U.S. Markets open in 42 mins

Edited Transcript of SMPL.OQ earnings conference call or presentation 29-Oct-19 12:30pm GMT

Q4 2019 Simply Good Foods Co Earnings Call

NEW YORK Nov 1, 2019 (Thomson StreetEvents) -- Edited Transcript of Simply Good Foods Co earnings conference call or presentation Tuesday, October 29, 2019 at 12:30:00pm GMT

TEXT version of Transcript

================================================================================

Corporate Participants

================================================================================

* Joseph E. Scalzo

The Simply Good Foods Company - CEO, President & Director

* Mark Pogharian

The Simply Good Foods Company - VP of IR, Treasury & Business Development

* Todd E. Cunfer

The Simply Good Foods Company - CFO

================================================================================

Conference Call Participants

================================================================================

* Alexia Jane Burland Howard

Sanford C. Bernstein & Co., LLC., Research Division - Senior Analyst

* Brian Patrick Holland

D.A. Davidson & Co., Research Division - Senior VP & Senior Research Analyst

* Christopher Robert Growe

Stifel, Nicolaus & Company, Incorporated, Research Division - MD & Analyst

* Eric Jon Larson

The Buckingham Research Group Incorporated - Analyst

* John Joseph Baumgartner

Wells Fargo Securities, LLC, Research Division - VP and Senior Analyst

* William Bates Chappell

SunTrust Robinson Humphrey, Inc., Research Division - MD

================================================================================

Presentation

--------------------------------------------------------------------------------

Operator [1]

--------------------------------------------------------------------------------

Greetings. Welcome to Simply Good Foods Company's Fiscal Fourth Quarter 2019 Conference Call. (Operator Instructions) Please note this conference is being recorded. I would now like to turn the conference over to Mark Pogharian, Vice President of Investor Relations, Treasury and Business Development. Thank you. You may begin.

--------------------------------------------------------------------------------

Mark Pogharian, The Simply Good Foods Company - VP of IR, Treasury & Business Development [2]

--------------------------------------------------------------------------------

Thank you, Sherri. Good morning. I'm pleased to welcome you to The Simply Good Foods Company earnings call for the fourth quarter ended August 31, 2019. Joe Scalzo, President and Chief Executive Officer; and Todd Cunfer, Chief Financial Officer, will provide you with an overview of results, which will then be followed by a Q&A session. Note that comments provided today related to the full year fiscal '20 outlook exclude any potential benefit from the Quest as the acquisition is yet to close. The company issued its earnings press release this morning at approximately 7 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 live on the website, and an archive of today's remarks will also be available there.

During the course of today's call, management will make forward-looking statements that are subject to various risk 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 risk and uncertainties can be found in today's press release and the company's SEC filings. In addition, management will make references to adjusted EBITDA, a non-GAAP financial measure, that it believes provides investors with the useful information with which to evaluate the company's operating performance. Today's earnings release includes a reconciliation of the most directly comparable GAAP financial measures to non-GAAP measures.

And with that out of the way, let me -- it's now my pleasure to turn the call over to Joe Scalzo, President and Chief Executive Officer.

--------------------------------------------------------------------------------

Joseph E. Scalzo, The Simply Good Foods Company - CEO, President & Director [3]

--------------------------------------------------------------------------------

Thank you, Mark. Good morning, and thank you for joining us. Today, I'll provide you with highlights of our full year performance, I'll recap the fourth quarter results and I'll give you an update on our business. Then I'll turn it over to Todd to discuss our fourth quarter and full year financial results in a bit more detail, after which I'll open the call for questions.

But before I begin, I want to say thanks to all of our employees, many of whom I know are listening on this call, who made this historic year possible. At 30,000 feet, fiscal 2019 look like a really easy year, and I think it would be further from the truth. Our unexpectedly strong point-of-sale results required our team to execute a number of challenging initiatives that included on selling retail or promotion during our busiest season, delaying new product launches and securing about 25% more supply with very little notice. We're fortunate to work with a talented group who are some of the most passionate people that I've encountered in my career. As a team, they executed superbly in a very challenging environment. Our people come to work every day with a sense of purpose to provide consumers with products that make a difference in their lives and provide customers with products, services and shopper insights to help grow our collective businesses together. They can be justifiably proud of our 2019 results and the work that they did to prepare us for a successful fiscal year 2020.

We delivered another strong quarter with both financial and point-of-sale results greater than our expectations. For perspective, full year net sales, gross profit and adjusted EBITDA increased double digits every quarter on a percentage basis versus last year, and cash generation was strong. Our full year results were well above our long-term algorithm and the outlook that we shared with you about a year ago. Adjusted EBITDA margin expanded 70 basis points, including significant investments in our business and capabilities, especially marketing that increased 36% this year.

Our retail takeaway growth as measured by IRI increased double digits across all forms, all major channels and all customers. Total Atkins U.S. retail takeaway in 2019 increased 19.5%, and our e-commerce business continues to do well with gross sales up 60%. Importantly, the nutrition snacking category continues to grow and outperform most center-store packaged food categories, driven by healthy snacking and meal replacement megatrends. For both the fourth quarter and full year, nutritional snacking category growth was mid- to high-single digits on a percentage basis versus last year. And with category household penetration of about 50%, we believe there's a lot of runway for growth.

