Simply Good Foods - Earnings Call - Q3 2017

Transcript

Speaker 0

Greetings. Thank you for joining our teleconference today. I will now turn the conference over to Katie Turner for opening remarks.

Speaker 1

Good morning. I am pleased to welcome you to the Simply Good Foods Company fiscal third quarter earnings call for the thirteen weeks ended May 2737. Joining me on the call this morning are Joe Scalzo, President and Chief Executive Officer and Sean Mara, Chief Financial Officer. The company issued its earnings press release at approximately seven 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.thesimplygoodfeedscompany.com. This call is being webcast live on the website and an archive of today's remarks will also be available for thirty days. 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 in the company's filings with the SEC. In addition, management will make references to adjusted EBITDA, a non GAAP financial measure that it believes provides investors with useful information with which to evaluate the company's operating performance. Today's earnings release includes a reconciliation of the most directly comparable GAAP measures to non GAAP financial measures. And finally, the company has included in today's earnings release and presentation unaudited pro form a financial information for the thirteen thirty nine weeks ended May 2836 that provides results of that the company has licensed its frozen meal business throughout fiscal twenty sixteen. And with that, it's now my pleasure to turn the call over to Joe Gaozho, Chief Executive Officer of the Simply Good Foods Company.

Speaker 2

Thank you, Katie. Good morning and thank you for joining us today. I am excited to be speaking with you on our earnings call. As many of you know, the Simply Good Foods transaction became effective last week. I will begin today's discussion with a brief overview of the company, our key investment highlights and our growth opportunities and strategies.

Sean will then provide you greater detail on the third quarter and year to date financial highlights. Following that, we will open the call for your questions. We are pleased to report our initial quarter as a public company with solid results and positive momentum across our business. We enjoyed speaking with many of you while out on the roadshow earlier this year. For those of you who are new to our story, I'd like to take a few minutes to discuss our business.

Let me start by briefly describing the two companies that we'll talk about today. The Simply Good Foods Company is the result of the merger of Atkins Nutritionals with Conyers Park Acquisition Corporation. Conyers Park was a special purpose acquisition corporation founded by Jim Kilts and Dave West, long time business leaders within the consumer products industry. They raised over $400,000,000 in an IPO last July and Atkins is the asset added to the portfolio. Atkins is a leader in the nutritional snacking space, offering array of premium priced products with quality ingredients.

We have a highly focused portfolio of 60 SKUs comprised of bars, ready to drink shakes and other snacks. We have adjusted EBITDA margins approaching 20% and are an asset light model that generates strong free cash flow with modest working capital requirements. We run our business completely outsourced in terms of supply chain and distribution and we employ a lean operating philosophy. And as we'll discuss today, we have some very compelling growth opportunities. Atkins has strong brand attributes highlighted by 85% aided brand awareness.

For many consumers, the brand stands for low carb, low sugar and rich in protein and it has a proven track record over many years of promoting effective weight loss. Atkins enjoys a very high level of consumer loyalty with average buyer purchasing 62 servings per year. We typically have a substantial portion of the retail shelf within our aisle in the health and beauty section and are an important brand and profit generator for our retail customers. The Atkins brand was tightly aligned with consumer megatrends such as more frequent snacking occasions and the desire for on the go meal replacements. In addition, there are more than one hundred million diabetic and pre diabetic adults in The United States and we are approaching one hundred million Americans who are considered obese.

There is growing scientific consensus that lower carbohydrate intake can help reverse the trends in diabetes and obesity. This evidence is fueling consumer preferences for lower carb and sugar consumption as well as higher protein content, all of which play to our strengths and constitute considerable tailwinds that are expected to help drive continued profitable growth. Our combination of consistent sales growth, strong free cash flow, unique brand attributes, shelf leadership and industry tailwinds form a solid foundation and we think our prospects for continued growth and expansion both organic and through M and A activity are very good. Today, business has solid momentum and we are closing in our ninth consecutive year of U. S.

POS snacking growth. We have identified a significant opportunity with a new group of consumers and we are making good progress against our four key growth initiatives. As a result, we continue to expect to achieve adjusted EBITDA of approximately $72,000,000 for the full year 2017 consistent with the estimate we provided prior to the closing. Longer term, we expect annual top line growth to be 4% to 6% with adjusted EBITDA growth in the high single digits. We continue to grow consumption of the Atkins brand.

With the licensing of our frozen meal business earlier this fiscal year, we have narrowed our focus to the nutritional snacking space where we have achieved eight straight years of consumption growth in The U. S. And as you can see on the chart, we have increased takeaway by 5% to three quarters of the current year and are on track for our ninth consecutive year of retail sales growth. However, similar to most consumer companies, the flow of this during the year has its highs and lows as we started with double digit POS growth in the first quarter, but slowed low single digit in the third quarter. The third quarter performance is principally driven by the timing of promotional and new product support year on year as well as competitive activity.

