Q4 2021 Simply Good Foods Co Earnings Call
[music].
Greetings and welcome to the simply good Foods company fiscal fourth quarter 2021 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.
Your assistance during the conference. Please press Star zero on your telephone keypad.
As a reminder, this conference is being recorded.
Now my pleasure to introduce Mark Bulgarian Vice President of Investor Relations. Thank you you may begin.
Operator, good morning, I am pleased to welcome you to simply good foods.
Company earnings call for the fourth quarter and full year ended August 28, 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 seven am eastern.
A copy of the release and the 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 an archive of today's remarks will also be available.
During the course of today's call management will make forward looking statements that are subject.
Eastern serious risks and uncertainties that may cause actual results to differ materially. The company has it takes no obligation to update these statements based on subsequent events a detailed listing of such risks and uncertainties can be found in today's press release and in the company's SEC filings.
Note that on today's call, we will refer to certain non-GAAP financial.
Checked IP that we believe will provide useful information to investors.
Due to the company's asset light strong cash flow 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 that the treatment of other companies private warrants. We have included a detailed.
The reconciliation from GAAP to adjusted items in today's press release, we believe these adjusted measures are a key indicator of the underlying performance of the business. 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.
Filiation I believe non-GAAP financial measures to the most comparable measures prepared in accordance with GAAP with that I'll now turn the call over to Joe Scalzo, President and Chief Executive Officer.
Thank you Mark good morning, and thank you for joining us.
Today, I'll recap simply good foods fourth quarter results and provide you with some details on the performance.
Core brands.
Then Todd will discuss our financial results in a bit more detail and we'll wrap it up with a discussion of our outlook before opening it up to your questions.
Despite the challenging environment throughout fiscal 2021, our business accelerated in the second half of the year.
So with both of our brands generating nice gains.
We executed well and exceeded our plan as net sales surpassed $1 billion in fiscal 2021.
Yeah.
The diversification of our business provides us with multiple ways to win in the marketplace.
We're particularly.
We're pleased with our growth in 2021 across brands key customers and products.
New product launches were successful and our innovation pipeline is strong and focused on new formats that give us act increasing access to new snacking occasions.
Looking back on.
Lieber, our entire supply chain team performed well in a challenging external environment.
We responded quickly to the changing environment to minimize the effect on our business customers and consumers.
The collaborative work of our team with suppliers manufacturers and distributors enabled us.
On the year with a retail and e-commerce customers as well as expand gross margin and an increasingly inflationary period. It grew more challenging as the year progressed.
As many of our U S food group peers have discussed the cost and service challenges during the past six.
So nine months related to such things as procurement labor and transportation will most likely continue throughout the coming year.
Importantly, the price increase we announced in June that was effective September 12 provides us with a significant offset.
Hence these costs.
60 minutes.
Our asset asset light outsourced business model has proven to be a competitive advantage in these difficult times.
Importantly, despite volatility in both demand and supply our margins have been stable and our cash flow steady and sufficient.
Ted to support future growth.
Lastly, I want to recognize our employees and leadership team, who have performed superbly well operating remotely.
They executed well against our plans amid an uncertain operating environment that enabled us to make investments in our brands and our Oregon.
<unk> station to position us to deliver sustainable sales and earnings growth as consumers and the economy continue to recover from the pandemic.
We had a solid fourth quarter with net sales up 16, 9% as.
As expected workplace Moby.
Oregon, It was similar to last quarter and growth was relatively in line with our expectations.
Improvements in consumer mobility, and shopper traffic versus last year as COVID-19 restrictions resulted in favorable product and customer mix and combined with favorable trade promotion more than offset.
<unk> light chain cost inflation.
As a result fourth quarter gross margin increased 60 basis points versus the year ago period.
Adjusted EBITDA in the fourth quarter increased 39% to $48 5 million, primarily due to the solid sales.
Suppose favorable trade promotion and G&A cost controls.
This more than offset higher marketing investments and then and incentive compensation.
Total simply good foods Q4, retail takeaway increased 18, 7%.
<unk>, great U S measured channels of IRI, new low and convenience stores.
With no meaningful change in workplace mobility retail sales were about the same as last quarter.
Throughout the pandemic, we've executed well and remain committed to doing the right things over the long term.
In business, our customers and our consumers.
In the first half of fiscal year 2021, the nutritional snacking category declined low single digits due to COVID-19, driven movement restrictions.
In the second half of the year the category rebounded and.
For our leased about 24% of shopper traffic increased versus the year ago period.
Simply good foods performance outpaced the category in the first half of the fiscal year and was relatively in line with the category in the second half.
Importantly, our brands gained share in their respective.
Incredible segments of weight management, and active nutrition across all timeframes during the year.
