Q3 2021 Simply Good Foods Co Earnings Call
Greetings and welcome to the simply good Foods company fiscal third quarter 'twenty 'twenty 1 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 this conference over to your host Mr. Mark Bulgarian Vice President of Investor Relations. Thank you Sir you may begin.
Thank you operator, good morning, I am pleased to welcome you to the simply good Foods company earnings call for the third quarter ended May 29, 2021, Joe Scalzo, President and Chief Executive Officer, and Todd Comfort Chief Financial Officer will provide you with an overview of results, which will then be followed by a Q&A session.
The company issued its earnings release. This morning at approximately 7 a M. Eastern a copy of the release and accompanying presentation are available under the investors section of the company's website at www Dot the simply good foods company Dot Com. This call is being webcast and the archive of today's remarks will also be available.
During the course of today's call management will make forward looking statements are the 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 day.
Detailed listing of such risks and uncertainties can be found in today's press release, the on the company's SEC filings.
Note that on today's call, we will refer to certain non-GAAP financial measures that we believe will provide useful information for investors due to the company's asset light strong cash flow of business model, we evaluate our performance on an adjusted basis as it relates to EBITDA and diluted EPS. Additionally, adjusted results exclude the mark to market effect.
Of the treatment of private warrants per the FCC's. The April 12, 2021 statement related to accounting and reporting considerations for warrants by the special purpose acquisition companies. We have included a detailed reconciliation from GAAP to adjusted items in today's press release, we believe these adjusted measures of a key indicator of the underlying performance of the business.
The the presentation of this information is not intended to be considered in isolation or the substitute for the financial information presented in accordance with GAAP. Please refer to today's press release for a reconciliation of the non-GAAP financial measures for the most comparable measure prepared in accordance with GAAP.
With that out of the way I'll now turn it over to Joe Scalzo, President and Chief Executive Officer. Thank you Mark Good morning, and thank you for joining US today I'll recap simply good foods third quarter results and provide you with some details on the performance of our brands then I'll turn the call over to Todd who will discuss financial results in a bit more.
Detail and we'll wrap up with the discussion of our revised outlook before opening it up to your questions.
We had a strong third quarter with net sales up 32% as consumer mobile with the improved faster than our expectations.
In addition to mobility improvements shopper traffic within brick and mortar retailers improved, especially in the large mass channel an important class of trade for our business in our category.
And increasing on the go usage occasions resulted in nutrition bar consumption greater than our estimates.
Adjusted EBITDA in the third quarter increased 55, 6% due to the strong sales growth G&A cost controls and quest acquisition synergies.
This more than offset higher marketing investments and incentive compensation.
And improving bar of performance as well as favorable consumer mix in brick and mortar channel resulted in solid gross margin expansion.
Total simply good foods Q3, retail takeaway increased 29, 1% in the U S measured channels of the IRI Youll O N C stores.
It outpaced the category.
Our Atkins and quest brand performance was solid across all forms, particularly bars due to increasing consumer mobility.
Throughout the pandemic and knowledge of the recovery, we've executed well and remain committed to do the right things over the long term for our business.
In June we notified customers of of price increase effective in September as we will begin to experience higher raw material and distribution cost in this fourth quarter.
As we look to fiscal 'twenty 2022, we believe pricing as well as productivity will enable us to maintain gross margins and continued investing in initiatives to drive growth.
In the first half of fiscal 'twenty 'twenty, 1 of the nutritional snacking category declined low single digits due to COVID-19, driven movement restrictions.
In the third quarter, the nutritional snacking category increased about 26% as the category lapped weaker year ago performance.
Importantly, simply good foods gains market share across the all time frames at the at each of our brands in the resect respective sub segments of weight management and active nutrition.
We were also pleased with the performance in the mass channel, which rebounded during the quarter driven by improved shopper traffic.
And E Commerce growth continues to be solid and was in line with total measured channel performance.
The active nutrition segment of the category, which includes quest increased over 30% in the quarter.
That is done as it has done all year quest outperformed the segment.
Note that the IRI Youll know in C store universe represents about 70% of quest total retail sales.
The weight management segment, which includes Atkins increased low teens in the third quarter on a percentage basis versus prior year.
Has been the case of all year Atkins continued to outpace the weight management segment.
Yeah.
Atkins Q3 of U S retail takeaway in measured channels increased 15, 6%.
Increasing mobility, improving shopper trips, particularly in the important large mass channel and continued buyer growth resulted in solid retail takeaway across the all forms.
In Q3 bars, and shakes increased about 5% and 20%, respectively and improved sequentially versus the first half of the year.
Atkins convection momentum continued and increased about 20%, 27% in the quarter.
We're pleased with the performance of the confection products as well as the innovation, we've launched over the last year.
Improving shopper traffic of the mass channel was strong and combined with the increased levels of distribution and display resulted in Q3 Pos growth of about 25% in this channel.
