Yahoo Finance The Simply Good Foods Company (NASDAQ:SMPL) Q3 2024 Earnings Call Transcript
The Simply Good Foods Company (NASDAQ:SMPL) Q3 2024 Earnings Call Transcript June 27, 2024
The Simply Good Foods Company beats earnings expectations. Reported EPS is $0.5, expectations were $0.48.
Operator: Greetings and welcome to The Simply Good Foods Company Fiscal Third Quarter 2024 Conference Call. At this time, all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. [Operator Instructions] As a reminder, this conference is being recorded. I would now like to turn the conference over to your host, Mr. Mark Pogharian, Vice President of Investor Relations for The Simply Good Foods Company. Thank you, sir. You may begin.
Mark Pogharian: Thank you, operator. Good morning. I'm pleased to welcome you to The Simply Good Foods Company earnings call for the fiscal third quarter ended May 25th, 2024. Geoff Tanner, President and CEO; and Shaun Mara, CFO, will provide you with an overview of results, which will then be followed by a Q&A session. The company issued its earnings release this morning at approximately 07:00 A.M. Eastern Time. A copy of the release and accompanying presentation are available under the Investors section of the Company's website at www.thesimplygoodfoodscompany.com. This call is being webcast and an archive of today's remarks will also be available. During the course of today's call, management will make forward-looking statements that are subject to various risks and uncertainties that may cause actual results to differ materially.
The Company undertakes no obligation to update these statements based on subsequent events. A detailed listing of such risks and uncertainties can be found in today's press release and the Company's SEC filings. Note that on today's call, we will refer to certain non-GAAP financial measures that we believe will provide useful information for investors. Due to the Company's asset-light, strong cash flow business model, we evaluate our performance on an adjusted basis as it relates to EBITDA and diluted EPS. Please refer to today's press release for a reconciliation of the historical non-GAAP financial measures to the most comparable measures prepared in accordance with GAAP. The company completed the acquisition of OWYN in the fourth quarter of fiscal '24.
Therefore, results for the 13 and 39 weeks ended May 25th, 2024 exclude OWYN. Additionally, the reference to the legacy Simply Good Foods during today's conference call encompasses The Simply Good Foods business, excluding OWYN. I'll now turn the call over to Geoff Tanner, President and CEO.
Geoff Tanner: Thank you, Mark, and good morning. Thank you for joining us. Today, I will recap Simply Good Food's financial results and the performance of our brands. Then Shaun will discuss our financial results in more detail before we wrap it up with a discussion of our fiscal 2024 outlook and take your questions. We're pleased with our fiscal third quarter financial results that were slightly better than our estimates. Simply Good Food's third quarter results were led by continued Quest growth as well as strong gross margin improvement. Retail takeaway in the combined measured and unmeasured channels was about 5% and as expected outpaced net sales growth of 3.1%. Quest retail takeaway was driven by strong salty snacks growth and Atkins performance sequentially improved by month during the quarter.
Additionally, e-commerce growth for both Quest and Atkins continued to be solid, more on this in a bit. Q3 gross margin was 39.9%, a 320 basis point increase versus the year ago period, primarily due to lower ingredient and packaging costs. Higher gross profit enabled investments in growth initiatives, while also resulting in an increase in Q3 adjusted EBITDA of 7.9% to $71.9 million. The OWYN acquisition closed earlier this month and the business is tracking to the acquisition model and full calendar year 2024 net sales we initially outlined. I'm pleased to announce that Mark Olivieri, CEO of OWYN, has joined Simply Good Foods as the SVP and GM of OWYN, and is a member of our Executive Leadership team. Mark and I are excited to work together to unlock the value of our combined business and deliver shareholder value through both revenue growth, margin expansion, and cost synergies.
We're very pleased with our execution in Q3. Quest acceleration and Atkins revitalization plans are on track and we reaffirm our full-year fiscal 2024 net sales outlook for the legacy business. Specifically, we expect net sales to increase around the midpoint of the company's long-term algorithm of 4% to 6%, including the benefit of a 53rd week. The OWYN acquisition closed on June 13th, and we anticipate Q4 net sales to be in the $25 million to $30 million range. Total company adjusted EBITDA growth is expected to increase about 8% compared to last year and versus our previous estimate of 6% to 8%. Shaun will provide greater detail on our performance in the subsequent section. The next slide provides you with a perspective of nutritional snacking category growth as well as our retail takeaway performance within the IRI MULO + C-store universe and in the combined measured and unmeasured channels.
