Simply Good Foods Co (SMPL) 2019 Q3 法說會逐字稿

Greetings.

Welcome to Simply Good Foods Company's Third Quarter 2019 Conference Call.

(Operator Instructions) Please note, this conference is being recorded.

I will now turn the conference over to Mark Pogharian, Vice President of Investor Relations.

Thank you, you may begin.

Thank you, Sherry.

Good morning.

I am pleased to welcome you to Simply Good Foods Company earnings call for the third quarter ended May 25, 2019.

Joe Scalzo, President and CEO; and Todd Cunfer, CFO, will provide you with an overview of our results, which will then be followed by a Q&A session.

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

Eastern Time.

A copy of the release and accompanying presentation are available under the Investors section of the company's website at www.thesimplygoodfoodscompany.com.

The 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 results to differ materially.

The company undertakes no obligation to update these statements based on subsequent events.

A detailed listing of such risk and uncertainties can be found in today's press release and 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 with that out of the way, it's my pleasure to turn the call over to Joe Scalzo, President and Chief Executive Officer.

Thank you, Mark.

Good morning, and thank you for joining us.

Today, I'll recap our third quarter highlights and provide an update on our business.

Then Todd will discuss the summary of our third quarter and our year-to-date financial results, and after that we'll open the call to your questions.

We delivered another strong quarter with both financial and point-of-sale results exceeding our expectations.

Net sales and gross profit increased double digits on a percentage basis versus last year.

This is our fifth consecutive quarter of double-digit growth across both of these metrics.

And we're delivering on our commitments while also investing in our business and our capabilities, especially, marketing, which has increased 24% over the first 9 months of the year.

Our retail takeaway growth is measured by IRI continue to be strong across all forms, all channels and all major customers.

Total Atkins U.S. retail takeaway in Q3 was up 19.5%, exceeding our expectations even as we began overlapping stronger year ago comps.

And our e-commerce business continues to do well with sales up meaningfully in Q3.

Importantly, the nutritional snacking category continues to grow and outperforms most center-of-store package Goods Foods category, driven by healthy snacking and meal replacement megatrends.

For both the third quarter and year-to-date periods, category growth continues to be in the mid- to high single digits.

Our marketing and advertising complements the consumer megatrends and secular tailwinds driving this category growth, and with nutritional snacking household penetration only around 50%, we believe there is a lot more room for growth.

Turning to the third quarter.

Net sales increased 30.1% and is expected outpaced POS growth as customer inventories normalize to first half level.

In line with our long-term algorithm, adjusted EBITDA was up greater than sales growth and increased 38.8%.

Our business continued to be driven by strong base velocity gains on core products.

The increase in our top line underscores the strength and resilience of our brand against our large consumer target that includes both core programmatic weight loss consumers as well as lifestyle oriented low-carbers.

Our successful marketing campaign is resonating with both groups of consumers and we're driving consumers to the category and to our brand.

Buying was the biggest contributor to growth in Q3, up 32%.

As expected, net sales growth outpaced retail takeaway driven by the timing of inventory movements at key retailers.

Bar promotions resumed in the third quarter, although, slightly below prior year.

And net price realization was 100 basis point benefit in the quarter.

This was offset by the nonprice related trade promotion accounting shift from G&A that we discussed in the last couple of quarters.

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

These gains were partially offset by higher direct media investments and an increase in G&A.

Measured channel, U.S. POS growth continues to be robust across all time periods in fiscal 2019, 13, 26 and 39 weeks, POS growth has been around 20%.

This gives us confidence in the effectiveness of our marketing and message as well as the continued -- as we continue to drive consumption and grow buyers.

Although, we do anticipate the POS growth will slow in the fourth quarter as we lap aggressive year ago growth rates.

More on this in just a bit.

And I'm very pleased that our growth continues to be well balanced across all product forms, that's bars, shakes and confections.

Our marketing strategy for the brand is unique among traditional food brands.

We are the only major nutritious snacking brand that is well developed across bars, shakes and confections and achieving balanced growth across all these forms.

Our messaging is focused on the distinctive Atkins nutritional philosophy whose benefits are supported by over 100 independent peer review clinical studies.

The brand stands distinctively for low carbs, low sugar, protein-rich nutrition, designed to avoid blood sugar spikes and help the body burn stored fat.

