The Simply Good Foods Company (NASDAQ:SMPL) Q3 2024 Earnings Call Transcript

The Simply Good Foods Company (NASDAQ:SMPL) Q3 2024 Earnings Call Transcript June 27, 2024

The Simply Good Foods Company beats earnings expectations. Reported EPS is $0.5, expectations were $0.48.

Operator: Greetings and welcome to The Simply Good Foods Company Fiscal Third Quarter 2024 Conference Call. At this time, all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. [Operator Instructions] 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 The Simply Good Foods Company. Thank you, sir. 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 third quarter ended May 25th, 2024. 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 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 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. Please refer to today’s press release for a reconciliation of the historical non-GAAP financial measures to the most comparable measures prepared in accordance with GAAP. The company completed the acquisition of OWYN in the fourth quarter of fiscal ’24.

Therefore, results for the 13 and 39 weeks ended May 25th, 2024 exclude OWYN. Additionally, the reference to the legacy Simply Good Foods during today’s conference call encompasses The Simply Good Foods business, excluding OWYN. I’ll now turn the call over to Geoff Tanner, President and CEO.

Geoff Tanner: Thank you, Mark, and good morning. Thank you for joining us. Today, I will recap Simply Good Food’s financial results and the performance of our brands. Then Shaun will discuss our financial results in more detail before we wrap it up with a discussion of our fiscal 2024 outlook and take your questions. We’re pleased with our fiscal third quarter financial results that were slightly better than our estimates. Simply Good Food’s third quarter results were led by continued Quest growth as well as strong gross margin improvement. Retail takeaway in the combined measured and unmeasured channels was about 5% and as expected outpaced net sales growth of 3.1%. Quest retail takeaway was driven by strong salty snacks growth and Atkins performance sequentially improved by month during the quarter.

Additionally, e-commerce growth for both Quest and Atkins continued to be solid, more on this in a bit. Q3 gross margin was 39.9%, a 320 basis point increase versus the year ago period, primarily due to lower ingredient and packaging costs. Higher gross profit enabled investments in growth initiatives, while also resulting in an increase in Q3 adjusted EBITDA of 7.9% to $71.9 million. The OWYN acquisition closed earlier this month and the business is tracking to the acquisition model and full calendar year 2024 net sales we initially outlined. I’m pleased to announce that Mark Olivieri, CEO of OWYN, has joined Simply Good Foods as the SVP and GM of OWYN, and is a member of our Executive Leadership team. Mark and I are excited to work together to unlock the value of our combined business and deliver shareholder value through both revenue growth, margin expansion, and cost synergies.

We’re very pleased with our execution in Q3. Quest acceleration and Atkins revitalization plans are on track and we reaffirm our full-year fiscal 2024 net sales outlook for the legacy business. Specifically, we expect net sales to increase around the midpoint of the company’s long-term algorithm of 4% to 6%, including the benefit of a 53rd week. The OWYN acquisition closed on June 13th, and we anticipate Q4 net sales to be in the $25 million to $30 million range. Total company adjusted EBITDA growth is expected to increase about 8% compared to last year and versus our previous estimate of 6% to 8%. Shaun will provide greater detail on our performance in the subsequent section. The next slide provides you with a perspective of nutritional snacking category growth as well as our retail takeaway performance within the IRI MULO + C-store universe and in the combined measured and unmeasured channels.

Nutritional snacking category growth in the measured channel universe was 6.4%, driven primarily by volume. This category continues to be a standout performer and is increasingly a focus of our retail partners as they look for growth opportunities. Legacy Simply Good Foods retail takeaway in measured channels increased 2.9%, driven by Quest volume growth. Atkins performance improved compared to last quarter but was still off versus last year. Our e-commerce business continues to do well and resulted in legacy combined measured and unmeasured channel POS growth of 5%. Note that if we had acquired OWYN at the beginning of Q3, retail takeaway in measured channels in the combined measured and unmeasured universe would have been 6.4% and 8%, respectively.

Let me now turn to Quest. In Q3, retail takeaway in measured channels increased 13.5%, driven by volume. Growth was solid across key retail channels, driven by an increase in both household penetration and buy rate. Quest retail takeaway improved sequentially from Q2 to Q3, with a key driver being the new Quest advertising campaign that began in March. We’re pleased with the advertising that we believe will continue to drive higher household penetration and overall brand growth. In Q3, we estimate total unmeasured channel retail takeaway increased about 12% as e-commerce strength was partially offset by softness in specialty channels. Quest Q3 e-commerce POS was solid and increased about 16%. For perspective, total unmeasured channels in Q3 were nearly 23% of total Quest retail sales.

Quest bar and snacks retail takeaway in measured channels increased about 2% and 27%, respectively. We’re particularly pleased with our salty snacks POS growth of nearly 50%, which is a standout in the category and represents about 25% of Quest’s measured channels retail sales. The new advertising debuted with a strong emphasis on Quest chips, which is where we have seen the largest increase in household penetration, as we witnessed the explosive growth of chips. The size of the total addressable salty snacks market suggests significant and continued upside on this business. As a result, we are working on a multifaceted acceleration plan that includes growth levers such as flavors, pack types, and channel expansion. In Q3, bar segment growth within the nutritional snacking category slowed to about 1%.

