Simply Good Foods Q3 2023 Earnings Call Transcript

Quartr
Provided by Quartr
June 29, 2023

There are 8 speakers on the call.

Operator

Good morning, and welcome to Simply Good Foods Company Fiscal Third 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. This time, I would now like to hand the call over to Mark Bergarian, Vice President of Investor Relations.

Operator

Thank you. You may begin.

Speaker 1

Thank you, operator. Good morning. I'm pleased to welcome you into Simply Good Foods Company earnings call for the fiscal Q3 ended May 27, 2023. Joe Scalzo, CEO Jeff Tanner, President, COO and CEO Elect and Sean Mara, CFO, will provide you with an overview of results, which will then be followed by a Q and A of the company's website at www.simplygoodfoodscompany.com. This call is being webcast and an archive of today's remarks will also be available.

Speaker 1

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 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.

Speaker 1

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 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 Joe Scalzo, Chief Executive Officer.

Speaker 2

Thank you, Mark. Good morning

Speaker 3

and thank all of you for joining us. Today, I'll recap the company's 3rd quarter results and Jeff will provide you with some perspective on the performance of our brands. Then Sean will discuss our financial results in a little bit more detail before we wrap it up with a discussion of our outlook as well as taking your questions. Moving on to the Q3 results, retail takeaway and our overall financial performance were greater than our expectations. Simply Good Foods' 3rd quarter point of sale in the combined U.

Speaker 3

S. Measured and unmeasured channels increased about 11%. As expected, retail takeaway growth outpaced Q3 net sales growth of 2.6%, principally due to the prior year retail customer inventory build. Sean will provide more details on the difference between net sales and point of sale growth in a bit. Net sales growth was driven by North American performance as international business sales were about the same as last year.

Speaker 3

Quest momentum continued resulting in net sales increase of about 9%. Q3, gross margin was 36.7% and exceeded our estimate as input costs moderated versus our forecast. Gross margin declined 80 basis points compared to last year as ingredient and packaging costs were higher than the year ago period. Encouragingly and as we expected, the magnitude of these costs increases eased substantially from those in the first half of the year. Adjusted EBITDA in the 3rd quarter was $66,600,000 versus $63,300,000 in the year ago period.

Speaker 3

The $3,300,000 increase was greater than our forecast due to the better than expected net sales and gross margin performance as well as good SG and A cost control. This provides us with some flexibility to make additional investments as we move into the Q4. Now I'd like to pause here to just say thank you. It's been a pleasure to lead the company. I'm so proud of our team and everything that we've accomplished during the past 6 years.

Speaker 3

I've always appreciated the insights and the questions that you provided In all of the various calls and meetings that I participated with you, you've made me a better leader and the Simply Good Foods Company a better company. So thank you. As we announced in January, Jeff Tanner will become President and CEO on July 7, and I'm pleased to be staying on as Executive Vice Chair of the Board. I know you have all heard me say more than a few times that I love this category and I love the hand that I've gotten to play as CEO of Simply Good Foods. Well, I can think of no better person to take over this hand than Jeff.

Speaker 3

I've gotten to know him better over the past few months. He has an infectious enthusiasm for our company, for our brands and for driving growth. He brings passion and ideas to the business that only make us a better company. I know many of you have met Jeff and know that he's an experienced leader with superb marketing and commercial capabilities. So now let me turn the call over to him to provide you a summary of Q3 brand performance and some of his initial observations of the company.

Speaker 3

Jeff?

Speaker 4

Thank you, Joe, and good morning to everybody. Simply Good Foods' year to date retail takeaway in measured channels increased 11.6%, driven by both pricing and volume. Similar to the last few quarters, Total unmeasured channel growth was additive to total company POS, resulting in combined measured and unmeasured channel growth about 13%. Atkins and Quest combined measured and unmeasured channel growth was about 2% 24%, respectively. Let me now turn to Quest Q3 performance.

Speaker 4

Retail takeaway was strong, driven by an increase in household penetration and buy rates. In Q3, measured and unmeasured channel retail takeaway was similar, about 25%. Quest Q3 POS at Amazon increased about 29% versus the year ago period. What I like It's how balanced the growth continues to be on the brand, balanced across product forms and retail channels as well as balanced across key drivers, namely distribution, velocity and innovation. Despite the size of the business and growth we've seen, outside penetration is only 15% and aided brand awareness measured channel Q3 POS growth of bars and snacks were both about 25%.

Speaker 4

Quest Bars growth was solid across the portfolio. Quest Snacks momentum continued with growth similar the last quarter across all forms. The star here is chips, nearly half of the Quest Snacks business, which continues to be a meaningful driver of growth. Snacks represents nearly 45% of total Quest measured channel retail sales, reinforcing the opportunity for the brand to expand into adjacent categories, dayparts and usage occasions. Turning to Atkins.

