The Simply Good Foods Company (NASDAQ:SMPL) Q4 2023 Earnings Call Transcript

The Simply Good Foods Company (NASDAQ:SMPL) Q4 2023 Earnings Call Transcript October 24, 2023

The Simply Good Foods Company beats earnings expectations. Reported EPS is $0.45, expectations were $0.44.

Operator: Greetings, and welcome to The Simply Good Foods Company Fiscal Fourth 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. [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, 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 fourth quarter and full year ended August 26, 2023. Geoff Tanner, President and CEO; and Shaun Mara, CFO, will provide you with an overview of the 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 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.

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The company undertakes no obligation to update these statements based on subsequent events. A detailed list 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 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 Geoff Tanner.

Geoff Tanner: Thank you, Mark. Good morning. Thank you for joining us. Today, I will recap Simply Good Foods’ 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 ended the year with strong Q4 net sales growth of about 17%. As expected, net sales outpaced retail takeaway due to the retail customer drawdown last year. Gross margin was slightly greater than our expectations, primarily due to lower supply chain costs. Full year fiscal 2023 organic net sales increased nearly 7%. This performance reflects our diversified portfolio across brands, retail channels, customers and product forms.

We believe we exited the year with trade inventory at normal levels. Gross margin improved during the year, and we expect to build on this momentum in fiscal 2024. In my nearly 7 months tenure at the company, I’m even more convinced of the long-term growth outlook of the nutritional snacking category and our business. Category growth in Q4 and the year was 15% and 17%, respectively. With low household penetration of about 50% versus legacy U.S. snacks at 90% plus, coupled with the twin tailwinds of snacking and health and well, we believe the category will continue to maintain its multiyear growth trajectory and outperform U.S. packaged foods and snacks. As the preeminent category leader and category adviser for the majority of our customers, we will continue to invest in our brands and partner with retailers to accelerate category growth.

I think over time this category will be twice its current size. I don’t have the exact sequence of pacing that the opportunity is there. Total Simply Good Foods combined measured and unmeasured channel U.S. retail takeaway broke in Q4 and the year was about 11% and 13%, respectively. In fiscal 2023, POS for Quest and Atkins increased 24% and 1%. Atkins retail takeaway slowed in the second half of the year and was up about 3%. Atkins performance is currently below our expectations and well below its full potential, which is why a comprehensive revitalization plan has been deployed to stabilize the brand and return it to growth. More on this in a bit. As we look to fiscal 2024, we’re excited about the prospects for our category and our business.

We’re making investments in brand building and growth initiatives as well as investments to enhance capabilities that accelerate growth. In fiscal 2024, net sales growth will be driven by volume as we’ve lapped the pricing actions of the prior year. Specifically, we expect net sales to increase at the high end of our 4% to 6% long-term algorithm, including the benefit of a 53rd week. Gross margin expansion should be solid, supporting the aforementioned investments and an increase of adjusted EBITDA slightly higher than the net sales growth rate. In addition, our advantaged business model results in strong cash flow generation and provides us with the financial flexibility to pursue value-enhancing acquisitions, pay down debt or opportunistically buy back our shares.

We’re confident in the strength of our business and our diversified portfolio across brands, products and channels. The investments that we’ve made and will continue to make in the business will enable us to deliver on our net sales and earnings objectives. The next slide provides you with the full year perspective of retail takeaway in the IRI MULO + C-store universe and in the combined measured and unmeasured channels. Similar to the last few quarters and years, total unmeasured channel growth driven by e-commerce with additive to total company PLM. Let me now turn to Quest performance. where retail takeaway was strong and consistent during the year. Q4 and full year retail takeaway growth in measured and unmeasured channels were similar about 24%.

What I like is how balanced the growth profile continues to be on the brand, balanced across product forms and retail channels, balanced across key drivers namely distribution, base velocity and innovation and balanced across household penetration and buy rate. More consumers buying more products in more stores. In my experience, when you rely on 1 or 2 drivers, they can tap out, the balanced growth profile on Quest, however, points to a long and sustained runway for growth. In Q4, IRI MULO + C-store POS growth was 26%, driven by volume, a 22 percentage point contribution, reflecting solid distribution gains and new product performance during the year and price that was about a 4 percentage point benefit. Measured channel Q4 POS growth of bars and snacks were similar, up about 25%.