This was primarily due to better for you or bars that have significantly less protein, if any, that declined low-single-digits on a percentage basis versus last year. Sports performance bars, which primarily have higher levels of protein, increase mid-single-digits, driven by the increased distribution of some new entrants into the measured channel universe. Quest bar growth is in line with the total bar segment, but it’s not what we expect from the leading protein bar brand in the market. In response, we have accelerated our bar innovation and we’re very excited about these innovative products that are tracking to launch in the second half of fiscal 2025 and beyond. Over the remainder of the year, we expect low-double-digit POS growth and continued household penetration and buy rate gains, driven by innovation, distribution, and the new marketing campaign.

Quest has been one of the most innovative brands in the category, supported by a world-class R&D team, the multi-year pipeline is strong and we expect innovation to be a lever of growth for a long time. March new product launches such as Strawberry Frosted Cookies and Iced Coffee are progressing nicely and are in line with our estimates. As we mentioned last quarter, I’m very excited for the upcoming bake shop platform, starting with high-protein muffins and brownies that launch in the fall 2024. Based on conversations with retail customers, we expect very strong support for the bake shop launch, that will also be underpinned by a comprehensive marketing plan as part of the, It’s Basically Cheating advertising campaign. Turning to Atkins Q3, retail takeaway in the IRI MULO + C-store universe and the combined measured and unmeasured channels were off 9% and 5%, respectively.

Strong e-commerce growth continued, driven by Amazon, whose POS growth was 16%. In Q3, the competitive in-store merchandising and programming comp was more normalized versus Q2, and as you’ll note in the chart on the slide, Atkins POS trends sequentially improved during the quarter. The Atkins revitalization plan is progressing as scheduled. Some elements of the plan are in the market now, and we expect all elements to be in the market in the second half of fiscal year 2025. While early the innovation we accelerated to market is performing well and is in line with our estimates. We’re also pleased with the amount and quality of innovation we’re bringing to market in the coming months, some of which you’ll see in the middle of the slide. While fall shelf set discussions continue, our fiscal 2025 innovation pipeline has helped us greatly during our discussions with retailers.

Most retailers will be replacing non-performing items with these new products. As a result, we believe we’ll maintain distribution at most brick-and-mortar retailers, with the exception of the club channel. Now, it’s not uncommon for club customers to wait and decide on innovation after they analyze performance in other retail channels. The second major revitalization pillar is new advertising. Over the past year, the relevance and cultural conversation around weight has changed and significantly increased in volume, much of it driven by the new weight loss drugs. In response to the shift, earlier this month, we shot new advertising that will be on air in late summer. The revised advertising refocuses on weight management, more strongly communicates the benefit of the brand’s unique macronutrient profile, and emphasizes Atkins as a sustainable and diet-free way to weight management.

We believe this messaging links better to the evolving consumer views and conversation on weight wellness. While still early, overall, we feel like we’re tracking towards stabilizing the business and we’re somewhat encouraged by the consumption trends that have slightly improved each month this past quarter. Given the strong execution of the revitalization plan, and as we look to fiscal 2025, we’re now in a position to move to the next phase of the Atkins journey. Specifically, we’ll focus on Atkins ROI and optimizing our investment levels on the brand as part of ensuring Atkins is a long-term, sustainable and profitable business. Historically, we’ve always done this evaluation. However, the COVID slowdown and the innovation outage that followed resulted in some low ROI investments to support short-term performance and preserve shelf space.

As we look to fiscal 2025 and beyond, we’ll work to eliminate trade and marketing investments that don’t meet specific ROI hurdles. This will have a short-term impact on sales growth, but it’s necessary to build Atkins back to a sustainable brand for the long-term. To conclude, I’m very pleased with how the team is executing. We’re confident we have the right plans in place to bring Atkins back to growth. However, as we have previously stated, it will take some time to get there. Turning to OWYN, the acquisition closed on June 13th. This is a strategically and financially compelling acquisition of a fast-growing, on-trend protein shake in our aisle. OWYN increases our exposure in the shake segment by about 400 basis points to 23% of our total sales.

Importantly, OWYN’s growth is outpacing the category and we expect the brand to benefit from continued distribution and velocity gains given our go-to-market scale, capabilities, and category adviser relationships with almost all top retailers. OWYN reaches a new consumer segment for Simply Good, namely consumers thinking plant-based, allergy-free, simple ingredient options. However, as we have discussed, what’s equally exciting is that OWYN is increasingly crossing over to appeal to mainstream consumers. In the sense, OWYN further strengthens our leadership position with retailers as we jointly work with them to accelerate category growth. We remain confident in our ability to effectively integrate OWYN into our business and deliver on the acquisition model commitments.

To align with our fiscal year-end 2025, we will achieve the majority of the synergies on the onset or first day of fiscal 2026. To summarize Simply Good Foods is uniquely positioned as the $1.4 billion net sales leader in the nutritional snacking category with a diversified portfolio across brands and product forms. The relevance of the category and demand for our products only continues to increase, as more and more consumers turn away from high-carb, high-sugar foods, seeking high protein, low-sugar, low-carb options. We believe our category and our brands represent the future of food and beverage and we have three uniquely positioned brands that are aligned around these consumer megatrends. Consumers trust our brands to help them achieve their wellness goals.

