The Marzetti Company (MZTI) Earnings Call Transcript & Summary

Good morning. My name is Kevin and I'll be your conference call facilitator today. At this time, I'd like to welcome everyone to The Marzetti Company's Fiscal year 2026 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] And now to begin the conference call, here is Dale Ganobsik, Vice President of Corporate Finance and Investor Relations for the Marzetti Company.

Good morning, everyone, and thank you for joining us today for The Marzetti Company's Fiscal Year 2026 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 and 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 website, investors.msacompany.com later today. 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 current strategy and outlook. With 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?

Thanks, Dale, and good morning, everyone. It's a pleasure to be here with you today, as we review our financial results and update you on the late developments across our business. Before I provide my comments on our fiscal fourth quarter, I am pleased to share that we completed fiscal year 2026 and which ended June 30, record highs in net sales, gross profit and operating income. FY '26 marks the fourth consecutive year of record highs for net sales and gross profit and the third consecutive year of record operating income. I'd like to extend my sincere thanks to all of our teammates throughout our business for their countless contributions to this achievement. Moving on to our results for our fiscal fourth quarter. We were very pleased to deliver record fourth quarter gross profit and operating income. On the sales front, reported consolidated net sales declined 2.2% to $465 million. Excluding noncore sales attributed to the temporary supply agreement, or TSA, adjusted net sales improved 40 basis points. In our Retail segment, net sales increased 0.9% including $15.4 million in incremental sales from Bachan's, our newly acquired Japanese barbecue sauce brand known for its delicious authentic and clean label products. Retail sales were unfavorably impacted by reduced sales into the club channel and the comparison to last year's pipeline build of Texas Roadhouse dinner rules into the traditional grocery channel. Circana scanner data for the quarter ending June 30 showed continued strong performance of the Bachan's brand with sales up 8.7% and total distribution points increasing 16.6% and as the brand continues to grow share in the barbecue sauce category. Texas Roadhouse rolls also continued to grow at a quarter pace. During the quarter, sales were up 28.1%. For the 52-week period, the product delivered $58 million in sales, up 76% versus the prior year. Importantly, even with expanded distribution, sales velocity measured in dollar sales per GDP were nearly 2x the category average. When combined with our Sister Schubert's brand dinner rolls, we finished the quarter with a category-leading market share of 61.7%. Our category-leading New York Bakery brand also continued to perform well with sales up 2.8%. We resulting in a market share gain of 220 basis points for a category-leading share of 45.5%. In the Kouton time category, our branded Koutons added 100 basis points of market share, resulting in a category leading share of 28.4%. In the Foodservice segment, excluding the noncore TSA sales, both adjusted net sales and sales volumes measured in pound ship were nearly unchanged at gains where our leading national chain restaurant accounts were offset by reduced sales to other chains and lower sales of our branded food service proxy. I'll now turn the call over to Tom Pigott, our CFO, for his commentary on our fourth quarter results. Tom?

