Katie Turner - ICR Joe Scalzo - President & CEO Shaun Mara - CFO.

Analysts:.

Greetings, thank you for joining our teleconference today. I will now turn the conference over to Katie Turner for opening remarks..

Good morning. I’m pleased to welcome you to The Simply Good Foods Company’s fiscal third quarter earnings call for the 13 weeks ended May 27, 2017. Joining me on the call this morning are Joe Scalzo, President and Chief Executive Officer; and Shaun Mara, Chief Financial Officer.

The Company issued its earnings press release at approximately 7:00 AM Eastern Time. A copy of the release and accompanying presentation are available under the investors section of the Company’s website at www.thesimplygoodfoodcompany.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 and 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 the Company’s filing with the SEC.

In addition, management will make references to adjusted EBITDA, a non-GAAP financial measure that it believes provides investors with useful information with which we value the Company’s operating performance. Today’s earnings release includes a reconciliation of the more directly comparable GAAP measures to non-GAAP financial measures.

And finally, the Company has included in today’s earnings release and presentation, un-audited pro forma of financial information for the 13 and 39 weeks ended May 28, 2016, that provides results that the Company had licensed its frozen meal business throughout fiscal 2016.

And with that, it's now my pleasure to turn the call over to Joe Scalzo, Chief Executive Officer of The Simply Good Foods Company..

Thank you, Katie. Good morning and thank you for joining us today. I’m excited to be speaking with you on our first earnings call. As many of you know, The Simply Good Foods transaction became effective last week.

I’ll begin today’s discussion with a brief overview of the Company, our key investments highlights and our growth opportunities and strategies. Shaun will then provide you greater details in the third quarter and year-to-date financial highlights. Following that we’ll open the call for your questions.

We’re pleased to report of initial quarter as a public company with solid results and positive momentum across our business. We enjoyed speaking with many of you while out on the road show earlier this year. For those of you who are new to our story, I’d like to take a few minutes to discuss our business.

Let me start by briefly describing the two companies that we’ll talk about today. The Simply Good Foods Company is the result of the merger of Atkins Nutritionals with Conyers Park Acquisition Incorporation.

Conyers Park was a special purpose acquisition corporation founded by Jim Kilts and Dave West longtime business leaders within the consumer products industry. They raised over $400 million in an IPO last July, and Atkins is the first asset added to the portfolio.

Atkins is a leader in the nutritionals snacking space, offering a way of premium price products with quality ingredients. We have a highly focused portfolio 60 SKUs comprise the bars, ready-to-drink shakes and other snacks.

We have adjusted EBITDA margins approaching 20% and earned asset-light model that generates strong free cash flow with modest working capital requirements. We run our business completely outsourced in terms of supply chain and distribution, and we employ a lean operating philosophy.

And as we’ll discuss today, we have some very compelling growth opportunities. Atkins has strong playing attributes highlighted by 85% aided brand awareness. For many consumers, the brand stands for low-carb, low-sugar and rich in protein; and it has a proven track record over many years of promoting effective weight loss.

Atkins enjoyed a very high level of consumer loyalty with average buyer purchasing 62 servings per year. We typically have a substantial portion of the retail shelf within our aisle in health and beauty section and an important brand and profit generator for our retail customer.

The Atkins brand was tightly aligned with consumer megatrends such as more frequent snacking occasions and the desirable on-the-go meal replacements. In addition, there are more than 100 million diabetic and pre-diabetic adults in the United States and we are approaching a 100 million Americans who are considered obese.

There is growing scientific consensus that lower carbohydrate intake can help reverse the trends in diabetes and obesity.

This evidence is fueling consumer preferences for low-carb and sugar consumption, as well as higher protein content, all of which play to our strengths and constitute considerable tailwinds that are expected to help drive continued profitable growth.

Our combination of consistent sales growth, strong free cash flow, unique brand attributes, self leadership, and industry tailwinds from a solid foundation; and we think our prospects for continued growth and expansion both organic and through M&A activity are very good.

Today, our business has solid momentum and we’re closing in our ninth consecutive year of U.S. POS snacking growth. We have identified a significant opportunity with the new group of consumers and we are making good progress against our four key growth initiatives.

As a result, we continue to expect to achieve adjusted EBITDA of approximately 72 million for the full year 2017, consistent with the estimate we provided prior to the closing. Longer term, we expect annual top line growth to be 4% to 6% with adjusted EBITDA growth in the high single digits.

We continue to grow consumption of the Atkins brand with the licensing of our frozen meal business earlier this fiscal year. We have narrowed our focus to the nutritionals snacking space, where we have achieved eight straight years of consumption growth in the U.S.

And as you can see on the chart, we have increased takeaway by 5% through three quarters of the current year and are on track for our ninth consecutive year of retail sales growth.

However, similar to other most consumer companies, the flow of this during year has its highs and lows, as we started the double-digit POS growth in the first quarter, but slow to low single digit in the third quarter.

The third quarter performance is principally driven by the timing of promotional and new product support year-on-year as well as competitive activity. We’re pleased to report that our most recent four week consumption data through June 25th is back to plus 5% as our year-on-year promotional and marketing comparisons have eased.

