The Simply Good Foods Company (NASDAQ:SMPL) Q1 2024 Earnings Call Transcript

The Simply Good Foods Company (NASDAQ:SMPL) Q1 2024 Earnings Call Transcript January 4, 2024

The Simply Good Foods Company beats earnings expectations. Reported EPS is $0.43, expectations were $0.4. SMPL isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).

Operator: Greetings, and welcome to the Simply Good Foods Company Fiscal First Quarter 2024 Conference Call. At this time, all participants are in a listen-only mode. A brief question-and-answer session will follow the formal presentation. [Operator Instructions] As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Mark Pogharian, Vice President of Investor Relations. Thank you, Mr. Pogharian. 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 25, 2023. Geoff Tanner, President and CEO; and Shaun Mara, CFO, 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 07:00 A.M. Eastern Time. A copy of the release and the accompanying presentation are available under the investor 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 for 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 underlining performance of the business. The presentation of this information is not intended to be considered in isolation or the substitute for the financial information presented in accordance with GAAP.

Please refer to today’s press release for reconciliation of the non-GAAP financial measures to the most comparable measures prepared in accordance with GAAP. I’ll now turn the call over to Geoff Tanner, our President and CEO.

Geoff Tanner: Thank you, Mark. Good morning. Thank you for joining us. Today, I’ll recap Simply Good Foods financial results and the performance of our brand. Then Shaun will discuss our financial results in more detail before we wrap it up with a discussion of our fiscal 2024 outlook and we take your questions. We’re pleased with our fiscal first quarter results that were in line with estimates. Retail takeaway and the combined measured and unmeasured channels was slightly more than 8% and, as expected, outpaced net sales growth primarily due to the timing of shipments versus the year-ago period. We anticipate that shipments and consumption should be largely in line by the end of Q2. Net sales increased 2.6% to $308.7 million, driven by continued Quest momentum.

First quarter gross margin was 37.3% and in line with our forecast. The 40 basis point increase versus a year ago period was primarily due to lower ingredient and packaging costs. Adjusted EBITDA in the first quarter was $62 million, an increase of 2% versus last year. Higher growth profit was partially offset by higher SG&A versus a year ago period, reflecting investments in marketing growth initiatives and G&A capabilities. Cash flow generation continues to be strong and provides us with financial flexibility to invest in organic growth, to see value enhancing acquisition, pay down debt, or opportunistically buy back our shares. Our Q1 results are a positive start to the year, and while early, Q2 is off to a good start. Additionally, we have strong marketing and promotional plans in place for the new year, New Year season, which started this week and which will run through the second quarter of fiscal 2024.

We’re pleased with the progress we’ve made on the acceleration plan for Quest and the revitalization plan for Atkins. As such, we reaffirm our full year fiscal 2024 outlook. The next slide provides you with a perspective of our retail takeaway performance within the IRI MULO + C-store universe and in the combined measured and unmeasured channels. The nutritional snacking category growth in the measured channel universe was 12%, driven primarily by volume or unit growth. The category continues to be a standout performer within brick and mortar and e-commerce and as a result is increasingly a focus of our retail partners as they look for growth opportunities. We have category advisors at most major retailers and we’re working closely with them on how to further capitalize on the growth potential of this category.

Simply Good Foods retail takeaway in the measured channel increased 7.1% driven by Quest volume growth of 20%. Atkins performance was similar to last quarter. And our e-commerce business continues to do well and resulted in total company combined measured and unmeasured channel POS growth slightly better than 8%. Now let me turn to Quest Q1 retail takeaway, where combined measured channel growth was 20%. Growth was driven by solid performance across all major forms and retail channels, driven by an increase in both household penetration and buy rates. Our retail customers view Quest as the pioneer of the category, and they’re excited about our near and long-term innovation pipeline and growth initiatives that we have in place. A major focus for us is working with those retail partners to find additional space and merchandising opportunities for the brands.

