The Simply Good Foods Company (SMPL) Q4 2018 Earnings Report, Transcript and Summary

Greetings and welcome to the Simply Good Foods Company fourth quarter 2018 conference call. At this time all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. [Operator Instructions] As a reminder, this conference is being recorded. It’s now my pleasure to turn the call over to Mark Pogharian, Vice President of Investor Relations. Please go ahead, Mark.

Thank you, Kevin. Good morning. And I am pleased to welcome you to Simply Good Foods Company earnings call for the fourth quarter ended August 25, 2018. Joe Scalzo President and Chief Executive Officer, and Todd Cunfer, Chief Financial Officer, will provide you with an overview of results, which will then be followed by a Q&A session. The company issued its earnings release this morning at approximately 7 a.m. Eastern. A copy of the release and the accompanying presentation are available under the investors section of the company's website at www.thesimplygoodfoodscompany.com. This call is being webcast live on the website and an archive of today's remarks will also be available for 30 days. 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 in the company's SEC filings. In addition, management will make references to adjusted EBITDA, a non-GAAP financial measure, that it believes provides investors with the useful information with which to evaluate the company's operating performance. Today's earnings release includes a reconciliation of the most directly comparable GAAP financial measure to non-GAAP measures. And finally, the company has included in today's earnings release and presentation financial information for the 13 weeks and 52 weeks ended August 25, 2018, and pro forma combined financial information for the 13 and 52 weeks ended May 27, 2017. The pro forma adjustments are based on available information upon assumptions that our management believes are reasonable in order to reflect on a pro forma combined basis the impact of its business combination transactions on the historical financial information of our predecessor and successor entities as applicable. The pro forma financial statements provide results as if the business combination transactions had been completed as of the beginning of fiscal 2017. All financial measures related to the fiscal 2017 discussed today will be on a pro forma combined basis. And with that out of the way, it’s my pleasure to turn the call over to Joe Scalzo, President and CEO.

