The Simply Good Foods Company

Greetings and welcome to the Simply Good Foods Company fiscal fourth quarter 2020 conference call. At this time, all participants are in a listen-only mode. A brief question and answer session will follow the formal presentation. If anyone should require operator assistance during the conference, please press star zero on your telephone keypad. As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Mark Pagarian, Vice President of Investor Relations at Thank you. You may begin.

Thank you, Operator. Good morning. I am pleased to welcome you to the Simply Good Foods Company earnings call for the fourth quarter and full year ended August 29, 2020. Joe Scalzo, President and Chief Executive Officer, and Todd Comfort, Chief Financial Officer, will provide you with an overview of results, which will then be followed by a Q&A session. 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 investor section of the company's website at www.TheSimplyGoodFoodsCompany.com. This call is being webcast and an archive of today's remarks will also be available. During the course of today's call, management will make forward-looking statements that are subject to various risks and uncertainties that may cause actual results to differ materially. The company undertakes no obligation to update these statements based on subsequent events. A detailed listing of such risks and uncertainties can be found in today's press release and the company's SEC filings. Note that on today's call, we will refer to certain non-GAAP financial measures that we believe will provide useful information for investors. The presentation of this information is not intended to be considered in isolation or as a substitute for the financial information presented in accordance with GAAP. Please refer to today's press release for reconciliation of non-GAAP financial measures to the most comparable measures prepared in accordance with GAAP. Additionally, note that management's reference to legacy actings in today's presentation and remarks encompasses the Simply Good Foods business excluding Quest. With that, it is now my pleasure to turn the call over to Joe Scalzo, President and Chief Executive Officer.

Thank you, Mark. Good morning, and thank you for joining us. Today, I'll recap Simply Good Foods' fourth quarter and four-year results. and provide you with some details on the performance of our brands. Then Todd will discuss our financial results in a bit more detail, and we'll wrap that up with a discussion of our outlook, and then open the call to your questions. The last eight months have been an extraordinary period, and the COVID-19 situation continues to impact shopping behavior and consumer consumption habits. During this time, we've all faced challenges on the home and work fronts, However, I couldn't be more proud of how our team has stayed focused and executed against our plans during these challenging times. Despite the volatility we experienced during fiscal 2020, we executed well against our company initiatives for the year, and those include increasing market share within the total nutritional snacking category and the subsegments of active nutrition and weight management, diversifying our portfolio with the acquisition of Quest, hitting every milestone on the integration of the business as well as the ERP implementation, and achieving our fiscal 2020 synergy target while remaining on track to realize our three-year 20 million target prior to the end of fiscal 2022. I'd be remiss if I didn't call out our supply chain team who performed exceptionally well this year with no major issues. Our team worked collaboratively with suppliers, contract manufacturers, and distributors to ensure production occurred seamlessly throughout the year. Importantly, our outsourced supply chain has proven to be a competitive advantage in these times and gives us confidence that despite near-term top-line volatility, our margins remain stable, our cash flow steady, and sufficient to support future growth. In fiscal 2020, the marketplace changed dramatically at mid-year. We adjusted to these changes, and despite the revenue impacts resulting from stay-at-home restrictions, we delivered adjusted EBDA at the low end of the outlook that we provided you in January, which was after we closed on the EQUEST acquisition and before COVID-19 became an issue. In doing so, we executed well against our plans, emitted an uncertain operating environment, and made investments in our organization and our brands to position us to deliver sustainable sales and earnings growth as consumers and the economy recover from the pandemic. Our brands and category marketplace trends improved from the third quarter to the fourth quarter as the US emerged from confinement and moved to a partial reopening. Net sales exceeded our expectations due to better than expected retail takeaway, continued strong e-commerce growth, and the timing of shipments related to a first quarter promotion. Adjusted EBITDA for the fourth quarter increased 53.5%, exceeding our estimates, reflecting the inclusion of Quest, the greater-than-anticipated increase in sales, and strong cost controls. These