Speaker 4

Q3 retail takeaway and the combined measured and unmeasured channels As expected, declined 2%. POS softness was primarily due to incremental programming in the year ago period that we did not repeat this year and a lack of innovation on our BAR business that led to TDP declines on this form over the last year. As a result in measured channels, Atkins Q3 POS was off 3.4%. Strength at a large mass retail customer and at Amazon, which was up 16%, was offset by declines across the broader retail landscape. Moving on to performance by forms, games and shakes and meal bars, about 60 At the end of the quarter, we expect to be in the range of 2% to 3% of Adkins retail sales was offset by declines in snack bars and Indulge Confections.

Speaker 4

Recall, as discussed the last couple of quarters, the underperformance of our snack bar business was driven by a lack of innovation That also led to distribution losses. Year to date snack TDPs are off about 25%. Year to date total buyers are about the same as in the year ago period, resulting in flat household penetration over the last 52 weeks. Performance in the 3rd quarter slowed versus the first half of the year, largely due to the aforementioned snack bar distribution losses. Getting Atkins back to its full potential by form and channel is my number one focus as the incoming CEO And work here is already underway.

Speaker 4

In the near term, we're actively working to shore up our innovation and regain TDPs. We'll continue to focus on accelerating our e commerce success with the right pack sizes, and we're also working with each of our retail customers to strengthen programming. Concurrently, as you would expect, we are committed to ensuring Atkins remains A vibrant culturally relevant brand that is built for today and tomorrow's consumers. The consumer demand and need for weight wellness has never been greater. And low carb, low sugar, weight wellness is broadly and well understood as a highly effective solution.

Speaker 4

Finally, Atkins has 98% brand awareness. Given the brand's unique positioning in the space, Q3, we'll look at opportunities and levers to ensure and strengthen the brand's long term growth. We expect Accum's Q4 retail takeaway to be better than Q3, but it will not be where we want it to be. The aforementioned work underway will take some time, But you have my commitment that we'll make the investments necessary to accelerate growth and to get actions back to full potential. Now shifting gears before I turn it over to Sean, I wanted to provide you with some of my early observations on the company.

Speaker 4

Over the last 3 months, I've dived into the business, spending time with Joe, the leadership team, employees, our Board of Directors, top customers and suppliers. I don't officially transition to the CEO role for about a week. However, I wanted to share my observations of the opportunities I'll focus on for continued delivery of top tier shareholder value. You'll see no major deviations from the strategy Joe and team have been executing against, rather a doubling down and acceleration of key elements. The first pillar is accelerating category growth.

Speaker 4

Most center store categories in North America are mature with household penetration in the high 80s with Legacy Brands. Hence, it's mostly a share gain. The nutritional snacking category in comparison is a virtual teenager, outside penetration is in the 50s and there's the potential to continue to bring new product forms like salty snacks to further expand penetration and buy rate. In addition, there's the twin tailwinds Consumers wanting to live a healthier lifestyle and the relentless growth in snacking now half of all eating occasions. I think this category will be twice its current size and I'm committed to working with my team and customers to get it there as fast as we can.

Speaker 4

I don't know the exact sequence or pacing, but the opportunity is there. Bricks and mortar, e commerce retailers, they see it too, And we'll be working closely with them to build this future together, especially in how we create more category space. The second pillar is driving top tier growth, starting with Quest. With nearly $700,000,000 in net sales by year end fiscal 2023, Quest has approximately doubled since the acquisition and continues to disproportionately win with Gen X and Millennials. Despite its size, we see a very long runway of growth.

Speaker 4

So what will this look like? 1st, continuing to press on innovation, close in and further out and expanding distribution. 2nd, a step change in marketing. Brand awareness is extremely low given the brand size, which speaks to the opportunity for increased media investment, broader reach and iconic creative. Turning to Atkins, with any brands, you need to pay close attention to short term performance and to long term brand health.

Speaker 4

As mentioned in the short term, we will strengthen the brand through addressing our lack of innovation on bars, improved merchandising execution and doubling down on e commerce. And currently though, we're working to ensure the brand remains fresh and culturally relevant for today and tomorrow's consumers. The first phase of this is talking with consumers, customers and other stakeholders, which will then inform us of the opportunities and levers to pull. The brand is iconic, enjoys tremendous awareness and is uniquely positioned at a time when the need for weight wellness has never been greater. Plus, the products are absolutely delicious.

Speaker 4

I'm excited to work with the team to accelerate Atkin's growth so that the brand can achieve its full potential. The 3rd pillar is to fuel margin and brand reinvestment. Recently, the CPG industry has operated under a confluence of challenges that have stressed how we operate the business. Simply Good Foods has performed well, but as in every business, there are opportunities to improve execution. I will work with Sean to enhance our continuous improvement mindset.