While we'll not address or announce the acquisition of Quest directly today, I will say we are progressing nicely towards closing the transaction and preliminary integration planning is on track. We have obtained all the necessary regulatory approvals and began raising the necessary additional capital to complete the transaction by selling about 3.4 million shares on October 7. The syndication of our term loan borrowing is underway, and we anticipate closing the acquisition in November. I will note, having worked closely over the past few months with the Quest executive team, that they're very capable, highly engaged and justifiably proud of their business momentum. We look forward to working with them after close.

This is one of my favorite slides. Since 2008, Atkins has enjoyed 11 consecutive years of retail takeaway growth at a compound annual growth rate of nearly 15%. Within MULO track channels over the last 12 months, Atkins growth was #1 among all nutritious snacking brands. That includes brands like Clif, Kind, Premier Protein and RXBar. The category has benefited from powerful consumer megatrends such as meal replacement convenience, on-the-go consumption and health and wellness. Atkins has benefited from the category trends as well as our strategy over the last few years of appealing to lifestyle consumers. And while our consumer proposition is sound and our marketing efforts are on target, the magnitude of growth rate of our initiatives frankly surprised us and exceeded our best case scenarios.

For perspective, fiscal 2019 was the strongest year of total retail growth for Atkins in over a decade with over $100 million in retail growth. While we're confident in our long-term strategy and plans, we believe retail growth will moderate in fiscal 2020. I'll talk about this in more detail shortly.

Turning to the fourth quarter. Net sales increased 28.6% and as expected outpaced POS growth. In line with our long-term algorithm, adjusted EBITDA was up greater than sales growth and increased 33%. Volume was the biggest contributor to growth in the fourth quarter, up 29.3%. As expected, net sales growth outpaced retail takeaway due to items we've mentioned throughout the year, including the 53rd week in this fiscal and sales in transit. Todd will provide you more details on each of these in a bit.

With optimal retail inventory levels, promotions resumed in the third quarter and continued into the fourth, although slightly below prior year. As a result, net price realization was 160 basis points benefit. This was offset by the accounting change for non-price-related trade promotions. The increase in adjusted EBITDA is a direct result of higher gross profit due to sales growth. The increase in gross profit was partially offset by higher direct media investment and increases in G&A.

Given the investments that we've made across the business combined with television advertising and in-store programming in 2019, sales growth was strong across all major channels. Specifically, gross sales increased double digits on a percentage basis versus last year across all major channels with the exception of drug that was up a respectable mid-single digits. We're growing with growing customers and have collaborative relationships with the buyers who are also focused on the consumer megatrends I mentioned earlier.

In the fiscal fourth quarter, POS growth was ahead of our estimates and as expected sequentially moderated by month given the tough year ago comparisons. Our Q4 and full year retail takeaway was 14.1% and 19.5% respectively, and indicates the effectiveness of our marketing and messaging that drove consumption and buyers. As an added perspective, our 2-year stack growth rate since Q4 2017 was up 34%, with POS this year up about 14% on top of 20% growth in 2018. We focused on continuing to drive velocity of POS growth and believe we have the right combination of advertising, product innovation and promotions in place to deliver our goals.

I'm very pleased that our growth continued to be well balanced across all product forms, that's bars, shakes and confections. Our marketing strategy is unique among traditional food brands. We're the only major nutritious snacking brand that is well developed across bars, shakes and confections. We have seen a bit of acceleration in confections that may be benefiting somewhat from the keto craze in the U.S. Our business model enables us to invest in our brands. Specifically, as part of our long-term algorithm, we're committed to increasing marketing at least in line with sales growth on an annual basis.

In fiscal 2019, we had financial flexibility. As such, advertising increased greater than sales growth, justified by strong returns on media, while still delivering on our adjusted EBITDA objectives. In addition to higher levels of television advertising, we also tested new digital and social media marketing as well as product standpoint. We believe our sales increase in fiscal 2019 can be attributed to 2 significant consumer metrics: growth in total buyers and increases in buy rate. The buy rate increases were well above historic levels and a significant driver of our unexpected strong double-digit growth. Our growth in buyers is attributed to the quality of our marketing execution as well as the media investments we made during the year. Growth in buyers continued a trend we experienced in fiscal 2018, as we communicated to a 4x larger consumer target. The buy rate growth in 2019 exceeded our expectations and surprised us. Going forward, we do not expect buy rate to grow at last year's rate. As such, we expect POS will moderate accordingly.

Overall, I'm very satisfied with our performance. Fourth quarter and full year results were strong, and we're positioned nicely as we begin 2020. In fiscal 2020, year-over-year comps will be more challenging. Looking at the POS data, you'll note that the year-over-year growth rates in Q1 have been in the high single to low double-digit range. That said, we expect retail takeaway growth to be top-tier within the U.S. food group although given our outstanding comps in 2019, we anticipate POS will return to more moderate levels. We believe our strategy of educating consumers on low-carb, low-sugar nutrition is working. We are highly confident in the continued effectiveness of our marketing, our improved supply situation and our financial flexibility to invest, improving growth initiatives. We remain focused on evolving the Atkins brand by growing total buyers, targeting both programmatic and lifestyle low-carb consumers. We believe that our advertising continues to be effective, and we expect that the year-over-year total marketing investment rate to increase in line with sales growth. I'm excited to build on our record-setting year. We are well positioned from a strategy, planning and investment standpoint to deliver solid growth in 2020 and over our strategic planning cycle.

