Simply Good Foods Q1 2024 Earnings Call Transcript

Quartr
Provided by Quartr
January 4, 2024

There are 10 speakers on the call.

Operator

Greetings, and welcome to the Simply Good Foods Company Fiscal First Quarter 2024 Conference Call. At this time, all participants are in a listen only mode. A brief question and answer session will follow the formal presentation. As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Mark Pogren, Vice President of Investor Relations.

Operator

Thank you, Mr. Pogren. You may begin.

Speaker 1

Thank you, operator. Good morning. I'm pleased to welcome you to the Simply Good Foods Company Earnings Call for the fiscal Q1 ended November 25, 2023. Jeff Tanner, President and CEO and Sean Mara, CFO will provide you with an overview of results, which will then be followed by a Q and A session. The company issued its earnings release this morning at approximately 7 am Eastern Time.

Speaker 1

A copy of the release and the accompanying presentation are available under the Investors section of the company's website at www.simplygoodfoodscompany.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 Note that on today's call, we will refer to certain non GAAP financial measures that we believe will provide useful information for investors.

Speaker 1

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.

Speaker 1

I'll now turn the call over to Jeff Tanner, President and CEO.

Speaker 2

Thank you, Mark. Good morning and thank you for joining us. Today, I'll recap Simply Good Food's 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 of our fiscal 2024 outlook, then we take your questions. We're pleased with our fiscal Q1 results that were in line with estimates.

Speaker 2

Retail takeaway in the combined measured and unmeasured channels was slightly more than 8%, and as expected, outpaced net sales growth, primarily due to the timing of shipments versus the year ago period. We anticipate that shipments and consumption should be largely in line by the end of Q2. Net sales increased 2.6% to $308,700,000 driven by continued Quest momentum. 1st quarter gross margin was 37.3% and in line with our forecast. The 40 basis point increase versus the year ago period was primarily due to lower ingredient and packaging costs.

Speaker 2

Adjusted EBITDA in the Q1 was $62,000,000 an increase of 2% versus last year. Higher gross profit was partially offset by higher SG and A versus the year ago period, reflecting investments in marketing growth initiatives and G and A capabilities. Cash flow generation continues to be strong and provides us with financial flexibility Our Q1 results are a positive start to the year and while early, Q2 is off to a good start. Additionally, we have strong marketing and promotional plans in place for the New Year, New Year season, which started this week which will run through the Q2 of fiscal 2024. We're pleased with the progress we've made on the acceleration plan for Quest and the revitalization plan for Atkins.

Speaker 2

As such, we reaffirm our full year fiscal 2024 outlook. The next slide provides you with a perspective of our retail takeaway performance Within the IRI, Newlove, our C store universe and in the combined measured and unmeasured channels. The nutritional snacking category growth in the measured channel universe was 12%, driven primarily by volume or unit growth. The category continues to be a standout performer within brick and mortar and e commerce, and as a result It's increasingly a focus of our retail partners as they look for growth opportunities. We are category advisors at most major retailers and we're working closely with them on how to further capitalize on the growth potential of this category.

Speaker 2

Simply Good Foods retail takeaway in the measured channels increased 7.1%, driven by Quest volume growth of 20%. Atkin's performance was similar to last quarter. And our e commerce business continues to do well and resulted in total combined measured and unmeasured channel POS growth slightly better than 8%. Now let me turn to Quest's Q1 Retail Takeaway, where combined measured channel growth was 20%. Growth was driven by solid performance across all major forms in retail channels, driven by an increase in both household penetration and buy rate.

Speaker 2

Our retail customers, ViewQuest, is the pioneer of the category and they're excited about our near and long term pipeline and growth initiatives that we have in place. A major focus for us is working with those retail partners to find additional space and merchandising opportunities In Q1, we estimate total unmeasured channel retail takeaway increased about 14% E commerce strength was partially offset by softness in specialty channels. There is no denying quest momentum. With nearly $700,000,000 in net sales in fiscal 2023, we have essentially doubled the business since we acquired it in November 2019. Quest retail sales in U.

Speaker 2

S. Measured and unmeasured channels this past year was 945,000,000 So we clearly expect it will be a $1,000,000,000 retail sales brand in fiscal 2024 with the footprint across multiple forms. It's no small fee for our brands that's barely a dozen years old. In Q1, Quest Bar Business Retail Takeaway increased 16%. The snackier portion of Quest products continue to do well With Q1 measured channel retail takeaway up 24%.

Speaker 2

We're particularly pleased with our salty snacks performance That we believe has a long runway of growth. Quest Snacks segment now represents nearly 45% of total Quest measured channel retail sales and is roughly equal to Quest Bars and household penetration. We expect that Quest will have a strong year Behind innovation, distribution gains and a new marketing campaign. I'm particularly excited to announce that we will debut a new advertising campaign In February, that will be supported by a reach based medium model. Despite the size of the business, The brand awareness of Quest is significantly below several competitors and this campaign has the potential to further accelerate growth.

