Simply Good Foods Co (SMPL) 2018 Q4 法說會逐字稿

Greetings, and welcome to The Simply Good Foods Company Fourth Quarter 2018 Conference Call.

(Operator Instructions) As a reminder, this conference is being recorded.

It's now my pleasure to turn the call over to Mark Pogharian, Vice President of Investor Relations.

Please go ahead, Mark.

Thank you, Kevin.

Good morning, and I'm pleased to welcome you to The Simply Good Foods Company Earnings Call for the fourth quarter ended August 25, 2018.

Joe Scalzo, President and Chief Executive Officer; and Todd Cunfer, Chief Financial Officer, will provide you with an overview of results, which will be then followed by a Q&A session.

The company issued its earnings press release this morning at approximately 7:00 a.m.

Eastern.

A copy of the release and the accompanying presentation are available under the Investors section of the company's website at www.thesimplygoodfoodscompany.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 that 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 in 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 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 finally, the company has included in today's earnings release and presentation financial information for the 13 weeks and 52 weeks ended August 25, 2018 and pro forma combined financial information for the 13 and 52 weeks ended August 25, 2017.

The pro forma adjustments are based on available information and upon assumptions that our management believes are reasonable in order to reflect on a pro forma combined basis the impact of its business combination transactions on the historical financial information of our predecessor and successor entities as applicable.

The pro forma combined financial statements provide results as if the business combination transactions had been completed as of the beginning of fiscal 2017.

All financial measures related to the fiscal 2017 discussed today will be on a pro forma combined basis.

And with that out of the way, it's my pleasure to turn the call over to Joe Scalzo, President and CEO.

Thank you, Mark.

Good morning, and thank you for joining us.

Today, I'll recap our full year and fourth quarter results and provide an update on our business, then Todd will discuss the summary of our fourth quarter and full year financial results, and after that, we'll open the call to your questions.

Before I begin, as I reflect on our first year as a publicly traded company, I'm proud of our accomplishments.

We're fortunate to have a small team of talented and dedicated employees who come to work every day committed to contribute to our business growth.

This has served us well and is reflected in the company's solid financial and marketplace results.

So thank you to all of my colleagues across the business, many of whom I know are listening to this call.

I'm pleased we completed our first fiscal year having significantly exceeded the long-term financial algorithm we provided to you a year ago.

We ended the year believing that the expansion of our target audience beyond core programmatic weight loss consumers to a more lifestyle-oriented consumer that we call self-directed low-carbers would accelerate our business growth.

That strategy change was the principal catalyst to our strong business results this year, highlighted by double-digit increase in total buyer growth during the year.

Importantly, the growth in new buyers accelerated as the year progressed.

That strategy as well as the brand investments that we made during the year resulted in strong point-of-sale growth of 10.1%.

I would add this represents our 10th consecutive year that U.S. snacking retail takeaway has increased.

Also, I'm most proud of the composition of our POS growth.

For the year, a 100% of our growth resulted from improvements in base velocity as distribution and promotion slightly declined.

This demonstrated to us the power of our marketing strategy, primarily the successful advertising campaign to a consumer group 4x greater than our historic target.

POS performance was encouraging and reflected the increase in the number of buyers coming to the aisle to purchase more Atkins products.

Based on the solid results and building momentum, we invested in more media to bring more buyers to the brand.

I'm extremely happy with the performance of our supply chain team as they navigated the inflationary and supply challenges due to increased demand, especially late in the year, while still delivering solid gross margin gains that enabled investments in our business and an increase in full year adjusted EBITDA of 8.4%.

Turning to the fourth quarter.

Net sales grew 11% year-over-year with adjusted EBITDA up 4.2%.

Similar to last quarter, base velocity is driving sales growth.

The increase in our top line continues to underscore its strength and resilience of our brand as well as our successful marketing campaign that is resonating with consumers interested in nutritious snacking, convenience, meal replacement and low-carb, low-sugar protein-rich products.

