Q3 2023 Simply Good Foods Co Earnings Call
Good morning, and welcome to simply good Foods company fiscal third quarter 2023 conference call. At this time all participants are in a listen only mode. A question and answer session will follow the formal presentation. If anyone should require operator assistance during the call. Please press star.
<unk> on your telephone keypad.
As a reminder, this conference is being recorded at this time I would now like to hand, the call over to Mark for Gary <unk>, Vice President of Investor Relations. Thank you you may begin.
Thank you operator, good morning, I'm pleased to walk in and they simply good Foods company earnings call for the fiscal third quarter ended May 27, 2023, Joe Scalzo, CEO , Jeff Kantor, President and C O O.
And CEO elect and Sean Marett 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 early this morning at approximately seven a M. Eastern time, a copy of the release and accompanying presentation are available under the investors section of the company's website at www the simply good foods company.
<unk> Com. This call is being webcast 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 risk and uncertainties can be found in today's press release and the company's SEC filings.
Note that on today's call, we refer to certain non-GAAP financial measures that we believe will provide useful information for investors due to the company's asset light strong cash flow business model, we evaluate our performance on an adjusted basis as it relates to EBITDA and diluted EPS. We have included a detailed reconciliation from GAAP to adjusted items in today's press release.
We believe these adjusted measures are a key indicator of the underlying performance of the business.
The presentation of this information is not intended to be considered in isolation or as a substitute for 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 to the most comparable measures prepared in accordance with GAAP with that I'll now turn the call over to Joe Scalzo Chief Executive.
Officer.
Thank you Mark good morning, and thank all of you for joining us.
Today, I'll recap the company's third quarter results and Jeff will provide you with some perspective on the performance of our brands.
And Shawn will discuss our financial results in a little bit more detail before we wrap it up with a discussion of our outlook.
As well as taking your questions.
Moving on to the third quarter results retail takeaway on our overall financial performance were greater than our expectations.
Simply good foods third quarter point of sale and the combined U S measured and unmeasured channels increased about 11%.
As expected retail takeaway growth outpaced Q3, net sales growth of two 6%.
Principally due to the prior year retail customer inventory build.
John will provide more details on the difference between net sales and point of sale growth in a bit.
That sounds growth was driven by North American performance as international business sales were about the same as last year.
Quest momentum continued resulting a net sales increase of about 9%.
Third quarter gross margin was 36, 7% and exceeded our estimate as input costs moderated versus our forecast.
Gross margin declined 80 basis points compared to last year as ingredient and packaging costs were higher than the year ago period.
Encouragingly and as we expected the magnitude of these cost increases ease substantially from those in the first half of the year.
Adjusted EBITDA in the third quarter was $66 $6 million versus $63 3 million in the year ago period.
The $3 3 million increase was greater than our forecast due to the better than expected net sales and gross margin performance as well as good SG&A cost control.
This provides us with some flexibility to make additional investments as we move into the fourth quarter.
Now I'd like to pause here to just say thank you it's been a pleasure to lead the company.
I'm, so proud of our team and everything that we've accomplished during the past six years.
I've always appreciated the insights of the questions that you provided.
All of the various calls and meetings that I participated with you.
You've made me a better leader and the simply good Foods company a better company. So thank you.
As we announced in January Jeff Tanner will become president and CEO on July seven and I'm pleased to be staying on as executive Vice chair of the board.
I know you've all heard me say more than a few times that I've loved this category and I love the hand that I've got to play as CEO of simply good foods.
Well I can think of no better person to take over this hand, then Jeff.
I've gotten to know it better over the past few months, yes, its an infectious enthusiasm for our company for our brands and for driving growth great.
Great passion and ideas to the business, they don't really make us a better company.
I know many of you have met Jack and know that he is an experienced leader with superb marketing and commercial capabilities.
So now let me turn the call over to him to provide you a summary of third quarter brand performance and some of his initial observations of the company.
Thank you, Joe and good morning to everybody.
Simply good foods year to date retail takeaway in measured channels increased 11, 6% driven.
Driven by both pricing and volume.
Similar to the last few quarters total unmeasured channel growth was additive to title company P. O S, resulting in combined measured and unmeasured channel growth about 10%.
Atkins and quest combined to measured and Unmeasured channel growth was about 2% and 24% respectively.
We now turn to quest Q3 performance rights.
Retail takeaway was strong driven by an increase in household penetration and buy rate in Q3 measured and unmeasured channels retail takeaway was similar about 25% Quest Q3 P. O S at Amazon increased about 29% versus a year ago.
Period.
What I like is how balanced that growth continues to be on the brands.
Balanced across product forms and retail channels as well as balanced across key drivers, namely distribution velocity and innovation.
Despite the size of the business and growth with same household penetration is only 15% and aided brand awareness as well below competitors, indicating quest has a long runway for growth ahead of it.
Measured channel Q3, P O S growths of bars, and snacks with Paris about 25%.