Speaker 4

Very specifically, We are committed to sequential gross margin improvement. This will ensure advertising and marketing gets back to our target level. The final pillar is Simply Good Foods as a platform for scaled growth. We have a bold mission for health and wellness and a bold vision for the category supported by scaled go to market capabilities. The end of the call, we like the profile of our P and L and our profitability and asset light model results in strong cash generation.

Speaker 4

This provides us with the flexibility to opportunistically participate in M and A or share buybacks. Now, we have a tremendous organic growth runway in front of us, which is where we'll be focused. However, if the asset is right and the price is right, M and A has a role and we would consider higher leverage. I want to close my prepared remarks by thanking and recognizing Joe. Very few people have the distinction of establishing large publicly traded companies, especially in the food and beverage space and then delivering outsized returns year after year.

Speaker 4

I don't mind admitting that Joe leaves some pretty large shoes to fill. The good news for me is that Joe isn't going anywhere and will transition to Executive Vice Chair on our Board. Now I'll turn the call over to Sean, who'll provide you with some additional financial details.

Speaker 2

Thank you, Jeff. Good morning, everyone. I will begin with an overview of our net sales. Total Simply Good Foods' 3rd quarter net sales of $324,800,000 increased 2.6% versus the year ago period. Looking at the Q3 drivers of growth, Net price realization was about 7.3 percentage points and volume was off about 4.6 percentage points.

Speaker 2

As Joe stated earlier, retail takeaway growth outpaced the net sales change. On the bottom of this slide, we attempt to reconcile Q3 POS of percent to Q3 North America net sales growth of 3%. The biggest driver is in the prior year period, As last year, retailers did not deplete inventory in Q3 as they would normally do. As we've discussed in our last two calls last year, Retailers increased their inventory levels to address supply chain challenges in the first half of the fiscal year and help these inventory levels through Q3 of fiscal 2022. Retailers largely depleted this inventory in Q4 of fiscal 2022 and we exited the year with more normal retail inventory levels.

Speaker 2

As I've said before, last year was atypical. As normally retailers build a week or so of inventory in the first half of the fiscal year anticipation of New Year, New You and then largely deplete that inventory build in the Q3. We saw the return to historical operating norms this year. As a result, in the Q3 of fiscal 2023, we estimate the change in retail inventory compared to last year to be about an 8 percentage point headwind. Moving on to other P and L items for Q3.

Speaker 2

Gross profit was $119,200,000 an increase of $600,000 from the year ago period, resulting in gross margin of 36.7%. The 80 basis points decline versus the year ago period was primarily due to higher ingredient and packaging costs. This was slightly better than our estimate due to input cost moderation versus our forecast. Net income was $35,400,000 versus 38 $8,000,000 last year, adjusted EBITDA was $66,600,000 an increase of $3,300,000 from the year ago period. Selling and marketing expenses were $30,200,000 versus $32,300,000 a decline of 6.7% largely due to the timing of GAAP G and A expense was $30,500,000 an increase of $3,800,000 versus last year, primarily due to fees associated with the term loan B reprice and maturity extension and executive transition costs.

Speaker 2

Excluding these costs as well as stock based compensation, G and A declined $200,000 to $23,300,000 For the full fiscal year 2023, we expect selling, marketing and G and A expense to be slightly down versus the year ago period. Moving to other items in the P and L, net interest income and interest expense increased $2,400,000 to $7,200,000 Due to higher variable interest rates related to the term loan and our tax rate in Q3 was about 24.8%, about 170 basis points higher than last year. We anticipate the full year fiscal 2023 tax rate to be in the 24% to 25% range. Turning to EPS. 3rd quarter reported EPS was $0.35 per share diluted compared to $0.38 per share diluted for the comparable period of 2022.

Speaker 2

In fiscal Q3 2023, Appreciation and amortization expense was about $5,000,000 and similar to the year ago period. Stock based compensation was $4,100,000 Fees associated with the term loan B repriced maturity extension were $2,400,000 and executive transition costs were $700,000 Adjusted diluted EPS, which excludes these items, was $0.44 the same as 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.

Speaker 2

As of May 27, 2023, the company had cash of $68,800,000 Year to date cash flow from operation was $110,400,000 an increase of about 64% versus the year ago period. In Q3, the company repaid $40,000,000 of its term loan debt And at the end of the Q3, the outstanding principal balance was $325,000,000 resulting in a trailing 12 month net debt to adjusted EBITDA ratio of 1.1 times. We anticipate net interest expense for the year to be about $28,000,000 to $30,000,000 including non cash amortization expense related to deferred financing fees. Year to date capital expenditures and depreciation were $10,100,000 $15,000,000 respectively. Capital expenditures included an investment of about $8,000,000 to secure specialized equipment at a co manufacturer.