Our marketing strategy focuses on communicating the benefits of this nutritional philosophy while offering delicious convenient snacks for consumers seeking those benefits and looking for a snack or a meal replacement.

And our strong retail performance continues to come almost entirely from base velocity grip.

Distribution is up in fiscal 2019 driven by our new 30-gram protein shake and some confection items.

As planned, overall promotional buying was down slightly versus year ago as we dial back on the frequency of borrower activity, given supply constraints.

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

As such, we are committed to increasing advertising and marketing at least in line with sales growth.

During fiscal 2019, we've invested well beyond that target, given the effectiveness of our marketing executions and our strong financial performance.

Building on the 3 advertising spots that began airing in Q2, the third quarter featured a new spot called Rob Lowe's Secret is out, the ad focuses on our bar products and flavors as well as the benefits of that specifically that our products are an excellent source of protein, low in carbs and contain no added sugars.

Our advertising is resonating with consumers and having the desired effect.

POS growth continues to be strong and total buyers continue to grow while maintaining loyalty and buy rate consistent with historic levels.

New products are an important element of our strategy.

Our 2019 innovation such as the Atkins protein wafer crisp bar and our new 30-gram protein shake are both doing well.

The wafer bar distribution is on track with ACV of about 55%, trial and repeat has been solid and similar to other successful Atkins' items.

Our 30-gram protein product offers consumers a higher protein meal replacement shake and is performing in line with our expectations.

We estimate at this point that it's over 80% incremental to Atkins and over 40% incremental to the category.

Overall, I'm satisfied with our performance.

Third quarter and year-to-date results we're strong and we're on pace to deliver another year of meaningful sales and EBITDA growth that will significantly exceed our long-term targets.

In the fourth quarter, year-over-year comps are more challenging.

Looking at the POS data on this slide, you'll note that the year-over-year growth rates in fiscal '19 have been sequentially slowing as we make our way throughout the year.

However, encouraged by the growth in total buyers, we continue to see, coming to the brand, and we feel good about the quality of our fourth quarter on air advertising, which will be up significantly versus last year.

Our strategy of educating consumers on low-carb, low-sugar nutrition is working.

We are confident in the continued effectiveness of our marketing, our improved supply situation and our financial flexibility to invest in proven growth initiatives.

We are focused on driving top line growth especially with new lifestyle self-directed low-carbers.

Additionally, the investments we've made position us nicely, deliver solid growth in 2020 and over our strategic planning cycle.

Now I'll turn the call over to Todd to provide you with some greater financial details.

Thank you, Joe, and good morning, everyone.

Let me start with 2 points as it relates to the numbers you've seen on the slide that follow.

First for comparative purposes, we will review financial statements for quarters ended May 25, 2019 and May 26, 2018.

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

We have 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.

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

Let me start with net sales.

Core volume growth has been solid over the last year and continues to be the primary driver of our sales increase.

Specifically, in the third quarter, volume increased 32%.

As expected, net sales growth outpaced retail takeaway driven by the timing of inventory movement at key retailers.

Note that year-to-date net sales growth and retail takeaway are now relatively in line, and we are well positioned to meet consumer demand.

Bar and trade promotions resumed in the quarter, although, frequency was slightly lower than last year resulting in modest price realization of 1%.

These gains were partially offset by the change in how we account for services provided by some of our customers.

As we discussed during the last 2 quarterly calls in the year ago period this cost was recorded in selling expense.

Turning to the rest of the P&L.

Gross profits increased 27.3% to $65.3 million.

Gross margin declined 100 basis points to 46.8%, primarily due to the nonprice-related customer activity that is a shift from selling expense.

This change in methodology only impacts fiscal 2019 amounts, therefore, affecting comparability versus the year ago period by negatively impacting the third quarter 2019 by about 120 basis points.

Additionally, the company incurred slightly higher supply chain costs due to modest inflation, but this was offset by savings from the strategic sourcing initiative, which was in line with our expectations.

Adjusted EBITDA was up 38.8% to $24.9 million driven by the increase in gross profit, partially offset by a 34.1% increase in marketing, driven by increased media and e-commerce investments as well as 29.1% increase in G&A due primarily to greater incentive compensation as well as slightly higher distribution center costs due to greater volume.

Note that selling expense was lower than last year, due to the previously discussed shift of nonprice related customer activity.