When excluding from 2017 net sales, a reimbursement benefit due to a product recall of $1.2 million and about $1 million due to 4 months of Wellness Foods revenue, core volume growth was 13.2%.

And as stated on the slide, in the fourth quarter, the company deferred revenue for sales in transit at the end of the year.

This was an 8.1 percentage point headwind.

Todd will have a bit more on this in a second.

The increase in adjusted EBITDA is a direct result of the sales growth.

These gains were partially offset by incremental expenses in the business that we mentioned previously as well as the strategic sourcing initiative and higher incentive compensation.

Given the investments we've made across the business combined with television advertising and in-store programming, we're seeing solid sales growth across all major channels.

Specifically, in the fourth quarter and for the full year, U.S. gross sales increased across all major channels and customers.

And our e-commerce business continues to do well, up about 63% in fiscal 2018.

E-commerce represents about 4% of our total sales and we anticipate this will continue to increase over our strategic planning cycle.

Across all major time frames, measured channel U.S. POS growth was up.

As this slide depicts, the acceleration of POS for the 4 and 13 weeks ended August 25 gives us confidence as we begin our new fiscal year.

Our measured channel POS growth for fiscal 2018 was up 10.1%, slightly ahead of our net sales increase.

Q4 POS was outstanding, up 19.5% and stronger than net sales growth, primarily due to the aforementioned deferral of revenue for shipments still in transit at the end of the quarter.

Overall, our performance continues to be driven by our strategic marketing initiatives, targeting lifestyle-driven consumers, an opportunity that is 4x greater than our programmatic consumers, more on this in just a bit.

The most encouraging part of our strong retail sales performance is it coming entirely from base velocity growth, partially offset by slight volume decline from distribution and feature and display activity.

Per IRI over the last 6 quads, our POS growth has been up double digits on a percentage basis versus the year-ago period.

Over the course of the year, I have discussed this a number of times, but let me spend a moment reviewing the self-directed low-carb consumer opportunity.

Recall a while back, we initiated a consumer segmentation that provided insights that indicated there were a group of consumers we weren't actively pursuing that was 4x our target programmatic weight loss consumers.

And these consumers were already buying our brand.

So in addition to targeting the 8 million weight conscious program consumers who are open to our low-carb approach, we began targeting another 32 million self-directed consumers open to low-carb nutrition.

In fiscal 2018, we tied it all together with the new marketing campaign in January with Rob Lowe that coincide with our cleaner bar initiative and new package graphics.

As we exited April, POS began to accelerate and maintained strong double-digit growth.

Needless to say, we're pleased with the initial results and that our message is resonating with the 32 million self-directed low-carbers.

Looking to 2019, we'll build on the strategies that delivered solid results in 2018.

It all starts with advertising and marketing.

Our strong results give us the financial flexibility to invest in the business.

As such, we're committed to increase advertising and marketing in line with sales growth.

And we couldn't ask for a better brand spokesperson than Rob Lowe, who is passionate and engaged.

We're also improving our website and continuing to invest in digital messaging, an important part of our integrated marketing campaign.

Further, we have a solid pipeline of new products that brings the right level of variety, news and excitement to the brand and to the category.

Here, you see some of the new products such as the Atkins wafer bar and SimplyProtein bars that are launching now.

To summarize, we believe these initiatives target programmatic as well as self-directed consumers with messaging designed to keep the Atkins brand fresh.

We're very excited about our business as we begin the new year and hope to build on our momentum.

With my overview complete, I'd like to turn the call over to Todd Cunfer who'll provide you with some additional financial details.

Thank you, Joe, and good morning, everyone.

Let me start with 2 points as it relates to the numbers you see in the slides to follow.

First, for comparative purposes, we will review financial statements for the quarter and full year ended August 25, 2018 and pro forma combined financial statements for the quarter and full year ended August 26, 2017, which presents our results as if the business combination had occurred as of August 28, 2016, including amortization expense based on the fair value of assets after the purchase and interest expense based on the new capital structure.