The accident nutrition segment of the category, which includes quest increased 35% in the second half of the fiscal 2021.
As it has done all year quest outperformed the segment.
<unk> 44, 5% over the same period.
In the second half of the year the weight management segment was up about 8%.
<unk> outperformed the segment with retail takeaway.
Up 12%.
And we're extremely pleased with our ecommerce performance in the fiscal <unk>.
It was a full year retail takeaway of 40% exceeded measured channel growth.
As expected with brick and mortar shopper traffic increasing in the second half of the year E. Commerce point of sale moderated and was similar to measured channel retail takeaway growth.
<unk> Atkins Q4 U S retail takeaway in measured channels increased eight 7%.
Growth in total buyers and increasing shopper trips, particularly in the mass channel along with improved consumer mobility resulted in growth across all forms and key retail channels.
Border bars, and shakes increased about 3% and 11% respectively.
[noise] Confections Q4 retail takeaway increased eight 9% benefiting from at home snacking usage occasions, and recent innovation.
And we're pleased with Atkins E Commerce performance.
In the Amazon Atkins second largest customer.
Q4, retail takeaway increased low teens on a percentage basis versus the year ago period.
Total Atkins E Commerce point of sale in the quarter.
With similar to measured channels.
Atkins buyer growth remained strong up double digits for the quarter and the year.
Buy rate remain below historic levels by mid single digits due to the high correlation between consumption of Atkins bars and being at work.
Therefore, the improvement in Atkins buy rate remains.
The biggest opportunity for the brand.
Let me now turn to quest, where fourth quarter retail takeaway increased 34, 9% in the measured IRI Bulow C store universe and outpaced the category.
Growth was driven by the increase in household penetration.
The singles, improving shopper traffic a rebound in bars and success of new product forms.
Quest bars retail takeaway in the quarter increased 23, 9% more than 50% greater than the segment growth rate.
Recall quest bars are about 60%.
<unk> of total quest retail sales.
The snack year portion of quest products continued to do well and increased to 105% in the quarter driven by continued strong performance of chips cookies and confections.
We continue to see robust chips demand as we managed supply within our network.
We have taken actions to ensure there are no disruptions at retail and have dialed back trade promotions and programming on these items.
And as we stated last quarter, we'll be increasing chip supply.
During this fiscal year.
We had another good quarter of growth across all key channels, we were particularly pleased with the increase.
Work foot traffic at both mass and convenience stores.
Combined the mass channel and C store universe represents about 40% of quest sales.
And in Q4 Pos growth in these important channels was up about 40 and 50% respectively.
Increased <unk> e-commerce business, nearly 25% of total quest U S sales continues to do well with Q4 retail takeaway up 30%.
Our business at Amazon remains strong and growth was solid across all major forms.
In this fiscal year we.
The marketing will increase in line with sales growth.
A new Atkins, Rob Lowe advertising campaign is beginning to air now.
We'll be advertising across all forms with messaging focused on bars are back and taking a healthier approach to life.
And I'm very excited to announce.
<unk> fiscal year Quest. In addition to their digital marketing efforts will be on air with television advertising for the first time in the brand's history.
The fun campaign focused on four individuals.
Harold NFL and WNBA rookie as well as to working professionals who changed.
And then <unk> to pursue their passion.
Common theme is that Theyre, all fueled by athlete worthy nutrition in pursuit of their own personal quest.
Our marketing and advertising will also support our new product launches some of which you see on this slide.
We have a strong innovation pipeline.
Change the fiscal year have a good balance of new products across both brands and all four.
In summary, we're pleased with our fourth quarter results as we look to fiscal 2022, we are positioned well to build on our momentum and deliver solid net sales and adjusted EBITDA growth.
And it isn't predicated on any meaningful change in workplace mobility.
We expect that both brands, while the solid start to the fiscal year with the growth in the first half of the year stronger than the second half as the latter period is more difficult year ago comparisons.
And as I discussed earlier, we have a good balance of innovation and advertising.
<unk> in place that we believe should generate retail and consumer excitement.
We continue to expect supply chain cost inflation will be a significant headwind in the year.
Pricing and cost savings initiatives are in place to mitigate this impact.
We're executing well against our plans and delivering on our.
<unk> financial objectives with flexibility to invest in the business as a path to increasing shareholder value.
Now I will turn the call over to Todd who will provide you with some greater financial details.
I will then end our prepared remarks, with greater details and assumptions related to our outlook.
Thank you Joe and good morning, everyone.
I will begin with a review of our net sales total simply good foods fourth quarter net sales increased 16, 9% to $260 million.
The core North America business contributed 17, one percentage points to total company growth driven primarily by Atkins and quest volume across major forms and channels.
One net net price realization in Q4 was a slight benefit driven by lower trade promotion.