As such, we’re focused on our innovation and marketing plans to provide consumers with products to help them in their journey. I’m thankful every day for our talented employees. Our team is excited and passionate about our brands and helping consumers achieve their goals. We will continue to execute our strategic priorities that should enable us to deliver on our long-term growth objectives that ultimately drive increased shareholder value. Now I’ll turn the call over to Shaun who will provide you with some greater financial details.

Shaun Mara: Thank you, Geoff. Good morning, everyone. Total Simply Good Foods’ third quarter net sales of $334.8 million increased $10 million or 3.1% versus the year ago period and was driven by Quest volume growth. North American net sales increased 3.2% and international net sales declined 2.4% versus the year ago period. As Geoff stated earlier, retail takeaway of 5% in combined measured and unmeasured channels was greater than the net sales growth. This was largely due to incremental trade investments supporting Atkins. Moving on to other P&L items for the quarter, gross profit was $133.6 million, an increase of $14.4 million from the year ago period, resulting in gross margin of 39.9%. The 320 basis point increase versus the year ago period was primarily due to lower ingredient and packaging costs as well as reduced freight costs.

Including OWYN, we expect total company Q4 gross margin to be around 38%, excluding the typical non-cash inventory step-up related to the acquisition. Adjusted EBITDA was $71.9 million, an increase of $5.2 million from the year ago period. Selling and marketing expenses were $36.5 million versus $30.2 million, largely due to higher marketing investments and growth initiatives. GAAP G&A expenses were $31.5 million, an increase of $1 million versus the year ago period. The increase was primarily due to higher employer-related costs, stock-based compensation, and corporate expenses, excluding stock-based compensation, as well as fees associated with last year’s term loan amendment and executive transition costs, Q3 G&A increased $3 million to $26.5 million, driven by higher employer-related costs.

Finally, net interest income and interest expense was $4.1 million, a decline of $3.1 million versus Q3 last year. The decline was due to lower debt balances versus the year ago period. Our Q3 effective tax rate was 24.5%, about the same as the year ago period. We continue to anticipate our full year fiscal 2024 effective tax rate to be around 25%. As a result, net income was $41.3 million versus $35.4 million last year. Moving on to year-to-date results, net sales of $955.6 million increased nearly 4% compared to last year. Gross profit was $365.6 million, resulting in gross margin of 38.3%, a 220 basis point increase versus the year-ago period. We’re pleased with our gross margin progress in fiscal 2024. However, we anticipate that input cost inflation will be a headwind and most likely will result in gross margin compression in fiscal 2025, particularly in the second half.

Adjusted EBITDA was $191.7 million, an increase of 7.5% from the year ago period. Net interest income and interest expense was $13.8 million, a decline of $8.7 million versus last year. The year-to-date tax rate was 24.2%. As a result, net income was $110 million versus $96.9 million last year. The next slide provides you with a reconciliation of reported and adjusted diluted EPS. Third quarter reported EPS was $0.41 per share diluted compared to $0.35 per share diluted for the comparable period in 2023. Adjusted diluted EPS was $0.50 compared to $0.44 in 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 May 25th, 2024, the company had cash of $208.7 million. Year-to-date cash flow from operations was $167 million, an increase of about 50% or $56 million, principally due to adjusted EBITDA growth and improvements in working capital. Term loan debt at the end of the third quarter was $240 million. Subsequent to the Q3 quarter end on June 13th, we completed the OWYN acquisition. The cash purchase price of $280 million was funded through a combination of cash on our balance sheet and incremental borrowings under our outstanding credit facility of $250 million. The company expects to pay down a portion of the $490 million in total term loan debt during the balance of fiscal 2024 and is targeting a net debt to adjusted EBITDA ratio of around 1.25 times by fiscal year-end August 2024.

Capital expenditures in Q3 and year-to-date were $0.7 million and $1.8 million, respectively. 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 around $22 million to $24 million, including non-cash amortization related to the deferred financing fees. Now to wrap up, as Geoff stated earlier, we’re on track and feel good about the remainder of the year. We reaffirm our full-year fiscal 2024 net sales outlook for the legacy business. Specifically, we expect net sales to increase around the midpoint of the company’s long-term algorithm of 4% to 6%, including the benefit of the 53rd week. OWYN’s 11-week contribution to Q4 net sales is expected to be in the $25 million to $30 million range.

We continue to expect that ingredient and packaging costs will be lower in Q4 versus last year. As I stated earlier, including OWYN, we expect total company Q4 gross margin to be around 38% excluding the non-cash inventory step-up related to the acquisition. In Q4, OWYN adjusted EBITDA contribution is negligible. Given our solid year-to-date performance, we have narrowed our total Simply Good Foods adjusted EBITDA outlook. Specifically, we now expect adjusted EBITDA to increase about 8% compared to last year and versus our previous estimate of 6% to 8%. We appreciate everybody’s interest in our company and we’re now available to take your questions.

While we acknowledge the potential of SMPL as an investment, our conviction lies in the belief that AI stocks hold greater promise for delivering higher returns, and doing so within a shorter timeframe. If you are looking for an AI stock that is more promising than SMPL but that trades at less than 5 times its earnings, check out our report about the cheapest AI stock.

