MARZETTI CO Q1 FY2027 earnings call

• Cyclospora Impact: The outbreak significantly impacted results, particularly in the Great Lakes region (30% of business), driving double-digit declines in affected categories. However, the impact has moderated, with significant recovery observed in August.
• Bachan's Acquisition: The Japanese barbecue sauce brand is performing well with 10.7% sales growth, 7% increase in distribution points, and 13% velocity growth. Nearly three-quarters of usage occasions are for everyday meals rather than specific Asian cuisine, informing marketing strategy.
• Bread & Rolls Leadership: Texas Roadhouse rolls saw 21.3% sales growth and a 270 basis point market share gain. Combined with Sister Schubert’s, the company holds a category-leading 64.2% market share in frozen dinner rolls.
• Strategic Hiring: Mark Christenson joined as President of Retail, bringing extensive experience from Wingstop and P&G to accelerate organic growth and strengthen innovation pipelines.
• Chick-fil-A Partnership: A new spicy version of Chick-fil-A sauce will launch nationwide on November 16 as a permanent addition to their menu, strengthening the long-standing partnership dating back to 1983.
• Innovation Pipeline: New products include Tajin licensing items launching in February, versatile refrigerated sauces under the Marzetti brand, and continued expansion of the Bachan's mayo line into natural channels.

Retail Segment: Reported net sales grew 2.0% to $252.7 million. Growth was driven by a $17.8 million contribution from the newly acquired Bachan's brand and strong performance from Texas Roadhouse dinner rolls, which offset declines in dressings and dips caused by the cyclospora outbreak. Foodservice Segment: Sales excluding non-core TSA sales decreased 2.6%. Performance was mixed, with strength from select national chain restaurant accounts and modest inflationary pricing partially offset by the negative impact of the cyclospora outbreak on categories like croutons and salad dressings.

• Full-Year Net Sales: Management reaffirmed the expectation for mid-single-digit net top-line growth for fiscal year 2027, including contributions from Bachan's.
• Gross Margin: Adjusted full-year gross margin growth forecast downward to between 25 and 75 basis points. Q2 margins are expected to be flat due to persistent freight headwinds, with margin expansion anticipated in the second half of the year.
• Capital Expenditures: Full-year capex forecast remains unchanged at $90 million.
• Tax Rate: Estimated tax rate for the remainder of fiscal 2027 is set at 23%.

• Cyclospora Outbreak: Continued volatility in consumer demand for dressings and dips, particularly in key regions, poses an ongoing risk to volume.
• Freight and Input Costs: Significantly higher diesel prices and linehaul rates created substantial headwinds (approx. 120 basis points impact in Q1). While moderation is expected in H2, costs remain elevated.
• Pricing Execution Risk: The company faces the challenge of implementing additional inflationary pricing on grain/dough products and foodservice services to offset freight costs, requiring careful negotiation with retailers and customers.
• Cannibalization: Introduction of new SKUs, such as the Texas Roadhouse roll, may cannibalize existing brands like Sister Schubert’s, though management notes this has not been margin-destructive to date.

Q: Analyst asked if the heavy concentration of cyclospora impact in the Great Lakes region would lead to an outsized recovery. / A: CEO confirmed that because the Great Lakes represent 30% of the business, the recovery there will benefit the company disproportionately. He noted that while categories were soft going into the issue, they have substantially recovered, and marketing spend will return online in January to support the rebound during salad season.

Q: Analyst inquired about the magnitude and timing of incremental sales from the new Chick-fil-A spicy sauce and other innovations. / A: CEO stated the sauce launches Nov 16 as a permanent item, contributing to Q2 and Q3 Foodservice growth. Retail launch is planned for next February. Other innovations like Tajin licensing and new Marzetti sauces are also scheduled for February launches, building the pipeline for future growth.

Q: Analyst questioned whether underlying organic volume trends remained weak after adjusting for cyclospora and if the full-year mid-single-digit growth target was still achievable. / A: CFO confirmed the mid-single-digit top-line growth target remains intact. CEO explained that base business shows low single-digit volume decline, but this is being offset by successful price implementations in center-store and produce categories, protecting margins despite volume pressures.

Q: Analyst asked for clarity on the revenue ramp of the Bachan's acquisition, specifically if the $100 million annual run-rate was still on track given Q1 figures. / A: CFO clarified that Bachan's is seasonal, with stronger performance in the back half of the year. Therefore, a steady ramp from the Q1 level is expected, supporting the full-year revenue guidance.