We believe this discussion provides helpful information on the performance of the business during this period and all fiscal year 2017 financial measures discussed today will be on a pro forma combined basis.

Second, we evaluate our performance on an adjusted EBITDA basis based on our asset-light strong cash flow model.

We've 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.

Let me start with a review of our fourth quarter and full year net sales drivers.

There are some moving parts impacting year-over-year comparability and in comparison to IRI measured channel data, so let me walk you through it.

Core volume growth has been solid all year and has been the primary driver of our sales increase.

Specifically, for the fourth quarter and full year, volume increased 13.2% and 8.3%, respectively.

The increase in Q4 is primarily driven by the solid POS growth as well as the timing of promotional shipments in August that we initially anticipated would ship in September.

During the integration of Wellness Foods, 4 months of revenue was recorded in the fourth quarter of 2017.

The impact of the extra month was about $1 million or a 1 percentage point headwind.

For the full year of 2018, Wellness Foods contributed 0.9 percentage points of growth as we only captured 8 months of sales last year.

Also impacting comparability was a reimbursement benefit in the year-ago period of $1.2 million, which was a 1.2 and 0.3 percentage point headwind in the fourth quarter and full year.

In our third quarter 10-Q, we disclosed that the company had historically recorded revenue using the FOB Shipping Point methodology.

In the fourth quarter, we completed our review of customer contracts and determined that we should have been recording revenue via FOB Destination term.

We did not restate prior periods and believe FOB Shipping did not result in a material misstatement of the company's consolidated financial statement.

Therefore, as stated on this slide, in the fourth quarter, the company deferred revenue for sales in transit at the end of the year.

This was a headwind of 8.1 percentage points in Q4 and 2 points on the full year.

You will note that with these adjustments, net sales and retail takeaway are roughly in line.

Now for a review of fourth quarter results across major metrics.

As I mentioned earlier, fourth quarter net sales increased 11%.

Turning to the rest of the P&L, gross profit increased 12.4% to $53.3 million with gross margin up 60 basis points to 49.2%, driven primarily by lower supply chain costs.

Excluding the $1.2 million product recall reimbursement in the prior period, gross margin increased a 130 basis points.

The increase in gross profit was partially offset by an 11.7% increase in selling and marketing, a 33.7% increase in G&A due to the timing of previously discussed public company costs and accelerated capability expenses that were weighted to Q4, costs associated with the strategic sourcing initiative discussed last quarter and higher incentive compensation.

Our effective tax rate in the fourth quarter was about 0.8% versus an assumed pro forma rate of about 40% in the year-ago period.

The reduction versus the prior period is driven primarily by year-end work associated with the tax reform act and a change in prior year's state tax rate.

As a result, the reported net income in the fourth quarter was $11.7 million.

Year-to-date results were as follows: Full year net sales increased 8.9% to $431.4 million and adjusted EBITDA increased 8.4% to $78.6 million.

The increase in full year net sales was driven primarily by organic core volume growth of about 8.3 percentage points.

The acquisition of Wellness Foods was a 0.9 percentage point benefit.

Year-to-date gross profit increased 11.5% to $207.6 million with gross margin up 110 basis points to 48.1%, driven by favorable net price realization and lower supply chain costs.

Excluding the $1.2 million product recall reimbursement in the prior period, gross margin increased 130 basis points.

The increase in full year gross profit was partially offset by higher distribution costs, $2.3 million of transaction costs, an 8.5% increase in selling and marketing expense and an 18% increase in G&A as a result of Wellness Foods, professional fees, public company costs, accelerated capability expenses, the strategic sourcing initiatives and higher incentive compensation.

Additionally, for the full year, we recorded a gain related to the deferred tax liability remeasurement of $31 million and a gain of $2.8 million on the tax receivable agreement.

For the full year, this resulted in a negative effective tax rate of 32.7%.

Excluding these nonrecurring items, our pro forma tax rate was about 28%.

