The Simply Good Foods Company (SMPL) Earnings Call Transcript & Summary

Okay. I think we're live. Good morning, folks. Thank you. Thank you for joining us. At least I think it's still morning. Days start to blur and blend together now. I'm excited about our next session. So joining me next on this virtual stage are Joe Scalzo, President and CEO of Simply Good Food Company; and Todd Cunfer, the company's CFO. So for those who may not know, Joe joined Atkins, as it was known back then, as CEO and President in 2013, right after the company had crested the $300 million revenue mark in 2012. Mr. Cunfer joined him a number of years later, 2017, after a 20-year career at The Hershey Company. The business, at that point in time, generated roughly $400 million of revenue. Today, the company is rapidly approaching the $1 billion mark after sustained organic sales growth even through COVID and the successful acquisition of Quest. Please welcome Joe and Todd with me to the virtual stage as we sit down to hear how they're going to keep this momentum going and what the future may look like for Simply overall. Joe, Todd, welcome.

Thank you.

Good morning, Jason. Thanks for that intro.

You're welcome.

I didn't realize Todd was that old. Holy c***.

You wouldn't guess by looking at him. He looks like maybe right out of college, right?

Yes.

Let's jump into -- I kicked off -- in the opening, I said, impressively, the business grew even through COVID, but not every quarter, but I think on an annual basis, you kept your streak of organic growth a lot despite the headwinds. But let's start there because we're still sort of in a pandemic slowly creeping out the other side. Can we walk through the COVID impacts, the countervailing impacts that it hit your business with?

Yes. So there's 2 things that we experienced -- or actually, 3 things that we experienced in the earliest stage that kind of continued to various degrees. The first thing was people's shopping behaviors changed pretty dramatically, right, fewer shopping trips, fewer retail doors, and we were experiencing that and continue to experience that to a lesser degree. Second, just the importance of active nutrition and weight management as a consumer benefit weighing considerably and that has been improving as time has gone on. And then thirdly, the reduced mobility of consumers has reduced consumption in the category and, in particular, on bars. And we've seen that in our business, and we've also seen that as a category in general. Now as we've moved through COVID, those impacts, for the most part, have waned and on the uprise, and our business performance has consequently improved with it. As we look at our business today and we consider our business as we're moving through the second half of our fiscal year -- our fiscal year starts on September 1, there are 2 things that we're -- that we've been looking at pretty hard and trying to understand better. The first is we're really pleased about the consumers return to our brands and, in general, to the category. So if we look at our business and our sales of our business and 2 big components, are consumers coming back? Do we have buyers? And then are they buying in historically sufficient amounts? The first factor is exceeding our expectations. Consumers have come back to weight management, active nutrition to Atkins and Quest and actually have come back in a pretty significant way. So we have good buyer flow into our brands. So the volume impact of our business is now really being driven by buy rate and significantly impacted due to the development of our business in bars. And what we've learned about mobility is there's a high correlation between being at work and being in transit and consumption of bars. In fact, that correlation is about a 0.85 correlation. So if people go back to work and start commuting, you're going to see bar consumption consistently stepping up. The interesting other fact is we have developing forms on both brands, chips, cookies, confections that have no correlation to where you are, don't correlate to being at home, don't correlate to being at work, don't correlate to being in transit. So interestingly enough, we don't expect, as mobility improves, that those forms are going to be affected one way or the other. So we're pretty optimistic. We're sitting with good buyer flows on both brands. We're back growing on both brands and continuing to step up. And then we know as people return to work, we would expect the buy rate of bars on both business. And actually, we're starting to see that to improve. And we would expect chips, confections and cookies to be unaffected as people go back to work. So does that help, Jason?

No -- it does. It does. And clearly, we see the balance. We see the improvement in bars in the retail sales data, the Nielsen data we're looking at. It's impressive to see it given your reference to workplace mobility because if you look at Google workplace mobility stats, we're stuck in the mud. We're down high 20s, 30% from baseline, which is the exact, same place we were, I think, last fall. I would -- I'm guessing we're going to be there until we get through Labor Day, and we get back to school. I think that's probably going to be the catalyst to get people back to work.

