The Simply Good Foods Company (NASDAQ:SMPL) Q2 2024 Earnings Call Transcript

The Simply Good Foods Company (NASDAQ:SMPL) Q2 2024 Earnings Call Transcript April 4, 2024

The Simply Good Foods Company 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 Second 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]. Please note this conference is being recorded. I will now turn the conference over to Mark Pogharian, Vice President of Investor Relations. 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 second quarter ended February 24, 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 an earnings release this morning at approximately 07:00 A.M. Eastern Time. A copy of the release and accompanying presentation are available under the investor section on 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 as a 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 E. 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 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 your questions. Simply Good Foods second quarter results were led by continued Quest growth as well as strong gross margin improvement. Net sales increased 5.3%, driven by volume and due to the timing of shipments last quarter, outpaced retail takeaway of about 3%. Retail takeaway in measured channels was less than our expectations. E-commerce POS growth for both Quest and Atkins continued to be solid. Quest retail takeaway was on track with our plans driven by strong salty snacks growth while Atkins performance was off versus our estimates.

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Q&A Session

Atkins had solid plans in place, but was ultimately disadvantaged on two fronts during the quarter. First, it left a onetime merchandising and promotional benefit that it had in the 2023 New Year, New You season, due to the out of stock challenges of a category participant. And second, in the 2024 New Year, New You season this category participant had adequate supply to service its base business. It then layered in extensive merchandising programs and promotions during the season, which greatly reduced the overall in-store share of voice for the Atkins brand and others. In March as we exited the New Year, New You season and moved past the difficult lap, Atkins trends improved. More on that in a bit. We were very pleased with the Q2 gross margin of 37.4%.

The 280 basis point increase versus the year ago period was primarily due to lower ingredient and packaging costs. Higher gross profit enabled investments in our business, and an increase in Q2 adjusted EBITDA of 13.6% to 57.8 million. However, due to the softer than anticipated Q2 Atkins consumption trends, we have updated our full year fiscal 2024 outlook. 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. We previously expected net sales to increase at the high end of the long-term algorithm. We continue to expect solid gross margin expansion, and adjusted EBITDA is now anticipated to increase 6% to 8%, driven by solid gross margin expansion. Let me now turn to Quest.

In Q2, retail takeaway measured channels increased 13.1%. Growth was solid across the key product forms and retail channels, driven by an increase in both household penetration and by rate. In Q2, we estimate total unmeasured channel retail takeaway increased about 10% as e-commerce strength was partially offset by softness in specialty channels. Quest Q2 e-commerce POS remained solid and increased about 14%. For perspective, total unmeasured channels in Q2 were nearly 24% of total Quest retail sales. Quest bar and snacks retail takeaway and measured channels increased 6% and 21% respectively. We’re particularly pleased with our salty snacks POS growth of about 40%, which is a standout in the category and now represents about 25% of Quest retail sales.

Additionally, we continue to see new Quest consumers coming into the brand via chips and then trying our other products such as bars, cookies, or confections. The success of Quest chips continues to be a proof point of the brand’s ability to extend beyond its core and disrupt other large snacking categories where we can offer high protein, low sugar, and great tasting options for consumers. Over the remainder of the year we continue to expect low double digit POS growth and continued household penetration and buy rate gains driven by innovation, distribution, and a new marketing campaign. In March, we announced the launch of a new advertising campaign entitled It’s Basically Cheating. The campaign features Academy Award and Emmy nominated writer, actor, and comedian Kumal Nanjiani, who playfully and satirically delivers a core campaign idea that Quest products are so good tasting and better for you that it basically feels like cheating.

Quest has been one of the most innovative brands in the category and is supported by a best in class R&D team. The multi-year pipeline is strong, and we expect innovation to be a lever of growth for a long time. In March, we launched Strawberry Frosted Cookies and one of my favorites Iced Coffee. This 10 gram protein packed 10 ounce drink has minimal sugar, only 90 calories, and 200 milligrams of caffeine. Today, I’m also excited to announce a new bake shop platform for the fall of 2024. As we’ve seen with chips, this is an opportunity to disrupt a large snacking category sweet baked goods with high protein, low sugar, and great tasting muffins and a brownie. Like Quest chips we believe this new platform will bring new consumers to the active nutrition category and expand by right through another usage occasion.