Speaker 2

In summary, 3rd quarter results were 4th quarter POS is off to a good start. Through the 1st 3 weeks of the quarter, retail takeaway increased about 11%. The recessionary economy continues to be a concern as shopper traffic shifts away from grocery to more value oriented channels. As we get late into our Q4, we will lap last year's price increase. As such, we expect our retail takeaway growth will moderate slightly from current levels over the remainder of the year.

Speaker 2

Net sales will outpace POS growth in Q4 as we lap a significant retail customer inventory reduction in the year ago period. The overall cost environment is improving and we're on a path for gross margin recovery. Gross margin is expected to sequentially improve again in the Q4 from the Q3 and should continue to improve as we move into fiscal 2024. We will continue to execute against our priorities and remain committed to doing the right thing over the near and long term for our brands, customers and consumers. Now to wrap up,

Speaker 4

the company has

Speaker 2

a portfolio of brands aligned with consumer megatrends of both health and wellness, convenience and on the go nutrition. As such, despite the challenging economic environment, the company believes it is well positioned to deliver on its objectives. Therefore, we anticipate the following in fiscal 2023. We reaffirm a net sales increase slightly greater than our 4% to 6% long term algorithm, gross margin will decline versus last year, although at a lower rate than fiscal 2022. Full year fiscal 2023 adjusted EBITDA will increase, but slightly less than the net sales growth rate and adjusted diluted EPS Retail takeaway growth in our category and our brands remains solid.

Speaker 2

As such, we are excited about our near and long term growth prospects We'll continue to execute against our strategies as a path to increase shareholder value. We appreciate everybody's interest in our company and we are now available to take questions.

Operator

Our first question comes from the line of Matt Smith with Stifel. Please proceed with your question.

Speaker 2

Hi, good morning.

Speaker 3

Good morning. Hey, Matt.

Speaker 4

I wanted to ask about the performance Promotional activity in the prior year. But could you talk about the path to recovery there? There was a comment about near term priorities to shore up the brand, is that reliant on shelf resets or are there things and initiatives you can take on to improve the sequential performance there ahead of the fall shelf resets?

Speaker 3

Yes. I'll start and then I'll turn it over to Jeff to Kind of talk about how he sees it playing out from a timing standpoint. As we've communicated, I think, on the last few calls, The slowdown in the Atkins business has been primarily driven by the loss of distribution points in particular On our snack bar business that occurred about a year ago and the losses were pretty significant somewhere around 25% TDP loss, we lost almost half the items that we had in the lineup. And so we've been accelerating the innovation pipeline to get bars back into distribution. We As we are executing in the most recent shelf sets, we have one item that is building distribution as we speak.

Speaker 3

We'll start lapping some of the TDP losses. So We'll start seeing some of the TDP losses just because we're lapping last year's losses start to ease. But the true recovery on it will be our ability to get back kind of the full distribution kind of where we started about a year ago. And I'll talk to Jeff because I know Jeff's been knee deep in the details of the innovation pipeline. I'll turn it over to him For some call commentary.

Speaker 4

Yes. Thanks. Thanks, Joe, and thanks for the question. Look, I look at Atkins, located in two time periods, strengthening the business in the short run and then working to strengthen it For the long term, and as Joe mentioned, in the short run, we're very focused on accelerating our innovation to market, working with the teams, working with them most of yesterday, and I'm pleased with the new innovation pipeline on bars, as you know though, it does take time, but sequentially over the coming launch windows, you'll see us build that distribution back. In addition, you'll see us work with customers to strength in our merchandising and we also see a near term opportunity to accelerate our e commerce business.

Speaker 4

As you look a little further afield, I think as you would expect, and as I mentioned in the scripted remarks, we'll be taking a step back on the brand, talking to consumers and other stakeholders and determining how we can ensure This brand delivers on the full potential that is clearly evident given the need for white wellness And how well positioned this brand is. That takes a little bit longer and we're looking at different levers, but that's how I would think about how we're approaching Atkins, Okay. Thank you for that. I can pass it on now.

Speaker 5

Thank you.

Operator

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

Speaker 6

Good morning. Thanks for the question.

Speaker 3

Hey, John.

Speaker 2

Good morning, John.

Speaker 6

Good morning. Good morning. Maybe a follow-up on Matt's Just sticking with Atkins, it sounds Jeff, it sounds as though you're taking, I guess, moving the timeframe back for recovery in the brand. And It's been through a lot the last couple of years with the mobility during COVID and some of the missteps on innovation and merchandising. But I'm curious, like To what extent is just a simple elasticity a factor here?

