The Marzetti Company Stock

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 David Ciesinski, President and CEO; and Tom Pigott, CFO. [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 that could cause actual results to differ materially, and the company undertakes no obligation to update these statements based upon subsequent events.

A detailed discussion of these risks and uncertainties is contained in the company's filings with the SEC. Also note that the audio replay of this call will be archived and available at our website, investors.marzetticompany.com later today. For today's call, David 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. 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?

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 latest 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, which ended June 30 with 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 rolls 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% as the brand continues to grow share in the barbecue sauce category. Texas Roadhouse rolls also continued to grow at a torrid 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 TDP were nearly two times 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%, resulting in a market share gain of 220 basis points for a category-leading share of 45.5%.

In the crouton category, our branded croutons 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 pounds shipped were nearly unchanged as gains for our leading national chain restaurant accounts were offset by reduced sales to other chains and lower sales of our branded foodservice products.

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 volume and product mix of 330 basis points, excluding Bachan's; a pricing contribution of 40 basis points; the addition of two 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 the 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%.

Fourth quarter reported diluted earnings per share increased $0.58 or 49.2% to $1.76. 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 the acquisition-related costs, adjusted diluted earnings per share increased $0.12 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.

The 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 enduring 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 three 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's, we expect retail sales will benefit from new product introductions, including New York Bakery Cheesy Focaccia Bread, single-serve packs of popular Chick-fil-A Avocado Lime Ranch Dressing and the much anticipated return of the Sister Schubert sausage rolls.

Pricing is also in place to take effect during our fiscal first quarter, which will help offset inflationary costs. Specific to the contribution of the Bachan's business, we project stronger top-line growth for Bachan's 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 two exciting innovations. First is Bachan's Wing Sauce, which will be produced at our own Horse Cave, Kentucky facility. Crafted by the Bachan's team in conjunction with our culinary team, the wing sauce features craveable tamari-based flavors that deliver rich savory depth. The second is Bachan's Japanese Mayo that offers a smooth, silky umami flavor.

We expect the addition of the Bachan's business to 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 inflationary 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 Foodservice segments.

With respect to input costs, 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 soybean oil up nearly 40% year-to-date. Obviously, a testament to the skill of your procurement team, but could 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? Could you just 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. As 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 half is our continued commodity risk management program and our cost savings initiatives combined.

As it relates to pricing, we've rolled out our pricing. We feel confident we'll get it through, but it is essentially helping-it is an impact on our margins in that the commodity inflation is forecasted to be around 5%. And when you consider the higher revenue and the 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 points 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, Jim. There are three 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 a great-tasting product, and it's a category that's about $3.4 billion. The barbecue sauce category, just for a frame of reference, is a little bit bigger than $1 billion. So mayo presents a really big category expansion opportunity. They have three 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 the launch of wing sauce. And we're pleased to share that the integration and 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 foodservice operator, came up with a variety of formulas. Justin Gill, the founder, and others tasted them; 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 it 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.

Our next question comes from Todd Brooks with The Benchmark StoneX.

I want to add on-you just gave us some good color on Bachan's for '27, Dave. But if we're thinking about the licensed branded product portfolio growth, obviously some onetime lapse 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 at a lower level. I guess, can we talk through thoughts on what licensed 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's, but within the licensed 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 if you sort of step back, I would say we have several things going on in licensed 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 exceedingly happy with the performance of our Texas Roadhouse item. In the course of the last year, it grew to almost $60 million in retail sales; it was up 70%.

Velocities are two times 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 a year and a half ago when we began to talk about that item, I estimated that it could be a $100 million in retail sales item, and I still believe that it most certainly has the potential to do that.

Then you swing through licensed 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 on licensing from here, we have a couple of different initiatives that are in flight.

Unfortunately, we're not far enough along on those to talk to you about them. But some of those actually include us expanding beyond restaurants. So we have restaurant activity that's in flight with some of the banners that you're familiar with, but also some non-restaurant activity that's in flight. We're just not ready to share with you yet.

Okay, fair enough. That's great. And then you talked about Texas Roadhouse. And 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 have 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 as I look at this product, first of all, it's great-tasting. And I think there are two different themes that our consumers are looking for in this environment. We live in this world of an incredible amount of noise in inflation, debt, the war in Iran, gas prices, et cetera, et cetera. But when you distill it 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 see things like our own New York Texas Toast playing really, really strong.

The second category I would characterize as affordable moments of joy, just simple things that mom can bring to the house, or dad 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 fits there. The restaurants fit there if you want to go, 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 Wings 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's 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 build, our licensed sauces I would expect to be closer to flat, with room to grow in our licensed dough items.

Our next question comes from Alton Stump with Loop Capital Markets.

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 Cyclospora outbreak. Obviously, a lot of your retail products, but also foodservice, do indirectly participate in the salad category. So I guess it's also early on, but if you had to speculate sort of how lasting the impact will be, is it possible that it could bleed past the current first quarter? Just kind of what your thoughts are with that recent outbreak in particular?

First of all, it's nice to speak with you. And I'm really glad you asked this question because this is an important one for our business, but I think food in general. Maybe I'll start with a couple of factoids. If you go back to when the outbreak started in the first couple of weeks -- last couple of weeks of July, what we found is that the host foods, think lettuce and greens and veggies all demonstrated a dip. For that matter, even fruit led by berries demonstrated a dip. So in the case of lettuce, the low watermark in those last couple of weeks of July would have been down 30%.

Veggies during that same period would have been down 16%. Fruit would have been down 13%. You swing around then and you look at what our dressings or basically the food that we offer to complement those items; they were down correspondingly, not to the same amount. Olive Garden in that period would have been down to 11%. Our Marzetti Classics would have been down because it's produce right next to the lettuce, a little bit closer to 15%. Even Chick-fil-A was down.

Having said that, now we roll forward to the most recent period, which is the week of the 21st of August, what we've seen in the case of produce, so lettuce, veggies and fruit-is all of those categories have begun to improve somewhere in the 5% to 10% range off of that low watermark. As we look at our own items, what we're seeing is they too are improving. Olive Garden's low watermark might have been 11%; now it's off more like 6%. Our Classics were off 16%; now they're off more like 8%. So the whole thing seemed to hit the low watermark in those last couple of weeks of July and seems to be coming back.

Now, how do we think about this going forward? What we've done is we went back and we looked at more recent outbreaks. We looked at the outbreaks in '22, which were romaine, but we actually chose to go back and look at the outbreak in 2018. And in that moment in time, there were actually two E. coli outbreaks and there was one Cyclospora outbreak. And we think that one may be the more instructive of the two. And what we've modeled into our volume assumptions is that it follows the path of that 2018 outbreak, not because of the volume of the Cyclospora, but just because of the aggregate media that it received in that moment in time.

So if you follow that through, this thing kind of has a half-life. The first month improves, let's say, by 10%, and then it improves by half of that, and it improves by half of that. So by the time you get more like four months past the event, it's trending back to where things were before. So we looked at '22; it was somewhat similar, but the magnitude of the outbreaks weren't as big in terms of media coverage as this one. So our best estimate is that it's going to follow that 2018 path.

That's some great color. And I guess one more and then I'll hop back in the queue. I just wanted to talk about the margin outlook. Quite impressive, I think you said you expect 100 basis points of margin even with all the kind of noise going on. How much of that is sort of internal cost savings driven versus is there any cost synergies baked in with the Bachan's deal? Just kind of if you could sort of, in general, maybe give us a bit more color on sort of how you are confident that you can get to that type of margin expansion this year.

Why don't I begin top-side, and then I'll turn it over to Tom again, but maybe start with a couple of points. The first thing that I would point to, and Alton, you have followed us well enough to know over the last handful of years, we've invested in a network reset. The investment in Horse Cave, the purchase of the facility in Georgia, the closing down and the sale of the facility in California, all of those various network moves have facilitated this multi-period sequential improvement that we've seen in our gross margin, and we expect it to continue to be a source of that benefit as we go forward. But having said that, for more detail, I'll let Tom will cover it for us.

Yes. When you break it down and you look at it ex-Bachan's, we're about 50 basis points -- about half that 100 basis points I mentioned is on the base. And we've been delivering at that level pretty consistently. We feel confident that with the items Dave had in place, we'll continue to deliver on it. And then the other half represents the accretion from Bachan's, including the synergies that are baked in. And I would say immediately, we're realizing some productivity savings on Bachan's synergy savings in the procurement area, and we have plans to do more elsewhere. But overall, that integration is on track and the synergies are pretty much in line with our expectations.

Our next question comes from Scott Marks with Barclays.

I wanted to first ask, I kind of have a two-parter question just on the retail business, the core retail business. If we strip out Bachan's, it looks like organic volumes were down about 7%, driven by some of the lapping dynamics that you called out. Wondering if you can, first of all, help us understand how each of those components contributed to that decline? And then secondly, as it relates to Chick-fil-A business within the club channel, can you help us understand the latest there in terms of just distribution and overall business since you've launched the three-bottle pack in place of the two in some regions? And anything specific you would call out around that?

