The Simply Good Foods Company (NASDAQ:SMPL) Q1 2023 Earnings Call Transcript

The Simply Good Foods Company (NASDAQ:SMPL) Q1 2023 Earnings Call Transcript January 5, 2023

The Simply Good Foods Company beats earnings expectations. Reported EPS is $0.42, expectations were $0.4.

Operator: Greetings and welcome to The Simply Good Foods Fiscal First Quarter 2023 Conference Call. At this time all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. As a reminder, this conference is being recorded. I would now like to turn the conference over to your host, Mr. Mark Pogharian, Vice President of Investor Relations for Simply Good Foods Company. Thank you. You may begin.

Mark Pogharian: Thank you, operator. Good morning. I’m pleased to welcome you to The Simply Good Foods Company earnings call for the fiscal first quarter ended November 26, 2022. Joe Scalzo, President and Chief Executive Officer; and Shaun Mara, Chief Financial Officer, will provide you with an overview of results, which will then be followed by a Q&A session. The company issued its earnings release this morning at approximately 7:00 a.m Eastern. A copy of the release and the accompanying presentation are available under the Investors section of the company’s website at www.thesimplygoodfoodscompany.com. This call is being webcast and an archive of today’s remarks will also be available. During the course of today’s call, management will make forward-looking statements that are subject to various risks and uncertainties that may cause actual results to differ materially.

The company undertakes no obligation to update these statements based on subsequent events. A detailed listing of such risks and uncertainties can be found in today’s press release and the company’s SEC filings. Note that on today’s call, we will refer to certain non-GAAP financial measures that we believe will provide useful information to investors. Due to the company’s asset-light strong cash flow business model, we evaluate our performance on an adjusted basis as it relates to EBITDA and diluted EPS. We have included a detailed reconciliation from GAAP to adjusted items in today’s press release. We believe these adjusted measures are a key indicator of the underlying performance of the business. The presentation of this information is not intended to be considered in isolation or as a substitute for the financial information presented in accordance with GAAP.

Please refer to today’s press release for a reconciliation of the non-GAAP financial measures to the most comparable measures prepared in accordance with GAAP. With that, I’ll now turn the call over to Joe Scalzo, President and Chief Executive Officer.

Photo by Anna Pelzer on Unsplash

Joe Scalzo: Thank you, Mark. Good morning and thank you for joining us. Today I’ll recap Simply Good Foods first quarter and provide you with some perspective on the performance of our brands. Then Shaun will discuss our financial results in a bit more detail before we wrap it up with a discussion of our outlook as well as your questions. We’re pleased with our first quarter financial and marketplace results in a challenging cost and operating environment. Net sales increased 7% relatively in line with estimates. In the first quarter combined, measured and unmeasured channel, U.S retail takeaway growth was about 14% and as expected, outpace net sales growth. Shaun will provide more details on the difference between net sales and point of sales growth in a bit.

Our strong POS growth was driven by solid Quest performance across key forms, customers and channels. Atkins continued e-commerce growth resulted in about 4% retail takeaway for the brand in the combined measured and unmeasured channels. First quarter gross margin was 36.9%. The 450 basis point decline versus the year-ago period was slightly greater than forecast. Ingredient and packaging inflation as well as trade investment were in line with expectations. However, logistics and contract manufacturing costs were greater than estimates. Importantly, our supply chain team performed well and customer service was near at target levels. Adjusted EBITDA for the first quarter was $60.8 million versus $65.6 million in the year ago period. Sales growth which included our July 2022 price increase and SG&A cost control were primarily offset by supply chain inflation.