Thank you, Mark. And thank you for joining us. Today, I’ll recap our full year and fourth-quarter results and provide an update on our business. And then Todd will discuss the summary of our fourth-quarter and full year financial results. And after that, we’ll open the call to your questions. Before I begin, as I reflect on our first year as a publicly traded company, I'm proud of our accomplishments. I'm fortunate to have a small team of talented and dedicated employees, who come to work every day committed to contribute to our business growth. This has served us well and is reflected in the company’s solid financial and marketplace results. So, thank you to all of my colleagues across the business, many of whom I know are listening to this call. I'm pleased we completed our first fiscal year having significantly exceeded the long-term financial algorithm we provided to you a year ago. We ended the year believing that expansion of our target audience beyond core programmatic weight loss consumers to a more lifestyle-oriented consumer that we call self-directed low carbers would accelerate our business growth. That strategy change was the principal catalyst to our strong business results this year, highlighted by double-digit increase in total buyer growth during the year. Importantly, the growth in new buyers accelerated as the year progressed. That strategy, as well as the brand investments that we made during the year, resulted in strong point-of-sale growth of 10.1%. I would add this represents our tenth consecutive year that US snacking retail takeaway has increased. Also, I am most proud of the composition of our POS growth. For the year, 100% of our growth resulted from improvements in base velocity as distribution and promotion slightly declined. This demonstrated to us the power of our marketing strategy, primarily the successful advertising campaign to a consumer group 4 times greater than our historic target. POS performance was encouraging and reflected the increase in the number of buyers coming to the aisle to purchase more Atkins products. Based on the solid results and building momentum, we invested in more media to bring more buyers to the brand. I'm extremely happy with the performance of our supply chain team as they navigated the inflationary and supply challenges due to increased demand, especially late in the year while delivering solid gross margin gains that enabled investments in our business and an increase in full-year adjusted EBITDA of 8.4%. Turning to the fourth quarter, net sales grew 11% year-over-year with adjusted EBITDA up 4.2%. Similar to last quarter, base velocity is driving sales growth. The increase in our top line continue to underscore the strength and resilience of our brand, as well as our successful marketing campaign that is resonating with consumers interested in nutritious snacking, convenience, meal replacement and low carb/low sugar protein rich products. When excluding from 2017 net sales, a reimbursement benefit due to a product recall of $1.2 million and about $1 million due to four months of Wellness Foods revenue, core volume growth was 13.2%. And as stated on the slide, in the fourth quarter, the company deferred revenue for sales in transit at the end of the year. This was an 8.1 percentage point headwind. Todd will have a bit more on this in a second. The increase in adjusted EBITDA is a direct result of the sales growth. These gains were partially offset by incremental expenses in the business that we mentioned previously as well as the strategic sourcing initiative and higher incentive compensation. Given the investments we've made across the business combined with television, advertising and in-store programming, we’re seeing solid sales growth across all major channels. Specifically, in the fourth quarter and for the full year, US gross sales increased across all major channels and customers. And our e-commerce business continues to do well, up about 63% in fiscal 2018. e-commerce represents about 4% of our total sales and we anticipate this will continue to increase over our strategic planning cycle. Across all major time frames, measured channel US POS growth was up. As this slide depicts, the acceleration of POS for the 4 and 13 weeks ended August 25 given us confidence as we begin our new fiscal year. Our measured channel POS growth for fiscal 2018 was up 10.1%, slightly ahead of our net sales increase. Q4 POS was outstanding, up 19.5%, and stronger than net sales growth, primarily due to the aforementioned deferral of revenue for shipment still in transit at the end of the quarter. Overall, our performance continues to be driven by our strategic marketing initiatives, targeting lifestyle-driven consumers, an opportunity that is four times greater that our programmatic consumers. More on this in just a bit. The most encouraging part of our strong retail sales performance is it is coming entirely from base velocity growth, partially offset by slight volume decline from distribution and feature and display activity. Per IRI, over the last 6 quads, our POS growth has been up double digits on a percentage basis versus the year-ago period. Over the course of the year, I have discussed this a number of times, but let me spend a moment reviewing the self-directed low carb consumer opportunity. Recall, a while back, we initiated a consumer segmentation that provided insight that indicated there were a group of consumers we weren’t actively pursuing that was 4X our target programmatic weight loss consumers. And these consumers were already buying our brand. So, in addition to targeting the 8 million weight conscious program consumers who are open to our low-carb approach, we began targeting another 32 million self-directed consumers open to low-carb nutrition. In fiscal 2018, we tied it all together with a new marketing campaign in January with Rob Lowe that coincided with our cleaner bar initiative and new package graphics. As we exited April, POS began to accelerate and maintain strong double-digit growth. Needless to say, we’re pleased with the initial results and that our message is resonating with the 32 million self-directed low-carbers. Looking to 2019, we’ll build on the strategies that delivered solid results in 2018. It all starts with advertising and marketing. Our strong results give us the financial flexibility to invest in the business. As such, we’re committed to increased advertising and marketing in line with sales growth. And we couldn’t ask for a better brand spokesperson than Rob Lowe who is passionate and engaged. We’re also improving our website and continuing to invest in digital messaging, an important part of our integrated marketing campaign. Further, we have a solid pipeline of new products that brings the right level of variety, news and excitement to the brand and to the category. Here you see some of the new products such as the Atkins wafer bar and SimplyProtein bars that are launching now. To summarize, we believe these initiatives target programmatic as well as self-directed consumers, with messaging designed to keep the Atkins brand fresh. We’re very excited about our business as we begin the new year and hope to build on our momentum. With my overview complete, I’d like now to turn the call over to Todd Cunfer, who will provide you with some additional financial details.

