Greetings, welcome to The Simply Good Foods Company first quarter 2018 earnings conference call. At this time, all participants are in a listen-only mode. A question and answer session will follow the formal presentation. If anyone should require operator assistance during the conference, please press star zero on your telephone keypad. As a reminder, this conference is being recorded. I would now like to turn the conference over to your host, Ms. Rachel Perkins with ICR. Thank you. You may begin.
Good morning. I am pleased to welcome you to The Simply Good Foods Company earnings call for the first quarter ended November 25th, 2017. Joining me on the call this morning are Joe Scalzo, President and Chief Executive Officer, and Todd Cunfer, Chief Financial Officer. The company issued its earnings press release this morning at approximately 7:00 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. This call is being webcast live on the website, 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 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. Finally, the company has included in today's earnings release and presentation unaudited financial information for the 13 weeks ended November 25th, 2017, and unaudited pro forma financial information for the 13 weeks ended November 25th, 2016. 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 basis, the impact of its business combination transactions on the historical financial information of our predecessor and successor entities as applicable.
The pro forma 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 fiscal 2017 discussed today will be on a pro forma basis. With that, it is now my pleasure to turn the call over to Joe Scalzo, President and Chief Executive Officer.
Thank you, Rachel. Good morning, and thank you, everyone, for joining us. Today, I'll recap our first quarter highlights and provide an update on our growth initiatives. Todd will discuss a summary of our first quarter financial results. We'll open the call to questions. We started off the fiscal year well and are pleased with our first quarter financial results. For the first quarter, net sales grew 6.8% year-over-year, with adjusted EBITDA of 6.6%. This growth underscores the strength and resilience of our core business and the powerful nutritious snacking macro tailwinds of convenience, meal replacement, and low-carb, low-sugar, protein-rich nutrition. You may recall the nutritious snacking category is still relatively underpenetrated at about 50% of U.S. households, leaving what we believe is plenty of room for future upside.
We generated U.S. point of sale growth of 5.5% as a result of continued growth in our core U.S. nutritional snacking business and strategic marketing efforts to target a broader consumer audience. Importantly, as we expected, this POS growth represents an acceleration from our reported total fiscal year 2017 POS growth of 4.2%. I'll talk in a moment about our strategic initiatives. I will note that based on our confidence in these initiatives, we stepped up our marketing investment during the quarter by 7% behind new advertising and invested in strong merchandising support in key retailers to synergistically support our new campaign. We believe Atkins represents a compelling growth opportunity as we expand our marketing to address a 4X consumer target. You may recall since 2008, our core target has been programmatic weight loss consumers.
In 2016, we identified a large group of low-carb lifestyle consumers already buying our brand as a nutritious snack. We began targeting this group during 2016 and 2017, resulting in strong total buyer growth during the past two years. Our strategic initiatives reflect this opportunity, and we remain intently focused on the execution against these initiatives, including improved advocacy, education, and activation of our core program users; targeting a new group of self-directed low carbers who represent a 4X opportunity in terms of size when compared to our core program users; driving product innovation and portfolio expansion; and pursuing white space opportunities. The centerpiece of our strategy for educating consumers is a new integrated ad campaign that targets programmatic as well as self-directed consumers with messaging designed to update and contemporize Atkins brand imagery.
The spots are focused on the theme of today's Atkins and the simple idea that the positive effects of Atkins on your health can be enjoyed even if you aren't doing Atkins. During the first quarter, we ran copy targeted at our core consumers, featuring country western star Lauren Alaina and the positive effects Atkins has had on her. In a lifestyle ad targeting self-directed low carbers, featuring our breakthrough hidden sugars insight, reminding consumers that some seemingly healthy protein bars are actually loaded with hidden sugars that can negate the positive effects of protein. Importantly, we learned that even though each ad was targeting a specific group, each worked equally well against both groups. We're pleased with the copy. As we head into the balance of the year, I'm incredibly excited to announce our new partnership with actor Rob Lowe.
Rob is our new brand spokesperson, having authentically lived an Atkins low carb lifestyle for decades. Advertising featuring Rob started last week and builds on the successful campaign we began in September themed around today's Atkins. Rob is the epitome of the Atkins lifestyle consumer. He emphasized the desire for living a healthy life for family health and wellness, and how healthy living is possible by following the Atkins nutritional principles of eating delicious foods with optimal protein and fewer carbs and sugar. As a devotee of Atkins products with a self-proclaimed killer sweet tooth, Rob describes the Atkins portfolio of bars and shakes as his secret weapon, free of any deprivation, while also allowing him to indulge a lifelong taste for chocolate milkshakes.
