The Simply Good Foods Company (NASDAQ:SMPL) Q3 2023 Earnings Call Transcript
The Simply Good Foods Company (NASDAQ:SMPL) Q3 2023 Earnings Call Transcript June 29, 2023
The Simply Good Foods Company beats earnings expectations. Reported EPS is $0.44, expectations were $0.41.
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. [Operator Instructions] As a reminder, this conference is being recorded. At this time, I would now like to hand the call over to Mark Pogharian, Vice President of Investor Relations. Thank you. You may begin.
Mark Pogharian: Thank you, operator. Good morning. I'm pleased to welcome you to The Simply Good Foods Company Earnings Call for the fiscal third quarter ended May 27, 2023. Joe Scalzo, CEO; Geoff Tanner, President, COO and CEO Elect; 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 early decent accompanying presentation are available under the Investors section of the company's website at www.thesimplygoodfoodscompany.com 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 refer to certain non-GAAP financial measures that we believe will provide useful information for investors. Due to the company's asset-light strong cash flow business model, we evaluate our performance on an adjusted basis as it relates to EBITDA and diluted EPS. We have included a detailed reconciliation from GAAP to adjusted items in today's press release. We believe these adjusted measures are a key indicator of the 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.
Joe Scalzo: Thank you, Mark. Good morning and thanks to all of you for joining us. Today, I'll recap the company's third quarter results and Geoff will provide you with some perspective on the performance of our brands. Then Shaun will discuss our financial results in a little bit more detail before we wrap it up with the discussion of our outlook as well as taking your questions. Moving on to the third quarter results, retail takeaway and our overall financial performance were greater than our expectations. Simply Good Foods third quarter point of sale and the combined U.S. measured and unmeasured channels increased about 11%, outpaced Q3 net sales growth of 2.6%, principally due to the prior year retail customer inventory build.
Shaun 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. Quest momentum continued, resulting in a net sales increase of about 9%. Third quarter 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 cost increases eased substantially from those in the first half of the year. Adjusted EBITDA in the third quarter was $66.6 million versus $63.3 million in the year ago period.
The $3.3 million increase was greater than our forecast due to the better-than-expected net sales and gross margin performance as well as good SG&A cost control. This provides us with some flexibility to make additional investments as we move into the fourth quarter. 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. 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 a Simply Good Foods company, a better company. So thank you. As we announced in January, Geoff 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. While I can think of no better person to take over this hand than Geoff. I've gotten to know one 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 idea to the business that only makes us a better company. I know many of you have met Geoff 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 third quarter brand performance and some of his initial observations of the company. Geoff?
Geoff Tanner: 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% and 24%, respectively. Let me now turn to Quest Q3 performance. Retail takeaway was strong, driven by an increase in household penetration and buy rates the way it was similar about 25%. Quest Q3 POS at Amazon increased about 29% versus the year ago period. What I like is 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 is well below competitors, indicating Quest has a long runway for growth ahead of it. Measured channel Q3 POS growth of bars and snacks were both about 25%. Quest bars growth was solid across the portfolio. Quest [indiscernible] momentum continued with growth similar to 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; Q3 retail takeaway and the combined measured and unmeasured channels is expected to climb 2%.
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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 an 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% of Atkins retail sales was offset by declines in snack bars and indulge confections. 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 house type penetration over the last 52 weeks. Performance in the third 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 formed and channel is my number one focus as the incoming CEO and work here is already underway. In the near term, we're actively working to shore our buyer innovation and regain TDPs [ph]. 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. Finally, Atkins has $0.98 brand awareness. Given the brand's unique positioning in the space, we'll look at opportunities and levers to ensure and strengthen the brand's long-term growth. We expect Atkins 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 will make the investments necessary to accelerate growth and to get Atkins back to full potential. Now shifting gears and before I turn it over to Shaun, I wanted to provide you with some of my early observations on the company.
Over the last 3 months, I've dived into the business, spending time with Joe, the leadership team, employees, our Board of Directors top new delivery of top-tier shareholder value. The first pillar is accelerating category growth. 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 game. A nutritional snacking category in comparison is a virtual teenager. Our penetration is in the 50s [ph], and this has a potential to continue to bring new product forms like salty snacks to further expand penetration and buy rate. In addition, there is the twin tailwinds of consumers wanting to live a healthier lifestyle and the relentless growth in snacking, now possible eating occasions.