We agree.

Which would be great. It's...

We agree with that.

If already in recovery and we get a second kicker down the road, that would be phenomenal.

Yes. We're seeing a little bit of return to shopping -- normal shopping behavior. So you're seeing mass shopping starting to improve, which is, frankly, helping our business. We have pretty good development among mass merchants. So that's helping our business momentum, too. As people come back to mass and start shopping, get to our aisle, we're starting to see a pickup in that channel, which is helping our business.

Yes. We certainly saw that in Walmart's results this morning. I think they referenced in a press release the market share recovery there, too. So...

Yes.

Yes.

We definitely know you over-index there. The other area where you historically sort of under-indexed, but I think Quest has helped you catch up -- and probably your own investment has helped you catch up too is e-comm. Talk to us about e-comm. It's -- where was it pre-COVID? Where is it now? How much of that was just the good luck of being in right place? And how much of it was sort of in your own control of the initiatives that you've deployed there?

Yes. Well, I think, obviously, with COVID e-comm adoption from a consumer standpoint, it's moved forward somewhere in the 3- to 5-year range. So you see people adopting the behavior of shopping online. And that's been a boon to our business. Now obviously, it is accelerated for us given the development of Quest at e-comm. So we were -- I think we were fortuitous in that Quest development. The history of the brand kind of developed online and in specialty channels. So it is a big business in e-comm. They had pretty good capability. So we maintained and built on that capability. It gave us an unequal seat at the table with most e-comm retailers. And so we have a better team, a better leader, more capable organization than we were kind of pre-Quest acquisition. E-commerce is now, as a percent of our sales, in the high teens and continues to grow. We've seen I think a modest slowing of our growth rate as mobility has started to improve but certainly not to the degree that leads us to believe that people are going to go back to their old channels and shop their old way, so the way they used to pre-COVID. So our expectation now at this point is e-comm, in general, should be 25% to 30% of our business. And we have the team and the capability and the brands that we think we can do reasonably well there in pretty short order. So we're pretty confident about the channel and our growth prospects there.

What does that mean for the economics for your margins?

Yes.

I'm going to let Todd.

Modestly lower margin -- yes, modestly lower margin, not significant. We're able to manage it within the P&L. We'll obviously look to improve that margin profile over time. But for us, it's not significant.

And Todd, when you say modestly lower margin, are you referring to EBIT margin or gross margin?

Gross margin. And we spend -- from an advertising eyeballs, things on Amazon, where we're spending some marketing dollars there, we spend consistently in that 9% to 10% range as we do the overall business. So we see great returns from a marketing investment. I mean so many people are on the site just not to purchase but to do brand reviews and check out products, and we have great ROIs on Amazon and other sites. So it's very consistent with our overall marketing spend.

Yes. And have you always spent at that rate? Or have you stepped up your investment in retail media?

It's been pretty consistent for about the last 3 years now. 4 or 5 years ago, that wasn't the case, but the last couple of years, it's been in that range.

Yes. I would also add, Jason, we think that we really like the shape of our P&L. We think it's a strength for the organization. So as a business, we have gross margins for -- including all-in distribution cost over 40%, marketing as an investment as a percent of sales somewhere right around that 10%. So it gives us plenty of firepower for growing our brands and making investments. And then EBITDA margins in that kind of high teens, low 20s. So we certainly have the firepower and the capability to invest in e-commerce and any of the other media platforms that we want. For us, it's frankly all about -- the focus is all about what's the return we get for the investment we make. You can always expect us to move investment to the best return. And then second, we're constantly trying to understand what's the source -- who's the source of the buyer. So if it -- because we think this category is all about bringing new buyers to the category, and the people that do that better will win. So for us, it's as we're making investment in e-commerce, we're trying to understand, are we shifting consumers from other channels? Or is this actually a source of new buyers to our brands? So -- and if that is the case, we'll over-invest, right? So we'll invest past the point in order to make sure we're recruiting new buyers. So we like the shape of our P&L. We like our ability to make investments when we need to make it. And you can expect us to continue to support the -- to take actions necessary to keep our gross margins where they are.