We continue to be pleased by buyer flows on Atkins and good growing consumer interest the weight management as the U S emerges from COVID-19 mobility restrictions.
The strong growth of buyers is fueled consumption improvements for the brand during the fiscal year.
Atkins buy rate remains the single biggest growth opportunity for the brand as it is currently below historic levels. You may recall Atkins bar consumption is highly correlated to return to work.
Based on that we believe is consumer mobility continues to improve.
The rate of Atkins bars will follow.
We anticipate continued improvement in consumer mobility, although as we entered Q for the Pos growth rate is affected by more difficult year ago comparisons as such we expect overall Q4 retail sales to be similar to Q3.
We expect continued improvement in the mass channel and I'm pleased with the Atkins ecommerce business, although the growth rate is expected to moderate given strong year ago comparisons.
Lastly in Q4, we have solid marketing improved distribution and new innovation that should enable us to continue to build on our year to date buyer trends.
Now, let me turn to quest for Q3 retail takeaway increased 56, 2% in the measured IRI Mueller and C store universe.
Growth was driven by improving shopping traffic of the mass channel and increasing consumer mobility and greater on the go consumption as evidenced by the strong rebound of quest bars.
<unk> Q3 bars retail takeaway increased 38% more than doubled the segment growth rate.
Recall quest bars are about 60% of total quest retail sales.
The snack year portion of quest products continued to do well and increased nearly 150% in Q3, driven by chips and the launch of new confection items earlier in the year.
In addition to increased foot traffic of the mass channel. We were pleased with the performance in C stores.
Combined the mass and C store channels represent about 30% of quest retail sales and in Q3 growth of these 2 channels with over 60%.
Quest ecommerce business about 20% of total.
Quest U S retail sales continues to do well with retail takeaway up 43%.
Of our business at Amazon remains robust and growth was strong against all major forums.
The specialty channel, while small as the total percentage of quest sales returned to growth in the quarter.
In Q4, we anticipate trends by 4 of them will continue and will result in total quest retail dollar sales similar to the third quarter.
We expect that the demand for quest chips and convention items will remain strong and that supply will be pressured as.
As such we have taken actions to ensure there are no disruptions at retail and we will be dialing back trade promotions and programming on these items.
And we'll continue to invest in marketing and innovation that drives greater levels of consumption and new consumers to our brands.
In summary, we're pleased with the third quarter results that were better than our expectations due to improving mobility and increasing shopper traffic of the mass channel.
In Q4, we anticipate retail dollar sales to be similar to the Q3.
Raw material and distribution of inflation is expected to be of headwind in Q4 offset.
By continued improve product and channel mix.
Price increase we announced a few weeks ago as well as productivity should offset fiscal 2022 supply chain inflation.
We believe pricing as well as productivity will enable us to maintain gross margins and continue to invest in initiatives that drive growth.
We're executing well against our plan and delivering on our financial objectives with flexibility to invest in the business.
As a path to increasing shareholder value.
Now I'll turn the call over to Todd to provide you with some greater financial details.
Thank you Joe and good morning, everyone I will begin with the review of our net sales total simply good foods third quarter net sales increased 32% to $284 million.
The core North American business contributed 37% to total company growth driven by strong Atkins and quest volume across major forms and channels.
Net price realization in Q3 was negligible.
Q3 shipments benefited by about 2% from delays related to the winter storm disruption at the end of last quarter.
Our core international business was of 2.3% benefits of sales growth driven by strong gains in Australia for both Atkins and quest.
And as simply protein brand divestiture, and the European business exit where combined 0.9% headwind.
Gross profit was $121 million, an increase of 36, 5% versus last year.
Gross margin of 42, 6% increased 140 basis points versus the year ago period, driven by positive <unk>.
The form and favorable customer mix in the brick and mortar channel.
In Q4, we anticipate supply chain cost to be higher specifically raw materials inflation will be of headwind as well as freight and warehouse expenses as we begin transitioning to our new distribution center.
As Joe mentioned, given the inflationary pressure, we're seeing in both Q4 and fiscal 2022, we recently announced the price increase.
The pricing action is effective in September and we expect it will enable us to maintain gross margin and continue to invest in initiatives that drive growth.
Adjusted EBITDA, which excludes quest integration costs restructuring expenses and stock based compensation. Among some other things increased 55, 6% to $67.5 million, primarily due to greater than anticipated sales cost control measures and quest acquisition synergies.
Yes.
SG&A expenses were greater than our estimates, specifically selling and marketing expense increased $6.3 million driven by incremental brand building investments on both Atkins and quest and.
And G&A expenses increased $1.5 million as higher incentive compensation was partially offset by cost control measures and quest acquisition synergies.
For the full year of the company continues to anticipate that marketing expense related to its core businesses will increase at least in line with organic sales growth.
