Greetings. Welcome to Simply Good Foods Company’s Third Quarter 2019 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] Please note this conference is being recorded. I will now turn the conference over to Mark Pogharian, Vice President of Investor Relations. Thank you. You may begin.

Thank you, Sherry. Good morning. I’m pleased to welcome you to Simply Good Foods Company earnings call for the third quarter ended May 25, 2019. Joe Scalzo, President and CEO; and Todd Cunfer, CFO, will provide you with an overview of results, which will then be followed by a Q&A session. The company issued its earnings press release this morning at approximately 7 A.M. Eastern Time. A copy of the release and accompanying presentation are available under the Investor section of the company’s website at www.thesimplygoodfoodscompany.com. The 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 results to differ materially. The company undertakes no obligation to update these statements based on subsequent events. A detailed listing of such risks and uncertainties can be found in today’s press release and the company’s SEC filings. 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 measures to non-GAAP measures. And with that out of the way, it’s my pleasure to turn the call over to Joe Scalzo, President and Chief Executive Officer.

Thank you, Mark. Good morning and thank you for joining us. Today, I’ll recap our third quarter highlights and provide an update on our business. Then, Todd will discuss the summary of our third quarter and our year-to-date financial results. And after that, we’ll open the call to your questions. We delivered another strong quarter with both financial and point-of-sale results exceeding our expectations. Net sales and gross profit increased double digits on a percentage basis versus last year. This is our fifth consecutive quarter of double-digit growth across both of these metrics. And we’re delivering on our commitments while also investing in our business and our capabilities, especially marketing, which has increased 24% over the first nine months of the year. Our retail takeaway growth is measured by IRI, continues to be strong across all forms, all channels, and all major customers. Total Atkins U.S. retail takeaway in Q3 was up 19.5%, exceeding our expectations even as we began overlapping stronger year ago comps, and our e-commerce business continues to do well with sales up meaningfully in Q3. Importantly, the nutritional snacking category continues to grow and outperforms most center-of-store package Goods Foods category, driven by healthy snacking and meal replacement megatrends. For both the third quarter and year-to-date periods, category growth continues to be in the mid-to-high single digits. Our marketing and advertising complements the consumer megatrends and secular tailwinds driving this category growth, and with nutritional snacking household penetration only around 50%, we believe there’s a lot more room for growth. Turning to the third quarter, net sales increased 30.1% and is expected outpaced POS growth as customer inventories normalize to first-half level. In line with our long-term algorithm, adjusted EBITDA was up greater than sales growth and increased 38.8%. Our business continued to be driven by…

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 competitive purposes, we will review financial statements for the quarters ended May 25, 2019 and May 26, 2019. Second, we evaluate our performance on an adjusted EBITDA basis based on our asset-light, strong cash flow model. We have included a detailed reconciliation from 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. Now for a review of third quarter results across major metrics. Let me start with net sales. Core volume growth has been solid over the last year and continues to be the primary driver of our sales increase. Specifically, in the third quarter, volume increased 32%. As expected, net sales growth outpaced retail takeaway, driven by the timing of inventory movement at key retailers. Note that year-to-date net sales growth and retail takeaway are now relatively in line and we are well-positioned to meet consumer demand. Bar trade promotions resumed in the quarter, although frequency was slightly lower than last year, resulting in modest price realization of 1%. These gains were partially offset by the change in how we account for services provided by some of our customers. As we discussed during the last two quarterly calls in the year ago period, this cost was recorded in selling expense. Turning to the rest of the P&L, gross profit increased 27.3% to $65.3 million. Gross margin declined 100 basis points to 46.8%, primarily due to the non-price-related customer activity that is a shift from selling expense. This change in methodology only impact fiscal 2019 amount, therefore, affecting comparability versus the year ago period by…