As we move into the second quarter, we’re focused on executing against our plans and we are well-positioned to deliver another solid year of net sales and adjusted EBITDA growth. Simply Good Retail Takeaway in measure channels increased 11.1%. Similar to the last few quarters, total unmeasured channel growth was additive to total company POS, resulting in combined measured and unmeasured channel growth of about 14%. In Q1, Atkins and Quest combined measured and unmeasured channel growth were about 4% and 24%, respectively, with top tier performance within the measured channel segments of weight management and active nutrition. Turning to Atkins first quarter performance. Atkins Q1 retail takeaway and combined measured and unmeasured channel was up about 4% as outstanding e-commerce growth continued from the previous quarter with the IRI MULO universe essentially unchanged from the year ago period.

Atkins Q1 point of sale at Amazon increased 75% with solid growth across all major forms. We estimate total unmeasured channel retail takeaway increased over 40% and is now about 13% of total Atkins retail sales. The brand continues to benefit from shopper channel shifting to e-commerce as well as improved digital marketing initiatives. Consistent with prior quarters, Q1 brand relevance and loyalty remained strong supported by a growing base of new and total buyers. In Q1 buy rate continued to improve from prior quarters, but was slightly down versus prior year. Within buy rate strength in meal replacement bars and shakes, likely driven by post Labor Day returned to work trends was offset by declines in snack bars and confections as we lapped strong pandemic consumption from those snacking occasions in the year ago period.

Moving on to measured channels and the IRI MULO C-store universe, Atkins Q1 POS was about the same as a year ago period, and as expected sequentially improved from Q4. Consistent with recessionary shopper channel shifting, performance was driven by solid trends in the mass retail channel offset by softness in the food class of trade. By form, Q1 sales retail takeaway increased 7.6% driven by solid growth across all major channels. Total Atkins bars were off 6.9%. Meal bars about two-thirds of the bar business were about the same as last year and offset by the snack bar distribution loss we discussed last quarter and price sensitivity. Elasticity on some snack bar items has been greater than our estimates in brick-and-mortar channels. And as expected, confections POS improved from Q4 and Q1 confections retail takeaway was off 5.3% as we started to lap the impact of the strong year ago dessert bar launch.

Importantly, the commitment to our brands in the nutritional snacking category by major retailers remain strong. Atkins distribution gains are tracking as expected and strong New Year, New You in-store merchandising and programming is in place. Let me now turn to Quest. Q1 retail takeaway were combined measured and unmeasured channel growth was up 24% and about the same as the IRI MULO C-store universe. In Q1, we estimate total unmeasured channel retail takeaway increased about 20% as e-commerce strength is partially offset by softness in the specialty channel. Quest Q1 POS at Amazon increased about 36% driven by growth across all forms. For perspective, total unmeasured channels in Q1 were about 24% of total Quest retail sales. In measured channels, Quest Retail Takeaway increased 25.4% in the IRI MULO C-store universe.

Growth was driven by solid performance across all major forms and retail channels as well as increases in household penetration, base velocity, distribution, and continued success of new products. In the quarter, Quest core bar business retail takeaway increased 16.8%. Growth was solid across the original bars as well as the new minis. Consumer response in the new recipe that provides a much softer original bar has been encouraging. The snack year portion of Quest products that’s cookies, confections and salty snacks continued to do well with Q1 measured retail channel takeaway up 41%. Growth was strong across all forms and was driven by increasing household penetration, distribution gains and marketing investments to drive awareness and trial.

Consumer response to the price increase initiated in late in Q4 is tracking mostly as expected, although elasticity on chips so far has been greater than our estimates. The Snack segment represents nearly 45% of total Quest measured channel retail sales, and is already roughly equal to Quest bars in household penetration. So it’s a sizeable and growing segment for the brand. Further, we expect the segment to continue to contribute disproportionately to total brand growth over the next few years, driven by improvements to household penetration as well as solid pipeline of innovation. That said, given the significant and increasing size of the segment, we expect the rate of growth over the next few quarters to moderate from its current level .