Yes, no, our pleasure. So maybe I'll start, Scott, if you'll allow me, by sort of laddering back up. We look at the three different pieces of our business. Foodservice, which really hasn't been covered so far, continues to meet and exceed our expectations in an environment where we're continuing to win with winners. Chick-fil-A winning with their consumers, Domino's winning in pizza QSRs and Taco Bell-even in spite of the more recent news with Cyclospora, where they're continuing to win and we're continuing to win with them. Our supply chain, which we've talked about, where we feel like we're executing quite well.

That brings us around to retail, moving Bachan's to the side a second, where we're pleased with the integration and focusing on the core. I think there are several things that are going on as you plot it apart. We continue to be pleased with our progress in specialty bakery as a group overall. We talked about the growth of New York Texas Toast in the script, which just continues to motor along. We talked about Texas Roadhouse and the continued promise there.

As we swing around, I think the soft spot that we're focused on in particular, notwithstanding the cycling of the pipeline build, is dressings and licensing is an area where we continue to need to focus. And I think what we look forward to talking about in the quarters ahead is we have a range of different activities in flight around marketing and innovation that we believe will restore those segments to grow.

So laddering back up, how would I encourage you to think about it? I would expect continued sequential growth in the dough space of our core business, to include the piece that we license from Texas Roadhouse. As we think about sauces, notwithstanding the noise from the pipeline build at Chick-fil-A, we continue to believe overall those brands are healthy as well. The area where we're really focused, which is exacerbated by Cyclospora, is the dressing space.

Okay, appreciate the color there. And then maybe if we just turn to the margins for a sec across the different segments just as we look at maybe the current quarter and what happened there, it looks like foodservice benefited quite a bit more than retail from some of your cost savings initiatives. So just wondering if you can help us break that down a bit. What was the driver of that? And as we look ahead to '27, how should we be thinking about the split between segment profit performance?

So the -- what you're seeing is the benefit of the network moves that are impacting the Foodservice segment. So exiting the Milpitas plant, moving production to Horse Cave, we're more efficient and beginning to ramp up College Park is kind of what you're seeing in the current quarter. As you get into next year, retail will benefit from the accretion from Bachan's being added, and both segments will continue to benefit from our productivity program. So we have positive outlooks on both segments as you get into fiscal '27.

Our next question comes from Matt Curtis with D.A. Davidson.

Maybe a follow-up on gross margin expansion in fiscal '27. I mean, in terms of the timing of the expansion, do you think the gross margin improvement is likely to be balanced? Or would it maybe be weighted more towards the second half as Bachan's strengthens or maybe price becomes more fully realized?

Well, a great question. I think the first thing we need to zoom in on is Q1 and what our expectations are there. Given the Cyclospora impact, we do expect the impact on revenue on the base business that Dave highlighted, which gets us into kind of flattish net sales in Q1. We don't expect to grow our margins in the first quarter. So when you put that together from an operating income standpoint, we are looking at a 15% decline roughly in operating income in Q1. And now your question on the -- once we get past Q1, I think we feel good that we're going to give steady, pretty consistent gross margin accretion throughout the year.

Okay. And then I guess on Bachan's growth that I think you said you expect to strengthen in the second half of the year. Is this -- if you can help us understand, is this mostly related to the timing of things like new product launches? Or do other drivers like maybe marketing also play a role in that outlook?

It's an important question; it's actually both. So the new item launches are being sold in now. There will be a couple of customers that will take them early, more like, let's call it, the holiday time frame. But most of those customers will take those items for their spring reset, so they'll most certainly be a contributor. As you think about the core business, what we've done over the last four months is we've worked with the team to help refine their marketing, and in particular, a couple of different components.

One, who are their cohorts that they want to reach out to where the message resonates the most strongly? And the second component of that is what does that message need to say. That work is being done now. In short order, they'll be reworking their creative, and we expect to turn that on here within the next couple of months. As that comes on, we expect to see more lift in that space.

It may be worth even recalibrating for the group: as of today, the trial on the item remains only 5% or 6%. It was 5% when we bought the business; it's moved to 6%, and that continues to be the single biggest opportunity. The other thing that I would share with you on Bachan's that we've learned is it's a Japanese barbecue sauce, but it's actually an incredibly versatile product. And actually, grilling isn't one of the top occasions that it's used on; it's actually used in a whole range of everyday occasions, which gives us more confidence that we can grow the business, not just in grilling season, but throughout the entire year.

Okay, interesting. Got it. And then maybe just the last one for me on your fiscal '27 CapEx guidance. I think you said $90 million. Could you just briefly walk us through what the major buckets of that spend are for this year?

Yes. The biggest piece is really investing in the College Park facility in Atlanta and scaling that primarily to support the growth in Chick-fil-A. We're adding quite a bit of manufacturing capacity to that facility, and that's the largest piece of it. There's also some additional cost savings initiatives that contribute to that margin growth and then some ongoing infrastructure investments we're making, with the biggest piece being the College Park.

And I'm not showing any further questions at this time. I'd like to turn the call back over to Dave for any further remarks.

Yes, I want to share a little bit more about our expectations for next year in terms of the top line. We are, with the benefit of Bachan's, we're expecting mid-single-digit revenue growth. Retail is expected to grow revenue in the mid-single digits, driven really by Bachan's and a modest decline on the base for the factors that Dave highlighted, including the Cyclospora impact.

And the foodservice business is expected to also grow in the low to mid-single digits. From a gross profit outlook, we've covered that. SG&A is expected to grow in the 10% to 15% range, really driven by the addition of Bachan's SG&A; the base SG&A is expected to grow with inflation. So overall, we feel good about our outlook for fiscal '27, really benefiting from Bachan's, the foodservice business and some work on retail.

So maybe bringing it all back together, you bring the quarter together, we were pleased to see progress in some areas, not satisfied with our progress in others. Foodservice continues to, we believe, outperform the peers in the space. Our supply chain executed well. In retail, it was a bit mixed. We're super pleased with our progress on the integration of Bachan's.

We're pleased with the growth of what we have going on in specialty bakery. But there's areas within the dressing space where we really have a lot of activity going on to restore those important businesses to grow. You swing forward, even in this environment of uncertainty, we see line of sight to mid-single-digit top-line growth, mid-single-digit bottom-line growth when you bring in the benefit of Bachan's. So a lot going on here. We're excited about our progress. Look forward to having more to share with you guys when we're together here in November. Have a great rest of the day.

Thank you, ladies and gentlemen. This does conclude today's presentation. We thank you for your participation. You may now disconnect, and have a wonderful day.

Good morning. My name is Didi, 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 Third Quarter Conference Call. Conducting today's call will be Dave Ciesinski, President and CEO; and Tom Pigott, CFO. [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 Third 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 website, investors.marzetticompany.com later today.

For today's call, Dave Ciesinski, our President and CEO, will begin with an update on our Bachan's acquisition that was successfully completed on Friday, May 1, along 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. 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?

Thanks, Dale, and good morning, everyone. It's a pleasure to be here with you today as we review our third quarter results for fiscal year 2026. I would like to start today's call by providing you with some insights specific to our acquisition of Bachan's, the fast-growing Japanese American Barbecue Sauce brand known for its delicious, authentic clean label products.

I'm happy to share that in advance of last week's closing of the transaction, we have been collaborating closely with the Bachan's team on our future plans for the business. Everything we've learned has made us even more convinced about what a great addition this is to our family of brands.

Since our announcement, the Bachan's business has continued on a path of strong growth with Circana data for the quarter ending March 31 showing strong sales growth of over 25% and TDPs up over 50%. This growth has resulted in share gains for Bachan's in the barbecue sauce category, positioning them as the second leading retail brand.

Consumers love both the brand and the products, as evidenced by its broad usage across a wide variety of proteins, food types and meal occasions. We believe this brand has tremendous potential and is the perfect fit for our sauce portfolio.

Our thoughtful plans for the Bachan's integration are fully on track. They will remain based in California with their very strong team retained to lead the business. We are also delighted that Bachan's founder, Justin Gill has agreed to continue working with us on product development and marketing strategy.

At the same time, we are developing plans to provide this team with the opportunity to draw from Marzetti's resources, including our go-to-market capabilities, culinary expertise, procurement capabilities and supply chain expertise to support both their continued growth and cost synergies.

Over time, we anticipate additional opportunities for Bachan's to more fully leverage Marzetti's supply chain network. We believe our light touch integration approach will allow Bachan's to continue its strong growth trajectory, and we look forward to a bright future with the Bachan's team.

This acquisition strategically expands our portfolio of leading sauces, dressings and dip brands that now represent 2/3 of our consolidated net sales. It also specifically strengthens our portfolio of sauces, which alone account for nearly 40% of our consolidated net sales.

