The Simply Good Foods Company

Ladies and gentlemen, good morning and welcome to the Simply Good Foods Company Fiscal Fourth Quarter 2024 Conference Call. At this time, all participant lines 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 and zero on your telephone keypad. As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Mark Pogarian, Vice President of Investor Relations. Please go ahead, sir.

Thank you, operator. Good morning. I'm pleased to welcome you to the Simply Good Foods Company fourth quarter earnings call. Note that fiscal Q4 and full year amounts reflect results for the 14 and 53 weeks ended August 31, 2024. Jeff Tan, President and CEO, and Sean 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 this morning at approximately 7 a.m. Eastern Time. A copy of the release and presentation slides are available under the Investor section of the 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 as 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. 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. Please refer to today's press release for a reconciliation of the historical non-GAAP financial measures to the most comparable measures prepared in accordance with GAAP. The acquisition of Owen was completed on June 13, 2024. Therefore, the company's fourth quarter and full year 2024 results include about 11 weeks of Owen performance. The reference to legacy Simply Good Foods encompasses Simply Good Foods' business excluding Owens. I'll now turn the call over to Jeff Tanner, President and CEO. Thank you, Mark. Good morning.

Thank you for joining us. Today, I'll recap Simply Good Foods' financial results and the performance of our brands. Then Sean will discuss our financial results in more detail before we wrap it up with a discussion about fiscal 2025 outlook and your questions. We're pleased with our fiscal fourth quarter financial results with net sales increasing 17.2%. The acquisition of Owen in the 53rd week are a nine and eight percentage point contributor to growth. On a like for like basis, North America Quest net sales increased about 5% and Atkins declined about 5%. Quest performance was less than expected due to temporary chip supply constraints, and Atkins was in line with our estimate. Our gross margin improvement continued in the fourth quarter and resulted in adjusted EBITDA of $77.5 million, an increase of 15% compared to the year-ago period. Total Simply Good Foods retail takeaway, including Owen, in the combined measured and unmeasured was about 8% for both the Q4 and full fiscal year 2024 periods. Quest and Owen full-year POS was about 13% and 80%, and Atkins was off 5%. Importantly, nutritional snacking category growth remained strong, driven by volume. Key subsegments of the category, including bars, shakes, and chips, all increased in both Q4 and full year fiscal 2024. We are category advisor at most retailers and will continue to work with our customers to develop and support initiatives in the aisle to further accelerate category growth. Given the twin tailwinds of snacking and health and wellness, as well as low household penetration, the category is expected to maintain its momentum and its multi-year growth trajectory. As we look to fiscal 2025, we're excited about the prospects for our category and our business, and we believe we are well positioned to deliver on our objectives. We'll execute against our strategic initiatives, focusing on innovation, marketing, and increased physical availability that we expect will drive trial and increase household penetration. The Owen acquisition closed early in Q4 and the integration work is progressing as planned. We continue to be very pleased with this brand and believe the combination of our two businesses will create future significant shareholder value through revenue growth, margin expansion and cost synergies. Sean will provide you with the details of our fiscal 2025 outlook, but assuming a comparable full year of OIN results are included in fiscal 2024, as well as the exclusion of the 53rd week in fiscal 2024. Fiscal 2025 is expected to be in line with the company's long-term algorithm. Specifically, net sales growth in the 4% to 6% range. and adjusted EBITDA growth slightly greater than the net sales increase. The next slide provides you with a perspective of nutritional snacking category growth, as well as our retail takeaway performance within the IRI, MULO, plus C-Store universe, and in the combined measured and unmeasured channels. Nutritional snacking category Q4 growth in the measured channels was 7.3%, driven primarily by volume. The category continues to be a standout performer and is increasingly a focus of our retail partners as they look for growth opportunities. Quest and Owen retail takeaway in measured channels increased about 9% and 112% and outpaced the category. Atkins performance down about 8% in measured channels, was similar to last quarter. Our e-commerce business continues to do well. As a result, retail takeaway in unmeasured channels is nearly two percentage points additive to Total Simply Good Foods measured channel POS. Let me now turn to Quest. In Q4, retail takeaway growth in measured and combined measured and unmeasured channels was 9% and 10%. Consumption slowed versus Q3, primarily due to temporary chips capacity constraints that resulted in stock outs at retailers. Additionally, we saw some increased competitive distribution and promotions in the bar category. In Q4, we estimate total unmeasured channel retail takeaway increased about 16%, driven by strong e-commerce growth of 21%, that was nearly 450 basis points greater than Q3. E-commerce strength was partially offset by softness and specialty channels. Quest snacks and bars retail takeaway in the combined measured and unmeasured channels increased about 17%, and 1% respectively. Despite the CHIP supply challenges, we continue to be pleased with our salty