Now I'll turn the call over to Todd who'll provide you with some greater financial detail.

--------------------------------------------------------------------------------

Todd E. Cunfer, The Simply Good Foods Company - CFO [4]

--------------------------------------------------------------------------------

Thank you, Joe, and good morning, everyone. Let me start with 2 points as it relates to the numbers you see on the slides to follow. First, for comparative purposes, we will review financial statements for the 13 weeks ended August 25, 2018, and 14 weeks ended August 31, 2019. Second, we evaluate our performance on an adjusted EBITDA basis based on our asset-light strong cash flow model. We have included a detailed reconciliation from GAAP net income to adjusted EBITDA in today's press release. We believe this measure is a key indicator of the true underlying performance of the business.

Let me start with a review of our fourth quarter and full year net sales drivers. There are some moving parts in here that affects comparison to IRI-measured channel data, so let me walk you through it. Core volume growth has been solid all year and has been the primary driver of our sales increase. Specifically for the fourth quarter and full year, volume increased 29.3% and 22% respectively. The increase in Q4 is driven by the solid POS growth, the 53rd week, as well as the benefit of sales in transit that we discussed last year. Recall, in our Q4 2018 conference call, we disclosed the company has historically recorded revenue using the FOB Shipping Point methodology. Bar trade promotions resumed in the third quarter, continued in the fourth quarter, although the depth and frequency was slightly lower than last year, resulting in modest price realization. These gains were partially offset by the change in how we account for services provided by some of our customers. And as we've discussed throughout the year, in the year-ago period, this cost was recorded in selling expense.

Before I discuss gross profit and adjusted EBITDA performance, note that in the fourth quarter, we updated our income statement presentation. The changes broken out by quarter for fiscal 2019 were posted to our website this morning. Distribution costs, which were a separate line item in our P&L below gross profit, are now included in cost of goods, in addition to our warehousing costs, which historically sat in our G&A line. This is similar to the presentation by most CPG companies.

We also combined selling and marketing expenses as the strategic rationale for these investments are similar. Also, there are 2 fiscal 2020 budget changes that will be headwinds to adjusted EBITDA growth in the first half of fiscal 2020. In fiscal 2020, selling and marketing expense is expected to increase in line with sales growth, and the expense amount by quarter is expected to be about 13% of net sales. Our accounting methodology is to accrue marketing expense each quarter based on a full year outlook as a percent of net sales. As an example, this time last year, our marketing budget for fiscal year '19 was much lower than our final expenditures. Given the last year's increased investment in marketing in the third and fourth quarter due to our financial flexibility, the year-over-year comparison in the first half of fiscal 2020 is more pronounced. We expect sales and marketing expense to grow about 15% to 20% in the first half of the year and be relatively flat in the second half.

Second, we will begin to accrue incentive compensation more evenly throughout the year versus our previous practice of expensing more in the back of the year once internal targets are well on track to being achieved. Therefore, given the timing of these moving parts, we expect adjusted EBITDA growth in the second half of fiscal 2020 to be greater than the first half of the year.

Now for a review of the fourth quarter results across major metrics. As I mentioned earlier, fourth quarter net sales increased 28.6%.

Turning to the rest of the P&L. Gross profit increased 27.9% to $59.2 million. Gross margin was 42.5% compared to 42.7%, a decline of 20 basis points versus last year. Note that distribution and warehousing costs, which historically were not included in cost of goods sold, are now included in this line item. The decline in gross margin was primarily due to the non-price-related customer activity that is a shift from selling expense. On a quarter-over-quarter basis, this change in methodology, which only affects fiscal 2019, was a negative 100 basis point reduction in gross margin for the quarter.

Additionally, the savings from the strategic sourcing initiative was in line with our expectation and offset inflation. Adjusted EBITDA increased 33% to $24.1 million, driven by the increase in gross profit, partially offset by a 38.7% increase in selling and marketing expense, driven by higher television media and e-commerce investments, which were somewhat offset by lower selling expenses due to the previously discussed accounting shift in non-price-related customer activity.

General and -- G&A expense, excluding reserves associated with a potential litigation settlement, increased 9.6%, significantly less than net sales growth. The increase was driven by higher professional fees and greater employee-related costs. Also note that business transaction costs primarily associated with the Quest acquisition were $5 million in the fourth quarter. Income tax expense in Q4 was $3.5 million, resulting in an effective rate of about 36.5% due to a catch-up related to the state apportionment rate. This is greater than the year-ago period, which reflects the final true-up associated with the Tax Reform Act. As a result, reported net income in the fourth quarter was $6.1 million versus $11.7 million last year.

Full year results are as follows. As I stated earlier, the increase in full year net sales was primarily driven by volume growth. Full year gross profit increased 20.5% to $217.4 million with gross margin down 30 basis points versus the prior year. The accounting shift in non-price-related customer activity from selling expense to trade resulted in an unfavorable effect on 2019 gross margin of about 100 basis points. Excluding this gross margin -- excluding this shift, gross margin is a 70 basis point improvement for the full year due to strong price realization and supply chain savings greater than inflation.