In the era of MAHA and GLP-1 we believe consumers will continue to seek flavor enhancements for their meals. We believe our deep culinary expertise and focused scale in these categories positions us well to support the continued growth of Bachan's as well as our other brands.

Moving on to The Marzetti Company's results for our fiscal third quarter, which ended March 31, consolidated net sales declined 1% to $453 million. Excluding noncore sales attributed to the temporary supply agreement, or TSA, adjusted net sales decreased 0.9% to $452 million.

Despite the lower sales, we were pleased to report record third quarter gross profit of $107.2 million, an increase of 1.2%, driven by our cost savings programs. In our Retail segment, net sales declined 3.2%, while volume measured in pounds shipped declined 5.6%.

Our category-leading frozen bread brands were a bright spot as sales of our New York Bakery frozen garlic bread products continue to grow and increase market share, while sales of our Sister Schubert's dinner rolls benefited from the pull forward of demand due to the earlier Easter holiday.

These sales gains were more than offset by the impacts of category softness and reduced sales into the club channel. We have initiatives in place with our club channel partners to pursue future growth for both our Chick-fil-A sauces and Olive Garden dressings.

Circana scanner data for the quarter ending March 31 showed sales of our core brands and licensed items up 0.2%. In the frozen garlic bread category, our category-leading New York Bakery brand grew sales 4.4%, adding 260 basis points of market share for a category leading share of 46.7%.

In the frozen dinner roll category, our own Sister Schubert's brand and our licensed Texas Roadhouse brand combined to grow 10.1% for a category-leading market share of 61%. In the shelf stable sauces and condiments category, sales of our licensed Chick-fil-A sauces grew 4.4%, resulting in a 5 basis point growth of share. In the Crouton category, our branded croutons added 40 basis points of market share for a category-leading 28.5%.

In the Foodservice segment, excluding the noncore TSA sales, adjusted net sales grew 1.8%, while volume measured in pounds shipped improved 0.8%. In addition to the benefit of inflationary pricing, the increase in Foodservice segment net sales reflects increased demand from several of our core national chain restaurant customers.

We were pleased to report record third quarter gross profit of $107 million with reported gross margin up 50 basis points. 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 third quarter results. Tom?

Thanks, Dave. Overall, the company delivered improved gross profit performance despite a modest decline in revenue. In addition, investments were made to support future growth.

Third quarter consolidated net sales decreased by 1% to $453.4 million. The revenue performance was primarily driven by a decline in core volume and product mix of 120 basis points. This decline was partially offset by net pricing, which was accretive by approximately 30 basis points.

Despite the decline in revenue, consolidated gross profit increased by $1.3 million or 1.2% versus the prior year quarter to $107.2 million, and reported gross margin expanded by 50 basis points. The gross profit growth was driven by our productivity program, where we benefited from cost savings across a number of areas, including procurement, manufacturing, value engineering and distribution.

This quarter marks the 11th straight quarter of gross margin improvement versus the prior year. This accomplishment is a reflection of the many cost savings initiatives, network restructuring programs, revenue growth management projects and the ongoing pricing net of commodities management program that the company has successfully implemented.

Selling, general and administrative expenses grew $5.4 million or 9.5%. The increase was primarily driven by a net increase in acquisition-related costs, higher IT expenses and personnel-related costs as we invested to support continued growth. Consolidated and reported operating income decreased $3.3 million. The gross profit growth was offset by the higher investments made in SG&A.

Our tax rate for the quarter was 23.3% versus 20.7% in the prior year quarter. We estimate our tax rate for the fourth quarter of fiscal '26 to be 23%.

Third quarter diluted earnings per share decreased $0.14 or 9.4% to $1.35, driven by the reduced operating income and higher tax rate.

Turning to the balance sheet and cash flow. The company had strong cash flow generation during the quarter and year-to-date operating cash flow is up over $55 million versus the prior year. Year-to-date payments for property additions totaled $54.6 million.

For the full year of fiscal '26, we are forecasting total capital expenditures of $80 million. We will continue to invest in both cost savings projects and other manufacturing improvements as well as the Atlanta facility we acquired to support future growth.

In addition to investing in the business, we also returned funds to shareholders. Our quarterly cash dividend of $1 per share paid on March 31 represented a 5% increase from the prior year's amount. Our enduring streak of annual dividend increases stands at 63 years.

As we've completed 3 quarters of the year, we are pleased to report growth across a number of metrics in a difficult operating environment. Reported and adjusted net sales increased 2.2% and 0.9%, respectively. Reported and adjusted gross margin reflected increases of 40 and 80 basis points, respectively.

Reported operating income was flat, while adjusted operating income increased 1%. In addition, operating cash flow grew by 32%. We finished the quarter with a debt-free balance sheet and over $218 million in cash.

As was previously announced, we closed on the $400 million acquisition of Bachan's on May 1. The transaction was funded by a $200 million term loan and cash on the balance sheet. The interest rate on the debt is currently less than 5%. The company's strong cash-generating capabilities and low debt levels put us in a position to continue to invest for growth and return funds to our shareholders.

So to wrap up my commentary, our results demonstrate strong execution across a number of areas, and we continue to invest to support the future growth of our business and return funds to our 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, to simplify our supply chain to reduce our cost and grow our margins; and number three, to expand our core with focused M&A and strategic licensing.

As we look ahead to The Marzetti Company's fiscal fourth quarter, in addition to the incremental sales attributed to the Bachan's acquisition, we expect retail sales will benefit from new product introductions, including Marzetti Protein Ranch dressing and veggie dips, our new Olive Garden Zesty Italian dressing flavor and the addition of a larger-sized bottle for the popular Chick-fil-A Avocado Lime Ranch dressing.

In the Foodservice segment, we anticipate continued growth from select customers in our mix of national chain restaurant accounts. Specific to the contribution of the Bachan's business as part of The Marzetti Company for 2/3 of our fiscal fourth quarter, we would guide to a net sales run rate moderately above the $87 million that the business reported in calendar year 2025 with an operating margin similar to Marzetti's current level.

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 that inflation will continue to tick up during the months ahead, and we will continue to carefully monitor the macroeconomic impact of the Iran war.

We believe our commodity risk management program will serve us well in these volatile times. Specific to soybean oil prices, we believe we have sufficient coverage in place to mitigate the near-term impact of the price runup, and moreover, to implement relevant pricing.

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. I would also like to reiterate to Justin Gill and the entire Bachan's team, how excited we are about the opportunities for future growth and shared success.

This concludes our prepared remarks for today, and we'd be happy to answer any questions you may have. Operator?

[Operator Instructions] And our first question comes from Jim Salera of Stephens.

Dave, you almost read my mind in your prepared comments there. I wanted to start on soybean oil, so it's very convenient it's the last thing that you mentioned. Can you just give us a sense for how the duration of the coverage in place right now? I know there's a lot of moving pieces, but certainly, it's an important input.

And I know we get questions from investors about as you're doing kind of demand forecasting and procurement planning for 2027, how the recent run-up impacts the mix and kind of the margin outlook? So any thoughts there would be very helpful.

Jim, I'd be happy to share that with you. So we have, I would call it, intermediate-term coverage that takes us through essentially the end of the summer on board and basis which should be more than enough time for us to be able to get into the marketplace and implement pricing, so that our retail team is in the throes of putting those plans together right now.

And in the case of private label, we've already begun to see the market start to move within the last few weeks. So we feel like we're in a much better position as it pertains to that than we were in 2022, the last time we saw a spike.

On the Foodservice business, as you recall, it's a mark-to-market process, where we have some of our customers on national accounts that have taken positions, some that were a little closer nearby. But independent, the pricing differential is passed through. So I think for you and others that track us, the watch is our coverage on retail, and we feel like we're in a strong position relative to where we were in 2022.

Great. And I was hoping you could help us size up how you're thinking about the protein launch. I know the protein craze, all these protein forward new products have been very high with consumers. If I recall correctly, I think your produce dressing business is around $150 million, inclusion of Chick-fil-A, on a retail sales basis.

Given that I would imagine this would maybe pull some people that aren't historical consumers in that category into the category, can you just help us think about how we should think about that business scaling?

Yes, I'd be happy to. So this was a fast launch in the marketplace now. It's continuing to build distribution, and we attacked it in 2 different places. One was as it pertains to produce dressing. And you're right, the overall category is about $525 million, of which we have about $150 million, $140 million or so size of our business.

And we've launched a ranch protein SKU that's in the marketplace that we're watching carefully. And then we also launched it in cups, in a 75-millimeter dip cup. And we launched the product in dips as well. And what we're seeing so far is that the product actually in the portable cup seems to be performing the best. So we're excited about both of those.

And to help you size dips for you, let me look here, the size of the category is about $200 million. If you remember, we have about a 75% or stronger share there. So we have 2 different places where we see that there is an opportunity, and it really depends.