Our core international business was a two one percentage point benefit benefit the sales growth driven by strong gains in Australia for both Atkins and quest and.
And as simply protein brand divestiture and the European business.
Were a combined two three percentage point headwind.
Moving on to the other P&L items gross profit was $104 $5 million, an increase of 18, 6% versus last year.
Gross margin of 42% increased 60 basis points versus the year ago period.
As expected supply chain inflation was a headwind this quarter. However, it was more than offset by the previously mentioned and lower trade promotion as well as favorable product and customer channel mix.
As Joe discussed, we anticipate significant supply chain inflation in fiscal 2022, due to higher costs related to raw materials packaging.
<unk> and logistics.
Rice increase that went into effect last month, along with cost savings initiatives should largely offset these cost pressures.
Bring a significant step up in cost inflation from current levels.
Adjusted EBITDA increased 39% to $48 5 million due to the higher sales.
Let's control.
Selling and marketing expense increased $6 $3 million driven by incremental brand building investments on both Atkins and quest.
G&A expense increased $1 2 million as higher incentive compensation was partially offset by lower corporate expense and quest acquisition synergies.
This excludes.
<unk> fourth quarter fiscal 'twenty, one charges of $3 $3 million related to quest integration cost restructuring expenses stock based compensation and noncore legal expense.
Moving to other items in the P&L interest expense declined $1 7 million to $7 2 million.
And clearly the paydown of the term loan.
And the fourth quarters of 2020, one to noncash non tax deductible charge related to the re measurement of our private warrant liabilities was $51 7 million and $5 5 million respectively.
The income tax rate was 32, 7%.
This includes a five five percentage point impact related to the noncash non deductible $5 $5 million loss on the fair fair value change of private warrant liabilities.
Net income in Q4 was $18 2 million versus a loss of $39 3 million in a year ago period.
Full year results were as follows net sales increased 23, 1% to $1 $5 million driven by the acceleration of our business in the second half of the year.
Profit was $409 8 million an increase of 26, 3%.
Gross profit in the prior year was affected by a noncash.
Noncash $7 5 million inventory purchase accounting step up adjustment related to the quest acquisition recall, the noncash inventory purchase accounting step up impacted full year 2020 gross margin by 90 basis points.
Excluding this amount gross profit was $331 $8 million last year and gross.
<unk> margin was 46%.
Therefore full year fiscal 2021 gross margin of 47% increased 10 basis points versus the year ago period.
Adjusted EBITDA increased 34, 7% to $207 3 million, primarily due to the higher gross profit.
And marketing expenses increased 19, 5% to $112 $9 million. The increase was driven by higher brand building initiatives and the full year impact of quest.
G&A expenses increased about 11% or $9 million due to higher incentive compensation and the inclusion of quest.
This excludes charges of 15.
Selling $5 million related to quest integration costs restructuring expenses stock based compensation and non core legal expense.
Moving to other items in the P&L combined interest income and interest expense was about $31 $5 million about the same as the year ago period note that the cash savings from debt pay.
<unk> during the year was partially offset by noncash amortization expense of deferred financing.
The income tax rate was 49, 4%. This includes a 22 three percentage points impact related to the noncash non deductible $66 $2 million loss on the.
<unk> value change of private warrant liabilities borrowing.
Barring an increase in the tax rate by federal or state authorities, we anticipate the full year fiscal 2000, 22022 tax rate to be similar to last year around 27%.
Net income for the full year was 40.
Third $9 million versus $65 6 million in a year ago period.
Klein of $24 $8 million is primarily due to the remeasurement of the private warrant liabilities.
Turning to EPS fourth quarter reported EPS was <unk> 19 per share diluted compared with an EPS loss.
Now <unk> 41 per share diluted for the comparable period of 2020 and.
In fiscal Q4, 2021, and we recorded a non operating non cash charge of $5 $5 million due to the change in fair value of the outstanding private warrants. This it was about $46 million lower than last year.
Depreciation.
Loss amortization expense was $4 $7 million similar to the year ago period.
And costs associated with quest integration and restructuring were <unk> 8 million $4 6 million lower versus last year adjusted.
Diluted EPS, which which excludes these items was 29.
And entries of <unk> versus the year ago period.
Note that we calculated adjusted diluted EPS as adjusted EBITDA less interest income interest expense and income taxes.
Full year reported EPS was <unk> 42, while full year adjusted diluted EPS was $1 26 versus <unk> 90.
91, <unk> in the year ago period.
Note that the calculation of adjusted diluted EPS in the Q4 and full year period assumes fully diluted shares outstanding of $102 4 million and 100 Watt $101 5 million shares respectively versus 97 $8 million and 97.
On a $4 million under GAAP the difference versus GAAP is due is due to the.