Speaker 6

I mean, this is a category where we're seeing more brands, more formats. It seems as though elasticities vary quite a bit between the brands and the formats, so do you have any data or insights that would suggest elasticity has not been a material factor here and it's not something as simple as just the price point, given the Atkins consumer relative to a Quest consumer or somebody else who may be more, I don't know, loyal, but just

Speaker 3

Yes, I think great question. And I'll start and I'll turn it over to Jeff. So if you just look at the brand From a product standpoint, as we've since kind of last Labor Day when people started going back to work, we saw A real shift in what people were buying on the brand and I'll get to elasticities once I touch on this. So shakes end meal bars, which tend to be meal replacement on the go meal replacement, somewhat driven by Kind of being on the go and being back at work, we've seen those businesses pick up. Where we've seen the slowdown has been in kind of the more snackier portion of the portfolio, snack bars and adult.

Speaker 3

And they have in fact been slightly more Dick in their response to the price increase. So we've tactically done some spending back on the business. So We'll get a better sense of how that's going to play out because we start lapping that price increase in July and August and we'll see whether how consumers respond to that. But we have seen the snacker portion of the portfolio tends to be the last the thing in the basket, last thing purchased and the first thing out when people feel a little squeezed from a financial standpoint. We have seen that behavior in the confection business and the snack bar business.

Speaker 3

And actually even as part of the Quest business, we've seen some Confections and Chip, since more great slightly greater sensitivity to the pricing than kind of the more main Got a meal replacement or full snack forms. Anything to add, Jeff?

Speaker 4

Yes. I mean, all I would probably say is taking a step back year to date POS on Atkins is up 2%. But you're right, we're not immune from elasticity like any other brands. But to Joe's point, when you disaggregate the business, you're seeing growth in RCDs, you've seen growth in meal buzz and where you're seeing the disproportionate impact as in, as Joe said, the snacking part of the business, which is where we've lost distribution and not innovated as we should have. So yes, I think you're absolutely right, elasticity is a factor.

Speaker 4

Disaggregating the business, you can see where the business has strength, where we have gaps and the plans we have put we're putting in place to solidify where we're seeing more of the impact.

Speaker 6

Okay. Okay. Thank you, Jeff. Thanks, Joe.

Speaker 4

Good day. Thanks, John.

Operator

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

Speaker 7

Good morning. Good morning. You've highlighted the initiatives To improve Atkins innovation, can you talk about what you see as some of the gaps in the product portfolio and where you think the innovation has lagged? I guess just in terms of the opportunity to improve innovation on bars versus Innovation on some of the snackier formats, which you've seen some elasticity on, but I guess how are you thinking about the balance of where the innovation is

Speaker 3

Yes. Let me do one thing first. I think Jeff started to do this. I just want to remind the callers that our POS Year to date is up. Total company is up 12%, 13%, Right.

Speaker 3

So we're zooming in on one piece of the business and one form of the business. But I want to highlight continue to show strong growth. So kind of, Pam, how to think about Support where the gaps in the portfolio were in the innovation pipeline is it was kind of a confluence of 2 factors a year ago. Factor number 1 was, as I mentioned from the previous call, we saw heightened sensitivities to our first price Crease, which would have been in October of 2021, we saw some velocity slowdowns In our snacking portfolio, so when those shelf resets were starting in September, we had some items in our snack new items in, those items fell out. And just to give you some context, year to date, Atkins distribution is up 6%, 7% Nationally.

Speaker 3

So it's not like we've lost shelf space. We've actually lost items in a particular part of the portfolio. That trade out has been actually detrimental to the brand. And then the second factor was the innovation in any innovation pipeline, you're putting ideas at the top of the funnel, eventually products commercialize out the bottom. The rate of success on those commercializations was below what we normally would have experienced.

Speaker 3

So the combination of Losing more items than what we anticipated and not as many items come falling down to commercialization led to the gap. In roughly the gap, let's call it 4 to 5 items lost in distribution spring of last year. That takes time to rebuild that. Jeff and the team are on it. It will happen as we play out the next fiscal year The resets in the spring, fall and next spring and we're pretty confident that we'll rebuild the snacking portfolio and the brand and the brand will get back to the kind of growth we wanted to have.

Speaker 4

The only build for me would be, as I mentioned in the scripted comments, I've been on the road talking with all our top retailers. They love this category and they really love Atkins. And so we expect we're going to get a lot of support when we bring these new items to market over the sequential launch windows.

Speaker 7

Okay. Yes, I was just curious if the innovation is going to be around flavors or different pack sizes. I guess, How you think about the opportunity to innovate and where you see attractive segment?

Speaker 3

Yes. Look, we'll talk about Jeff will talk about the items in distribution As they're in distribution and starting to produce results, we don't like to talk forward about how we think about innovation.

Speaker 7

Okay, understood. And my other question is just around reinvestment. You talked about how Can you just talk about how you think about that timeline for getting to 10% of sales on marketing and advertising And how you're thinking about spending over the next couple of quarters behind brand building?

