The Simply Good Foods Company

Welcome to the Simply Good Foods Company Fiscal Fourth 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. 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. I would now like to turn the conference over to your host, Mr. Mark Pagarian, Vice President, Investor Relations for Simply Good Foods Company. Thank you. You may begin.

Thank you, operator. Good morning. I'm pleased to welcome you to the Simply Good Foods Company earnings call for the fiscal fourth quarter and full year-ended August 26, 2023. Jeff Tanner, President and CEO, and Sean Mara, CFO, will provide you with an overview of the results, which will then be followed by a Q&A session. The company issued its earnings release this morning at approximately 7 a.m. Eastern. 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 list of such risks and uncertainties can be found in today's press release and the company's SEC filings. Note that on today's call, we will refer to certain non-GAAP financial measures that we believe will provide useful information for investors. Due to the company's asset-light, strong cash flow business model, we evaluate our performance on an adjusted basis as it relates to EBITDA and diluted EPS. 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 the 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 Jeff Tanner. Thank you, Mark. Good morning. Thank you for joining us.

Today, I will recap Simply Good Foods' financial results and the performance of our brand. Then, Sean will discuss our financial results in more detail before we wrap it up with a discussion of our fiscal 2024 outlook and take your questions. We ended the year with strong Q4 net sales growth of about 17%. As expected, net sales outpaced retail takeaway due to the retail customer drawdown last year. Gross margin was slightly greater than our expectations, primarily due to lower supply chain costs. Full year fiscal 2023 organic net sales increased nearly 7%. This performance reflects our diversified portfolio across brands, retail channels, customers, and product forms. We believe we exited the year with trade inventory at normal levels. Gross margin improved during the year and we expect to build on this momentum in fiscal 2024. In my nearly seven month tenure at the company, I'm even more convinced of the long term growth outlook of the nutritional snacking category in our business. Category growth in Q4 in the year was 15% and 17% respectively. With low household penetration of about 50%, versus legacy U.S. snacks of 90% plus. Coupled with the twin tailwinds of snacking and health and wellness, we believe the category will continue to maintain its multi-year growth trajectory and outperform U.S. packaged foods and snacks. As the preeminent category leader and category advisor for the majority of our customers, we will continue to invest in our brand and partner with retailers to accelerate category growth. I think over time this category will be twice its current size. I don't know the exact sequence or pacing, but the opportunity is there. Total Simply Good Foods combined measured and unmeasured channel US retail takeaway broke in Q4 in the year with about 11% and 13% respectively. In fiscal 2023, POS for Quest and Akron increased 24% and 1%. Atkins' retail takeaway slowed in the second half of the year and was off about 3%. Atkins' performance is currently below our expectations and well below its full potential, which is why a comprehensive revitalization plan is being deployed to stabilize the brand and return it to growth. More on this in a bit. As we look to fiscal 2024, we're excited about the prospects for our category and our business. We're making investments in brand building and growth initiatives. as well as investments to enhance capabilities that accelerate growth. In fiscal 2024, net sales growth will be driven by volume, as would lapse the pricing actions of the prior year. Specifically, we expect net sales to increase at the high end of our 4% to 6% long-term algorithm, including the benefit of a 53rd week. Growth margin expansion should be solid, supporting the aforementioned investments, and an increase of adjusted EBITDA slightly higher than the net sales growth rate. In addition, our advantage business model results in strong cash flow generation and provides us with the financial flexibility to pursue value-enhancing acquisitions, pay down debt, or opportunistically buy back our shares. We're confident in the strength of our business and our diversified portfolio across brands, products, and channels. The investments that we've made and will continue to make in the business will enable us to deliver on our net sales and earnings objectives. The next slide provides you with a full year perspective of retail takeaway in the IRI, Nilo Plus C-Store universe and in the combined measured and unmeasured channels. Similar to the last few quarters and years, total unmeasured channel growth driven by e-commerce, was additive to total company PLS. Let me now turn to Quest Performance, where retail takeaway was strong and consistent during the year. Q4 and full-year retail takeaway growth in measured and unmeasured channels was similar, about 24%. What I like is how balanced the growth profile continues to be on the brand. Balanced across product forms and retail channels, balanced across key drivers, namely distribution, base velocity, and innovation, and balanced across household penetration and buy rate. More consumers buying more products in more stores. In my experience, when you rely on one or two drivers, they can tap out. The balanced growth profile on Quest, however, points to a long and sustained runway for growth. In Q4, IRI MULO Plus C-Store POS growth was 26%, driven by volume, a 22 percentage point contribution, reflecting solid distribution gains and new product performance during the year, and price that was about a 4 percentage point benefit. Measured channel Q4 POS growth of bars and snacks was similar, up about 25%. Gains were driven by distribution, base velocity, and new product success. Salty snacks were particularly strong, with POS growth of about 40%, proving the ability of Quest to expand beyond the core and create new incremental segments in the category. In Q4, we estimate total unmeasured channel retail takeaway increased about 15%. E-commerce growth of approximately 18%, was partially offset by softness and specialty channels. In fiscal 2024, we predict that Quest will have another strong year driven by volume growth. We're making investments in the brand that will continue to result in near and long-term growth across retail channels and forms. A particular focus will be investments in marketing. Despite the size of the business, household penetration is only 15%. During the year, we will debut a new marketing campaign and a higher reach-based media plan that we believe will drive greater awareness and household penetration. Additionally, we're partnering closely with retailers to view Quest as the leader and pioneer of the nutritional snacking category. They're excited about the investments we're making in the brand, as well as the innovation pipeline we've shared with them. This should continue to drive distribution gains