Greetings, and 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. 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 Q1 ended November 25, 2017. Joining me on the call this morning are Joe Salzo, President and Chief Executive Officer and Todd Kumpfer, Chief Financial Officer. The company issued its earnings press release this morning at approximately 7 am Eastern Time. A copy of the release and accompanying presentation are available under the Investors section of the company's website at www.simplygoodfoodscompany.com.
This call is being webcast live on the website and an archive of today's remarks will 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. And finally, the company has included in today's earnings release and presentation unaudited financial information for the 13 weeks ended November 25, 2017 and other unaudited pro form a financial information for the 13 weeks ended November 26, 2016. The pro form a adjustments are based on available information and upon assumptions that our management believes are reasonable in order to reflect on a pro form a basis the impact of its business combination transactions on the historical financial information of our predecessor and successor entities as applicable. The pro form a financial statements provide results as if the business combination transactions have been completed as of the beginning of fiscal 2017. All financial measures related to fiscal 2017 discussed today will be on a pro form a basis.
With that, it is now my pleasure to turn the call over to Joe Scouso, President and Chief Executive Officer.
Thank you, Rachel. Good morning and thank you everyone for joining us. Today, I'll recap our Q1 highlights and provide an update on our growth initiatives. Then Todd will discuss a summary of our Q1 financial results. After that, we'll open the call to questions.
We started off the fiscal year well and are pleased with our Q1 financial results. For the Q1, 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 nutrition 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 percent 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. However, 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 'seventeen, resulting in strong total buyer growth during the past 2 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 Q1, we ran copy targeted at our core consumers featuring country western star Lauren Elena and the positive effects Atkins has had on her. We also ran 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 in 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. A website which in 2017 had 11,000,000 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 3rd 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 to. To date, 7 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 4 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 7 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. A 4th area of growth focus is expanding into white space opportunities. E commerce has been showing steady growth for us. For the Q1, 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 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 2 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 25, 2017 and pro form a financial statements for the quarter ended November 26, 2016, 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 financial measures discussed today will be on a pro form a basis. 2nd, 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 Q1 results are as follows: net sales were up 6.8 percent to $106,600,000 driven by core growth of 4% and the acquisition of Simply Protein, which contributed 2.8% in the quarter. You'll recall our consumer takeaway for the quarter was up 5 0.5% ahead of our core growth rate. Gross profit increased 8.3% to $52,800,000 with gross margin up 70 basis points to 49.5 percent driven primarily by favorable product mix and lower input costs.
Net income increased 11.7 percent to $10,200,000 driven by the gross profit improvement, partially offset by 7% increase in marketing spend and a 17.5% increase in G and A due to the addition of Wellness Foods and higher public company costs as we embark on our 1st full year as a public company. Adjusted EBITDA was up 6.6% to $23,700,000 from $22,300,000 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 Q1 of 2018 were approximately $700,000 driven by investment in our new website and digital media application.
We estimate full year CapEx of approximately $1,500,000 Moving on to the balance sheet, as of November 25, 2017, the company had cash of $62,900,000 and a $200,000,000 term loan outstanding, resulting in a pro form a net debt to adjusted EBITDA ratio of 1.9 times. The company also has a $75,000,000 revolving line of credit available with no borrowings outstanding as of November 25, 2017. As a reminder, as a result of the merger with Conyers Park on July 7, all the former debt was paid off and a new $200,000,000 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 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% to 32% compared to a 39.6% effective tax rate for pro form a fiscal 2017. As a reminder, based on our August fiscal year end, we only have 2 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 and as a result, we estimated 26% to 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 4 strategic growth initiatives. We are pleased with the start to our fiscal 2018 and 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 $2,000,000 of public company expenses.
We appreciate everyone's interest in the Simply Good Foods Company. And with that, Todd and I are now available to take your questions. Operator?
Thank 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. Good morning, Rob.
How's it going? Couple hopefully more housekeeping items given Q1 and the top line seem to come in pretty decently. I guess just in terms of the marketing spend year over year, is that 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 further potentially further adds as the year goes on or is that 7% rate kind of more of a quarterly bump and then we kind of normalize back?
Yes. The 7% right now is our not only was that what we hit in the P and L in Q1, that's our current estimate of the full year increase as well.
Okay, perfect. And then just kind of more broadly, I kind of hate to dive into the tax issue or tax reform, but that's obviously seems to be a material impact for you going forward. Just what you just said, Todd, you said in 'eighteen that would be blended, it would be 31%, 32%, but then 'nineteen would be more like 26, 28. But it seems like if it's blended upfront in the first half of twenty eighteen, then maybe the back half of twenty eighteen is a little bit better than kind of what you're looking for in all of twenty nineteen. So just kind of any color you can provide around the process you've done so far to get to those numbers?
And just it sounds like the level of confidence is pretty high as to what those numbers would be. Yes.
So you're correct. So what you saw in the P and L in the Q1 was a tax rate close to 39%. So 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. So for Q2, for example, we have 1 month December in our fiscal Q2, so we'll get a third under the old tax rate, 2 thirds under the new tax rate.
And then 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, and those will likely get revalued under the new tax, corporate tax laws as well and you'll see some one timers come through our P and L in Q2.
Okay. And then just last question. Just in terms of M and A acquisition pipeline and kind of 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 kind of the M and A landscape more broadly within U.
S. Food given what's happened on the tax side now?
Yes, 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. So some certainty around tax now, I think will if there have 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 that were thinking that way, certainly that provides more certainty to them about what their options are.
So I can't imagine that the M and 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 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. I'll take a little bit better. You pointed to the retail brick and mortar. I think the IRI data is showing 5.5 percent with 60% 67% growth online at 3% of sales, that should add around 2 points, suggesting that real sort of all channel consumption is tracking in the 7%, 7.5% range. Is that consistent with what you're seeing in the correctly.
I
correctly. I mean, obviously, we also have we have an international business that's kind of declining slightly, so there's a little bit of an there. The way our business works in the 1st two quarters, we actually we build inventory as we get ready for New Year's resolution and things of that nature, the promotional activity. So, what you're seeing is a little less build of inventory in the Q1, but I think the way you're thinking about it is correct, very strong takeaway in the Q1 and obviously the e commerce numbers were really strong as well and we're pleased about that.
Yes, I can build on that. I think that we the there was a lag, the timing of the trade inventory build that happens around the seasonal kind of merchandising season was a little bit delayed relative to prior years. So we would expect in 2nd quarter that to kind of balance itself out over time.
Have you seen that flow through so far into your Q2?
A little bit, yes. It's hard to you have to be careful on week to week kind of thing. So you want to look at it on a total quarter basis. So there's a lot of them as you can imagine as POS grows in January February, the amount of inventory retailers have to have just came just to keep the same weeks of inventory has to be pretty considerable. So when those shipments happen by customer can vary week to week.
And so we would expect that to kind of right itself as we go through the Q2.
Got it. An 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 Simply Protein launch in the U. S, Restage launch in the U. S?
Yes. 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, we are less book is actually in every Costco club in the United States, but no products yet. So and your second question was around simply protein.
We continue to complete the validation work for simply protein 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 in the launch in the U.
S. And we'll let you guys know when that is.
Perfect. Last question for 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. Do you 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?
Yes, I mean, it's absolutely 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. So 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. So no plans right now to change the algorithm, but we obviously need to be competitive and we'll adjust if necessary.
Yes. 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. And we're always evaluating the effect of marketing in the marketplace, right. So 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. And I don't anticipate a major change relative to the new tax law.
Thanks, guys. Very helpful. I'll pass it on.
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.