In Q1, we estimate total unmeasured channel retail takeaway increased about 14% as e-commerce strength was partially offset by softness in specialty channels. There is no denying Quest momentum. With nearly $700 million in net sales in fiscal 2023, we have essentially doubled the business since we acquired it in November 2019. Quest retail sales in US measured and unmeasured channel this past year was $945 million. So we clearly expect it will be a $1 billion retail sales brand in fiscal 2024, with a footprint across multiple forms. It’s no small feat for a brand that’s barely a dozen years old. In Q1, Quest bar business retail takeaway increased 16%. The snackier portion of Quest products continued to do well, with Q1 measured channel retail takeaway up 24%.

But particularly pleased with our salty snacks performance that we believe has a long runway of growth. Quest Snacks segment now represents nearly 45% of total Quest measured channel retail sales and is roughly equal to Quest bars and household penetration. We expect that Quest will have a strong year behind innovation, distribution gains, and a new marketing campaign. I’m particularly excited to announce that we will debut a new advertising campaign in February that will be supported by a reach-based media model. Despite the size of the business, the brand awareness of Quest is significantly below several competitors, and this campaign has the potential to further accelerate growth. Turning to Atkins. Q1 retail takeaway in the IRI MULO + C-store universe and the combined measured and unmeasured channel as expected was similar to last quarter, up about 6% and 4%, respectively.

As has been the case for a while, Atkins heavy users migrate to e-commerce, where we continue to see good growth. Specifically, Atkins Amazon POS increased 12%. As a result, e-commerce was additive to Atkins’ measured channel POS. For perspective, in Q1, e-commerce was about 15% of total Atkins retail sales. In Q1, Atkins’ retail takeaway trend stabilized from when we entered the quarter. October marketplace performance was somewhat better than September and November. Note, that given the consumption seasonality in November and December, we were not on air with advertising and we had minimal in-store merchandising. Now that the calendar has turned to January, we will heavy up on advertising and merchandising for the new year, New Year season.

We continue to have tremendous faith in the long-term potential of the brand, and in support, we’re making good progress against the five-point Atkins revitalization plan we talked about on our last conference call. However, as you may recall, it’s going to take some time before all of the elements of the plan are collectively in the marketplace. As a reminder, the Atkins five-point revitalization plan includes enhanced merchandising and assortment of select customers, new advertising supported with a reach-based media model, greater focus on a near and longer term robust innovation funnel, product upgrades on our bar portfolio and new packaging, and multiple work streams targeting GLP-1 weight loss drug users. Getting Atkins back to green is our focus and we believe we have the plans in place to improve marketplace performance over the remainder of the year.

In summary, we’re pleased with our start to the year, particularly our first quarter marketplace results. The Simply Good Foods Company competes in an attractive category and is uniquely positioned as the US leader in the nutritional snacking category with two scaled lifestyle nutritional snacking brands that are well developed across multiple forms of snacking occasions. Nutritional snacking category continues to be resilient with top tier volume growth propelled by the consumer mega trends of healthy snacking with a nutritional profile that is protein rich, low in carbs and sugar. This profile has broad appeal to consumers across all generations, but particularly with Gen X, Gen Z and millennial consumers that look to our brands as a means of helping them achieve their goals.

Given the future growth runway of the nutritional snacking category, we continue to work closely with our retail partners on how to optimize the category today and where to source additional space from in the store to support new and emerging formats. We’re executing against our priorities and we remain committed to delivering against our commitments, while making the necessary investments in our business that should result in sustained long-term growth. Now, I’ll turn the call over to Shaun who will provide you with some great financial details.

Shaun Mara: Thank you, Geoff. Good morning, everyone. I will begin with an overview of our net sales. Total Simply Good Foods first quarter net sales of $308.7 million increased $7.8 million or 2.6% versus the year ago period. With our July 2022 price increase behind us, the Q1 net sales increase is driven by volume growth. North America and international net sales increased 2.6% and 0.7%, respectively versus last year. As Goeff stated earlier, as expected, retail takeaway of 8% outpaced North America sales growth, primarily due to the timing of shipments. As such, we would expect Q2 net sales growth to be slightly greater than consumption, with shipments and consumption relatively aligned at the end of the first half of fiscal 2024.

