Simply Good Foods Q4 2023 Earnings Call Transcript

Quartr
Provided by Quartr
October 24, 2023

There are 12 speakers on the call.

Operator

Greetings, and welcome to the Simply Good Foods Company Fiscal 4th Quarter 2023 Conference Call. At this time, all participants are in a listen only mode. A question and answer session will follow the formal presentation. As a reminder, this conference is being recorded. I would now like to turn the conference over to your host, Mr.

Operator

Mark Pergarian, Vice President, Investor Relations for Simply Good Foods Company. Thank you. You may begin.

Speaker 1

Thank you, operator. Good morning. I'm pleased to welcome you to the Simply Good Foods Company Earnings Call for the fiscal Q4 and full year ended August 26, 2023. Jeff Gannon, President and CEO and Sean Maher, CFO, will provide you with an overview of the results, which will then be followed by a Q and A session. The company issued its earnings release this morning at approximately 7 am Eastern.

Speaker 1

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 list of such risks and uncertainties can be found in today's press release and the company's SEC filings.

Speaker 1

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 presentation of this information is not intended to be considered in isolation or as a substitute for the financial information presented in accordance 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 Jeff Dann.

Speaker 2

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 Sean 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.

Speaker 2

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.

Speaker 2

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 20 In my nearly 7 month tenure at the company, I'm even more convinced of the long term Growth outlook of the nutritional snacking category in our business. Category growth in Q4 and the year was 15% 17% respectively. With low household penetration of about 50% versus legacy U. S.

Speaker 2

Snacks at 90% plus, Coupled with the twin tailwinds of snacking and health and wellness, 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 advisor 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.

Speaker 2

I don't know the exact sequence or pacing, but the opportunity is there. Total Simply Good Foods combined measured and unmeasured channel U. S. Retail takeaway growth in Q4 And the year was about 11% and 13% respectively. In fiscal 2023, POS for Quest and Atkins Increased 24% 1%.

Speaker 2

Atkins retail takeaway slowed in the second half of the year and was off about 3%. Atkins' performance is currently below our expectations and well below its full potential, which is why 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.

Speaker 2

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 advantage business model results in strong cash flow generation and provides us with the financial flexibility The strength of our business and our diversified portfolio across brands, products and channels. The investments that we've made and we'll continue to make In this business, we'll enable us to deliver on our net sales and earnings objectives.

Speaker 2

The next slide provides you with a full year perspective of Retail Takeaway in the IRI, Nelo plus 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 TOA. Let me now turn to Quest performance, For retail takeaway was strong and consistent during the year. Q4 and full year retail takeaway growth in measured and unmeasured 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 based velocity and innovation and balanced across household penetration and buy rates.

Speaker 2

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 new low plus fee store POS growth 26%, driven by volume, a 22 percentage point contribution, reflecting solid distribution gains and new product performance During the year and product, there was about a 4 percentage point benefit. Measured channel Q4 PLX growth of bars and snacks were similar, up about 25%.

Speaker 2

Gains were driven by distribution, base velocity and new product success. Solsysnax were particularly strong with POS growth of about 40%, proving the ability of Quest to 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% This was partially offset by softness in specialty channels. In fiscal 2024, we project that Quest We'll have another strong year driven by volume growth.

Speaker 2

We're making investments in the brand that will continue to result in near and long term growth 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 to view Quest as the leader and pioneer of the nutritional snacking category. We're excited about the investments we're making in the brand as well as the innovation pipeline we've shared with them.

Speaker 2

This should continue to drive distribution gains related to annual shelf reset. Before getting into detail of the Atkins revitalization 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, every users of the product are leveraging the convenience of e commerce.

Speaker 2

As a result, Amazon has been additive to the Atkins' measured channel POS. Q4 retail takeaway in this channel increased 12% The solid bars and shakes performance that were up 11% 16%, respectively. In the IRI Mueller plus 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 were positive. To stabilize the brand and get it to its full potential, We've developed a comprehensive revitalization plan, and I'll share this with you in the coming slides.