In summary, we’re pleased with our start to the year and our first quarter results. Our retail takeaway was relatively in line with expectations and a very challenging cost and operating environment. Recessionary economy continues to be a concern as higher prices appear to be slowing unit demand in the category and shifting shopper traffic away from grocery to more value oriented channels. That said, we remain cautiously optimistic about our business with strong POS momentum over the first 4 months of our fiscal year. We are well-positioned in the mass and e-commerce retail channels that typically do well as shoppers seek out value. As I mentioned earlier, collaboration with key customers are strong, and they are committed to our brands in the category.

As such, in q2, we have good breadth and depth of merchandising and programming in place for the upcoming New Year season. While Q1 gross margin was slightly lower than our forecast, due to logistics and co-manufacturing costs, there is no change to our full year fiscal 2023 gross margin outlook. We would note that we are seeing early signs of an improving marketplace for ingredient and packaging cost for the second half of our fiscal year. We are executing against our priorities and we remain committed to doing the right thing over the near and long-term for our brands, customers and consumers. Now I’ll turn the call over to my friend, trusted business partner and prior CFO, Shaun Mara, who will provide you with some greater financial details.

Shaun?

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Shaun Mara: Thank you, Joe. Good morning, everyone. Before I get into our first quarter results, let me start by saying it’s great to be back in the CFO chair. In my CPG career I’ve worked with Joe for nearly 20 years. We first crossed paths at Gillette in 2000 or we became proficient in the Jim Kilts approach to managing the business. Joe and I ran Atkins together when it was PE owned. And as some of you may remember, I was CFO for the Simply Good Foods first conference call as a publicly traded company in 2017. I then stepped away to recharge and did some consulting. Midyear 2019 Joe convinced me to come back to the company in a different role, running strategy, M&A, and projects, biggest of which was the integration of Quest and the ERP implementation.

It was a great opportunity for me to get reengaged with the business, helping to build out the organizational structure, systems and processes and drive the company priorities across the newly designed organization. With Todd leaving, it comes full circle. I’m excited to be back in the CFO role and believe our category and our brands have a long runway for growth. I look forward to helping the company execute against this strategy and increasing shareholder value. Let me now provide you with an overview of our financial performance beginning with sales. Total Simply Good Foods first quarter net sales increased 7% to $300.9 million. Net price realization was about 9.8 percentage points and volume was off about 1.7 percentage points. The March 2022 agreement to license the Quest frozen pizza business was a headwind of 1.1 percentage points.

As Joe stated, here, retail takeaway outpaced net sales growth. On the bottom of this slide, we attempt to reconcile Q1 POS of 14% to Q1 North American net sales growth of about 8%. I’m going to walk you through the reconciliation starting with the first line, double pricing of about 1 percentage point. Recall, in the year ago period, some retailers did not increase retail price points until early November, despite being invoiced at a higher price point from mid September. Therefore the POS in the current period reflects the benefit of two price increases from a few retailers up over that period. The timing of trade promotion investment was a 2 percentage point headwind and as previously stated the licensing of pizza was about a 1 percentage point drag.

Finally, recall in the year ago period, some customers are likely to build atypically higher inventory levels starting in Q1 of fiscal ’22 and continuing through Q2 due to supply chain concerns last year. We expect the retail inventory built in the first half of fiscal year ’23 to return to more normal levels. As a result, in Q1 we estimate the change in retail inventory compared to last year to be about 2 percentage point decline. Moving on to other P&L items for Q1. Gross profit was $111 million, a decline of $5.6 million from the year ago period, resulting in gross margin of 36.9%. The 450 basis points decline versus the year ago period was slightly higher than forecast. Ingredient and packaging cost inflation as well as trade investment was in line with expectations, while logistics and contract manufacturing costs were greater than estimates.

Net income was $35.9 million versus $21.2 million last year. The year ago period was impacted by the fair value change of private warrant liabilities of $17.3 million. Adjusted EBITDA was $60.8 million, a decline of $4.8 million from the year ago period. Selling and marketing expenses were $28.5 million versus $30.5 million, a decline of 6.5% due to the timing of spend within the year. That said, spend in Q1 was greater than the year ago period. GAAP G&A expense was $25.6 million, including stock-based compensation of 3.3 million and increased 8.2% versus last year. Excluding stock-based compensation in the current year ago periods, G&A increased 5.8% to $22.3 million. The $1.2 million increase versus last year was primarily due to employer related costs and corporate expenses.