Moving to other items in the P&L interest expense declined <unk> 3 million to $8 million due to the pay down of the term of alone.
Although the the additional debt pay down in the quarter resulted in greater noncash amortization expense of deferred financing fees.
Our statutory tax rate in the third quarter was 27.0% versus 26, 9% last year.
Net income in Q3 was $5.9 million versus $48.1 million in the year ago period, the decline, reflecting non cash charge of $35.8 million related to the remeasurement of our private warrant liabilities.
Year to date results are as follows net sales increased 25, 5% to $745.8 million driven by the acceleration of the business in the third quarter and the full 39 week impact of the quest acquisition.
Gross profit was $305.3 million, an increase of 29, 2%.
Gross profit in the prior year was affected by of noncash $7.5 million inventory purchase accounting step up adjustment related to the quest acquisition.
Recall, the noncash inventory purchase accounting step up impacted year to date 2020 gross margin by 130 basis points.
Excluding this amount of gross profit was $243.6 million last year and gross margin was 41%.
Year to date fiscal 'twenty, 1.2021 gross margin of 49% is essentially in line with a year ago period.
As I stated earlier, we expect supply chain inflation, beginning in Q4 and anticipate gross margin for the quarter to be about the same as prior year.
Adjusted EBITDA increased 35, 9% to $158.8 million, primarily due to higher Q3 gross profit and the inclusion of 39 weeks of quest the results in the current year.
Excluding quest integration costs restructuring expenses and stock based compensation SG&A SG&A expenses increased $19.8 million specifically.
Specifically selling and marketing expenses increased 18, 4% to $82.1 million. The increase was driven by higher brand building initiatives and the full year impact of quest.
G&A expenses increased about 12% of our $7 million due to higher incentive compensation and the inclusion of quest.
Moving to other items in the P&L the net impact of interest income and interest expense was an increase of $2 million due to a full 9 months of acquisition related debt.
Our year to date statutory income tax rate was about 27%.
Net income was $22.6 million versus $104.9 million in the year ago period, the decline of $82.7 million is primarily due to the noncash charge related to the remeasurement of the private warrant liabilities.
Good.
Turning to EPS.
Third quarter reported EPS was <unk> <unk> per share diluted compared with EPS of <unk> 17.
Per share diluted for the comparable period of 2020.
In fiscal Q3, 2021, we recorded a non operating non cash charge of $35.8 million due to the due to the change in the fair value of the outstanding private warrants.
Depreciation and amortization expense and stock based compensation was $6.7 million about the same as the year ago period.
Costs associated with quest integration and restructuring the <unk> $4 million $5 million lower versus last year.
And we had of legal settlement gain of $5 billion.
Adjusted diluted EPS, which excludes the items just mentioned was 43, an increase of 17 versus the year ago period note that we calculated adjusted diluted EPS as adjusted EBITDA less interest income interest expense and income taxes.
Year to date reported EPS was <unk> 23, while year to date adjusted diluted EPS was <unk> 97.
Versus 71 in the year ago period.
Note that the calculation of adjusted diluted EPS in Q3 and year to day period assumes fully diluted shares outstanding of $101.9 million and $101.1 million shares respectively versus $97.6 million and $97.2 million under GAAP.
The difference versus GAAP of 2 to the exclusion of the private warrants in fully diluted shares outstanding under GAAP due to the private warrants being classified as a liability on our balance sheet.
Please refer to today's press release for the explanation and reconciliation of non-GAAP financial measures.
Moving to the balance sheet and cash flow in May 2021 of the company paid down $50 million of its term loan and at the end of the third quarter. The outstanding balance was $506.5 million.
In the third quarter of the company generated about $52 million of cash, resulting in year to date cash flow from operations of $91.8 million.
As of the end of Q3 of the company had cash of $92 million and of trailing 12 month net debt to adjusted EBITDA ratio was 2.1 times.
Capital expenditures for the year to day period were $3.2 million, we still expect $5 million to $6 million of Capex in fiscal 'twenty 'twenty, 1 driven primarily by equipment for our new warehouse.
We anticipate interest expense to be about $31 million higher than our previous forecast of about $30 million. The increase is the result of greater noncash amortization expense of deferred financing fees due to incremental paydown of the term loan.
I would like to now turn the call back to Joe for closing remarks.
Thanks Todd.
The consumer mobility increased in the third quarter our business accelerated.
As we emerge from the challenges of COVID-19, our business is stronger and.
The organization is more capable.
As such we remain confident in both our short and long term growth prospects.
Over the remainder of the year, assuming there are no significant COVID-19 related disruptions in the United States.
The company anticipates full year fiscal 2021 net sales of.
Of about $995 million to $1.15 billion, and adjusted EBITDA of $200 million to $205 million.
As previously stated the divestiture of simply protein and the European business exit is about a combined 1.5 points of headwind to our full year fiscal 2021 net sales growth.