Speaker 2

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 80% of consumers are looking to maintain or lose weight and that Atkins is distinctly and uniquely positioned as the most trusted leader in low carb, In addition, when consumers try our products, they're pleased and delighted. Research suggests there is clearly significant potential for the brand. Similar to some of the things we've developed over the last year, Outlook also identified some opportunities we need to address, specifically, strengthening innovation, addressing executional misses at some retail customers And enhancing and modernizing the brand experience and perception.

Speaker 2

Starting with innovation, we clearly dropped the ball on innovation, particularly snack bars and indulgence 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. 2nd, we had some execution on the steps with a few key customers That resulted in suboptimal assortments and price points. 3rd, we heard that some potential consumers don't understand the benefits of the product or are skeptical that Atkins is a delicious and easy way to maintain or lose weight.

Speaker 2

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 that bring variety and new news to the brand. In the second half of fiscal twenty twenty four, 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.

Speaker 2

Consumers like the product, We've identified an opportunity to deliver a superior taste experience. In some cases, this may also reduce costs and provide greater shelf life. To address gaps to key customers, our plan includes optimizing assortment and getting to the right price point. An example of this is our recent transition from variety packs to straight plaque 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.

Speaker 2

For example, Amazon has been additive to Atkins measured channel PRF, 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 Adkins' overall appeal and relevance with the goal of continuing to bring new users to the business. As we indicated last quarter, we believe The GLP class of weight loss drugs will be a tailwind for our business. As a strong proponent of weight wellness, We're excited consumers have another option to help with what can be a difficult struggle. We recently conducted our own proprietary research The research shows our products are a perfect complement for consumers, so when they're on the drug, Furthermore, our research suggests the majority of GLP users What we found is that our products are a perfect off ramp when they do as a way to hold on to the physical and emotional benefits of the weight loss.

Speaker 2

Importantly, being mindful of privacy laws, We are working with several external partners to build a sizable, addressable audience of consumers who are either 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 a perfect companion 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 To first stabilize marketplace performance and then deliver the brand to its full potential. To execute this time 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 I have confidence in them and our collective ability to reshape the strategy and growth trajectory of the brand.

Speaker 2

I'm not spending 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 I want to close the update on the revitalization plan with some additional perspective on the new advertising and marketing campaign. The campaign addresses feedback that some potential new buyers are unaware or skeptical of the brand benefits and how delicious the products taste. Entitled the Who Knew campaign, It gives voice to the skeptics as well as our core existing consumers, reinforcing that you can eat and enjoy these delicious products Rob Lowe remains our brand ambassador, an embodiment of the brand benefit. Joining him in a playful dialogue is converting a skeptic into an Atkins consumer as renowned comedian and known skeptic, We've created 3 spots that will rotate over the coming months. Each ad is focused on a different aspect of the business, which should position us nicely for the upcoming New Year, New Year season.

Speaker 2

Consumer testing shows greater appeal among the likes and non users, but also resonate 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 ad on October 12 during Thursday Night Football and October 22 during Sunday Night Football. You'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.

Speaker 2

We're beginning to deploy the plan and we'll continue to build during the year and In summary, I'm pleased with our overall fiscal 2023 results. We compete An attractive category that is well positioned against the megatrend 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 Quest 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 nutritious, delicious and convenient food options for consumers.

Speaker 2

Our team believes food should work for people, not against them, and they're passionate about helping consumers live a healthy lifestyle. I'm very grateful for their passion and commitment. Now, I'll turn the call over to Sean, who provides you with some greater financial details.

Speaker 3

Thank you, Jeff, and good morning, everyone. I will begin with an overview of our net sales. Total Simply Good Foods 4th quarter net sales of $320,400,000 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 up 13.4%.

Speaker 3

As Jeff stated earlier, net sales growth outpaced retail takeaway. At the bottom of the slide, we attempt to reconcile Q4 POS of 11% to Q4 North American net sales growth of 17%. Biggest driver is in the prior year period due to the retail customer inventory drawdown 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.

Speaker 3

Full year net sales of $1,240,000,000 increased 6.3% versus the year ago period. As we exited fiscal year 2021 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 the full year net sales and retail takeaway growth will be largely in line. Moving on to other P and L items for Q4.