Income tax expense in Q3 was $4.6 million versus $2.8 million in the prior year.

Our effective tax rate in Q3 was 25.4% versus 28.5% in the year ago period.

Our year-to-date tax rate is 24.2% brackets our targeted full year anticipated tax rate of 24% to 25%.

As a result, reported net income in the third quarter was $13.5 million versus $7.1 million last year.

Year-to-date net sales were up 18.9% to $384.2 million.

As I mentioned earlier, the year-to-date net sales increase was driven primarily by organic core volume growth.

Year-to-date gross profit increased 18% to $182 million with gross margin down 30 basis points versus prior year.

The shift in nonprice-related customer activity from selling expense to trade resulted in an unfavorable impact on 2019 gross margin of about 90 basis points.

Year-to-date adjusted EBITDA increased 23.3% to $74.6 million, driven by the increase in gross profit partially offset by other expenses, including a 24.3% increase in marketing and a 23.2% increase in G&A due to higher incentive compensation, costs associated with the strategic sourcing initiative and annualization of second half fiscal 2018 investment to enhance organizational capability.

Year-to-date income tax expense was $13.2 million versus a benefit of $17.5 million in the prior year.

Recall 9-month year-to-date 2018 amounts included $29 million onetime gain related to the remeasurement of deferred tax liabilities and a $4.7 million gain on the fair value of the Tax Receivable Agreement that were recorded in the second quarter of 2018.

As a result, year-to-date reported net income of -- was $41.4 million versus $58.7 million last year.

Moving on to the balance sheet and cash flow.

The company's solid balance sheet and cash flow provides us with continued financial flexibility to support future organic growth and participate in value enhancing M&A.

Year-to-date cash generated by operating activities was $52.6 million, driven by strong earnings growth, partially offset by higher inventory.

Although note that inventory is down nearly 10% versus last quarter as to get back towards our desired levels.

Year-to-date CapEx was $0.8 million and net cash provided by financing activities was $84.3 million, primarily driven by the cash received from the warrants exercised.

Additionally, note that full year CapEx is forecasted to be less than $2 million.

In Q3, we acquired $1.5 million of our shares in the open market.

Year-to-date, we have acquired $1.7 million against the $50 million authorization approved in November.

As of May 25, the company has cash of $247.6 million.

There is $197 million remaining on the outstanding term loan resulting in a net cash position of $50.6 million.

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

Thank you, Todd.

In summary, we expect that we'll end the year strong with full year net sales and adjusted EBITDA growth up meaningfully versus last year.

Given our momentum, we anticipate full year fiscal 2019 sales and EBITDA growth to be in line with the year-to-date percentage increase trend.

The full year outlook reflects first significantly more challenging POS comps in the fourth quarter and our expectation that retail takeaway will continue to sequentially slow.

Second, incremental strategic investments in marketing that should continue to drive buyer growth.

And finally, we anticipate that Q4 net sales will outperform POS growth due to fourth quarter benefits of the 53rd week and the year-over-year positive impact of sales and transit that we previously discussed.

We are highly confident in our long-term opportunities that are focused on driving top line growth and total buyers to the brand.

The marketing investments we've made in the business as well as the investments enhanced -- and enhanced capability position us to deliver solid growth in 2020.

As we have shared with you over the last year, we're confident in our business as we execute against our strategies, and we're delivering on our financial objectives while investing in the business, a path that we believe will continue to create value for our shareholders.

We appreciate everyone's interest in the company and now we're available to take your questions.

(Operator Instructions) Our first question is from Jason English with Goldman Sachs.

Congrats on the strong quarter.

I've got a couple of quick questions.

First, the fourth quarter guidance, if our math is right, implies organic sales growth kind of underlying ex some of the transitory benefits of around 5%.

So first, is that about right?

And second, what we see in retail, scanner data suggests momentum sustaining well above that, are we missing anything happening maybe outside Nielsen track channels?

So this is Todd.

So a couple of things to consider.

Two continued drags through the entire year, as you know, is that accounting shift impacts us by approximately 2 points a quarter.

So that -- we'll get the last piece of that in Q4 and then we'll -- they will start lapping that as we get into next fiscal year.

And International has been about 2 point drag on our top line as well.

So you're correct.

We're obviously -- we have 2 favorable tailwinds from the 53rd week and revenue recognition impact from last year.