I think for this launch, we're going to be, I would say, an agile innovator, in particular, looking at making sure that we nail the right size format. Our supposition is this is something that's going to be perfect for kids and adults that are on the go so that the dip cup in particular, seems like it's particularly interesting to us.

And our next question comes from Alton Stump of Loop Capital.

Just wanted to ask, first off, obviously, you, of course, mentioned the sell-through data, which was once again very strong for both your frozen dinner rolls and for Chick-fil-A. Yet obviously, overall segment sales were down. So what do you think were sort of couple of kind of key areas of weakness that you saw when -- as you kind of look at your -- just over 5% volume decline in the quarter for the retail segment?

Yes. So really, Alton, I'd point to 3 things. One is January and February weather resulted in the Northeast being particularly hard hit. The second is category softness in both produce dressings as well as portable dressings, where the category is down about 5 points. And then the third is that we're lapping the pipeline build of both Chick-fil-A into the club channel and Texas Roadhouse rolls.

So really those 3 things combining together are what really drove that decline on the volume front. As you swing around and you say, what of this came as maybe a surprise to us or below our expectation, well, weather just necessarily can't plan for when we were talking to you in January.

I would say, as it pertains to the launch of our Roadhouse rolls, the velocities in Walmart continue to be particularly strong. It's taken us a little bit longer to build the quality of distribution that we want in retail. So as a consequence, those velocities are lagging a little bit.

But I think as you put all those together, I'd ladder back to some January, February weather, category softness in produce and in refrigerated dressings at about 5 points, which is significant, and then lapping that pipeline build. And the executional component that we're really continuing to focus on is continuing to drive improved velocities on Roadhouse, not in the aggregate, if you look at the share data that's out there, but in retail in particular.

Got it. Great. Very helpful. And then I guess just a question I wanted to ask is just with your comments, I think you used the word moderately higher as far as modeling Bachan's sales, now that, obviously, that has closed for the last 2 months of the current quarter. But then you mentioned that sell-through data was up over 25% during the first quarter.

So is this just you guys, look, we just closed and want to be a little conservative here? Or is there any reason why we should think that there should be any kind of slowdown as it pertains to the current growth profile of that brand or of that business, I should say?

Yes. So what I would point to, Alton, is let's kind of look at it strategically. First of all, an amazing product, authentic founder story, great ingredients and really connecting with consumers, has been growing in strong double digits, both the velocity as well as distribution, and we expect that to continue.

Now as we sort of work our way through the next handful of quarters, they have some new item launches that they have that are in the queue and some other activities. So I can't tell you it's necessarily going to be linear at the exact same rate, but we continue to be extremely bullish on the growth of the brand.

And as a proof point, I think what I would look to is 2 important pieces of data. In the recent Circana period, they actually became the #2 barbecue sauce right behind Ken's. So they passed -- or not Ken's, excuse me, but behind Ken's and Sweet Baby Ray's, but in front of Kraft and Kinder's in that period.

The second thing that I would point to is the velocities on those items. They continue to be extremely high, satisfying both retailers, of course, us. And then the last item that I would point to, and this is sort of a longer-term piece. When we look at something like a Net Promoter Score, the brand actually connects and scores more strongly than almost any other sauce brand that's out there.

So all of these make us confident that this is a great platform with room to continue to grow. So as you're aware, we closed on the transaction on Friday. I'm jumping on a plane tomorrow morning, first thing and flying out there along with the leader of our retail team where we're going to spend a couple of days with them celebrating the close.

We've been working with them and the leadership team to put together their AOP for our fiscal year that will be forthcoming. And I can tell you that they couldn't be more excited about the opportunity to work with our culinary and product development team.

So we're really -- we're very, very bullish about it. Great brand, and maybe later in the call, I'll talk about why I think that this transaction, in particular, marks an important evolution in our company's strategy.

Yes. I would say we're probably a little conservative in what we put out there, and we'll see as we progress deeper into it.

And our next question comes from Todd Brooks of Benchmark StoneX.

Congrats on getting the Bachan's deal across the finish line. Good to hear.

Thanks, Todd.

Two questions. Talked about some friction in the club channel. Can you walk through details behind that? And is that related to maybe the new SKU introductions on the Olive Garden side around Zesty? Can you just walk us through maybe some of that friction you saw and how you work that out and restore the momentum in the club channel?

Yes. So good eye, but that's not the cause. That new item that's coming out there is really the response. So within club, 2 different points of noise. One is we're lapping the launch of Chick-fil-A sauce last year. So we had a big pipeline build in the period. When we went out with that item, we launched it in a 2-pack, so two 20-ounce Chick-fil-A sauce.

What we found is that the sell-through was strong. However, buyers didn't come back. And when we did the math, what we realized is that we were selling consumers about what becomes a year's worth of supply of Chick-fil-A sauce. So in conversations with the buyers at Chick-fil-A, what we've elected to do is to come back with a 3-pack. So it's going to be 2 smaller originals and 1 Polynesian sauce, and that's shipping into the marketplace now.

The other thing that happened, and this isn't related, is that, as you recall, you followed us for a while, we've been in club with our Olive Garden dressing for quite a long time with the exact same variance. We had a couple of different regions on Costco, not on Sam's, that elected to move us from full-time distribution to more of a rotation sort of distribution.

And in response to that, we've gone back and retooled the offering to offer a multipack as well, where it's the original plus the Zesty that we're bringing to the marketplace there. So we are working with our club partners to work on innovating and ensuring that, that offering is relevant, but it doesn't have to do with the Zesty. The Zesty is part of the response.

Okay. Great. And then can we talk through just within the concept of frozen bread, how we should be thinking about Easter shift impacts with the 2-week earlier Easter that we had this year versus prior, just think about so that we can really fine-tune the modeling that segment of the business as we're looking at the upcoming quarter?

Sure. Well, while Tom and Dale are going to give you specific information on Sister, I think what I would point to is maybe just a quick set of words on what's going on with New York Texas Toast, which really continues to be our evergreen legacy brand growth story, where it was up several points in the period behind both the strength of our gluten-free item, which I think in sales value now is pushing $20 million and also our value size of sticks, which continues to grow in the high single-digit, if not double-digit range.

So that brand just continues to grow almost independent of the economic circumstances. That category is down about 1.5 points, but we're continuing to deliver not only just market share gains but actual sales gains through this. And increasingly, what you're seeing is the category seems to be closing in on more and more of a 2-brand set where it's our brand and private label and select retailers. So -- but that's Toast. And then Tom?

Yes. On the Retail segment, we benefited only about 30 basis points, really driven by Sisters in terms of revenue impact, maybe slightly less than what we had anticipated when we talked to you at the prior quarter.

And then on Roadhouse, just to kind of finish up the frozen side. You talked about good performance of -- really actually a very strong performance at Walmart being the retail distribution the way that you wanted to get it so you can really accelerate that roll, and I think at one point, you thought that was an extendable category as well with different flavors, many type of SKUs. Do we need to get the retail distribution in place before we start to see SKU extension? Or how do we stage those 2?

Sure. So maybe I'll give you a little bit of backdrop. So when we originally launched the item into Walmart, it was in a 10-count displayable case and the velocities were so fast, we were having a hard time keeping it on the shelf.

And at the request of our partner, we shifted it to a 20-count case. The case was not a display-ready case. So that worked fine for Walmart where they had already built the awareness in trial and repeat was strong and it continued to grow.

But as we then pivoted into driving retail distribution, having a case that wasn't display-ready resulted in, let's just say, a suboptimal merchandising on the shelf. So the team has been working for, let's say, the last 3 or 4 months on strengthening the display of that item, and we feel like we're starting to make some progress there.

So really, as we look through the remainder of this fiscal year and into next fiscal year in the Retail segment, which you can expect to see us more effort on getting display strengthened and getting it where we want it on the shelf.

As it pertains to extending the platform into new flavors, those plans are already in place, and we should have some news here shortly to share with you, but we're well down the path on that. We continue to believe that it's not only viable, but we have great confidence in it.

And our next question comes from Scott Marks of Jefferies.

First thing I wanted to ask about, I don't think we've really touched as much on the Foodservice side of things. So wondering if you can help us understand some of the puts and takes there, maybe how the businesses are doing within Chick-fil-A operator as well as some of the other bigger customers you have and help us understand how we should be thinking about that going forward.

Yes. No, I'm glad that you asked. And Foodservice actually had a pretty solid quarter when you look at it, where volume and sales were both up in the period. And let's maybe pull it apart. If you look at the whole industry, the industry is essentially where it was 3 months ago, it's flat.

Now you pull that apart and we look at national accounts, what I would point to, Scott, is it sort of bifurcates into the concepts that are emerging as the continuous winners and those that I think are struggling. Within our portfolio, we have a handful of those performers that continue to do pretty well.