Thank you, Joe. And good morning, everyone. Let me start with two points as it relates to the numbers you see on the slides that follow. First, for comparative purposes, we will review financial statements for the quarter and full year ended August 25, 2018 and pro forma combined financial statements for the quarter and full year ended August 26th, 2017, which presents our results as if the business combination had occurred as of August 28, 2016, including amortization expense based on the fair value of assets after the purchase and interest expense based on the new capital structure. We believe this discussion provides helpful information on the performance of the business during this period and all fiscal year 2017 financial measures discussed today will be on a pro forma combined basis. Second, we evaluate our performance on an adjusted EBITDA basis based on our asset-light, strong cash flow model. We've included a detailed reconciliation for GAAP net income to adjusted EBITDA in today’s press release. We believe this measure is a key indicator of the true underlying performance of the business. Let me start with a review of our fourth-quarter and full-year net sales drivers. There are some moving parts impacting year-over-year comparability and a comparison to IRI measured channel data, so let me walk you through it. Core volume growth has been solid all year and it's been the primary driver of our sales increase. Specifically, for the fourth quarter and full year, volume increased 13.2% and 8.3% respectively. The increase in Q4 is primarily driven by the solid POS growth as well as the timing and promotional shipments in August that we initially anticipated would ship in September. During the integration of Wellness Foods, four months of revenue was recorded in the fourth quarter of 2017. The impact of the extra month was about $1 million or 1 percentage point headwind. For the full-year 2018, Wellness Foods contributed 0.9 percentage points of growth as we only captured eight months of sales last year. Also impacting comparability was a reimbursement benefit in the year-ago period of $1.2 million which was a 1.20 and 0.3 percentage point headwind in the fourth quarter and full year. In our third quarter 10-Q, we disclosed that the company had historically recorded revenue using the FOB shipping point methodology. In the fourth quarter, we completed our review of customer contracts and determined that we should have been recording revenue via FOB destination turns. We did not restate prior periods and believe FOB shipping did not result in a material misstatement of the company's consolidated financial statement. Therefore, as stated on this slide, in the fourth quarter, the company deferred revenue for sales in transit at the end of the year. This was a headwind of 8.1 percentage points in Q4 and 2 points on the full year. You will note that, with these adjustments, net sales and retail takeaway are roughly in line. Now for a review of fourth-quarter results across major metrics. As I mentioned earlier, fourth-quarter net sales increased 11%. Turning to the rest of the P&L, gross profit increased 12.4% to $53.3 million with gross margin up 60 basis points to 49.2%, driven primarily by lower supply chain costs. Excluding $1.2 million product recall reimbursement in the prior period, gross margin increased 130 basis points. The increase in gross profit was partially offset by an 11.7% increase in selling and marketing, a 33.7% increase in G&A due to the timing of previously discussed public company costs and accelerated capability expenses that were weighted to Q4, costs associated with the strategic sourcing initiative discussed last quarter and higher incentive compensation. Our effective tax rate in the fourth quarter was about 0.8% versus an assumed pro forma rate of about 40% in the year-ago period. The reduction versus the prior period is driven primarily by year-end work associated with the tax reform act and a change in prior-year state tax rate. As a result, reported net income in the fourth quarter was $11.7 million. Year-to-date results were as follows. Full year net sales increased 8.9% to $431.4 million and adjusted EBITDA increased 8.4% to $78.6 million. The increase in full year net sales was driven primarily by organic core volume growth of about 8.3 percentage points. The acquisition of Wellness Foods was a 0.9 percentage point benefit. Year-to-date gross profit increased 11.5% to $207.6 million, with gross margin up 110 basis points to 48.1%, driven by favorable net price realization and lower supply chain cost. Excluding the $1.2 million product recall reimbursement in the prior period, gross margin increased 130 basis points. The increase in full-year gross profit was partially offset by higher distribution costs, $2.3 million of transaction costs, and 8.5% increase in selling and marketing expense, and an 18% increase in G&A as a result of Wellness Foods, professional fees, public company costs, accelerated capability expenses, the strategic sourcing initiative and higher incentive compensation. Additionally, for the full year, we recorded a gain related to the deferred tax liability remeasurement of $31 million and a gain of $2.8 million on the tax receivable agreement. For the full year, this resulted in a negative effective tax rate of 32.7%. Excluding these non-recurring items, our pro forma tax rate was about 28%. As a result, net income increased $41.8 million to $70.5 million. The company continues to benefit from very attractive cash flow characteristics underpinned by our asset-light business model, which enables strong cash flow generation. CapEx for the year was $1.8 million, driven primarily by investment in our new website and digital media application. Moving on the balance sheet and cash flow, as of August 25, 2018, the company had cash of $112 million and $198.5 million remaining on the outstanding term loan, resulting in a net debt to adjusted EBITDA ratio of about 1.1 times. The company also has a $75 million revolving line of credit available with no borrowings outstanding as of August 25. On October 4, we issued a press release electing to require all public warrants to be exercised on a cashless basis. Leading up to this date, there were a significant number of warrant holders who elected for a cash exchange. As such, we received approximately $113.5 million in warrant proceeds, doubling our year-end cash balance. The company has a solid balance sheet and strong cash flow and we are assessing our needs on the right capital structure as we look to grow our business organically and via M&A. I would now like to turn the call back to Joe for brief closing remarks.