Full year adjusted EBITDA increased 25.6% to $98.7 million, driven by the increase in gross profit, partially offset by other expenses including a 14.2% increase in selling and marketing, specifically, higher marketing related to television media and e-commerce investments was up 36.3%, partially offset by lower selling expenses due to the previously discussed accounting shift in non-price-related customer activity. Additionally, G&A expense, excluding the legal reserve, increased about 19%, driven by higher incentive compensation, professional fees and investments to enhance organizational capabilities in key functions.

Business transaction costs of $7.1 million, primarily associated with Quest acquisition, increased $5.2 million versus last year. Full year income tax expense was $16.8 million versus a benefit of $17.4 million in the prior year. Recall that 2018 amounts include a $29 million onetime gain related to the remeasurement of deferred tax liabilities and a $4.7 million gain on the fair value of a tax receivable agreement that were recorded in the second quarter of 2018. As a result, year-to-date reported net income was $47.5 million versus $70.5 million last year. We anticipate that our effective tax rate for fiscal 2020 to be about the same as fiscal 2019 and be in the 25% to 26% range.

Moving on to the balance sheet and cash flow. Full year cash generated by operating activities was $73 million, driven by strong earnings growth. As expected, inventory is down nearly 10% versus last quarter as we get back towards our desired level. CapEx for the year was $1 million and net cash provided by financing activities was $83 million, primarily driven by the $113 million of cash received from the warrant exercises, partially offset by the $26 million TRA liability settlement previously discussed in the first quarter. The company's solid balance sheet and cash flow provides us with a continued financial flexibility to support future organic growth and the ability to pay down debt related to Quest acquisition.

As of year-end August 31, 2019, the company had cash of $266.4 million. There is $196.5 million remaining on the outstanding term loan, resulting in a net cash position of approximately $7 million. After the end of the fourth quarter, on October 7, as part of generating the necessary capital to complete the Quest acquisition, we sold approximately 13.4 million shares of common stock. We intend to use the $350 million of cash generated in this offering, other cash on our balance sheet and the anticipated proceeds from our planned incremental term loan borrowing to fund the acquisition and anticipated related expenses.

I would now like to turn the call back to Joe for brief closing remarks.

--------------------------------------------------------------------------------

Joseph E. Scalzo, The Simply Good Foods Company - CEO, President & Director [5]

--------------------------------------------------------------------------------

Thanks, Todd. In summary, we're confident in our ability to execute and capture the growth opportunities in fiscal year 2020. We expect reported 2020 net sales growth to be at the high end of our long-term target, which is an annual increase of 4% to 6%. Please note that the extra week included in fiscal year 2019 will be a headwind of about 2 points to year-over-year comparisons of reported net sales growth in fiscal year 2020. And we expect adjusted EBITDA will grow at a somewhat higher rate than sales.

The above outlook reflects continuing to grow total buyers with buy rate flat to prior year's historic levels, better in-stock position versus prior year and a return to more normal promotion frequency, more challenging POS comps and our expectation that retail takeaway will somewhat moderate, and input cost inflation expected to be offset by the company's previously disclosed strategic sourcing initiatives, and marketing expense will increase in line with sales growth. We're really excited about the upcoming closing of the Quest transaction. The process is progressing and the business is tracking with our acquisition model. Quest retail takeaway across all forms including the core bar business remains strong. With the equity raise behind us and the term loan syndication on track, we anticipate closing the transaction in the first half of November. And we anticipate net leverage of about 3 and 3.25 points or less by fiscal year-end, August 2020.

As we shared with you over the last year, we're confident in our business and we're confident in our ability to execute against our strategies. We're delivering on our financial objectives while investing smartly in the business, a path that we believe will continue to create value for our shareholders. We appreciate everyone's interest in the company, and we're now available to take your questions.

================================================================================

Questions and Answers

--------------------------------------------------------------------------------

Operator [1]

--------------------------------------------------------------------------------

(Operator Instructions) Our first question is from Chris Growe with Stifel.

--------------------------------------------------------------------------------

Christopher Robert Growe, Stifel, Nicolaus & Company, Incorporated, Research Division - MD & Analyst [2]

--------------------------------------------------------------------------------

I just wanted to ask you -- you had obviously a very strong fiscal '19. So congrats on that. And I just want to get a better sense of, as you look to fiscal '20, some of the demand-generating activities, you've got marketing up in line with sales. Can you talk little bit more about new products? And then promotional spending getting back to normal levels will still be up year-over-year, as I understand it. So I just want to get a sense of how those things you think are going to help drive sort of demand growth, if you will, in fiscal '20?

--------------------------------------------------------------------------------

Joseph E. Scalzo, The Simply Good Foods Company - CEO, President & Director [3]

--------------------------------------------------------------------------------

Yes, Chris. First, I'd say we tend to look at our business first by -- from a consumer perspective. So we've enjoyed now 2 years of total buyer growth that obviously has a nice effect as we move into 2020, and that the number of retained or multiple-year buyers that we have coming to the business this year given our historic rates will continue to be strong. So we feel really good about our total buyer growth. Our advertising, so we're shooting new spots with Rob as we speak. Those will go on air in January behind pretty good media weight. We've got relatively consistent data on the effectiveness of those and the return for those. So we expect total new buyer growth during the year to continue to be strong. So we like the overall platform that will drive base velocities in our business due to buyer growth. I expect new item distribution to be more flattish than not, maybe we'll grow a little bit, but we're not expecting huge gains from distribution. And as you mentioned, I think incremental volume will be good because we'll have more weeks of activity than we did a year ago.