I think this category will be twice its current size, and I am committed to working with my team and customers to get it there as fast as we can. I don’t know the exact sequence of pacing but the opportunity is there. Brick-and-mortar and 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 million in net sales by year-end fiscal 2023, Quest has approximately doubled since the acquisition and continues to disproportionately win with GenX and millennials. Despite its size, we see a very long runway of growth. So what would this look like? First, continuing to press on innovation, close in and further out and expanding distribution; second, 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. As mentioned, in the short term, we will strengthen the brand through addressing our lack of renovation 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.
I'm excited to work with the team to accelerate Atkins growth so that the brand can achieve its full potential. The third pillar is to fuel margins 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 Shaun to enhance our continuous improvement mindset. 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.
We like the profile of our P&L and our profitability and asset-light model results in strong cash generation. This provides us with the flexibility to opportunistically participate in M&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&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. I don't mind admitting that Joe leaves and pretty lad 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 Shaun, who will provide you with some additional financial details.
Shaun Mara: Thank you, Geoff. Good morning, everyone. I will begin with an overview of our net sales. Total Simply Good Foods third quarter net sales of $324.8 million 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. As Joe stated earlier, retail takeaway growth outpace the net sales change. On the bottom of this slide, we attempt to reconcile Q3 POS of 11% 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 have discussed on our last 2 calls, last year, retailers increased their inventory levels to address supply chain challenges in the first half of the fiscal year and held these inventory levels through Q3 of fiscal '22.
Retailers largely depleted this inventory in Q4 of fiscal '22 and we exited the year with more normal retail inventory levels. 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 third quarter. We saw the return to historical operating norms this year. As a result, in the third quarter of fiscal '23, we estimate the change in retail inventory compared to last year to be about an 8 percentage point headwind. Moving on to other P&L items for Q3; gross profit was $119.2 million, an increase of $0.6 million 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 ingredients and packaging costs.
This was slightly better than our estimate due to input cost moderation versus our forecast. Net income was $35.4 million versus $38.8 million last year. Adjusted EBITDA was $66.6 million, an increase of $3.3 million from the year ago period. Selling and marketing expenses were $30.2 million versus $32.3 million, a decline of 6.7%, largely due to the timing of spend within the year. GAAP G&A expense was $30.5 million, an increase of $3.8 million versus last year, primarily due to fees associated with the Term Loan B reprice and maturity extension and executive transition costs. Excluding these costs as well as stock-based compensation, G&A declined $0.2 million to $23.3 million. For the full fiscal year 2023, we expect selling, marketing and G&A expense to be slightly down versus the year ago period.
Moving to other items in the P&L. Net interest income and interest expense increased $2.4 million to $7.2 million 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; third quarter reported EPS was $0.35 per share diluted compared to $0.38 per share diluted for the comparable period of 2022. In fiscal Q3 2023 depreciation and amortization expense was about $5 million and similar to the year ago period. Stock-based compensation was $4.1 million. Fees associated with the Term Loan B reprice maturity extension were $2.4 million and executive transition costs were $0.7 million.
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; as of May 27, 2023 the company had cash of $68.8 million. Year-to-date cash flow from operation was $110.4 million, an increase of about 64% versus the year ago period. In Q3, the company repaid $40 million of its term loan debt; and at the end of the third quarter, the outstanding principal balance was $325 million resulting in a trailing 12-month net debt to adjusted EBITDA ratio of 1.1x.
We anticipate net interest expense for the year to be about $28 million to $30 million, including non-cash amortization expense related to deferred financing fees. Year-to-date capital expenditures and depreciation were $10.1 million and $15 million respectively. Capital expenditures included an investment of about $8 million to secure specialized equipment at [indiscernible] manufacturer. In summary, third quarter results were slightly better than our expectations, giving us an opportunity to make some additional investments in our business in the fourth quarter. While early, fourth quarter POS is off to a good start. Through the first 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 fourth quarter, 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. 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 fourth quarter from the third quarter 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; the company has 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 will increase less than the adjusted EBITDA growth rate due to the company's expectation of higher interest expense. Retail takeaway growth in our category and our brands remain solid. As such, we are excited about our near- and long-term growth prospects and 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.
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