Gains were driven by distribution, base velocity and new product success. Salty snacks were particularly strong with POS growth of about 40% proving the ability of Quest to expand beyond the core and create new incremental segments in the category. In Q4, we estimate total unmeasured channel retail takeaway increased about 15%. E-commerce growth of approximately 18% was partially offset by softness in specialty channels. In fiscal 2024, we project that Quest will have another strong year, driven by volume growth. We’re making investments in the brand that will continue to result in near- and long-term growth across retail channels and forms. A particular focus will be investments in marketing. Despite the size of the business, household penetration is only 15%.

During the year, we will debut a new marketing campaign and a higher reach-based media plan that we believe will drive greater awareness and household penetration. Additionally, we’re partnering closely with retailers, if you Quest as the leader and pioneer of the nutritional snacking category. They’re excited about the investments we’re making in the brand as well as the innovation pipeline we’ve shared with them. This should continue to drive distribution gains related to annual shelf resets. Before getting into detail of the Atkins pre-vitalization plan, let me provide you with a quick overview of Q4 performance. Q4 retail takeaway and the combined measured and unmeasured channels was up 4%. Clearly, we’re not happy with the performance of the business.

which we believe is well short of its full potential. As has been the case all year, several users of the product are leveraging the convenience of e-commerce. As a result, Amazon has been additive to Atkins measured channel PLM. Q4 retail takeaway in this channel increased 12% with solid bars and shakes performance that were up 11% and 16%, respectively. In the IRI MULO + C-store universe, Q4 retail takeaway was up 5.6%. Although ready-to-drink shakes performance as well as POS at our largest mass retail customer are positive. To stabilize the brand and get it through its full potential, we’ve developed a comprehensive revitalization plan, and I’ll share this with you in the coming slides. Over the past several months, we’ve conducted consumer research on the Atkins brand to inform revitalization efforts.

The work strongly reaffirmed our belief of the high potential of the brand. What we heard is that 80% of consumers are looking to maintain all this weight and the Atkins is distinctly and uniquely positioned as the most trusted leader in low carb, low sugar solution. In addition, when consumers try our products, they are pleased and delighted. The research suggests there is clearly significant potential for the brand. Similar to some of the things we’ve developed over the last year, I will also identify some opportunities we need to address. Specifically, strengthening innovation, addressing executional misses at some retail customers and enhancing and modernizing the brand experience and exception. Starting with innovation, we clearly dropped the ball on innovation, particularly snack bars and indulge confection.

Innovation, variety and new news is a critical driver of the business, especially in the bar segment. We fell short, and that resulted in distribution losses. Second, we had some execution on this step with a few key customers that resulted in suboptimal assortments and price points. Third, we heard that some potential consumers don’t understand the benefits of the product or a skeptical to Atkins a delicious and easy way to maintain all these ways. Let’s move to the next slide and tell you what we’re doing to address these issues, which I really view as opportunities. To address our innovation gap, we have quickly accelerated some new items to market to bring variety and new news to the brand. In the second half of fiscal 2024, we expect that we’ll have even more meaningful innovation.

Importantly, we’ve enhanced our efforts to build a robust multiyear pipeline. We’re also working on product upgrades to deliver a better taste experience. Consumers like the products that we’ve identified an opportunity to deliver a superior taste experience. In some cases, this may also reduce cost and provide greater shelf life. To address gaps to key customers, our plan includes optimizing assortment and getting to the right price points. An example of this is our recent transition from variety packs to straight pack in the club channel and hitting a key price point in that channel. Additionally, we’re doubling down at customers where we have strong momentum. For example, Amazon has been additive to Atkins measure channel POS and we will continue to invest with them and other winning customers to accelerate growth.

And to improve brand perception, a comprehensive advertising and marketing plan is underway to enhance Atkin’s overall appeal and relevant with the goal of continuing to bring new users of the business. As we indicated last quarter, we believe the GLP class of weight-loss drug will be a tailwind for our business. As a strong proponent of white wellness, we’re excited consumers have another option to help with what can be a difficult struggle. We recently conducted our own proprietary research of consumers on the drug. The reset showed our products are a perfect complement for consumers to when they’re on the drug, on smaller and more nutritious options. Furthermore, our research suggests the majority of GLP users want to eventually come off the drug.