Thanks, Dave. Overall, the fourth quarter results demonstrated strong execution. Gross margin expanded for the 12th consecutive quarter. Reported and adjusted operating income grew by 48.2% and 17.5%, respectively. In addition, record full year operating cash flow has strengthened our capacity to both invest and return capital. Fourth quarter reported net sales decreased by 2.2%. The key drivers were a decline in core omen product mix of 330 basis points, excluding Bachan's a pricing contribution of 40 basis points. The addition of 2 months of Bachan's sales, which added 320 basis points of growth. These items were offset by the discontinuation of the temporary supply agreement sales we have previously discussed. This discontinuation unfavorably impacted revenue by 260 basis points. Excluding the temporary supply agreement sales that occurred in the prior year, adjusted net sales grew by 40 basis points. Consolidated gross profit increased by $7.9 million or 7.4% versus the prior year quarter to $114 million. Reported and adjusted gross margins expanded by 220 basis points and 160 basis points, respectively. The strong gross profit growth was driven by our productivity program, where we benefited from cost savings across several areas, including network changes, procurement, manufacturing, value engineering and distribution. We also benefited from the addition of Bachan's net sales, which were accretive to our gross margins. As I mentioned at the top, this quarter marked the 12th straight quarter of gross margin improvement versus the prior year. This accomplishment reflects many cost savings initiatives, network restructuring programs, revenue growth management projects and ongoing pricing net of commodity management efforts that the company has successfully implemented. Selling, general and administrative expenses increased by $12.3 million. This increase was primarily driven by acquisition-related costs. These included investment banking fees, integration costs amortization of intangible assets and other transaction-related expenses. When you exclude the acquisition-related costs from both the current year and prior year periods, adjusted SG&A expenses were up by just $100,000. This increase reflects the addition of Bachan's core SG&A expenses, partially offset by reductions elsewhere. During the quarter, the company completed the sale of the previously closed manufacturing facility in Milpitas, California for more than $20 million. As a result, the company recorded an $18.5 million gain on the sale that was recorded within restructuring, impairment and other. Overall, restructuring impairment and other was favorable by $23.1 million versus the prior year, primarily due to the gain on sale and lower year-over-year restructuring costs. Consolidated reported operating income increased by $18.8 million or 48.2%. Excluding the acquisition-related costs, and restructuring impairment and other from both periods, adjusted operating income increased by $7.8 million or 17.5%. This growth was driven by the strong gross margin performance I mentioned. Our tax rate for the quarter was 14.6% compared to 17.9% in the prior year quarter. The lower tax rate was driven by a favorable tax impact from the Milpitas facility sale. We estimate our tax rate for fiscal '27 to be 23%. And Fourth quarter reported diluted earnings per share increased $0.58 or 49.2% to $1.76 and -- the growth was driven by the favorable restructuring impairment and other impacts I mentioned as well as the core business performance. These favorable drivers were partially offset by acquisition-related costs recorded in SG&A. Excluding all restructuring, impairment and other items and acquisition-related costs, adjusted diluted earnings per share increased $0.12 and to $1.46. Turning to the balance sheet and cash flow, the company delivered record operating cash flow of $283.8 million, an increase of $22.3 million or 8.5% over the prior year. Year-to-date payments for property additions totaled $77.7 million. For fiscal year '27, we're forecasting total capital expenditures of $90 million. We continue to invest in both cost savings projects and other manufacturing improvements as well as the Atlanta facility we acquired last year to support future growth. Company finished the year with slightly less than $200 million of long-term debt on the balance sheet resulting from the Bachan's acquisition. The effective interest rate on this term loan was approximately 4.8% at June 30. The company's relatively low debt levels and strong cash flow generating capabilities allow for continued investment in the business and the return of funds to shareholders. Our quarterly cash dividend of $1 per share paid on June 30 represented a 5% increase from the prior year's amount. Our during streak of annual dividend increases stands at 63 years. Our dividend payments for the year totaled $108.8 million. In addition, the company has the financial flexibility to buy back shares. In fiscal '26, the company completed $36.3 million in buybacks, a $28.3 million increase over the prior year. Looking at the full fiscal year, we are pleased to report growth across several metrics despite a difficult operating environment. Reported and adjusted net sales increased 1.1% and 0.8%, respectively. Reported and adjusted gross margins increased by 80 and 100 basis points, respectively. Reported and adjusted operating income grew 8.3% and 4.2%, respectively. So to wrap up my commentary, our results demonstrate strong execution across several areas. We continue to invest to support the growth of our business while returning funds to shareholders. I'll now turn it back over to Dave for his closing remarks. Thank you. .

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 3 simple pillars of our growth plan. to: 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. As we look ahead to fiscal 2027, in addition to the incremental sales attributed to Bachan, we expect retail sales will benefit from new product introductions, including York Bakery, Chase Prakash Bread, single-serve packs of popular Chick play avocado lime ranch stressing and the much anticipated return of the Sister Schubert sausage rules. Pricing is also in place to take effect during our fiscal first quarter, which will help offset inflationary cost. Specific to the contribution of the Bachan's business, we project stronger top line growth for Bachan in the back half of the fiscal year, driven by our continued investments in marketing and advertising to build the brand's awareness and support trial. In addition to building brand awareness, the team is also launching 2 exciting innovations. First is Bachan's wing sauce, which will be produced at our own HorseCave, Kentucky facility. Crafted by the Bachan team in conjunction with our culinary team, the Wing sauce features craveable Tomari based flavors that deliver rich savory depth. The second is Bachan's Japanese Mayo that offers a smooth silkiMammi flavor, we expect the addition of the Bachan's business, our portfolio to be a key growth driver for Marzetti in fiscal '27, and we're also pleased to share that the integration of this business remains on track. In the Foodservice segment, we anticipate continued growth from select customers in our mix of national chain restaurant accounts. Contractual inflation pricing will also support the segment sales in the year ahead. External factors, including U.S. economic performance and consumer behavior may impact the demand for our products in fiscal year 2027. Furthermore, we continue to monitor the impact of the Cyclospora outbreak on our business. At this point, we estimate that the outbreak will result in a net sales headwind of approximately 250 basis points in our fiscal first quarter, with the impact similar for both our retail and our food service segments. With reback to input cost in the aggregate, we anticipate a moderate level of inflation in fiscal year 2027, that we plan to offset through pricing and our cost savings program as we remain focused on continued margin improvement. In closing, I'd like to thank the entire Marzetti company for all of their hard work this past year and their ongoing commitment to grow our business. Furthermore, specific to Bachan's as the new addition to our team, I look forward to working with all of you in the coming year, and I share your excitement for the next phase of growth and our continued success of Bachan's. This concludes our prepared remarks for today, and we'd be happy to answer any questions you may have. Operator? .