Based on conversations with key retail customers we expect very strong support for the launch that will also be underpinned by a comprehensive marketing plan as part of the Its Basically Cheating campaign. Turning to Atkins, Q2 retail takeaway in the IRI MULO + C-store universe and the combined measured and unmeasured channels was off 11% and 8% respectively. Strong e-commerce growth continued, driven by Amazon, whose POS growth was 13%. In Q1 e-commerce was nearly 17% of total Atkins retail sales up from 11% only three years ago. E-commerce retail sales are over $2 million per week driven by a mix of new consumers and some heavy users that are migrating to this channel from brick and mortar. Atkins performance in brick and mortar channels was softer than expected.

This was primarily due to greater than anticipated in-store competitive merchandising and programming that also impacted several other brands. As I noted earlier, last year, Atkins received incremental one time merchandising and promotional support due to the supply challenges of a category participant, which is why the 2024 New Year, New You was a challenging headwind. However, as you’ll note in the chart in the middle of the slide, as we exited the New Year, New You season, retail takeaway trends have improved. Over the remainder of the year, we expect more normalized level of competitive in-store merchandising and programming. We also have a strong advertising plan in place and are excited about the quality of the new products we will soon bring to market.

Therefore, we anticipate full year fiscal year 2024 combined, measured and unmeasured channel POS to be off around 7% versus our previous estimate of 3% to 4%. We continue to have tremendous faith in the long-term potential of the brand, especially given the increased cultural relevance and conversation about weight wellness. We continue to make progress against the five-point revitalization plan we’ve talked about on previous calls. However, as you may recall, it’s going to take time before all the elements of the plan are collectively in the marketplace. I’m particularly pleased with the progress we’re making in accelerating innovation, which is a critical driver of business performance. As previously stated, our lack of quality innovation has been a headwind to Atkins performance, so getting this back on track has been a focus area for us.

The significant improvements we’ve made should enable us to have 15 new product launches in calendar year 2024 across all product forms. At the bottom of this slide I’d like to point out Atkins Strong, a high protein shake developed specifically for consumers on a weight loss drug, or for shoppers just seeking higher levels of protein. For consumers experienced rapid weight loss either through medications, surgery, or dieting, high protein levels are important to help maintain muscle mass. Atkins Strong protein shakes deliver 30 grams of protein with 1 gram of sugar, and have also been formulated with 7 grams of prebiotic fiber to support gut health. This beneficial level of fiber is lacking in many RTD shakes in the market today, and is a highly relevant nutrient for many folks on the new medications.

Finally, research continues to suggest that the Atkins approach can be an effective off-ramp for those who choose to transition off the medication, and we’re working to optimize our communications to ensure the brand is seen as a way to maintain weight loss benefits after taking the drugs. To summarize, Simply Good Foods is uniquely positioned as a U.S. leader in nutritional snacking. The nutritional snacking category is more relevant today than at any other time, as the conversation of health and wellness continues to increase. Furthermore, our category continues to be a standout versus many other center of store categories. As such, we’re leveraging our role as category advisor at most retailers, and continue to work with our customers to develop and support initiatives in the aisle to further accelerate category growth with a particular focus on gaining more space.

Consumers trust our brands to help them achieve their wellness goals, and we are accelerating our innovation and marketing plans to provide consumers with products to help them in their wellness journey. We will continue to execute our strategic priorities, focusing on doing the right thing for our customers and consumers. They will enable us to deliver on our long-term growth objectives that ultimately drive increased shareholder value. Now, I will 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 second quarter net sales of $312.2 million increased $15.6 million, or 5.3% versus the year ago period, and was driven by Quest volume growing. North America and international net sales increased 5.1% and 12.3% respectively. As Geoff stated earlier, as expected, net sales growth was greater than retail takeaway of about 3%, primarily due to the timing of shipments last quarter. Recall, in Q1 POS growth of about 8% outpaced the net sales increase of nearly 3%. Moving on to other P&L items for the quarter, gross profit was $116.9 million, an increase of $14.1 million from the year ago period, resulting in gross margin of 37.4%. The 280 basis point increase versus the year ago period was primarily due to lower ingredient and packaging costs.