Thank you, Todd. In summary, we expect that we’ll end the year strong with full-year net sales and adjusted EBITDA growth up meaningfully versus last year. Given our momentum, we anticipate full-year fiscal 2019 sales and EBITDA growth to be in line with the year-to-date percentage increase trend. The full-year outlook reflects first significantly more challenging POS comps in the fourth quarter, and our expectation that retail takeaway will continue to sequentially slow. Second, incremental strategic investments in marketing that should continue to drive buyer growth. And finally, we anticipate that Q4 net sales will outperform POS growth due to fourth quarter benefits of the 53rd-week and the year-over-year positive impact of sales and transit that we previously discussed. We are highly confident in our long-term opportunities that are focused on driving top line growth and total buyers for the brand. The marketing investments we’ve made in the business, as well as the investments enhanced capability position us to deliver solid growth in 2020. As we have shared with you over the last year, we’re confident in our business as we execute against our strategies. And we’re delivering on our financial objectives while investing in the business, a path that we believe will continue to create value for our shareholders. We appreciate everyone’s interest in the company, and now we’re available to take your questions.

Thank you. [Operator Instructions] Our first question is from Jason English with Goldman Sachs. Please proceed with your question.

Hey, good morning, folks. Congrats on the strong quarter. Hey, I’ve got a couple of quick questions. First, the fourth quarter guidance, if our math is right, implies organic sales growth kind of underlying ex some of the transitory benefits of around 5%. So first, is that about right? And second, what we see in retail, scanner data suggests momentum sustaining well above that. Are we missing anything happening maybe outside Nielsen track channels?

So, this is Todd. So, a couple of things to consider, to continued drag through the entire year, as you know, is that expense. Accounting shift impacts us by approximately two points a quarter. So that – we will get the last piece of that in Q4 and then we’ll start lapping that as we get into the next fiscal year. And international has been about a 2 point drag on our topline as well. So, I mean, you’re correct. We’re obviously – we have two favorable tailwinds from the 53rd week and revenue recognition impact from last year, also have always potentially a little bit of noise about where retailer inventories land. And do we have the potential to do slightly better than that, of course, but that – those are kind of the bridges. Hopefully, that makes sense.

It does. Is my 5% number roughly right? Because I think we were contemplating all those factors when we’d arrived to our 5%?

No, look, do we think we’re going to outdo 5% POS growth in Q4, certainly. Do we think we can do a little bit better than the numbers you’re kind of implying, yes. There’s always uncertainty around work. Retail inventory is going to land. That’s always the wildcard.

Got it. That’s helpful. And a quick question on innovation. It sounds like the 30-gram protein shake is off to a strong start. It looks like in the POS data that you’re building some momentum behind powder shakes as well. Can you give us an update on where they stand? It looks like pretty light distribution. Do you see more opportunity there and what do you see in terms of cannibalization of your ready-to-drink shakes?

Hey, good morning, Jason. This is Joe. I would say, look, I think the 30-gram shake is going to be a nice addition to our portfolio given its incrementality. Powders have been slower in the build and frankly not as incremental as we anticipated. So unclear to me at this point how well powders would do over the next, call it, six to 12 months.

Got it. Thanks a lot, guys. I’ll pass it on.

You’re welcome. Thank you.

Thanks, Jason.

Our next question is from Chris Growe with Stifel. Please proceed with your question.

Hi, good morning.

Hey, Chris.

I just had a couple of questions for you as well. If I could start first, just to understand your consumption and shipments are now in line for the year, but if retailer inventory levels were depleted entering the year, I’m just trying to understand from an inventory standpoint at retail, do you expect to continue to build a bit like in the fourth quarter? Are we at the right level now for inventory levels overall?

No, we’re – we feel very good about the inventory levels we are at retailers. So, I think from this point forward, there should be a nice [ph] big swing, so that should not be a big issue going forward.

Okay. And then just a question on your – so the savings coming through from your supply chain program. You talked about those savings, which I think really kind of kicked in here in Q3 offsetting cost of goods due to an increase in costs. I just wanted to get, hopefully, a little bit of sense around the size of each of those. Do you have an idea, like just to get an idea of how much the costs are up, and then how those synergies kind of phase as those are kind of the first quarter from here in Q3. Do they pick up sequentially as we go forward like Q4 and into 2020? Just trying to get a better sense there.