Quest <unk> growth was solid across the portfolio.
Quest snacks momentum continued with growth similar to last quarter across all forms.
The stock here as chips nearly half of the quest snacks business, which continues to pay a meaningful driver of crest.
Snacks represents nearly 45% of total quest measured channel retail sales reinforcing the opportunity for the brand to expand into adjacent categories, Dave Pat and usage occasions.
Turning to Atkins.
These three retail takeaway in the combined measured and unmeasured channels as expected declined 2%.
Softness was primarily due to incremental programming in the year ago period that we did not repeat this year and a lack of innovation on a bad business that led to TDP declines on this form over the last year.
As a result in measured channels Atkins Q3, Pls was off three 4%.
Strength at a large mass retail customer and an Amazon, which was up 16% was offset by declines across the broader retail landscape.
Moving on to performance by forms games, and shakes meal bars about 60% of Atkins retail sales was offset by declines in snack bars and indulge confections.
Recall as discussed the last couple of quarters, the underperformance of our snack bar business was driven by a lack of innovation that also led to distribution losses year to date snack TD pays are off about 25%.
Year to date total bias or about the famous in the year ago period, resulting in flat household penetration over the last 52 weeks.
Performance in the third quarter slowed versus the first half of the year largely due to the aforementioned snack bar distribution losses.
Getting atkins back to its full potential by form and channel is my number one focus as the incoming CEO and.
And work here, it's already underway.
In the near term, we're actively working to shore up by our innovation and regain TD pace.
We'll continue to focus on accelerating our e-commerce, how much success with the right pack sizes and we're also working with each of our retail customers to strengthen programming.
Concurrently as you would expect we are committed to ensuring Atkins remains a vibrant culturally relevant brand that is built for today and tomorrow's consumers.
The consumer demand and need for weight wellness has never been greater.
And low carb low sugar white wellness, it's broadly and well understood as a highly effective solution.
Finally, Atkins has 98 defense brand awareness.
Given the brand's unique positioning in the space.
We will look at opportunities and levers to ensure and strengthened the brand's long term growth.
We expect Atkins Q4, retail takeaway to be better than Q3, but it will not be where we want it to be.
The aforementioned work underway it will take some time.
But you have my commitment that will make the investments necessary to accelerate growth and to get Atkins back to full potential.
Now shifting gears before I turn it over to Sean.
I wanted to provide you with some of my early observations on the company.
Over the last three months I've dived into the business spending time with Joe and the leadership team employees our board of directors.
Top customers and suppliers.
I don't officially transitioned to the CEO role for about a week.
However, I wanted to share my observations of the opportunities are focused on for continued delivery of top tier shareholder value.
You will see no major deviations from the strategy, Joe and team have been executing against.
Rather a doubling down and acceleration of key elements.
The first pillar is accelerating category growth.
Most center store categories in North America are mature with household penetration in the high Eighty's with legacy brands.
It's mostly a share game.
The nutritional snacking category in comparison.
Virtual teenager.
<unk> penetration is in the fifties and there's the potential to continue to bring new product forms like salty snacks to further expand penetration and buy rate.
In addition, there's the twin tailwind of consumers wanting to live a healthier lifestyle and their relentless growth in snacking now hospital eating occasions.
I think this category will be twice its current size and I'm committed to working with my team and customers to get up there as fast as we can.
I don't know the exact sequence of pacing, but the opportunity is there.
Right and more e-commerce retailers, they see it too and we'll be working closely with them to build this future together, especially in how we create more category space.
The second pillar is driving top tier growth.
Starting with quest.
With nearly 700 million in net sale by year end fiscal 2023 quest.
<unk> has approximately doubled since the acquisition and continues to disproportionately win with Gen X and millennials.
Despite its size, we see a very long runway of growth.
What would this look like.
First continuing to press on innovation close end and further out and expanding distribution.
Second a step change in marketing.
And awareness is extremely low given the brand size, which speaks to the opportunity for increased media investment broader reach and iconic creative.
Yes.
Turning to Atkins with any brands you need to pay close attention to short term performance and to long term brand health.
As mentioned in the short term, we will strengthen the brand through addressing a lack of innovation on bass improved merchandising execution and doubling down on e-commerce.
And currently though we're working to ensure that brands remains fresh and culturally relevant for today and tomorrow's consumers.
The first phase of this that's talking with consumers customers and other stakeholders, which will then inform us of the opportunities and levers to pulse.
The brand is iconic enjoys tremendous awareness N is uniquely positioned at a time when the need for white wireless Neste has never been greater plus the products are absolutely delicious.
I'm excited to work with the team to accelerate Atkins growth so that the brand can achieve its full potential.
The third pillar is to fuel margin and brand reinvestment.
Recently, the CPG industry has operated under a confluence of challenges that have stressed how we operate the business.
Simply good foods has performed well, but as in every business there are opportunities to improve execution.
We'll work with Sean to enhance our continuous improvement mindset.