We have learned that the universal themes of eating right for health and a better quality of life, while not sacrificing taste and satiety, appeal to both programmatic and self-directed consumers. We also recently launched a new book targeting self-directed low carbers entitled "Eat Right, Not Less." This fully illustrated book is a guide to living a low-carb, low-sugar lifestyle and is packed with 100 delicious whole food recipes to achieve optimum health and looking better while doing so. Our website, which in 2017 had 11 million new visitors, just received a complete overhaul and offers content for both programmatic as well as self-directed low carbers, including great information on hidden sugars. It also features a video from Rob Lowe where he shares his thoughts on living the Atkins lifestyle. Our third growth strategy focuses on product innovation and portfolio expansion.
We continue to respond to consumer demand for cleaner labels, which means fewer ingredients and ingredients recognizable to consumers while still delivering the high taste profile and fewer net carbs that Atkins consumers are accustomed to. To date, seven of our 10 meal bars have been converted to clean labels and rolled out. We're also working on our snack bars and have converted four of 11 thus far. Most importantly, we're introducing new products in both our Atkins ready-to-drink shakes and bars. Our new shakes are focused on delivering against consumer needs and providing superior taste. Here you see our Plus Protein Shakes, which will be hitting the shelves soon. They have 30 grams of protein and seven grams of fiber, giving consumers the protein and fiber they seek, but still low in sugars and net carbs.
You may have also seen newly refreshed packaging graphics, modernizing the Atkins logo, improving our taste appeal, shelf impact, and product benefit communication. Here you see the before and after of our leading meal bar and our leading shake. Our fourth area of growth focus is expanding into white space opportunities. E-commerce has been showing steady growth for us. For the first quarter, our gross sales in e-commerce increased 67% year-over-year, continuing the growth trajectory from fiscal year 2017. As many of you know, in 2017, we stepped up e-commerce investments, including digital media to drive top-of-funnel traffic and new product development to customize offerings. For fiscal year 2017, e-commerce represented approximately 3% of Atkins' gross sales. Over time, we believe our strategic initiatives can help grow this to the 10% range. This remains an exciting opportunity.
These initiatives we've discussed today are designed to accelerate growth, and we're pleased with our execution so far. With that as an overview, I'd like to turn the call over to Todd.
Thank you, Joe, and good morning, everyone. Let me start with two points as it relates to the numbers you see on the pages that follow. First, for comparative purposes, we will review unaudited financial statements for the quarter ended November 25th, 2017, and pro forma financial statements for the quarter ended November 26th, 2016, which presents our results as if the business combination had occurred as of August 28th, 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 financial measures discussed today will be on a pro forma basis. Second, we also 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 included in today's press release. We believe this measure is a key indicator of the true underlying performance of the business. The first quarter results are as follows. Net sales were up 6.8% to $106.6 million, driven by core growth of 4%, and the acquisition of SimplyProtein, which contributed 2.8% in the quarter. You'll recall our consumer takeaway for the quarter was up 5.5%, ahead of our core growth rate. Gross profit increased 8.3% to $52.8 million, with gross margin up 70 basis points to 49.5%, driven primarily by favorable product mix and lower input costs.
Net income increased 11.7% to $10.2 million, driven by the gross profit improvement, partially offset by a 7% increase in marketing spend and a 17.5% increase in G&A due to the addition of Wellness Foods and higher public company costs as we embark on our first full year as a public company. Adjusted EBITDA was up 6.6% to $23.7 million from $22.3 million in the prior period. The company continues to benefit from very attractive cash flow characteristics. We have an asset-light business model with strong cash flow generation. Capital expenditures for the first quarter of 2018 were approximately $0.7 million, driven by investment in our new website and digital media application. We estimate full-year CapEx of approximately $1.5 million. Moving on to the balance sheet.