Yes. So, I won’t get into a deep level of specificity on it, but we are seeing some modest inflation, low-single digits on our ingredients and other supply chain costs. We are offsetting those beginning in Q3 by strategic sourcing. It’s behaving exactly the way we had hoped, doing really well. That will continue in Q4 and as we go into fiscal year 2020, we are starting to see some inflation in milk proteins, in whey and things of that nature does nothing that we can’t overcome obviously by our strategic sourcing and other projects we have on, that we’re working on right now, but the project is doing very, very well, but we are seeing a little bit of inflation out there.

Okay. Thank you for the time this morning.

Our next question is from Brian Holland with D.A. Davidson. Please proceed with your question.

Yes, thanks. Good morning. I guess, a couple of high-level questions. As we think about the improved inventory situation, I think about some of the long-term opportunities you’ve spoken to in the past channel-specific whether that’s club where you’re underpenetrated convenience in the single served as well. I appreciate they may not be near-term initiatives or focus points, but to what extent with an improved inventory situation can you revisit those opportunities and more, maybe aggressively attack those? Does that change at all with the improved inventory situation or are there other dynamics that maybe I’m just not considering here?

Hey, Brian, this is Joe. We’re – we never slow down on those initiatives, because they tend to be more strategic in nature. So, you’ve got to keep pressure on those. So, they are desired to want to build out in white space. We kept pressure on those initiatives. I think over time, we’ll start to see some of the positive impact of those things, but we didn’t slow those down for our supply situation. You can’t…

Okay.

…you can’t stop and start those initiatives, because you’re having conversations with customers over a sustained period of time to build distribution, but those didn’t shut down.

Okay, that’s helpful. And then can you help us understand – if we go back a few years ago, you sort of talked about 6 million buyers, maybe 62 servings per buyer, that’s kind of – that may be specific to a product line bars, et cetera. But even just directionally, so what does this kind of quantify the growth in the number of buyers that you have? And maybe how, at least directionally, how service provider – you said service provider are going up, so that’s certainly encouraging. But just trying to get a sense of, what the tail looks like here at this point based on the progress you’ve had here in the past couple of years? And maybe, I think the chart that I’m thinking about there that you presented a few years ago, just what kind of progress that we made? Is there any change in view on what that looks like, given the success of the initiatives you’ve had in place here?

Yes. So I don’t – again, the chart we showed you was a incidence study, so that’s a strategic study that you do once every multiple years. So I can’t tie back to those numbers on a quarterly basis or even on an annual basis. Here’s what I know. From that chart, we knew we were underpenetrated among these lifestyle consumers. And there were about four times as many of those as the programmatic weight loss, folks. I’m trying to remember the numbers, but I think the programmatic were about $8 billion, and the lifestyle low-carbers were about, call it, 30 million. As we’ve tracked our progress over the last year, we’ve made – we’ve grown our buyers significantly behind the lifestyle consumers. And we’ve kind of held our ground with programmatic weight loss consumers. I can’t tell you what’s the penetration among that $30 million, I just know a lot of my new buyers, a meaningful percentage of those buyers are coming into lifestyle bars. Now the one concern that we had going into this is that, their loyalty would be different than a programmatic weight loss person, i.e., lower, either I don’t hold them as long or they don’t buy as much. I can’t see the specifics by the buyer group. But overall, the loyalty of the buyer group hasn’t changed. And knowing that I’ve grown meaningfully among lifestylers, it just – we can infer that the loyalty of a lifestyle consumers is fundamentally the same as the programmatic weight loss consumers. And if you remember, the – our branded buy rate is the category – is category leading. So on average, I think, our number is close to 50 servings per year on average of our average buy. So – and then the – it changes meaningfully from year one to year two with about 30 purchases, 35 purchases in the first year and over 100 purchases in the second. That seems to be holding up, which is a nice surprise for our business. And that is probably the biggest single driver of the growth exceeding our expectations. Buy rate and royalty remain consistent, even though we’re bringing in a different and therefore, we expected different purchase behavior consumer that had not been the case.