We are pleased to report that our most recent four week consumption data through June 25 is back to plus 5% as our year on year promotional and marketing comparisons have eased. This recent performance is consistent with our year to date growth of 5% and believe is more reflective of the real health of our business. One of the biggest reasons we are excited about our growth prospects is we have recently identified a significant opportunity to expand our total targeted consumer base by a factor of four. In 2016, we commissioned proprietary research to help us understand who was buying our brand and why. Working left to right on this slide, you will see that 108,000,000 U.

S. Adults or sixty four percent are trying to lose weight and 21,000,000 of them are using some sort of branded weight loss approach. These 21,000,000 have been our historic target consumer. 8,000,000 of them are open to low carb and we've converted about 3,000,000 of them or 38% to Atkins buyers. But what the study really showed us and this was our big moment was that 77,000,000 consumers who are self directing their weight loss, 31,000,000 of them are open to low carb and had never been targeted by Atkins.

When we did begin targeting them in 2016, we achieved the largest influx of new buyers of our brand since 02/2008. So this four plus, 4x increase in our addressable target market from 8,000,000 to 39,000,000 consumers is very exciting for us and we are just getting started with a lot more to learn about this group of consumers. With that in mind, let me provide some insights on the four areas we will focus on to driving growth. Number one, continue to educate and convert core program consumers into Atkins buyers. Number two, target a large new group of self directed low carb consumers that represent a potential 4x growth opportunity number three, product innovation with our near term focus on the clean label initiative and number four, white space opportunities.

I am going to walk through these one at a time. In the case of our program consumers, we are using celebrity advertising, in this case, Alyssa Milano to advance the simple idea of getting to your happy weight. Our data shows as consumers are tired of weight loss claims, they want to hear about the simple choices in their life that can make a difference. Alyssa even says Atkins taught me to make simple choices about the best foods to eat. This new approach is working as the number of consumers using the Atkins program in 2017 has shown a meaningful increase over the prior year.

We are also stepping up our social media campaigns and continuously improving our mobile app and website, which by the way had 10,000,000 unique new visitors in 2016 and which offers consumers useful education news and information on nutritional snacking and healthy lifestyles. And as a reminder, our 38 share with program consumers leaves room to grow with our historic core target. aggressively targeting the 31,000,000 self directed low carbers mentioned earlier, where we still have only 10% penetration and thus very attractive upside with a new set of consumers. These people are trying to make better choices around nutrition and lifestyle, but their approach is often flawed due to common misperceptions about nutrition. This is why we believe the concept of hidden sugars is so powerful.

People know sugar in food is bad for them, but they don't understand that the carbs in foods get converted into sugar in the body. So a seemingly healthy bagel gets converted in your body into 7.5 teaspoons of sugar. Your body can handle one to two teaspoons at a time, so 7.5 is nearly a full day's worth of sugar. Alternatively, one of our meal bars has less than one teaspoon of sugar which is easily metabolized. We have a microsite that gets into the foods consumers are eating with hidden sugars, bagels, bananas, raisins, cereal, foods where sugar content might surprise most people.

And we have multiple advertising executions in television and print. In summary, we think Hidden Sugars is a breakthrough marketing concept and we are very excited to continue its development. Again, we have eliminated the weight loss message in favor of messaging around great tasting snacks that are actually good for you and we are targeting our advertising at younger, more gender neutral consumers. The results have been good. A 23% increase in new buyers of Atkins in 2016 and another 9% increase year to date in 2017.

The area where we expect to generate growth is through product innovation and portfolio expansion. We compete in highly innovation driven categories where it's essential to continuously introduce new products to keep our brand on trend and interesting and relevant to consumers. A very important trend is towards cleaner snacking. By cleaner, mean fewer ingredients comprised of real foods easily recognizable to the consumer. This includes current and future product launches as well as legacy products that we are going back and reformulating.

The latter group includes six meal bar flavors that have been reformulated and are now shipping to customers. A few recent examples of new product innovation include our Harvest Trail line launched in 2016 that added a nut and fruit bar to our portfolio that is rich in protein and most importantly low in hidden sugar. It also has simple ingredients and tastes great. We recently launched our Atkins Superfood Meal Bars with clean ingredients such as coconuts and almonds, another example of product innovation in line with consumer trends. We also launched a new line of almond butter snack bars.

And finally, our December 2016 acquisition of the Simply Protein brand in Canada, a great tasting line of bars and chips with emphasis on clean protein is right in line with our clean bar initiative. Our growth initiative involves capitalizing on white space opportunities. We have only scratched the surface in e commerce, which comprises about 2% of our overall business, but we believe should be closer to 10%. For perspective, we did only $4,000,000 in e commerce sales in the trailing twelve months ending August 2015. We just recently started focusing resources against a leading online retailer and almost doubled that to $7,000,000 last year and are now on a run rate of $10,000,000 We're making solid progress against a compelling opportunity with a lot of upside yet to be captured.

The initiatives we discussed so far are designed to accelerate organic growth, but there is another aspect to our growth strategy I would like to touch on and that's M and A. Our core capabilities in product development, manufacturing and marketing serve us well to pursue acquisitions of healthy snacking brands and use our scalable presence in the nutrition aisle to accelerate growth. Simply Protein is a great example. Simply Protein is a growing brand sold almost exclusively in Canada. Their small team was challenged both from a capability and a resource standpoint as they tried to grow this business into The U.