--------------------------------------------------------------------------------

Christopher Robert Growe, Stifel, Nicolaus & Company, Incorporated, Research Division - MD & Analyst [4]

--------------------------------------------------------------------------------

Okay. And then -- so just 2 quick -- go ahead, sorry, just 1 out there?

--------------------------------------------------------------------------------

Joseph E. Scalzo, The Simply Good Foods Company - CEO, President & Director [5]

--------------------------------------------------------------------------------

No. Go ahead, Chris.

--------------------------------------------------------------------------------

Christopher Robert Growe, Stifel, Nicolaus & Company, Incorporated, Research Division - MD & Analyst [6]

--------------------------------------------------------------------------------

Okay, sorry. So just 2 quick follow-ups to that. One would be the new item distribution. Typically with a brand growing the way it is, especially base volume velocity being so strong, you tend to see distribution gains. It sounds like you don't have those built in, but would you be -- I guess, to understand, would you be -- would you expect some of that potentially through the year? And then the second question relates to just the -- you're going to have some benefit year-over-year due to the comps -- due to -- you'll have stronger shipment growth versus your point-of-sale shipments early in the year. I just want to get a sense of, if you have any kind of framing of how big a benefit that could be in the first half of fiscal '20?

--------------------------------------------------------------------------------

Joseph E. Scalzo, The Simply Good Foods Company - CEO, President & Director [7]

--------------------------------------------------------------------------------

Yes, I think -- to answer your first question on distribution, we do have some new items going in. I don't think it's going to appreciably improve our distribution. Our business, we're on average pretty close to 40 items in distribution today. So in most cases, we're seeing swap out for weaker items. We may see some gains, but we don't -- we haven't factored that into our plan for the year. Todd, do you want to talk about it?

--------------------------------------------------------------------------------

Todd E. Cunfer, The Simply Good Foods Company - CFO [8]

--------------------------------------------------------------------------------

Yes. So you're absolutely correct, Chris. We expect the shipment flow to be a little bit back more to normal. Obviously, the first half of last year, it was a headwind of about 4 or 5 points per quarter. I do not expect all of that to come back. It will be probably in the middle. So I would expect in the first half of the year, we will benefit from maybe 2 or 3 points in each of Q1 and Q2, as we kind of get back to the normal shipping patterns. And then obviously, we'll have a little -- we'll have a -- we had a huge benefit, if you remember, in Q3, that will come out in Q3. But you're right, we'll get to more of a normal historical shipping pattern.

--------------------------------------------------------------------------------

Operator [9]

--------------------------------------------------------------------------------

Our next question is from Brian Holland with D.A. Davidson & Co.

--------------------------------------------------------------------------------

Brian Patrick Holland, D.A. Davidson & Co., Research Division - Senior VP & Senior Research Analyst [10]

--------------------------------------------------------------------------------

I'm curious about the commentary, Joe, you made during your remarks about -- it sounded like stronger confidence in not just buyer growth, but buy rate growth. I know you sort of talked about wanting to get more data and have more time to assess as you pivot from programmatic to self-directed dieters, what those buying trends might look like? It sounds like they're incrementally positive, but can you give us any sense? I mean is the repeat rate of the loyalty or purchase frequency materially better? Or any sort of improvement off of what you've seen from kind of the historical, sort of, core consumer that you had in your base?

--------------------------------------------------------------------------------

Joseph E. Scalzo, The Simply Good Foods Company - CEO, President & Director [11]

--------------------------------------------------------------------------------

Brian, let me reiterate, I think what my comments said just to make sure we're clear. In 2019, we saw 2 major impacts from a buyer standpoint. We saw strong growth in total buyers. So household penetration increased. What surprised us, we expected it based -- we expected that based on our marketing -- what we anticipated for marketing effectiveness and the amount of media spend. So we expected that. What was really unexpected to us was buy rate improved. And it improved beyond what we historically have seen buy rate to be. And it was appreciable. So it was noticeable and it was a multiplier to our growth rate. As we planned 2020, we do not -- we anticipate we'll hold on to that buy rate level, but it's going to be flat to prior year. So if you just kind of do the math, total buyers growing, buy rate flat, highly unlikely we're going to see 20% growth again. We're going to -- we'll be at more moderate levels, still top-tier in food, but we don't expect to see that kind of 20%-plus growth. And it's because buy rate, we can't -- hard for us to imagine buy rate continue to grow at the rate it grew last year.

--------------------------------------------------------------------------------

Brian Patrick Holland, D.A. Davidson & Co., Research Division - Senior VP & Senior Research Analyst [12]

--------------------------------------------------------------------------------

No, no. But of course, you've got tailwinds as the consumer backdrop seems favorable for bringing in more households. So if you've got the strong buy rate, that's -- but I appreciate you clarifying that. That's helpful. So just a quick question about the competitive landscape. You're not the only player that maybe is emerged from some capacity constraints in the industry. Premier Protein, I know this is on the shake side. I know there may be limited exposure or limited channel overlap. So maybe I'm answering my own question. But as you see some folks come back and get some distribution back and get some capacity back, are you seeing any changes from a promotional standpoint, from a competitive or a distribution standpoint that's squeezing maybe particularly on shakes, but just broadly overall?