The company's previous outlook for full year fiscal 2021, net sales and adjusted EBITDA was $930 to $940 million and $180 million to $185 million respectively.
Apart from the inventory purchase accounting step up in the year ago period, we expect full year fiscal 2021 gross margins to be about the same as fiscal 2020.
You may recall, the company's previous outlook indicated full year gross margins will be slightly lower compared to the previous fiscal year.
As previously discussed favorable product and channel mix in Q3 exceeded our expectations and resulted in solid gross margin expansion in the quarter.
In Q4, we will begin to see higher raw material and distribution costs and anticipate gross margins will be down versus Q3 and about the same as year ago period as inflation is offset by continued improved product mix.
And due to solid cost control and acquisition synergies. The company continues to anticipate adjusted EBITDA margin expansion.
Additionally, the company anticipates 2021, adjusted diluted EPS to be in the range of $1.20 to $1.25 versus <unk> 91.
In the prior year.
We have an advantage asset light variable business model. The enables strong cash flow from operations that provides us with the financial flexibility to invest in organic growth opportunities and participate in M&A.
We continue to execute against our strategies to position us to deliver on our financial objectives with the ability to invest in the business is the path to increasing shareholder value over the long term.
We appreciate everyone's interest in our company and where we are now available to take your questions.
At this time, we'll be conducting a question and answer session. If you would like to ask the question. Please press star 1 on your telephone keypad. The confirmation tone will indicate your line is in the question queue. You May Press Star 2 Chin little good question from the queue for participants using speaker equipment. It may be necessary for you to.
I'll take a free has said before pressing the star key 1 moment, while we poll for questions I'm.
The first question comes from the line of Jason English with Goldman Sachs. You May proceed with your question.
Hey, good morning folks thanks for Slotting me in and congrats on a strong quarter.
Thanks, Jamie.
You're welcome I want to make sure the I understood. Your comments on the sort of retail sales expectations properly I think you said quarter on quarter flat as we go into the fourth quarter.
Which of my quick back of the envelope math suggests that you may be expecting year on year growth to slow to something into the mid to high teens.
Do I have it roughly right.
Yes, you did.
Okay.
That's that's still pretty darn robust relative to the comps because of I think it actually implies the off of the 2019 level Youre actually going to expect a degree of acceleration of what we saw last quarter.
But as of as I look at the model and the implied guidance for for Q, you're suggesting of a bit of of D cell on 2 year stack I was hoping you could help me understand that maybe unpack that was there a pull forward into this quarter clearly there was a bit of of delta between retail sales or anything else from the comparison from last year that we should make note of.
Yes, so kind of say Q3 as we as we stated Jason was helped by the.
The pull in from Q2 of the winter storms that inflated the Q3 numbers a little bit.
The European shutdown is now fully.
And place so thats kind of affect Q4, more along with the simply protein divestiture.
That's been tracking about of 1 point headwind, that's now going to be a 3 point headwind in the <unk>.
Quarter, and then from a shipment perspective, we just typically pull inventory out.
Of the system.
Late in the year, so we're anticipating that's going to happen again.
Got it I didn't appreciate the the.
The elevated simply protein comp in the in the fourth quarter that's helpful.
The switching gears real quick Joe.
Alluded to this I think with the consumer and Andy of the Reengagement with weight management, we hear from weight watchers and expectation of an anticipation of an off cycle.
Resolution season, if you will that they are anticipating the happen throughout the summer and particularly late fall are you beginning to see that take shape. In do you do you expect to see do you also expect to see something like that as we enter the fall and maybe back to school back to work period.
First I would say, we're really pleased with the growth of the Atkins business the thing Thats.
Frankly surprised us throughout the fiscal year is that the disc.
Bye.
Despite movement restrictions of people not being out and about our buyer of performance has been outstanding. So we've seen strong buyer growth throughout the fiscal year, even in the midst of the COVID-19.
So as we move through the summer and into the fall I would tend to agree with weight watchers theres going to be a catalyst as people get out in the about more fully.
And they were good.
We will drive renewed interest in weight management.
We're kind of gearing up Todd mentioned that we've made in grant of marketing investments.
We will continue to do that through the fourth quarter, and we're kind of gearing up for kids back to school folks back to work as kind of of that catalytic event. So you should expect us to be ready as we kind of move through all of it.
The September October expecting that in the best and investing appropriately for it.
Yeah makes sense. Thanks, a lot guys I'll pass it on.
Our next question comes from the line of Chris Growe with Stifel. You May proceed with your question.
Hi, good morning, all of that.
My congratulations for a nice quarter, there and the outlook.
Just 2 questions. The first 1 as you see this consumer coming back to the Atkins brand in particular in the mass channel is it just the number of the raw number of incremental users that are using the product that are coming back or have you seen more heavy users.
Engaging with the proud of I can say that way I'm, just curious what youre seeing in particular in Atkins with the as sort of of the consumer comes back for the mass channel.