This recent performance is consistent with our year-to-date growth of 5% and believe is more reflective of the real health of our business. One of the biggest reasons we’re excited about our growth prospects is we’ve recently identified a significant opportunity to expand our total targeted consumer based by a factor of four.

In 2016, we commissioned proprietary research to help us understand, who is buying our brand and why? Working left to right on this slide, you’ll see that $108 million U.S. adults or 64% are trying to lose weight, and 21 million of them are using some sort of branded weight loss approach.

These 21 million have been our historic target consumer, 8 million of them are over the low-carb and we’ve converted about 3 million of them or 38% to Atkins buyers.

What the study really showed us and this was our bigger moment was that 77 million consumers who are self-directing their weight loss, 31 million of them are open to low-carb and had never been targeted by Atkins. When we did begin targeting them in 2016, we achieved the largest influx of new buyers of our brand since 2008.

So, there is four plus, four times increase in our addressable target market from 8 million to 39 million consumers is very exciting for us, and we’re just getting started with a lot more to learn about this group of consumers. With that in mind, let me provide some insights on the four areas we’re focused onto driving growth.

Number one, continue to educate and convert core program consumers into Atkins buyers. Number two, target a large new group of self-directed low-carb consumers that represent a potential 4x growth opportunity. Number three, product innovation with our near term focus on the clean label initiatives. And number four, white space opportunities.

I’m going to walk through these one at the time. In the case of our program consumers, we’re using celebrity advertising, in this case Alyssa Milano to advance the simple idea of getting to your happy weight. Our data shows these consumers of tired of weight loss claims.

They want to hear about the simple choices in their life that could make a difference. Alyssa even said that Atkins taught me to make simple choices about the best foods to eat. This new approach is working as a number of consumers using the Atkins' program in 2017 have shown a meaningful increase over the prior year.

We’re also stepping up our social media campaigns and continuously improving our mobile app and website, which by the way have 10 million unique new visitors in 2016 and which offers consumers useful education news and information on nutritional snacking and healthy lifestyles.

And as a reminder, our 38 share with program consumers, lease room to grow with our historic core target. Second, we’re aggressively targeting the 31 million self-directed low-carber mentioned earlier, where we still have only 10% penetration and thus very attractive upside with the new set of consumers.

These people are trying to make better choices around nutritionals and lifestyle, but their approach is often slogged due to common misperceptions about our nutritional. This is why we believe the concept of hidden sugars is so powerful.

People know sugar in foods bad for them, but they don’t understand that the carbs and foods get converted into sugar in the body. So, a seemingly healthy bagel that's converted in your body into 7.5 teaspoons of sugar, your body can handle one to two teaspoons at a time, so 7.5 is nearly a full day's worth of sugar.

Alternatively, one of our meal bars has less than one teaspoon of sugar which is easily metabolized. We have a microcyte that gets into the foods consumers are eating with hidden sugars, bagels, bananas, resins, cereal, foods where sugar content might surprise most people; and we have multiple advertising executions in television and print.

In summary, we think hidden sugars as a breakthrough marketing concept and we’re very excited to continue its development. Again, we’ve eliminated the weight loss message in favor of messaging around great tasting snacks that are actually good for you. And we’re targeting our advertising at younger, more gender neutral consumers.

The results have been good, a 23% increase in new buyers of Atkins in 2016, and another 9% increase year-to-date in 2017. The third area we expect to generate growth is through product innovation and portfolio expansion.

We compete in a highly innovative, innovation driven category where it’s essentially to continuously introduce new products to keep our brand on trend and interesting and relevant to consumers. A very important trend is towards cleaner snacking. By cleaner, we mean fewer ingredients comprised of real foods, easily recognizable to the consumer.

This includes current and future product launches as well as legacy products that were going back and reformulating. The latter group includes 6 meal bar flavors that have been reformulated and are now shipping to customers.

A few recent examples of new product innovation includes our Harvest Trail line launched in 2016 that added in fruit bar to our portfolio that is rich in proteins and most importantly low in hidden sugar. It also has simple ingredients and tastes great.

We recently launched our Atkins' SuperFood Meal Bars with clean ingredients such as coconuts and almonds, another example of product innovation in line with consumer trend.

We also launched a new line of Almond Butter Snack Bars and finally our December 2016 acquisition of the SimplyProtein brand in Canada, a great tasting line of bars and chips with emphasis on clean protein is right in line with our clean bar initiative. Our fourth growth initiative involves capitalizing on while space opportunities.

We have only scratched the surface in e-commerce which comprises about 2% of our overall business, but we believe should be closer to 10%. For a perspective, we did only 4 million in e-commerce sales in the trailing 12 months ending August 2015.

We just recently started focusing resources against leading online retailers and almost double that to 7 million last year and are now on a run rate of $10 million. We’re making solid progress against the compelling opportunity with a lot of upside yet to be captured.

The initiatives we discussed so far designed to accelerate organic growth, but there is another aspect to our growth strategy I’d like to touch on and that’s M&A.