Speaker 2

Turning to Atkins. Q1 retail takeaway in the IRI Muuto C Store universe And the combined measured and unmeasured channels, as expected, were similar to last quarter, off about 6% and 4%, respectively. As has been the case for a while, Atkins heavily uses migrate to e commerce where we continue to see good growth. Specifically, Atkins Amazon POS increased 12%. As a result, e commerce was additive to Atkins measured channel POS.

Speaker 2

For perspective, in Q1, e commerce was about 15% of total Atkins retail sales. In Q1, Atkins retail takeaway trends stabilized from when we entered the quarter. October marketplace performance Somewhat better than September November. Note that given the consumption seasonality in November December, we were not on air with advertising And we have minimal in store merchandising. Now that the calendar has turned to January, we will heavy up on advertising and merchandising for the New Year, New Year season.

Speaker 2

We continue to have tremendous faith in the long term potential of the brand and in support we're making good progress Against the 5 point Atkins revitalization plan we talked about on our last conference call. However, as you may recall, It's going to take some time before all of the elements of the plan are collectively in the marketplace. As a reminder, the Atkin 5 point revitalization plan includes enhanced merchandising and assortment of select customers, New advertising supported with the reach based media model, greater focus on a near and longer term robust innovation funnel, Product upgrades on our bar portfolio and new packaging and multiple work streams targeting GLP-one weight loss drug users. Getting Atkins back to green is our focus and we believe we have the plans in place to improve marketplace performance over the remainder of the year. In summary, we're pleased with our start to the year, particularly our Q1 marketplace results.

Speaker 2

The Simply Good Foods Company competes in an attractive category and is uniquely positioned as the U. S. Leader in the nutritional snacking category With 2 scaled lifestyle nutritional snacking brands that are well developed across multiple forms of snacking occasions. Nutritional snacking category continues to be resilient with top tier volume growth propelled by the consumer mega trends of healthy snacking with a nutritional profile that is protein rich, low in carbs and sugar. This profile has broad appeal to consumers across all generations, But particularly with Gen X, Gen Z and millennial consumers that look to our brands as a means of helping them achieve their goals.

Speaker 2

Given the future growth runway of the nutritional snacking category, we continue to work closely with our retail partners on how to optimize the category today and where to source additional space from in the store to support new and emerging formats. We're executing against our priorities and we remain committed to delivering against our commitments, while making the necessary investments in our business that should result in sustained long term growth. Now, I'll turn the call over to Sean, who will provide you with some greater financial detail.

Speaker 3

Thank you, Jeff. Good morning, everyone. I will begin with an overview of our net sales. Total Simply Good Foods' 1st quarter net sales of $308,700,000 increased $7,800,000 or 2.6 percent versus the year ago period. With our July 2022 price increase behind us, the Q1 net sales increase is driven by volume growth.

Speaker 3

North America and international net sales increased 2.6 percent and 0.7% respectively versus last year. As Jeff stated earlier, as expected, Retail takeaway of 8% outpaced North America sales growth, primarily due to the timing of shipments. As such, We would expect Q2 net sales growth to be slightly greater than consumption with shipments and consumption relatively aligned at the end of the first half of fiscal twenty twenty four. Moving on to other P and L items for the quarter. Gross profit was $115,100,000 an increase of $4,100,000 from ago period resulting in gross margin of 37.3%, a 40 basis point increase versus the year ago period primarily due to lower ingredient and packaging costs.

Speaker 3

Adjusted EBITDA was $62,000,000 an increase of $1,200,000 from the year ago period. Selling and marketing expenses were $32,000,000 versus $28,500,000 an increase of 12.1% largely due to higher advertising Costs and investments in growth initiatives. GAAP G and A expenses were $27,000,000 an increase of $1,300,000 versus last year, primarily due to higher employee stock based compensation. Excluding this as well as executive transition costs, G and A increased $300,000 to $22,700,000 Finally, net interest income and interest expense was $4,900,000 A decline of $2,100,000 versus Q1 last year. The decline was due to lower debt balances versus the year ago period.

Speaker 3

As expected, our Q1 tax rate was about 25% versus 21.3% last year. We continue to anticipate the full year 2024 tax rate to be about 25%. As a result, net income was $35,600,000 versus $35,900,000 last year. The next slide provides you with a reconciliation of reported and adjusted diluted EPS. 1st quarter reported EPS was $0.35 per share diluted compared to $0.36 per share diluted for the comparable period of 2023.

Speaker 3

Adjusted diluted EPS was $0.43 compared to $0.42 in the year ago period. Note that we calculate adjusted diluted Reconciliation of non GAAP financial measures. Moving to the balance sheet and cash flow. As of November 25, 2023, The company had cash of $121,400,000 Cash flow from operations in Q1 was about $47,500,000 compared to $8,700,000 last principally due to improvement in working capital. During the quarter, the company repaid $10,000,000 of its term loan debt.