Adjusted EBITDA was $57.8 million, an increase of $6.9 million from the year ago period. Selling and marketing expenses were $34.6 million versus $29.9 million, an increase of 15.7%, largely due to higher marketing investments and growth initiatives. GAAP G&A expenses were $29.9 million, an increase of $4 million versus last year, primarily due to higher employee-related costs, stock-based compensation, and corporate expenses. Excluding stock-based compensation, G&A increased $2.5 million to $25.4 million. Finally, net interest income and interest expense was $4.7 million, a decline of $3.6 million versus Q2 last year. The decline was due to lower debt balances versus the year ago period. Our Q2 tax rate was about 24% versus 25% in the year ago period.

As a result, net income was $33.1 million versus $25.6 million last year. Moving on to year-to-date results, net sales were $620.9 million, increasing about 4% versus last year. This is slightly below year-to-date retail takeaway in the combined measured and unmeasured channels, which is growing approximately 5.5%. The difference is principally due to some incremental trade investment made in the first half of fiscal 2024. That said, we expect POS growth and net sales growth to be largely in line for the full year. Gross profit was $232 million, resulting in a gross margin of 37.4%, a 160 basis point increase versus the year ago period. We have good visibility into supply chain costs over the remainder of the year and anticipate gross margin will continue to improve and could approach 39% in the second half of the year.

Adjusted EBITDA was $119.8 million, an increase of 7.3% from the year ago period. Net interest income and interest expense was $9.6 million, a decline of $5.7 million versus last year. The year-to-date tax rate was 24.1% versus 22.7% last year. We continue to anticipate the full year effective tax rate to be around 25%. As a result, net income was $68.7 million versus $61.5 million last year. The next slide provides you with a reconciliation of reported and adjusted diluted EPS. Second quarter reported EPS was $0.33 per share diluted compared to $0.25 per share diluted for the comparable period of 2023. Adjusted diluted EPS was $0.40 compared to $0.32 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 February 24, 2024 the company had cash of $135.9 million. Year-to-date cash flow from operations was about $94 million, an increase of 76% or $40.6 million, principally due to adjusted EBITDA growth and improvements in working capital. During the quarter, the company repaid $35 million of its term loan debt and at the end of the second quarter, the outstanding principal balance was $240 million. Capital expenditures in Q2 and year-to-date period were $300,000 and $1.1 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 $17 million to $19 million, including non-cash amortization expense related to the deferred financing fees.

Now to wrap up, as Geoff stated earlier, due to the soft food anticipated consumption trends in Q2, we updated our full year outlook. 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 we expect will drive near and long-term growth and generate solid earnings growth. Therefore, for full year fiscal 2024, we anticipate net sales growth driven by volume to increase around the midpoint of the company’s long-term algorithm of 4% to 6%, including the benefit of the 53rd week. And adjusted EBITDA is now anticipated to increase 6% to 8% versus last year. We appreciate everybody’s interest in our company, and we’re now available to take your questions.

Operator: Thank you. [Operator Instructions]. Our first questions come from the line of Matt Smith with Stifel. Please proceed with your questions.

Matthew Smith: Hi, good morning Geoff and Shaun.

Geoff E. Tanner: Good morning.

Matthew Smith: The overall active nutrition category growth slowed in the first calendar quarter of the year, that’s during the key diet season. You talked about the competitive dynamic impacting Quest and Atkins. But from a high level, was the performance of the overall category in line with your expectations and are you seeing any signs of a pickup in growth in the categories as we move past March?

Geoff E. Tanner: Yes. No, the category continues to show strong growth. It certainly has slowed versus the past couple of years. If you look backwards, you see a bump coming out of COVID and then you’ve had a lot of inflation-driven growth. We’re now back to around 6% or 7% which is where the category was pre-COVID. And additionally, it continues to be a standout category versus most of the standard store where, as you know, volumes are flat. And that reflects some underlying drivers, health and wellness trends, snacking convenience. It’s got low household penetration that we’ve talked about before and it over-indexes with younger consumers. So we continue to be excited where the category is performing. It’s right where we expect it to be. And retailers see that, too. It’s why we’re working with them on how to even further accelerate that growth.

Matthew Smith: Thank you Geoff and as a follow-up, the lower revenue guidance includes a 7% reduction in POS for Atkins for the year. Does that outlook consider improving dollar consumption from here, are you looking at dollar consumption for the Atkins brand and believing you can hold that level and then you benefit from easier comparisons in the second half of the year from a POS perspective?