S. Our strategy is to add this brand to our U. S. Infrastructure to accelerate growth in The U. S.

Remember, this is a $10,000,000 brand in Canada, a country with about 1 of The U. S. Population. So the upside is very attractive. In addition, the Simply Good Foods Company is a scalable platform that is well positioned as a potential Reverse Morris Trust partner for additional acquisitions presenting the opportunity to expand our business into other food categories.

With that, I would like to turn the call over to Sean Mauer to recap our third quarter and year to date results.

Speaker 3

Sean? Thank you, Joe. Good morning, everyone. Let me start with two points as it relates to the numbers you see on the pages that follow. the pro form a Q3 and year to date numbers we will be discussing today are different than what appears in our GAAP results.

We have adjusted the historical results to show them as if we had licensed our frozen meal business throughout 2016. As disclosed in our proxy, the frozen meals business was licensed at the beginning of fiscal twenty seventeen. However, our pro form a shown here excludes the frozen meals P and L during 2016 and replace it with licensing revenue that we would have received if we had licensed the business at the beginning of fiscal twenty sixteen. We think this provides an apples to apples comparison that is more useful to investors. we evaluate our performance on an adjusted EBITDA basis as opposed to net income due to our asset light strong cash flow model.

As there are a few charges that we back out of EBITDA to arrive at our adjusted EBITDA numbers, we have included a detailed reconciliation for this in the appendix to our presentation. In addition, we have also included in the appendix P and Ls for each quarter in 2016 and year to date 2017, bridging by line item our GAAP results to the pro form a results presented here. In terms of results, the third quarter pro form a results are fairly consistent with what we have seen through the half of the year. Pro form a net sales were up seven percent year over year. That includes two points of growth or about $2,000,000 that came with our fiscal twenty seventeen acquisition of Simply Protein.

That was on top of 5% organic growth led by The U. S, which was up 6% for the quarter. Pro form a gross profit continued to improve, growing at 8% year over year with gross margin up 40 basis points, primarily due to lower product costs driven by cost savings initiatives and positive product mix. Pro form a adjusted EBITDA was up 20% to $14,800,000 with Simply Protein contributing about four points of this growth. Organic growth of approximately 16% was driven by the gross profit improvement noted earlier as well as lower year over year marketing expense.

The decrease in marketing expense is largely due to timing as Q3 twenty sixteen included support behind some new product launches we did not have in Q3 twenty seventeen. This favorability will largely offset in Q4. One other point on marketing costs, despite total marketing decreasing year on year in Q3, our media spend was up 10% as we continue to reallocate our spend to the highest return vehicles. Let's turn now to the nine month year to date results, which are pro form a consistent with the methodology we used for the third quarter numbers. Pro form a net sales were up 6%, again driven by U.

S. Growth. We grew organic sales 5% and Simply Protein added another point of growth. Pro form a gross profit was up 8% with gross margin up 70 basis points to 46.5% of net sales due to positive product mix and lower product costs. Pro form a adjusted EBITDA grew 16% to $55,000,000 with Simply Protein adding about two points of the growth.

The organic growth of 14% is largely driven by gross profit improvement noted earlier and the timing of certain marketing spend, which again will fall in Q4 this year. Consistent with Q3, even though total marketing spend is decreasing on a year to date basis, media spend year to date is actually up 5%. Finally, through three quarters of fiscal twenty seventeen, we've delivered approximately $55,000,000 of adjusted EBITDA and we continue to expect to achieve approximately $72,000,000 for the full year consistent with the estimate we provided prior to the closing. As we look forward, we expect to see organic top line growth of 4% to 6% per year with adjusted EBITDA growing two to four points better than net sales growth or adjusted EBITDA growing in the high single digits on an annual basis. With that, I will hand it back over to Joe for some closing remarks.

Speaker 2

Thanks, Sean. In summary, we are very pleased with our solid POS growth and feel good about the prospects for extending that well into the future. We are pursuing a compelling business opportunity with a very large consumer group that we've only begun to target and we are advancing what we think is a breakthrough marketing concept in Hidden Sugars. We are executing on our four strategic initiatives as evidenced by the continued growth pro form a net sales and pro form a adjusted EBITDA year to date. And as Sean has said, we expect to deliver on our adjusted EBITDA forecast for 2017.

Longer term, we expect annual top line growth to be 4% to 6% with adjusted EBITDA growth in the high single digits. And finally, I would like to thank all the members of our team for their efforts. We have a talented group of people who perform at a very high level day in and day out and are committed to growing the business and who are working together in a culture of continuous improvement that's aimed to create value for all of our stakeholders. And with that, I'll open the call to questions. Operator?

Speaker 0

Thank

Speaker 2

you.

Speaker 0

Thank you. At this time, I'll turn back to management for further remarks.

Speaker 2

We appreciate your participation on today's call and your interest in Simply Good Foods. We continue to execute on our strategic initiatives and look forward to speaking with you again on our fourth quarter earnings call this fall. Have a good day.

Speaker 0

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