Too early to call on a quarterly basis, we continue to see strong buyer participation. So both from new buyers of retained buyers are strong on the brand so the.
And in the case of mass.
Foot traffic really improve now they are up against softer comps, but youre starting to see mass pick the market share of backup in the category of both categories in fact, and given our development in particular on Atkins and mass that has helped our business.
So so far it's been a buyer.
Number of buyer dynamics by rate continues to be kind of below historic levels, just because of the number of occasions aren't what they normally are it'll be interesting frankly to see how the math dynamic plays out in the fourth quarter and first quarter and how that might affect by rate going forward.
Okay.
And then I just had a question also on bars and if I heard right. I think you said, maybe the bar category was up 15% I think you said Atkins was up 5 and sounds like quest gained share in bars, just want to make sure I was correct on those numbers number 1 and number 2 kind of what's behind those like what's driving quest growth to gain share and Atkins was the strong new.
Product innovation, what's causing the lag that category for if that number is correct yes.
The Atkins as Atkins is.
More dependent upon being back at work and being in transit than even we expected.
And if you look at quest quest out of few dynamics that are.
That are helping it 1 it was down more of this time last year. So it's comparable is a little bit easier the stores rebound of which is an important component to its business and we're even seeing specialty start to come back lastly, our sales team has done a really nice job of building distribution and some of the drug mass on bars.
So that kind of that triple threats really helped accelerate quest as we've kind of moved through the third quarter.
Okay. That's great. Thanks, so much for your time.
Yes.
Our next question comes from the line of Faiza <unk> with Deutsche Bank. You May proceed with your question.
Yes, hi, good morning, Thank you and congratulations from me also.
Sorry, if I missed this in the prepared remarks, but I was hoping you could give us a breakdown of Atkins quest sales in the quarter.
Yes so.
You'll see it and Youll see it in the K I mean, I'm sorry in the Q.
From a from a pure takeaway perspective.
And so it was up about 15% quest up about 56% you have actually the shipments smart candy for us.
Haven't pardon me right now.
Yes.
Okay.
Pardon me Okay. Okay. That's the that's fine.
I guess my second question was just you know as we look ahead to 'twenty 'twenty 2 acknowledging that the significant uncertainty I'm curious sort of how you're thinking about the for research.
You know you did mention that you know there is this anticipation that consumers will get back into the weight management category. So I guess I'm wondering are retailers thinking about it. Similarly do you expect.
The category to gain incremental shelf space and you know maybe how are retailers thinking about you know big brands versus smaller new brand sort of in this new normal.
Let me try to unpack that there was the last thing for a lot of questions in there first I would say that.
We like our we like our product pipeline, we are of very talented R&D organization terrific marketers the pipeline that we had the spring and in the fall we think is pretty compelling so.
I suspect we don't like to talk forward too much I suspect, we'll do really well on the resets.
In general.
Covid has taught retailers that big brands are important good. If you just think about the dynamic that was going on in Covid you were fighting for shopper traffic.
The brands matter, so we're seeing that in.
And strategy with retailers they are re engaging with bigger brands they understand they're important to the island to the foot traffic and obviously.
We've got 2 of the bigger brands in the category. So we have we're in a nice position with retailers right now just from an important standpoint I would also add.
We really focus on consumers and we really focus on consumer.
<unk> penetration of our brands, that's the language Thats really interesting to retailers because they day, then think about that as shopper conversion from the rest of the store so.
I think we're in a very good spot as we move through fiscal 'twenty 2.
Just from a brand.
Our category I'll standpoint.
And your question around do I expect weight management to pick up space. Those things are more stable than you would think so the allocation between the adult nutrition in active nutrition and weight management. There is not of lot of variability kind of reset to reset. So you tend to be in a fixed set for them for them.
The more times than not then they're thinking about the entire IL line moving between.
Moving between the 3 sub segments that that's more rare.
But I think overall I think we're in a really good position as we move through the summer and into the fall for the resets.
Yes.
<unk> was the low.
Low twenties percentage in the quarter.
Quest and the <unk>.
The 40% so a strong performance from both brands.
Great. Thank you so much.
Our next question comes from the line of Wendy Nicholson with Citi. You May proceed with your question.
Thanks, Good morning.
First question in terms of pricing just order of magnitude is there anything you can tell us in terms of how much pricing you'll take is it going to be on both Atkins and quest and is there any risk given just how fragmented, particularly the borrowers category is do you think there's any risk of sort.
The elasticity when those prices go into the marketplace, but for us.
First I would say, we we calculate as we think about pricing and inflation, we calculate elasticity into our model. So.
Be confident that we understand that dynamic pretty well pricing.
We are executing of mid to upper single digit price increase it is on those brands, it's different as a percentage because the inflation hits the brands a little bit differently and.
So from a from the execution standpoint, we're in the early stages with conversations with customers. Obviously this is not a conversation that's in isolation right. There are.