Speaker 3

Gross profit was 120 $16,600,000 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 and packaging costs. Adjusted EBITDA was $67,300,000 an increase of $16,300,000 from the year ago period. Selling and marketing expenses were $30,800,000 versus $26,900,000 an increase of 14.8%, largely due to timing of spend within the year. GAAP G and A expenses were $29,500,000 an increase of $2,400,000 versus last year, primarily due to executive transition costs.

Speaker 3

Excluding these costs as well as stock based compensation, G and A declined $900,000 to $23,200,000 Finally, net interest income Interest expense increased $1,000,000 to $6,400,000 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 $36,600,000 versus $30,100,000 last year. Turning now to full year results. Gross profit was 450 $3,400,000 an increase of 1.8% versus the year ago period.

Speaker 3

Adjusted EBITDA increased 11 point $6,000,000 to $245,600,000 due to higher gross profit and SG and A leverage. Selling and marketing expenses declined 1.8 percent to $119,500,000 GAAP G and A expenses were $111,600,000 including stock based compensation, executive transition costs and term loan transaction fees. Excluding these costs, G and A declined $800,000 to $91,300,000 Net income was $133,600,000 versus $108,600,000 in the year ago period. Note that the year ago period includes $30,100,000 related Remeasurement of the Private Warrant Liabilities. Turning to EPS.

Speaker 3

4th 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 And 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. 4th quarter and full year cash provided by operating activities was $61,000,000 $171,000,000 respectively.

Speaker 3

As of August 26, 2023, the company had cash of $87,700,000 In fiscal 2023, the company repaid $121,500,000 of its term loan and at the end of the year, The outstanding principal balance was $285,000,000 Capital expenditures in 2023 were $11,600,000 Fiscal 2024, CapEx is expected to be in the $8,000,000 to $10,000,000 range. In fiscal 2024, we anticipate net interest expense to $20,000,000 including non cash 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 ingredients and packaging costs to be lower in fiscal 2024 compared to last year and 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.

Speaker 3

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 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

Operator

Thank you. At this time, we'll be conducting a question and answer session. Thank you. Our first question comes from the line of John Baumgartner with Mizuho Securities, please proceed with your question.

Speaker 2

Good morning. Thanks for the question. Good morning, John. Good

Speaker 3

morning, John.

Speaker 4

Good morning. Jeff, I wanted to ask about the skeptics associated with the Atkins brands. How many of them are buying other brands in the

Speaker 2

category relative to how many would be incremental? And of

Speaker 4

the folks buying other brands, 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 game and dislodging consumers relative to how much would be contingent on growing the category and how that impacts your engagement?

Speaker 2

Yes. Thanks for the question. 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.

Speaker 2

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, low sugar solutions. 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 0ing 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 their buy rate It's particularly high compared to most consumer products.

Speaker 2

So that was the goal with this new advertising 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, 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.

Speaker 2

So that was the genesis for how we arrived at that marketing strategy. What we also found is the WHO 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.

Speaker 2

Okay. And then just to follow-up, when

Speaker 4

we think about the marketing initiatives for fiscal 'twenty four, 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 funneling back the upstream deflation in the market?

Speaker 2

Yes. I think what separates Simply Good Foods from almost the majority of our competitors It's how committed we are to brand building and in particular marketing. We're spending right now about 9% 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 heavier focus over the Q1.

Speaker 2

And as we talked about, based on our testing results, we believe that 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 Quest 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. Thanks, Jeff.

Speaker 2

Thank you.

Operator

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

Speaker 5

Hey, good morning folks. Thanks for slotting me in. A couple of questions. First, some tactical questions. You highlighted some new club product for Atkins.

Speaker 5

Is this designed for your existing customers? And then on Quest, you referenced partnering with retailers who view Quest as a pioneer of nutrition snacking category. Partner 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 normal partnership, can you expound, give us a little more detail and color on that initiative? Thank you.

Speaker 2

Yes, happy to Jason. As it relates to the Atkins Club Program, we have moved from offering variety pack to a straight pack. And what we've learned from our own research is 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.

Speaker 2

With relation to With respect to your second question on yes, you're right. This category and I've talked about it before, I describe it as a teenager compared to the majority of same store categories. You've got the twin tailwinds of snacking and health and wellness. It over indexes with millennials and Gen Z. The reason I refer to it as a teenager, 50% household penetration versus 90% for most center store categories.