One of those is Chick-fil-A. They're doing it on their base business, but they're also doing it behind several of their LTOs, which we've been fortunate enough to support. Taco Bell has also continued even in this economic environment to emerge as a winner. And we have a handful of others that I would say we're continuing to win with.

What we're seeing then on the other side of the ledger, though, is for those concepts that can't lead with price or they have a product offering that isn't necessarily connecting with consumers, they're struggling. But all in, on our national accounts component, which is 75% of our Foodservice business, we were able to grow it really led by Chick-fil-A and our winners offset partially by some of the others.

And on our branded piece of the business, that business was flattish, would have been up were it not for the fact that we exited a very low-margin breadstick business, which is pulling it back slightly. So net-net, for our Foodservice business in a competitive environment, I think we continue to do well.

Part of it is we sell sauces and it continues to be the area where our partners look to differentiate their menu. And the other part of it is because we're fortunate enough to have partners with big, strong concepts that seem to be performing best in this environment.

Appreciate the color on that. Second question for me would be, you made some comments about higher investments in personnel and IT. I know you've also been working through testing some different advertising concepts within the retail business.

So I was just wondering if you can give us an update on some of those initiatives and some of the extra costs that you've called out and how we should be thinking about where those investments are going and the kind of growth you're looking for because of that.

Yes. Great question. So on the IT side, after we put in SAP, there are a number of legacy systems that, quite frankly, needed to be replaced, and were not being supported by vendors anymore. And then there was opportunity to put in systems that would give us more sophistication.

So a couple of examples would be on the Foodservice side, the trade system we put in really helps us on the branded business to improve the trade optimization, and that's been a key contributor to the improved PNOC performance we've seen in Retail on a year-to-date basis. So that's been very positive.

And then there's some other legacy systems that we've had to replace that are not as value-added, but necessarily to kind of sustain the business and the growth. What I can tell you is that from an IT standpoint, a lot of that spending is now behind us. And as we plan the future years, we're not putting as much emphasis on that aspect of it.

So going forward, I think you'll see -- and in Q4, you'll see, even with Bachan's, just a modest increase in SG&A in line with inflation. So as we plan for the next fiscal year, I think we're in the same mode in terms of SG&A spend. Now as we see good marketing spends to support growth in Bachan's and other brands, we will continue to invest, but that's kind of our overall profile going forward.

Appreciate the color there. And then just one quick just technical question. I think you called out earlier, the Bachan's op margin is the same as The Marzetti Company. Is that referring specifically to the retail segment? Or is that total Marzetti?

That's total operating margin. Now again, I think we're being a little conservative at the onset and as we get into it, certainly, what we know to be true is that they're an investment -- invest-to-grow brand. And so there's a higher level of marketing spend there as they expand into markets and build awareness, as Dave shared.

It's a fantastic brand. It's #2 in barbecue sauce, but the awareness is relatively low. So their margins are slightly below -- their operating margins are slightly below our existing retail, and part of that is the amount of investment going into the brand to sustain its growth and to build it out.

At the gross margin level with Bachan's, it's nicely margin accretive to the business. And as we get into next quarter's call, we'll have completed the planning process with the team, and we'll have certainly more to share. But as Dave shared, everything we can see in terms of their performance give us comfort in terms of our business model for what we can achieve with that acquisition.

[Operator Instructions] And if there are no further questions, we will now turn the call back to Mr. Ciesinski for his closing comments.

Thank you, operator. And before we end the call, I just wanted to make a couple of short comments about strategically, the disposition of the company and where we're heading. And I believe that the acquisition of Bachan's is an opportune time to kind of take a step back and take an inventory of where we've been and where we are and where we look to go.

And really, over the last 10 years, if you've looked at the evolution of our company, we started as a company really focused on driving our legacy brands, and really, we focused in that mode, and then we started to add to that with our restaurant brand licenses.

And I would argue that over the course of the last 7 years, we've built out our retail business essentially by leaning into the growth of those licensed restaurant brands. As we sit today, it's about $550 million or so of Circana sales. It's about $350 million more than that of net sales, and it's been really an important driver of our growth story.

At the same time, we've leveraged our strong balance sheet as a means by which to go back and make key investments in our infrastructure, both our plant infrastructure by retiring old lines and putting in place high speed, more efficient lines and then putting in place scalable IT infrastructure.

What Bachan's really marks for us is not only just the acquisition of a phenomenal brand and the opportunity to work with tremendously talented people, but the first of what we believe will be more acquisitions in an area that we're calling authentic flavors. So if 10 years ago, the growth of our company, Marzetti or in Lancaster Colony was driven by legacy brands, Marzetti, Sister Schubert's and New York, the more recent period has been driven by that plus restaurant brands.

As we look to go forward, what we're excited about is the opportunity to add a whole new growth leg to our overall story, which is authentic flavors. So if you look at what our aspirations are going forward, it's to continue to innovate and market and grow against our legacy brands and our restaurant licensed brands, but also to use our end-to-end focused scale from culinary to product development through the supply chain to help highly relevant brands like Bachan's achieve their full potential in the marketplace.

And what we would love to be able to do as we learn more about Bachan's and we get the integration successfully underway is to start to think about where are those opportunities to continue to leverage our balance sheet and find other authentic flavors where those brands and those teams can come and take their business to the next level.

So as we look at the next 10 years going forward, it really gives us a platform for a much more balanced pathway to grow in Retail and in Foodservice. And before we wind down the call, I just wanted to share that with those of you that are listening.

But with that, operator, and everybody else, thank you for your time today. We look forward to being with you in August. Have a great rest of the day.

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

Good morning. My name is Siobhan and I will be your conference call facilitator today. At this time, I would like to welcome you to the Marzetti Company's Fiscal Year 2026 Second Quarter Conference Call. Conducting today's call will be Dave Ciesinski, President and CEO; and Tom Pigott, CFO. [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 Second 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.merzeticompany.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 Marzetti Company's President and CEO, Dave Ciesinski. Dave? .

Thanks, Dale, and good morning, everyone. It's a big day here for the Marzetti Company because in addition to reporting our Q2 results for fiscal year 2026, we are thrilled to announce that the Marzetti Company has entered into a definitive agreement to acquire Bachan, the authentic great tasting and rapidly growing Japanese American barbecue sauce brand. I will have more details to share on the acquisition later in the call following the review of our second quarter results. .

In our fiscal second quarter, which ended December 31, consolidated net sales increased 1.7% to $518 million. Excluding noncore sales attributed to a temporary supply agreement, or TSA, adjusted sales increased 1/10th of 1% to $510 million. Gross profit grew 3.4% to a second quarter record $137 million. In our retail segment, the 1.1% decline in net sales compares to a strong prior year quarter of 6.3% and reflects softer demand during the time frame of the U.S. government shutdown.

Retail segment sales highlights include continued growth from our category-leading our Bakery frozen garlic bread products and expanding distribution for our Texas Roadhouse dinner roles. Sirona scanner data for the quarter ending December 31st showed solid performance for several of our core brands and licensed items with overall scan sales up 2.3% for the 13-week period. In the frozen garlic bread category, our New York Bakery brand grew sales 8.4%, adding 300 basis points of market share for a category-leading 44.6%.

In the frozen general category, our Sister Schubert's brand and our licensed Texas Roadhouse brand combined to grow 7.1%, resulting in a market share increase of 40 basis points to a category-leading 60.8%. In the shelf stable sauces and condiments category, sales of our licensed Chickplaysauce grew 6.7% and resulting in 13 basis points of share growth. Chick-fil-A sauce has benefited from expanded distribution into the club channel that began during our fiscal fourth quarter, which ended June 30th.

In the produce dips category, sales of our Marzetti brand increased 0.3%, adding 130 basis points of market share for a category-leading 75.5%. In the Foodservice segment, excluding the noncore TSA sales, adjusted net sales grew 1.6%, while volume measured in pound ship declined 4/10th of 1%. In addition to the benefits of inflationary pricing, the increase in Foodservice segment sales reflects increased demand for several of our core national account customers and higher sales for branded foodservice products.

During the period, we are pleased to report a 3.4% increase in gross profit to a second quarter record of $137 million, with reported gross margin up 40 basis points. 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 second quarter results. Tom?

Thanks, Dave. Overall, the company delivered improved performance against a strong comparative period. In addition, investments were made to support future growth. Second quarter consolidated net sales increased by 1.7% to $518 million. Breaking down the revenue performance, net pricing was accretive by approximately 140 basis points. Core volume and product mix drove a 130 basis point decline. In addition, the company reported $8.2 million in sales or 160 basis points of growth that resulted from a temporary supply agreement with Windlin Foods, the seller of the Atlanta-based manufacturing facility that we acquired last year. .

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 $4.5 million or 3.4% versus the prior year quarter to $137.3 million, and reported gross margin expanded by 40 basis points. The gross profit growth was driven by our productivity program, where we benefited from cost savings across a number of areas, including procurement, manufacturing, value engineering and distribution.

