Simply Good Foods Co Q2 FY2025 earnings call

Management Statement and Operational Highlights

• Overview: Momentum continues with double-digit growth for Quest and OWYN offsetting Atkins declines. Net sales increased 15% vs last year with 4% organic growth. Adjusted EBITDA increased 18%.
• Quest: Strong double-digit retail takeaway and net sales growth. Salty Snacks platform growing rapidly, Bake Shop platform successful, new Overload bars and ready-to-drink shakes launched.
• Atkins: Expected declines due to lapping significant low ROI merchandising and distribution losses at club. Partnering with retailers to shift display support to Quest and OWYN. Goal is to right-size investment levels to build sustainable business.
• OWYN: Strong quarter with retail takeaway up 52%. Low household penetration and awareness but strong velocity. Confident in long runway for growth with distribution and innovation opportunities.

Segment Performance

• Quest: Net sales grew 16.5% in the quarter. First half retail sales increased 12%, representing 60% of net sales. Salty Snacks platform grew 45%, Bake Shop platform successful, new Overload bar platform and ready-to-drink shakes launched. Retail takeaway assumptions for the year increased to the low-double-digit range.
• Atkins: Net sales declined 11.5%. Consumption declined 10%, expected to continue declining through Q3 and Q4 due to lapping significant low ROI merchandising and distribution losses at club. Represents ~30% of net sales.
• OWYN: Retail takeaway up 52% in the quarter. First half retail sales increased 57%, representing ~30% of net sales. One of the fastest growing brands of scale in the category, with low household penetration and awareness but strong velocity.

Guidance

• Fiscal Year 2025: Total reported net sales expected to increase 8.5% to 10.5% with organic growth driven by volume. OWYN net sales expected $140M to $150M. Adjusted EBITDA expected to increase 4% to 6%. Gross margins expected down ~200 basis points. Net interest expense expected $21M to $23M. Effective tax rate expected 24%. Capital expenditures $10M to $15M. Expect to repay essentially all OWYN acquisition debt, with net leverage around 0.5 times by fiscal year-end.

Risks

• Tariffs: Uncertainty around tariffs, with estimated 15%-20% of COGS affected, potentially a $5M to $10M headwind. Retaliatory tariffs and USMCA exemptions not fully estimated.
• Commodity Inflation: Continued inflation in ingredients like whey, cocoa, and CLI, which could impact margins.
• Consumer Sentiment: Uncertain economic conditions and consumer purchasing behavior could affect sales.

Question and Answer Q: On Atkins sales guidance reduction, what's driving it and insights on Atkins consumer?

A: Accelerated declines in Q2 due to not repeating significant display space from last year, and additional distribution loss at club. Consumer is more promo dependent, with lower promo leading to larger spillover drag on baseline volumes.

Q: Relaunch of Quest shakes, what prompted it and positioning?

A: Quest's ethos is flipping macros. New shakes have 45g protein, 2g sugar, 4g net carbs. Launched with ultra-filtered milk for superior taste. First month of launch, pleased with retailer acceptances.

Q: OWYN growth, catalyst for acceleration in second half?

A: Continued distribution upside, low awareness and household penetration, high velocities, and new distribution coming in April. Excited about distribution in bank and conversations with retailers.

Q: Contribution margin differences between brands, outlook?

A: Atkins margins under pressure from inflation; Quest margins stronger. Expect Atkins margins to not drastically improve in near term, but efforts to improve Atkins margins ongoing.

Q: OWYN awareness and household penetration, how to build?

A: Focus on distribution initially, similar to Quest's playbook. Low ROI on marketing until distribution footprint built. Continue with current digital influencer marketing.