Moving on to other P&L items for the quarter, gross profit was $115.1 million, an increase of $4.1 million from the year ago period, resulting in gross margin of 37.3%. The 40 basis point increase versus the year ago period was primarily due to lower ingredient and packaging costs. Adjusted EBITDA was $62 million, an increase of $1.2 million from the year ago period. Selling and marketing expenses were $32 million versus $28.5 million, an increase of 12.1% largely due to higher advertising costs and investments in growth initiatives. GAAP G&A expenses were $27 million, an increase of $1.3 million versus last year, primarily due to higher employee stock-based compensation. Excluding this, as well as executive transition costs, G&A increased to $0.3 million to $22.7 million.

Finally, net interest income and interest expense was $4.9 million, a decline of $2.1 million versus Q1 last year. The decline was due to lower debt balances versus the year ago period. As expected, our Q1 tax rate was about 25% versus 21.3% last year. We continue to anticipate the full year of 2024 tax rate to be about 25%. As a result, net income was $35.6 million versus $35.9 million last year. The next slide provides you with a reconciliation of reported and adjusted diluted EPS. First quarter reported EPS was $0.35 per share diluted compared to $0.36 per share diluted for the comparable period of 2023. Adjusted diluted EPS was $0.43 compared to $0.42 in the year ago period. Note, that we calculate 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 25, 2023, the company had cash of $121.4 million. Cash flow from operations in Q1 was about $47.5 million compared to $8.7 million last year, principally due to improvement in working capital. During the quarter, the company repaid $10 million of its term loan debt. At the end of the first quarter, the outstanding principal balance was $275 million. However, subsequent to the close of the quarter, the company repaid an additional $25 million of its term loan debt, bringing the outstanding principal balance to $250 million. Capital expenditures in Q1 was $0.7 million. In fiscal 2024, we continue to expect CapEx to be in the $8 million to $10 million range.

In fiscal 2024, we anticipate net interest expense to be about $17 million to $19 million, including non-cash amortization expense related to deferred financing fees. Now to wrap up, as Goeff stated earlier, we are on plan across all key metrics in Q1 and therefore we reaffirmed the full year outlook we discussed last quarter. We continue to expect that ingredient and packaging costs will be lower in fiscal 2024 compared to last year and drive solid gross margin expansion. This provides us with the flexibility to invest in marketing initiatives that will drive near and long-term growth and organizational capabilities. Therefore, for full year of fiscal 2024, we anticipate net sales growth driven by volume to be at the high end of the company’s long-term algorithm of 4% to 6%, including the benefit of the 53rd week.

Adjusted EBITDA is anticipated to increase slightly greater than net sales growth rate, and adjusted diluted EPS will increase greater than the adjusted EBITDA growth rate. We appreciate everybody’s interest in our company, and we’re now available to take your questions.

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Q&A Session

Operator: Thank you. We will now be conducting a question-and-answer session. [Operator Instructions] Our first question comes from Matt Smith from Stifel. Please proceed.

Matt Smith: Hi, good morning and thank you for taking my question.

Geoff Tanner: Good morning, Matt.

Matt Smith: The 12% growth in the active or convenient nutrition category, which has been supported primarily by volume growth, that’s a stark contrast to the standard store where volumes and consumptions remain pressured. From a high level, could you talk about the trend supporting the strong consumption growth in the category? Are we seeing a period of accelerated household penetration growth or is the buy rate increasing at a greater rate than it has historically as the category remains relevant with consumers? Could you just help us understand what’s driving the strong category relative to the rest of the store?

Geoff Tanner: Yes, good morning, Matt. This is Goeff. I appreciate the question. Yes, no, you’re right. The nutritional snacking category has grown recently and consistently low double digits versus standard store, which is closer to 1% to 2%. And as you noted and you questioned, most of that growth is now volume. And it is a significant difference, which I think is due to several factors. The category is certainly benefiting from health and wellness and convenience snacking trends. But in addition, the high protein, low carb, low sugar macros of the category are increasingly emerging as the nutrients of choice, particularly for younger millennial Gen Z consumers, perhaps in contrast to high carb, high sugar products. So those are two macro drivers of the category.