In addition, our pricing actions offset the higher commodity costs we experienced during the quarter. Note that excluding the $8.2 million in sales from the temporary supply agreement, which did not contribute meaningfully to gross profit, adjusted gross margin expanded by 80 basis points. Sales and general and administrative expenses grew by $3.3 million or 5.8%. The increase was primarily driven by a higher marketing even as we invested to support the continued growth of our retail brands and the expanded launch of Texas Roadhouse rolls.

Note that last year, SG&A expenses included acquisition-related costs of $1.6 million. During the quarter, the company recorded $1.7 million in restructuring and impairment charges. The charges are attributed to a noncash impairment charge. On manufacturing equipment in our Foodservice segment as well as the planned closure of our sauce and dressing facility in Milpitas, California that we previously announced. Consolidated reported operating income decreased by $500,000. The gross profit growth was offset by the higher investments we made in SG&A and the restructuring impairment costs.

Excluding the restructuring and impairment charges, and the acquisition-related costs recorded in the prior year, adjusted operating income declined by $400,000. Our tax rate for the quarter was 22.6% versus 22.5% in the prior year quarter. We estimate our tax rate for the remainder of the fiscal year '26 to be 23%. The Second quarter diluted earnings per share increased $0.37 or 20.8% to $2.15. Note that in the prior year, we took a pension settlement charge of $0.39 and in addition to the acquisition-related costs, which totaled $0.05. In the current year quarter, the restructuring impairment charges totaled $0.05 per share.

With regard to capital expenditures, our payments for property additions totaled $17.7 million for the quarter. For fiscal 2016, we are forecasting total capital expenditures between $75 million and $85 million. We will continue to invest in both cost savings projects and other manufacturing improvements as well as the Atlanta facility we acquired last year. In addition to investing in our business, we also returned funds to shareholders. Our quarterly cash dividend of $1 per share paid on December 31 represented a 5% increase from the prior year's amount. It marked 63 consecutive years of regular cash dividend increases. In addition to the $27.6 million paid in dividends, the company repurchased in common stock in the second quarter.

Our financial position remains strong with a debt-free balance sheet in over $201 million in cash. And as Dave will discuss, we plan to take advantage of that strong position to invest for further growth with the acquisition of Bachan's. We will continue to have a strong balance sheet following the acquisition. As we complete the first half of the year, we're pleased to report growth in net sales of 3.6% and adjusted net sales of 1.7%. Reported and adjusted gross margin reflected increases of 30 and 80 basis points, respectively. Reported operating income was up 2.2%, while adjusted operating income increased 3.1%. In addition, operating cash flow grew by $30.6 million or 24%.

To wrap up my commentary, our results demonstrate strong execution across a number of areas that drove solid top and bottom line performance in a difficult operating environment. In addition, we returned funds to shareholders through our increased dividend and share repurchase and also continued to make investments to support further growth and cost savings. I'll now turn it back over to Dave for his closing remarks. Thank you.

Thanks, Tom. 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, to: one, accelerate core business growth; two, to simplify our supply chain to reduce our cost and grow our merchants; and three, to expand our core with focused M&A and strategic licensing. .

As an example of how we're executing against that third pillar, this morning, we announced that the Marzetti Company had entered into a definitive agreement to acquire Bachan's, the authentic, great-tasting and rapidly growing Japanese American barbecues brand. Bachan's has been built around a multigenerational family recipe passed down to its founder, Justin Hill, who has done an amazing job of developing the products and building this brand. We are extremely excited to add Bachan’'s on to our portfolio. In the months ahead, we look forward to sharing with you our plans to leverage our industry-leading culinary and product development capabilities and working shoulder to shoulder with the Bachan’'s team to deliver long-term growth while maintaining the authenticity and quality that makes Bachan’'s brand so special.

This transaction reinforces Marzete's position as a leader in sauces by adding a premium brand that is exceptionally well aligned with evolving consumer preferences for authentic global flavors and better-for-you products. From 2022 to 2025, Bachan’'s on delivered net revenue compound annual growth of approximately 48%, driven by strong consumer demand and expanded distribution. We see meaningful opportunities to accelerate Bachan’'s next chapter of growth by leveraging Marzeti's culinary capability, retail relationships and food service partnerships.

Over time, we intend to broaden distribution, support continued product innovation and thoughtfully extend the brand into new channels and adjacent categories. We also expect to capture substantial synergies as we carefully integrate Bachan’'s into our supply chain by leveraging our scale and expertise in making many of the world's most iconic and great tasting sauces. The total consideration for the acquisition was approximately $400 million in cash. Overall, we expect this acquisition to be accretive to both top line growth and gross margins beginning in year 1.

Looking ahead to the back half of our fiscal year, excluding any impact from the planned acquisition, we project retail sales will continue to benefit from our expanding licensing program led by Texas Roadhouse dinner rules. In addition to investments in innovation and growth for our own brands. Note, with this year's earlier Easter holiday, we anticipate some retail segment sales will be pulled forward into our fiscal third quarter. In the Foodservice segment, we expect continued growth from select customers in our mix of 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 our input costs, in the aggregate, we anticipate a modest level of cost inflation that we plan to offset through contractual pricing and our cost savings program as we remain focused on continued margin improvement. In closing, I would like to thank the entire Marzetti Company for all their hard work this past quarter and their ongoing commitment to grow our business. I would also like to convey to Justin Gill and the entire Bachan's team how excited we are about the opportunities to grow that lie ahead. This concludes our prepared remarks for today, and we'd be happy to answer any questions you may have. Operator?

[Operator Instructions] And your first question comes from the line of Scott Marks from Jefferies.

I just wanted to ask a little bit about top line performance in the quarter. I think you called out on retail, obviously lapping a very strong quarter last year as well as some of the government shutdown impacts. As we think about maybe the go forward, should we expect that the impacts from those government shutdowns are fully behind us? Should we be thinking about any type of inventory rebuild coming into the pipeline in addition to some of those Easter ships or any other dynamics that we should be thinking about with regard to the retail segment.

Yes. It's a great question, 1 that we've obviously watched carefully and maybe I'll try to frame it in little context for you. First, as you pointed out on the retail side of the business, we were going up against a strong comp last year, where our volume was actually up 7.4%. Then you sort of walked down from that, as you highlighted, we saw a bit of a category slowdown between the 13-week period and the 5-week period across all MULO and in our categories in particular. And importantly, Scott, as you pointed out, by the time we got back into December, we started to see those rates recover as we move along. As we then lift our focus to the go-forward period, we continue to believe that we're set up to deliver low single-digit volume growth against this business here. .

Got it. I appreciate the answer there. And then maybe just shifting over to the food service side. I think after last quarter, the commentary was pretty positive just around some of the initiatives within food service and being able to continue with some of the volume momentum. Obviously, volumes came in a little bit softer than folks were expecting. So just wondering if you can share with us maybe what happened in the quarter? What was the reason for the organic volume declines? And then how are you thinking of that rest of the year for that foodservice segment?

Yes. Let's do the same thing. Let's kind of ladder up and settle little context for the industry and then we'll bring it down specifically to our business. So at an overall industry level, I think the best way to categorize things that essentially, they're flat. We also saw a bit of a pullback in Foodservice during the period of the government shutdown. But there, again, we saw an element of normalization. If you look at most of our large national accounts were continuing to win with those Chile, Domino's, Taco Bell, et cetera. I would say in those particular cases, we were very satisfied with their performance and our performance.

If you go back and you look at the script for probably the last couple of periods, we talked about the fact that we were going to be lapping a couple of limited time offerings during this period that we thought were going to create a whole I think the setup that we used as we expected volume to be down a couple of points and for us to be able to get a little bit of pricing to get us closer to flat in the business. So I guess I think the way we were thinking about it then it came in I would say, at or maybe even slightly better than we were expecting.

Now let's come in maybe even a click deeper on what actually happened in the period. First, I think it's -- we've continued to work and benefit from our partners that are doing well on a relative basis and particularly, we had a number of specialty sauce promotions that were going on in the period, either new items that were limited time offerings or in some cases, just core menu sauces that we've used that select food service partners have decided to promote in the period. So on this piece of the business, as you continue to shift your focus forward, I would argue that we're feeling a little bit more optimistic than we might have the last couple of quarters.

All eyes are on the consumer to see what happens. But it's really hard to envision as we move now into calendar year '26, short Blackline, something changing materially on the downside. I think there are a couple of things that are working in our favor for everybody that services food service first, gas prices are down year against year, which we know gives consumers discretionary spending that oftentimes comes back and away from home dining.

The other thing that we're seeing here is like you, I think we're expecting income tax returns to be a little bit stronger this year than they were last year because of some of these changes. And those ordinarily hit around the time of President's weekend or so. So you put the fact that inflation remains relatively in check. Gas prices seem to be moderating some. There's a case for a slightly stronger income tax returns. I think the setup there for all the food service is at least for a flat scenario, if not for a modest improvement.