Factors across the board, taking pricing as we speak so with staring at inflation significant changes inflation as we move into fiscal 'twenty..2 we're pretty confident that we'll work through this with customers and execute against the price increase as we move into September <unk>.
Terrific.
You sort of more broadly on the Atkins.
You sort of momentum.
A sense sort of for the demographics of the new customers that you're bringing into the brand.
Younger I know you've said, it's it's an issue of mobility, but just in terms of demographics, specifically on assets I'm wondering where are you where you are taking those customers from.
Yes over the last year, it's been our target so.
I'll talk the vast demographic more psychographic right. So the change that we made in <unk> for its been for years now.
Moving from.
Fast weight loss on our program consumers, which were the early if I remember right about $8 million of those in the United States to low carb lifestyle weight management concerned consumers there were about $33 million of those if you just look.
At the age and the 33, they tended to get younger tended to get a little bit more apt is because you're moving away from fast weight loss, but we are moving directionally towards more of lifestyle oriented directionally more healthier people directionally with people that.
It's less about I got to lose weight right now more about I want to live right and I'm looking for solutions to do that those tend to be a little bit younger a little bit more active than the original target I haven't seen a breakout this last year on kind of how our improvements and consumers look.
<unk>, but we can take a look at that and.
And get back to you separately.
Perfect. That's great. Thank you so much very helpful.
Have a good day.
Our next question comes from the line of Rob Dickerson with Jefferies. You May proceed with your question.
Great. Thanks, so much.
So Joe just kind of a follow up I guess the.
The comment you just in terms of the demographic makeup of that consumer right as you kind of chip away at the original strategy right.
The simply.
Atkins, obviously very large brand working well with retailers mass tropics coming up Atkins.
I can sense very well for large and mass, but as you think about the shelf resets, maybe it's not the small maybe its next fall.
Or are there opportunities you think such that you might be able to replace some of the shelf you have with Atkins with some of the products from quest, if quest potentially seems to maybe be up.
A broader based brand.
Acceptance by different types of demographics does that makes sense.
Right.
It does makes sense of they tend to be.
They tend not to be in the same section of the Isle in some cases not even in the same aisle. So no we won't be swapping for us it's not a decision of what space, we allocate to Atkins versus quest. It's how do we use how do we gain more space in each of the segments and how do we allocate.
As I think about.
Skins and growth.
I think about.
How do we develop our product portfolio beyond bars and shakes, what we've learned during COVID-19 is those consumption occasions, especially on bars are highly dependent on on the go and at work.
And we've also learned from our quest business that the snack year of portions of that portfolio and confections on Atkins, our all the time consumption products not dependent upon that so you should expect us and Thats. The way were thinking the develop our other forms to even the big.
A portion of our portfolio it Insulates us to some degree on the kind of back to work dynamic and not surprising confections on Atkins growing double digits, our confection business in the earliest stages of on the quest growing strong our chip business just crazy strong so expect us.
The continue to do that it also leverages, what we think is our competitive advantage, which is the best R&D organization and the in the category.
Alright Super makes sense.
Then.
Yes.
Coming back to Jason's original question because all of the top line is going to Q4 and then.
I respect you probably don't want to give guide for fiscal 'twenty..2 there were some there's some commentary on price of oil and gross margin so kind of.
I'll take a shot on the sales side.
If I look at the data set over the past 4 months, just even week by week right total dollar sales have been pretty consistent and very strong very impressive.
It's just like you said on the Atkins piece more correlated to work for mobility, we're still in the summer. Some people are going back to work more but not everybody has not yet decided what's critical mass, we'll probably of that improves into the fall while at the same time.
As Jason pointed to you like there could be the kind of an off cycle of resolution period, So kind of if I'm just thinking about the retail data sets.
The.
It seems as if there is still potential upside obviously 2 of the guide because it would seem like the retail datasets wouldn't necessarily be decelerating that much in the U S for ignoring the Europe piece and then the storm was a couple of percent, but not that much. So I'm just trying to kind of gauge like.
All of the commentary just to be clear it out Q3, very strong maybe Q4, decelerates a little bit, but if we're all thinking about the first half of next year already it would seem as if there could be increased momentum on an absolute dollar basis as we're coming out of Q4, because that makes sense.
Yes, it doesn't look obviously, there's a couple of variables here.
Q4, as we stated sequentially.
The volume of retail shipping.
Pretty much the same where obviously the lapping.
The stronger numbers, a year ago, particularly on the quest. So the comps are getting a little bit harder from a shipment perspective as I mentioned, we do tend to pull inventory out.
Specially in Q4, so that's going to be impact for sales.
We'll see how it plays out and have the ability.
If it continues to accelerate or not it's still a little bit of an open question, we're not anticipating that it does.