Q&A Session

Operator: Thank you. At this time, we’ll be conducting a question-and-answer session. [Operator instructions] Our first question comes from the line of Matt Smith with Stifel. Please proceed with your question.

Matthew Smith: Hi. Good morning. The category growth profile remains a standout for food at home and you’ve talked about a successful shelf reset for Atkins. So a couple of questions here. Can you provide more detail on why you’re lowering investment spend behind the brand, despite the strong category and scale Atkins has? And how are you thinking about the growth potential of Atkins next year, given the lower investment spend?

Geoff Tanner: Yeah, good morning. Yeah, no, you’re right. The nutritional snacking category continues to be a standout, especially versus the rest of the store, most recent trends, plus six, plus seven, and almost all of that volume, obviously, fueled by more and more consumers seeking the macro profile that our products offer. High protein, low sugar, low carb. And obviously, we’re seeing an increase in demand for beverage and hydration. And we continue to believe the category has a long runway for growth. And as leaders, category captains at most retailers, we believe we’re uniquely positioned to continue to lead that growth. To your question on investment, and particularly on Atkins, we look at across the portfolio, Matt, Quest as a scaled growth driver, we now have OWYN in the mix.

So a component of the decision on Atkins is taking a step back and evaluating investment through a portfolio lens. As we dive deeper into Atkins, it’s clear that to some extent we’ve overinvested in marketing and trade as a percentage of sales. And we’ve looked with more of an ROI lens and identified some low-performing ROI trade events, low-performing marketing events, and as we work to build Atkins to be a long-term sustainable business, we believe that we have an opportunity to take a harder look at some of these investments. And again as we think about investing across the portfolio, what is the best use of our investment, as we think now across three brands. Now with that being said, we still believe in Atkins, still very confident in the future growth of that business, especially given the increased focus on weight management.

We’re fully committed to the revitalization plan. As we’ve noted before, it will take some time. But as we said on the scripted remarks, we do expect a one-time impact from just taking a harder look at some of those lower ROI events and investments in marketing and trades.

Matthew Smith: Thanks, Geoff. And Shaun you called out some gross margin pressure in fiscal ’25 due to inflation. Is that for the legacy business or are you including the headwind from the mix of OWYN acquisition? And how are you thinking about the pricing dynamic in the category? We’ve seen some large brands announce incremental pricing. Do you expect overall category growth to benefit from pricing or do you expect that to be more targeted kind of brand-by-brand?

Shaun Mara: A lot of questions there, Matt. Let’s break them down a little bit. So as it relates to inflation next year there’s going to be a little bit of impact on OWYN obviously, with the RTD business, it’s going to be a lower margin business than the rest of the portfolio, and we’re certainly not at a fully synergized level at this point in time. However, the bigger impact really is going to be the inflation we see on ingredients. And let me just bear with me here, I’m going to step back a little bit because it’s principally cocoa we call CLI or coatings, layers and inclusions. So if you go back in time at the end of February, when we did our Q2 results, we basically, at that point in time cocoa was spot prices about 6,000 a metric ton.

First couple of weeks in March, we closed the books, updated our fiscal ’24 outlook. Cocoa traded sideways, but weren’t too concerned because we’re kind of covered through fiscal ’24. Over the next two weeks, I mean, when we got to the conference call on April 4th, the spot prices were now nine and a half thousand metric ton, about a 60% increase in a month. So at that point in time it’s on our radar for ’25. But we’re trying to determine if the 60% price increase in one month is the new norm and what that means for ’25. So we’re kind of remembering, if you take a step back, we don’t procure cocoa directly. We basically have that like we do with like a whey or a casein. We work with our suppliers to procure that cocoa and turn it into what we call coatings, layers and inclusions, which we use in our products.

It’s not a major ingredient in and of itself, but coatings, layers and inclusions are about $125 million. So I think if you’ve seen the news on cocoa and where it is right now, spot prices have lingered particularly higher over the last four plus months. Commentary from our ingredient suppliers kind of changed that they’re indicating that the pricing outlook for the second half of our fiscal ’25, so beginning calendar year ’25 is going to be significantly higher. We’re typically covered about five to six months, so we have good visibility into the end of our calendar year or through the first half of ’25 fiscal year. That said, I think inflation is going to be an issue potentially in the second half of the year. So the real impetus behind the push on where we think inflation is next year is really around the cocoa market.

And we’re going to look at all the levers we got to pull. We typically try to get productivity as an offset for that. We will continue to work on that and we are working on that, but we will look at pricing and look at pricing as a lever to pull. We’ve done that obviously in the past and we’ll continue to look at that. So I don’t know if I got all your questions, Matt, but hopefully it gives you a flavor.

Matthew Smith: You got it. Thanks, Shaun. I’ll pass it on.

Operator: Thank you. Our next question comes from the line of Alexia Howard with AllianceBernstein. Please proceed with your question.

Alexia Howard: Good morning, everyone.

Shaun Mara: Hi.

Geoff Tanner: Good morning, Alexia.

Alexia Howard: Hi, there. Just a couple of quick ones, actually sticking with the puts and takes for fiscal ’25 for you, you’ve talked about the inflation. Are there other things on the radar? I know you’re not going to give us guidance for this year, obviously, but just that the list of the high — high level sort of levers for next year that we should be thinking about as we pull together our models?