Very specifically, we are committed to sequential gross margin improvement.
That's what I'm sure advertising and marketing gets back to our target level.
The final pillar is simply good foods as a platform for scaled growth.
We have a bold mission for health and wellness and a bold vision for the category supported by scale with go to market capabilities with.
We liked the profile of our P&L and our profitability and asset light model results and strong cash generation.
This provides us with the flexibility to opportunistically participate in M&A or share buybacks.
Now we have a tremendous organic growth runway in front of us, which is where we'll be focused.
However, if the asset is right and the prices right M&A has a role and we would consider a higher leverage.
I want to close my prepared remarks by thanking and recognizing Joe.
A few people have the distinction of establishing large publicly traded companies, especially in the food and beverage space and then delivering outsized returns year after year.
I don't mind admitting that Joe leaves them pretty large shoes to fill.
Good news to me as if that wasn't going anywhere and will transition to executive Vice chair on that board.
Now I'll turn the call over to Sean will provide you with some additional financial details.
Thank you Jeff good morning, everyone.
I will begin with an overview of our net sales.
<unk> simply good foods third quarter net sales of $324 $8 million increased two 6% versus the year ago period.
Looking at the Q3 drivers of growth net price realization was about seven three percentage points and volume was off about four six percentage points.
As Joe stated earlier retail takeaway growth outpaced the net sales change on the bottom of this slide we attempt to reconcile Q3 P. O S. A 11% to Q3, North American net sales growth of 3%.
The biggest driver is in the prior year period as last year retailers did not deplete inventory in Q3 as they would normally do.
As we've discussed in our last two calls last year retailers increased their inventory levels to address supply chain challenges in the first half of the fiscal year and help these inventory levels through Q3 of fiscal 'twenty two.
Retailers largely depleted this inventory in Q4 of fiscal 'twenty, two and we exited the year with more normal retail inventory levels as I've said before last year was atypical as normally retailers build a week or so of inventory in the first half of the fiscal year in anticipation of new year, New you and then largely deplete that inventory.
We build in the third quarter.
We saw the return to historical operating norms. This year as a result, the third quarter of fiscal 'twenty three we estimate the change in retail inventory compared to last year to be about an eight percentage point headwind.
Yeah.
Moving on to other P&L items for Q3 gross profit was $119 $2 million, an increase of zero point $6 million from the year ago period, resulting in gross margin of 36, 7%.
The 80 basis points decline versus the year ago period was primarily due to higher ingredient and packaging costs.
Was slightly better than our estimate due to input cost moderation versus our forecast.
Net income was $35 $4 million versus $38 $8 million last year.
Adjusted EBITDA was $66 $6 million, an increase of $3 $3 million from the year ago period.
Selling and marketing expenses were $32 million versus $32 $3 million.
A decline of six 7% largely due to the timing of spend within the year.
GAAP G&A expense was $30 $5 million, an increase of $3 $8 million versus last year, primarily due to fees associated with the term loan b reprice and maturity extension and executive transition costs.
Excluding these costs as well as stock based compensation G&A declined zero point $2 million to $23.3 million.
For the full fiscal year 2023, we expect selling marketing and G&A expense to be slightly down versus a year ago period.
Moving to other items in the P&L net interest income and interest expense increased $2 $4 million to $7 $2 million due to higher variable interest rates related to the term loan and our tax rate in Q3 was about 24, 8% about 170 basis points higher than last year, we anticipate the full year.
Fiscal 2023 tax rate to be in the 24% to 25% range.
Turning to EPS third quarter reported EPS was <unk> 35 per share diluted compared to 38 cents per share diluted for the comparable period of 2022.
In fiscal Q3, 2023, depreciation and amortization expense was about $5 million and similar to the year ago period.
Stock based compensation was $4 $1 million.
Trees associated with a term loan b repricing maturity extension were $2 $4 million and executive transition cost for zero point $7 million.
Adjusted diluted EPS, which excludes these items was <unk> 44 cents.
As the year ago period.
Note that we calculated adjusted diluted EPS as adjusted EBITDA less interest income interest expense and income taxes.
Please refer to today's press release for an explanation and reconciliation of non-GAAP financial measures.
Moving to the balance sheet and cash flow as of May 27, 2023, the company had cash of $68 $8 million year to date cash flow from operation was $110 4 million, an increase of about 64% versus the year ago period.
In Q3, the company repaid $40 million of its term loan debt and at the end of the third quarter. The outstanding principal balance was $325 million, resulting in a trailing 12 month net debt to adjusted EBITDA ratio of one one times.
We anticipate net interest expense for the year to be about $28 million to $30 million, including noncash amortization expense related to deferred financing fees.
Year to date capital expenditures and depreciation were $10 $1 million and $15 million, respectively. Capital expenditures included an investment of about $8 million to secure a specialized equipment at a co manufacturer in summary, third quarter results were slightly better than our expectations, giving us an opportunity to make some additional investments in our business in the fourth quarter.