As a result, net income increased $41.8 million to $70.5 million.

The company continues to benefit from very attractive cash flow characteristics underpinned by our asset-light business model, which enables strong cash flow generation.

CapEx for the year was $1.8 million driven primarily by investment in our new website and digital media applications.

Moving on to the balance sheet and cash flow.

As of August 25, 2018, the company had cash of $112 million and $198.5 million remaining on the outstanding term loan, resulting in a net debt-to-adjusted EBITDA ratio of about 1.1x.

The company also has a $75 million revolving line of credit available with no borrowings outstanding as of August 25.

On October 4, we issued a press release electing to require all public warrants to be exercised on a cashless basis.

Leading up to this date, there were a significant number of warrant holders who elected for a cash exchange.

As such, we received approximately $113.5 million in warrant proceeds, doubling our year-end cash balance.

The company has a solid balance sheet and strong cash flow and we're assessing our needs on the right capital structure as we look to grow our business organically and via M&A.

I would now like to turn the call back to Joe for brief closing remarks.

Thanks, Todd.

In summary, we're confident in our ability to execute and capture the growth opportunities in front of us in fiscal 2019.

We expect 2019 net sales to be slightly higher than our long-term target of an annual increase of 4% to 6%.

This outlook reflects expected strong POS growth in the first half of the year, moderating in the second half of the year as we lap the double-digit increases from 2018; the aforementioned recognition of the deferral of revenue pushed into fiscal 2019; and a slight benefit of the 53rd week.

Partially offsetting these gains are supply shortfalls as we ramp up capacity due to an extended period of 20% plus consumption growth and a shift in our promotion calendar that resulted in shipments into August 2018 that we initially anticipated that would occur in September.

We expected -- we expect adjusted EBITDA will grow at a slightly higher rate than sales, and while we expect modest inflation during 2019, there is some uncertainty around inflation in the second half of the year.

That we're excited about the growth opportunities that exist within our business and our category.

We're focused on profitable organic growth as a path of increasing shareholder value.

We appreciate everyone's interest in our company.

And with that, we're now available to take whatever questions you may have.

(Operator Instructions) Our first question today is coming from Rob Dickerson with Deutsche Bank.

Another good quarter.

So I have a couple of questions really just around 2019.

I know in Q4, right, there is the accounting shift that was like approximately the 8% headwind.

And then you've spoken to a bit of potential supply constraint just given the fast volume growth on the base business.

So if we think about 2019 first half versus second half and your first quarter versus second quarter, I guess, what I'm hearing is that, that accounting change should be reversed in Q1, which would, therefore, it sounds like the 8% tailwind.

And then also, just in terms of the capacity piece, if we kind of normalize organic sales growth for Q4, right, and we compare it to POS, didn't seem to be that much of a delta between the 2. So I'm just curious, I guess, one is, there should be a headwind -- I mean, there should be a tailwind in Q1 and first half?

And then on the capacity side, is that something we should be concerned about?

Or is that just an easy fix and it's really no big deal?

That's the first question.

So let me take the deferral question first.

So that will not be a tailwind in Q1.

Q1, Q2 and Q3 will be basically normalized.

The revenue recognition of in transit comes in and out of the quarter.

Where it will actually be of benefit for us will be in Q4 because we'll be lapping that one kind of pushout or deferral of revenue as of Q4.

So we will not see that benefit until the fourth quarter.

Did that make sense to you?

Yes, it's great, is enough.

And then just in terms of the acceleration overall that we've seen in the business, obviously I know the strategy is to target the self-directed and that seems to be working.

But if we step back, and we're looking at where there business has come over the past 6 months, Joe, I'm really just curious to hear kind of what your thoughts are, how the growth has come in relative to where you thought it could be?

I mean, it seems like I don't think everybody really expected 20% top line growth.

So if we think about '19, is -- how do we continue the growth trajectory?

And I'm not implying 20%, but still just that mid-single-digit I'm assuming would continue with the Rob Lowe effect basically.