Thanks, Todd. In summary, we’re confident in our ability to execute and capture the growth opportunities in front of us in fiscal 2019. We expect 2019 net sales to be slightly higher than our long-term target of an annual increase of 4% to 6%. This outlook reflects expected strong POS growth in the first half of the year, moderating in the second half of the year as we lap the double-digit increases from 2018, the aforementioned recognition of the deferral of revenue pushed into fiscal 2019 and a slight benefit of the 53rd week. Partially offsetting these games are supply shortfalls as we ramp up capacity due to an extended period of 20% plus consumption growth and the shift in our promotional calendar that resulted in shipments into August 2019 that we initially anticipated that would occur in September. We expect adjusted EBITDA will grow at a slightly higher rate than sales. And while we expect modest inflation during 2019, there is some uncertainty around inflation in the second half of the year. Next, we are excited about the growth opportunities that exist within our business and our category. We are focused on profitable organic growth as the path of increasing shareholder value. We appreciate everyone’s interest in our company. And with that, we are now available to take whatever questions you may have.

Thank you. [Operator Instructions]. Our first question today is coming from Rob Dickerson from Deutsche Bank. Your line is now live.

Great. Thank you so much. Another good quarter. So, I have a couple of questions really just around 2019. I know, in Q4, there was the accounting shift that was like approximately an 8% headwind. And then, you've spoken to potential supply constraints, just given the past volume growth on the base business. So, if we think about 2019 first half versus second half and even first quarter versus second quarter, I guess what I’m hearing is that that accounting change should reverse in Q1, which would therefore – it sounds like the 8% tailwind. And then also, just in terms of the capacity piece, if we kind of normalize organic sales growth for Q4 and we compare it to POS, it didn’t seem to be that much of a delta between the two. So, I'm just curious, I guess, one is, there should be a tailwind in Q1 and first half. And then, on the capacity side, is that something we should be concerned about or is that just the easy fix and it’s really no big deal? That’s the first question.

So, let me take the deferral question first. So, that will not be a tailwind in Q1. Q1, Q2 and Q3 will be basically normalized. The revenue recognition of in-transit comes in and out of the quarter. Where it will actually be a benefit for us will be in Q4 because we’ll be lapping that one kind of push out or deferral of revenue as of Q4. So, we will not see that benefit until the fourth quarter, if that makes sense to you.

Yeah, that’s great. Easy enough. And then, just in terms of the acceleration overall that we’ve seen in the business, obviously, I know the strategy is to target the self-directed and that seems to be working. But if we step back and we look at where the business has come over the past six months, Joe, I’m really just curious to hear kind of what your thoughts are, how the growth has come in relative to where you thought it could be. I don’t think everybody really expected 20% top line growth. So, if we think about 2019, how do we continue the growth trajectory? And I'm not implying 20%, but still just that mid-single-digit, I’m assuming, would continue with the Rob Lowe effect basically.