Thanks. That’s very helpful context.

[Multiple Speakers]

No, no, no. No, that was very helpful. Thank you for the context. Best of luck going forward.

Yes. And unfortunately, I can’t give you, I wish I had a digital instrument to tell me how many buyers and who they were and what they were buying, I don’t have that tool, right? I can infer from different types of studies, what’s going on. And what’s going on is, it’s exceeding our expectations, because we’re bringing lifestyle people in, and they’re buying at a rate pretty consistently with the programmatic weight loss people.

Got it. Perfect. Thank you.

Yes. You’re welcome.

Our next question is from Rob Dickerson with Deutsche Bank. Please proceed you’re your question.

Great. Thank you so much. So I guess just follow-up from Brian’s question is, I guess then, if lifestyle consumers and buyers are exceeding expectations and obviously driving kind of crazy, let’s call it, volume growth, while the programmatic pull study, kind of where you stand today relative to where you stood two years ago. Is there – would you say there is obviously a lot of incremental learnings and you watched a lot occur with the brand and what – kind of innovated around the brand. But – so now what? Is this, obviously, just keep doing exactly what we’ve been doing? There is no need to change anything to your marketing program. We definitely are keeping Rob Lowe, and we’ll definitely will have new adjacency, flavors, marketing or else what have you, because obviously, you’re doing extremely well on the top line. So, get in that lifestyle consumer seems like it’s bought in and you continue to try to increase your household penetration. And you’ve also learned a number of things. As you think forward even to next year and no guidance – but just, what do you do differently to sustain the growth rate or maybe you do nothing differently?

Hey, Rob, good – great question. So it’s the one that keeps me up at night. So what should we keep doing and what should we change? And the answer is, I think there are some things that are working that we continue to do, but we also keep testing different ideas. So you can never –a wise man once told me all trees don’t grow to the sky. So you can’t believe that doing the same thing consistently year after year after year is going to continue to drive the same results. So you’re always looking for new insights and new avenues to grow. So I’ll give you an example of something that we began during the year that we’re getting learning from. So we went into a market and we significantly changed the level of marketing support and the composition of the marketing support. So trying to get broader reach in the marketing efforts, and we’re getting learning out of that every day. So if you’re going to spend more, how do you deploy? We’re consistently looking for new insights. So you do copy testing, you do in-market [indiscernible]. You understand what consumers are taking away. You have an idea – pretty good idea of what you’re trying to communicate in the next round of execution. You’re always trying to do a little bit better. So I’ll give you an example there. We would like the weight component of our messaging, as we move into the next year to be a little bit stronger. If you remember the first year executions with Rob, he talked a little bit about when you’re feeling better, you start looking a little bit better. We kind of lost that this year and we think we need to get that back that would help us with programmatic weight loss consumers. So we’re always looking for – you should plan on us continue to do it. What else can we do to help us improve the efficiency and the effectiveness of the marketing investment? And we’re always out there looking for those ideas.

Okay.

…so no stasis, but we’re not not throwing the good stuff away, but we’re never at stasis, we’re always looking for new opportunities.

Yes. And it’s obviously just the balance of how much you really need to spend, whether it’s in trade promo, which you can – with the up a little bit corner and then you’re obviously spending a lot keeping the distribution and the velocities up. The question is, do you need to be growing 20% for the stock? And kind of what we’re always worried about, keep me up at night.

Yes.

The other question is just, strategically, obviously, it’s always a question, especially for your company and the Board or management team is just cash on the balance sheet. Net cash is still high, leveraged strong position, 2 million CapEx. How is the deal pipeline? Is there a sense of, let’s say, more immediate timing now relative to where we start a year ago? But we haven’t really seen anything come through yet. And I know you’re always focused on it, but just trying to get a sense as to sense of urgency, what’s in the marketplace, how the pipeline looks, et cetera?