Yes, Rob.

First, you asked a second question that I don't think we answered for you, which is, how significant is the supply issue and kind of where are we in that.

And I think I'll first address that, no, we do not expect sustaining 20% growth in our business.

So we're now 15, 16 weeks into 20-plus percent consumption growth.

So as we build our plans for the year from a supply standpoint, we have some ability negotiated with our suppliers for surge capacity.

And frankly, the longevity of this consumption growth has blown through all that capacity.

So as we sit right now and collectively, our inventory levels and our customer inventory levels even to the shelves are below where they should be.

So -- and it is going to be an issue that's going to be with us for a while.

We can get more supply, it just takes time to get more supply.

So I can't tell you -- the impact of POS was not seen in the POS yet, and I can't tell you how long it's going to last because I don't know how strong POS is going to be.

If POS abates a little bit, we catch up in inventory and we're in better shape.

If I get a little bit more supply, we catch up and we get in better shape.

But at this point, we saw it as a risk as we provided guidance to you.

It's going to last through the first half of the year, maybe a little bit longer and it really depends upon how strong is our marketing initiatives, how strong this POS remain before we get healthy and where we want to be.

So did I answer your question?

Yes.

I think that's comprehensive.

And then, just quickly and I'll pass it on.

It's just the capital structure.

I understand the cash came in off the warrant.

You're not saying that you're buying back stock to off that.

Obviously, you're running extremely high cash balance.

In terms of acquisition potential, I'm assuming pipeline strong, you're holding on the cash to have the firepower to kind of step into the next phase of Simply Good Foods.

Any comments around that?

Yes.

So to be honest, we were little surprised how many people exercised for cash prior to us redeeming the warrants.

So as I mentioned, we doubled our cash position.

We actually have a board meeting coming up in a few weeks where we're going to layout some -- discuss where we are from a cash and the net debt position and kind of determine where we want our capital structure to be.

M&A continues to be a very, very important piece of our long-term strategy.

So obviously, it's very important to us.

But look, if -- those are difficult to know when they're going to come to fruition, and so we'll have a good discussion with the board on what to do with that excess cash.

Our next question is coming from Jason English from Goldman Sachs.

You -- thanks for detailing the drivers of growth this year.

As you highlight in your presentation, distribution was actually a bit of a net drag.

Per last quarter, I think you had a bit more optimistic than in terms of how refits may go into diet season.

Given we were a quarter later and the point of sale that has been pretty darn robust, can you update us on how those negotiations are going?

And if there is any way to quantify, how you think the distribution headwind may flip to a tailwind next year?

I would certainly appreciate it.

Yes.

At this point, I would say we expect continued performance in base velocities and potentially some modest improvements in distribution.

The big overhang here obviously, Jason, is it's difficult to get new items into distribution when you're having challenges servicing the business that you have.

Those become pretty challenging conversations with customers, right?

So give me the inventory, give me the product I need or the products I already have on my shelf before we talk about putting new products on the shelf.

So I think you should expect as we go forward predominantly base velocity gains.

Now the one thing I would point out, in 2018, we had the drag of the discontinuations from lift for most of the year.

So as our core velocity -- as our core -- as that burned off towards the second half of the year, that's when you saw our POS step up from kind of low teens to high 20%.

I expect that favorable overlaps through most of this year.

We're not going to see a drag due to a distribution loss.

We're going to see flat to slightly improving.

But I wouldn't expect much more than that given our supply issues right now.

How does this impacted selling for new your innovation?

These new forms, I assume they're produced on new lines if they don't have the same capacity constraints.

Is that true?

But at the same time, to your point, if retailers aren't happy with your service, you're losing your base, how is it impacting their willingness to accept this new innovation?

Yes.

So challenging to accept when you can't service, so that's always the first conversation, right?

So as you can imagine, when you go talk to a customer, if you're not servicing them 95%, then you're going to have difficult conversations.

And recently, we've been not doing that.