Speaker 3

At the end of the Q1, the outstanding principal balance was $275,000,000 However, subsequent to the close of the quarter, The company repaid an additional $25,000,000 of its term loan debt, bringing the outstanding principal balance $250,000,000 Capital expenditures in Q1 were $700,000 In fiscal 2024, we continue to expect CapEx to be in the $8,000,000 to $10,000,000 range. In fiscal 2024, we anticipate net interest expense to be about $17,000,000 to $19,000,000 including non cash amortization expense related to deferred financing fees. Now to wrap up, as Jeff stated earlier, we are on plan Across all key metrics in Q1 and therefore, we reaffirm the full year outlook we discussed last quarter. We continue to That ingredient and packaging costs will be lower in fiscal 2024 compared to last year and drive solid gross margin expansion. This provides us with the flexibility to invest in marketing initiatives that will drive near and long term growth and organizational capabilities.

Speaker 3

Therefore, for full year fiscal 2024, we anticipate net sales growth driven by volume to be at the high end of the company's long term algorithm of 4% to Including the benefit of the 53rd week. Adjusted EBITDA is anticipated to increase slightly greater than net sales growth rate And adjusted diluted EPS will increase greater than an adjusted EBITDA growth rate. We appreciate everybody's interest in our company and we're now available to take your questions.

Operator

Thank you. We will now be conducting a question and answer session. Our first question comes from Matt Smith from Stifel. Please proceed.

Speaker 4

Hi, good morning and thank you for taking my question.

Speaker 3

Good morning, Matt. The

Speaker 4

12% growth in the active or convenient nutrition category, Which has been supported primarily by volume growth. That's a stark contrast to the Senator store where volumes and consumptions remain pressured. From a high level, could you talk about the trend supporting the strong consumption growth in the category? Are we seeing a period of accelerated household penetration growth? Or is the buy rate increasing at a greater rate than it has historically as the category remains relevant with consumers?

Speaker 4

Could you just help I understand what's driving the strong category relative to the rest of the store.

Speaker 2

Yes. Good morning, Matt. This is Jeff. Appreciate the question. Yes, no, you're right.

Speaker 2

The nutritional snacking category has grown Recently and consistently low double digits versus center store, which is closer to 1 to 2. And as you noted And your question, most of that growth is now volume. And it is a significant difference, So I think it's due to several factors. The category is certainly benefiting from health and wellness and convenience snacking trends. But in addition, the high protein, low carb, low sugar macros of the category Are increasingly emerging as the nutrients of choice, particularly for younger, millennial, Gen Z consumers, Perhaps in contrast to high carb, high sugar products.

Speaker 2

So that those are 2 macro drivers Of the category, I think what's interesting is despite the strength we're seeing in the category versus stand to store, I still think we're in the early innings and that this momentum has a lot of continued runway. And just a few thoughts on that. Household penetration is only at 50% versus high 80s, low 90s for standard store. While the nutritional snacking category largely grew up on bars and shakes, As we bring new formats to market, for example, our salty platform on Quest, it's increasingly driving buy rate as well as penetration. Retailers and I've met with all of them, most of them recently.

Speaker 2

They're certainly seeing the growth. They are looking to us as category advisors to the majority of those accounts and saying how can we capitalize, where can we find more space. And lastly, while in the early innings, we're on the right side of the GLP-one drugs, which are In the early stage, but I think that's a future tailwind as well. So there's certainly a difference we're seeing today. You're seeing it in the numbers, but I think the category, nutritional thinking category has a long runway of growth in front of it.

Speaker 2

We're working as a company and in partnership with our retailers on how we can accelerate that to take further advantage of it.

Speaker 4

Thanks, Jeff. I'll pass it

Speaker 2

on. Thank you. Thanks, Matt.

Operator

Our next question comes from Pamela Kaufman from Morgan Stanley. Please proceed.

Speaker 5

Hi, good morning. Happy New Year.

Speaker 3

Happy New Year to you.

Speaker 5

Thanks. So you are now a You've taken so far and remind us how you're thinking about the trajectory of Atkins improvement and milestones to gauge The improvement?

Speaker 2

Yes. That's a good question, Pam. As we talked about at the last quarter, We're not happy with the current performance of Atkins, especially given the long term potential we see for the brands. I talked about that on the last quarter So 80% of consumers looking to lose and maintain weight, the brand is highly trusted, the macros work, the products taste great and we've put The 5 point revitalization plan into market and I outlined those elements in our scripted remarks. Now I'm pleased with the progress the team is making.

Speaker 2

As we talked last quarter, We've set a 12 to 18 month timeframe for when all of those elements will be to market. So some of them take a little longer than others, for example, The packaging refresh, but some of the elements have are in market today. That would be the new configuration at the club store, which has shown a marked improvement in trends in that channel. The new advertising is out. It was out in October.