Also have always potentially a little bit of noise about where retailer inventories land.

And do we have the potential to do slightly better than that?

Of course, but that -- those are kind of the bridges.

Hopefully, that makes sense.

It does.

Is my 5% number roughly right?

Because I think we were contemplating all those factors when we'd arrived to our 5%.

No.

Look, do we think we're going to outdo 5% POS growth in Q4?

Certainly.

Do we think we can do a little bit better than the numbers you're kind of implying?

Yes.

Because there's always uncertainty around where retail inventory is going to land, that's always the wildcard.

Got it.

That's helpful.

And a quick question on innovation.

It sounds like the 30-gram protein shakes is off to a strong start.

It looks like in the POS data that you're building some momentum behind powder shakes as well.

Can you give us an update on where they stand?

Looks like pretty light distribution.

Do you see more opportunity there and what do you see in terms of cannibalization of your ready-to-drink shakes?

Jason, this is Joe.

I would -- look I think the 30 gram shake is going to be a nice addition to our portfolio given its incrementality.

Powders have been slower in the build and frankly not as incremental as we anticipated.

So unclear to me at this point how well powders would do over the next, call it, 6 to 12 months.

Our next question is from Chris Growe with Stifel.

I just had a couple of questions for you as well.

To start first, just to understand your consumption in shipments are now in line for the year, but if retailer inventory levels were depleted entering in the year.

So I'm just trying to understand from an inventory standpoint at retail, do you expect to continue to build a bit like in the fourth quarter, are we at the right level now for inventory levels overall?

No.

We're -- we feel very good about the inventory's levels we are at retailers.

So I think from this point forward, there should be mass big swing, so that should not be a big issue going forward.

Okay.

And then just a question on your -- so the saving is coming through from your supply chain program.

You talked about those savings, which I really kind of kicked in here in Q3 offsetting cost of goods to increase in cost.

I just want to get hopefully a little better sense around the size of each of those.

You have an idea like -- to get an idea of how much the costs are up and then how those synergies kind of phase.

Those are kind of the first quarter form here in Q3.

Do they pick up sequentially as we go forward like Q4 into 2020?

Just trying to get a better sense there.

Yes.

So I won't get into a deep level of specificity on it.

But we are seeing some modest inflation, low single digit on our ingredients and other supply chain costs.

We are offsetting those beginning in Q3 by strategic sourcing.

It's behaving exactly the way we had hoped, it's doing really well.

That will continue in Q4 and then as we go into fiscal year 2020, we are starting to see some inflation in milk proteins and whey and things of that nature.

Nothing that we can't overcome obviously by our strategic sourcing and other projects we have on that we're working on right now, but the project is doing very, very well.

But we are seeing a little bit of inflation out there.

Our next question is from Brian Holland with D.A. Davidson.

I guess, a couple of high-level questions.

So as I think about the improved inventory situation, I think about some of the long-term opportunities you've spoken to in the past channel specific, whether that's club or your underpenetrated convenience in the single served as well.

I appreciate they may not be near-term initiatives or focus points, but to what extent with an improved inventory situation can you revisit those opportunities and more maybe aggressively attack those?

Does that change at all with the improved inventory situation?

Or are there other dynamic that maybe I'm just not considering here?

Brian, this is Joe.

We're -- we never slow down on those initiatives because they tend to be more strategic in nature so you've got to keep pressure on those so they are desired to want to build out in white space.

We kept pressure on those initiatives.

I think over time, we'll start to see some of the positive impact of those things, but we didn't slow those down for our supply situation.

You can't stop and start those initiatives because you're having conversations with customers over a sustained period of time to build distribution.

But those didn't shut off.

Okay.

That's helpful.

And then -- and can you help us understand, if we go back a few years ago, you sort of talked about 6 million buyers, maybe 62 servings per buyer, that's kind of -- that may be specific to a product line, bars, et cetera.

But even just directionally, so what is the -- kind of quantify the growth in the number of buyers that you have and maybe how -- at least directionally, how service provider -- you said service providers are going up, so that's certainly encouraging.

But just trying to get a sense of what the tail looks like here at this point based on the progress you've had here in the past couple of years?

And maybe -- I think you know the charts that I'm thinking about there that you presented a few years ago.

Just what kind of progress have we made?

Is there is change in view on what that looks like given the success of the initiatives you've had in place here?