I think what’s interesting is, despite the strength we’re seeing in the category versus standard store, I still think we’re in the early innings and that this momentum has a lot of continued runway. Just a few thoughts on that. Household penetration is only at 50% versus high 80s, low 90s for standard store. While the nutritional snacking category largely grew up on bars and shakes as we bring new formats to market, for example, our salty platform on Quest, it’s increasingly driving buy rate as well as penetration. Retailers, and I’ve met with all of them, most of them recently, they’re certainly seeing the growth. They’re looking to us as category advisors to the majority of those accounts and saying, how can we capitalize? Where can we find more space?

And lastly, while in the early innings, we’re on the right side of the GOP1 drives, which are in the early stage, but I think that’s a future tailwind as well. So there’s certainly a difference we’re seeing today. You’re seeing it in the numbers, but I think the category, nutritional snacking category has a long runway of growth in front of it and we’re working as a company and in partnership with our retailers on how we can accelerate that to take further advantage of it.

Matt Smith: Thanks, Goeff. I’ll pass it on.

Geoff Tanner: Thank you.

Shaun Mara: Thanks, Matt.

Operator: Our next question comes from Pamela Kaufman from Morgan Stanley. Please proceed.

Pamela Kaufman: Hi. Good morning. Happy New Year.

Geoff Tanner: Happy New Year to you.

Pamela Kaufman: Thanks. You are now a quarter into the Atkins revitalization plan that you announced at Q4 results. Can you talk about what actions you’ve taken so far and remind us how you’re thinking about the trajectory of Atkins improvement and milestones to gauge the improvement?

Geoff Tanner: Yes, that’s a good question, Pam. As we talked about at the last quarter, we’re not happy with the current performance of Atkins, especially given the long-term potential we see for the brands. I talked about that on the last quarter too. 80% of consumers looking to lose and maintain weight. The brand’s highly trusted. The macros work. The products taste great. And we’ve put the five- point revitalization plan into market. And I outlined those elements in our scripted remarks. Now I’m pleased with the progress the team is making. As we talked last quarter, we’ve set a 12 month to 18 month timeframe for when all of those elements will be to market. So some of them take a little longer than others, for example, the packaging refresh.

But some of the elements have — are in market today. That would be the new configuration in the club store, which has shown a marked improvement in trends in that channel. The new advertising is out. It was out in October. As we noted, we tend to throttle back more in November, December, but we’re pleased with how that advertising tested and as we move into January, February, March, we’ll be heavying up that advertising and then we’re pleased with some of the new innovation and how that’s turning, for example, the bake bars and the break bars. So some of the elements are in market, and I’m pleased with our execution. But I think the most critical period for us to evaluate how we’re performing is January, February, March, when we’ll have more sustained advertising in market, more merchandising in market.

As you know, it’s a critical seasonal period for us. But I just want to reiterate, we are taking a 12 to 18 month view on the revitalization of this brand because that is how long it will take before all of the elements are in market.

Pamela Kaufman: Great, thank you. And just wanted to ask about your capital allocation priorities. It seems you’ve paid down debt recently. Your balance sheet is in strong shape. So how do you think about the capital allocation options that you have in M&A versus buybacks and more debt pay down?

Shaun Mara: Yes, Pam, I think, overall, we spend a fair amount of time looking to evaluate the best return of our cash to our shareholders. That includes, obviously, as you said, debt pay down, share repurchases, M&A, and even potentially a dividend. We had a very strong cash from operations this quarter. We get over $100 million in cash in our books. We evaluate opportunities to buy back shares pretty consistently as well as looking at other ways of spending them overall. But I think, if we take a step back, we’re going to evaluate these opportunities as they come up. I wouldn’t say they’re, right now, we’ve thought the best use of cash in Q1 was the debt pay down, and we’ll continue to evaluate that on a quarterly basis. But we are very fortunate to be in a position where we have a lot of cash from operating activities that allows us to quickly pay down debt, as well as provide other opportunities for our shareholders.