What we found is that our products are a perfect offering when they do as a way to hold on to the physical and emotional benefits of the weight loss. Importantly, being mindful of privacy was, we are working with several external partners to build a sizable addressable audience of consumers to what they’re interested in or on the drug to whom we will deliver targeted communication, brand messaging and offers about how our products can be used as suppressor companion and/or off-ramp. We expect to be in the market with this campaign later in the fiscal year. Lastly, we’re working on a packaging refresh project that will modernize the brand and make it easier to shop. The goal of the revitalization plan is to first stabilize marketplace performance and then deliver the brand to its full potential.

To execute this plan with excellence and a sense of urgency, we’ve established a new leadership team and structure. We have a very strong and experienced team and are confident in the and our collective ability to reshape the strategy and growth trajectory of the brand. I’ll not spend a lot of time here, but on this slide, you’ll see some of the accelerated innovation currently making its way into the marketplace and the refinement and optimized pack types in the club and e-commerce channels. We are a category adviser at most retailers, and we’ll continue to work with them to ensure our product is optimally positioned on the shelf. I want to close the update on the revitalization plan with some additional perspective on the new advertising and marketing campaigns.

The campaign addresses feedback that some potential new buyers are unaware or skeptical of the brand benefits to how delicious the products take, entitled the food new campaign, it gives voice to the skeptics as well as our core existing consumers, reinforcing that you can eat and enjoy these delicious products and maintain or lose weight. Rob Lowe remains our brand ambassador and embodiment of the brand benefits. Joining him in a playful dialogue and converting a skeptic into an Atkins consumer is renowned comedian and no one’s skeptic [indiscernible]. We’ve created 3 plots that will rotate over the coming months. Each ad is focused on a different aspect of the business, which has positioned us nicely for the upcoming New Year, New Year’s season.

Consumer testing shows the spot to drive greater appeal among lights and nonusers that also resonates strongly with existing users. And we’re taking a slightly different approach to where consumers will see our advertising, which will increase our reach. Most recently, we debuted our new ads on October 12, during Thursday Night Football and October 22 during Sunday Night Football. We’ll continue to see our ads during the year across cable, streaming and digital channels. We know what we need to do to change the trajectory of the brand performance. We’re beginning to deploy the plan and it will continue to build during the year and into fiscal 2025. I look forward to keeping you up to date with that progress. In summary, I’m pleased with our overall fiscal 2023 results.

We compete in an attractive category that is well positioned against the mega trends of healthy snacking with a focus on convenient products across multiple forms that are high in protein and low in carbs and sugar. In fiscal 2024, driven by quick marketplace momentum our plan is to deliver solid net sales growth driven by volume. As such, we’re excited about our plans, our business and the opportunities ahead. Lastly, I want to thank our amazing employees who work tirelessly every day to provide you precious delicious and convenient food options for consumers. Our team believes food should work for people, not against them, and they’re passionate about helping consumers that a healthy lifestyle. I’m very grateful for their passion and commitment.

Now I’ll turn the call over to Shaun, who will provide you with some greater financial details.

Shaun Mara: Thank you, Geoff, and good morning, everyone. I will begin with an overview of our net sales. Total Simply Good Foods fourth quarter net sales of $320.4 million increased 16.9% versus the year-ago period. Looking at the Q4 drivers of growth, net price realization was about 3.5 percentage points and volume was about 13.4%. As Geoff stated earlier, net sales growth outpaced retail takeaway. At the bottom of this slide, we have to reconcile Q4 POS of 11% to Q4 North America net sales growth of 17%. The biggest driver is in the prior year period, to the retail customer inventory draw down last year. As we’ve discussed throughout the year, in fiscal 2022, retailers increased their inventory levels to address supply chain challenges and depleted this inventory in Q4 of fiscal 2022, which is atypical.

This year, we returned to a more normalized pattern, where retailers built a week or 2 of inventory in the first half of the year and depleted the majority of it in Q3 with minimal change in Q4. Full year net sales of $1.24 billion increased 6.3% versus the year ago period. As we exited fiscal year 2021 and 2022, inventory at retail moved around due to supply chain issues. However, as we exit 2023, we believe we ended the year with more normal retail inventory levels. Therefore, in fiscal 2024, we anticipate for full year net sales and retail takeaway growth will be largely in line. Moving on to other P&L items for Q4. Gross profit was $120.5 million, an increase of $18.6 million from the year ago period, resulting in gross margin of 37.6%.