Speaker 2

As we noted, we tend to throttle back more in November, December, But we're pleased with how that advertising tested. And as we move into January, February, March, we'll be heavying up that advertising. And then we're pleased with some of the new innovation and how that's turning, for example, the bake bars and the break bars. So Some of the elements are in market, and I'm pleased with our execution. But I think the most critical period for us to evaluate how we're performing It's January, February, March when we'll have more sustained advertising in market, more merchandising in market.

Speaker 2

It's a critical seasonal period for us. But I just want to reiterate, we are taking a 12 to 18 month View on the revitalization of this brand because that is how long it will take before all of the elements are in market.

Speaker 5

Great. Thank you. And just wanted to ask about your capital allocation priorities. It seems you've Paid down debt recently, your balance sheet is in strong shape. So how do you think about the capital allocation options that you have in M and A versus buybacks and more debt pay down.

Speaker 2

Yes, Pam, I think overall, we spent

Speaker 3

a fair amount I'm looking to evaluate the best return of our cash to our shareholders. That includes, obviously, as you said, debt pay down, share repurchases, M and A and even We had a very strong cash from operations this quarter. We got over $100,000,000 in cash on our books. We evaluate opportunities to buy back shares pretty consistently as well as looking at other ways of spending the overall. But I think, if we take a step back, we're going to evaluate these opportunities as they come up.

Speaker 3

I wouldn't say there right now, we've thought the best Use of cash in Q1 was the debt pay down and we'll continue to evaluate that on a quarterly basis. But we are very

Speaker 5

Thank you. I'll pass

Speaker 6

it on.

Operator

Our next question comes from Steve Powers from Deutsche Bank, please proceed.

Speaker 7

Hey, guys. Good morning. Thank you.

Speaker 6

Good morning, Steve.

Speaker 7

Good morning, Steve.

Speaker 3

Good morning, Steve.

Operator

Good morning, Steve.

Speaker 2

Steve, well.

Speaker 7

Yes. So two questions, if I could. The first one is just a little more just tactical on the guidance. I think the 8% plus consumption that we saw in the Q1 was a bit better than going in expectations. The full year guidance implies you still expect Roundabout mid single digit consumption on the year.

Speaker 7

I'm just trying to think about how the phasing in your mind is going to work And kind of specific to 2Q, just because if you're going to catch up to consumption, just trying to figure out what that what you're trying to imply And then broader, Jeff, you talked about the The category advisory conversations that you've been having with the retailers, I guess I'd love a little bit, if you could, Elaboration on that and kind of what are the key points of emphasis that you're bringing to those conversations I'm trying to impart to retailers so that they can, take good on further category success.

Speaker 2

Yes. Thanks, Steve. Maybe I'll start on the guidance question, turn it over to Sean, and then I'll come back on the Category advisor question. As we noted, Q1 consumption was a little better than we expected. But as we said also, we're comfortable when we reaffirmed our guidance.

Speaker 2

As you know, the seasonality of this category, January, February, March is a critical period for us. And that's going to give us a much clearer picture on how Quest and Atkins will perform For the year, we're very pleased with how Quest Retail Takeaway plus 19 in Q1. We're in the early innings of the Atkins revitalization plan, but it will be another quarter and we'll have a much better view of the year. And then we'll think through longer term how to think about that. But I'll turn it over to Sean for any added color there.

Speaker 3

Yes. Just reiterating a little bit, I guess, overall, I mean Q2 was better than we expected a little bit. Q1, excuse me, I hope Q2 better. We're comfortable with our guidance overall. Let's see how we execute the next quarter or so and that may impact our view on the year.

Speaker 3

But Consumption in Q1 was encouraging as we look at what the results were. I think as we've talked about it internally on plan through Q1 Like what we have for plans in place for Q2, need to see how things turn out in the marketplace in Q2 and then we'll kind of reassess where we are as we get

Speaker 2

I'll come back on the category advisor question. It's a good one. Yes, I've certainly been on the road a lot over the last 3 months having these conversations with retailers. And as Matt noted in his question, The category, nutritional snacking category is now consistently disproportionately showing growth versus 74 And retailers are seeing that and they're seeing that discrepancy. They're looking for growth and they're coming to us and saying, How much additional opportunity can we get after?

Speaker 2

What do we have to put in place to take further advantage Of what seems to be a long term trend, particularly around the nutrients, as more and more consumers switch to protein forward, they want to take out sugar, they want to take out carbs from their diets. And so we are working with them. We're investing considerable amount in Understanding the category, projecting out where the category is going to go over the next several years and then we started Building plans with them on how to further capitalize on that growth. So those plans will include a mix of Whether we find more space, whether that be from close adjacencies or further out, how do we take advantage of the omnichannel, because this Category does lend itself to heavy online purchases. How do we drive more traffic down the aisle?