Speaker 2

And Ariel, as you know, a bright spot in the center store and retailers see that. I believe the category could double over the next 5 to 7 years. 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.

Speaker 2

We're also category adviser to the majority of our customers. So one of the things I've Focused on in my first six months is developing multi year 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 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, etcetera, etcetera.

Speaker 2

Obviously, e commerce, the omni is a big focus there. And within that, innovation plays a critical role. And as you know, our retailers view Quest as 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, but one That will underpin what we believe will be a doubling of this category over the next 5 to 7 years.

Speaker 6

Jason, just to

Speaker 2

add a

Speaker 3

little bit on To 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 the winner here. So they're looking to partner with us because they see the growth potential of the brand.

Speaker 5

Right on and congrats on that success by the way. 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?

Speaker 2

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 Find a proposition that works for us and for Costco, but you can probably bet that we're having ongoing conversations with them.

Speaker 5

Okay, helpful. Thank you.

Speaker 2

Thanks, Jason.

Operator

Thank you. Our next question comes from the line of Pamela Kaufman with Morgan Stanley. Please proceed with your question.

Speaker 7

Hi, good morning.

Speaker 3

Good morning, Pam.

Speaker 7

Can you talk about how you're thinking about the cadence of top line growth throughout fiscal 2024? And Maybe elaborate on how you're thinking about the growth outlook by brand and just what are you expecting from the contribution from the 53rd week?

Speaker 3

Okay. A lot in there. So let me take a step back and let's talk about the year first and then I'll talk about the quarter a little bit. So On a 52 week basis, we expect total S and PL sales increase in the midpoint of our long term net sales growth to 4%, 6%, right? That's all volume.

Speaker 3

We have no price in there for next year. Within that, we expect Quest to be growing at least low double digits For the year, with some slight declines in Atkins. Before I start seeing the benefits of the Atkins revitalization plan, we expect POS to improved during the year with the consumption in the second half of the year better than the first half. And I think that just speaks to the overall strength of the business as well as the underlying health of the category. So as it relates to the 53rd week, we simply added a point of growth here as we had in our plan we talked about last time.

Speaker 3

As we finalized that plan, what we basically did was take the average of the last 3 years for the 1st week in September to forecast the extra week. That's a little bit more than a point of growth. You can't just take 1 divided by 52 to estimate that because we have a fall recess that we shipped in August, we don't replenish that until mid September. So it's pretty early getting into the 53rd week, but we should plan on about a point of benefit there to more or less depending on timing of shipments. So That kind of focuses on the year and the split of the by the brands.

Speaker 3

As it relates to the flow during the year, Retail takeaway should be somewhat similar by quarter, say, high to mid say, mid to high single digits overall. And as it relates to net sales, it's largely going Follow that consumption, little bit of a flip from Q1 to Q2. So let me explain that. In Q1 'twenty four, the net sales comp versus Last year was a little bit tough for a couple of reasons. One, we had a specific program last year called the Healthy UN Cap for Quest At a very large mass retailer that we are not repeating this year.

Speaker 3

Secondly, Atkins RTD bonus packs which are a big part of our New Year New You Are going to ship in Q2 this year. They shipped in Q1 last year. And as Jeff alluded to already, we are increasing trade spend in fiscal 2024 on Atkins, particularly in Q1, as we say, stay active really in the eyes of the retailer. So Q1 sales is only going to increase in the low single digits. On the flip side, We expect that impact to reverse in Q2.

Speaker 3

Q2 last year had flat growth. Therefore, Q2 this year, we expect net sales growth to be at Higher end of our algorithm of 4% to 6%. So at the end of Q1 consumption and sales should largely be in line just to flip between Q1 and Q2.

Speaker 7

Thank you. That's very helpful. I also just wanted to dig into a bit More on how you plan to capitalize on the growth in GLP-one drugs. What were the findings of the study that you conducted? And how are you thinking about The role that each Atkins and Quest can play in targeting this consumer.