Our core capabilities and product development, manufacturing and marketing serve us well to pursue acquisitions of healthy snacking brands and use our scalable presence in nutrition aisle to accelerate growth. SimplyProtein is a great example. SimplyProtein is a growing brand sold almost exclusively in Canada.

Their small team was challenged both from a capability and a resource standpoint as they try to grow this business into the U.S. Our strategy is to add this brand to our U.S. infrastructure to accelerate growth in the U.S. Remember this is a $10 million brand in Canada, a country with about one-tenth of the U.S. population.

So, the upside is very attractive. In addition, The Simply Good Foods Company is a scalable platform that is well positioned as a potential Reverse Morris Trust Partner for additional acquisitions presenting the opportunity to expand our business into other food categories.

With that, I’d like to turn the call over to Shaun Mara to recap our third quarter and year-to-date results.

Shaun?.

Thank you, Joe. Good morning, everyone. Let me start with two points as it relates to the numbers you see on the page the follow. First, the pro forma Q3 and year-to-date numbers will be discussing today are different than they appear in our GAAP results.

With adjusted to the historical results to show them as we have licensed our frozen meal business throughout 2016. As disclose in our proxy, the frozen meals business was licensed at the beginning of fiscal 2017.

However, our pro forma shown here exclude the frozen meals P&L during 2016 and replace it with licensing revenue that we would have receive, if we have license the business at the beginning of fiscal 20016. We think this provides an apples-to-apples comparison as it's more useful to investors.

Second, we evaluated our performance on an adjusted EBITDA basis as opposed to net income due to our asset-light strong cash flow model. As there are a few charges that we backed out of EBITDA to arrive at adjusted EBITDA number, we’ve included a detailed reconsolidation for this in the appendix to our presentation.

In addition, we’ve also included in the appendix P&L for each quarter in 2016 and year-to-date 2017 working by line item, our GAAP results to the pro forma results presented here. In terms of results, the third quarter pro forma results are fairly consistent with what we've seen for the first half of the year.

First half, pro forma net sales were up 7% year-over-year that includes two points of growth or about $2 million that came with our fiscal 2017 acquisition of SimplyProtein. That was on top of 5% organic growth led by the U.S., which was up 6% for the quarter.

Pro forma gross profit continued to improve, growing at 8% year-over-year with gross margin up 40 basis points primarily due to lower product costs, driven by cost savings initiatives and positive product mix. Pro forma adjusted EBITDA was up 20% to $14.8 million with SimplyProtein contributing about four points of this growth.

Organic growth of approximately 16% was driven by the gross profit improvement, noted earlier as well as lower year-over-year marketing expense. The decrease of marketing expense is largely due to timing as Q3 2016 included support behind some new product launches, we did not have in Q3 2017. This favorability will largely offset in Q4.

One other point of marketing cost. Despite total marketing decreasing year-on-year in Q3, our media spend was up 10% as we continue to reallocate our spent to the highest return vehicles. Let’s turn now to the nine months year-to-date results, which are pro forma consistent with the methodology we used for the third quarter numbers.

Pro forma net sales were up 6% again driven by U.S. growth. We grew organic sales 5% and SimplyProtein added another point of growth. Pro forma gross profit was up 8% with gross margin up 70 basis points to 46.5% of net sales due to positive product mix and lower product costs.

Pro forma adjusted EBITDA grew 16% to $55 million or SimplyProtein adding about two points to the growth. The organic growth of 14% is largely driven by gross profit improvement, noted earlier and the timing of certain marketing expense which again will follow in Q4 this year.

Consistent with Q3, even though total marketing expense is decreasing on a year-to-date basis, media spend year-to-date is actually up 5%.

Finally, through three quarters of fiscal 2017, we’ve delivered approximately $55 million of adjusted EBITDA and we continue to expect to achieve approximately 72 million for the full year consistent with the estimate that we provided prior to the closing.

As we look forward, we expect to see organic top line growth of 4% to 6% per year with adjusted EBITDA growing two to four points better than net sales growth or adjusted EBITDA growing in the higher single digits on an annual basis. With that, I’ll hand it back over to Joe for some closing remarks..

Thanks, Shaun. In summary, we’re very pleased with our solid POS growth and feel good about the prospects for extending that well into the future.

We’re showing the compelling business opportunity with the very large consumer group that we’ve only begun to target and we are advancing what we think is a breakthrough marketing concepts and hit concept in hidden sugars.

We’re executing on our four strategic initiatives as evidenced by the continued growth in pro forma net sales and pro forma adjusted EBITDA year-to-date. And as Shaun had said, we expect to deliver on our adjusted EBITDA forecast for 2017.

Longer-term, we expect annual top line growth to be 4% to 6% with adjusted EBITDA growth in the high single digits. And finally, I’d like to thank all the members of our team for their efforts.

We have a talented group of people who performed at a very high level day-in and day-out and are committed to growing the business and who are working together in a culture of continues improvement that's aimed to create the value for all of our stakeholders. And with that, I’ll open the call for questions.

Operator?.

Operator:.

We appreciate your participation on today’s call and your interest in Simply Good Foods. We continue to execute on our strategic initiatives and look forward to speaking with you again on our fourth quarter earnings call to this fall. Have a good day..

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