And so, again, I think that our focus has to be on -- and the second question, the answer to it is, innovations on new lines.

Actually not.

Innovation, for the most part, is on existing lines.

And so it's a matter of -- and right now, the challenge in our business is we're selling every form, every flavor at double-digit growth.

So there's not a item that's strong and an item that's weak.

We've got more buyers coming to the shelf and they're buying whatever is there.

And so there is no weakness in our business where we can shift from one SKU to the other SKU.

We're across the board selling well ahead of our own expectations.

Now I would highlight that our supply chain has done a phenomenal job in ramping up supply.

We continue to get more than what we expect.

The challenge has been we also continue to get more than we expect in POS growth.

So as we bring on more supply, we seem to be able to blow through that pretty easily.

So from our business standpoint, we have to address that.

It's going to be a midterm issue.

It's not going to be a short-term issue.

It's going to be a midterm issue as we bring on more supply and we're going to have to work our way through those problems with customers.

So I would focus less on innovation and more on improving supply and expecting our base velocities to drive our business as we go forward.

Very good.

Last question and I'll pass it on.

What does midterm mean to you, Joe?

Not a month or 2 problem.

Is it a quarter or 2 problem?

Hard to say because I can't project.

If you could give me what POS was, I could probably give you a better idea.

If POS stays in the 20s or just into the 30s, it will be longer.

If it moderates a little bit, we can recover.

Our next question today is coming from Matthew Smith from Stifel.

As a follow-up on the supply chain challenges, could you discuss the impact of constraints on your sales growth outlook for fiscal '19?

And do the capacity concerns impact your promotional plans for the year?

Yes.

First of all, we gave, I think, a pretty comprehensive view of where we saw risks and opportunities in our business, and we believe those, right?

So we expect strong POS in the first half of the year.

We expect it to moderate in the second half of the year as we lap last year's growth.

So that's the first high-level conversation, right?

So I'm expecting some moderation, and as I just described to Jason, moderation helps us from a customer service issue, right?

So and then our service issues we've got to work through, those are issues that we got to deal with as we go forward, right?

So that's -- the only other factor in our risks and opportunities is, we have a pretty good view of what inflation is going to look like for the first half, less of a solid view.

And goods and services right now are pretty -- the basket is pretty volatile.

So hard to say what inflation is going to look like as we move into the second half of the year.

So those are the risks and opportunities that we're managing as we go into the year.

We feel pretty comfortable that we're going to be slightly above the long-term algorithm from a net sales standpoint, slightly above that and that our EBITDA growth will be slightly better than our net sales growth as we kind of balance those risks and opportunities.

Yes.

So Matt, regarding promotional activity, obviously, we'll still have that going forward in '19.

To your question, I think we potentially won't be able to be as aggressive as we've historically been.

As Joe pointed out, the good news is, our growth has come 100% from base velocities.

We believe that will continue.

So we are not as reliant on promotional activities, maybe some other categories or companies are.

But yes, it's actually a really good question.

We're not going to be able to lean into promotional activity probably as aggressively as we'd like to be, but we will still have our fair share.

One key factor in our business that's important to know is 85% of our volume is base volume.

So the volume we get for promotion activity during the year totally is only about 15% of our volume.

It has some seasonal shifts.

January, March, May, we tend to see higher levels of promotion activity than the balance of the year, but this is not a business that's heavily promoted.

So that as a lever is far less important than other businesses out there and my team have been in.

Great.

I appreciate the color.

And one more for you.

If you could talk about your capacity constraints, is it mostly in shakes?

And how about the bar capacity?

And do your supply partners have more capacity coming online?

And when would you expect that to come online?

Yes.

Great question.

It's across the board, more in bars than in shakes, but pretty much across the board.

And our suppliers have been bringing capacity online.

And we've been outperforming that.

So our POS is not abating at all.

If you go back and look at the historic levels, we started in this 20% growth, I think, 16 weeks ago, and we continue to surprise ourselves week after week after week.

So our -- we can bring in more supply.