Exclusion of the private warrants and 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 an explanation and reconciliation.
<unk> of non-GAAP financial measures.
Moving to the balance sheet and cash flow in fiscal 2021, the company paid down $150 million of its term loan and at the end of the year. The outstanding principal principal balance was for $456 5 million in the fourth quarter the company generated about.
$1 million of cash, resulting in full year cash flow from operations of $132 million.
Note that this is impacted by higher levels of inventory as we're carrying a bit more given the growth of our business as well as the need for higher safety stocks.
As of August 28, 2021, the company had cash.
40 to $75 3 million in the trailing 12 month net debt to adjusted EBITDA ratio was one eight times.
Capital expenditures for the full year were $5 $9 million driven primarily by equipment for our new warehouse fiscal 2022 capital expenditures are expected to be similar to last.
Depreciation and amortization for the full year was $18 $2 million.
We anticipate GAAP interest expense to be about $25 million, including noncash amortization expense related to the to the deferred financing fees.
I'd now like to turn the call back to Joe for closing remarks.
Thanks, Todd and fiscal 2022 will build on our momentum and expect to deliver solid net sales and adjusted EBITDA growth.
We're confident in our business as both Atkins and quest of strong advertising marketing and innovation plans in place to drive growth.
Looking at the key metrics.
Year for the full fiscal 2022, assuming no meaningful change in workplace mobility, we expect net sales to increase 8% to 10% versus last year. This includes a one percentage point headwind related to the European business exit.
We expect supply chain cost inflation in the fiscal year and anticipate that gross margins will be modestly lower versus the year ago period.
The price increase that went into effect last month.
Cost savings initiatives should largely offset these cost pressures.
Barring.
Significant step up in cost inflation from current levels.
Marketing expense is expected to increase in line with sales growth and G&A leverage should result in an increase of adjusted EBITDA slightly greater than the net sales growth rate.
And the decline in interest.
<unk> should result in an increase of adjusted diluted EPS greater than the adjusted EBITDA growth rate.
We anticipate that the first half of the year will be stronger than the second half of the year from a growth rate standpoint, as the year over year comparisons are more difficult.
Expense we proceed through the year.
Turning to the first quarter, we expect net sales growth to be similar to the fourth quarter of fiscal 2021.
By chain cost inflation will be a headwind in the quarter, however, due to existing raw material coverage as well as the price increasing.
Cost savings initiatives gross margin should be relatively flat versus prior year.
Supply chain cost inflation is expected to be a greater headwind for the balance of the year.
As we emerge from the challenges of COVID-19, our business is stronger and our organization.
<unk> per capable as such we remain confident in our short and long term growth prospects.
We are executing against our strategies that position us to deliver on our financial objectives with the ability to invest in our business as a path to increasing shareholder value over the long term.
We appreciate everyone's.
As Morris in our company and we're now available to take your questions.
Operator.
Thank you we will now be conducting a question and answer session. If you would like to ask a question. Please press star one on your telephone keypad.
Confirmation tone will indicate your line is in the question.
<unk>.
Press Star two if you would 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 keys one.
One moment, please while we poll for your questions.
Question.
Our first questions come from the line of Jason English with Goldman Sachs. Please proceed with your questions.
Hey, good morning folks thanks for sneaking me in and congrats on a great year.
Two questions.
First on service levels capacity, you referenced chips.
Patsy constraints.
Can you give us some quantification of how much that's holding you back and when you expect the capacity to be back online or are not back on line, but expanded to be able to meet the demand.
And then also related can you walk through the situation across some of your other categories. Obviously, there's a lot of service low disruptions in the industry.
But can you give us a status of where you stand with available capacity and service levels and things like bars, and shakes et cetera.
Yes, I'll start off with chips. So we did pull back on.
Promotional activity on chips in the fourth quarter. That's part of the reason why we had favorable price realization. So we work we work.
Typhon shifts and peanut butter cups.
In Q4 going into this year that has been resolved we are actually in a much better position on both of those products. So we feel really good about the ability to service our customers this year.
And Jason answering your question regarding kind of other categories.
There is no.
We're one single issue and our supply chain beyond what Todd just covered but we're experiencing episodic.
Discontinuities in our supply chain to create a bullwhip effect and from a service level. So you kind of deal with those on a case by case basis.
No one and nothing really different than I think everybody is experiencing right now in this sector, where service levels are challenged as you deal with an ingredient not showing up or a co man not being able to staff a shift.
We're dealing with those things pretty much every day.
Yes, yes.
Yes, it makes sense, but it sounds like nothing too serious.
Second question leverage now below two times quest integration effectively.
Fleet.
What is your acquisition appetite now.