As of November 25th, 2017, the company had cash of $62.9 million and a $200 million term loan outstanding, resulting in a pro forma net debt to adjusted EBITDA ratio of 1.9 times. The company also has a $75 million revolving line of credit available with no borrowings outstanding as of November 25th, 2017. As a reminder, as a result of the merger with Conyers Park on July 7th, all the former debt was paid off and a new $200 million term loan was issued. The new term loan has favorable terms to the old debt with a current interest rate of LIBOR plus 400 basis points. Before I turn the call back to Joe, I would like to briefly touch on the recent corporate tax reform legislation and our initial view of it.
While we continue our thorough evaluation and review of the potential tax benefit with our auditors, based on what we know today, we estimate our fiscal 2018 blended effective tax rate to be approximately 31%-32%, compared to a 39.6% effective tax rate for pro forma fiscal 2017. As a reminder, based on our August fiscal year end, we only have two-thirds of our 2018 fiscal year under the new corporate tax law. For fiscal 2019, we expect to realize the full benefit of the corporate tax reform. As a result, we estimate a 26%-28% effective tax rate. That concludes my financial overview. I would now like to turn the call back to Joe for brief closing remarks.
Thanks, Todd. In summary, we remain confident in the growth opportunities for the business as we move forward, as well as our ability to execute against our four strategic growth initiatives. We are pleased with the start to our fiscal 2018. We believe we are well positioned to deliver our 10th straight year of snacking point-of-sale growth in the U.S. We expect to deliver fiscal 2018 net sales consistent with our previous stated long-term algorithm and adjusted EBITDA growth at a rate slightly higher than that of net sales, including an incremental $2 million of public company expenses. We appreciate everyone's interest in The Simply Good Foods Company. With that, Todd and I are now available to take your questions. Operator?
Thank you. If you'd like to ask a question, please press star one on your telephone keypad. A confirmation tone will indicate your line is in the question queue. You may press star two if you'd like to remove your question from the queue. For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star key. Our first question comes from the line of Rob Dickerson with Deutsche Bank. Please proceed with your question.
Thank you. Good morning, everyone.
Hey, Rob.
Morning, Rob.
How's it going? Couple hopefully more housekeeping items given it's Q1 and the top line seemed to come in pretty decently. I guess just in terms of the marketing spend year-over-year, should we expect that now to increase as the Rob Lowe campaign is now launched or let's say was launched in January and that progresses with potentially further ads as the year goes on or is that 7% rate kind of more of a quarterly bump and then we kind of normalize back?
Yeah. The 7% right now, not only was that what we hit in the P&L in Q1, that's our current estimate of the full year increase as well.
Okay, perfect. Then more broadly, I kind of hate to dive into the tax issue or tax reform, but that obviously seems to be a material impact for you going forward. What you just said, Todd, you said in 2018 that would be blended, would be 31%, 32%, but then 2019 would be more like 26%, 28%. It seems like if it's blended up front in the first half of 2018, then maybe the back half of 2018 is a little bit better than what you're looking for in all of 2019. Can you provide any color around the process you've done so far to get to those numbers, and it sounds like the level of confidence is pretty high as to what those numbers would be?
Yeah. You're correct. What you saw in the P&L in the first quarter was a tax rate close to 39%. You're correct. To get to the 31%, 32% blended for the full year, we will see that rate go down as the year goes on. For Q2, for example, we have one month, December, in our fiscal Q2, so we'll get a third under the old tax rate, two-thirds under the new tax rate. As we get into the second half of the year, we anticipate the full benefit of that tax rate to come through.
The other piece out there, Rob, is as we finalize our Q2 financials, we will be taking a deep dive into our deferred tax assets and liabilities, the TRA. Those will likely get revalued under the new corporate tax laws as well, and you'll see some one-timers come through our P&L in Q2.
Okay, just last question. Just in terms of M&A acquisition pipeline and the thought process going forward now that tax reform has occurred. Is there a different expectation internally, potentially, as to the number of assets you think could come to market from potentially some larger-cap companies? Or, do you believe valuations might shift a bit? Or just any conversation you can and color you can provide about maybe how you and others internally are thinking about the M&A landscape more broadly within U.S. Food, given what's happened on the tax side now.
Rob, this is Joe. First of all, as you've seen in the deals that have been announced in the last few months, seemingly the activity has picked up. Some certainty around tax now, I think will, if there had been larger-cap looking to realign their portfolios, certainly tax was one of the issues that was uncertain for them. I would think for those who are thinking that way, certainly that provides more certainty to them about what their options are. I can't imagine that the M&A activity that we've seen most recently is going to slow down.