First, you asked the second question and I don’t think we answered for you, which is how significant is the supply issue and kind of where are we in that. And I think, first to address that, no, we did not expect sustained 20% growth in our business. So, we’re now 15, 16 weeks into 20-plus-percent consumption growth. So, as we build our plans for the year from a supply standpoint, we have some ability negotiated with our suppliers for surge capacity. And, frankly, the longevity of this consumption growth has blown through all that capacity. So, as we sit right now, collectively, our inventory levels and our customer inventory levels, even to the shelves, are below where they should be. And it is going to be an issue that’s going to be with us for a while. We can get more supply. It just takes time get more supply. So, I can’t tell you the impact of POS. We’ve not seen it in POS yet. And I can’t tell you how long it’s going to last because I don’t know how strong POS is going to be. If POS abates a little bit, we catch up in inventory and we are in better shape. If I get a little bit more supply, we catch up and we get in better shape. But at this point, we saw it as a risk. As we provided guidance to you, it’s going to last through the first half of the year, maybe a little bit longer, and it really depends upon how strong is our marketing initiatives, how strong does POS remain before we get healthy and where we want to be. Did I answer your question?

Yeah. I think that’s comprehensive. And then just quickly, and I’ll pass it on, is just the capital structure. I understand the cash came in off the warrants. You’re not saying that you're buying back stock to offset. Obviously, you’re running extremely high cash balance. In terms of acquisition potential, I’m assuming pipeline strong, you’re holding on the cash to have the firepower to kind of step into the next phase of Simply Good Foods. Any comments around that?

Yeah. So, to be honest, we were a little surprised how many people exercised for cash prior to us redeeming the warrants. So, as I mentioned, we doubled our cash position. We actually have a board meeting coming up in a few weeks where we’re going to lay out, discuss where we are from a cash and a net debt position and kind of determine where we want our capital structure to be. M&A continues to be a very, very important piece of our long-term strategy. So, obviously, that’s very important to us. Those are difficult to know when they’re going to come to fruition. And so, we’ll have a good discussion with the board on what to do with that excess cash.

Okay, great. Thanks, guys.

Thank you. Your next question is coming from Jason English from Goldman Sachs. Your line is now live.

Hey, good morning, folks. Thank you for allowing me to ask the question. Thanks for detailing the drivers of growth this year. As you highlight in your presentation, distribution was actually a bit of a net drag. Per last quarter, I think you had a bit more optimistic bent in terms of how resets may go into diet season. Given we are quarter later and the point-of-sale has been pretty darn robust, can you update us on how those negotiations are going and if there’s any way to quantify? How you think that distribution headwind may flip to the tailwind next year? I would certainly appreciate it.

Yeah. At this point, I would say we expect continued performance in base velocities and potentially some modest improvements in distribution. The big overhang here, obviously, Jason, is it’s difficult to get new items into distribution when you’re having challenges servicing the business that you have. Those become pretty challenging conversations with customers, right? So, give me the inventory, give me the product I need on the products I already have on my shelf before we talk about putting new products on the shelf. So, I think you should expect, as we go forward, predominantly base velocity gains. Now, the one thing I would point out, in 2018, we had the drag of the discontinuations from lift for most of the year. So, as that burned off towards the second half of the year, that’s when we saw our POS step up from kind of low teens to high 20%. I expect that favorable overlaps through most of this year.. We’re not going to see a drag due to distribution loss. We’re going to see flat to slightly improving. But I wouldn’t expect much more than that given our supply issues right now.

How does this impact sell-in for your new innovation? These are new forms. I assume, they are produced on new lines. They don’t have the same capacity constraints. Is that true? But at the same time, to your point, if retailers are happy with these service levels in your base, how is that impacting their willingness to accept this new innovation?