snacks POS growth of 34%, which is a standout in the category and represents about 25% of Quest retail sales. CHIP's retail takeaway slowed during the quarter due to temporary capacity constraints that impacted our ability to keep retail shelves fully stocked. We brought on a second chips manufacturing line during the quarter, and it took some time to get up the learning curve. As we exit the first quarter in November, we anticipate supply will be back to normal, with now two chips production lines. This positions us well for the upcoming new year, new year season, and any new distribution wins. Bar segment competition increased driven by distribution of some new entrants into the measured channel universe. In response, we will increase promotional activity at select retailers starting in Q1 of fiscal 2025, and we have accelerated the launch of the Quest overload bar platform to February. These bars are loaded with inclusions and have a unique texture and mouthfeel that will bring variety news, and excitement to the bar segment. Therefore, in fiscal 2025, we expect that Quest will have another strong year driven by volume that should result in retail takeaway growth of 9% to 10%. As I mentioned earlier, Chip's recovery has already begun. With two production lines, we have the flexibility to meet increased demand for this fast-growing business In the fourth quarter of fiscal 2024, we partnered with a large club customer on a small regional trial of Quest chips. Due to the success, in the second half of fiscal 2025, we'll have a broader nationwide test with this retailer that could lead to an expanded presence. At the bottom of this slide, you'll note images of the key innovation items in fiscal year 2025 that I just discussed. Additionally, the rollout of the bake shop line began in late fiscal 2024. It is ongoing and while early, is progressing nicely and in line with our estimates. Importantly, Quest core products and innovation will be supported with a full year marketing campaign. Recall the successful, it's basically cheating, advertising debuted in mid-March and drove an almost immediate lift in consumption, particularly chips, as this is where a large portion of the advertising was focused. In fiscal 2025, we will have a full year benefit of the campaign at even higher media weights, which we expect will drive greater awareness and household penetration of all Quest products. Turning to Atkins. Q4 retail takeaway in measured and combined measured and unmeasured channels was off 8% and 5%. Strong e-commerce growth continued, driven by Amazon, whose POS growth was 15%. In Q4, Atkins retail dollar sales were relatively consistent. Specifically, during the last 11 weeks of Q4, average weekly dollars in measured channels was 10.6 million, and very similar on a week-to-week basis. This was partially due to RTD shakes, where retail takeaway improved and was about the same as the year-ago period in the combined measured and unmeasured channels. We continue to believe in the long-term vitality of the brand, given the renewed cultural relevance and conversation on weight, and we are confident we have the right plans in place to bring Atkins back to growth. I'm pleased with the execution of the Atkins Revitalization Plan that is progressing as scheduled. Some elements of the plan are in market now, and we expect all elements to be in the market as we exit fiscal year 2025. While early, the innovation rolling out in the marketplace in conjunction with the fall shelf resets, is tracking to our estimates. We have a full suite of innovation across forms, including the Atkins Strong ready-to-drink 30-gram protein shake, a new wafer bar, and Atkins and Dodge confectionary gummy bears and truffles. Our innovation enabled us to maintain distribution at key food and mass customers, However, we do anticipate that some items in the more space-constrained club channel could be at risk in the spring shelf reset. Product upgrades or reformulation work is progressing as well as new packaging. The Atkins Strong Shake packaging is an indication of what you'll see. Note the fresh new look including a bold A in the middle as our new, more modern logo. More to come here soon. As we exited fiscal 2024, new Atkins advertising was on air and the Atkins.com website was refreshed. If you haven't seen it, the revised advertising, one, more clearly communicates and owns the benefit of weight management, two, more strongly communicates the brand's unique macronutrient profile, focused on weight, and three, emphasizes Atkins as a sustainable and diet-free eating approach to weight wellness. We believe this messaging links better to the evolving consumer views and conversation on weight wellness. Notably, one of the spots specifically positioned Atkins as a diet-free and sustainable way for GLP-1 users or anyone who has lost weight to hold onto their gains. The refreshedatkins.com website has been contemporized and is user-friendly. As has always been the case, it is loaded with customizable tools to help consumers achieve their weight wellness goals. While we work on revitalizing the brand, we also recognize the need to ensure Atkins is a long-term, sustainable business. As such, beginning in fiscal 2025, we will work to optimize ROI and investment levels, specifically eliminating trade and marketing investments that don't meet specific ROI hurdles. This will impact fiscal 2025 sales growth, as we expect some volume declines due to the reduction in spending, as well as some distribution losses. We'll also discontinue our breakeven Canada export business. As such, we anticipate Atkins' full year fiscal 2025 retail takeaway to decline high single digits, half of which is due to the aforementioned planned lower spend. To conclude, we're making progress and positioning the brand to succeed in the future. However, as we have previously stated, it will take some time to get there.