gains were partially offset by a $3 million impairment charge related to the Simply Protein brand that we subsequently sold on September 24, 2020. Total Simply Good Foods retail takeaway in the fourth quarter increased 3.9% in U.S. measure channels, outpacing the category that declined about 3%. Our performance was driven by the more snack-oriented portion of our portfolio, primarily Atkins confections, Quest protein chips, and cookies that are consumed mostly at home. Bars for both brands remain pressured due to fewer on-the-go usage occasions. The retail takeaway trends of our total Simply Good Foods business tracks generally in line with the category pre-COVID-19 and during the COVID-19 confinement period and semi-reopening. The four periods of this chart provide you a good visual of how our business has performed by week in calendar 2020. Remember that IRI track channels account for most of Atkins POS. but only about 60% of Quest, given its large business in the convenience store, specialty in e-commerce channels. Pre-COVID-19, we enjoyed strong growth with our performance in line with plan and tracking to deliver another year of above-category performance. After the brief pantry loading period in mid-March, the category saw a marked decrease in shopping trips and fewer usage occasions. This affected our portable and convenient on-the-go products, especially our large bar business, on both brands. These two factors resulted in a decline in retail takeaway for our brands and the category starting in late March. As home confinement restrictions began to ease in May, shopping trips steadily improved from their lows in April, and consumer interest and weight management and active nutrition began to improve sequentially. However, in mid to late July, the improvement in category trends plateaued. The active nutrition segment of the category, which includes Quest, plateaued up low single digits since July and over the first two months of fiscal 2021. Within that, Quest has outperformed the active nutrition segment over the same timeframe. The weight management segment, which includes Atkins, has improved but is still down in the upper single digits due to temporary lower consumer interest in weight control. Fewer on-the-go usage occasions and weakness in the mass channel has experienced meaningful reduced shopper traffic during the pandemic. We believe our diversified portfolio and channel mix is a strength. As this slide depicts, bars are about 50% of our business and shakes 25%. In fiscal 2020, bars declined mid-single digits due to lower usage occasions in the second half of the year. Shakes increased low double digits as some softness in Atkins was more than offset by the launch of Quest shakes. All other snacks increased about a combined 30% in 2020 and represents about 25% of our business. Majority of these forms are consumed mostly at home, are doing extremely well, and have strong velocities. Importantly, they were growing pre-COVID and have accelerated during home confinement. Turning to the fourth quarter, net sales increased 59.7%, driven by the Quest acquisition. Legacy Atkins net sales declined 8%, which was better than our initial forecast. Excluding the 53rd week in the year-ago fourth quarter period, Atkins net sales were slightly lower than last year. Atkins' performance was driven by continued e-commerce momentum, improved retail takeaway versus our expectations, and the timing of shipments related to promotional activity. Quest net sales for the fourth quarter exceeded our forecast and increased about mid-single digits on a percentage basis versus last year. Performance was driven by stronger than anticipated retail takeaway, investor channels, and e-commerce, partially offset by the softness in convenience stores and specialty classes of trade. The increase in adjusted EBITDA is a direct result of higher gross profit driven by the inclusion of Quest and legacy Atkins cost control offset by the previously mentioned $3 million impairment charge. I'll provide greater details on these metrics in just a bit. Atkins' fourth quarter and four-year retail takeaway was all 4.9% and 0.4%, relatively in line with the category. Similar to last year, Atkins bars and shakes were pressured. We estimated about 40% of the consumption of Atkins occurs away from home. Therefore, lower on-the-go usage occasions impacted these forms. Atkins bars retail takeaway declined 11.1% and 2.4% for the fourth quarter and full year, respectively. Although in both periods, Atkins bar performance outpaced the bar segment of the category. Atkins ready-to-drink shakes declined 8.3% and 9.4% in Q4 and for the full year. Atkins confections momentum continued with retail takeaway up 17.3% in the fourth quarter and 21.9% for the full year. Our e-commerce business remained strong and increased 55% in the fourth quarter driven by a mix of existing and new online shoppers. We estimate that e-commerce contributed about 2.6 percentage points to total Atkins brand net sales growth in the quarter. For the full year, e-commerce sales increased 77% and represents nearly 9% of legacy Atkins total U.S. gross sales. Our brand was responsive as shopper trips