So, challenging to accept when you can’t service. So, that’s always the first conversation, right? So, as you can imagine, when you go talk to a customer, if you're not servicing them 95%, then you’re going to have difficult conversations. And recently, we've been not doing that. And so, again, I think that our focus has to be on – and the second question we answered is, innovation is on new lines. Actually not. Innovation, for the most part, is on existing lines. And so, it’s a matter of – and right now, the challenge in our business is, we are selling every form, every flavor at double-digit growth. So, there’s not an item that’s strong and an item that’s weak. We’ve got more buyers coming to the shelf and they're buying what’s ever there. And so, there’s no weakness in our business where we can shift from one SKU to the other SKU. We are across the board selling well ahead of our own expectations. Now, I would highlight that our supply chain has done a phenomenal job in ramping up supply. We continue to get more than what we expect. The challenge has been we also continue to get more than we expect in POS growth. So, as we bring on more supply, we seem to be able to blow through that pretty easily. So, from our business standpoint, we have to address that. It’s going to be a midterm issue. It’s not going to be a short-term issue. It’s going to be a midterm issue as we bring on more supply and we’re going to have to work our way through those problems with customers. So, I would focus less on innovation and more on improving supply and expecting our base velocity to drive our business as we go forward.

Very good. Last question and I’ll pass it on. What does midterm mean to you, Joe?

Not a month or two problem.

Is it a quarter or two problem?

Hard to say because I can’t project. If you can give me what POS was, I can probably give you a better idea. POS stays in the 20s or sets into the 30s, it will be longer. If it moderates a little bit, we can recover.

Very good. Thank you very much.

Thank you. Our next question today is coming from Matthew Smith from Stifel. Your line is now live.

Hi, good morning.

Good morning.

As a follow-up to the supply chain challenges, could you discuss the impact of constraints on your sales growth outlook for fiscal 2019? And do the capacity concerns impact your promotional plans for the year?

Yeah. First of all, we gave, I think, a pretty comprehensive view of where we saw risks and opportunities in our business. And we believe those, right? So, we expect strong POS in the first half of the year. We expect it to moderate in the second half of the year as we lap last year’s growth. So, that’s the first high-level conversation, right? So, I’m expecting some moderation. And as I just described to Jason, moderation helps us with customer service issues. And then, our service issues, we’ve got to work through. Those are issues that we’ve got to deal with as we go forward, right? So, the only other factor in our risks and opportunities is we have a pretty good view of what inflation is going to look like for the first half. Less of a solid view – goods and services right now are pretty – the basket is pretty volatile. So, hard to say what inflation is going to look like as we move into the second half of the year. So, those are the risks and opportunities that we’re managing as we go into the year. We feel pretty comfortable that we’re going to be slightly above the long-term algorithm from a net sales standpoint, slightly above that. And then, our EBITDA growth will be slightly better than our net sales growth as we kind of balance those risks and opportunities.

Yeah. So, Matt, regarding promotional activity, obviously, we’ll still have that going forward in 2019. To your question, I think we potentially won’t be able to be as aggressive as we’ve historically been. As Joe pointed out, the good news is, our growth has come 100% from base velocity. We believe that will continue. So we are not as reliant on promotional activity as maybe some other categories or companies are. But it’s actually a really good question. We’re not going to be able to lean into promotional activity probably as aggressively as we’d like to be. But we will still have our fair share.

One key factor in our business that’s important to know is 85% of our volume is base buying. So, the volume we get for promotion activity during the year totally is only about 50% of our volume. It has some seasonal shifts. So, January, March, May, we tend to see higher levels of promotion activity in the balance of the year. But this is not a business that’s heavily promoted. So, that as a lever is far less important than other businesses that I've been in and my team have been in.

Okay, thank you. I appreciate the color. And one more for you. If you could talk about your capacity constraints, is it mostly in shakes and how about the bar capacity? And do your supply partners have more capacity coming online? And when would you expect that to come online?

Yeah. Great questions. It’s across the board. More in bars than in shakes. But pretty much across the board. And our suppliers have been bringing capacity online and we've been outperforming that. So, our POS is not abating at all. If you go back and look at the store levels, we started in this 20% growth, I think, 16 weeks ago. And we continue to surprise ourselves week after week after week. So, we can bring in more supply. We need POS to be a little bit moderated as we move into the second half of the year, which is what we expect it to do.

