The Simply Good Foods Company Q3 FY2025 earnings call

Management Statement and Operational Highlights

• Net sales in Q3 were up 14% y-o-y driven by the Owen acquisition and ~4% organic growth. Adjusted EBITDA grew ~3% y-o-y, though margins were under pressure due to higher inflation, particularly from cocoa and whey.
• The company repurchased over $24,000,000 of common stock during Q3 and repaid $150,000,000 of term loan debt year-to-date. Cash flow generation remains strong.
• Quest's salty snacks platform is growing rapidly, with retail takeaway up 31%, and the brand is seeing increased distribution and merchandising support from retailers. Bars consumption turned positive with growth from Hero Crispy line and Overload bars.
• Atkins is undergoing a revitalization plan with efforts to rebalance shelf space across the Simply portfolio, though distribution cuts are expected to continue. Ecommerce for Atkins is growing nicely.
• Owen continued strong performance in Q3 with 24% retail takeaway growth across channels, and has a long runway of growth due to strong velocities and category incrementality.

Segment Performance

• Quest: Represents approximately 60% of net sales. Q3 retail takeaway sales growth was double-digit, consumption grew 11% with household penetration at 18.3%. Salty snacks platform retail takeaway grew 31% this quarter. Bars consumption grew 3% led by Hero Crispy line and new overload bars. The 45 gram Quest milkshake is also progressing.
• Atkins: Consumption in Q3 was down 13% y-o-y. Core SKUs performed above category velocity benchmarks, but the brand faces a long tail of low-velocity SKUs. Ecommerce growth was 7% in Q3. Distribution cuts are expected to continue as part of revitalization efforts.
• Owen: Retail takeaway increased 24% in Q3. Ready-to-drink shakes retail takeaway grew over 20%, and distribution increased 18%. Owen represents approximately 10% of net sales, with strong growth across channels and a long runway of opportunity.

Guidance

• Total company reported net sales are expected to increase 8.5% to 9.5% for the full year. Adjusted EBITDA is expected to increase 4% to 5%.
• Q4 organic net sales are expected to grow around 3% at the midpoint, with gross margin impacted by realized inflation and tariffs. The full-year outlook includes a fifty-third week in fiscal year 2024, which is a headwind to growth.

Risks

• Inflation, particularly for cocoa and whey, is impacting margins.
• Distribution challenges for Atkins, including significant cuts, which could continue to impact sales.
• Competitive pressures in the ready-to-drink protein shake category, though early performance of the Quest milkshake launch is optimistic.

Q: Matt Smith asked about distribution expectations for Atkins and impact on sales.

A: Geoff Tanner responded that Atkins is facing continued double-digit declines in fiscal '26 due to distribution cuts, but these are offset by gains from Quest and Owen. Chris Bealer added that Atkins is flat when stripping out distribution losses, and the company is proactively addressing space challenges with retailers.

Q: Peter Grom asked about Owen's performance and fiscal '26 guidance.

A: Geoff Tanner stated Owen's slowdown was contemplated, with distribution gains expected to reaccelerate. Chris Bealer mentioned similar consumption trends to recent times are expected for Quest and Owen in fiscal '26.

Q: Jim Salera asked about Quest's SKU count and expansion.

A: Geoff Tanner said there's no specific target for SKUs, but Quest is expanding distribution out of its aisle, with strong growth in salty snacks and focus on additional merchandising and channels.

Q: Robert Moskow asked about the Quest milkshake launch and channel focus.

A: Geoff Tanner was optimistic about the milkshake launch, stating it's performing well despite competition, and initially focused on non-club channels before considering club entry.

Q: Jon Andersen asked about capital allocation and 2026 top-line growth.

A: Chris Bealer said capital allocation priorities are M&A, debt pay-down, and buybacks. Geoff Tanner reiterated early planning for '26 with strong growth from Quest and Owen offsetting Atkins drag.

Q: Alexia Howard asked about Texas legislation and portfolio impact.

A: Geoff Tanner stated the company is insulated from food regulations, with minimal impact on portfolio, and Owen is well-positioned against clean label trends.

Q: Brian Holland asked about Quest protein bars and innovation.

A: Geoff Tanner noted bar business returned to growth with Hero Crispy line and Overload, with strong performance and positive reviews, and a robust innovation pipeline.

Q: John Baumgartner asked about Atkins innovation.

A: Geoff Tanner said innovation is ramped up, with the 30 gram AtkinStrong platform and confection innovation, focusing next on bar innovation to drive the business.