fil-A that we can do with this great brand platform. So we're very excited. I think the other notable thing with club is that it's allowing us to further improve our household penetration and reach more customers. So we believe that channel is going to be an important long-term way for us to reach consumers in addition to mass and retail.

Operator, Operator

Your next question comes from the line of Jim Salera with Stephens.

James Salera, Analyst

I wanted to drill down a little bit more on Foodservice. Given the strong results there, even when we strip out the TSA, particularly given what a lot of restaurant companies are reporting right now. Can you just walk us through where the outperformance there came from, again, as kind of restaurant commentary across the industry is pretty downbeat. Is it the type of products that you're supplying to your restaurant partners are kind of more in demand? Is it the brands that you're servicing? Just any color you can provide there would be helpful.

David Ciesinski, President and CEO

I'd be happy to explain. The core of our Foodservice business revolves around our large national accounts. In the most recent period, five of our seven largest national accounts experienced growth in sales and traffic, with Chick-fil-A leading the way thanks to their successful launch of the pretzel club sandwich, for which we provided the sauce. Domino's is another key customer that has also shown growth during this time. Taco Bell and others have performed well too. Looking at the broader context, we found opportunities with successful brands that offer a value proposition resonating with consumers who are willing to spend their money. Additionally, we operate in categories that are important to these customers, as they seek to stand out in a competitive environment. This focus on flavor aligns with what our customers and their consumers want. This strategy has allowed us to offset some challenges related to discontinued items and positions us well for future growth, highlighting the strength of our overall business approach, which emphasizes relevant flavors in consumer-favorite forms.

James Salera, Analyst

Great. And Dave, if I remember correctly, when you talked in the fourth quarter, the expectations for Foodservice for full year '26 were kind of flattish. Any update to that outlook given the outperformance in 1Q and then some of the dynamics you just referred to?

David Ciesinski, President and CEO

Yes. If you remember, we were a bit cautious about the volume outlook because we had a couple of big customers that discontinued items. And we thought we were going to get flattish on sales by way of a little soft volume and a little bit of inflationary pricing that got us there. And I think if anything, what we're seeing in this environment is that the Foodservice outlook has improved modestly based on what we're seeing.

Operator, Operator

Your next question comes from the line of Scott Marks with Jefferies.

Scott Marks, Analyst

I wanted to ask on the profitability side. You made some comments in the prepared remarks about some increased marketing spend. Just trying to gauge how much that impacted the Retail segment. I think profit for that segment came in a little light of what folks were looking for. And I know you've been playing a little bit with some of the marketing, some of the promotional spend. So just wondering if you can share an update on that and how we should be thinking about that.

Thomas K. Pigott, CFO

Overall, Retail profitability declined in the quarter. There are three main reasons for this. First, egg prices have risen significantly, leading us to adjust pricing for the long-term forecast. This quarter, PNOC was negative for Retail, affecting the margin profile. Second, we have made considerable efforts in our network by shutting down the Milpitas facility and activating the College Park location, which has resulted in savings primarily benefiting the Foodservice P&L. Eventually, we expect to see more productivity savings for Retail, but currently, Foodservice is reaping the main benefits. Regarding your core question about marketing investments, we recognize an opportunity to enhance our marketing in Retail. Our spending is still lower than many peers, and the response to our marketing initiatives has been positive. Therefore, we plan to keep investing in this area. In terms of SG&A for Retail, most of the increase was due to marketing expenditures, along with slightly higher brokerage costs linked to better volume performance in the segment. Overall, we are optimistic about the investments we are making in Retail and the outlook for profitability.

Scott Marks, Analyst

Appreciate the color there. A follow-up question would be, there's been a lot of commentary from some of your peers recently around a softer U.S. consumer. Obviously, your business seems to be bucking the trend a little bit, have some benefits from some of the distribution initiatives. But just wondering if you can kind of help us understand how you're seeing the consumer today? And how are you feeling about kind of the core underlying business relative to some of those distribution wins that you noted?

David Ciesinski, President and CEO

Yes, Scott, we're experiencing the same challenges that others are. Consumers are feeling pressure, but they are still purchasing food, and flavor remains important to them. Our strategy is to utilize our innovation capabilities to introduce products that resonate with consumers. On the retail side, for example, New York Bakery is experiencing growth in the garlic toast category, capturing a 44.1% market share recently. This growth is partly due to our own toast and a new gluten-free item that is gaining popularity, along with a value pack of breadsticks. Despite the economic challenges, consumers find these items relevant. In our roll business, we've seen an increase of around 650 basis points in overall market share, and we continue to expand both our share and the category overall. Our Sister Schubert's brand remains steady, with notable growth coming from Texas Roadhouse rolls, which are a great product at an affordable price that allows consumers to treat themselves. Additionally, our Marzetti brand has had a strong season with dips and caramel dip. These products represent affordable luxuries that consumers can still purchase even in tough times. Yes, it's challenging, but we see opportunities to leverage our innovation and execution to sustain our growth. While we wish for faster growth, we are committed to achieving it. We believe we can continue to expand our owned and licensed brands because consumers value flavor, and we excel in innovation related to flavor in our industry.

Operator, Operator

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

David Ciesinski, President and CEO

Well, thanks, everybody. It's been a short call, but a good call. We enjoyed sharing our results with you. We look forward to seeing all of you guys on the road during the course of the next quarter and look forward to getting together when we announce our next earnings in February. Have a great rest of the day.

Operator, Operator

Thank you, and thank you for your participation. This does conclude the program. You may now disconnect.