Speaker 2

Yes. Let me just piece a lot of pieces of that question. Let me think of piece of my part a little bit. So terms of gross margin, I'm glad we're talking about it because we actually had over delivery this quarter. So we're happy about that, about 30 basis points, forty basis points overall, which is about $1,000,000 not a ton of money overall, but gives us a little bit more flexibility going into the Q4.

Speaker 2

As we look at the Q4 and we look at spending overall, our opportunity we think is to basically take advantage of Some of the things that Jeff talked about in terms of the pillars he wants to spend money on. So we think we're going to use that money to get the favorability to start work on the growth opportunities Jeff talked about in each of those pillars overall. As it relates to fiscal 'twenty 4, I think they're talking about that. I think at a high level, we just started planning for fiscal 'twenty four. So it's pretty early for us to have a discussion about 'twenty four.

Speaker 2

But when we look at that right now, we think sales will be at the high end of our long term algorithm. EBITDA growth will likely be in the high single digits. Couple of things I want to point out though to the group. 1, as it relates to sales, shipments and consumption should be more aligned now that we've left the kind of abnormal fiscal 2022 builds. And as it relates to gross margin, it's a little too early in specifics, but we're going to see the progression from first half to Our second half this year Q3 and Q4 is a good setup for fiscal 2024.

Speaker 2

You're going to see sequential improvement from fiscal 2023 to 2024, not back to full potential, I wouldn't say. We feel really good about the first half gross margin versus this year. And I'll While we expect to get back to the algorithm where EBITDA is greater than sales growth, we're not going to see all the gross margin improvement drop to EBITDA. We're going to invest incrementally in One more point on 2024 just before I forget. Fiscal 2024 is a 53 week year for us.

Speaker 2

So we'll have an extra week. That's about a point in both top and bottom line as you guys start building your models out. So with that, that's kind of how we're thinking about the next I'll turn to Jeff in terms of the Quest investment specifically.

Speaker 4

Yes. I mean, if you take a step back, we continue to be really excited about not just the delivery from Quest, but by its potential consumption up 24% Q3, as I mentioned in the scripted remarks, we think the brand just has a ton of growth the runway in front of it, brand awareness is very low compared to a number of its peers, which suggests that the brand just has continued runway pushing And as I mentioned, what you're going to see is a step change in marketing on the business Because the awareness is low compared to where a brand of this size should be. And so that will be looking at media mix, Creative as well as stepping up our investment on the brand more towards our targeted levels. So we see nothing but runway in front of this brand despite its size and despite the success that it's had.

Speaker 2

Pam, as I answered a lot of pieces to that question, I'm sorry, we got to all of them, is that

Operator

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

Speaker 5

Great. Thanks so much. Maybe just kind of

Speaker 2

like a broader question of

Speaker 5

the category as you speak to, I guess trying to increase overall brand awareness and then just ongoing household penetration upside. I think historically, Right. There's been a lot of commentary around the benefits of being kind of the health and beauty aid, health and beauty area of the store, Especially on the profitability side, maybe competitive dynamics. Just kind of given your background, Jeff, and kind of how you think about especially your comment on center items with that brand awareness. Like Could there be like kind of this, I don't want to say broader rethink of positioning within the store and within channels, But have you thought about almost making it and I'm speaking more specifically to the Actors brand Again, kind of more of a brand, kind of for everyday consumption, maybe almost a little bit away from such a specific kind of legacy weight loss product in Health and Beauty Aids.

Speaker 5

And I just and I also asked that just kind In the framework of, there's a lot of competition, right, within the category because the category has done great and you've helped the category be great. But there's always kind of this ongoing kind of mixing of category positioning between salt, Sweet and salt, snacking indulgence relative to health and protein fortification, etcetera. So very broad question, just kind of Curious how you're thinking about it stepping in.

Speaker 4

Yes. Thanks for the question. It's a good one. As I mentioned, I have been on the road And I've been speaking with retailers and talking to them about our business, but also about category. And as they look at the category, they see the same runway that we do.

Speaker 4

Several factors in there, but certainly the low level of household penetration in the 50s this high 80s percent of store, they also see the twin tailwinds of health and wellness and snacking as driving that. And so when I've talked to them About how we can build this category together, they certainly look at this space as a differentiated opportunity versus the broader center Dore. And that's the opportunity that's in front of us. To your question on where would our brands play in that category, that's what we'll do with them. But I think it's a credit to Joe and the team how they have positions, let's say, Atkins as more of a lifestyle brand versus a big weight management brand.

Speaker 4

And you can see that With the recent commercials of bringing Rob Lowe, etcetera. So on that theme, I agree. Broadening the scope of this category to be more of a lifestyle destination is an opportunity. Retailers see it and we will be working with them combining our joint capabilities and building that out over the years to come.