Speaker 2

How do we use our combined marketing capabilities? They see the growth and they're looking to us and say, how can we build it together? You bring your resources, we'll bring our resources because it is a bright spot. And so we've just started those conversations in earnest with several of Our largest customers and I'm excited to see where this goes because I think this is one of our pillars for sustained long term Growth, which is the growth of the the continued growth of the category.

Speaker 7

That's great. Thanks so much. Thanks.

Speaker 2

Thank you.

Operator

Our next question comes from Alexia Howard from Bernstein. Please proceed.

Speaker 5

Good morning, everyone.

Speaker 2

Good morning. Good morning.

Speaker 5

Hi, there. So can I ask you, you commented about how the gross margin improvement this quarter It gives you an opportunity to invest in organizational capabilities? Can you give us a little bit more color on exactly what you're hoping to accomplish there? And I'll pass it on. Thank you.

Speaker 2

Yes, I'll take that. So it is we're fortunate to have some flexibility. And as I mentioned in the scripted remarks, our focus is on delivering consistent growth quarter to Quarter year to year to year. One of the biggest areas we have invested back to Steve's question is enhancing our category management capabilities. And that includes research, It includes bringing on some additional talent and bolstering our capability to develop These long term plans with retailers, our industry is pretty good at developing 1 year joint business plans with retailers, Alexia.

Speaker 2

It's a different muscle to build 2 to 3 to 4 year growth plans at the category level. So that's been an investment we've made. As you saw in the financials, we've increased our investment in marketing, taking up to just over 9%. And we've also invested in bolstering our long term innovation capabilities. As I talked on the last quarter, We were disappointed with the lack of innovation on Atkins.

Speaker 2

We don't want that to happen again. So We're invested in building and bolstering our pipeline. And as you know, innovation is kind of the lifeblood of Quest. So we want to ensure that we keep our foot on the gas there. So those are probably the 3 biggest areas, enhanced category management, additional marketing And innovation, which by the way is in a much better place from when I came to Simply.

Speaker 2

Very pleased with the progress we're making there. Sean, anything you'd add? Great.

Speaker 3

Just one more thing I think I'd throw out there. Just the capability wise, I think we also kind of made some assessment as we kind of get into this year and talk about what the Plans we have going forward and the pillars that Jeff talked about last quarter and making sure we have the right longer term capabilities to support that Type of work as well as the growth associated with that. So we've also kind of looked at that internally and added some capabilities within that or within the organization to That's one other area I said we've invested in, but we've been very thoughtful about where that favorability is for gross margin gets reinvested And really being thoughtful about making sure what provides us with longer term growth as well as hitting our short term goals.

Speaker 5

Great. Thank you very much. I'll pass it on.

Speaker 2

Thanks.

Operator

Our next question comes from Brian Holland From D. A. Davidson, please proceed.

Speaker 7

Yes, thanks. Good morning. Good morning. I wanted to maybe Just dive into a little bit from I guess it sounds like 1st quarter consumption trends were better than expected. It sounds like that was Maybe more specific to Atkins, so maybe being less negative than maybe the expectations going in.

Speaker 7

You can correct me if I'm wrong on any of that. But Just wanted to kind of focus in on that and understand exactly what you're seeing there. Obviously, it's a seasonally lighter quarter, but you did Run some fresh advertising, as you said at the beginning of the quarter. So excuse me, I'm just curious what you're seeing with respect to Whether you're finding a new buyer, I know that some of the messaging around the advertising campaign was to try to address some misconceptions about the brand. So I'm just Curious if you're seeing any early results from that and where exactly the better than expected consumption is coming from?

Speaker 2

Yes, the consumption was slightly better than we had forecasted. Actually, it was across both Atkins and Quest. I'll start with Atkins. As we said in the scripted remarks, October was a pretty good month for us versus the previous month As we came into the quarter and Still below our expectations. Yes, not happy with the number in absolute, but on a relative basis, It was a much better month for us.

Speaker 2

And that coincided with us dropping the new advertising and strengthening our merchandising And also having this new configuration in club. And so, but it's only 5 weeks and we don't want to overreact to 5 weeks of advertising because as you know, we have to throttle back in November, December given the seasonality. So as we said, the real test on actions, I think, comes in January, February, but we were encouraged with what we saw in October when we did have several of these Revitalization plan elements in market, particularly the advertising. But in addition, Quest Came in stronger than we had forecasted as well. What's interesting about Quest is if you go back 2, 3 years, the majority of growth on Quest was coming from penetration, Which was very distribution driven.

Speaker 2

Now you look at the drivers of growth and it's roughly fifty-fifty balance And so we've just seen a more balanced growth profile on Quest that I think is carrying the momentum through. And what's really about Quest is despite the size of the business and it will be a $1,000,000,000 retail brand this year, Brand awareness is still relatively low versus a lot of key competitors, and we're excited to debut new So yes, the consumption was a little better than we thought. Both brands, the critical period for us is again January, February, March.

Speaker 7

Yes. Appreciate the color, Jeff. And fully recognizing, we're just a few days into New Year, New You. I'll ask anyway. Just curious what, if anything, you are seeing either from the competitive landscape, I.