--------------------------------------------------------------------------------

Joseph E. Scalzo, The Simply Good Foods Company - CEO, President & Director [13]

--------------------------------------------------------------------------------

Yes, great observation. I think that's one of the factors to Chris' earlier question, why don't we see more incremental distribution? There's a fair amount of new product entry coming in right now. In the case of Premier, they've kind of relaunched the SKUs that they discontinued when they had their supply issues. Quest actually just launched their ready-to-drink shake that's in the marketplace right now. There are a lot of activity from -- in keto items. So it's a kind of a phenomenon we're seeing right now, particularly from SlimFast. There's a lot of pressure on the shelf right now from a new product standpoint. We don't typically see a lot of switching with any of those brands. But what it does is it puts pressure on the shelf, it puts pressure on promotion to access to display. We're seeing a little of that in our business right now, nothing that would greatly concern us, but stuff that we keep our eye on.

--------------------------------------------------------------------------------

Brian Patrick Holland, D.A. Davidson & Co., Research Division - Senior VP & Senior Research Analyst [14]

--------------------------------------------------------------------------------

And last question from me. If you can comment, I know that we haven't yet closed Quest, but noticed that the debt priced a week or 2 ago a little bit higher than what I might have been looking at in sort of my pro forma outlook. I'm curious if that fell with -- if you can comment as to whether that fell within your range of expectations and whether there would be any expectation that, that would impact cash EPS guidance?

--------------------------------------------------------------------------------

Joseph E. Scalzo, The Simply Good Foods Company - CEO, President & Director [15]

--------------------------------------------------------------------------------

So obviously, we're not done with the pricing yet. We're hoping to get the term loan debt finished in the next week. So a little bit too early to tell. Obviously, if the pricing moves up, yes, it will have a slight impact on cash EPS. But we're confident that we'll get a very competitive rate.

--------------------------------------------------------------------------------

Operator [16]

--------------------------------------------------------------------------------

Our next question is from Bill Chappell with SunTrust Robinson Humphrey.

--------------------------------------------------------------------------------

William Bates Chappell, SunTrust Robinson Humphrey, Inc., Research Division - MD [17]

--------------------------------------------------------------------------------

Can you talk a little bit more -- I mean, just -- obviously, the business growth is moderating. Just kind of trying to understand how you get comfortable to where it moderates? I mean in terms of data or something that kind of -- as we see the growth go from 25% down to the mid-teens. That's understandable with -- because that was such a strong number. But I'm just trying to understand, does it moderate all the way back down to 6% to 8% -- 4% to 6%, especially if you've still got 4x the market opportunity? And it seems like over the past 2 years, you've kind of broken through. I'm just trying to understand how you get comfortable on how fast it flows?

--------------------------------------------------------------------------------

Joseph E. Scalzo, The Simply Good Foods Company - CEO, President & Director [18]

--------------------------------------------------------------------------------

Yes, we -- first of all, we wouldn't consider our growth slow growth. That would be my first observation. So I think you have to put this in perspective, our growth rate for 2020 is going to be top-tier in food, full stop, right? So for us, it's -- we take a look at it across the number of vectors and just kind of triangulate. So the first thing we look at is buyer flow, which has been the most predictive in our business. How many buyers, how much are they buying, what's their loyalty? That has been, for us, the most predictable model. Where it kind of broke down last year a little bit for us was the buy rate just accelerated. We're still trying to dig into that and understand that a little bit.

So we get a good view of the year just based upon horizontal buyer flow over time or longitudinal buyer flow over time. We then take a look at it from a customer standpoint. And we do it a little bit like Chris' question earlier, what do we expect in base velocities? What do we expect in distribution? And then how do we view incremental volume or promotion volume? And then we triangulate, frankly that way, building up from customer first and then we get a decent estimate. So that -- those are the points that we'd use to really understand where we expect the year to kind of fall. We then factor in what we sense is competitive environment, so access to display, access to shelving, any sourcing, any interaction that we might see among competitive brands in our business. And we use that kind of to affect our thinking too. But it's a good question.

It's in fact -- and I've had this experience in the last 15 years with some other businesses I've run. In fast-growing categories, in fast-growing brands, it's really hard to call growth rate because they tend to be a little bit more volatile than your average 0% to 1% businesses. So we do our best to look at a number of factors. And the only thing I would tell you, it tends to be more of a factor of what we do than what competition does. So if you can execute well, if you have good plans, if you have good data around the effectiveness of your plan, you typically have a pretty good feel for what your business is going to do. Does that answer your question?

--------------------------------------------------------------------------------

William Bates Chappell, SunTrust Robinson Humphrey, Inc., Research Division - MD [19]

--------------------------------------------------------------------------------

Yes. I mean yes, it does. I guess second, maybe I missed it, but kind of contribution from SimplyProtein. I know you've talked about how that distribution gains and kind of outlook for that business in terms of contributing to growth.

--------------------------------------------------------------------------------

Joseph E. Scalzo, The Simply Good Foods Company - CEO, President & Director [20]

--------------------------------------------------------------------------------

Yes. Early innings. Distribution is building. So I think we closed the year just under 20% ACV. Velocity, where it is, is doing really well. So I would say too early to call on SimplyProtein and how it's doing in the U.S. We'll keep updating as we get more data over time.