Speaker 5

Sorry, Craig, very interesting. And before I forget, Joe, always a pleasure. Thank you so much for All of your hard work and diligence and looking forward to staying in touch. And Jeff, good to have you back. I guess just one more quick question.

Speaker 5

You kind of mentioned willingness to Operating maybe at a little bit of a higher leverage level. Clearly, right now, leverage is in a great spot. You're in a very balance sheet is clean. Clearly, you have some kind of work to do out of the gate with respect Kind of changes and improvements on the distribution side with Atkins. But as we think kind of almost more near term, right, Kind of with leverage where it is, kind of what I'm hearing within the space, certain assets being potentially dislodged a little bit Coming out of COVID, is that or could we say acquisition Activity is still top of mind given CEO transitional dynamics in the near term or is it more, Hey, let's fix the core, let's support the growth, let's go for organic opportunity, work with the retailers.

Speaker 5

And yes, if something comes along, we'll take a look at it, but we're really focused On the other side, that's it. Thanks.

Speaker 3

I'll start and then I'll let the other guys jump in. Look, the environment is about as slow as I've seen in the last 6 years, Mainly because there's just not a lot of folks transacting given the cost of debt right now. So you're just not seeing a lot of activity and the things that have come to market frankly haven't transacted. So we I think you've characterize our view, which is we're focused on organic growth until the right opportunity comes along at the right price with the right brands that we like. And we're in a from a balance sheet standpoint in a good position to do that.

Speaker 3

But there just the activity in the market right now is not particularly heavy Given the cost of debt. And I'll turn it over to anyone else who wants to add to that.

Speaker 2

No, I mean we love the leverage situation we're at now. We're a little bit of a one time. We'll be in really good shape by the end of As you know, we generate a lot of cash and that's helpful from paying down debt. We've done that this year and we continue to see that runway overall, but we Constantly look at stuff, I think the answer to your question is both. We're going to do the things we want to, to grow business organically, but we're also going to do look at things and look at opportunities that are out there and we continue to do that.

Speaker 5

All right. Super. Makes sense. Thanks guys.

Speaker 4

Thank you. Thanks.

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. Thank you for signing in. And Joe, Good luck and enjoy as you find yourself with some more free time. I'm Menbiot Savath. And thank you so much

Speaker 3

Jason, I asked Mark to make sure you were my last question.

Speaker 5

There you go. Well, I'm going to I'm going to inaugurate Jeff for one of those inaugurinated questions, but in a minute. But first, a housekeeping item. The growth expectations you gave for next year, were those inclusive or exclusive of the 53rd week?

Speaker 2

Those were exclusive of the I'll put another point on top of the numbers I gave. So high end of our algorithm for top line, high single digits bottom line plus 53rd week.

Speaker 5

Great, great stuff. Okay. Now that you know you're an aggravating question. And I apologize in advance, but it's on my mind. It's on a lot of investors' minds.

Speaker 5

But you mentioned weight wellness, the broader weight wellness industry is being disrupted by all these new pharmaceutical solutions. And it's still early. The disruption is only going to get bigger as more drugs come to market, more adoption, more insurance coverage. And legacy weight management businesses Across the board are under pressure, right, like, listed programs, food, and we're all feeling the pain. And I look at Atkins in that context, it feels like This is a bigger issue than just a product cycle or innovation.

Speaker 5

It feels like this could be a bit of a secular turning point in the industry. What gives you confidence that that's not the case, that This is something that can be so easily resolved with a tactical product solution.

Speaker 3

Yes, let's I'll start and I'll turn it over to Jeff. Obviously, he's got some fresh eyes on the matter, but look, it's the press of the event And the actual number of users, there's a pretty big gap right now. So it's still very early innings on these weight loss drugs because they tend to be coastal in their use right now based on everything that we've seen, you're seeing a lot of pickup on the press. So this is still very early innings. So we actually don't see this as a threat, but we see it as an opportunity and I'll provide some color commentary.

Speaker 3

First of all, Typically, people that are using these drugs have a significant amount of weight to lose, call it 20 plus pounds, 20, 25 Pounds of weight to lose, right? That is not the epicenter of the buyer of Atkins anymore and hasn't been for a number of years. The number of our buyers who are actively using the Atkins program to lose a significant amount of weight It's kind of mid single digits as a percent. So it's not a threat From a volume standpoint, but we think actually an opportunity from a marketing standpoint. So that Look, the drugs are driving renewed interest in weight management.