Speaker 2

Yes. When we believe Based on our research, which I'll talk about that the GLP-one drug is higher rate significant tailwind for both businesses. Over the past 3 months, we conducted a lot of proprietary research with consumers on the drug to understand the impact they were having. What we saw is, yes, there's a reduced appetite, but it's especially focused on less healthy products. And what we found is that consumers on the drugs were eating and seeking smaller healthy meals and snacks, Especially high protein products, because they still need to get nutrition they need.

Speaker 2

So through our research, what we found For both Axon's and Questwick, opportunities for these brands to be an excellent companion when consumers are on the products. And our research found that by far the majority of consumers taking the drugs don't plan to stay on them. So They still want to hold on to the gains. And what we found in our research is our products are an excellent off ramp as well. So We see this as a significant long term opportunity.

Speaker 2

We're clearly still in the early innings of these drugs and their adoption. But we wanted to get a jump start on it. We've worked with Several external partners to build a sizable addressable audience of consumers who are either interested in or on the drugs, And we plan to deliver them targeted communication, brand messaging, offers, etcetera, again, about how our products can be a perfect Companion when you're on the drug and an off ramp. Again, we're still in the early innings of this and the campaign that we will bring to market We'll deploy in the next quarter, but we see this as a long term potential. And as advocates of Weight wellness, we think it's terrific that consumers have another tool in their arsenal.

Speaker 2

And it's just going to bring additional focus to weight loss, Particularly on actions, which is where the brain plays.

Speaker 7

Thank you. Maybe if I could just sneak in one more. So you

Operator

Thank you. Our next question comes from the line of Matt Smith with Stifel. Please proceed with your question.

Speaker 8

Hi, good morning.

Speaker 1

Jeff, if I could ask

Speaker 8

you, a number of years ago, the Atkins brand, you talked about high loyalty rates And the annual buy rates for existing consumers really being a tailwind to the brand. How do you think about the development of the overall category and the prevalence of new brands And the impact that would have on Atkins as we stand here today, do those metrics naturally move lower over time, but the growth potential and

Speaker 3

Size of the category are larger today and therefore,

Speaker 8

it may not be a negative to the brand or do you expect to get back to those high loyalty and repeat rates?

Speaker 2

Yes. As I said in the remarks, since coming on to the business, dive very deep on Atkins, A lot of research with consumers, a lot of analytics on the business. And That research to me just reaffirms the opportunity this business has. It is so uniquely positioned Again, an opportunity that is significant. As I said, 80% of consumers want to lose or maintain weight And Atkins is seen as a trusted leader in low carb and low sugar solutions.

Speaker 2

So The long term potential of this business is significant. What I talked about was we had some executional missteps That has impacted some of those metrics by rate, for example. When you're not bringing really great innovation, when You've got an executional misstep with a large club customer that's going to show up in those numbers. It's fundamentally When we fix those and those fixes are in market and when we continue to support the business with marketing, Focused on talking to core users as well as some of the skeptics. We believe these metrics will start to turn around.

Speaker 2

And then you have, for the last question, the additional interest in weight management that is just going to drive additional interest in this brand. So the slight decline we're seeing in some of those metrics right now, you've got to look at those and say A big driver of the impact we're seeing is the commercial misstep. We're fixing it. We're committed to the long term growth of this business, which We're doubling down, increasing marketing, bringing new innovation to market, working on packaging and those metrics, Very confident. We'll start to turn very quickly in the right direction.

Speaker 3

Just a quick add on there, Matt. If you take a step back, the Atkins Consumer has been a very loyal consumer over the years. We've seen that through the modeling that we've done. We've mentioned before, we've seen a slight Increase in buy rate over the last X period of time, principally because of the probably the pricing aspect for that thing. But the buy rate on retained users continues So we'll see that get better as Jeff said with all the things we're doing in market, but I think it continues to be a strength of the brand.

Speaker 8

Thank you, Jeff and Sean. That was very helpful. I can leave it there and pass it on.

Speaker 2

Thank you.

Operator

Thank you. Our next question comes from the line of Jim Celera with Stephens Inc. Please proceed with your question.

Speaker 2

Hi, guys. Good morning. Thanks for taking our question.