[Operator Instructions] Our first question comes from Jim Salera with Stephens. .

I know you're probably sick of me asking about soybean oil, but you keep delivering gross margin outperformance, and that's against the backdrop of soyabean oil up nearly 40% year-to-date. Obviously a testament to the scale of your procurement team, but can you give us some color on the moving pieces in gross margin as we think about '27 given the commodity inflation, obviously, the incremental benefit from the Bachan's integration, some of the pricing you mentioned, can you kind of walk us through the gross margin build and how we're thinking about that.

Well, Jim, I never grow tired of talking about soybean oil. You know it's one of those elements of our business that we watch closely. Well, a couple of points. I appreciate the shout out for our procurement team. They do a fantastic job, and we were able to protect ourselves in the most recent period with hedges we put in place a while ago. And then as was outlined in the script, -- we also were able to get through pricing, which should protect us as soybean oil starts to elevate. So net-net, we feel like we were able to buy when it was advantageous and able to protect ourselves by way of most recent pricing. But as it pertains to the buildup of our margin story, what I'll do is I'll turn it over to Tom and let him walk you through that. .

Sure. So as we look at fiscal '27, we're estimating about 100 basis points of margin growth on the consolidated results. About half of that driven by the accretion we get from Bachan's adding to the portfolio, a nice high-margin business. And then the other hand are continued commodity risk management program and our cost savings initiatives combined. As it relates to pricing, we've we've rolled out our pricing. We feel confident we'll get it through, but it is essentially helping it is an impact our margins and that the commodity inflation is forecasted to be around 5%. And when you consider the higher revenue and commodity inflation, you do get a dilutive impact of about 50 basis points on the consolidated results. However, that, as I mentioned before, our cost savings program is helping offset that. And so overall, our forecast is to grow gross margins by about 100 basis point in fiscal '27.

Okay. Great. That's very helpful. And then turning to Bachan's, -- if I do my napkin math correct here, if I kind of take the 8% growth rate and just roll that forward, I come up with something in the ballpark of $100 million for the full year '27. Is that the right way to be thinking about that from a sales contribution standpoint?

I would expect it to be stronger than that at June. There are 3 elements of the growth. The first is the growth of the core. That's going to come by way of expanding awareness trial and household penetration. The second is the launch of their Mayo, which is already in the process of being sold in and they're getting good acceptance. Three different SKUs and great-tasting product, and it's a category that's about $3.4 billion. Bar juice sauce category just for a frame of reference, a little bit bigger than $1 billion. So Mayo present a really big category expansion opportunity. They have 3 great items and the fastest-growing part of the category is in the -- either the natural better-for-you Mayos or the ethnic Mayo. So I think they're well positioned to capitalize on that trend. The third piece also in the space of innovation is to launch [ Link ] sauce we're pleased to share that the integration of collaboration with them has gone exceedingly well. They reached out and said, "Hey, we would like to use the Marzetti culinary team and product development team to get into wing sauces" -- and so we treated them, believe it or not, like a food service operator, came up with a variety of formulas, just Gill, the founder and other case, we iterated on them, and we're in the process of selling them in right now as well. So -- the reason why I shared that is, as was mentioned in some of the comments in the script, we expect the sales actually to build as we go deeper into the fiscal year predicated on not just the advertising on the core but on some of these new items.