Speaker 7

E, innovation, promotion, etcetera, or Consumer engagement with the category, again, admittedly only a few days into the New Year, but Given its significance, I trust you're watching that closely.

Speaker 3

Yes. We're blowing it away. I'm Just kidding. So I think right now, we are set up as we get into New Year, New You to kind of get with our retailers. Everything is in the stores, you see the Blaze, you see a lot of the activity ready to go in all of our key retailers.

Speaker 3

There's some advertising that dropped And specifically on January 1st, you'll see that continuing through there. We've had significant investment in both consumer communication for both brands In Q2 as well as the merchandising and promotional activity that's out there, as you said, I mean, it's still early. I mean, it's We haven't got really results other than a day in and day out basis. So I can't really comment on progress, but we feel confident in our plans.

Speaker 2

It is it's obviously early, but we feel very confident in the consumer and retail Plans we have as we enter this critical period.

Speaker 7

Thanks, John. Thanks, Yap. Best of luck.

Speaker 2

Thanks.

Operator

Our next question comes from Jim Valera from Stephens Inc. Please proceed.

Speaker 8

Hi, guys. Thanks for taking our question. You've already discussed some of the trends with Quest in the category. But I was wondering if you could give us a sense for how much of the broader category growth is being driven by the Expansion of products and the appeal that that brings to expand buy rates versus consumers that are increasingly health conscious kind of engaging with these protein dense, caloric, low calorie snacks.

Speaker 2

Yes. No, it's a good question. I don't have that information at a category level. As we look at our brands, We certainly see a balanced, across both Health hog penetration and by rate. And as I said again to Matt's question, This category largely grew up as bars and shakes and over time has expanded well beyond that New format, new usage occasions, new dayparts.

Speaker 2

So that's a big driver of By rate, but we continue to see also consumers we still continue to see health of penetration increase. So It's both. And I think the opportunity for us is to continue to drive both, To continue as particularly as category leaders, to continue to bring consumers into the space, that's the job of advertising And then to continue to drive buy rates, which is the job of innovation. I think the biggest driver Here, underlying all of this is protein has really emerged as the nutrient of choice, particularly for younger consumers. Sugar, they don't want sugar, they don't want carbs.

Speaker 2

And so as these Nutrients become more and more broadly adopted, you're seeing more and more consumers look for our products as a way of delivering against They're looking for and to power their lifestyle, but we still believe the category has tremendous runway both on Buy rate and penetration. Yes.

Speaker 3

And I think just building off that a little bit, I think Jeff mentioned the bringing consumers in through advertising, getting the innovation, but then also working The retailers to continue to expand the shelf space that allows us to have new formats that are out there. I think Quest, as Jeff said in his prepared remarks, Has actually expanded in other formats pretty successfully, which is great because salty snacks, I think is about $300,000,000 business at retail. So It's grown from just a bar and shape bar business particularly and then into the other categories and we see that expansion Opportunity really in other categories as well. When Quest was acquired, the business was by far majority of our Okay.

Speaker 2

For sure. Now bars represent just about 50% of sales. So that shows you the expansion And it shows you the opportunity on particularly I think they're on buy rate.

Speaker 8

Great. I appreciate the color. And if I could sneak in maybe one follow-up to that. Do you have a sense for consumers that are actively using the GLP-one drugs that they gravitate more towards Atkins versus Quest?

Speaker 2

Not between brands. We do know from our own research, but I think you're seeing it from other research as well that when consumers are on the drug, their appetite is suppressed, but they're looking for Smaller, more convenient, healthier, high protein, low sugar options, that's where our category majors in that. In talking to consumers on the drug, we certainly see an increased interest in products from Atkins and Quest. That's why I do think our category is on the right side of these drugs. That's why we've got out of the gate early.

Speaker 2

We have identified we've been able to identify these consumers. On Atkins, we're sending them targeted communication. We're investing in research to better understand it. But specifically to your question, we think both Atkins and Quest have a strong role to I hear it's not one versus the other.

Speaker 8

Great. Appreciate the color guys. I'll hop back in the queue.

Speaker 3

Thank you.

Operator

Our next question comes from Kaumil Tharawala from Jefferies. Please proceed.

Speaker 9

Hey, guys. Good morning. If I could follow-up on that on your last response on GLP-one. Is there is M and A part of the strategy on trying to leverage the opportunity that's in front of you as it relates to GLP-one?

Speaker 2

Not explicitly. Would it be something that we would look at if a right asset came along? Yes. But I think it's we're very much in the early innings on GLP-one. We've got a lot to learn.

Speaker 2

I don't think it would be front and center As an M and A driver, but it would be a factor that we would probably look at as we would look at any asset.

Speaker 9

Got it. And then how about M and A in general? You mentioned a few times kind of value enhancing acquisition. What does the M and A environment look like? Have multiples come down?