Speaker 6

Jeff, I wanted to ask, you gave some good detail and appreciate on kind of the Atkins revitalization. When you're having these conversations with your retail partners, are there certain metrics that they want to see, whether it's from the existing Atkins on shelf presence Or maybe in terms of like new product innovation for you guys to win the distribution back? And any color you could offer on that would be helpful.

Speaker 2

Yes, sure. I just want to just your last point first, Ed Sheer distribution is extremely strong right now. So that hasn't been an issue for us. I have been on the road. I've met with every retailer Many multiple times since joining the company and I've had conversations about Atkins And I've been candid about some of our commercial mistakes, which I think I've appreciated.

Speaker 2

But those conversations have Every time gone to the importance of the Dwight Management category and how we are A clear leader in that category and they want us to win. They are extremely aware As I've talked about, of the size, the 80% want to lose weight, maintain weight, and that This is an important job for consumers that we need to support, and they are committed to Atkins long term health. They also when you talk to them, to them it's all about incrementality and that's what Atkins brings to the category particularly with its high buy rate. So in those conversations, I've laid out our 6 point plan to revitalize the brand. They're excited about it.

Speaker 2

They're giving us the time. They're giving us the support. And they know They look at this category in relation to the rest of the store. They see what is how it's performing today and they see Potential, we've talked about doubling it over the next 5 to 7 years, and they know that Atkins is a critical component of that plan. Very, very positive conversations with retailers.

Speaker 6

Okay, great. That's helpful. And if I could sneak a follow-up in for Sean, High quality problem to have, but as we look forward, you guys don't really have any need to pay down debt. You don't have any CapEx really expenditures. As we're modeling the cash build, I mean, should we think of like share repo as a use of some of the excess cash you guys build?

Speaker 6

Should we just expect cash to build on the balance sheet? Does that get put back into maybe the R and D pipeline or some advertising? Just any way we can think about that moving forward?

Speaker 3

Yes. I mean, we have first of all, I'll take a step back. We love our model. We love the cash it You guys know that as you look at our results overall, this year we'll be continuing that overall. And right now, we're happy to be lower than one time levered, Especially when you think about the fact we were over 4, 4.5 times about 4 years ago with Quest acquisition.

Speaker 3

So we have a small group that meets Pretty regularly to discuss capital allocation, we evaluate that debt pay down, share buyback and M and A opportunities as they come up. We'll continue to do that in fiscal 2024, but those are certainly the areas that we're looking for from a standpoint of use of the cash.

Speaker 2

Okay, great. Thanks, guys. I'll pass on. Yes. Thank you.

Operator

Thank you. Our next question comes from the line of John Anderson with William Blair. Please proceed with your question.

Speaker 9

Good morning, John.

Speaker 3

Good morning. Good morning.

Speaker 9

I have a question on Quest. The consumption obviously remains Quite strong there, running up mid-20s. I'm wondering if you could talk a little bit about The composition of that growth that you're seeing and the composition going forward, so you referenced the household penetration rate relatively modest, I think at 15%. When we think about that kind of mid-20s consumption, how much of that is household penetration gain? How much Is buy rate among existing users?

Speaker 9

And can you talk a little bit more about your plan to maintain strong consumption in fiscal 2024 on the Quest brand? Thanks.

Speaker 2

Yes, absolutely. When we acquired Quest, it was primarily a bar business. I think Buyers are about 80% of the business. Today, buyers are just a little bit over 50%. And that is because in the last few years, we've We've successfully launched new products and formats that have really propelled the business.

Speaker 2

For example, in fiscal 2024, We anticipate our salty snack platform to be over $200,000,000 in net sales, 25 percent of the Quest portfolio. But to your question, importantly, this innovation has proven to be highly incremental to the brand and very importantly to the category. For example, 30% of new users to the brand have come from chips. But critically, why we've been growing chips, the Baa business Ground 22% year to date. So Quest has proven it's one of the few brands that can successfully extend across multiple product forms.

Speaker 2

And I'll go a step further. Our consumers are demanding it and our retailers are asking for it and that's the opportunity. I've spent a lot of time with Quest Consumers over the last 6 months. So then Quest is a lifestyle brand, sort of brilliant hack of sorts. It's not just a product brand and that's why they're demanding us to bring out additional formats that we're focused on.