Geoff Tanner: Maybe I’ll start and I’ll turn it over to Shaun. You know, I’d say, reiterating on Matt’s question, continues to be very bullish on the category, up 6% to 7% and sustaining that level, which is impressive. Quest continues to outperform double-digit consumption right now, and it’s certainly seen by consumers and retailers as the disruptor in the category. We continue, we’ll continue to fuel that business, Alexia, with advertising, which we debuted in March, which had almost an immediate impact on sales. So we’ll continue to feel that. We’ve got some exciting innovation coming on Quest, particularly the bake shop platform launch, which is high protein muffins and brownies. And we still see distribution opportunities.

And I should probably circle chips in particular, almost as a phenomenon, really, given the growth we’re seeing there, nearly run rating $300 million right now, and we see nothing but upside given the total addressable market there. So I would say on Quest continue to be very bullish about the growth we can deliver there. I’ve talked about Atkins, we remain confident in the long-term trajectory of that business, particularly given the increased conversation and cultural relevance around weight, driven by the weight loss drugs. We’ll continue to fuel the revitalization plan and all the elements within. As I mentioned to Matt’s question, we’re just taking a harder look at some of those lower ROI investments and trade and marketing. And then, of course, we closed on OWYN a couple of weeks ago, and that shows tremendous momentum.

So there’s a lot to be very positive about. And then, as Shaun talked about previously, we just — we have to probably deal with inflation, cocoa-driven inflation in the back half, in particular of our fiscal next year. So there’s some puts and takes, a lot to be to feel very positive about. We do expect a short-term impact to Atkins as we remove that lower ROI investment. And of course, as Shaun said, we’ll pull the levers we need to manage inflation. But Shaun, what would you add to that?

Shaun Mara: Yeah, I mean, I take a step back in terms of your modeling. I think, you know, we’ve had a long-term algorithm that we think is right for the business, 4% to 6% top-line growth, bottom line, a little better than that from a leverage standpoint. It’s very early in our ’25 planning process, so we’re certainly not at a point to provide guidance, but as we kind of look at where we are right now, I’d say, you know, the headwinds we talked about for Atkins will impact the top-line. The inflation issues we talked about will impact the bottom line. So we’re probably organically more at the bottom end of that range for both top and bottom than we are for the top end. That said, it’s probably better than most of the food segment overall.

The other thing I would say is, as you think about OWYN, which is not in the numbers I just gave you, top and bottom line growth for fiscal ’25 versus ’24 should be strong. Now, obviously, a part of that is it’s a full year versus about 11 weeks, give or take, but that will add about the high-single-digit top-line growth and it will add about mid-single-digit bottom-line growth to the ’24 numbers. The only other point I’ll make, Alexia, as you guys are working through your models, just keep in mind that ’24 — fiscal ’24 is a 53-week year. Fiscal ’25 is a 52-week year. So that extra week is about a point and a half overall. So the numbers I gave you were all 52 to 52. So you got to take about a point and a half off of that because you’re going to have a lapping impact from the year before.

So I don’t know if that answers your question, but that’s directionally how I’d say we are right now.

Alexia Howard: Great. Thank you very much. I’ll pass it on.

Operator: Thank you. Our next question comes from the line of John Baumgartner with Mizuho securities. Please proceed with your question.

John Baumgartner: Good morning. Thanks for the question.

Geoff Tanner: Good morning.

Shaun Mara: Hi, John.

John Baumgartner: Just maybe first off, I wanted to ask about Atkins and sort of the go-forward look for that business. You look at the distribution points in the Nielsen data, they continue to decline. In the last couple of quads in the data, the volume velocities are stabilized and are getting back to growth for bars, which is a good first step. But the distribution and volume velocities are still pretty firmly negative for a huge swath of the rest of the subcategories. I’m curious, as you go through this revitalization, I’m trying to better understand the extent to which some of these subcategories just need to be eliminated, or whether they were just originally overdistributed, and there is a role in the portfolio, but just a much smaller role going forward. How are you thinking about the breadth of subcategories going forward and maybe how far along they are in terms of distribution adjustments?

Geoff Tanner: Yeah. So as you said, when I came to Simply, I took a look at the true health of Atkins. It’s a great brand in a sense, it pioneered this category. However, as we’ve discussed on previous calls, the brand was perceived as a little dated. Recent innovation had been poor, and we had an opportunity to sharpen some of our commercial execution price points. So we developed the revitalization plan. Now, one of the issues that we were addressing on Atkins was that we’d had a weak pipeline on the business for a couple of years, and as a result of that weak pipeline, we had lost some distribution to your point, Atkins, this is a business where innovation matters. It’s a key driver. The buy rate on Atkins is high, almost double most other brands in the category.

Those consumers are looking for variety, and when we don’t bring it, we impact both velocity and distribution. So one of the first things I did when I came is we tried to really jump start innovation on Atkins. And I’m very pleased with how the team responded. We are bringing 17 new items to market, which will ship in the fall, which will largely hold our distribution flat. Still waiting for a couple of customers to come in to finalize those modular decisions, but will largely hold flat other than the club channel, where in the club channel, they tend to wait on new products to make a decision. So I’m very pleased with how the team responded. I’m pleased with the quality of innovation, the number of new items, and that has helped us largely hold distribution flat outside of club as we go into fiscal 2025.