Yes.

So I don't, again, the chart we showed you was an incident study.

So that's a strategic study that you do once every multiple years.

So I can't tie back to those numbers on a quarterly basis or even an annual basis.

Here is what I know.

From that chart, we knew we were underpenetrated among these lifestyle consumers and they were about 4x as many of those as the programmatic weight loss folks.

I'm trying to remember the numbers.

But I think the programmatic were about 8 million, and the lifestyle low-carbers were about call it 30 million.

As we've tracked our progress over the last year, we've made -- we've grown our buyers significantly behind the lifestyle consumers.

And we've kind of held our ground with programmatic weight loss consumers.

I can't tell you what's the penetration among that 30 million, I just know a lot of my new buyers, a meaningful percentage of those buyers are coming into lifestyle bars.

Now the one concern that we had going into this is that their loyalty would be different than a programmatic weight loss person, i.e.

lower, either I don't hold as long or they don't buy as much.

I can't see the specifics by the buyer group, but overall, the loyalty of the buyer group hasn't changed.

And knowing that I've grown meaningfully among lifestylers, it just -- we can infer that the loyalty of the lifestyle consumers is fundamentally the same as the programmatic weight loss consumers.

And if you remember the -- our branded buy rate, the category -- is category leading.

So on average, I think our numbers close to 50 servings per year on average of our average buy.

So -- and then the -- it changes meaningfully from year 1 to year 2, it's about 30 purchases, 35 purchases in the first year and over 100 purchases in the second.

That seems to be holding up, which is a nice surprise for our business.

And that is probably the biggest single driver of the growth exceeding our expectations.

Buy rate and loyalty remain consistent, even though we're bringing in a different -- and therefore, we expect different purchase behavior consumer that had not been the case.

That's very helpful context.

That was very helpful.

And that can totally confuse you or did you track that?

No, no, no.

That was very helpful.

And unfortunately, I can't give you -- I wish I had a digital instrument to tell me how many buyers and who they were and what they were buying, I don't have that tool, right?

I can infer from different types of studies what's going on.

And what's going on is its exceeding our expectations because we're bringing lifestyle people in and they're buying at a rate pretty consistently with the programmatic weight loss people.

Our next question is from Rob Dickerson with Deutsche Bank.

So I guess just a follow-up from Brian's question is, I guess then if lifestyle consumers and buyers are exceeding expectations and obviously, driving kind of crazy, let's call it, volume growth while the programmatic pull study, kind of where you stand today relative to where you stood 2 years ago?

Is there -- would you say -- there's obviously a lot of incremental learning and you've watched a lot occur with the brand and what -- and how you've innovated around the brand but -- so now what?

I mean is it obviously just keep doing exactly what we've been doing?

There's no need to change anything for a marketing program.

We definitely are keeping Rob Lowe, oh, we definitely will have new adjacency, flavors, marketing or else what have you, because obviously you're doing extremely well on the top line.

So given that lifestyle consumer, seems like he'd bought in, wherein you continue to try to increase to your household penetration, and you've also learned a number of things.

As you think forward even to next year, there's no guidance but just what do you do differently to sustain the growth rate or maybe you do nothing differently?

Rob, good -- great question.

So it's the one that keeps me up at night.

So what should we keep doing and what should we change?

And the answer is, I think there are some things that are working that we continue to do but we also keep testing different ideas.

So you can never -- a wise man once told me all trees don't grow to the sky, so you can't believe that doing the same thing consistently year after year after year is going to continue to drive the same results.

So you're always looking for new insights and new avenues to grow.

So I'll give an example of something that we began during the year that we're getting learning from.

So we went into a market, and we significantly changed the level of marketing support and the composition of the marketing support.

So trying to get broader reach in the marketing efforts.

And we're getting learning out of that every day.

So if you're going to spend more, how do you deploy?

We're consistently looking for new insights.

So you do copy testing.

You do in-market U&As.

You understand what consumers are taking away.

You have an idea -- a pretty good idea of what you're trying to communicate and the next round of executions, you're always trying to do a little bit better.

So I'll give an example there, we would like the weight component of our messaging as we move into the next year to be a little bit stronger.

If you remember the first year executions with Rob, he talked a little bit about when you're feeling better, you start looking a bit better.

We kind of lost that this year, and we think we need to get that back that would help us with programmatic weight loss consumers.