While early fourth quarter is off to a good start through the first three weeks of the quarter retail takeaway increased about 11%.
The recessionary economy continues to be concern as shopper traffic shifts away from grocery to more value oriented channels as.
As we get late into our fourth quarter, we will lap last year's price increase.
As such we expect our retail takeaway growth will moderate slightly from current levels over the remainder of the year.
Net sales will outpace Pos growth in Q4, as we lap a significant retail customer inventory reduction in the year ago period.
The overall cost environment is improving and we're on a path for gross margin recovery.
Gross margins are expected to sequentially improve again in the fourth quarter from the third quarter and should continue to improve as we move into fiscal 2024.
We will continue to execute against our priorities and remain committed to doing the right thing over the near and long term for our brands customers and consumers.
Now to wrap up.
The company has a portfolio of brands aligned with consumer Megatrends of both health and wellness convenience and on the go nutrition.
As such despite the challenging economic environment. The company believes it is well positioned to deliver on its objectives. Therefore, we anticipate the following in fiscal 2023.
We reaffirm our net sales increased slightly greater than our four 6% long term algorithm.
Margin will decline versus last year, although at a lower rate than fiscal 2022.
Full year fiscal 2023, adjusted EBITDA will increase but slightly less than the net sales growth rate and adjusted diluted EPS will increase less than the adjusted EBITDA growth rate due to the company's expectation of higher interest expense.
Retail takeaway growth in our category and our brands remains solid.
As such we are excited about our near and long term growth prospects and we'll continue to execute against our strategies as a path to increase shareholder value.
We appreciate everybody's interest in our company and we are now available to take questions.
I'm Gonna go. Thank you we will now be conducting a question and answer session. If.
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You May press star two if he would like to remove your question from the queue.
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Get to as many questioners as possible. We ask that you. Please try to limit yourself to one question one moment. Please while we poll for your questions.
Our first question comes from the line of Matt Smith with Stifel. Please proceed with your question.
Hi, good morning.
Good morning, Matt.
Wanted to ask about the performance of the Atkins brand in the quarter consumption slowed sequentially and there was an expectation for that given the tough comparison lapping promotional activity in the prior year.
But could you talk about the path to recovery. There there was a comment about near term priorities to shore up the brand is that reliant on shelf.
Shelf resets or are there things in our initiatives you can take on to improve the sequential performance. There ahead of the fall shelf resets.
Yeah, I'll I'll I'll I'll start, Matt and then I'll turn it over to Jeff.
Kind of talk about.
<unk> playing out from a timing standpoint.
Our as we've communicated I think on the last few calls the <unk>.
Slowdown in the Atkins business has been primarily driven by.
The loss of distribution points in particular on our snack bar business that occurred about a year ago and the losses.
Losses were pretty significant somewhere around.
25% TTP loss.
We lost almost half the items that we had in our lineup and so we've been accelerating the innovation pipeline to get bars back into the into distribution. We are as we are executing in the most recent shelf sets. We have one item that is building distribution as we speak.
We'll start lapping some of the TDP losses. So we'll we'll start seeing some of the TDP losses, just because we're a <unk>.
<unk> last year's losses start to ease but.
They're true recovery on it will be our ability to get back kind of to full distribution kind of where we started about a year ago and I'll talk to Jeff because I know jeff's been knee deep in the details of the innovation pipeline I'll turn it over to him for some color commentary.
Yeah. Thanks, Thanks, Joe and thanks for the question.
Because I look at Atkins, Okay, two time periods.
Strengthening the business in the short run and then working to stir.
Strength in it for the long term.
And as John mentioned in the short run we're very focused on accelerating.
Our innovation to market.
Working with the teams working with them.
Most of yesterday and I'm pleased with the innovation pipeline.
Pipeline on buys as you know, though it does take time, but sequentially over the coming launch Windows, you will see us build that distribution back.
In addition, youll see us work with customers to strengthen our merchandising.
And we also see a near term opportunity to accelerate our e-commerce business.
As you look a little further afield I think as you would expect.
And as I mentioned in the scripted remarks, we'll be taking a step back on the brands.
Talking to consumers and other stakeholders.
And determining how we can ensure that this brand delivers on the full potential that is.
Clearly evident.
Given the need for white wellness and how well positioned this brand is that takes a little bit longer and we're looking at different levels.
That's how I would think about how we're approaching Atkins really shoring it up in the short term while working to ensure it delivers its full potential in the long term.
Okay. Thank you for that I can pass it on.
Thank you.
Thank you. Our next question comes from the line of John Baumgartner with Mizuho Securities. Please proceed with your question.
Okay.
Good morning, Thanks for the question.
Hey, John Good morning, John Good morning, Good morning, maybe to follow up on Matt's question, just sticking with that you're it sounds Jeff It sounds as though your tea.