The 50 basis point increase versus the year ago period was primarily due to lower ingredient packaging costs. Adjusted EBITDA was $67.3 million, an increase of $16.3 million from the year ago period. Selling and marketing expenses were $30.8 million versus $26.9 million, an increase of 14.8%, largely due to the timing of spend within the year. GAAP G&A expenses were $29.5 million, an increase of $2.4 million versus last year, primarily due to executive transition costs. Excluding these costs as well as stock-based compensation G&A declined $900,000 to $23.2 million. Finally, net interest income and interest expense increased $1 million to $6.4 million due to higher variable interest rates related to the term loan. And as expected, our Q4 tax rate was about 25%.

As a result, net income was $36.6 million versus $30.1 million last year. Turning now to full year results. Gross profit was $453.4 million, an increase of 1.8% versus the year ago period. Adjusted EBITDA increased $11.6 million to $245.6 million due to higher gross profit and SG&A leverage. Selling and marketing expenses declined 1.8% to $119.5 million. GAAP G&A expenses were $111.6 million, including stock-based compensation executive transition costs and term loan transaction fees. Excluding these costs, G&A declined $800,000 to $91.3 million. Net income was $133.6 million versus $108.6 million in the year ago period. Note that the year-ago period includes $30.1 million related to the remeasurement of the private warrant liabilities. Turning to EPS.

Fourth quarter reported EPS was $0.36 per share diluted compared to $0.30 per share diluted for the comparable period of 2022. Adjusted diluted EPS was $0.45 versus $0.36 in the prior year ago period. Full year reported EPS was $1.32 and adjusted diluted EPS was $1.63. 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. Fourth quarter and full year cash provided by operating activities was $61 million and $171 million, respectively. As of August 26, 2023, the company had cash of $87.7 million. In fiscal 2023, the company repaid $121.5 million of its term loan and at the end of the year, the outstanding principal balance was $285 million.

Capital expenditures in 2023 were $11.6 million. Fiscal 2024 CapEx is expected to be in the $8 million to $10 million range. In fiscal 2024, we anticipate net interest expense to be around $18 million to $20 million, including noncash amortization expense related to the deferred financing fees. Now to wrap up in a challenging macroeconomic environment, the nutrition snacking category growth continues to be strong. We expect the ingredients and packaging costs to be lower in fiscal 2024 compared to last year and a result in solid gross margin expansion. This provides us with the flexibility to invest in capabilities and marketing initiatives that will drive near and long-term growth. As such, while early, in fiscal 2024, we are on track to deliver solid net sales and adjusted EBITDA growth.

Specifically, we anticipate the following for the full fiscal year 2024. Net sales growth driven by volume to be at the high end of our 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 the net sales growth and adjusted diluted EPS will increase greater than adjusted EBITDA growth. We appreciate everyone’s interest in our company, and we’re now available to take your questions.

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Q&A Session

Operator: [Operator Instructions] Our first question comes from the line of John Baumgartner with Mizuho Securities. Please proceed with your question.

John Baumgartner: Geoff, I wanted to ask about the skeptics associated with the Atkins brand. How many of them are buying other brands in the category relative to how many would be incremental? And of the folks buying other brands, do you have a sense as to whether they’re buying other weight management brands or more high-protein active nutrition brands. I’m trying to think through this and understand how much of this pool of skeptics as you pursue them requires winning more of a market share gain and dislodging consumers relative to how much would be contingent on growing the category and how that impacts your engagement?

Geoff Tanner: I hope you like the new advertising. When we were looking at Atkins, so we took a step back. And what we really heard loud and clear through the research is that Atkins is one of the best positioned brands out there focused on weight management. What we heard loud and clear is that 80% of consumers want to lose or maintain weight and Atkins is seen as the trusted leader in low carb no sugar solution. So we see nothing but tremendous potential for this brand. But and as we talked in the scripted remarks, we did hear that there’s a group of consumers who are either a little confused about what Atkins is or don’t fully understand the benefits that you can eat products this delicious and lose or maintain weight. And that’s when we started zeroing in on this idea that there are some skeptics out there, which to us represent nothing but upside to the business.

Because as you know, once we convert consumers, they become loyal very quickly and the buy rate is particularly high compared to most consumer products. So that was the goal with this new advertising is to firstly communicate Atkins is not a weight management plan. It’s not a regimented weight loss program. We have a range of delicious products that can help consumers maintain or lose weight. And as I step back on the business in a fresh set of eyes, I see nothing but upside. If we can start to convert what might be very light consumers or non-consumers and start moving them down the funnel into loyal consumers with high buy rate. So that was the genesis for how we arrived at that marketing strategy. What we also found is the 2 new campaign also strongly resonates with loyal consumers because it’s a little tip of the hat to them, who knew, I knew.