So we're always looking forward.

You should plan on us continuing to do it.

What else can we do to help us improve the efficiency and the effectiveness of the marketing investment?

And we're always out there looking for those ideas.

So no stasis, but we're not throwing the good stuff away but we're never at stasis, we're always looking for new opportunities.

Yes.

And it's obviously just a balance of how much you really need to spend.

Whether it's in trade promo, which you can -- with the up a little bit corner and then you're obviously spending a lot keeping the distribution and the velocities up.

The question is, do you need to be growing 20% for the stock?

And kind of what we're always worried about, keeps me up at night.

The other question, just strategically, obviously, it's always a question especially, for your company and the Board and management team is just cash in the balance sheet, net cash is still high, leveraged strong position $2 million CapEx, how is the deal pipeline?

Is there a sense of, let's say, more immediate timing now relative to where we started a year ago, right?

We haven't really seen anything come through yet?

I know you're always focused on it but just trying to get a sense as to -- sense of urgency, what's in the marketplace?

How the pipeline looks, et cetera?

Yes, the pipeline is full and we're very active as you can tell from some of the deal costs that are flowing through our financials.

Very, very active.

And as you know, when you're dealing with fast-growing, typically privately owned nutritious snacking company, expectations on valuations are high.

So the job is do your diligence understand what value you think you bring to the asset and how you can bring those to light.

Like can you find the right intersection between seller expectations and what we believe we could do with the business.

So far, we've not been able to find that despite a lot of activity.

And I wish I could tell you are we going to get something done in the short-term but I can't tell you that, because I don't know.

Our next question is from Eric Larson with Buckingham Research Group.

Really nice quarter.

By my calculations, Joe and Todd, I'm not sure if this is correct.

It looks like Simply Good is providing about 35%, maybe 1/3 of the total category growth right now.

That might be an inaccurate number, it's the best that I have with the data I have.

First of all, is that accurate?

And then, what are you seeing from your competitors?

It seems like you're looking over your shoulder yet -- obviously, you have to be careful as you do that, but can you kind of stack up what you're seeing in the marketplace today relative to maybe what you've had over the last 3 to 6 months?

Yes.

I think -- this is Joe, what the -- we're obviously big and growing in big numbers, so we're a meaningful part of the category growth.

We tend not to want to talk too much about how we view the category because we feel that's competitively sensitive, but we're a big player, and we're growing fast.

So we're a meaningful part of that.

Our comments, I think, reflect how we view the category.

The category, relative to center of store, is underpenetrated and it's got nice tailwinds.

It's got snacking tailwinds, convenient tailwinds, meal-replacement tailwinds, there's a whole number of secular consumer trends that are going to continue to drive this category towards growth.

The last 6 to 12 months growth rates kind of been the mid-single digit to the high single digit, so we've been growing category share, but there are a number of players in the category that continue to grow nicely, continue to pick up market share and we expect -- I don't think -- I think, that's unchanged, quite frankly.

So we expect to continue category growth.

We think there'll be small guys come in and grow, and I think some of the bigger guys will continue to take market share.

I -- we cannot focus too much also on competition.

For us, it's what do we believe about our opportunities to growth?

What are the initiatives to do it and how well are we executing it against those?

Those are more important than what the competition is doing right now.

So it's much more about doing, understanding what you need to do and executing well against it.

Got it.

Just a final question.

It's kind of grilling down a little bit more into some of the questions that have already been asked but you brought Rob Lowe on I believe January of '18 and January of this year was your second year with him and if the -- your lifestyle users are as high of consumers and repeat purchasers as your -- the traditional Atkins consumers, you're now kind of starting year 2 of may be pretty significant consumption on the consumers you may have brought in '18 and that then in 2020 could even be better higher consumption number.

It -- should that give us just from what you've already built in the last 18 months of Rob Lowe, the confidence that we could still see continued strong POS numbers if those relative consumption numbers are about the same for your lifestyle versus the traditional Atkins user?

Yes.

I think, yes, so the unknowns, obviously, are does the buy rate hold, does the loyalty hold?

But yes, we've done a nice job of growing buyers, as you grow new buyers, they become year 2 and year 3 buyers and they have a benefit to us.

So I would just say that prior performance on loyalty is not necessarily predictive of future performance.