Great. The investment posture behind your brands is both welcomed and unusual in -- at least amongst the more mature companies -- food companies and very much welcomed. Sticking on margins. I'm going to jump around a bit just because you brought margins to the forefront. Let's drill on that topic a little bit because it's top of line for investors. Inflation is everywhere right now, very few places to hide. And it would seem to apply to you as well. I mean when you look at proteins, dairy-based proteins, soy-based proteins, you look at packaging cost, everything, it looks like you're going to have some real cost inflation on the come. Where are we now on the inflation curve? And as we think about contracts, hedges, et cetera, like what's the expiry on those? How much time do you have cover?

Yes. So inflation is real. I mean it's obvious. And it's -- as the months go by, it's becoming more real for us as we go into our next fiscal year. We're very fortunate. Our team made some very smart bets early in the year and locked in prices before the recent rise. So we're largely in very, very good shape for this year, as we talked in the last conference call, a little bit of exposure in Q4. That's why we kind of mentioned a little bit of -- a little bit downward trend on gross margins in the second half but nothing significant. Nothing's changed there from a second half perspective. So we're in very good shape for this fiscal year. Going into FY '22, it's obvious we're going to have to do something. So Joe and I get paid not to allow gross margins to decline. And you can bet that we're going to do something to make sure those margins are maintained.

I imagine it applies to your competitors as well. Are you seeing any of your competitors raise prices or react to this yet?

We've seen a couple do it. We anticipate it will probably be fairly broad-based, hard to tell, but we're just kind of focused on our P&L and our elasticity. So we'll be prepared to go.

Sure. And now I think...

We saw recently -- Jason, recently, we saw a survey conducted by one of the firms that do -- brokers that do in-store merchandising. And the survey of CEOs and chief customer officers showed about 60% of the companies that they survey taking price in the near term. So we -- as you would expect, they are seeing inflation as they move into the next kind of 6 to 12 months. And it appears that most folks are taking pricing in order to recover some of their inflationary costs.

It's broad-based enough that I think it's going to happen. I mean we have advantage on [ the street ] earlier today, and it's a great opportunity to ask them some of those questions because to your point, where they sit gives them some unique visibility and insight, so a much broader swathe of the market. So that was a nice advert, teaser for another session later for any audience that's listening. Let's stick -- let's then use that as a good transition to competition since we talk sort of competitive pricing actions that you're seeing out there. I've -- you and I have had this debate before. I'd love to have a little discussion just in front of an audience on it, the life cycle of the growth category, and we've seen plenty of precedence in history where growth attracts competition, always and forever. That results in proliferation, fragmentation, which then usually results at some point of a shakeout, a cleanup, a retailer who say, "Gosh, look at the mess we've made. We need to clean this up." Bars seem to have gone through that. Like it seems like we're at a tipping point where we've passed the fragmentation of proliferation point. I'm not suggesting there won't be moving competitors. There always will be some churn there. But retailers seem like they've used COVID as an opportunity to clean up that shelf set. Is that true? And do you think it's durable?

