Q3 2022 Simply Good Foods Co Earnings Call

Conference center. May I have your name Please?

Numbers the second is we know all throughout coveritt and even a little bit before, confections were benefiting from the interest in Keto And if you look at some of the competitive Keto launches they're all typically confection like products. Keto interest is off by half right now. Obviously we're seeing some impact on our confection business from that declining interest and obviously that will be something that will burn off over time. Do I think it's how you know, a long term trend on the business? No, I go if, if we were re seeing declining interest in the brand, we would see a fall off in buyers and we're not seeing that. In fact we're seeing double digit growth and buyers and we'll burn through. I'm pretty confident we'll burn through the buy rate issues of bars and confeions over time and get back to a more normal consumption behaviors. Got OK understood, Thank about. I said that next question today is coming from B B M, the new from Stephen July of that lot.

Yes Hello, this is Jack hardarten goingilling in for Ben vamvenue or ack morning. one quick question here: what does your product innovation pipeline currently look like?

Well we don't Jack. We typically don't talk a little much about what could happen in our business. We'd like to talk about what's happened. I would say we have a robust new product pipeline. We feel pretty confident. If you look at our, if you look at our most recent history, a lot of our innovation has focused on other snacking forms. So we look at our business and we see bars and shakes as a core.

On the akkins business, we have a strong bar and shake business. On the Quest business, we have a very strong bar business. That's our core. We always innovate in that because we have to provide consumers news and variety. Our focus on innovation beyond that has been in other forms, So very strong: solaly snack with dotia chips. We have a very strong confection business on both brands and we're building a cookie business on both brands over time. You would expect our pipeline to continue to explore those opportunities as we go farther and also look at other snacking forms to drive more purchaseation.

Ok awesome, Thank you so much, I'll pass it all.

irespect and our question is coming from Alexia Howard, from bern, senior lot is Ally.

Good morning everyone.

The morning HI. Can I ask about the gross margin trend? From here it looks as though this might have been the low point, with the sort of big decline in the adjusted gross margin. Given your guidance for the full year and the fact that it's been down, you know, 250 basis points year to today, it looks Theresa sequential improvement next quarter. Is that because more pricing is kicking in? Is that because the cost situation is getting easier? Is it operating well? It probably isn't operating leverage because the sale was slowing down next quarter. So I'm just curious about what's driving that and if we are at an inflection point.

Sure So a couple, couple of factors. So number 1: last year's gross margin was very, very high, with the highest we've had since the acquisition of Quest. Just kind of everything hit last year: we had favorable, we got bars back in and, most importantly, we didn't. Q3 was really the last quarter that we didn't see a big increase, start to see the increase in commodity, So that our we were covered through Q3 of last year, Q4 of last year's, when we started to see input prices accelerate. So Q3 was high threshold and as you move into this year yes, we had some pricing.

But we're lapping a very high gross margin. Significant increase in input cost degree and cost ingredient cost year-over-year for the quarter we're actually up hoper 20%. Total total supply chain cost kind of more in the mid-teens, but significant year-over-year impact is based on timing of last year. So that's the big driver and yes, this will be the low point from a year-over-year change. Sequentially we will be the actual gross margin will be higher in Q4 and year-over-year.

Speaker 1: You know the guidance kind of implies were about down 200 basis points in Q4 great. And then, as's a follow up, can you give us any, any color on the, the ingredient cost of breakdown? We know that dairy is important for you, but you know these are big numbers, that we're talking about 20%, I'm around. What is that that's going up so much? Is it mainly dairy? Other other ingredients that you're exposed to? Is it on the? Is it on the sweetness side as well? Thank you, or I'll tal it on yes's. It's mostly dairy protein complex, So it's ever. It's our proteins, whether it's way any.

From a civil security hereline. Is that lie?

Good morning. Thanks for the question.

Or is going to be first offer for Joe coming about the cookies? I mean you've lap, you know, one year in market and I appreciate your thoughts regarding next steps here. I guess you know top of mind from these racyc V be leveling all around 50%. How do we think about the manufacturing capacity available to grow the business going forward new shelf sets and, I guess competitively, how are you seeing consumers engage with Atkins relative to some of the other, your Bo sugar, sugar free products in that category?

Yes So let me kind of unpack your questions. First of all, I think we're still in really always stages when it comes to cookies. So you mentioned- I think you were referring to questass- questes, probably three years into its cook, launched. So conventional cookies were launched. purchin cookies were launched about three years ago. We're continuing to build distribution on those. We have Frosted cookies that we just launched were, I think, in the Forty's percent e cv on those and still building and those have so far have performed really well in store.