improved, but lower on-the-go usage occasions and the temporary lower importance of weight management during this time are headwinds. As a result, Atkins' total buyer growth was slightly down this year, with buy rates slightly up. Importantly, our analysis shows that brand switching has been minimal and our existing consumers loyal. Change in shopping behavior we discussed last quarter continued in Q4. Trips at large mass merchants, our biggest channel, are slightly improving but are still well below last year. Traditional grocery channels trips are better, as is Atkins' performance there. As the chart at the bottom of the slide indicates, in fiscal 2020, Atkins sales in Mass Channel declined low double digits on a percentage basis versus last year. We're particularly pleased with our performance in the club and e-commerce channels, which now represent about 21% of total Atkins U.S. sales. Given that shopper traffic is better in the traditional food channel, it appears that COVID-era consumers are less price sensitive more focused on convenient locations, quick in and quick out, and perceived quietliness. Let me now turn to Quest, where Q4 and full-year retail takeaway increased 28.4% and 21.3% respectively in the measured IRI and ULO universe, driven by snacks and the launch of shakes. Quest generates about 60% of its U.S. sales in the IRI MULO universe of traditional food, drug, mass, and club channels. The other 40% of Quest's U.S. sales are generated in the convenience store class of trade and the unmeasured e-commerce and specialty channels that are not included in the MULO universe. Quest's e-commerce business continues to do well, and we estimate that sales increased 25% in the fourth quarter. Full year sales were up less than that. Quest snacks, driven by chips and cookies, performed extremely well with retail takeaway in the fourth quarter and the full year up 95% and 72% respectively. Retailer and consumer demand for these products, which remain strong, represents about 27% of the Quest business during the quarter. Quest bars declined 5.8% in Q4, much better than the bar category that was off low double digits. For the full year, Quest bars were down only 1% versus the bar category that declined mid-single digits. As I mentioned earlier, bars have been impacted by less on-the-go consumption. Quest is outperforming the category due to its large, loyal, and active consumer base. The fourth quarter and for the full year, the specialty channel underperformed the measured new low universe. Fiscal 2020, we estimate that the specialty channel sales declined about 45%. This channel is about 9% of Quest sales at year end, down about by half from last year. We expect specialty to continue to be a headwind over the near term, albeit a smaller one, as it shrinks in importance to the brand. After pulling back on promotions, marketing, and retail merchandising in the third quarter, we increased spending in the fourth quarter on both brands. Fiscal 2021, we anticipate that advertising and marketing will increase at least in line with organic sales growth. In the first half of fiscal 2021, new Atkins Roblo advertising will be on air, communicating the benefits of our products and promoting at-home consumption. Some of the relevant messaging includes Atkins bars are better and healthier alternative to other at-home snacks. The importance of losing weight gained during the pandemic. Better shakes include key vitamins and minerals that support the immune system and providing solutions for people to eat better while working from home. Advertising will also support a robust innovation, some of which you see on this slide. that we believe is the most robust pipeline in years. We have a good balance of new product forms across both of our brands. Additionally, the fall resets are on track, and you should start to see some of our innovation on shelf at select retailers in November. Summary, the Simply Good Foods company competes in an attractive category with two scale lifestyle brands that transcend forms and usage occasions. The Quest initial integration and full ERP implementation are largely complete, and we're on track to achieve our three-year synergy target of $20 million. We'll begin to recognize the majority of the 10 million fiscal 2021 synergies beginning in January. Bar performance will be pressured in the near term until further easing of movement restrictions. Despite these pressures, we are gaining share in the category and in subsegments of active nutrition and weight management. Our brand equities are strong as evidenced by the solid performance of our other snacks that are primarily consumed at home. We continue to engage with consumers and be flexible on our approach to brand investment to drive growth. The Atkins and Quest brands are aligned with consumer mega-trends for healthy snacking with a nutritional profile that is protein rich and low in carbs and sugar. This profile has broad appeal to consumers interested in Better For You as well as weight management and active nutrition shoppers looking to achieve their goals. Now I'll turn the call over to Todd to provide you with some greater financial details. Todd?