As you’ve said, if you just go one click lower, our ready-to-drink business is performing pretty well, strongest part of our portfolio. Where we really needed the focus was on the bars, to your point. So I’m excited to see how these new products perform, which will start shipping in the fall. And as I said, they were absolutely critical to us to hold on to distribution.

Shaun Mara: Yeah, I think, John, keep in mind is, if you look at our business, we have the fall reset and the spring reset, I’d say 75%, 80% of our customer base is in the fall reset. So holding on distribution in the fall is a pretty big win for us. And I think it holds, actually talks to the innovation that Geoff mentioned because I think it’s a big part of those guys recognizing that there’s opportunity for the brand to continue to grow. And the stuff that we have coming in, especially some of the RTD strong stuff, will be positive overall for the portfolio.

Geoff Tanner: I mean, those 17 new items, John, they were — they’re all swapped, right? So we’re not gaining shelf space. As a result of that innovation, it enables us to hold on to it.

John Baumgartner: Okay. And then quickly on OWYN, I’m just curious if you can discuss kind of the latest thoughts regarding the sort of the immediate growth plans. How you’re thinking about building distribution out of the gate, any specific channels that are a focus for you? And then in terms of investment, how are you thinking about any immediate needs for brand building or any tweak to the product itself, new flavors, formulations, any sort of reinvestment here and in the near future? Thank you.

Geoff Tanner: You know, so we’re really excited about OWYN, which we closed a couple of weeks ago. It’s strategically and financially very compelling. Increases our exposure in the shape segment by about 400 basis points to 23% of our total sales. It reaches a new consumer segment. And as we’ve said on previous calls, I think what excites me most about OWYN is the brand is starting to cross over to appeal to mainstream consumers, which represents obviously a much larger TAM. And then the ability of our scaled go-to-market capabilities are only going to help drive distribution and velocity. OWYN is performing very well. They’re on track for calendar 2024 of $120 million and consumption is very strong. It’s around 120% and measured channels a little lower online.

And we expect the business to certainly at least double in the next four years. Now, in terms of the levers, I like to think about OWYN and the growth of OWYN in three concentric circles. The first is growth of the core and that’s largely driving distribution of existing products. The 20 gram, the 32 gram shake. There is a lot of distribution upside and the team, the OWYN team continues to expand doors and get new accounts as the business continues to perform. The second circle would be continuing to appeal to mainstream consumers, again, a much larger TAM. And given the formula improvements that we’ve recently put into market, we’re certainly seeing increased crossover to mainstream consumers, which is driving velocity. And then I’d say the last circle would be expanding into new forms or formats, such as bars, potentially chips.

Now, as you think about investment, our thesis for the first year has been that OWYN will largely run somewhat independent for that first year, while we focus on integration, where there are opportunities to partner together, we’ll certainly look at those. But the focus right now is letting OWYN run. Run their play. They’re running it really well, while we work on integration, and then we’ll be able to bring the full capability — suite of capabilities of Simply to really accelerate that growth.

John Baumgartner: Thanks, Geoff. Thanks, Shaun.

Geoff Tanner: Thanks, John.

Operator: Thank you. Our next question comes from the line of Jon Andersen with William Blair. Please proceed with your question.

Jon Andersen: Good morning. Thank you for the questions. I want to ask on Quest, I think you mentioned, chips have been very strong. I think you even mentioned a $300 million run rate at present. Could you comment I think another platform or another launch in recent years was a cracker under Quest. And I always kind of thought of that as another opportunity to demonstrate the ability of the brand travel. Can you update us on where you stand with respect to the Quest brand in that particular vertical? And then if you could talk a little bit about the initial reception you’ve received from retailers, I assume at this point you’ve presented bake shop and what your expectations are in terms of distribution on that, that new launch in the fall? Thanks.

Geoff Tanner: Yeah. So I’ll talk about chips and then address the cracker question, and come back on bake. So you’re right, Quest is somewhat unique and that it has proven its ability to crossover to other categories. Quest is seen as the disruptor in the category and we are certainly disrupting the salty snacks category. As I mentioned, run rate just crossed $300 million in retail sales and it’s growing at about 50%. And certainly chips has been the big driver of the increase in household penetration on Quest. Not only new to the brand, but also new to the category, which is why retailers are getting behind it in a big way. What excites me the most is the size of that addressable market. And as we continue to see the chips phenomenon, we continue to challenge ourselves on how big could this be?

We have a rallying cry internally. We call think like a chip company, and we’re in the process of executing a multi-levered plan to really accelerate that growth. Now, I would argue crackers, as underneath that salty snack platform. It’s one of my favorite products that we make. We got into some, I’d say, supply challenges with one of our co-packers, and we have just moved that over to a new one, which will free up capacity to be able to put support behind that. So in a sense, we had to throttle that demand down, couldn’t promote it. Throttled back on driving new points of distribution, didn’t advertise it. But now that we’ve moved to the new co-packer, that will enable that. And then to your question on bake, I’m excited. My favorite product in the portfolio is the brownie, 10 grams of protein, barely any sugar.