And actins just launched its cookie. So I would say we're kind of early innings on cookies with Quest about three years old but innovating on that platform and look I'm pretty optimistic about the format. I think there's a lot of innovation opportunities in that space. In both the type of cookies flavor sizes textures. So I think you should expect this to continue to innovate there and we're not going to stop distribution pushes until we start getting top by items near 70% ACV at retail. So we're pretty we're put pretty bullish and it's a very.

Speaker 2: So the reason we're excited about it- it's an incremental consumption occasion to our core by our business and shape business, So you pick up more. The way to think about it is you can bring more people in from it, but you also can get by ate because people will eat these at different occasions. So we're pretty, we're pretty bullish about the segment and we're bullish about our pipeline of products that's come in.

We like it great. And then just a bit more broader follow-up on the. The phasing of the merchandise marketing this F fiscal year challenges of the roized presolid. You're pleased with consumer engagement in buyers, based on christimas's question. But taken that further, might there be an argument to be made? The promo window: you have a larger investment in quality promo. You know, should that extend later into the fiscal year as a normalized approach going forward I what's been the feedback from retailers as of thinking about seasonal merchandise and see these categories, you know doesn'it make sense to end that out more regularly.

We're already in th. It's a great question historically and I'm going to go back.

seven eight years. Historically the mindset of our business in the category is if you kind of win January February , March kind of resolution season, you win the year. And we challenge that conventional wisdom a long time ago and said we actually think that the seasonality of the business is more skewed by how manufacturers invest their marketing dollars and we started spreading our marketing dollars out, both media as well as customer programming. So we have major programming now January , March.

May in September , and our spending from a programming standpoint is more balanced than it's ever been before, and we've seen our business become less seasonal because of it.

From a media investment standpoint, we're big believers in as best as you can year round spending. So, as opposed to trying to own January and March, we like to be on airr as long as we can be on air where decent levels of support and that has proven out in our business. Our businesses- both of our businesses- are less seasonally dependent than they've ever been before.

So and that's all been driven by good returns, right? So if you, if you're, if you think about it, if you're trying to win January and March, you spend all your money in January , March. The next incremental dollar gives you a less return because everybody else is spending their money in that period of time and you've got too much investment and you lose your efficiency as you start spreading that out. Your returns and other parts of the year are better.

Speaker 2: And so we're always driving it based on what we can see from an ROI standpoint and that has told us weeks on. Air is the key metric at some decent level of weight, and that's the way we've been allocating our spending over for a number of years now: based on the M that we see from a marketing signence standpoint.

Thank ans wer your question. Thanks the absolutete. Thank you very detailed. Appreciate it all right yes, have a be day.

Thank your next question is coming from toy Ross from ubbs. Jv is Ally.

Good morning folks. Thanks for taking our question. In the Nielsen scanner data we can see the price you implemented on a four-wardek basis. However, volume decelerated, largely driven by outright declines in the last two weeks. Can you discuss the underlying demand that you're seeing right now and then more broadly discuss your outlook for elasticity of the brandch?

Yes So we took on average, called 70% pricing. We estimated there would be a one-to-one relationship with volume. That's about what's happened.

So your business was growing 7% on the dollar basis, volume would be flat and it would all be pricing driven on. On akins we're seeing, So you're looking at poss, measure channels, you're seeing, call it, 5% growth. So volumes at down about two and the balance is pricing and that's what we would have predicted. So nothing unusual. On from elasticity standpoint, the pricing is coming through as we would have expected and the volume impact is what we would have expected. Yes, I would just follow on to your point. Pos and broick and mortar has lightened up a little bit, particularly on actins, I would say it's.

Kind of suple one is we're just getting a category and we are just getting back to more normalized growth rates in total. Obviously it was food accelerated as we kind of lap the cooded time period, So we're kind of getting back to work re kind of more of a sustainable growth rate actand we've seen tremendous growth as.

As shopping trips. With the impending consumer issues right now, shopper trips are actually down a little bit. They're starting to starting to lag. We're seeing a big shift, particularly on hakins, to e-commerce. So heard thosees comments, our e-commerce business, particularly on ama, zon with with hakins, has grown significantly over the last couple of months and we're seeing that continue. So we're seeing some volume shift from brick-and-mortar to online. In total that's we're happy with the performance. But yes, between shopper tripsand kind of little bit of a channel shif, there is a bit of an impact.

Great Thank you if I can sneak one more in here. There's been a lot of discussion about Quest ability to effectively compete in the snacks category and outlump in actkins with that too, without cannibalizing your existing business. We have many examples of brands failed attempt to jump into adjoicing categories. What is different about your strategy with Quest actkins that will make you successful ones? snnextacks and what are some investors missing?

thanksnow, I think. First of all, the track record is pretty good evidence.