We need POS to be a little bit more moderated as we move into the second half of the year, which we expect it to do.

Our next question is coming from Brian Holland from Consumer Edge Research.

Just quickly first with a housekeeping question.

Can you give us some sense of the impact of the SimplyProtein national launch that you announced a little while back, maybe how meaningful that could be is a contributor to your top line?

So it's going to be a modest contributor.

Just by design, this is going to be a slow build.

We're trying to get it in the right customers and the right part of the store.

So this is something that we feel great about, feel very strongly about, but it's not going to be a big bang out of the gate.

It'll be a slow build, and we're going to do it the right way over the next of couple of years.

And then, I'm asking sort of again about sort of the impact of the capacity constraints and your ability may be to market as effectively as you have over the past year, maybe from a share perspective.

Weight Watchers has talked very recently about a rebranding, SlimFast has been acquired.

It seems at a high level at least affirmation of your strategy to pivot towards a self-directed diet or I presume SlimFast probably has more direct overlap from a product standpoint with you.

But as you kind of think about managing the capacity issue, your ability to continue to market, obviously your awareness is high, but sort of continuing to hammer home your message where maybe that starts to get a little bit more crowded.

So maybe less of just a velocity question and maybe a share question, how you sort of weigh risk/reward of balancing that capacity with those dynamics in place?

Yes.

First, I would say we tend to pay attention more to what we do than what the marketplace is doing.

And I think that's proven out in 2018.

We shifted our strategy to a broader target audience.

We shifted our brand promise to a more lifestyle weight management story and our business performed.

So we feel in the most case -- for the most part, what we do matters.

We pay attention to what the competition is doing.

It's nice to see that Weight Watchers is doing well, following essentially the same strategy that we kind of led last year.

So -- but we don't pay too much attention to what other competitors are doing.

Our business is influenced by what we do.

We noticed the sale of SlimFast.

They've done a nice job in that turnaround.

Their brand is different, their consumer is different, and their brand promise is fundamentally different.

So we don't have a lot of overlap between the 2 brands at all.

So I'm less concerned.

I like the fact that SlimFast is being successful.

The biggest challenge for us in retail has been a declining weight management category puts pressure on the amount of space available to weight management brands with them growing again, with us growing strong.

It is actually a fastest-growing segment in nutritious snacking, right, exceeding sports performance and exceeding all the kind of bars, the premium bars, any other part of the stores.

So that's, I think, good for our category, quite frankly.

But we're paying attention to what we do and we have our eye on the competition, but we know what we do drives our business more so than anything else.

Sure.

Fair enough.

And then, maybe just last question.

You've talked before about kind of the buying rate of consumers as they come into your brand and the extent to which that accelerates in year 2. Obviously, you've had a nice bump in household penetration, I think, over the past year.

As we think about sort of the dynamics, would you expect, if you maybe pulled the marketing lever a little bit less because of supply constraints, do you expect a little less household penetration maybe growth or that to moderate a bit?

Is that the segment that gets impacted most bringing in new households versus accelerating buying patterns for folks who have come in maybe within the past year?

And then, would you expect or is there any reason based on the analysis maybe that you've done internally -- is there any change in the algorithm for those consumers who have come in over the past year, any reason to be less confident?

I think you've talked about maybe that buying rate something like tripling in year 2, but maybe you can clarify.

And that's a question that -- that's a great question and the question we think about a lot.

So we just brought in a large influx of new buyers.

It has a different composition than it had in previous years.

What does the loyalty behavior look like in year 2?

And we just don't know at this point, right, because year 2 is 1-month old.

So I don't have that data.

I don't know what the data is.

If you take some modest assumptions, we're going to continue to -- the loyalty remains mostly the same.

We're going to continue to have a really good year, frankly.

So we'll track that as we go into the year and have a better idea after the first quarter what that looks like, but hard enough, right, is a lifestyle consumer, more promiscuous in their purchases, do they buy at the same rate, do I get him back in the same numbers, those are all questions that will have a lot to do with how our business performs in this year and in the subsequent years.