I guess moving the timeframe back for recovery in the brand and it's been through a lot. The last couple of years with mobility during COVID-19 and some of the missteps on innovation merchandising, but I'm curious to what extent is just as simple elasticity of factor here. I mean, this is a category, where we're seeing more brands more formats. It seems as though elasticity very quite.
Yeah.
The brands and the formats, so given data or insights that would suggest that elasticity has not been a material factor here and it's not something as simple as just the price point, given the Atkins sooner relative to our quest consumer or somebody else with anymore.
All of them oil, but just stickier in terms of the price point. Thank you.
Yeah, I think great question.
And I'll start and I'll turn it over to Jeff So.
Just look at the brand.
From a product standpoint as we've.
Kind of last Labor day, when people started going back to work we saw a real shift in what people were buying on the brand and I'll get to elasticities.
Once I touch on this so shakes and meal bars, which tend to be below replacement on the go meal replacement.
Somewhat driven by.
Kind of being on the go and be back at work, we've seen those businesses pick up where we've seen the slowdown has been in kind of the more snack your portion of the portfolio snack bars and adult and they have in fact been slightly more elastic and their response to the price increase that we've tactically does.
<unk> spending back on the business. So we'll get a better sense of how that's going to play out because we start lapping that price increase in July and August and we'll see whether how consumers respond to that but we have seen the snack year portion of the portfolio tends to be the last thing.
In the basket last thing purchase and the first thing out when people feel a little squeezed from a financial standpoint, so we have seen that behavior.
In the confection business in the snack bar business and actually even as part of the quest business. We've seen some competitor confections and ship sets more great slightly greater sensitivity to the pricing than kind of the more mainstream.
Got a meal replacement of our full snack.
Sure.
Anything to add Jeff.
I mean, all I would probably say is <unk>.
The step back year to date.
POS on the Atkins was up 2%.
But you're right, we're not immune from elasticity, but like any other brand.
But to <unk> point when you.
This aggregate the business.
We are seeing Rosa <unk>, you're seeing growth in neopets.
And what you are saying that disproportionate impact and then as Joe said, the snacking are part of the business.
Which is why we have lost distribution and not innovated as we should have.
Yes, I think you're absolutely right elasticity as a factor.
That does aggregating that business you can see where the business has strength really have gaps.
The plans, we have put we're putting in place to solidify where we're seeing more of the impact.
Okay. Okay. Thank you Jeff Thanks, Joe.
You bet.
Yes, John .
Thank you. Our next question comes from the line of Pamela Kaufman with Morgan Stanley . Please proceed with your question.
Good morning.
Good morning.
You've highlighted the initiatives to improve the Atkins innovation can you talk about what you see as some of the gap in the product portfolio and where you think the innovation has lag.
And I guess just in.
In terms of the opportunity to improve innovation on bars.
Our innovation I'm kind of a snack ear for an ax, which you've seen some elasticity on but I guess, how are you thinking about the balance of where the innovation is okay.
Yes, let me let me do one thing first I think Jeff start to do this I just want to remind the callers that are Pos year to date is up.
Total company is up 12, 13% right. So we're zooming in on one piece of the business and one form of the business, but I want to highlight the diversification of the portfolio by brand and by format by channel has enabled us despite some slowdowns in part of the Atkins.
Business to continue to show strong growth.
So kind of how to think about.
How to think about the port where the gaps in the portfolio. We're in the innovation pipeline as it was kind of a confluence of two factors at year ago factor number one was as I mentioned on the previous call. We saw heightened sensitivities to our first price increase which would have been in.
October of 2021, we saw some velocity slowdowns in our snacking portfolio. So when those shelf resets were starting in September we had some items in our snack portfolio that will be.
After that we had originally anticipated and as we were putting new items in those items fell out.
And just to give you some context year to date Atkins distribution is up six 7% nationally. So it's not like we've lost shelf space, we've actually lost items in a particular part of the portfolio in that trade out has been actually detrimental to the brand and then the second fab.
Doctor was innovation and any innovation pipeline youre, putting ideas at the top of the funnel.
<unk> products commercialize out the bottom of the rate of success on those commercialization was below what we normally would have experienced so the combination of losing more items than what we anticipated and not as many items come falling down to commercialization led to the gap.
Roughly the gap was call it four to five items lost in distribution spring of last year. It takes time to rebuild that Jeff and the team are on it it will it will happen as we exit as we play out the next fiscal year.
<unk> in the spring fall and next spring and we're pretty confident that.
We will rebuild.
Rebuilt the snacking portfolio in the brand and the brand and I'll get back to the kind of growth we wanted to have.
They only build for me would be as I mentioned in the scripted comments I've been on the road talking with all that top retailer.
They love this category and they really love Atkins.
So we expect we're going to get a lot of support.
When we bring these new items to market over the sequential launch windows.
Okay, Yeah I was just.
Curious if the innovation is going to be around flavors or different pack sizes I guess.
How you think about the opportunity to innovate and where you see IMAX on attacking stagnate.