In light of those conditions and what are you seeing in the marketplace anything interesting at reasonable valuations.
<unk>.
But were always hungry and we obviously have the capacity now.
Two two.
To look at assets. So the market is busy so we keep busy looking at those assets and as we kind of explained externally the folks we like things in our aisle we like.
<unk> staying in our category, because we understand the category that fits our supply chain.
Fits our selling capability and.
The first screen for US is always how strong is the brand how well do we understand the consumer targets do we think there's opportunity to accelerate innovation.
And marketing communication to build the brand. So we are staying pretty busy right now.
We're just we will be patient to find the right thing as we always are.
Good to hear thanks, a lot I'll pass it on.
Thank you Jason.
Thank you our next questions come from the line of Chris Growe with Stifel. Please.
Proceed with your questions.
Hi, Good morning, I'll add my congratulation as well nice quarter Nice I'll look there.
If I could ask first in relation to quest and.
Just just the kind of how the demographic profile. If you will that user is that different from Atkins and kind of you know then what you expect.
There's mobility improves for active nutrition and for weight management is to go kind of at that hopefully happens throughout our fiscal 'twenty two.
Yeah, so the target audience.
Interesting thing, Chris I think you already know that the interesting thing is the kind of the macro nutrient kind of nutritional philosophy, both brands is pretty similar right on.
Quest, it's <unk>.
<unk> and protein because of its active.
Consumer benefit kind of miners and low carb, low sugar, where atkins with a weight management benefit majors, and low carbs and low sugar and kind of miners in protein, but for the most part the nutritional profiles are very very.
The consumer benefits and the consumer targets are very different so on quest, it's about being active in fueling your ability to be active so it tends to be younger tends to be FID or tends to be more physically active.
Kind of think of the target audience.
Similar to <unk> under 35.
Atkins tends to be a little bit of weight to lose tends to be a little bit older. Both groups demographically financially a little bit better a little bit better educated but tend to have a little bit of weight to lose on atkins and tends to be older kind of over 35%. So no.
No very very little overlap between the brands.
And as you look through the year or do you go ahead, sorry, what was your second question as it is.
As as.
As co. If we think mobility improves how will it affect our brands interestingly enough we've seen.
We've seen quest accelerate during the second half of the year, even the quest bar business has done extremely well in that part of that is channel development C store foot traffic is better Amazon is the largest customer request. So the business has been channel benefited.
But we're seeing even the bar business start to accelerate.
Atkins.
We have we're really encouraged by the growth second half growth was around 12% on a absolute level kind of the third and fourth quarter consumption was about the same the rate has a lot to do with what happened last year.
But the composition of Atkins as encouraging buyer growth for the year up double digit and what's been holding Atkins back has been the buy rate, which is kind of down mid single digits right. So in doing our analysis on Atkins, we understand being at work is an important driver to snack.
Year, King occasions, and has been holding down by right. So we didn't build this into our assumptions on our business, but mobility improved we would see we would expect to see upside on our business and in particular on Atkins and in particular on bars.
Okay.
That's very helpful color. Thank you.
Follow up.
Snack or I guess I had a question around shelf.
Shelf resets and shelf space and I guess, there have been some shelf resets what youre seeing right now from a high level.
And as you look at the shelf set here for your brands.
Yeah, So I'll talk a little history first we saw good growth on both brands in the last.
No year shelf sets are happening the ones that happened in the fall are happening as we speak we expect it to be pretty positive for us as we've said pretty consistently the new product pipeline on both brands is pretty good. So we would expect.
Pretty good performance, there and I would also say.
Fiscal retailers have re learned the importance of.
Large brands to drive category.
Consumers to the to the to the <unk>.
Category into the aisle.
And so we see them kind of focusing in general focusing on larger more important brands to keep their aisles.
The and keep their categories healthy so we're benefiting from those those tailwind.
That seemed to work well this past year, yes. Thank you. Okay. That's great I appreciate your time this morning.
Alright, Thanks, Chris.
Thank you our next questions come from the line of Wendy Nicholson with Citi. Please proceed with your questions.
Hi, two questions first short term.
Do you think theres any need for more pricing, it's great that the pricing you took in June has gone through but do you think that there has been sufficient either commodity and freight inflation that you need to take more and then second question longer term I know you talked about favorable operating leverage and enabling adjusted.
Healthy EBITDA.
Grow faster than gross profit, but you've been able to reduce SG&A now for I think three years in a row as a percentage of sales and I'm wondering how much further you.
Have to go Youre doing a great job advertising more so how much more.
That is they are in G&A before you start to cut into muscle from a productivity.
Just any perspective thanks.
Yes, so I'll take the first one.
So from a pricing gross margin perspective first I'll just start off and say, we're super proud of our ability to expand gross margins by 60 basis points in Q4.