One on for our next question. Our next question comes from Todd Brooks with Benchmark Stone.

Want to add on, you just gave us some good color on Bachan for '27, Dave. But if we're thinking about the license branded product portfolio growth, obviously, some onetime laps here that made for a bit of a choppy quarter, and you talked in prior quarters about this not being necessarily the same type of growth engine, but still a growth engine for Marzetti going forward just to a lower level. I guess can we talk through thoughts on what license branded products should grow? And then a follow-on to that. You kind of teased some new product launches, not just on the branded products like Bachan, but within the license portfolio as well. Can you give us an idea of maybe some thoughts there and maybe a contribution or magnitude of revenue growth that those can support in your mind?

Yes. So you sort of step back, I would say we have several things going on in license sauces. The first of which is we have another quarter of the noise associated with the pipeline build that we've been referring to. Notwithstanding that, here's how I would think about it. We're exceeding with the performance of our Texas Roadhouse item. In the course of the last year, it grew almost $60 million in retail sales, was up 70%. Velocities are the category average or thereabouts. We're launching a second item into Walmart and honestly, there's more room just through better distribution on the core items for it to grow. So if you go back 1.5 years ago, when we began to talk about that item. I estimated that it could be $100 million in retail sales item. And I still believe that it most certainly has the potential to do that. then you swing through license sauces, we continue to be bullish about Buffalo Wild Wings and Chick-fil-A sauces. The area that we're watching a little bit more closely is the salad dressing category overall has been a bit of a drag for the last few quarters. So we have a whole range of activity that's in flight on our own Olive Garden. But that's one of the washouts that we have. As it pertains to where we go from licensing from here, we have a couple of different initiatives that are in flight and unfortunately, we're not far along on those to talk to you about them. But some of those actually include us expanding beyond restaurants. So we have restaurant activities in flight with some of the banners that you're familiar with, but also some non-restaurant activity that's in place. We're just not ready to share with you.

Okay. Fair enough. That's great. And then you talked about Texas, as I think when you initially talked about the potential for that category and you just confirmed it kind of -- I think it was the fourth product line that would approach or cross over $100 million in kind of sales at retail. Does the second SKU launch get you there? Like how big does the platform to be to support that type of success? And I'll jump back in queue. .

It's a great question. So here's an interesting thing. That's a $60 million retail sales business our household penetration right now is 2.5%. That is a really, really small household penetration. So I think with good execution and good trial, that core has the potential to get there. You add that new item, I think it should give us even more confidence that we ought to be able to get there. But what -- as I look at this product, first of all, it's great tasty. And I think there are 2 different themes that our consumers are looking for in this environment. We live in this world of an incredible amount of noise, inflation, debt, the war in Iran, gas prices, et cetera, et cetera, but it is still down to houses around the country. People are looking for a couple of different things. What are affordable solutions to extend their meal dollars. And within that space, you think -- you see things like our own New York, Texas Toast playing really, really strong. The same category I would characterize as affordable moments of joy, just simple things that mom can bring to the house or get can bring to the house that people can eat that bring a little bit of affordable pleasure to the household. And I think Roadhouse in this moment in time it's there. The restaurants fit there, it's want to go and you want to go visit a restaurant, -- and I think the product in the home delivers on that as well. I think that same thing is true, by the way, with Buffalo Wild weight and with Chick-fil-A. So I think as we think about where we go with -- back to your original question with Roadhouse, I think if we can just continue to drive awareness, trial and household penetration on that item from 2.5% to closer to 5 that math gets you there. Parenthetically, our own sister Schubert has household penetration right now, I think, about 8% or maybe closer to 10%. So I think that gives you an idea that there is room to run on that.

So if you roll that up, Dave, how would you frame it up for us licensed branded product growth in '27 for the portfolio as a whole, how should we be thinking about that? .

I would say if we pull out the noise associated with the Chick-fil-A pipeline bill, our license sauces, I would expect to be closer to flat with room to grow in our licensed items.

Our next question comes from Alton Stump with Loop Capital.

I appreciate it. I just want to touch on -- and I thought it was very helpful with your comments, Dave, talking about the expected impact from the recent cycle for outbreak. Obviously, a lot of your retail products but also food service now indirectly just in solid categories. So it's also early on, but if you had to speculate sort of how lasting impact will be, is it possible it could be past the current first quarter? Just kind of what your thoughts are with our recent outbreak in particular? .