That we can be successful in multiple forms. So if you look at the akkins business about 20 per to 20 five percent of its in confections already. So core business a bar in shake we have a really strong confection business alreadywe. We ran that playbook on Quest with confections pber cops clusters and it's already a pretty strong business. Quest was even before our acquisition well down the path on chips which has become for Quest. They closeed to $2 million retail business iness already So I'd say that.

That conventional wisdom around ability to innovate I think is proven to be incorrect on these businesses and I think part of it is.

These are lifestyle brands, they stand for something other than just the product that they market, and so therefore, in the case of akkins, it's a nutritional philosophy, in the case of Quest very similar active lifestyle, with a kind of macronutrient philosophy around it, to fuel that lifestyle, So that those promises enable more than just a single product.

And so as long as you're true to those promises I think you have the ability to innovate. Now. I would say there's a few executional differences that.

We believe in. We believe in the strength of the brand and a brand block in the storm and owning the aisle that we're in.

So you're not going to see us, for the most part, playing in other people's parts of the store. I think that is difficult to pull off.

Because you don't have scale, you're not a major player in the aisle. There are people that are and you have difficulty controlling your brand in those. You know other sections of the store. So I would probably put in addendum on your belief around innovation in other categories. And the endum would be: if you start spreading yourself to then around the different parts of the store, you can run into issues and I do believe that is the case. So, not surprising our mule Bowl business on Atkins, our pizza business on quest- we've license those products out. We didn't believe we had a competitive advantage in those aisles and we put those brands in the hands of people that do.

A trade off and I think when we follow that platform, peanut butter cups- you know what I would. I would challenge you to take to your own comparison with the full blown, full sugar peanut butter cup and tell me that you can taste the difference.

So I think that product matters right. So when we get great innovation that tastes really good, that's got great macronutrients, we've proven that we can be successful.

Expect us to continue to do that.

Speaker 3: Great Thank you for the detailed explanation, appreciate it.

Thank you. Your next question, today's coming from Steve pwers, from docha bankchor line, is now live.

Hey guys, good morning, Thank you. Maybe more of a higher level question, I guess, as you work through your planning, its scenario modeling, I'm curious how you're balancing tals around normalizing mobility trends, exceing the pandemic, versus the risk of constrain mobility in a recessionary scenario, and you know, I guess, more generally how, how do you, how would you expect the business to hold up or shift maybe to your earlier commentary and act, moving to e-commerce, as economic pressures you know potentially or, I guess likely, build on the consumer over the next 6, 12 months?

Yes we've done a fair amount of work on recession behavior. Yes, happy to look back 15 years for the last recession.

And there's very little data on our category, because the category was really nascent.

So we're trying. We're trying to build our IQ around that right now. How will be? How do we think these businesses of this category and our brands will be a, during a recession, high level we tend to have?

Better social, economic consumers buying our brand. So for the most part, we're not dealing with the lower end of the consumer purchase at households. We tend to. We tend to do with more deal with more affluent consumers. But if you step back and look at the last recession, here's what we've been able to piece together and it's starting to guide how we think about it. First it during the last recession, eating out was pretty significantly impacted versus grocery shopping and eating it, So a little bit of the COVID-19 behavior: people eat in more, So that's probably good news for food and grocery in stores, right?

Second there was a significant amount of channel shifting due to in the last recession, So people shop in fewer stores. Were' starting to see that behavior right now? Fewer shopping occasions. People started limiting the stores that they shop in and, in general, they tend to shop in more discounters.

So more away from grocery, more towards mass merchants, dollar stores and some of the other discounting formats. Right, that tends to be a behavior that we've seen. Snacking in general and talking broad snacking: better for you and more indulgent snacking less impacted than center store food categories.

So in general, I think you rationalize it with- and people are still going to have small indulggences. That's a relatively low cost way of of enjoying yourself in an an economy where you're not feeling particularly good. And then, center of store, you saw private label start winning over brand. So in general, that's kind of the playbook that we're starting to construct how we think about our business. Frankly, I'm all. We're taking a second price increase. We're going to a price points we haven't experienced before, combined with what appears to be a pretty good recession, So we're going to be pretty cautious about what we believe around volume growth.

And stay focused on are we recruiting consumers to the category? Maybe you're going to see a little bit of a y rate decline because of that, but stay focused on keeping our marketing focused onrecruiting consumers, keeping people coming into the brand, and then we'll deal what kind of impact if there's any own a BU rateas we deal as as see thatoccur during the year upcoming. But I'm concerned, and I think anybody that's running a food company right now should be concerned- about what sumersmers are facing.