Geoff E. Tanner: Yes, that’s what it is. Obviously, we’re disappointed how Atkins performed in January, February. And obviously, we walked into some tough competitive merchandising comps. We still remain confident in the long-term vitality of the business, and as we look forward, we certainly have seen trends improve that have come out of January and February. And certainly, for the balance of the year, we do have easier comps, and that’s why we expect the business to return more to that mid-single-digit decline.

Shaun Mara: Yes, Matt if you look at it by — for Q3 and Q4, then Q3 is relatively in line with what we saw in Q2, slightly better in Q4 because we get some easier laps as you said, overall. So we’re not expecting drastic changes in the trajectory in the next X period of time.

Matthew Smith: Thank you, I will leave it there.

Operator: Thank you. Our next questions come from the line of Alexia Howard with Bernstein. Please proceed with your questions.

Alexia Howard: Good morning everyone.

Geoff E. Tanner: Good morning.

Alexia Howard: Just a couple of quick questions here. You’ve got innovation stepping up and it feels as though we’ve been through a few cycles of innovation over the last few years, some of which haven’t worked, some of which has. What metrics do you use to make sure innovation is successful and sustainable in the marketplace and how do you track that over time to make sure that you’re calling things that aren’t going to work and obviously supporting things that are?

Geoff E. Tanner: Yes. I mean, Alexia, I’d probably point to the innovation on Quest, which has been I think, a standout and a major driver of growth and very successful. If you look at chips, for example, we’re seeing 40% growth in that business, and it continues to be highly incremental. We’re excited about the bake shop platform that we have coming up on Quest. So I’d say the innovation on Quest has been incredibly successful and certainly retailers view it that way and continue to reward us with more space. If you look at Atkins, and I’ve been quite transparent about this on previous calls, we were very disappointed with the quality and level of innovation on Atkins over the past couple of years, which has contributed to the slowdown in the brand.

It’s why we have jump started innovation on Atkins. It was certainly one of my priorities coming into the role. And I think the quality of the innovation we’re bringing to market on Atkins over the next — we will cut statin in the fall and thereafter it is much stronger. Where we’ve tried to push is innovation that’s more incremental to the business, more platform focused. But we do know that on Atkins, what we’re trying to do is hold on to shelf space and replaced underperforming items with the innovation. So the jobs are different on innovation for both businesses. Right now, on Atkins, it’s replacing underperforming items with better items. On Quest, it is about innovation that is incremental to the business and incremental to the category.

Shaun Mara: Alexia, just to touch on your process question, I think, a little bit there. When we kind of launch any new innovation, we go through a process internally, what the metric we kind of look at as we go out there, our ACV build then turns per week and then related to that kind of repeat purchase. So those are the metrics we kind of model out before we launch anything and then we evaluate that performance, if you want to call it that, over the first six months or so of the launch to see how successful it would be.

Alexia Howard: Really appreciate the details from both of you. I’ll pass it on. Thank you.

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

Stephen Powers: Thanks guys, sorry I was on mute there. Hey, a first question on Atkins and weight management category dynamics in general. You talked about the expectation that the competitive environment, the competitive dynamics would normalize as we go through the calendar year. I guess a little bit more perspective on where your confidence comes from in that and yes, we’ll take it from there?

Geoff E. Tanner: Yes. No, the reality is that this time last year, as we talked about in the prepared remarks, one of our major competitors had supply challenges and that was particularly acute over the January and February period. And as a result, Atkins benefited significantly, particularly in a few customers, from outsized merchandising and promotional support, which we obviously didn’t get this year. So that was going to be a difficult lap. And that competitor is now back and able to service the business. So it was an inevitable difficult New Year, New You season, but we will lap that. And as we’ve come out of January, February trends have improved, and I’d say by around the summer, we should be largely lapped — that effect should be largely lapped, which is why our comps should get easier.

Stephen Powers: Okay. Yes. Okay, makes sense. And then pivoting over to Quest, you highlighted, Geoff, the ready-to-drink coffee innovation, which is interesting to me. I guess as you think about the pipeline for Quest from an innovation perspective, what — how big a role do you think beverages will play versus further endeavors in food and if beverages are envisioned as kind of a material driver of the franchise going forward, how do you think about prioritizing future consumption occasions versus the media consumption occasions and just the complexities of reaching different channels, especially on the immediate consumption side?