Nutritional snacking category growth in the measured channel universe was 6.4%, driven primarily by volume. This category continues to be a standout performer and is increasingly a focus of our retail partners as they look for growth opportunities. Legacy Simply Good Foods retail takeaway in measured channels increased 2.9%, driven by Quest volume growth. Atkins performance improved compared to last quarter but was still off versus last year. Our e-commerce business continues to do well and resulted in legacy combined measured and unmeasured channel POS growth of 5%. Note that if we had acquired OWYN at the beginning of Q3, retail takeaway in measured channels in the combined measured and unmeasured universe would have been 6.4% and 8%, respectively.
Let me now turn to Quest. In Q3, retail takeaway in measured channels increased 13.5%, driven by volume. Growth was solid across key retail channels, driven by an increase in both household penetration and buy rate. Quest retail takeaway improved sequentially from Q2 to Q3, with a key driver being the new Quest advertising campaign that began in March. We're pleased with the advertising that we believe will continue to drive higher household penetration and overall brand growth. In Q3, we estimate total unmeasured channel retail takeaway increased about 12% as e-commerce strength was partially offset by softness in specialty channels. Quest Q3 e-commerce POS was solid and increased about 16%. For perspective, total unmeasured channels in Q3 were nearly 23% of total Quest retail sales.
Quest bar and snacks retail takeaway in measured channels increased about 2% and 27%, respectively. We're particularly pleased with our salty snacks POS growth of nearly 50%, which is a standout in the category and represents about 25% of Quest's measured channels retail sales. The new advertising debuted with a strong emphasis on Quest chips, which is where we have seen the largest increase in household penetration, as we witnessed the explosive growth of chips. The size of the total addressable salty snacks market suggests significant and continued upside on this business. As a result, we are working on a multifaceted acceleration plan that includes growth levers such as flavors, pack types, and channel expansion. In Q3, bar segment growth within the nutritional snacking category slowed to about 1%.
This was primarily due to better for you or bars that have significantly less protein, if any, that declined low-single-digits on a percentage basis versus last year. Sports performance bars, which primarily have higher levels of protein, increase mid-single-digits, driven by the increased distribution of some new entrants into the measured channel universe. Quest bar growth is in line with the total bar segment, but it's not what we expect from the leading protein bar brand in the market. In response, we have accelerated our bar innovation and we're very excited about these innovative products that are tracking to launch in the second half of fiscal 2025 and beyond. Over the remainder of the year, we expect low-double-digit POS growth and continued household penetration and buy rate gains, driven by innovation, distribution, and the new marketing campaign.
Quest has been one of the most innovative brands in the category, supported by a world-class R&D team, the multi-year pipeline is strong and we expect innovation to be a lever of growth for a long time. March new product launches such as Strawberry Frosted Cookies and Iced Coffee are progressing nicely and are in line with our estimates. As we mentioned last quarter, I'm very excited for the upcoming bake shop platform, starting with high-protein muffins and brownies that launch in the fall 2024. Based on conversations with retail customers, we expect very strong support for the bake shop launch, that will also be underpinned by a comprehensive marketing plan as part of the, It's Basically Cheating advertising campaign. Turning to Atkins Q3, retail takeaway in the IRI MULO + C-store universe and the combined measured and unmeasured channels were off 9% and 5%, respectively.
Strong e-commerce growth continued, driven by Amazon, whose POS growth was 16%. In Q3, the competitive in-store merchandising and programming comp was more normalized versus Q2, and as you'll note in the chart on the slide, Atkins POS trends sequentially improved during the quarter. The Atkins revitalization plan is progressing as scheduled. Some elements of the plan are in the market now, and we expect all elements to be in the market in the second half of fiscal year 2025. While early the innovation we accelerated to market is performing well and is in line with our estimates. We're also pleased with the amount and quality of innovation we're bringing to market in the coming months, some of which you'll see in the middle of the slide. While fall shelf set discussions continue, our fiscal 2025 innovation pipeline has helped us greatly during our discussions with retailers.