Okay I think that kind. I think our, I think our portfolio, a category, our brands are well positioned relative to broadud food to write out there. If there's a recession coming, we're well positioned to write it out. We have high levels of marketing support. We've got good product innovation. We've got momentum on shelf. I feel pretty good about our hand. Nonetheless, I'm concerned about what we're going to face over the next 12 to 18 months.

Understood Thank you, you welcomethank. Your next question is coming from Eric lawarsson, from seapport research partners: vid's Ally.

Yes Thank you for the questionit's still. So two real quick items. Number 1: I don't think you talked about this metric Joe, which which is fairly critical to the afghans brand, kind of the return to work, kind of the return to work metric, and where we sit with that, and I know it's probably continuue to improve in the quarter, but you didn't mention anything about that specifically. Where do we sit with that today?

yeah better than it's been, not as good as it needs to be.

So you know part of it, I think, is.

Part of it is there are Fe. There are fewer snacking occasions because not everybody's back to full work as they were prior recession. We also know. We also know that there's high level within actkins. There's high levels of switching between our shakes and our bars.

And in particular our meal bar. So we're seeing strong growth in shapkes right now, kind of mid-teens growth. It's been pretty consistent for the last call it.

three quarters and I think that's having an impact on our bar business. All shakes tend to be a slightly different eating occasion. They tend to be more meal replacement than snacking but they are used for nacking. But I suspect we're seeing we're seeing some switching to shakes as a format. so- and that's clearly in our history we've seen that pretty consistently- bars and shakes have high interactions. I have strong growth on one form. It does have a reverse impact on the other form. I think that's happening right now in our shake businesses been really strong for a sustained period of time. I know that's impact in the business. So look, I think that.

I think that the upside for our business continues to be bars back in full potential. We're paying attention to our ability to recruit new consumers. That appears to be exceeding our expectations. I expect buy rate to come back. I expect us to be starting to grow buy rate again as we move forward, So I'm cautiously optimistic about our ability to do that over the next 12 months.

Okay great thanks for that and I just want to dive in a little bit on Alexia's question again on gross profits. So I know you were against a really, really difficult, difficult comp in this quarter. Your gross profit dollars were down about $3 million give or take. I don't have the exact number of I, but I think we re 1, twent-one last year, one and 18 or so this year. So when you- and that was maybe a very difficult comp So I think I asked this question- the passed when you.

You put a pricing strategy together. You price to protect, I believe, gross profit percentage of margin, which would be a more aggressive strategy than just to protect gth profit dollars. Is that the case and, given the rate of inflation, et cetera, would you change the way you might price going forward, given that inflation is so high?

Yes let me look long term. We love the shape of our PL. We think it's a competitive advantage, allows us, if we can get gross margins to around threety percent and spend n etypercent to 10% on marketing and have very attractive EBITDA margins, we think we have aeffect, create a sustainable model for us and that's the shape of the PL that we want. Obviously, as we came into the year, we thought, with the price increase that we took, that we would be able to not get maintain margins all the way, but a pretty close because prices were arrising pretty quickly.

Prices continue to accelerate obviously in. Then we took our guidance down for the year and then had to take another price increase, announced in apr, which will start to hit from a shipment perspective in about a month or so. So yes, it's look, the inflation has obviously gotten ahead of just about everybody. Our long term goal is to maintain gross margin and ultimately get back to a 40%. That going to happen next year, probably not over time, over our strategic planning horizon- that we think we can get back to 40% yes, and that's, and we're going to do everything we can to get to get back there. But it's really important for us to maintain gross margin.

Your next question is coming from John Anderson, from William Blair. Your line is now live.

Speaker 2: goodmorningthanks to the questions, a couple of quick ones. one spent: innovation and growth.

You know I, I guess.

I'm curious to hear with the court court categories and then some of the extensions you've done into the snacky portions of the portfolio. It seems like you have certain day parts. Pretty well covered the you know breakfast day part perhaps not as much and so as you think about innovation. More occasions helping drive the buy rate is that something that you think question in actins you know can play a role there as well. I mean in terms of contributing over time. Thank.

Speaker 2: Yes like the way you think you want a job. Now I think look you think about it. The same way we do which is where are occasions today day part and then what are the various snacking formats right. So if you quite simply we look at all the day parts. What's our development where or might there be gaps. Core bars tend to be for the most part earlier in the day than later than the day. Confections and chips tend to be later in the day right. So that's that you're thinking exactly the right way and then I would say if you walked around a grocery store and you looked at all the snacking categories that.