So with this new campaign, what we found is we were talking and we were resonating both with our loyal consumers and with potential new consumers that we’re going to move through the funnel.

John Baumgartner: And then just to follow up. When we think about the marketing initiatives for fiscal ’24, it sounds like you’ve got a fair amount of non-price initiatives that are heading into the market. Do you have a sense — maybe it’s too early, but do you have a sense at this point, when you look across the competitive spectrum in the category, do you have a sense that your competitors are sort of also in market following in a similar way where they’re leaning more on non-price promotion, more marketing more advertising, more in-store display as opposed to just deep price cuts in terms of funnelling back the upstream deflation in the market.

Geoff Tanner: I think what separates Simply Good Foods from almost the majority of our competitors is how committed we are to brand building and in particular, marketing. We’re spending right now about 9% of net sales. And we know that at that level of spend, we have a very strong share of voice. As we think about Atkins, and we just talked about that marketing campaign. We’re investing slightly above a year ago on Atkins and with a particular heavy up focus over the first quarter. As we talked about, based on our testing results, we believe the creative will perform more strongly, and we’re focused on additional reach, taking our reach from 69% to 86%. And then in the back half of the year, we’re going to be making a significant investment in cost advertising, which really hasn’t had a lot of focus to date.

So we’ll be bringing out a new campaign, a reach-based media campaign behind that. So we are the market leaders. We fundamentally believe in brand building, and we believe that separates our company and our brands from our competitors.

Operator: Our next question comes from the line of Jason English with Goldman Sachs. Please proceed with your question.

Jason English: A couple of questions. First, some tactical questions. You highlighted some new club product for Atkins. Is this designed for your existing customers? Or is any of this an opportunity to penetrate new customers. And then on Quest, you referenced partnering with retailers who view Quest as a pioneer, nutrition snacking category. Part of your retailers seems like it’s par for the course. It sounds like this is probably not like the fact you’re calling it out suggests this may be something over and above partnership. Can you expand and give us a little more detail and color on that initiative?

Geoff Tanner: Yes, happy to, Jason. As it relates to the Atkins club program, we have moved from offering a variety pack to a straight pack and what we’ve learned from our own research, there’s a significant opportunity if we can hit a specific price point, which we have. We believe that effort will resonate both with existing consumers as well as bring in new consumers. So that’s the goal there. With respect to your second question on Quest, yes, you’re right. this category, and I’ve talked about it before, I describe it as a teenager compared to the majority of senior store categories. You’ve got the twin tailwinds of snacking and health and wellness. It over indexes with millennials and Gen Z. And the reason I refer to it as a teenager, 50% household penetration versus 90% for most in the store categories.

And a real, as you know, a bright spot in the same store. And retailers see that. I believe the category could double over the next 5 to 7 years, I don’t know exactly when, but that’s the potential, retailers see that. I’ve met with all of them, many multiple times since joining the company. We’re also a category adviser to the majority of our customers. So one of the things I focused on in my first 6 months is developing multiyear partnerships with retailers to provide and build additional space and additional focus on this category. So moving from perhaps more of a transactional approach to category leadership to a longer term, more strategic approach where we’re building plans together to double down on this category, how do we add more space?

How do we bring — how do we have additional merchandising opportunities et cetera, et cetera. Obviously, e-commerce the only — a big focus there. And within that, innovation plays a critical role. And as you know, our retailers view Quest is the innovation pioneer in the category. So you’re right to highlight it, Jason. It is a stepped up next level approach to category management. that one, that will underpin what we believe will be a doubling of this category over the next 5 to 7 years.

Shaun Mara: Jason, just to add a little bit on that, too, if you take a step back in the last year, we’re up 25% in consumption for Quest, right? So I mean that’s a huge growth and retailers obviously see that and want to go with a winner here. So they’re looking to partner with us because they see the growth potential of the brand.

Jason English: And I did a poor job of asking my first question. So let me come back and ask it more directly. Are you taking these new Atkins products to Costco?

Geoff Tanner: Well, as you know, we’re not in Costco. We see it as an opportunity. It would represent a significant increase in the business, which would be incremental but of course, we have to find a proposition that works for us and for Costco but you can probably bet that we’re having ongoing conversations with them.