And it passed as prolog, what we see is that the winners continue to win in this environment. And I think this is where we'll continue to perform relatively well. So that would be kind of the view.

Our next question comes from the line of Todd Brooks with Benchmark at StoneX.

Congratulations on the Bachan's acquisition. I was wondering -- I know there'll be a plan for the synergies and everything that you look to be harvesting. But -- if you look at that business in '25, I think it was like an $87 million business. But wondering what kind of the exit rate was? It looks like maybe there was some SKU expansion, there was probably door expansion. As we think about maybe an exit quarterly run rate for Bachan's in Q4 25. Is there anything you can share there?

Yes. So why don't I maybe step back and frame it if you'll allow me a little more broadly. But first of all, this is a business that we had been tracking in the industry for the better part of 4 years. It's a really an amazing product and amazing brand. It's an authentic founder story. It's great tasting, clean label and what we love about this product. Todd, is that when you look at it, it's significantly over-indexes with millennials and Gen Z. So it does well with all of the various cohorts. But if you look at sort of the future of food consumption, and these are people that love their sauces. It does particularly well with those cohorts. .

And that, in conjunction with the fact that the brand has very broad shoulders, it plays in sauces, place in marinades, place in glazes, even in plays in dips. We tested all of these items. It gave us reason to believe that this could be a very meaningful brand platform for us. And as we talk to Justin Gill, the founder of the business and his team really what we focused on was the fact that we believe we have best in industry culinary and product development capabilities. We can't develop everything. But when it comes to sauces and dips and flavor systems, we believe that we really have top of the peer group capabilities. And I think that became part of a selling point for our partnership together.

Now as you pointed out, the business did $87 million in sales strong growth rate. If you look at the history of the business, it grew principally through Costco and then began to diversify into mass, into -- with Walmart and into retail. So the mix of the business was growing a little bit faster this most recent year in mass and in retail. The price point is premium, which gives us the ability to make it margin accretive. And as you might imagine, there is a synergy case here, given that this is in sauces and it's really our wheelhouse to be able to support this business.

So overall, you bring it all together, authentic founder story, great tasting product aligned with where consumers are going, GLP friendly, it really just made a lot of sense for us. So a very, very exciting item here. So -- and I'm going to give you a little inside baseball for those listening. We literally signed this last night. We had been following this business for 4 years. We have participated in the process. We've been diligencing it 4 months. But literally, we signed last night. So it's relatively fresh news.

And we'd like to come back to you with a more complete story for how we intend to grow the business and outline for you the synergy case and everything else. But suffice it to say, if you look at us, our history really started in dressing, and our most recent chapter of boat and sauces is come way of brands that we've licensed, and we love those brands. That being said, we've always wanted brand platforms that we could own that we could also grow. So we could have multiple pathways to grow. Our legacy brands, Marzetti, Sister Schubert and New York these amazing, highly relevant restaurant brands, but then over time, in the right circumstances to add additional brands that we think are consumer relevant for the future that we can own and help grow. So for us, it really checks all of those boxes.

That's amazing. And one nonrelated follow-up and I'll jump back in queue. Dave, if we think about the Texas Roadhouse inner roles, I think scanner data north of $20 million in the quarter, when you originally talked about the launch of the product, you thought this was the next $100 million offering within the licensed branded portfolio. As we look towards the back half, how do you think about exit run rates for this business given that distribution continues to grow. And you've also talked about possible extensions with additional flavorings and things like that. Can you address that as well? And I'll jump back in queue.

Yes, I'd be happy to. And thank you for asking. The business continues to maintain that same growth rate. If you look at it, you pointed out, the most recent period, we exited about a 20% -- $20 million run rate. Actually, the 5-week was better than the 13-week. And I think there's still room for us to continue to dial in the merchandising on the shelf and a range of other things. Parathetically, yesterday, I was on the phone with the team at Texas Roadhouse, and we were talking about partnership and how mutually excited we are about the whole thing. And we are also talking about other items that are in the pipeline. .

So you get to the end of our fiscal year. I think there's most certainly a case that this thing could be working towards a retail $100 million run rate. And this is an amazing brand. It's really one of those away-from-home brands that really connects with consumers in a good economy and in a tough economy. And we feel like we're uniquely suited to work with them in their iconic role platform to grow the business.

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

As always, I guess, first 1 is for Tom. I want to ask with the $21 million in share buybacks, obviously, it's not a big number with where your balance sheet is at. But believe is the biggest number even on a full year basis that you bought back in over a decade. So I guess anything to read from that as far as your appetite for buyback forward obviously, you just completed a sizable deal. So that probably hasn't met that. But just kind of what your thoughts are when it comes to buybacks going forward

Yes. So great question. So obviously, with the stock trading off and with the rest of the sector, we felt opportunistically there was an opportunity to buy back. So we executed a limited number of buybacks during the quarter. Now as you've mentioned, we're levering that balance sheet against the acquisition of Bachan's which, as Dave articulated, will be tremendously positive for our financials over time. So I think at this time, it's safe to stay, we'll kind of go back to our attritional approach on buybacks. That said, on the dividend policy, we continue to expect to grow it, consistent with our history. Even with this acquisition, given the very strong cash position the company has developed over time. .

Understood. Makes sense. And Dave, than for the color that you just signed this deal last night. So I'm sure there's going to be some more information on the opportunities as you kind of work through things. But I think you mentioned that it grew 48% annually during '20 to 2025. So clearly, and we're just established in 2019, like I said in the release. So it's obviously a brand new brand. I would think that there's a ton of distribution opportunities. Like you mentioned that they've obviously had a lot of the growth in Costco and Walmart maybe just high-level color on kind of what the distribution upside potential could look like?

Yes. Well, our early thinking on things as we get to know the business is maybe, first of all, this is a very, very capable team, a very cohesive team, and our intention is to keep the team together and really augment them with our resources to help them grow rather than to to do anything other than that, really continue that momentum. As we think about how we intend to grow that, it's likely to come in 3 stages where the first phase is going to be focused on really refining the distribution that they have in place. The second phase would come by driving new items that were in their pipeline and in our pipeline and really helping them execute those. And then the third phase would be extending them even more into broader adjacencies with new items.

So this is a brand that plays most certainly well in the United States, we've seen it, and it's also a brand that we believe could play in a very meaningful way in Canada, if not other countries beyond. The last thing that I'll point to is if we look at this, one of the things that the business that really impressed us is when you look at the velocities of these items, the velocities are really remarkable. And the other thing that we saw that we really liked about it is the Net Promoter Score which is that ratio of positive feedback to negative feedback. And the Net Promoter Score on this brand was higher than virtually any other brand that we tested out there, including many of the the most popular items that the industry has talked about most recently, whether in sauces or even in other categories. So the setup here is very, very positive.

Your next question comes from the line of Brian Holland from D.A. Davidson. .

Maybe just sticking along with the Bachan's acquisition. So when you make an acquisition like this, there's two factors to consider. The availability of a desirous asset. You're talking about this from a timing perspective. So the availability of the desires asset and the preparedness of the acquirer to complete the acquisition. I think, Dave, as you and I have talked about, obviously, the market generally has some skepticism, spotty M&A track record. Historically, I think it's fairly straightforward here, looking backwards, some of those acquisitions were taking big swings that were focused on addressable market expansion, et cetera, big swings at least from a new category standpoint, not necessarily size.

This is really in your wheelhouse. So can you just kind of talk about why this -- less about the asset. We know about that and we can dig into it in just a second here. But why now is the right time for Marzetti to be able to execute and integrate this asset in a way that it may not have been able to do 5 years ago?

No, it's -- Brian, I'm really glad you asked that question, and you followed us long enough and closely enough, so I think really appreciate the journey that we've been on. And I think I would maybe talk to several things. Over the course of the last handful of years, we've really begun to narrow our focus into building end-to-end capabilities in sauces, dressings and dips. Even when we think about our do items, we think about the ability to stick flavor on top of those often tux, but focusing narrowly on sauces and dressings and dips, which is our core.

This whole transformation has taken place in several steps. One has been going back and looking at our asset base to modernize those to make sure that we can move from slower, less efficient filling lines, a highly efficient, scalable manufacturing and filling lines. And that was played out with Forest cave. It was played out with some of the other smaller expansions, and it was also played out with the most recent acquisition that we did at college car. As we worked our way through that, as you're aware, we looked at assets to buy, but the prices didn't make sense or the asset didn't make sense for what we were trying to achieve, and instead, we leaned into another organic growth pathway, which for us has been licensing.