Yes, the pipeline is full and we’re very active. You can tell from some of the deal costs that are flowing through our financials very, very active. And as you know, when you’re dealing with fast growing typically privately-owned nutritious snacking company expectations on valuations are high. So the job is do your diligence to understand what value you think you bring to the asset? How you contribute [Technical Difficulty]. Can you find the right intersection between seller expectations and what we believe we can do with the business? So far, we’ve not been able to find that despite a lot of activity.

Okay.

I wish I could tell you, are we going to get something done in the short term, but I can’t tell you that, because I don’t know.

Yes, I get it. We’re all waiting. Thank you, guys. Great quarter.

Thank you.

Our next question is from Eric Larson with Buckingham Research Group. Please proceed.

Yes. Good morning, everyone. Really nice quarter. By my calculations, Joe and Todd, I’m not sure if this is correct. It looks like Simply Good is providing about 35%, maybe a third of the total category growth right now. That might be an inaccurate number, it’s the best that I have with the data I have. First of all, is that accurate? And then, what are you seeing from your competitors? It seems like you’re looking over your shoulder yet, obviously, you have to be careful as you do that. But can you kind of stack up what you’re seeing in the marketplace today relative to maybe what you’ve had over the last three to six months?

Yes. I think, this is Joe. What the – we’re obviously big and growing in big numbers, so we’re a meaningful part of the category growth. We tend not to want to talk too much about how we view the category, because we feel that’s competitively sensitive. But we’re a big player and we’re growing fast. So we’re a meaningful part of that. Our comments, I think, reflect how we view the category. The category relative to center store is underpenetrated and it’s got nice tail. It’s got snacking tailwinds, convenient tailwinds, meal-replacement tailwinds, there’s a whole number of secular consumer trends that are going to continue to drive this category towards growth. The last six to 12 months growth rates kind of been the mid single-digit to the high single-digit. So we’ve been growing category share, but there are a number of players in the category that continue to grow nicely, continue to pick up market share, and we expand – I don’t think, I think that’s unchanged, quite frankly. So we expect to continue category growth. We think there’ll be small guys come in and grow, and I think some of the bigger guys will continue to take market share.

I believe we tend not to…

…focus too much also on competition. For us, it’s what do we believe about our opportunities to growth? What are the initiatives to do it? And how well are we executing it against those? Those are more important than what the competition is doing right now.

Okay.

…for insights. It’s much more about doing, understand what you need to do and executing well with it.

Got it. Just a final question, and it’s kind of drilling down a little bit more into some of the questions that have already been asked. But you brought Rob Lowe on, I believe, what January of 2018 and January of this year was your second year with him. And if the – if your lifestyle users are as high of consumers and repeat purchasers as your – the traditional Atkins’ consumers, you’re now kind of starting the year two of maybe pretty significant consumption on the consumers, you may have brought in 2018. And that then in 2020 could even be a better higher consumption number. It – should that give us just from what you’ve already built in the last 18 months of Rob Lowe, the confidence that we could still see continued strong POS numbers if those relative consumption numbers are about the same for your lifestyle versus the traditional Atkins user?

Yes. I think, yes. So the unknowns, obviously, are does the buy rate hold, does the loyalty hold? But yes, we’ve done a nice job of growing buyers, as you grow new buyers, they become year two and year three buyers and they have a benefit to us. So, I would just say that prior performance on loyalty is not necessarily predictive of future performance. So yes, we’re optimistic because of the buyer growth. And we feel good about the fact that the loyalty has held so far. And if it continues that hold, we feel pretty good about our prospects to 2020 and beyond.

Okay.

…and we’ve got to keep going and we got to keep getting new buyers, right? So we got to keep doing that next year.

Yes. No, that’s the engine to your company frankly.

Yes. Thank you.

Our next question is from Bill Chappell with SunTrust. Please proceed.