Okay, great. Thanks, guys. Good job.
Thank you.
Have a good day.
Thank you. Ladies and gentlemen, as a reminder, if you'd like to join the question queue, please press star one at this time. Our next question comes from the line of Jason English with Goldman Sachs. Please proceed with your question.
Hey, good morning, folks, and Happy New Year.
Thank you, Jason.
Happy New Year to you, Jason.
I wanted to understand the consumption uptake a little bit better. You pointed to the retail brick-and-mortar. I think the IRI data is showing 5.5 with 67% growth online at 3% of sales. That should add around two points, suggesting that real all channel consumption is tracking in the 7.5% range. Is that consistent with what you're seeing in the market overall, or are there offsets elsewhere that we're not seeing in the data?
No, I think you're looking at it correctly. Obviously, we also have an international business that's kind of declining slightly, so there's a little bit of an offset there. The way our business works, in the first two quarters, we actually build inventory as we get ready for New Year's resolution, things of that nature, the promotional activity. What you're seeing is a little less build of inventory in the first quarter. I think the way you're thinking about it is correct. Obviously, the e-commerce numbers were really strong as well, and we're pleased about that.
Yeah, I can build on that. I think there was a lag. The timing of the trade inventory build that happens around the seasonal merchandising season was a little bit delayed relative to prior years. We would expect in the second quarter that to kind of balance itself out over time.
Have you seen that flow through so far into your second quarter?
A little bit, yes. You have to be careful on week-to-week kind of thing.
Sure
you want to look at it on a total quarter basis. There's a lot of as you can imagine, as POS grows in January and February, the amount of inventory retailers have to have just to keep the same weeks of inventory has to be pretty considerable. When those shipments happen by customer can vary week to week. We would expect that to kind of right itself as we go through the second quarter.
Great. Got it. Exciting news on the marketing plan, the Rob Lowe endorsement here. Can you give us any updates on a couple of the other growth enablers, particularly your development work against the club business and the plans with the SimplyProtein launch in the U.S., restage launch in the U.S.?
On Club, we continue to have a really good business with Sam's and BJ's, and we continue to knock on the door at Costco. That's going to take some time. We've seen some progress there, but still slow. Interesting, I think we may have shared with you, our "Eat Right, Not Less" book is actually in every Costco club in the U.S., but no products yet. Your second question was around-
SimplyProtein. We continue to complete the validation work for SimplyProtein from a consumer products pricing, packaging standpoint, as well as moving the products into our supply chain. That work continues. We're pleased with the progress. As soon as we're ready, we feel like we're ready to go, we'll go and launch in the U.S. We'll let you guys know when that is.
Perfect. Last question from me, then I'll pass it on. I'm curious in your thoughts on sort of the second derivative implications of the lower tax rate. What are you expecting on the competitive landscape, retail pressure? In other words, what I'm trying to get to is, how much of the benefit do you think you're likely to retain versus how much you think is going to have to be reinvested to remain competitive?
It's obviously a great question. We've just started to think through some of those outcomes and reading a lot of analyses out there are guessing of whether people will reinvest some of that money back or not. We're going to have to be nimble on it. It's something Joe and I were actually just talking about yesterday, as a matter of fact. No plans right now to change the algorithm, but we obviously need to be competitive, and we'll adjust if necessary.
Yeah. It's interesting. I think that we like the level. We feel like the level of marketing support that we have in our business is appropriate. We're always evaluating the effect of marketing in the marketplace, right? I kind of view the opportunity as if we have things to invest in that give us a good return, regardless of kind of what the external forces are, we would always evaluate those and consider those as we go forward. Right now, we feel like the level of marketing support in our business is appropriate. I don't anticipate a major change relative to the new tax law.
Thanks, guys. Very helpful. I'll pass it on.
Yep.
Thank you. Mr. Scalzo, at this time, there are no further questions. I'll turn the floor back to you for any final comments.
Thank you very much, operator. Thank you for joining our call. We appreciate your interest in The Simply Good Foods Company. We hope you have a good day. Thank you.
Thank you. This concludes today's teleconference. You may disconnect your lines at this time. Thank you for your participation.