Yes. So we saw -- let me differentiate it first. For the most part, our business is in the health and beauty aisle right near the pharmacy. There is another part of this category as is adult nutrition, so the Abbott and Nestlé brands as has been active nutrition, right? So part of the category is kind of in OTC, pharmacy. Part of the category is in center of store, in the bar aisle. So we have really good visibility in the part of the category that we're in and kind of indirect visibility into the bar aisle. What I would tell you is in the most recent resets, we saw retailers move to larger brands. So we're seeing about a 10% increase in distribution in our brands in the hob aisle. Now the hob aisle is a little bit different, right? Bigger competitors, higher price points, less single-serve, more multi-serve. So there are fewer competitors in this part of the store just because you got to invest in marketing to get the trial because the price points are so much higher. So we're -- we've done, as have the larger brands have done, well in the reset because both of our brands are viewed as drivers of shoppers to the aisle and kind of magnets into the aisle. And during COVID, that was a real issue for brick-and-mortar retailers. It was actually an interesting fact. Atkins actually as a brand drives more trips into the hub, that entire categories in health and beauty. So we're talking categories like pain relievers, anti-perspirants and deodorants, right? So this is -- it is a main driver into the category and important to retailers, and I think they're recognizing that. So I think your premise that there's some consolidation going on, it's clearly the case certainly in our aisle and I suspect also happening in the bar section. I don't have quite as much visibility into that, but I think you're going to see some of that consolidation happen, support around the bigger brands. In that case, it's Clif and Kind and a few others, and maybe a dialing back of kind of the perimeter brands, the smaller brands that are kind of in and out. That part of the category, frankly, is crazy. And in any one fiscal year, there is 50 to 60 brands into that part of the store and exiting that part of the store. So there's a constant churn that I think you're starting to see that abate a bit. So I think your working theory is mostly right. And I think you're going to see some of that occurring.

I mean for acquisition opportunities for you, I mean if we've gone to a point where we've kind of consolidated the category and chasing these smaller brands, it probably doesn't make a tremendous amount of sense anymore. There just aren't many things left in your core categories than to acquire. Does this push you into other categories?

We're active. There are still assets in our core nutritional snacking category, and we do believe that -- post Quest, our strategy has changed a little bit in that I would have said we would look at smaller assets. We're probably looking at assets over $100 million now, right? Because when you have 2 really big brands trying to nurture a smaller brand, it becomes more problematic. And you saw us divest SimplyProtein last year just based upon that change in strategy. So we're looking for bigger assets. We prefer our aisle. We prefer nutritional snacking as a landing point just because it fits the supply chain, it fits the selling bag and channels, more likely to be a source of synergy, more likely we'll have the organizational capability to be able to accelerate and build on it. So that's our sweet spot. Would we consider other segments of other categories? It would really have to do with what we believe about the brand itself, the loyalty of the consumer base, and the growth prospects of it. But we would frankly prefer to stay closer to home, and we still think there's assets there.

Okay. That's interesting. Let's -- before we push you too far down your next acquisition, why don't we back it up a little bit and talk about your more recent acquisition, and that's Quest. You bought -- COVID hit. You had to integrate in the midst of a pandemic. How is the integration going? Are there -- is there any more yet to come? Or is it pretty much complete at this point?

You want to handle that, Todd?

Yes. So obviously, we're thrilled about the acquisition. We were bullish when we announced the deal. It has gone better than we actually ever imagine. It's a great brand. Business is on fire. You can see it in the data. The margins have improved. We could not be more optimistic about the Quest business. The integration, despite being virtual for the last year, has gone very well. We're largely done. I would say the biggest thing left to do is to get both of our brands into one warehouse. That will happen in our Q1 of next year. So that's really pretty much the last piece. So then we will be finished with integration, but it's gone very, very well, and we're thrilled to have that business.

And you would prefer not -- and you prefer not to do that integration when everybody is remote?

It's not the easiest thing to pull off, but the team has done a phenomenal job. Just an anecdote, Jason, I have direct reports I haven't met live yet.

Unbelievable.

Unbelievable, right?

It really is unbelievable. I mean direct reports to you. It's not like you're saying you've got -- there's people in the organization you haven't met in person. It's direct reports to you. And that's what's phenomenal about it.

Yes. It's crazy. It's absolutely crazy.

Yes. Now Quest also took you into some new categories. It took you into chips. It took you into cookies. It -- I guess I was going to say it took you into RTD shakes. But you're already there with Atkins. But speaking to pizza, which I guess you had been before and then you got -- you kind of made some moves. What have you learned about that? Like where are -- where does it make sense to stay in play or build further? And where, if at all, made the brands have gone too far and gone into places where they maybe don't have the right to win?