We continue to expect the full year selling and marketing and G&A expense will be about the same as the year ago period. Moving to other items in the P&L, interest expense increased $700,000 to $7.1 million due to higher variable interest rates related to the term loan. And our tax rate in Q1 was about 21.3% versus 25% last year. The tax rate in the year ago period excludes the impact of the charge related to the noncash, non-tax deductible warrant liability. The lower tax rate in the first quarter of fiscal ’23 is primarily due to the timing of equity compensation. We continue to anticipate the full year fiscal 2023 tax rate to be about 25%. Turning to EPS. First quarter reported EPS was $0.36 per share diluted compared to $0.22 per share diluted for the comparable period of 2022.

In fiscal Q1 ’23, depreciation and amortization expense was $4.9 million and similar to the year ago period and stock-based compensation of $3.3 million increased $700,000 versus last year. Adjusted diluted EPS which excludes these items was $0.42 compared to $0.43 for the year ago period. Note that we calculated adjusted diluted EPS as adjusted EBITDA less interest income, interest expense and income taxes. Please refer to today’s press release for an explanation and reconciliation of non-GAAP financial measures. Moving to the balance sheet and cash flow as of November 26, 2022, the company had cash at $54.1 million. Cash flow from operations of $8.7 million was affected by the timing of working capital. The company continues to anticipate full year fiscal 2023 cash flow from operations will be greater than last year.

In the first quarter, the company repurchased shares worth $16.4 million at an average cost of $30.11. As of November 26, 2022, approximately $71.5 million remains available under the company’s current authorization. In Q1, the company paid down $6.5 million of its term loan, and at the end of the first quarter, the outstanding principal balance was $400 million with capital expenditures at $1.2 million. We anticipate net interest expense to be around $28 million to $30 million, including noncash amortization expense related to the deferred financing fees. This is higher than our previous estimate of $25 million to $26 million due to the continuing rising rate environment. I would now like to turn the call back over to Joe for closing remarks.

Joe Scalzo: Thanks, Shaun. With the challenging economic environment we believe we are well-positioned to deliver on our fiscal ’23 financial objectives. Year-to-date, retail takeaway is tracking as expected and we have momentum as we enter Q2. We’re tracking to our initial full year gross margin target with pricing and cost initiatives offsetting the dollar impact of ingredient and packaging cost inflation. Additionally, we have made significant marketing and organizational investments in the business over the last few years. And we believe it will result in continued growth of our consumer base and distribution. As such, we continue to expect the total SG&A expense dollars will be about the same as last year. Therefore we reaffirm our full fiscal year ’23 net sales, gross margin and adjusted EBITDA outlook.

Specifically, we anticipate net sales to increase slightly greater than our 4% to 6% long-term algorithm including a headwind of almost 1 percentage point related to the previously discussed pizza licensing agreement. Gross margin is expected to decline, although at a lower rate than fiscal ’22. Full fiscal year adjusted EBITDA is expected to increase in line with the net sales growth rate and adjusted diluted EPS is expected to increase although less than the adjusted EBITDA growth rate. As we proceed through the balance of the year, we remain cautiously optimistic about our POS performance. Net sales growth by quarter is expected to be choppy as we anniversary last year’s second quarter significant retail inventory build and the second half inventory destock.

As we look to the second quarter of fiscal ’23, retail takeaway is off to a good start with December POS up about 16% and strong merchandising and customer programming in place for the upcoming New Year season. However, we anticipate that Q2 net sales will be slightly lower versus the year ago period as we expect customers will not repeat last year’s abnormally high retail inventory build. Adjusted EBITDA in Q2 is expected to decline upper single digits on a percentage basis compared to last year. Profitability is pressured as a result of lower sales and gross margin contraction due to higher ingredient and packaging costs compared to the year ago period. Given the early signs of an improving outlook related to ingredient and packaging costs, we anticipate gross margin in the second half of the year will be slightly higher versus the comparable year-ago period.