--------------------------------------------------------------------------------

William Bates Chappell, SunTrust Robinson Humphrey, Inc., Research Division - MD [21]

--------------------------------------------------------------------------------

Okay. And then last one for me. Just -- I know it's a different focus. You're not a diet plan and the disclaimers that come with that. But the announcement, Jenny Craig and Walgreens, and they're kind of focused next year. Does that have any impact? Or how would that impact your business?

--------------------------------------------------------------------------------

Joseph E. Scalzo, The Simply Good Foods Company - CEO, President & Director [22]

--------------------------------------------------------------------------------

I'm not familiar with what you're talking about, maybe I lost track of that category. So what's going on so I can understand it.

--------------------------------------------------------------------------------

William Bates Chappell, SunTrust Robinson Humphrey, Inc., Research Division - MD [23]

--------------------------------------------------------------------------------

It's more of they're going to promote and bring Jenny Craig type programs in their stores in the U.S., and so that was just announced yesterday or the day before, so...

--------------------------------------------------------------------------------

Joseph E. Scalzo, The Simply Good Foods Company - CEO, President & Director [24]

--------------------------------------------------------------------------------

That channel, Bill, for us is very small, unlike some other categories where drug is a major component of our sales, it's very small for us. So I do not anticipate it will be a major impact.

--------------------------------------------------------------------------------

Todd E. Cunfer, The Simply Good Foods Company - CFO [25]

--------------------------------------------------------------------------------

Are they selling meal kits?

--------------------------------------------------------------------------------

William Bates Chappell, SunTrust Robinson Humphrey, Inc., Research Division - MD [26]

--------------------------------------------------------------------------------

From what I've seen, it's kind of a full-on push or partnership, but it's just for now...

--------------------------------------------------------------------------------

Todd E. Cunfer, The Simply Good Foods Company - CFO [27]

--------------------------------------------------------------------------------

So the challenge, which obviously we are -- there's a difference between -- so people can understand. If you ask adults in the United States are they on the diet, its percent of adults is in the kind of low to mid-single digits. If you ask consumers in the United States are they managing their weight, it's about 2/3 of adults. So there's a real big difference between being on a diet and managing your weight. As we've evolved back and it's more about helping people manage their weight than it is being on the diet. Jenny Craig's model, Weight Watchers' model, Nutrisystem's model is much more about food plans. It's a much bigger capital expenditure. It focuses on giving people the food they need to be on a diet, and it's really a different business model. So we watch it because we pay attention to how companies talk about weight management and diet, but they're not direct competitors to us, and we don't view it that way.

--------------------------------------------------------------------------------

Operator [28]

--------------------------------------------------------------------------------

Our next question is from Alexia Howard with Bernstein.

--------------------------------------------------------------------------------

Alexia Jane Burland Howard, Sanford C. Bernstein & Co., LLC., Research Division - Senior Analyst [29]

--------------------------------------------------------------------------------

So a couple of quick ones from me. First of all, in the prepared remarks, you mentioned confections as a growth area for you. Is that becoming more strategic from the point of view of innovation and marketing? And should we expect that to become a bigger part of the portfolio over time? And then I have a follow-up.

--------------------------------------------------------------------------------

Todd E. Cunfer, The Simply Good Foods Company - CFO [30]

--------------------------------------------------------------------------------

Yes, Alexia. You know what, it's been a fast-growing element of our portfolio of products since I've been here, so 7 years. It's a different -- and the way to think about it is it's a different -- slightly different product and very different day part. So our Endulge products, our confection products tend to be an after dinner indulgence. So -- and the construction of the product from a nutritional standpoint is low protein, little bit more fat and continues to be relatively low carbs, tend to have a fair amount of fiber in them. So their construction is lower protein than our other products. And so we're seeing that day part grow, and I think because of that confections to grow. And then secondly, there really isn't anybody in the category with those kinds of products. We're starting to see a little bit -- some emergence of peanut butter cups from some other competitors, but we're pretty much the only player in that space right now. And I think it has a lot to do with our products, they're just delicious. They're just great products. And then I mentioned in my remarks, we're seeing, and I'm sure you all seeing a little bit of this keto craze going on right now. So keto is another approach to low carb. It's a more extreme approach. And our Endulge products fit the profile, which is a high-fat profile for keto enthusiasts. So we're seeing some offtake, I think, from a consumer standpoint just based upon that fad that's going on right now.

--------------------------------------------------------------------------------

Alexia Jane Burland Howard, Sanford C. Bernstein & Co., LLC., Research Division - Senior Analyst [31]

--------------------------------------------------------------------------------

Great. And then just a broader question on the buy rate comments that you made earlier. Can you talk a little bit about what drove those buy rates? Or what you think drove those buy rates to improve so significantly this year? Was that within newly acquired customers or was that the existing consumer base that suddenly sought to eat more? And then I'll pass it on.

--------------------------------------------------------------------------------

Joseph E. Scalzo, The Simply Good Foods Company - CEO, President & Director [32]

--------------------------------------------------------------------------------

Yes, great question. It was more new buyers than it was retained buyers, but we saw growth among year 2 and year 3 buyers. We're still trying to analyze what's going on. The one thing I would say is over the last few years, we've done a really good job of trading consumers up in pack sizes. So in early days in 2008, Atkins sold only singles. We moved people through kind of 2012, '13, '14 to larger sizes. So 4 packs on shakes, 5 packs on bars. Over the last few years, we've moved people to 8 packs and 15 packs. So there's some trade up going on that might be generating a little of that. Also we tend to promote in twofers -- 2 for 13, 2 for 14. That might be driving a little bit, but it's an area that we're digging into right down trying to better understand.