Speaker 3

And that's always a good thing for your business because The challenge as you know from your experience with the brand, the challenge is getting people actually to take interest to action When it comes to how they look and how they feel. And so these drugs, I think, are starting to renew interest in consumers To change behavior. So news is a good thing, not unlike Keto was for us, right. It wasn't us, but we were able to kind of get on that wave and ride that wave for over 3 years. As I think there's 2 elements of opportunity for us and Jeff and the team are already on them.

Speaker 3

The first is People come to pharmacies to get the drug. That's where our brand is. There is an opportunity to tap into that. And as you would imagine, Major retailers are really interested in having that conversation. The second, The drugs and this is the nuance of this.

Speaker 3

The drugs suppress appetite. So you're eating fewer calories and the calories you actually eat have to be more nutritious. So there is an opportunity for our brand. And I think you're seeing the weight wellness other brands do exactly the same thing, Right. That you end up having to help people eat more healthy, I.

Speaker 3

E, you need to be on a program As you're using these things, otherwise you're going to do damage to your body and getting it not getting enough nutrition to it. So our strategy as we're starting to think through it, our strategy is actually to market Atkins as a perfect complement to people thinking about using the drugs. And we have a rich pedigree as a nutrition philosophy to help people think about that and then use our relationships in the pharmacy aisle to market to it. So We're actually pretty optimistic. We like this is a tailwind.

Speaker 3

We think it's going to be a pretty good wave. I don't think it's going to have the fattish nature of keto. I think it will build. It'll build for a sustained period of time and I think there's a real opportunity for the brand to take advantage of it. And I'll turn it over to Jeff for any thoughts he's got.

Speaker 4

Yes, I mean, just a couple of builds perhaps. I think, firstly, as advocates of weight wellness and nutrition, I think it's great that consumers, when they come off the drugs, I think a very small portion will stay on for a long time. When consumers come off the drugs, the last thing they're going to want to do is put the weight back on, especially after experiencing the physical and mental benefits of weight loss. We see this as an opportunity to position Atkins as a complement to help consumers while they're on the drug and then to help them not get back on the drug. And lastly, with the digital tools available to us right now, We can find these consumers and we can message directly to them and probably not a surprise, but the team is on it right now.

Speaker 4

So we think this is a wave And we're going to catch it.

Speaker 5

Thank you for the very thorough and thoughtful answer.

Speaker 4

Thanks, Jason.

Operator

Thank you. Our last questions for today will come from the line of Steve Powers with Deutsche Bank.

Speaker 4

That's okay, Steve.

Speaker 3

Mark told me he was the last question. I apologize.

Speaker 5

Actually just one and relatively tactical. On the gross margin front, the overdelivery this quarter As you say, very welcome. As I look at the Q4, I think external estimates based on commentary last quarter, We're looking for gross margins to inflect closer to 38% in the 4th quarter. Your the slide today, Slide points that are closer to 37. So just wanted to maybe talk a little bit about the puts and takes there, if anything's changed and sort of how we think about the progress quarter over quarter and then sort of the what the exit rate implies for momentum Intuit 24?

Speaker 2

Yes, let me take that one. First of all, I'm not going to give you a number for Q4, but that's okay. As we go forward, I think Take a step back for a second. We over delivered our gross margin by about 40 basis points for the quarter. Q3, it's about $1,000,000 give or take.

Speaker 2

Favorability was really lower in reading costs as we started to see that flow through a little sooner than we thought, some favorability in inbound freight. We had no change to the Q4 fiscal year. We budgeted Q4 to kind of this run rate. And so the Q3 beat really wasn't significant enough to move the needle. We do think we'll see sequentially improvement from Q3 to Q4 for gross margin.

Speaker 2

The last point I want to make to the team here is, We had some misses obviously in Q1 and Q2. We put fixes in place. They've resulted in better communication visibility and more efficient operating effectiveness, gives us a greater confidence in our forecast as you see that with the Q3 results. So you're going to see sequential improvement.

Speaker 5

Okay. Okay. I'll leave it there. Thank you so much.

Speaker 4

Thank you. Thanks, Steve. Thanks.

Operator

Thank you for joining us today. I'll now turn the call back over to management for any final comments.

Speaker 2

Yes. Thanks again for the participation today. Just one note for me, I and the entire Simply Good Foods Organization, I want to thank Joe for his commitment and contributions to the business over the last 10 years. On a personal note, it's been a pleasure to work with him over the last 20 years in various roles and various companies. I wish him nothing but the best in retirement and obviously on the golf course.

Speaker 2

You will be greatly missed. On a more tactical note, Mark and I and Jeff will be available today for follow-up questions you have. And Jeff and I look forward to updating you on our Q4 results in October. Have a good day.

Speaker 4

Thank you. Thank you.

Operator

Thank you. This does conclude today's teleconference. You may disconnect your lines at this time. Thank you for your participation and enjoy the rest of your day.

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Earnings Conference Call
Simply Good Foods Q3 2023
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