Okay. I’ll leave it there and pass it on.

Thank you. The next question is coming from Brian Holland from Consumer Edge Research. Please proceed with your question.

Thanks. Good morning. Just quickly first with a housekeeping question. Can you give us some sense of – the impact of the SimplyProtein national launch that you announced a little while back, maybe how meaningful that could be as a contributor to your top line?

So, it’s going to be a modest contributor. Just by design, this is going to be a slow build. We are trying to get it in the right customers in the right part of the store. So, this is something that we feel great about, feel very strongly about, but it’s not going to be a big bang out of the gate. It will be a slow build. And we’re going to do it the right way in a couple of years.

And then, asking again about sort of the impact of the capacity constraints and your ability maybe to market as effectively as you have over the past year. Maybe from a share perspective, Weight Watchers just talked very recently about a rebranding. SlimFast has been acquired. Seems at a high-level at least affirmation of your strategy to pivot towards the self-directed dieter. I presume SlimFast probably has more direct overlap from a product standpoint with you. But as you kind of think about managing the capacity issue, your ability to continue to market, obviously, your awareness is high, but sort of continuing to hammer home your message where maybe that starts to get a little bit more crowded. So, maybe less of just a velocity question than maybe a share question, how you sort of weight risk/reward of balancing that capacity with those dynamics in place?

Yeah. First, I would say we tend to pay attention more of what we do than what the marketplace is doing. And I think that’s proven out in 2018. We shifted our strategy to a broader target audience. We shifted our brand promise to a more lifestyle weight management story and our business performed. So, we feel, for the most part, what we do matters. We pay attention to what the competition is doing. It’s nice to see that Weight Watchers is doing well, following essentially the same strategy that we kind of led last year. So, we don’t pay too much attention to what other competitors are doing. Our business is influenced by what we do. We noticed the sale of SlimFast. They’ve done a nice job in that turnaround. Their brand is different. There consumer is different and their brand promise is fundamentally different. So, we don’t have a lot of overlap between the two brands at all. So, I’m less concerned. I like the fact that SlimFast is being successful. The biggest challenge for us in retail has been a declining weight management category. It puts pressure on the amount of space available to weight management brands with them growing again. With us growing strong, it is actually the fastest growing segment in nutritious snacking, right, exceeding sports performance and exceeding all the kind of bars, the premium bars, in the other part of the store. So, that’s I think good for our category quite frankly. But we are paying attention to what we do and we have our eye on the competition. But we know what we do drives our business more so than anything else.

Sure, fair enough. And maybe just last question. You’ve talked before about kind of the buying rate of consumers as they come into your brand and the extent to which that accelerates in year two. Obviously, you’ve had a nice bump in household penetration, I think, over the past year. As we think about some of the dynamics, would you expect if you maybe pull the marketing lever a little bit less because of supply constraints, do you expect a little less household penetration, maybe growth or that to moderate a bit? Is that the segment that gets impacted most bringing in new households versus accelerating buying patterns for folks who have come in maybe within the past year? And then, would you expect – or is there any reason based on the analysis maybe that you’ve done internally to expect – is there any change in the algorithm for those consumers who have come in over the past year, any reason to be less confident? I think you’ve talked about maybe that buying rate something like tripling in year two, but maybe you can clarify.

That’s a great question and a question we think about a lot. So, we just brought in a large influx of new buyers. It has a different composition than it’s had in previous years. What does the loyalty behavior look like in year two? And we just don’t know at this point, right, because year two is one month old. So, I don’t have that data. I don’t know what that data is. If you take some modest assumptions, we’re going to continue to – the loyalty remains mostly the same. We’re going to continue to have a really good year frankly. So, we’ll track that as we go into the year and have a better idea after the first quarter what that looks like. But hard to know, right? Is a lifestyle consumer more promiscuous in their purchases? Do they buy at the same rate? Do I get him back in the same numbers? Those are all questions that will have a lot to do with how our business performs in this year and subsequent years.