And 10 basis points for the full year just given this.
Such an environment that's out there right now second we saw the inflation coming we priced very aggressively.
To manage that inflation.
We feel really good about the execution of that by our sales force.
Commodities are not slowing down.
To be Frank we.
When we took the price increase we might see some leveling off especially in our second half of the year, we're not seeing that yet we're still hopeful we're going to see that but some commodities are slowing down some are still growing at accelerated rate. So right now we feel good about the guidance. We've given we don't feel like we need to.
Do any additional pricing if we do see some modest increase in our cost assumptions I think we can manage that through trading.
Trade expense pulling back there a little bit.
But if we see an acceleration beyond what our expectations are.
All levers are in play we will price that we.
Two.
Regarding regarding.
The SG&A leverage.
I would say there's two reasons why we're getting so much leverage right now one is.
The quest integration and the synergies that we got from that obviously.
We reduce some head count with the combined companies have got some.
We have synergies that we've executed almost fully at this point. So that has helped second is just the growth in the business when youre growing.
10, 15, 20% top line you can you can and G&A is only growing maybe four 5% you get some significant leverage so I don't see us pulling back on.
Great.
Absolute dollars in G&A, but I think we will continue to get leverage in our P&L as the business accelerates.
Got it.
Yes, Hi, Wendy this is Joe I just wanted to.
You add a little bit of color to what Todd said.
And he is being modest his team has done.
Nominal job of seeing cost inflation soon enough.
<unk> estimated it well enough that it put us in a position to take what was a pretty aggressive price increase in September.
We don't see the need to price again.
So.
Mid to upper single digit pricing, we feel like we're in very good shape through the fiscal year, we would have to see a significant acceleration of commodity cost inflation relative to where it is right now in the second half of the year.
To even think about pulling that lever and we frankly.
We think that's a relatively low probability so really congratulations to todd's team part of our success has been seeing it early enough and not being too optimistic that its not going to be too bad we took a very aggressive path.
Cost inflation point of view that that compelled us to take some aggressive pricing in the marketplace.
That sounds fantastic and very very rare among your peers, so definitely congratulations on that front.
Just as a follow up you did talk about sort of lower levels of promotion and to the extent you see.
An increase in mobility, and you're eager to remind those people that they need to buy either Atkins requests as they.
To work what type of a step up in your promotional spending or promotional activity do you have embedded in your forecast for fiscal 'twenty, two or how much flexibility do you have to step up that promotional activity.
We all we tend to always lean in in the first half of the year, believing that the sales will come in that will have.
Backend room to spend so we're leaning into our marketing programming as we speak and we'll continue to do that through January and February.
Terrific, Thanks very much.
Yeah.
Thank you our next questions come from the line of Steve powers with Deutsche Bank. Please proceed with your questions.
Hey, Thanks, guys.
So you mentioned earlier in the conversation with Chris some of the successes, particularly around quest that you've had winning occasions that maybe less tied to mobility than maybe it had been the assumption in the past.
Do you mean.
Around things like chips and cookies.
I was hoping you could just.
How that experience may be influencing your decisions around R&D prioritization, and whether you see more opportunity now to.
The effect of cultivate more of those occasions.
That are independent of consumers being on the go or if that's not how you're thinking about it.
Okay.
No.
Talk about our focus on.
What Mark has coined as the snack year portion of our portfolio.
No. It was underway before we acquired quest and accelerated under the phenomenal R&D team led by Jeremy IV. So.
We've had a focus on it and the reason for it is.
Is it incremental use occasions and need states two bars and shakes, we knew that from Atkins, because we had a really big and very strong confection business from the earliest days and now we have a cookie business and a chip business and in a growing confection.
The song Quest, so we kind of understood that that those would be incremental consumption occasions along comes COVID-19.
And then we learned that while a lot of bar consumption.
In particular on Atkins is consumed at work and in transit. So we're kind of we're a little.
<unk> business unit and that our diversification by farm in.
Additional need states of use occasions became a nice offset to our bar business by the way, we're not deemphasizing our bar business were emphasizing the opportunity to grab new use occasions through other forms and you should expect us to continue to do that.
All four and we will continue to innovate and borrowers because it's a big an important portion of our business.
Great Great and then you mentioned leaning into advertising in the first half of the year and you talked to the presentation about some of the initiatives. Both Atkins then and now quest.
Just maybe elaborate on what you're hoping to achieve especially on the.
That side of that.
If it ties into what we're just talking about in terms of the.
Broadening of those occasions. So this category is underpenetrated and the marketing challenge.
Pretty much regardless of the brand you're running is to grow household penetration and bring more.
<unk>. So we have I have eight years of experience with Atkins. The single biggest correlation to growth has been our ability to grow buyers.