Speaker 9

There's obviously debates about asset prices and interest rates. How do you see the environment at the moment?

Speaker 3

Yes. I mean, I guess, take a step back. We love the category, right? And we believe the potential to double that There over the next pick of time frame 5, 10 years. We look at a lot of assets that come into our space, especially those that are complementary to our Folio, where we can get synergies.

Speaker 3

To your point about seller expectations, they're still high and we're not going to overpay quite candidly. We evaluate continue to evaluate complementary brands and businesses of size, preferably shelf stable, warehouse delivered and really in or adjacent to our aisle. That's We think the synergies really are. So our targets really here are strong consumer brands that are complementary. We've got a strong balance sheet.

Speaker 3

We've talked about it already that allows us to do those things, But we're not going to overpay for anything either. So we evaluate everything that comes up in the space and we kind of assess whether that's the right move for our shareholders.

Speaker 9

Got it. Thank you.

Operator

Our next question comes from John Baumgartner from Mizuho Securities, please proceed.

Speaker 6

Good morning. Thanks for the question.

Speaker 3

Good morning, Jeff.

Speaker 6

I wanted to ask about Quest and specifically the Snaps business. The distribution growth has remained strong in measured channels. It's been strong sequentially since the shelf resets But the resilience in velocities at the same time has been pretty surprising. And I'm wondering, Jeff, can you speak to anything different in The retail programming, the merchandising, even maybe the composition of the store doors with your gains in TDPs, that sort of explains the velocity resilience there at a time A number of categories are seeing softness in higher priced brands.

Speaker 2

Yes. I mean, the you're right. Distribution was the primary driver of Quest Growth, certainly following the acquisition, which speaks to the Strength of the selling organization at Simply, but more recently we've seen growth be more balanced Not just distribution, as I mentioned, but also by rate. And I think it just speaks to the underlying strength This business is one of the most culturally relevant on trend growth businesses I've seen, as we mentioned in the scripted remarks, it will cross $1,000,000,000 in retail sales this year. And what's really interesting about Quest versus most other brands is it has not just permission To extend into other forms, but this is what Quest consumers expect and demand.

Speaker 2

They look to quest to come into snacking categories, flip the macros And come out with a great tasting product that has high protein and low sugar. And this is what consumers want from the brand. And we have an incredible R and D organization, best I've ever worked with in my career that has been able to develop Wonderfully tasting products that deliver on these macros. Our retail partners see it too. It's why they continue to support the brand.

Speaker 2

But I think at the very heart of your question is the strength of the Quest brand and in particular, The demand of Quest consumers for the brand to come into snacking categories and flip those macros And offer them snacking occasions for different day parts, different usage occasions, different products. I think that is what in my opinion It's unique about Quest versus almost any other brand I've seen in my career.

Speaker 6

Thanks for that. And then just on Atkins, looking back to Starz, the non programmatic portion of the consumer base has been the big growth unlock over And I'm curious as the GLP-one awareness sort of takes hold, do you see the programmatic dieting consumer sort of also Making a comeback, shaking off some of the dormancy there on growth or as you're working through your 5 point plan for recovery, Are you still expecting the vast majority of growth to come from the non programmatic segment?

Speaker 2

I would say that we would look to both segments As growth opportunities for the brand, I think that we do have those consumers Who do look at look to Atkins as a regime, that's why the buy rate on the brand is virtually double any other I've ever worked with. And we think that obviously those consumers are very critical to us. They're front and center in our media planning. And I think they will be very open to, Atkins on GLP-one. But we also think the opportunity for Atkins Is to expand continue to expand the funnel, bring in new users, introduce them to the brand, the benefits it offers.

Speaker 2

So that If you look historically, programmatic has always been a smaller portion of the brand Sales, right, so 10% to 15%. But as I mentioned, the buy rate side, so they're critical. We have to continue to talk to those consumers, but we also have to bring new consumers into the funnel. I think both groups are very I see BOSGRED is having an opportunity for GLP-one.

Speaker 3

Yes. And I think you're also going to see the benefit of the category expansion that Jeff talked about and the There is we kind of we're in a growing category and it allows us to continue to grow with the category overall. We haven't Seen that recently with Atkins, but we're going to as we get through the plan, we'll see more of that overall. So I think it's all three of those things are going to drive the eventual return To the growth that we're looking for, for Atkins.

Speaker 6

Thanks, Jeff. Thanks, Ron.

Speaker 2

Thank you.

Speaker 3

See you, Jeff.

Operator

Our next question comes from Matt Smith from Stifel. Please proceed.

Speaker 4

Hi, Jeff and Sean. Thanks for taking another question here. Welcome back, Matt. In past years, when Simply has benefited from stronger consumption, the company has elected to increase its investments behind the business given the strong returns on those investments. Given the strong input cost favorability and the consumption trends today, I know it's early days, But is it reasonable given what you're seeing from investments you're making now?