Most retailers will be replacing non-performing items with these new products. As a result, we believe we'll maintain distribution at most brick-and-mortar retailers, with the exception of the club channel. Now, it's not uncommon for club customers to wait and decide on innovation after they analyze performance in other retail channels. The second major revitalization pillar is new advertising. Over the past year, the relevance and cultural conversation around weight has changed and significantly increased in volume, much of it driven by the new weight loss drugs. In response to the shift, earlier this month, we shot new advertising that will be on air in late summer. The revised advertising refocuses on weight management, more strongly communicates the benefit of the brand's unique macronutrient profile, and emphasizes Atkins as a sustainable and diet-free way to weight management.
We believe this messaging links better to the evolving consumer views and conversation on weight wellness. While still early, overall, we feel like we're tracking towards stabilizing the business and we're somewhat encouraged by the consumption trends that have slightly improved each month this past quarter. Given the strong execution of the revitalization plan, and as we look to fiscal 2025, we're now in a position to move to the next phase of the Atkins journey. Specifically, we'll focus on Atkins ROI and optimizing our investment levels on the brand as part of ensuring Atkins is a long-term, sustainable and profitable business. Historically, we've always done this evaluation. However, the COVID slowdown and the innovation outage that followed resulted in some low ROI investments to support short-term performance and preserve shelf space.
As we look to fiscal 2025 and beyond, we'll work to eliminate trade and marketing investments that don't meet specific ROI hurdles. This will have a short-term impact on sales growth, but it's necessary to build Atkins back to a sustainable brand for the long-term. To conclude, I'm very pleased with how the team is executing. We're confident we have the right plans in place to bring Atkins back to growth. However, as we have previously stated, it will take some time to get there. Turning to OWYN, the acquisition closed on June 13th. This is a strategically and financially compelling acquisition of a fast-growing, on-trend protein shake in our aisle. OWYN increases our exposure in the shake segment by about 400 basis points to 23% of our total sales.
Importantly, OWYN's growth is outpacing the category and we expect the brand to benefit from continued distribution and velocity gains given our go-to-market scale, capabilities, and category adviser relationships with almost all top retailers. OWYN reaches a new consumer segment for Simply Good, namely consumers thinking plant-based, allergy-free, simple ingredient options. However, as we have discussed, what's equally exciting is that OWYN is increasingly crossing over to appeal to mainstream consumers. In the sense, OWYN further strengthens our leadership position with retailers as we jointly work with them to accelerate category growth. We remain confident in our ability to effectively integrate OWYN into our business and deliver on the acquisition model commitments.
To align with our fiscal year-end 2025, we will achieve the majority of the synergies on the onset or first day of fiscal 2026. To summarize Simply Good Foods is uniquely positioned as the $1.4 billion net sales leader in the nutritional snacking category with a diversified portfolio across brands and product forms. The relevance of the category and demand for our products only continues to increase, as more and more consumers turn away from high-carb, high-sugar foods, seeking high protein, low-sugar, low-carb options. We believe our category and our brands represent the future of food and beverage and we have three uniquely positioned brands that are aligned around these consumer megatrends. Consumers trust our brands to help them achieve their wellness goals.
As such, we're focused on our innovation and marketing plans to provide consumers with products to help them in their journey. I'm thankful every day for our talented employees. Our team is excited and passionate about our brands and helping consumers achieve their goals. We will continue to execute our strategic priorities that should enable us to deliver on our long-term growth objectives that ultimately drive increased shareholder value. Now I'll turn the call over to Shaun who will provide you with some greater financial details.
Shaun Mara: Thank you, Geoff. Good morning, everyone. Total Simply Good Foods' third quarter net sales of $334.8 million increased $10 million or 3.1% versus the year ago period and was driven by Quest volume growth. North American net sales increased 3.2% and international net sales declined 2.4% versus the year ago period. As Geoff stated earlier, retail takeaway of 5% in combined measured and unmeasured channels was greater than the net sales growth. This was largely due to incremental trade investments supporting Atkins. Moving on to other P&L items for the quarter, gross profit was $133.6 million, an increase of $14.4 million from the year ago period, resulting in gross margin of 39.9%. The 320 basis point increase versus the year ago period was primarily due to lower ingredient and packaging costs as well as reduced freight costs.