Yeah look we will talk about as Jeff will talk about the items in distribution as they are in distribution and starting to produce results. We don't we don't like to talk forward about how we think about innovation.
I understand.
My other question is just around reinvestment you talked about how improved gross margin well allow you to reinvest behind the brand and opportunity to step up investment behind quest.
Can you just talk about how you think about that timeline for getting to I, 10% sales and marketing and advertising.
How youre thinking about spending over the next couple of quarters behind brand building.
Yes, let me just piece a lot of pieces to that question.
Pizza parcels, but so in terms of gross margin I'm glad we're talking about it because we actually had a over.
Over delivery this quarter. So we're happy about that about 30 or 40 basis points. So overall, which is about $1 million not not a ton of money overall, but give us a little bit more flexibility going into the fourth quarter as we look at the fourth quarter. When we look at our spending overall.
Our opportunity we think is to basically take advantage of.
Some of the things that Jeff talked about in terms of the pillars. He wants to spend money on so we think we're going to use that money to get the favorability start work on the growth opportunities that Jeff talked about in each of those pillars overall.
As it relates to.
Fiscal 'twenty four I think you were talking about that I think at a high level. We just started planning for fiscal 'twenty four so it's pretty early for us to have a discussion about 'twenty four but when we look at that right. Now we think sales will be at the high end of our long term algorithm EBITDA growth will likely be in the high single digits couple of things I wanted to.
I'll go to the group one as it relates to sales shipments of consumption should be more aligned now that we've lapped the kind of abnormal fiscal 'twenty two builds and as it relates to gross margin.
We want to really give specifics, but we're going to see the progression from first half.
Our second half this year Q3, and Q4 is a good set up for fiscal 'twenty four youre going to see sequential improvement from fiscal 'twenty three to 'twenty four not back to full potential I wouldn't say, we feel really good about the first half gross margin versus this year and I'll just say, what we expect to get back to the algorithm, where EBITDA is greater than sales growth. We're now.
Youre going to see all the gross margin improvement dropped to EBITDA, we're going to invest incrementally in consumer communication marketing capabilities and again that'll be consistent with the growth pillars, Jeff talked about in his prepared remarks overall, so one more point on 24, I just before I forget.
Fiscal 'twenty for the 53 week year for Us. So we will have an extra week, that's about a point in both top and bottom line as you guys start building your models out so with that that's kind of how we're thinking about the next couple of quarters or years alternative Jeff in terms of the quest investment specifically.
Yeah, I mean, if you take a step back.
Yeah.
And year to date really excited about not just the delivery from quest by its potential consumption up 24% in Q3 as.
As I mentioned.
Scripted remarks.
We think the brands has a ton of growth runway in front of it.
Brand awareness is very low compared to a number of its peers, which suggests that the brands have.
Continued runway.
<unk>.
On innovation, which has been the lifeblood of success continuing to push out on distributions and we feel really good about the results that we continue to get there and as I mentioned, what youre going to say as a step change in marketing on the business because the awareness.
Low compared to where our brand at the science should.
And so that will be looking at the media mix creative.
As well as stepping up our investment on the brands more towards our targeted levels. So we see nothing that runway in front of this brand despite its size and despite the success that it's had yeah.
Pam as I answered.
Pieces to that question I must say, we got to all of them as.
So we cover those yeah. Thank you that's helpful.
Sure.
Thank you our next questions come from the line of Rob Dickerson with Jefferies. Please proceed with your question.
Okay.
Great. Thanks, so much.
Maybe just kind of a broader question of the category.
Two.
I guess trying to increase overall brand awareness and then I'll go and household penetration upside.
I think historically right, there's still a lot of commentary around the benefits of being kind of a health and beauty.
Our health and beauty area of the store.
Especially on the profitability side will be kind of dynamics.
Just kind of given your background.
Kind of how you think about especially your comment on center.
With that brand awareness.
Could there be like kind of just I.
I don't want to be broader rethink positioning within the store and within channels.
But you know.
Have you thought about almost making it right now.
I'm speaking more specifically to the Atkins brand again.
You know kind of more of a brand you know kind of for every day, you know consumption, maybe almost a little bit away from such a specific kind of legacy.
The weight loss product in health and beauty AIDS I just didn't I also asked that just kind of within the framework of you know there's a lot of competition right within the category because the category has done great and your healthy category would be great, but there's always kind of this ongoing.
Kind of you know mixing of category positioning between sole.
Sweet and salty snacking indulgence relative to health and protein fortification et cetera. So very broad question, just kind of curious how you're thinking about it is evident.
Yeah. Thanks for the question, it's a good one.
As I mentioned I have been on the road and I've been speaking with retailers.
Talking to them about our business, but also about the category.
And as they look at the category.
Save the same runway that we do.
Several factors in there, but certainly the low level of household penetration in the fifties.
It's high Eighty's standard store.
They also say that twin tailwind.
Health and wellness and snacking.