Are low in good things like fiber and protein and high in bad things like carbs and sugars where we think we can design a product that has no taste trade-off that provides you yet better for-year experience. You can expect us to be trying to innovate in that space and if we can get a product that we think.

Consumers think tastes great, then you would expect us to start thinking about trying to innovate there. So yes, we divide the world about. Part of it is: how do you segment and then how do you go innovate it against it. one of it it's across all the parts of the day, and then the other one is all the categories that exist where there isn't a low-car protein rich proxy in the category that we think we can design a great tasting product.

Speaker 2: And I D just say I don't like to talk about future innovation. The pipeline is exciting. We've got a lot of we have a really taled rnd team and we've got some fantastic products going right. So.

You know, stay tuned.

Okay 1, one quick one

one one quick one you know the guidance.

Full year guidance. I think impli, ES and may be often this, but implies.

A modest sales decline in the fourth quarter, I think on an organic basis, excluding the impact of lic inquest. Can you just you know, are we accurate on that and step us through you what, how that could be given the? I think the expectations were point to sale up high single digit in the quarter and then, if you could address the next price increase, it sounds like it goes into effect, from a shipment standpoint, early August . You know what I don't know, if you talk aboutthemnitude or are willing to about the magnitude of that, Thank you.

And so your last question. First, very little impact, and this year this is all about FY 23, So very small impact to Q4 in the fiscal year for the price increase to your. Let me just run you through how the math works on Q4. So at the high end of the guidance it implies about net sales growth of about once sojust.

Illustrated purposes year we'reregarding to high single digits. So if we're at 9% consumption in Q4 you take a point off for the pza licensing year at eight we we built about $35 million worth of inventory through the first nine months of the year. Some of that was we were a little bit light as we exited the year. The most of it was higher. That extra week of intory thats 20 to 20, five million dollars of that exxttrure inventory that's pin our system right now as in the process of coming now. So that's 20 to $25 million.

Is approximately 7%. So that's how you get. If it got a consumption that 9, you take a point off. For pizza, I mean it takes seven out. For that one week of inventory you get to the high end of one now where are we going to end on inventory? It's always tough to know. We get some people who can swing it back and forth. We're confident we can manage the roout, but it's always a wildcard.

Speaker 2: The the only thing we would add is we saw a pretty heavy takeout in June . Yes, So it's already underway.

So I think we had got some questions earlier around. You know why is it going to happen? Or are you going to, are you going to force it? En now it actually happens on its own, it starting to happen. So it looks like it was a little on a little bit of delay, well the full we come out. Hard to say, right So, but your mass about right. We would expect to undership consumption in the quarter, based upon getting back to more normal inventory levels.

Okay great, and just the magnitude of the second price increase. I know it's a, it's a fiscal 2023 benefit, But generally, if we talked about the magnitude of it yeah, St similar to the first, one on average around 8%.

Great super helpful thanks. So much again, Thank you.

Thank a final question today is coming from Pamela kaum, an from Morgan salure. Life is our.

Hi good morning. I just have a follow-up question on the last question on pricing. So I guess what is your level of confidence around taking an an incremental high single-digit price increase? Has your? Has the tenor of your conversations with retailers changed at all over the last couple of months as you look to take more pricing?

We're proceeding as we expected to proceed. We expect the list prices to change. Call it end of July , early August . We didn't expect it to be easy and it isn't easy how that.

Okay that's helpful and can you comment on how you were feeling about the current emana landscape and any opportunities?

yeah yeah happy to do that I thought we're going to get through a call. It out them a questionions. So but there's been a there's been an adjustment to valuation expectations and I think that market is PA. So we're not seeing as much activity. Typically the pipeline is pretty full. We're constantly looking at things. Pipeline is not so full right now and I think what's happening is you know with the with the I Po O market kind of having disappeared. There's really not a lot of alternatives for you know private companies to transact other than to sell. So I think there's conversations that are going on between sellers and bankers right now lowering expectations on valuations and.

Really is right now versus where they thought it was 12 months ago, and that's going to take a little bit of time, but longterm we're optimistic. It's actually going to be a benefit for us.

Speaker 1: Versus where they thought it was, you know, 12 months ago, and that's going to take a little bit of time, But long term we're optimistic. It's actually going to be a benefit for us. I thought it thinks that's helpful.

Thank you. We reach end of our question and-answer session. I'd like to turn the close October for your further closing comments.

Yes thanks for your participation on today's call. We hope you continue to remain safe from a fora updating or our fourth quarter results in October . Hope you'all have a good day.

Thank you. That does conclude today's teleconference webcast. You may discuss the line at this time and have a wonderful day. We thank you for your participation today.