As we get as we get into next year, obviously, we're still working through the price increase so that's the big variable walks for once we get back to you at the next earnings call with with much more detail on next year's plan, but.
As you said first half just big picture first half should obviously be stronger than the second half because we are comping still a weak first half COVID-19 impact in this fiscal year. So the first half should be relatively strong.
Gross margins as we said our goal is to maintain the gross margin. Despite the inflation out there and looked at the end of the day, we love the momentum of this business, we feel great about it but we will get back to you in the next quarter of the more specifics on next year, Rob I'd I'd also say that.
We don't see Big I don't think we're going to see big shifts in consumer.
Mobility.
Q4 to Q3, I think it feels more just if you look at the U S. It feels more of the same the big shift was in Q3 I think we're.
We just changed very very quickly it almost like a switch flipped I think it's going to stay more of the same I think when kids go back to school.
Think that'll be the if theres, a catalytic event and movement, it's going to be 1 they put kids on the bus and they go back to school and.
Just looking at how businesses are thinking about this it feels more likely post labor day back to office. Some of it's happening now, but I think youre going to see a big shift after labor day and in fact.
I'm pretty confident debt.
That's when we're going to see kind of an inflection point and people being out and about.
Okay fair enough and the just quickly Joe on the M&A side.
Todd So the numbers you mentioned you paid down the term loan leverage staying a little bit better or good free cash flow the.
Great Q3.
So just in terms of kind of how youre thinking about the the.
The M&A pipeline I'm not sure of what Youre seeing out there kind of any.
And he can't answer side, just trying to check the box of they do usually on the on the acquisition front.
Yes.
We're active there is of pipe theres pretty good pipeline, we're looking at things as we speak as I said before we love. This category wed love to continue to get more scale in the category and we're looking at debt. We'll look at the assets that are in the space. Our screening process is pretty simple, we're looking for strong consumer brands.
The unique positioning.
And some pretty good understanding of who the user base is so we know how to recruit I think are competitive or at our competitive advantages are we can build distribution in food drug mass.
The format pretty quickly we understand how to build household penetration so understanding the consumer dynamic who that consumer is what the brand positioning as we feel like we're pretty good at debt and we're pretty good at innovation. So we're looking where we can use those capabilities to accelerate growth of assets that are out there and if there is an asset.
Out there in our space of the decent size you can bank on the we're looking at it.
Alright Super Thank you.
Our next question comes from the line of Eric Larson with Seaport Research Partners. You May proceed with your question.
Yes, Thank you and congratulations on the quarter everyone. So my first question.
Of all drawn a little bit more clarity on your growth profit margins I'm assuming.
You're talking percentage gross margins.
But I would assume that your pricing more tour to protect your dollar gross profit margins and maybe a little bit more than that but then would that then in order to maintain percentage gross margins year over year next year.
That would then require probably continued favorable product and channel mix am I is.
Is that the right to look at how Youre talking about your gross margins.
Yes, so first of all of the clarify it's on a percentage not dollars.
We're trying to the goal is to maintain we do have some pretty significant inflation next year.
Our objective is to price.
Effectively enough to maintain that gross margin percentage to offset the inflation.
We will see as you mentioned, we've had a nice benefit here in the second half has bars of rebounded as brick and mortar has rebounded well see I think we'll see some more of that in the first half of next year, then it will kind of level out, but we are our objective here is the price to offset the input pinpoint.
Cost inflation that we're seeing and to be clear on a percentage basis.
Okay. Thank you for that and then my follow up question is.
Is really on your indulgent brands I E things like peanut butter Cup. They were very strong I think for for <unk>.
Atkins and.
In the quarter are you seeing different buyers for those products are out of the same buyers and all your buy rates actually better in your indulgent products.
Curious as to more of the consumer demographic dynamics on the indulgent line yes.
I apologize I don't know the data by I don't know that data byproduct for them. So we tend to think brand first but.
What I would tell you is why it's doing so well is it's a different use occasion.
So if you think of a bar and shake tends to be.
The kind of afternoon to early morning, it tends to be a whole be over between deals or a meal replacement.
The snack year of portions of our portfolio.
Not that they are indeed, just a snack they're kind of indulgent.
Sometimes use can be after dinner so in the confections area the PD.
The cups that you mentioned the entire lineup and Atkins can be after dinner of kind of consumption occasions. So I think it's.
We went in and looked at the data I wouldn't guess, we would see different dynamics consumer dynamics based upon that I think you just kind of see different use occasions of different need states that consumers are purchasing those out.
Alright, thanks for the insight.
Yes.
Our next question comes from the line of Jon Andersen with William Blair. You May proceed with your question.
Good morning, Thanks for the question and congratulations on the strong quarter.
I wanted to ask you talked a little bit about the.
The success, you've had acquiring new buyers.
Specifically I think relative to Atkins.
But also the fact that the buy rate.
Continues the kind of lagged historical levels given the <unk>.