Including OWYN, we expect total company Q4 gross margin to be around 38%, excluding the typical non-cash inventory step-up related to the acquisition. Adjusted EBITDA was $71.9 million, an increase of $5.2 million from the year ago period. Selling and marketing expenses were $36.5 million versus $30.2 million, largely due to higher marketing investments and growth initiatives. GAAP G&A expenses were $31.5 million, an increase of $1 million versus the year ago period. The increase was primarily due to higher employer-related costs, stock-based compensation, and corporate expenses, excluding stock-based compensation, as well as fees associated with last year's term loan amendment and executive transition costs, Q3 G&A increased $3 million to $26.5 million, driven by higher employer-related costs.
Finally, net interest income and interest expense was $4.1 million, a decline of $3.1 million versus Q3 last year. The decline was due to lower debt balances versus the year ago period. Our Q3 effective tax rate was 24.5%, about the same as the year ago period. We continue to anticipate our full year fiscal 2024 effective tax rate to be around 25%. As a result, net income was $41.3 million versus $35.4 million last year. Moving on to year-to-date results, net sales of $955.6 million increased nearly 4% compared to last year. Gross profit was $365.6 million, resulting in gross margin of 38.3%, a 220 basis point increase versus the year-ago period. We're pleased with our gross margin progress in fiscal 2024. However, we anticipate that input cost inflation will be a headwind and most likely will result in gross margin compression in fiscal 2025, particularly in the second half.
Adjusted EBITDA was $191.7 million, an increase of 7.5% from the year ago period. Net interest income and interest expense was $13.8 million, a decline of $8.7 million versus last year. The year-to-date tax rate was 24.2%. As a result, net income was $110 million versus $96.9 million last year. The next slide provides you with a reconciliation of reported and adjusted diluted EPS. Third quarter reported EPS was $0.41 per share diluted compared to $0.35 per share diluted for the comparable period in 2023. Adjusted diluted EPS was $0.50 compared to $0.44 in the year ago period. Note that we calculated adjusted diluted EPS as adjusted EBITDA less interest income, interest expense, and income taxes. Please refer to today's press release for an explanation and reconciliation of non-GAAP financial measures.
Moving to the balance sheet and cash flow, as of May 25th, 2024, the company had cash of $208.7 million. Year-to-date cash flow from operations was $167 million, an increase of about 50% or $56 million, principally due to adjusted EBITDA growth and improvements in working capital. Term loan debt at the end of the third quarter was $240 million. Subsequent to the Q3 quarter end on June 13th, we completed the OWYN acquisition. The cash purchase price of $280 million was funded through a combination of cash on our balance sheet and incremental borrowings under our outstanding credit facility of $250 million. The company expects to pay down a portion of the $490 million in total term loan debt during the balance of fiscal 2024 and is targeting a net debt to adjusted EBITDA ratio of around 1.25 times by fiscal year-end August 2024.
Capital expenditures in Q3 and year-to-date were $0.7 million and $1.8 million, respectively. In fiscal 2024, we continue to expect CapEx to be in the $8 million to $10 million range. In fiscal 2024 we anticipate net interest expense to be around $22 million to $24 million, including non-cash amortization related to the deferred financing fees. Now to wrap up, as Geoff stated earlier, we're on track and feel good about the remainder of the year. We reaffirm our full-year fiscal 2024 net sales outlook for the legacy business. Specifically, we expect net sales to increase around the midpoint of the company's long-term algorithm of 4% to 6%, including the benefit of the 53rd week. OWYN's 11-week contribution to Q4 net sales is expected to be in the $25 million to $30 million range.
We continue to expect that ingredient and packaging costs will be lower in Q4 versus last year. As I stated earlier, including OWYN, we expect total company Q4 gross margin to be around 38% excluding the non-cash inventory step-up related to the acquisition. In Q4, OWYN adjusted EBITDA contribution is negligible. Given our solid year-to-date performance, we have narrowed our total Simply Good Foods adjusted EBITDA outlook. Specifically, we now expect adjusted EBITDA to increase about 8% compared to last year and versus our previous estimate of 6% to 8%. We appreciate everybody's interest in our company and we're now available to take your questions.
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