So we always are focused on how to do that in the case of Atkins, It's a high brand awareness brand virtually everybody.
Buyers the brand the marketing challenge with Atkins was to change their point of view of what they do.
And the marketing efforts are all built around that the repositioning of the brand away from a programmatic weight loss.
Bran into our lives low carb lifestyle weight management expert, Brian I think we've done a pretty good.
Body doing that we feel really good about the growth prospects and.
In the case of Quest Big brand growing fast still relatively modest brand awareness. So over the last few years people have met the brand by showing up at the shelf and finding really great products that they have tried our opportune.
With you on quest is to drive brand awareness shape People's point of view about what the brand is about which our new campaign does and in doing so you create pressure at the top of the funnel I create brand awareness drive brand consideration accelerates trial and repeat so.
Same the.
<unk> strategy, you got to you got to invest to drive buyer penetration, but two different marketing challenges one is about changing people's points of view about what they thought about the brand. The other is introducing them to the brand and we've got marketing efforts and marketing investment designed to do those two things.
Same okay. That's awesome. Thanks, Joe if I could just squeeze one more in just going back to Jason asked about.
The initiatives to add progressive capacity in snacks, I guess, maybe you can just give us a little bit of a sense of the pacing of that through 'twenty through fiscal 'twenty, two and then where you are.
Yeah.
You can kind of expect your theoretical capacity to sit starting in fiscal 'twenty three relative to where we've been at the fiscal 'twenty one run rate. Thank you.
I'll kick it off and then I'll turn it over to Todd it's been closer to it. The first thing I would say is our challenges on chips and peanut butter cups or because the.
The consumer response far exceeded our.
So on both.
So we did not go into the marketplace, believing we were going to have a supply challenge, though this is not about.
Our supplier falling short on what they provided out we said they were going to provide us. This is about us not seeing the consumer response to would.
Expect to who really great products.
And so as we on Chip's last year as we move through the year every time, we got more supply we absorbed it with demand and so we were not able to build inventory.
Werent able to keep up with service so knowing that changes in capacity.
Ben took some time, we slowed demand down to build inventory. So we could service the business at what is an appropriate level and I'll turn it over to Todd you can talk to you about.
The moves that we're making to add capacity on chips as we speak so but again, both on chips and cuts.
<unk> taken where as we've talked about earlier, we were short are very tight on supply as we got into Q4.
That is largely behind us at that point at this point, we have added capacity on both products.
In the last month or so so we're actually in pretty good shape right now for FY 'twenty two we.
Have more capacity coming on at the end of this year and the beginning of it.
423 on chips and cups, and some other products. So I think we're in pretty good shape for this year and then as we get into FY 'twenty three will actually have expanded capacity to grow the business.
Sure.
Okay. Thanks to.
Absolutely I appreciate it.
Thank you our next questions come from the line of Jon Andersen with William Blair. Please proceed with your questions.
Good morning, everybody and congratulations on a great year.
I wanted to ask a little bit about household penetration or come back to that because as you said Joe.
But I think the.
Highest correlation with the growth.
Typically for the Atkins brand.
Where do you see it today.
On household penetration for the two brands and household penetration growth has been strong to your point up double digits. This year.
<unk> seen.
Strong growth on both of the brands.
Who are these new consumers that you're attracting is it the snack year consumer based on the kind of innovation and occasions that.
You're capturing.
So any commentary around that kind of that kind.
Since state.
So penetration the growth and the complexion of that growth in household penetration. Thanks.
Alright, you're talking you're talking about the thing.
I don't sleep about all the time, right, which is where are they going to come from and who were getting so growing penetration on both brands.
As you know.
We are.
The curbside.
Our positioning shift which happened around the time, we went public was a.
Move from focusing on what we call low Carb program Dieters.
Two and at the time when we did the study we thought there were somewhere around 8 million.
Dennis those and we have done a nice job in the previous eight years targeting those and having successful growth.
<unk>.
The research that we did said there were about 33 million more low carb consumers lifestyle consumers, who had kind of weight management.
No.
As one of their consumer benefits. So it's not about weight loss, it's about living with my weight every day and how do I keep that under control.
And we've been targeting that consumer it led to a shift in consumer communication around fast weight loss lose 12 pounds in eight weeks.
Pre and post pictures of people that.
Our celebrities pre and post two Rob Lowe.
<unk> never had to lose weight because he knows how to eat any any any Liz atkins lifestyle. So we've been going after those that consumer target and.
<unk> seen a study in the last year, but when we last time, we looked at it those.
Self directed low carbs with a source of growth not a surprise.
In the case of Quest, we're gathering our database on quest from a consumer standpoint, here's what I do know the single biggest contributor to.