--------------------------------------------------------------------------------

Operator [33]

--------------------------------------------------------------------------------

Our next question is from John Baumgartner with Wells Fargo.

--------------------------------------------------------------------------------

John Joseph Baumgartner, Wells Fargo Securities, LLC, Research Division - VP and Senior Analyst [34]

--------------------------------------------------------------------------------

Just wanted to stick with the growth in buy rates. Just to be clear, we are aware that came in ahead of expectations in fiscal '19. Was that more on the programmatic side or the non-programmatic side?

--------------------------------------------------------------------------------

Joseph E. Scalzo, The Simply Good Foods Company - CEO, President & Director [35]

--------------------------------------------------------------------------------

Yes, that's an area that we're digging into. I don't have that data. I don't get that data every week or every month. We actually have to go into the panel and do a attitudinal segmentation to get that data. So I can't do that all the time. So as we start analyzing, we'll get a better sense of that. It's a great question.

--------------------------------------------------------------------------------

John Joseph Baumgartner, Wells Fargo Securities, LLC, Research Division - VP and Senior Analyst [36]

--------------------------------------------------------------------------------

Okay. And I was just thinking -- yes, thinking through the advertising spending. So there are a couple of new ad spots that launched, I think, what, Q2 and Q3. I'm curious, just broadly speaking, how is the ROI holding up on the advertising overall. You're still kind of that sizable return that you're seeing. Any inclination of a slowdown there? And then, I guess, is it too soon to analyze the incrementality of new ad spots that began hitting middle of fiscal '19?

--------------------------------------------------------------------------------

Joseph E. Scalzo, The Simply Good Foods Company - CEO, President & Director [37]

--------------------------------------------------------------------------------

So the ROIs that we've been able to track continue to be very, very high. We don't have the fourth quarter ROIs yet. With marketing being up 70% in Q4, our expectations is it probably came down a little bit. And I guess that's the slightly negative news. But the more positive news is that's now in our base and we'll be able to spend that money more evenly throughout the year, more efficiently. And we're very, very confident we'll get really high ROIs from it going into FY 2020. But everything we've seen in the data so far suggests the marketing continues to work, ROIs are still best-in-class, and again, we'll smooth it out this year and get the most effectiveness we can.

--------------------------------------------------------------------------------

Operator [38]

--------------------------------------------------------------------------------

Our next question is from Eric Larson with Buckingham Research Group.

--------------------------------------------------------------------------------

Eric Jon Larson, The Buckingham Research Group Incorporated - Analyst [39]

--------------------------------------------------------------------------------

Joe, we're probably beating this to death and you're -- you said you're kind of analyzing the effects of the new buyers, et cetera. But I believe in the past, you -- when you brought a new buyer in and then you retained that buyer and became a very loyal buyer, you'd see that buyer increase their buy rate over the course of 3 years, more in the second year and then become kind of a full buyer by year 3. So if you look at kind of the Rob Lowe campaign, which I think this January will be the second full year, if I'm not correct -- if I'm not mistaking. It seems that's -- that 3-year build in frequency for retained buyer, it seems like you'd still have some tailwind behind you in your fiscal '20 year from buyers that you brought on in the last 2 years. Is that a reasonable thought process or not?

--------------------------------------------------------------------------------

Joseph E. Scalzo, The Simply Good Foods Company - CEO, President & Director [40]

--------------------------------------------------------------------------------

Yes. So if you -- if loyalty is predictable, which it has been in this business, so my ability to move people from new buyers to second year and third year buyers, that remains and I have a relatively predictable number of retained buyers when I start my year. So yes, that's the basis to the earlier questions, how do we forecast what we believe our business is going to be? A relatively good insight into the number of retained buyers that I'm going to have during the year and until last year, relatively predictable buy rate. So then the real -- the only thing that we have to figure out is how many total new buyers that we can bring in and is there any change to the buy rate? So yes, that's been the nice thing about this business. When I bring somebody in, they return in relatively predictable numbers and they buy at relatively predictable levels. And just to remind you, so they come in, in the first year, they're buying somewhere in the mid-30 servings, and they move to a second year and third year buyer, and they're buying close to 100 servings. So I move them from less than a weekly buyer to somebody who's eating product twice, sometimes 3 times a week. So high level. That's the one thing about this business that's really interesting. You have people that are daily eaters of our products or snacking on our product every day. So very unusual even in broad scale confection to see something like that.

--------------------------------------------------------------------------------

Operator [41]

--------------------------------------------------------------------------------

We have reached the end of our question-and-answer session. I would like to turn it back over to management for closing remarks.

--------------------------------------------------------------------------------

Joseph E. Scalzo, The Simply Good Foods Company - CEO, President & Director [42]

--------------------------------------------------------------------------------

Yes. Thank you all for your questions, and thanks for your participation on our call today. We look forward to updating on our first quarter results in January. Have a nice day.

--------------------------------------------------------------------------------

Operator [43]

--------------------------------------------------------------------------------

Thank you. This concludes today's conference. You may disconnect your lines at this time, and thank you for your participation.