And we've added, as you know, over that period of time, I'm guessing $400 million plus or so of profitable revenue by way of that licensing arm. You continue to move forward with that. We had an antiquated IT infrastructure system. We had a cobalt-based system installed in 1994 that we tore out and replaced during COVID, and we went to really end-to-end SAP S/4 HANA, all based in the cloud all with our data in one data lake. So another element of modernization. So as we've worked to grow by way of organic activity and inorganic activity, with licensing, we've also worked in earnest to strengthen our capabilities. So we could get to a point where we feel like we have industry-leading culinary and product development capabilities, industry-leading manufacturing capabilities and then industry-leading marketing and selling capabilities.

So we're at a moment in time now where most of the infrastructure, let's call it, remediation and rebuilding is behind us. whether it's in the IT space or whether it's in the physical space. And it was a logical time with this experienced team to think about an acquisition, and this acquisition, like you said, was just really right down the wheelhouse. It has a combination on the asset now of a great founder story, clean label, great tasting products I could go on and on. And the partner, Justin Gill and the team that he has built is really top like.

So you bring all that together, it really made us feel like this was the time for us to think really hard about this. If we get it at the right price to move forward, and we felt like this was the right price for us.

Appreciate it. It's always a thoughtful answer. And then forgive me, if you've referenced this earlier in your remarks, and I just missed it. But just curious on the integration, the cost seg side and supply chain, et cetera. Are you -- what can you offer immediately? Do these -- are they self manufactured? Is this something you get to bring in house, obviously, the excitement, enthusiasm around growth will maybe need more capacity at some point? Is that something that you can offer immediately? Or will that require some capital investment in a meaningful way to allow for that future growth runway?

Sure. So as it stands today, the business is co-packed 100%. And obviously, that provides us with a pathway to integrate some of the manufacturing into our network, but this is one of those scenarios where we most certainly want to go slow to go fast. We want to make sure we understand the business. We want to make sure we understand how to manufacture the business. They have a good copac partner that's out there right now. And the last thing we want to do is a bugger this thing up. So -- but as you think about over the longer arc of time, there is a strong case for synergies here throughout the supply chain. And then we talked about the synergy case as well.

And our last question comes from the line of Jim Salera of Stephens.

I wanted to dig in a little bit, if I could, on Basham's potential on the margin side. as we think about pension, it's 100% co-man. I assume that you have the capabilities in place to make this in one of your existing facilities. Is there -- any way you can frame up the opportunity for where the margins might come in, whether it's relative to kind of your existing margins? Or if you have a specific number in mind?

Yes. So this is a very high-margin business. The product sells at a premium price point, justifiably and the existing margins are accretive to our existing retail segment at gross margin. So we're starting off with a premium product and as we look at it, we have opportunities not only in terms of utilizing our capabilities in manufacturing, procurement, distribution is another drill site for us. So this is going to be immediately margin accretive to us at the gross margin level with potential to add to that going forward.

And then I wonder if you have any detail on, do they have any sales in foodservice right now? Because I know we've seen other brands do kind of collaborations with food service partners if they have a particularly weak or kind of prominent thoughts? Is that or that's a possibility? .

No, it's a great question, and it's a great opportunity for us. Right now, they do a very limited amount with foodservice customers. And as we work with them over the course of several meetings, we both felt like this is a really exciting opportunity where we obviously have great capabilities to help them work with national accounts. Ideally, if you can imagine a Bachan's barbecue sauce, a wing sauce of some sort of feels like a home run. So there's a range of opportunities there potentially with national accounts that we would like to investigate. And also just opportunities up and down the street. This is a tabletop item that people also use to drizzle, particularly on volts. So they're in a real food service opportunity here, and one of the things that I think that the team at Bachan's was liked about us was our food service reach.

Perfect. And then if I could just sneak in 1 quick near-term question. Just with all the moving pieces for 3Q with estating pull forward and then 3Q is also going up against a negative comp in the year ago. I think sales were down like 3% in 3Q '25, would it be reasonable to expect 3Q to be up kind of if we're thinking kind of 2% for the year, that 3Q would be like 3% to 4% and then 4Q would be the balance of that to average to for the year. I just want to make sure we're kind of getting the cadence right as we think about modeling overall the calendar changes and then the year-over-year could lap.

Yes. We have -- for retail, we have low single-digit revenue growth for the second half. It actually is fairly even by quarter as forecasted today. And certainly, we do have -- while we have the Easter tailwind, we have some difficult new item launch comps in Q3 and in the club sector. So I would model it fairly even by quarter.

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

Well, thank you, operator, and thank you, everyone, for participating this morning. We look forward to sharing with you our third quarter results in May and giving you more exciting information about the acquisition of Bachan's. Have a great rest of the day. .

Thank you for your participation in today's conference. This does conclude the program. You may now disconnect.

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. [Operator Instructions] 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.

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?

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, 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?

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.

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, to: one, accelerate core business growth; two, to simplify our supply chain to reduce our cost and grow our margins; and three, to 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 Instructions] Your first question comes from the line of Alton Stump from Loop Capital.

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?

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 we'll 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.

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?

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.

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

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.

No, I'd be happy to. So I think you understand as well as anybody else that the core of our Foodservice business, our large national accounts. If you look at the most recent period, 5 of our 7 largest national accounts were actually growing sales and traffic in the period, led -- in that group led by Chick-fil-A, which is doing an amazing job with pretzel club sandwich that they launched that LTO, which we were more than happy to provide the sauce for. Domino's is another very important strategic customer for us, and they've been growing in this period. Taco Bell grew in the period and then others did as well.

So I think part of what's happening here, Jim, if you kind of ladder back and you look at the challenging backdrop, I would point to 2 things. One is we are blessed enough to be able to win with the winners. The people that have a value proposition in this environment that consumers continue to find relevant and they're willing to spend their hard-earned money against. The second is we're playing in categories that are relevant for these customers. They're all looking for ways to differentiate themselves and cut through this noisy backdrop and screen flavor. And that really is our wheelhouse. So that's how we feel like we've been able to do it in the quarter. It helped us offset a bit of a gap that we had that we've been talking to you guys about with some discontinued items.

And it sets up, I think, for us to continue to be able to grow and it highlights part of the durability of our overall business strategy, which is flavor, flavor, flavor on consumer-relevant forms that our customers in Foodservice continue to see as important and their consumers, the end-using consumers ultimately enjoy eating.

Great. And Dave, if I remember correctly, when you talked in 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?

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.

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

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.

Sure. So overall, when you look at Retail profitability, it was down in the quarter as you highlighted. Three main drivers to that. First, as eggs prices have gone up considerably, we price for that. But we've priced for the longer-term outlook. So right now, in this particular quarter, PNOC was negative for Retail and that impacted the margin profile this quarter.

The second thing on the margin aspect of Retail is we've done a lot of efforts on the network to close the Milpitas facility to activate the College Park. A lot of those savings are flowing more to the Foodservice P&L. So over time, we'll begin to get more productivity savings on Retail. But right now, as you look at the Foodservice profitability, it's getting the main benefit.

Now getting to your -- the core of your question, the investments in marketing, we see an opportunity to continue to elevate our marketing in Retail. We're below a lot of the peers in what we've spent. And we're getting great response in terms of the programs we're putting in place with the marketing team. So we're going to continue to invest in that space.

When you look at the SG&A in Retail, the majority of that increase was that marketing spend. We also had slightly higher brokerage costs relative to the higher volume performance for the segment. So overall, we feel good about the investments we're making into the Retail segment and the overall profitability outlook.

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?

Yes. No, Scott, we're seeing the same thing that everybody else is. We're looking at a consumer that's under pressure. All that being said, the consumers are still eating and flavor still matters. And I think what we're choosing to do is really leverage our innovation capabilities and bring to the market products that they're finding relevant. Maybe I could kick off a couple.

I would, on the Retail side, point to New York Bakery, which is in a bit of a sleepy category, right, garlic toast. If you look at it sequentially, we've been growing that business quarter after quarter, at least to 44.1% share in the most recent period. That's behind our own toast. It's behind the new gluten-free item which has increased in velocity and a value pack of bread sticks that we have. So great item even in this economy that consumers are finding relevant -- as it pertains to our roll business here, again, I think we were up about 650 basis points, if I recall, or thereabouts in overall market share.

We're growing our share. We're also growing the category considerably. Our own Sister Schubert's brand was roughly flat, and the real growth there is coming from the Texas Roadhouse roll, which is terrific. We love to repeat on that item, great tasting roll, affordable price point, where consumers can treat themselves.

If you move around and you look at our Marzetti brand, we've had a great season so far in our dips and caramel dip. And I think all of these are just affordable luxuries that even against a challenging backdrop, consumers can afford. So is it challenging? Yes. Do we see pathways to leverage innovation and good execution to continue to grow? Yes. Would we like the growth to be even faster? Absolutely. But -- and we're going to continue to press for it. But we continue to see against all of our different owned brands and licensed brands, the ability to, even against this backdrop, grow because flavor matters and we believe that our innovation capabilities around flavor is among, if not the best in the industry.

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

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.

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