What's driving that and so when I when I have talked to them about how we can build this category together, they're certainly look at that space as a differentiated opportunity versus the broader Santos store and that's the opportunity that's in front of us to your question on where we're at.
Our brands play in that category.
That's what we do with them, but I think it's a credit to Joe and the team.
They have positioned let's say atkins as more of a lifestyle brand versus what they were.
Management frame.
And you can see that with the recent commercialism, bringing Rob love et cetera.
On that theme.
I agree.
Broadening the.
Of this category to be more of a lifestyle destination.
As an opportunity.
Retailers see it and we will be working with them combining out joint capabilities and building that out over the years to come.
Alright, great credit addressed it and before I forget.
Always a pleasure.
Thank you so much for.
All of your hard work and diligence and looking forward to staying in touch and Jeff Good to have you back.
Okay.
I guess just one more quick question.
Mike you kind of mentioned.
You know willingness to.
Operator, maybe at a little bit of a higher leverage level clearly right now.
Our leverage is in a great spot that youre in a very.
Our balance sheet clean you know clearly you have some kind of work to do out of the gate with respect to changes.
<unk>, it's on the distribution side with Atkins.
But as we think kind of almost more near term right I'm kind of with leverage where it is.
Kind of what I'm hearing with the states and in certain assets being written.
The slides a little bit coming out of Covid.
Is that you know could we say.
Acquisition activity is still top of mind, given C O transitional dynamics.
In the near term or is it more you know.
Hey, let's fix the core what support the growth, let's go for organic opportunity to work with the retailers and yeah. That's something comes along we'll take a look at it but we're really focused on Cogs.
The other side I'll.
I'll start and then I'll, let the other guys jump in look there.
The environment is about as slow as I've seen in the last six years, mainly because there's just not a lot of folks transacting given the cost of debt right. Now. So you are just not seeing a lot of activity and the things that have come to market frankly, havent transacted. So we I think.
Characterized our view, which is we're focused on organic growth until the right opportunity comes along at the right price with the right brands that we like.
And we're in a from a balance sheet standpoint in a good position to do that but just the activity in the market right now is not particularly heavy given.
Given the cost of debt and I'll turn it over to anyone else wants to add to that no. I mean, we love the leverage situation right now are a little bit of a one time will be in really good shape by the end of the year as you know we are the.
We generate a lot of cash and that's a helpful from paying down debt. We've done that this year and we're continuing to see that runway overall, but we constantly look at stuff I think the answer to your question is both we're going to do the things we want to to grow the business organically, but we're also going to do look at things and look at opportunities that are out there and we continue to do that.
Alright, so it makes sense thanks guys.
Thank you.
Thank you. Our next question comes from the line of Jason English with Goldman Sachs. Please proceed with your question.
Hey, good morning folks.
Thank you Brad.
And Joe Good luck.
Joy as you find yourself with some more free time amendments to that and thank you so much for for.
Humour me and by annoying and sometimes aggregate your questions over the years.
Yeah.
Nathan I ask Mark to make sure you were my last question.
I'm going to I'm going to inaugurate, Jeff what was laid out great question, let me in a minute, but first a housekeeping item the growth expectations. You gave for next year were those inclusive or exclusive of the 50 <unk> week.
Those were exclusive third week, you've probably put another point on top of the.
The numbers I gave you know high end of our our algorithm for top line high single digits Bottomline plus the 50 <unk> week.
Great great Okay.
Okay.
Aggravating question.
And I apologize in advance, but it's on my mind is bought on a lot of investors' minds, but you mentioned weight wellness the broader weight wellness industry is being disrupted by all these new pharmaceutical solutions and it's still early the disruption or are you going to get bigger more drugs come to market more adoption more insurance coverage.
Legacy weight management businesses across the board are under pressure right.
The programs food and we're all feeling the pain.
I look at Atkins in that context. It feels like this is a bigger issue than just a product cycle renovation. It feels like it could be a bit of a secular turning point in the industry.
What gives you confidence that that's not the case that this is something that can be so easily resolved with the tactical product solution.
Yes.
I'll start and I'll turn it over to Jeff Obviously has got some fresh eyes on the matter, but if you look at it.
The press of the event and the actual number of users Theres, a pretty big gap right. Now so it's still very early innings on these weight loss drugs, because they tend to be coastal and their use right now based on everything that we've seen you are seeing a lot of pick up on the press. So there is still very early innings.
So we actually don't see this as a threat, but we see it as an opportunity at all and I'll provide some color commentary first of all.
Typically people that are using these drugs have a significant amount of weight to lose call. It 20% 20, plus per ounce 2025 pounds of weight to lose right that is not the epicenter of the buyer of Atkins anymore and hasnt been for a number of years. The number of the number of our buyers who are actively.
Using the Atkins program to lose a significant amount of weight is kind of in mid single digits as a percent. So it's not a it's not a it's not a threat from a volume standpoint, but we think actually an opportunity from a marketing standpoint, so that look the drugs.