Speaker 4

And then when you look at the business today, how do you balance investment and Quest to maintain momentum and drive growth versus the ability to accelerate the Adkins stabilization plan to the extent you're able to this year?

Speaker 2

Yes. So it's a really good question. Sean and I discuss this almost every day, right? Because we see the long term growth of the category in the multi year runway, We believe that that creates the opportunity for investment to take full advantage of it. I think it was Alexia's question where she asked about where are we investing to capitalize on that runway of growth.

Speaker 2

We have increased our investment in marketing. It's now just a little bit over 9%. We've increased our investment in innovation, And we've increased our innovation and category management because we think and we see the potential for those investments to pay off over the long To your question on Quest versus Atkins, we have to invest in both. Both brands are critical. They play a critical role in the category.

Speaker 2

As I mentioned, I've been on the road a lot over the last 3 months Talking to consumers about the category and the role that Atkins and Quest play to a retailer, They're committed to supporting both brands. Each brand plays a different role. And so we need to invest in both businesses. The investment obviously is a little different. The levers we pull are a little different.

Speaker 2

The brand's lifestyle they're within their life stages is a little different. So that's why the plans are different, but the commitment to investing in both is there. And all of this is because we see the long term growth potential of this category and we're going to get after it.

Speaker 3

Yes. And I think, Ova, it's a great question. It's something we talk about pretty much all the time. And I think it's something that we balance as we go through each Really, I'd say month quarter review as we think of where we are overall and getting ahead of the investment and return on those things. It goes back to a lot of the kind of pillars that Jeff set up when we started this discussion last quarter and really Throwing gasoline on fire for Quest, revitalizing Atkins, category management and then using the fuel to fund that to be Related to the, I'll say, commodity and cost savings that we have as well as some of the cost saving productivity we have in So it's a discussion we have all the time and we balance all those things and try to make sure that we support both brands because Jeff said, retailers expect that and on top of that built for this year and for future years.

Speaker 2

That's really it. It's about delivering the quarterly commitments we're making, But also ensuring we're set up for sustained long term growth.

Speaker 4

Got it. Thank you for your perspective and I'll pass it on.

Speaker 3

Thanks, Matt. Thanks.

Operator

Our last question is from Jon Andersen from William Blair. Please proceed.

Speaker 8

Good morning, everybody, and thanks for the question.

Speaker 2

Good morning.

Speaker 8

I wanted to take a different angle on Atkins and potential outcome of the revitalization plan. It seems that some of the Atkins innovation outside the core, so outside of bars and shakes, let's say Chips, as an example, has not had the same uptake as Quest is seeing outside its core. Do you think Atkins has Less permission or rationale to travel and if so, is the intent at least in the near to medium term To focus Atkins innovation, focus Atkins retail assortments on core bars and shakes rather than to try and

Speaker 2

Yes, that's a it's an astute question. I guess the short answer is yes. We have I mentioned on the last call, I was disappointed I've been disappointed with the Lack of innovation on Atkin, particularly in the bars segment, and That certainly has contributed to some of the trends we've seen on the business. When I came, it was a big focus on jump starting that pipeline, Getting products out now, but also building a robust innovation pipeline for the future, so we're never short again. Some of the more recent products we've brought out have performed pretty well.

Speaker 2

The bake bar, for example, is turning really well. The brake bar is turning very well, but that those are some of the early products from the pipeline. I think that they're now a lot more Robert, to your question on chips and your comparison to Quest, I think the question there is more around why did it work on Quest versus why did it not work on Atkins. There's very, very few brands, you can probably count them on one hand, who've been able to extend out of the core. Quest is one of those brands.

Speaker 2

And as I mentioned earlier, that is because the Quest consumer is demanding that Quest comes into snacking categories and flips the macros. On Atkins, what we've focused on is strengthening our core, strengthening our bar business and strengthening our shakes business as part of an overarching revitalization plan. So on Quest, it is about pushing beyond where we are today. On actions right now, it is about focusing on the core and strengthening the core And revitalizing the brand. Yes.

Speaker 3

Just to add ons to that, I think just if you go back in time when we did we looked at Quest before we bought them, It took a while for, I'll say, salty snacks to become what it is today. It wasn't like an immediate success and it was a linear grow every year. That's going to be Fantastic. It sort of took a little while for the consumer to accept it, understand it and then kind of see the growth that we see there right now. So Where we are at Atkins is a little early in the process and I wouldn't necessarily say it's not going to work.

Speaker 3

But to Jeff's point, I think the point we're trying to do is we need to make sure the core business And the core bars and shakes business is really humming before we start talking about expansion into other areas. So that's where we're kind of getting back to basics there.

Speaker 8

That's really helpful. Thank you.

Speaker 2

So I just want to thank everyone for their participation on today's call. Happy New Year, And we look forward to updating you on our Q2 results in April. Have a great day.

Speaker 3

Thanks, guys.

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Earnings Conference Call
Simply Good Foods Q1 2024
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