Speaker 2

So my what I would suggest is if you think about a large and perhaps growing carbohydrate dense snack where we can flip the macros, You can probably bet we're looking at it. We've seen again that innovation to be highly incremental, brings in new users. But very importantly, retailers see it too. It's bringing in new category users. And that's why we're getting the support of retailers.

Speaker 2

And then I guess lastly, you talked about where we're going with the brand. Yes, we'll continue to push out on innovation. There's still distribution, White space, I think Jason made a reference to that. But the next arrow we're pulling out in the Quest River is marketing. It's talked about that the awareness is relatively low versus most brands.

Speaker 2

There's an opportunity to drive additional awareness and household penetration behind a focused And world class marketing campaign that we'll be rolling out in the New Year. So those are the 3 drivers of Quest, But I would just underscore this is an incremental brand driving incremental consumers. Yes. I mean,

Speaker 3

I think if I

Speaker 2

take a step back,

Speaker 3

if you look at the 2023 growth, we've had tremendous growth. I mean, Obviously, we benefited like everyone else from price as we go through that, which we're not going to have this year. We're really excited about the opportunity to We continue to grow that brand in the mid teens with all the growth being volume overall. So when we did the acquisition way back when, one of the There we saw with distribution. We saw that build this year.

Speaker 3

We're going to continue to see that going forward. But I think the strength of that brand has It's been recognized by retailers and there's really a growth engine for them as they look at that category overall.

Speaker 9

Thanks so much. I'll leave it at that.

Speaker 10

Thank you.

Operator

Thank you. Our next question comes from the line of Rob Dickerson with Jefferies. Please proceed with your question.

Speaker 11

Great. Thanks so much. I just wanted to ask, I guess, a little bit about magnitude of kind of The new marketing campaign, right? I mean, if we go back, kind of historically with simply, kind of as it I had de SPAC ed and part of the platform was to kind of run kind of a higher relative rate of marketing Brand push, right, low CapEx model, solid top line growth. If we go back even to the fiscal 2017, 2018 years, Your selling and marketing expenses were almost at 14%.

Speaker 11

In 23%, we were sub 10%. And then I also understand over time as you can kind of recapture some of this gross margin, I would assume that the level of that marketing Stepping up, you're speaking to a new campaign. We have a new brand ambassador. So I'm just trying to get a sense of maybe firstly, if we think about fiscal 2024, Like how much should we be thinking selling and marketing would actually be up year over year or as a percentage of sales? And then maybe just any incremental color on kind of what material gross margin expansion kind of implies in fiscal 2024.

Speaker 11

And that's it.

Speaker 3

Thanks so much. Yes. So I think what you're asking Just basically how much we're stepping up marketing in fiscal 2024. We need to take a step back. We to your point, we We had always tried to our model, if you will, was get about 10% marketing spend.

Speaker 3

We're probably closer to 8% of that in 2023. We want to be closer to 9 to look up north of that in 2024. So we're going to see meaningful increases in marketing. We plan for Mid teen growth in marketing for fiscal 2024 versus where we are today. So that's the plan we have.

Speaker 3

And as Jeff said, it's on both brands. Probably see more of that for Atkins in the first half of the year. And then as we have the new advertising for Quest, we'll see that pop in the second half of the year. So I don't know if I answered your question or not, but That was what I think you asked. Yes.

Speaker 3

That's good enough.

Speaker 11

And then just on gross margin, Thinking of magnitude of expansion potential in

Speaker 2

2024? For gross margin? Yes.

Speaker 3

First of all, we're pretty confident in delivering the gross margin meaningfully in fiscal 2024. For the full year, we think gross margin of 38% is Very attainable, driven by commodity decreases across most of our key ingredients. A couple of caveats there. First, that's based on how the world is today. Obviously, we're not 100% covered.

Speaker 3

So if something rattles the market, it's subject to change. You see a little bit of that with COCO right now. 2nd, we're not going to drop all the favorability to bottom line. We talked about that already. We're reinvesting a big piece of that back into the business.

Speaker 3

Marketing will be growing in the mid teens, both brands and we're reinvesting some favorability back into trade for Atkins, Take a look at the first half of the year as we want to make sure we stay active in the eyes of retailers and consumers until the revitalization plan kind of bears out. So I I don't think it's a flavor of what we're looking

Speaker 2

for.