Thanks. Good morning. Do you mind – I think I’m right in saying that, I guess, your Founders, Board members are raising a new SPAC or money for that. If that’s correct, can you just kind of help us understand how that works with the new SPAC, M&A priorities versus your priorities and how the Board members work with you more or less going forward? Just kind of clear that for being, it’d be great.

Yes. First, I think the first question is, how active are they. They went out with their SPAC for a few days and they’ve been obviously behind the teams very active. I haven’t noticed a decrease in the number of calls that I get from my – from the Conyers’ archive. They continue to be robustly engaged in our business. The – as our business has accelerated, our M&A strategy had narrowed. And that has reduced the number of assets that we frankly would even consider looking at much closer to the nutritious snacking category. That opened the avenue up for the Conyers guys to look at another vehicle that would be in all likelihood more center of store as to take advantage of some of the assets that are out there. I think it’s some of the large-cap guys and/or private assets out there that are more center-of-store focus. So the agreement that we have with the Conyers guys is, we get first kick at the can and assets. And look, we we’re pretty narrow. So we’re going to be looking at nutritional snacking assets, mostly NRI. That’s where we’re going to stay focused. They’re going to be looking in other places, quite frankly.

Got it. And then – and just second one, I know there’ve been several questions around gross margin outlook and I know you’re not giving 2020 guidance. But just trying to understand the puts and takes. It’s tough to see – or for us to see how much strategic sourcing kicks in next year versus promotion kicks in back to more normal levels versus what you would prefer to – some of the higher commodity costs. I mean do you see stabilization as you move into next year for gross margin, or will you expect it to be, I guess, under pressure or at down year-over-year just for kind of the normal course of business?

Yes. So look, obviously our – gross margin expansion is incredibly important to the long-term model of our business. Our expectations are over the long-term, we will – we need to grow it approximately 20 to 30 basis points per year. We’ve been excluding some of the accounting shifts. We’ve been able to do that work better over the last couple of years. So that, I mean, continues to be incredibly important to our strategy. Yes, there’s some inflation out there. It’s relatively modest. It’s something that we’re terribly concerned about right now, but it’s out there. And the good news is, we continue to have really robust projects to offset that completion. Yes, we obviously pulled back on trade this year. We feel really good about the ability to still drive volume with pulling back on trade and/or having higher promotional price points out in the marketplace. We don’t see a big shift in that strategy going to – into FY 2020. So, we feel good that we can maintain our very, very healthy gross margin.

So 20 to 30 basis points is still a good number?

Yes, long-term. I’m not going to give specific guidance in the year. But long-term, that’s where – that’s the model. That’s what we hope to achieve at a minimum.

Got it. Thanks so much.

And our final question comes from Chase West with Consumer Edge Research. Please proceed.

Good morning. Thanks for the question. Most of mine have been answered.

Hi, Chase.

Hi. Most of mine have been answered this morning, but I wanted to ask a quick question on SimplyProtein. In our data, we’re seeing a slight uptick in distribution this spring, but it’s still well below Atkins. Are there any changes to your plans around SimplyProtein and maybe can we expect increased investment in near or medium-term?

Yes. We first highlighted pretty much every brand that’s well below Atkins category, so ‘m not sure that’s the correct benchmark. I think we said before that our view of, as we’re going to incubate this brand, so getting into some distribution, prove its success by driving velocity where it is before we expand further, that’s we think is a prudent approach, given the fact that if you grow distribution really quickly and you don’t have the velocity, you lose distribution and food/drug mass relatively quickly. So we’re – we’ve taken a much more one day at a time approach with Simply, kind of happy where we are right now from a distribution standpoint. I think the number is somewhere around 20% to 25% of food. And we’re now focused on driving velocity and making sure the turns of the shelf are good before we expand further.

Got it. That’s very helpful. Thank you.

You bet.

This concludes our question-and-answer session. I would like to turn the conference back over to management for closing remarks.

Yes. Thanks again for your participation on the call today. We look forward to updating you on the fourth quarter results in October. We hope you all have a good day. Thank you.

Thank you. This concludes today’s conference. You may disconnect your lines at this time, and thank you for your participation.