(Operator Instructions) Our next question is coming from Bill Chappell from SunTrust Robinson Humphrey.

This is actually Grant on for Bill.

I just had a question kind of on the marketing outlook for next year.

I know you guys have talked about you don't expect to continue to grow at this rate, but you've also said you expect to grow marketing in line with sales growth.

So are there new initiatives coming online that maybe weren't in the plan for last year?

Or is there additional spend or additional areas where you guys think you can move some of that spend to get return?

So as you pointed out, the algorithm is, we will -- investing in marketing is obviously a very key to our strategy.

We will continue to invest with sales growth.

In marketing, we have Rob coming on for year 2. You'll see some new advertising coming in beginning of January.

We're really, really excited about that.

We'll obviously have to put some marketing funds behind SimplyProtein, that's new from a U.S. perspective.

But we're really pleased with the campaign that we have.

We're really pleased with the strategy.

It's obviously working.

And we will continue to invest in marketing.

Nothing is going to change on that front.

Got it.

And actually maybe on that new advertising campaign coming in January, is there any thought of maybe pushing that out with the supply constraints that you guys have right now?

Or do you really feel like you want to seize on the opportunity or kind of gaining those incremental buyers at this point?

Yes.

Look, we're going to continue to invest in our business, and we're going to continue to grow buyers.

And the supply issues we have, again we expect it to abate as we move into the second half of the year.

Our next question today is coming from Eric Larson from Buckingham Research Group.

Most of my questions have been answered, but just a quick update on your supply chain, your cost savings initiatives.

What was maybe the cost that you had in the fourth quarter?

And what might be the spending and cost of expenses that you'll have for next year?

And does the supply chain constraints change how aggressively you go after some of the costs that you're outlining in the previous quarter?

So, it's Todd.

So we haven't disclosed what the exact dollars have been and I'm not going to disclose them at this moment either.

But they're not insignificant.

So these costs began to hit us in Q4.

It's a 9-month project.

So we'll see some headwinds from EBITDA perspective in the first -- in Q1, Q2 of this year.

We believe it's going to be the cost and then the savings will be EBITDA neutral for the year.

So what you're going to see is a bit of a headwind in the first half of the year coming through G&A.

You will see a tailwind in the second half as some of these initiatives start to come through our P&L and you can see that now obviously through G&A, you'll see it through gross profit.

But to your question, are we slowing down on that initiative?

Absolutely not.

It's full steam ahead.

It's going as planned.

We feel really good about the project.

There will be more to come on it as we finalize it, but nothing has changed from a ops perspective and they're pushing really hard on it.

Okay, great.

And then, just one quick follow-up question.

Joe, in your prepared comments, I think you -- when you were talking about the self -- the self-directed consumers, I think you stated, and correct me if I'm wrong and maybe I'm just misunderstanding this, but I believe you said that a lot of those self-directed consumers were already buying Atkins product.

And you allude to the fact that you're bringing on a lot of new buyers as well.

Is there a combination of those 2?

And what percent of those buyers are actually new as opposed to maybe driving more sales with existing customers in that self-directed category?

Yes.

You may recall from our earlier investor presentations that about 50% of our buyers -- if you look at the total buyers of our brand, about 50% of them were self-directed low-carbers.

Still a relatively small fraction of the total buyers.

So if I remember, about 10% of the self-directed low-carbers are already buyers of the brand.

So the point that I was making is, we weren't targeting them and they were buying our brand anyway.

And our opportunity is to start target them and then grow our share of those as we move forward.

We've reached the end of our question-and-answer session.

I'd like to turn the floor back over to management for any further or closing comments.

Yes.

Thanks, again, for your participation on our call today.

We look forward to updating you on our first quarter results in January.

Have a good day.

Thank you.

That does conclude today's teleconference.

You may disconnect your line at this time and have a wonderful day.

We thank you for your participation today.