This is an improvement from our October forecast where we anticipated gross margins to be slightly down in the second half of the year. We’re excited about our near and long-term growth prospects and we’re executing against our strategies as a path to increasing the value for our shareholders. We appreciate everyone’s interest in our company. And we’re now available to take your questions. Operator?

Q&A Session

Operator: Our first question comes from the line of Chris Growe with Stifel. Please proceed with your question.

Chris Growe: Hi, good morning.

Joe Scalzo: Hey, Chris.

Shaun Mara: Good morning, Chris.

Chris Growe: Hi. I just had a quick question to follow-up on some of the differential in sales between consumption versus takeaway essentially. And I did see that bridge in the slides, which is very helpful. I guess, I just want to ask, first of all, on the kind of the double pricing. Did that occur again with the most recent price increases, understand that’s on could be an ongoing factor. And then maybe related or secondary to that the timing of trade promotion investment was that was promotion up in the first quarter of ’23? Or was it more of a comparison to the prior year that causes differential in the first quarter.

Joe Scalzo: So on the doubled pricing piece, Chris, the reality of that as it didn’t happen in the second price increase. Retail prices went up pretty quickly after we saw the price increase out there that you’re not going to see that going forward. That was just an impact in Q1. As it relates to trade specifically take a step back a bit on trade. So for the year, for trade, we’re going to hold trade as a percentage of sales consistent with what we had last year. So that’s not going to change overall, what you’re seeing is really a shift in trade a little bit earlier in the year more in the first half, principally around display, promotional packs, some of that stuff was shipped into Q1. So effectively what that is is just a timing thing. And it impacted from gross and the net overall.

Chris Growe: Does that help? That does help. Yes. Thank you. Just one other follow-up question. You talked about seeing some early signs of relief run input costs, I just want to get a sense of how hedged you are currently. And then are there any signs of competition in the category, they might force you to have to give some of that back or get a little more aggressive on promotional spending? I know you’ve seen a bit of an increase here from a timing standpoint, but any signs of having to get a little more aggressive on the promotional side. It’s what we start with the commodity piece. I think what you’re really trying to get to is kind of what we think the commodities are going out and where are we overall. I think it take a step back.

I’m just going to reiterate what we said at the beginning, I guess about 3 months ago, give or take, so we thought we’d have a double-digit increases in cost of goods sold. And with that, we thought margins will be down versus the prior year, but not as much. Most of that would be in the first half of the year. And with modest declines in Q3, and Q4, as we sit here today, we’ve seen the softening in the dairy protein market, that gives us confidence that gross margins will be up slightly in Q3 and Q4 from our previous estimates. As it relates to the coverage, we’re about 60% covered in ingredient and packaging requirements. So roughly through March, and quite candidly, we want to kind of see what plays out in the marketplace right now. It’s meant to more that we think there’s more downward pressure than upward pressure.

So we can kind of see where we are, as we get towards the later in the year. But things are volatile, we’ll see where we are, if we go forward more of a much better picture on that by the time we get to the second quarter earnings call.

Shaun Mara: And to answer your second part, Chris, no our business is predominantly a turn business, about 80% — 85% of the volume turns off the shelf. So we’re not seeing and then we don’t have unlike I think a lot of other food categories we’re not particularly, because there’s so many different forms, so many different price points. There’s no one competitive price comparison or brand price comparison that’s relevant. So we’re not seeing any pressure to deal back from a pricing standpoint. If we would be spending back, it would probably be in reaction to kind of unexpected elasticity response from the most recent price increase, right. So — and so far, we’ve done a little bit of that in the first quarter and we’re just kind of reading the marketplace and will react as time moves on.

Chris Growe: Okay. That was great, Color. Thanks so much.