Yes. So I would say with Quest, the -- I'd first step back for a second. The kind of all other category development of our franchise on both brands is really strong. So confections is 20% to 25% of the Atkins business, right? If you take a look at non-bars on Quest, so the cookies, the chips, the pizza -- and now they've added confections, a big chunk of their -- and growing of their business. So we have a nice multiple product segment portfolio, and it's true on both brands. So we're really happy about that, especially as you think about what just happened to us at COVID, where bars got slammed. Our development in other forms, frankly, was very valuable to us because we kept consumers in the franchise and -- with a natural hedge against our bar business. So we're really happy about it. So just stepping back and looking at Quest and the acquisition, chips have exceeded our high expectations, and it's been primarily driven by the tortilla chip launch from about 18 weeks ago. And our execution focuses against that tortilla chip to get it as big as we can be. And so we're excited about that. Our cookie business is significant and growing. And even the pizza business is a pretty good business and has done really well for us. Early stages of confections, we launched the peanut butter cup on Quest, doing exceptionally well. So pretty much, where Quest seems to succeed is where we're able to turn the kind of the macronutrients upside down in the segment. So cookies -- there wasn't a high protein, low-carb low sugar cookie prior to Quest, and they succeeded. Same thing on chips, right? So where that isn't the case -- so in the case of Shakes, where it's sort of the standard of identity of shakes, high protein, low sugar, low carb, not as successful. So the blueprint is pretty obvious to us, where we can be differentiated from a macronutrient standpoint, where we can create a really great-tasting product, which our R&D group seems to be able to do, we're going to have success. So we just have to be thoughtful about where we expand the size of the opportunity and then focus on executing well.

You mentioned the pushout in chips 18 weeks ago. I think it's what you said.

18 months, 18 months.

I thought it was a lot longer than that. Where do you stand on distribution today? Because in the past -- I bought your chips before, but I've only bought them on Amazon because I haven't been able to find them elsewhere. Are retailers getting excited about this, brick-and-mortar? It seems like there's potentially a long runway for distribution growth if you can go get it.

Yes. I think there's a long runway for household penetration growth and, therefore, for distribution growth in all the channels in different pack sizes. So we're just starting to scratch the surface with this business. We're really excited about the opportunity going forward.

On the flip side...

As I mentioned, too, it's an everywhere consumption form. So it doesn't matter where you are. You tend to snack on it. And it's a nice complement to the bar business of Quest, right, because it's complementary to the bar use occasion.

For sure, for sure. Are you seeing opportunity to take these learnings to the Atkins brand and push that into new categories, new forms.

Yes. Atkins is already 20%, 25% into confection. So there is -- we just launched cookies on Atkins, a little bit different cookie, but we see that opportunity. I think you should expect us with our R&D capability to be focusing in on different use occasions, different forms, different need states and expanding our portfolio appropriately. Yes.

You were dabbling for a period of time with some international expansion, too. It hasn't really been top of mind or a focal point of late. Where do we stand with that? Is it just the opportunity here and the domestic market is big enough, stay focused on that? Or are you pushing outside the country?

Yes. It's -- so we have pulled back. As you know, we're exiting Europe. We had about a $15 million, $20 million business in Europe and made a little bit of money, but it was just with -- if you think about our company, as you mentioned, almost $1 billion, but only 250 people in the entire company. So we need to be focused on where we're going to participate, and it's still a very underpenetrated category in the U.S. So we see a tremendous amount of growth left in the U.S. We're going to focus most of our efforts there. Now in Australia, we're doing exceptionally well. The business -- it's a low carb country to begin with. And both brands -- we have a really strong team down there. Both brands are doing exceptionally well. So if you think about our business, on an onward basis, it's going to be U.S., Canada and Australia for the foreseeable future. That will be our 3 main countries.

On the Atkins business, part of the benefit proposition is predicated on weight loss. There's no doubt about it. This was not a great new year's resolution season for many weight-loss-oriented companies, products. There is some hope -- at least Weight Watchers is expecting to see an off-cycle sort of resolution, where it's a reopening resolution. We're back out and about, and we've got to shed the extra weight. Do you have similar expectations and any evidence of it taking shape yet?