Speaker 11

All right. Super. Thank you.

Speaker 3

Sure.

Operator

Thank you. Our next question comes from the line of Matt McGinley with Needham and Company. Please proceed with your question.

Speaker 6

Great. Thank you. As a follow-up on that gross margin, can you help frame your expectations on that cadence of gross margin improvement this year? Do you expect those gains to be more Front half weighted or back half weighted. And you made the mention around higher levels of marketing.

Speaker 6

I guess, can you kind of tease out like what How much higher levels of promotion do you expect? And how much of that will be offset by the gains from input deflation in this year?

Speaker 3

So in terms of sequential for gross margin, I think you're going to see more growth in the second half of the year than the first half of the year. Just if you take a step back, if you look at it historically, Q2 as we have lower gross margin with higher trade spend in the quarter New Year, New You. Additionally, we put a little more of that trade spend in Q1 of this year to really jump start the business as I mentioned. So You're going to see gross margin improve in Q1 versus Q1 last year. It should be about the same as Q4.

Speaker 3

So with Q1, it will be about the same as Q4 in terms of gross margin. And then you see pretty significant gross margin expansion in Q3 3 in Q4 this year. So a lot of that is, I'd say, back half loaded. As it relates to trade, we're up. I mean, we're not drastically up in spend overall.

Speaker 3

We're just really trying to make sure that we support the brand in the marketplace as we get through the revitalization. So A little bit of an increase there and effectively what we did was we typically do promotional plans with our retailers December and in January to support the resets as well as the New Year and New You. We've added some more spending in October February this year to Support the brand a little bit more and get better growth on those timeframes. So I don't know if I answered your question or not, but that's directionally what we're doing.

Speaker 6

You did. I appreciate it. Thank you very much.

Speaker 3

Sure.

Operator

Thank you. Ladies and gentlemen, our final question this morning comes from the line of Stephen Powers with Deutsche Bank. Please proceed

Speaker 10

Hey, thanks for fitting me in here. I guess just listening to the Atkins' conversation throughout the call. I think it comes across as you've got a pretty clear View of what the deficiencies have been and a pretty clear vision of what needs to be done. I guess The question I'm left with is there anything, Jeff, as you've gone through the review of that brand that you are there open questions that you still have? Are there things that You still don't know that you'd like to know to have just even a higher degree of confidence on the overall revitalization?

Speaker 2

That's a fair question. I mean, no, I have a lot of confidence In the plan that we've developed, which is based on what was very comprehensive research on the business, talking to consumers, advanced analytics, So there's a tremendous amount of confidence we have in the plan. We know that the opportunities in front of To in the near term accelerate bar innovation to market, but ensure we build a multiyear pipeline. We've identified opportunities to upgrade the product and hopefully deliver superior shelf life. We're focused in on specific customers.

Speaker 2

We've talked a lot about the club channels, which is an opportunity. That fix is already shipping to market. We've talked about doubling down on e commerce. And then a little more long term, how do we modernize the brand? How do we enhance the brand experience?

Speaker 2

You've seen us go out initially with new advertising supported by expanded reach. We've got a packaging refresh coming, which I'm So you understand takes a little longer. The series of initiatives we have will come to market sequentially over the next 12 to 18 months. And then we also have the weight management drug, which our research strongly shows this is a tailwind for the business, but that's in the early innings. So as we think about Atkins, we have a goal to stabilize the brand.

Speaker 2

And then by the back half of this fiscal, you'll start to see improvement. And underpinning it all, I've put a new leadership team in place to drive enhanced accountability and execution. So I have a tremendous amount of confidence. And then it's all wrapped up in the opportunity. This brand is so sharply positioned against a need that is only growing.

Speaker 2

And it's our job to ensure we can deliver its full potential. So a lot of confidence.

Speaker 10

Great. Thank you so much. I know we've gone an hour, so I'll leave it there. Thank you.

Speaker 2

Yes. I just want to thank everyone for the participation on today's call. We look forward to updating you on our Q1 results in January. So

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Simply Good Foods Q4 2023
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