So, yeah, we're optimistic because of the buyer growth and we feel good about the fact that the loyalty has held so far.

And if it continues that hold, we feel pretty good about our prospects to 2020 and beyond.

And we've got to keep going and we got to keep getting new buyers, right?

So we got to keep doing that next year.

Yes.

No, that's the engine to your company, frankly.

Our next question is from Bill Chappell with SunTrust.

Do you mind -- I think I'm right in saying that, I guess, your founders, board members are raising a new SPAC or money for that.

And if that's correct, can you just kind of help us understand how that works with that new SPAC, M&A priorities versus your priorities and how the board members work with you more or less going forward?

Just kind of clear that for me, it'd be great?

Yes, first, I think the first question is how active are they.

They went out with their SPAC for a few days, and they've been obviously behind the teams very active.

I haven't noticed a decrease in number of calls that I get from my -- from the Conyers Park guys..

They continue to be robustly engaged in our business.

The -- as our business has accelerated, our M&A strategy had narrowed.

And that had reduced the number of assets that we, frankly, would even consider looking at much closer to the nutritious snacking category.

That opened the avenue up for the Conyers guys to look at another vehicle that would be, in all likelihood, more center of store as to take advantage of some of the assets that are out there.

I think it's some of the large-cap guys and to work private assets out there that are more center-of-store focused.

So the agreement that we have with the Conyers guys is we get first kick at the can and assets.

And look, we're pretty narrow.

So we're going to be looking at nutritional snacking assets, mostly NRI.

That's where we're going to stay focused.

They're going to be looking in other places, quite frankly.

Got it.

And then -- and just second one, I know there've been several questions around gross margin outlook and I know you're not giving 2020 guidance, but just trying to understand the puts and takes.

It's tough to see -- or for us to see how much strategic sourcing kicks in next year versus promotion kicks in back to more normal levels versus what you would prefer to -- some of the higher commodity costs.

I mean do you see stabilization as you move into next year for gross margin?

Or will you expect it to be, I guess, under pressure or at least down year-over-year just for kind of the normal course of business?

Yes.

So look, obviously our -- gross margin expansion is incredibly important to long-term model of our business.

Our expectations are, over the long term, we will -- we need to grow it approximately 20 to 30 basis points per year.

We've been excluding some of the accounting shifts.

We've been able to do that work better over the last couple of years, so that, I mean, continues to be incredibly important to our strategy.

Yes, there's some inflation out there, it's relatively modest.

It's nothing that we're terribly concerned about right now, but it's out there.

And the good news is, we continue to have really robust projects to offset that inflation.

We obviously pulled back on trade this year.

We feel really good about the ability to still drive volume.

We're pulling back on trade, and we're having higher promotional price points out in the marketplace.

We don't see a big shift in that strategy going into FY '20.

So we feel good that we can maintain our very, very healthy gross margin.

So 20 to 30 basis points is still a good number?

Yes, long-term.

I'm not going to give specific guidance in the year, but long-term, that's where -- that's the model.

That's what we hope to achieve at a minimum.

And our final question comes from Chase West with Consumer Edge Research.

Most of mine have been answered this morning, but I wanted to ask a quick question on SimplyProtein.

In our data, we're seeing a slight uptick in distribution this spring, but it's still well below Atkins.

Are there any changes to your plans around SimplyProtein and maybe we can we expect increased investment in near or medium term?

Yes.

We first highlighted pretty much every brand that's well below Atkins category, so I'm not sure that's the correct benchmark.

I think we've said before that our view of, as we're going to incubate this brand, so get it into some distribution, prove its success by driving velocity where it is before we expand further, that's what we think is a prudent approach.

Given the fact that if you grow distribution really quickly and you don't have the velocities, you lose distribution and food/drug mass relatively quickly.

So we're -- we've taken a much more, one day at a time approach with Simply.

Kind of happy where we are right now from a distribution standpoint, I think the number is somewhere around 20% to 25% of food.

And we're now focused on driving velocity and making sure the turns of the shelf are good before we expand further.

This concludes our question-and-answer session.

I would like to turn the conference back over to management for closing remarks.

Yes.

Thanks again for your participation on the call today.

We look forward to updating you on the fourth quarter results in October.

We hope you all have a good day.

Thank you.

Thank you.

This concludes today's conference.

You may disconnect your lines at this time.

And thank you for your participation.