And we have received tremendous support from customers. This is a disruption of the large salty snacks category and the retailers have really got behind this launch. We’re going to launch it in a big way. It will be part of the, It’s Basically Cheating campaign. And retailers look at this as just another example of expanding usage occasions and likely bringing new consumers into the category, which is why they’re really getting behind it in a big way. I’m excited for this launch in the fall.

Jon Andersen: That’s helpful. One quick housekeeping on OWYN. I was wondering if you could talk about any seasonality in the sales of that business? How we should be thinking about that going forward? And then just remind me on that the cadence of synergies, how much of the 10% I think you’re targeting of OWYN revenue will kick in at the start of fiscal ’26 and how much will come later than that? Thanks.

Shaun Mara: Yeah, I think on the synergy side, almost all the synergies will basically hit in first month of fiscal year ’26.

Geoff Tanner: About 80%. And then on seasonality, OWYN performs like the rest of the category, right. So the seasonality profile and the bump that we typically see New Year, New You, but there’s nothing distinct in OWYN in terms of it being different, seasonality being different than the shakes category.

Jon Andersen: Great. Thank you very much.

Operator: Thank you. Our next question comes from the line of Steve Powers with Deutsche Bank. Please proceed with your question.

Stephen Powers: Hey, thanks, and good morning.

Shaun Mara: Good morning, Steve.

Geoff Tanner: Hey, Steve, how are you?

Stephen Powers: I’m well, thank you. So, Geoff, you started off talking about some of the, I guess, promising ROI you had seen on advertising and the March campaign around Quest. I couldn’t quite glean from the commentary, whether that was validation of your expectations or if the ROI was sort of ahead of expectations. And I’m just curious if what the answer there is and if it’s making you kind of think about leaning in further into kind of broad-based brand marketing, take advantage of the returns you’re seeing.

Geoff Tanner: Yeah. No, I mean, the short answer is that the advertising has performed ahead of my expectations. It’s not normal to see a very short-term impact on sales with advertising, tends to be more of a medium-term build, medium-to-long. With Quest, it’s very clear we’ve seen a short-term effect and a long-term effect on the business. It has clearly helped accelerate Quest versus our own internal forecast. And we’re absolutely going to increase our investment as we head into fiscal ’25. And this is part sort of ties back a little bit to the question on Atkins and thinking about the portfolio. When you have a brand that’s growing double-digits like Quest, and you turn on advertising and you see a result like we’re seeing, we have to increase our investment behind that.

So we’re excited to keep investing in it. And I also say that It’s Basically Cheating campaign idea, Steve, based on consumer reaction, social media monitoring, et cetera, has really resonated with consumers.

Stephen Powers: Okay, perfect. That helps. And then I guess just kind of pivoting to Atkins, on the one hand, I hear you’re broadly on track with the revitalization plan, which is good. But then it does seem like there’s some incrementality in what you’re saying around fiscal ’25 and some emphasis on cutting out some of those ineffective trade efforts and the like. So on the one hand, you’re on track, but on the other hand I’m kind of hearing that the timeline of stabilization might be a bit further out in the horizon base case, so just want to play that back and see if that was fair?

Geoff Tanner: I think that’s a fair assessment. I mean coming in, the initial focus was to look at the health of the brand. As I said, we accelerated innovation. We’ve got new marketing that we’re bringing to market. It’s coming out in the fall, focus on upgrading the products and packaging refresh. As we dive deeper into it, Steve, and we had an ROI, put an ROI lens across all of the trade investment, across all of the marketing investment. There are just some investments that we don’t think are the right investments as we think about building a long-term sustainable business. But this is in no way an assessment on the health of the brand. It’s all in service of building a brand that is a sustainable, long-term profitable business for us. And it’s a necessary step we have to take in 2025 — fiscal ’25, which is why we — there probably will be a short-term sales impact from that and we wanted to call that out for you guys. So I think your assessment is right.

Shaun Mara: Yeah, I would also say, I mean, I think we knew when we started the revitalization plan, it was going to be a multi-quarter time frame. So I’m not so sure it’s particularly different than we thought it was going to be. It’s just maybe expectations got a little ahead of that as we saw some progress there. So I think we’re tracking pretty much where we thought we were going to be at this point in time, and certainly not where we think it is longer term. And I think all these investment decisions we’re making are right for the portfolio and for the company overall. And honestly, I think it’s the right aspect for us to take a look at now because I think we know where we are in the revitalization plan and now it’s time to kind of relook at where the investments are and what the right return on those are.

Geoff Tanner: Steve the one added point, perhaps on Atkins is that the — what does excite me about this business is the change in conversation — cultural conversation and relevance of weight, driven by these new weight loss drugs. And I believe this does represent a new wave of relevance for Atkins, not only for consumers who are on the drugs, but particularly for those that are coming off that achieve their goals. And you’re starting to see a lot of media out there, which is, I’ve achieved my goals, how do I hold on to these weight loss benefits? Which is why we just recently shot two weeks ago, new advertising for Atkins to really position Atkins as being able to help consumers on that journey. So I’m pleased with revitalization.

I’m particularly pleased with innovation and how it’s largely enabled us to hold onto distribution. It’s the right decision for the long-term to take a harder look at lower ROI and trade investments. But at a macro level, Atkins, there’s an important role for Atkins to play in consumers lives within the category and we’re committed to investing behind the business to get there.