Yes. So first, I would say we're really happy with the buyer flows on Atkins. So people have come back to the brand, I think to a lesser degree to the category. We do think there's going to be a renaissance probably tied to when people start going back to the work, more -- going back to work, more likely a back-to-school kind of timing because frankly, people weren't particularly healthy during COVID. And as they're back out and about, we would expect they're going to start caring a little bit more about how they look. So yes, we don't see any evidence of it yet. We see good buyer growth, right, with an opportunity to get buy rate up. I think the buyer growth will accelerate as we move through the summer and into the fall. That would be my read. But we shall see. It's going to happen. There's going to be a catalyst for people out and about wanting to look better and care what they look like, and that will be a renaissance for the category. No doubt about that.

Yes. And COVID was very healthy for baking products. I mean everybody stayed at home and baked up a storm, pretending they're Betty Crocker. So I do think you're going to see a pivot on the back end of that. Joe, stepping back, all this -- it's easy to get excited about your growth potential. I mean we're looking at data right now that suggests your business is bouncing back far faster than I ever would have expected. And we still have this potential sort of resolution reopening window, this back-to-work window, which has the potential to give it another kicker. Am I missing something? Like are there offsets elsewhere that we're not seeing in the data that say like, "Hey, don't get this excited. You roll it back a little bit?"

No. I don't think -- look, we like our category a lot. We said -- I think we said in the last earnings call we expect what has been long-term tailwinds in our business that have been short-term headwinds. We expect those winds to shift and get behind us. Exactly when the shift happens, exactly how strong they are, hard to read, right? So my Ouija board or my little eight ball isn't as -- isn't great. Yes, we're doing really well right now. Category -- the fundamentals of the category are coming back. The consumer megatrends are behind us again. We feel really good about our business, yes. And we'll be really happy to talk about it -- talk about the performance of the business in early July with you.

Yes. Exactly. I'm eager to see it because if we look at where your guidance suggests the back half will be and contrast on what we're seeing in the data, it doesn't all fit together very nicely. I mean the business looks like it's doing better than...

Yes.

Excellent. And so...

We're always better calling the number when it's behind us than we are when that's in front of us. So yes.

Hindsight is 20/20.

Yes. And I would...

It's not going to...

It's like no, we're not going to...

Actually, Jason, we're...

It'd be different.

We're lapping -- I mean obviously, we're -- in the last 6, 7 weeks, we're lapping the worst of COVID last year. So the growth rates you're seeing for us and BellRing obviously are elevated. They will moderate. But to Joe's point, we're very bullish on our business. Both second half and for next year, we're very, very confident in the model that we have.

Yes, yes, yes. Perfect. What am I not asking that you think I should be asking? What are we not talking about that you think we should be talking about?

Look, Jason, I think you understand the business really well. I think the questions were all on point. I can't think of anything that you haven't covered in your questions. So Todd, anything?

No, no. All done.

The only thing we need to -- the only closing comment I would make is, look, you can expect us to be focused in the long term on our business, right? So we never try to let what's happening to us immediately right now get too caught up, right? We're -- so we're -- expect us to look at our business in the long term, make the investments that we need to make for sustainable growth. And we think we understand the fundamentals of the category really well, under-penetrated category, household penetration around 50%. This category will shake out. There will be big winners. So those people -- those companies that can compete for those new buyers and win that game will win long term. And I do think, as a competitor, the category is going to look, I think, more like confections look. There's going to be multiple brands necessary in the portfolio in order to compete. So you should expect us as a M&A platform to continue to look for those differentiated brands with strong consumer followings and good positionings and good products in order to add -- create a stronger portfolio as we go forward.

Yes. Makes sense. Gentlemen, thank you so much for your time. I really appreciate it. Thank you for joining us. Great discussion.

Yes. Thank you.

Thank you, Jason.

Thank you.