Great, thanks. Best of luck.

Thanks.

Thank you. [Operator Instructions]. Our next question is coming from Bill Chappell from SunTrust Robinson Humphrey. Your line is now live.

Hi, this is actually Grant [ph] on for Bill. Just had a question kind of on the marketing outlook for next year. I know you guys have talked about expecting – continue to grow at this rate, but you’ve also said you expect to grow marketing in line with sales growth. So, are there new initiatives coming online that maybe weren't in the plan for last year? Or is there additional spend or additional areas where you guys think you can move some of that spend to get return?

So, as you point out, the algorithm is we will – investing in marketing is obviously a very key piece of our strategy. We will continue to invest with sales growth in marketing. We have Rob coming on for a year or two. You will see some new advertising coming in beginning of January. We are really, really excited about that. We’ll, obviously, have to put some marketing funds behind SimplyProtein. That’s new from a US perspective. But really pleased with the campaign that we have. We are really pleased with the strategy. It’s obviously working and we will continue to invest in marketing. Nothing is going to change on that front.

Got it. And actually, maybe on that new advertising campaign coming in January, is there any thought of maybe pushing that out with the supply constraints that you guys have right now or do you really feel like you want to seize on the opportunity for kind of gaining those incremental buyers at this point?

Yeah, hi. Look, we’re going to continue to invest in our business. And we’re going to continue to grow buyers. And the supply issues we have, again, we expect it to abate as we move into the second half of the year.

Got it, thank you.

Thank you. Our next question today is coming from Eric Larson from Buckingham Research Group. Your line is now live.

Yeah. Thanks, guys. Most of my questions have been answered. But just a quick update on your supply chain, your cost savings initiatives. What was maybe the cost that you had in the fourth quarter and what might be the spending and cost expenses that you’ll have for next year? And does the supply chain constraints change how aggressively you go after some of the costs that you’re outlining in the previous quarter?

Hey, Eric. It’s Todd. So, we haven't disclosed what the exact dollars have been. And I’m not going to disclose them at this moment either. But they’re not insignificant. So, these costs hit us – it began to hit us in Q4. It’s a nine-month project. We will see some headwinds from an EBITDA perspective in the first – in Q1 and Q2 of this year. We believe it’s going to be the cost – and then the savings will be EBITDA neutral for the year. So, what you’re going to see is a bit of a headwind first half of the year coming through G&A. You’ll see a tailwind in the second half as some of these initiatives start to come through our P&L. And you’re going to see that in, obviously, through G&A, you will see it through gross profit. But to your question, are we slowing down on that initiative? Absolutely not. It’s full steam ahead. It’s going as planned. We feel really good about the project. There’ll be more to come on it as we finalize it. But nothing has changed from an ops perspective and we are pushing really hard on it.

Okay, great. Todd, thanks. And then, just one quick follow-up question. Joe, in your prepared comments, I think – and you were talking about the self-directed consumers. I think you stated – and correct me if I’m wrong. Maybe I’m just misunderstanding this, but I believe you said that a lot of those self-directed consumers were already buying Atkins product. And yet, you alluded to the fact that you’re bringing out a lot of new buyers as well. Is there a combination of those two? And what percent of those buyers are actually new as opposed to maybe driving more sales with existing customers in that self-directed category.

You may recall from our earlier investor presentation that about 50% of our buyers – if you look at the total buyers of our brand, about 50% of them were self-directed low-carbers. Still a relatively small fraction of the total –

Got it. Okay.

If I remember, about 10% of the self-directed low-carbers are already buyers of the brand. So, the point that I was making is we weren't targeting them and they were buying our brand anyway. And our opportunity is to start targeting and then grow our share of those as we move forward.

Perfect. Thank you for the clarification. Thank you.

Thanks, Eric.

Thank you. We’ve reached the end of our question-and-answer session. I can turn the floor back over to management for any further closing comments.

Yeah. Thanks again for your participation on our call today. We look forward to updating you on our first quarter results in January. Have a good day.

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