Stephen Powers: Great. Thank you both. And Geoff, on that new advertising, did you — sorry did you say when that’s likely to hit air?

Geoff Tanner: You should see that in the fall, Steve.

Stephen Powers: Okay, very good. Thank you very much.

Operator: Thank you. Our next question comes from the line of Brian Holland with D.A. Davidson. Please proceed with your question.

Brian Holland: Yeah, thanks. I’ll just try to squeeze two questions into one here. First, on Quest, can you share whether — or excuse me — the timing and how material the selling for the baked launch might be? And then just on Atkins, most of my questions around this have been answered. But if we just try to put a bow on it, consumption down for five — year-on-year for five consecutive quarters now probably six in Q4, you talked about pulling back on some of the A&P or maybe taking a more targeted approach, maybe some rationalization of SKUs, et cetera, tying that all together, should we expect Atkins to be down in fiscal ’25 year-on-year? Thanks.

Geoff Tanner: Yeah, I mean, I’ll hit that one first. Yeah, our expectation is Atkins will continue to be down in fiscal ’25, driven by this harder look at trade — lower ROI trade marketing investments. To your question on Quest and bake shop platform, again, this is another space that Quest is going to disrupt, the large sweet baked goods category. We have two muffins and a brownie that we’re launching and the retailer reaction and support for this platform has been absolutely terrific as you would expect. This is a new to the category platform. They view it as another lever to drive household penetration, drive usage. And we, based on the commitments we’ve got from retailers, we expect strong, very strong merchandising support and we’re very pleased with the sell-in and modular decisions that have been made by all customers, all channels.

Operator: Thank you. Our next question comes from the line of Kaumil Gajrawala with Jefferies. Please proceed with your question.

Kaumil Gajrawala: Hi. Good morning, everyone. So as it relates to Quest and you think about chips and how well it’s doing, now the rollout of bake shop, what is the sort of right cadence in terms of timing to sort of assure that you’re not doing too many things at once? Obviously, chips are not new, but they very much seem to be have a lot of momentum that maybe all the resources could be focused just on that piece of the business. So when we think about adding something new at this stage of the growth or something else, I’m just curious what sort of the logic or calculus is and how you think about it?

Geoff Tanner: Yeah, it’s a really great question. It’s the sort of thing we talk about a lot. I’ll say that, reiterate that chips, we’ve been particularly excited about the performance of chips, say, in the last 18 months. Most recent period growing 50%, as I said, run rate of $300 million. And we continue — we’re going to up, I’d say, up our sights on that business. I mentioned that think like a chip company strategy that we’re developing. We had been working on bake shop for several years and there’s a balance here between wanting to be first to market. And to your point, making sure we have sufficient investment that we can put behind these platforms. Again in part, the decision on Atkins to throttle back on some lower ROI investments does give us more fuel to invest behind Quest and you should expect a significant step up in advertising next year.

In terms of a cadence, throw a number out there every couple two or three years, we could be bringing a new platform. But to your point, this is not something we would want to be bringing every year. We need to give these platforms the oxygen, the fuel they need. But part of our confidence and the ability to support both chips and bake shop is that in our planning for next year, there’s a sizable step up in advertising and other investments on the Quest business. And then I guess the last point is back to Steve’s question, the performance of the advertising and how it has really accelerated chips is also a point of encouragement that this advertising can support different aspects of our business.

Kaumil Gajrawala: Got it. And I guess you opened up the door for a follow-up, which was that some of the adjustments at Atkins opens up some ability to invest higher in Quest. Now that you have OWYN, how do you think of it in that context? Is there more pressure under — do you have to sort of squeeze on Atkins a little bit more because you have this entirely new business that’s growing even faster than the Quest business? Like how are we thinking about the balance between the three?

Geoff Tanner: It’s a good question. Not at this stage. So, you know, we’re obviously two weeks into owning OWYN. Our plan is to letting them run for a year. OWYN has a runway of growth in front of it for the next 12 to 18 months, that it will be very distribution-driven and that’ll be our focus. And much like we did on Quest, when we acquired Quest, we focused on driving out distribution and then fueling marketing when we had that broader distribution footprint, which increases the ROI on the marketing investment. And that’s a similar playbook we’ll run on OWYN. So at some point, yes, we’ll probably be sitting here having the discussions on how much marketing to move to OWYN versus Quest versus Atkins. But at this point, where OWYN is in its lifecycle, the growth trajectory, the runway of growth on OWYN, there’s a significant distribution runway that we’re going to get after, just like we did on Quest.

Kaumil Gajrawala: Got it. Okay, great. Thank you, guys.

Geoff Tanner: Thank you.

Operator: Thank you. Ladies and gentlemen that concludes our question-and-answer session. I’ll turn the floor back to Mr. Tanner for any final comments.

Geoff Tanner: Thank you very much for joining us today for our third quarter conference call. We’ll talk to you guys all again next time in October, when we report fiscal fourth quarter and full year 2024 results. Thank you.

Shaun Mara: Thank you.

Operator: Thank you. This concludes today’s conference call. You may disconnect your lines at this time. Thank you for your participation.