If you haven't fully returned on the go.
Pre COVID-19 out of the go use cases could you talk a little bit more about.
The rate of new buyer acquisition.
Or how far off the buy rate is today versus historical levels to give us a bit of a sense of.
The the progress and opportunity that those 2 metrics represent.
Yes, so I can give you a high level kind of how the algorithm works is you get a sense of it so in any 1 year.
The R.
The new buyer, so first year buyers on Atkins by somewhere in the area of 30 to 35 servings.
Year, 2 and beyond by 3 times debt amount.
So if you think about it we have.
Weekly multiple weekly multiple times weekly buyers and retained so retain in any 1 year of the volume in your year is mostly driven by retained buyers.
Your new buyers are a pretty good proxy for how you're going to perform in the next year, because we retain a certain portion of those people.
So as you look at then our buyers are.
Our increase this year in.
Let me step back I'm sorry the.
The <unk>.
Buy rate becomes very sensitive to total volume, especially when you apply it against retained buyers.
So at 100 servings of my buy rate is off that's a significant amount of servings against the big number of retained buyers. So this year our growth is being driven almost exclusively by the number of total buyers that we have both retained and news that's been driving our business and the buy rate has been a buffer against that.
So buy rate is down.
As a percentage basis kind of in the mid single digits.
It's a significant number right and we've been more than offsetting that with the number of buyers that frankly, the good news for Atkins because that means I've got good buyer flow going into fiscal 'twenty, 2 if I get any improvements in buy rate historic buy rate, which we would expect to do it as people go back to work in bars improves and as I get the portfolio of more developed in.
Other forms I would expect buy rate to move back towards historical levels does it get there next year hard to say, but I would think we're going to start we're going to continue to see improvement in net debt held at.
That's super helpful. I appreciate the detail 1 quick follow up.
Mentioned supply challenges for quest I think in the fourth quarter.
Is this just to kind of of transitory situation, what's the what.
And how do we think about debt impacting maybe sales in the quarter. Yeah. All right. What I would say is in the chip business as well as the peanut butter Cup business, where our sales have approached where we would have considered the best case scenario.
So supply in this channel.
Category. It takes time to kind of build out so we're in a period of transitory having to manage demand to supply until the new supply comes on board.
We are pretty talented sales organization, they really like the south stuff, but they've got experience in kind of tamping down demand managing programs.
And as well as promotions because we've had the situation before happened on Atkins. So we know what we need to do we will do it as we move into fiscal 'twenty 2 of supply chain is working hard to bring on more capacity and we'll manage that well over the next few quarters.
Okay. Thank you very much good luck.
Our last question comes from the line of Pamela Kaufman with Morgan Stanley You May proceed with your question.
Hi, good morning.
Congrats on the.
Okay.
Thank you.
So I wanted to understand how we should think about the degree of the input cost inflation across the business and to what extent you.
Your implants.
What that's like what your hedging position is currently over the next year.
I'd say, we hedge about half of our.
Portfolio some of the.
Some of the day.
Major commodity.
We buy directly some of them parts of.
The direct pass through with our co Mans I'd say about half of our products, where we have an active hedging program and it's anywhere from 3 to 9 months. Our team did an incredible job. This year buying early locking in prices before we saw the spike.
Over the last few months, so we've been protected really nicely through the first 3 quarters as we mentioned we're going to start to see some of that come through in Q4, and obviously a bigger amount.
Next year, so we're going to see mid to high single digit inflation for next year, we will continue to be opportunistic and lock in prices, where with where we see value.
This is this is why we have to take the price increase.
Similar magnitude to maintain those gross margins.
Okay. Thanks, that's helpful and I was wondering if you can give an update on quest distribution expansion and that was 1 of the rationales behind the acquisition. So I'm just curious on where you are and where you see further opportunity for class.
The significant opportunities on quest, if you think about our Atkins business food drug mass, we're probably somewhere around 40 items in distribution quest is probably half of that.
And so we're pretty experienced this is selling organization at building those out.
As part of our part of our sales team, we've inherited some pretty talented quest folks too who are pretty good at that so I would expect youre going to continue to see improvements I think the year to date number on quest is.
But mid teens approaching 20% distribution gains and we're still in early innings.
The innovation pipeline is pretty good.
Can you comment on some of the innovation that you have planned for question Atkins and visibility into gaining shelf space.
Product.
I prefer not to do the I'll talk to you about it once it's in the marketplace and performing.
Okay sounds good thank you Youre welcome.
Good.
Ladies and gentlemen, we have reached the end of today's question and answer session I would like to turn this call back over to Mr. Joe Scalzo for closing remarks.
Thanks for your questions and thanks for your participation on today's call. We hope you'll continue to remain safe and look forward to updating you on our fourth quarter results in October of a good day.
This concludes today's conference you may disconnect. Your lines at this time. Thank you for your participation for the rest of your day.
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