The drugs are driving renewed interest in weight management and Thats always a good thing for your business because the.
The challenge as you know from your experience with the brand the challenges getting people actually to take interest action when it comes to how they look and how they feel and so these drugs I think are starting to renew interest in consumers to change behavior. So.
<unk> news is a good thing not unlike keto was for US right. It was it wasn't us, but we were able to kind of get on that wave of ride that wave for over three years. So.
As.
As I think theres, two elements of opportunity for us and Jeff and the team are already on them. The first is people come to pharmacies to get the drug that's where our brand is there is an opportunity to tap into that and as you would imagine major retailers are really interested in having that conversation.
Second.
The drugs and this is the nuance of this the drugs suppress appetite.
So youre eating fewer calories than the calories you actually have.
Have to be more nutritious.
So there is an opportunity for our brand and I think youre seeing the weight wellness.
Other brands do exactly the same thing right you end up having to help people eat more healthy I E. You need to be on a program Azure using these things otherwise youre going to do damage to your body and getting it not getting enough nutrition to it.
So our strategy as we're starting to think through what our strategy is actually to market Atkins is a perfect complement to people thinking about using the drugs and we have a rich pedigree as a nutritional philosophy to help people think about that and then use our relationships and the pharmacy aisle to market to it so.
We're actually pretty optimistic we like this as a tailwind we think it's going to be a pretty good wave I don't think it's gonna have the faddish nature of keto I think I think it will I think it will build it'll build for a sustained period of time and I think theres, a real opportunity for the brand to take advantage of it and I'll.
Turn it over to Jeff for any thoughts he has got.
Yes, I mean, just a couple of <unk> perhaps.
Firstly as advocates of.
White wellness and nutrition I think it's great that consumer has struggled with us have another option, which is with its Greg.
In addition.
The consumer to eliminate drug Jason.
Needing.
Traditional.
The port.
I'm equally excited about the opportunity that these consumers when they come off their drugs I think a very small portion will stay on for a long time when consumers come off the drug.
I think they're going to want to do is put the white background, especially after experiencing the physical and mental benefits of weight loss.
We see this as an opportunity to position Atkins as a compliment.
Consumer is while they're on the drug and then to help them.
Back on the truck.
And lastly, with.
With the digital tools available to US right now we can find these consumers and we can message directly through that and probably not a surprise that the team is on it right. Now. So we think this is a wave and we're going to catch it.
Thank you for the very thorough and thoughtful answer.
Thanks, Jason.
Thank you our last question for today will come from the line of Steve powers with Deutsche Bank. Please proceed with your question.
No.
I don't want to really chase on Sunday.
Dr.
Okay.
<unk>.
Mark told me he was the last it was the last question.
Right.
Yeah.
Yes, actually just one and relatively tactical.
On the gross margin front the over delivered this quarter was as you say is very welcome.
As I look at the fourth quarter I think external estimates based on commentary last quarter.
We're looking for gross margins since like close to a 38% in the fourth quarter.
Your.
Slide today's slide 15.
Points that closer to 37, so just wanted to maybe talk a little bit about the puts and takes there if anything has changed.
And sort of how do we think about that.
The progress quarter over quarter, and then sort of the what the exit rate for momentum into <unk> 'twenty four.
Yes, let me take that one.
First of all I'm not going to give you a number for Q4, but that's okay as.
As we go forward I think take a step back for a second we over delivered our gross margin by about 40 basis points for the quarter.
Q3, its about a million dollars give or take a favorability was really lower ingredient costs as we started to see that flow through a little sooner than we thought some favorability to inbound freight we had no change to the Q4 fiscal year. If we budget a Q4 to kind of this run rate and so the Q3 beat really wasn't significant enough to move the needle we do think we'll see sequentially.
<unk> from Q3 to Q4 for gross margin the last point I want to make to the team. Here is you know we had some misses obviously in Q1 and Q2, we've put fixes in place. They have resulted in better communication visibility and more efficient operating effectiveness gives us greater confidence in our forecast as you see that with our Q3 results. So.
Youre going to see sequential improvement.
Okay.
Okay I'll leave it there. Thank you so much.
Thanks.
Thank you for joining us today I'll now turn the call back over to management for any final comments.
Yeah. Thanks again for the participation today, just one note for me.
I and the entire simply good foods organization I want to thank Joe for his commitment and contributions to the business over the last 10 years on a personal note. It's been a pleasure to work with him over the last 20 years in various roles in various companies.
I wish him nothing but the best in retirement and obviously on the golf course, he will be greatly missed.
On a more tactical note, Mark and I and Jeff will be available today for follow up questions, you have and Jeff and I look forward to updating you on our fourth quarter results in the fourth in October have a good day. Thank you. Thank you.
Thank you. This does conclude today's teleconference. You may disconnect. Your lines at this time. Thank you for your participation and enjoy the rest of your day.