And I haven't household penetration growth has been the growth of chips. The other forms have been more stable from a from a.
Household penetration standpoint, but we brought in a significant number of new buyers on chips and they were incremental to the brand.
Which then leads you to a series of marketing questions why do they buy bars, how do we get them to buy more products and I've already asked all those questions and the marketing team is working on those things. The other thing I want to know about quest that we're still trying to learn is when I bring them in or do they stay how much do they buy how long do they stay right some of the things that a fundamental.
The mental to effective marketing, what's their lifetime value and we're we're in we're in the middle of that work and as soon as I know more I'll share it with you.
That's helpful. You anticipated my next questions there so I'll leave those for sure.
But.
One other follow up.
The as you extend the brands.
Into with other product forms to serve additional occasions, and I'm, particularly thinking about quest.
Which as you mentioned earlier is about.
Active nutrition active lifestyles fit individuals and you're moving.
The brand from kind of a bar orientation into more indulgent.
Cajuns fraught with frosted cookies. This year for instance, do do you worry that you you maybe lose that.
A part of that core active fit positioning or is it just you might not thinking about that the right.
Great way, but it just open ended and you don't you don't risk, losing that kind of that are trained up that kind of core consumer debt.
Got you to where you are with it.
Yeah.
Great question and it was core to the change in strategy and communication. So the campaign that was being.
<unk> run prior to the one that just went on air was was around.
The <unk>.
<unk> that you crave with the macros that you love.
So no compromise I can get a snack those things that I would see on a Super Bowl payable for.
Four.
<unk> snack table those are the things I really crave and I want to have those every day, but I don't want bad macros, right I don't want them to be low.
And carbs and sugar and lower protein right. So that was the positioning before around crave ability of snack.
The positioning now which is an evolution of where we were is around.
Athlete worthy nutrition, even though you don't need to be an athlete.
And it's around fueling people's desire for whatever they are trying to achieve so it's about SaaS to some degree about south actualization without compromise so great tasting product.
That fuels my desire to achieve what I want to achieve so we moved away from crave ability now the products themselves.
There is elements of this that are highly indulgent like you mentioned there are ice cookies, but frankly, it's still around.
Regardless of this.
Snack form.
It is completely about.
At Lee worthy nutrition, even though you don't need an athlete and so we were very choice full in the campaign we picked.
Spiering professional athletes so we pick too.
And NFL rookie and AWS.
NBA rookie.
They're still they're still they're still on a quest to be successful in their professional careers and are in our target audience find them very aspirational and then we picked two people kind of who changed their change their career midstream a former professional football.
Sir who became a firefighter a former office person, who became a yoga instructor rates. So again, it's about fueling their aspirations and their quest in life and.
We think the positioning addresses that question that exact question that you asked.
Very helpful. Thanks, so much.
<unk>.
Thank you our next questions come from the line of Eric Larson with Seaport Research Partners. Please proceed with your question.
Yeah, Thanks, everybody and I'll extend my congratulations as well.
Yes.
My question is probably more for Todd here, but I'm, just trying to get a little bit.
Clear cadence on higher gross profit margins were going to work. So you price in June you announced in June and you price September 12, So Q1 is going to get.
All but maybe a few days if your pricing.
Is what's holding up the margins that youre still seeing in the first half.
<unk>.
Channel and customer and product mix.
And that you might be taking a more conservative stance on a comparison basis in the second half or should we be conservative on our gross margins in two age.
Yes, so for.
For the first quarter, we actually still.
As we said in our remarks Q Q.
Gross margins should be relatively flat, we still have some coverage.
At very attractive prices through Q1.
Despite what you correctly said, we're not going to see much of a pricing benefit in the quarter. We still had some very favorable coverage and we do have the channel and product.
Mix that you mentioned, which will allow us we believe to keep gross margins relatively flat in Q1 that coverage largely goes away.
As we enter Q2.
So we do look we do have coverage throughout the first half of the year, but once we get into Q2 and beyond the pricing.
It's not as attractive as we've had in the second half of this year and this first quarter. So.
Margins will start to contract as we get into Q2 and beyond.
But you can expect gross margins to be relatively stable in the first quarter.
Okay. Thanks.
And our next question is for Joe So Joe I think you've covered a whole bunch of these points already but.
When you look back at your sort of your initial guidance on quest.
I you know I think you said well we're going to go at quest quite slowly because we don't want to screw it up and I think that was your comment.
And in <unk> and <unk>.
Precise and you're done that but if you look at quest now obviously household penetration is a big.
It is a big positive.
What is it are.
Are you more optimistic on quest today and.
And just kind of give you give us our thoughts because the growth there has been phenomenal.
And I guess the question is is.
Is it going to.
How sustainable is that growth and I'm just curious on your your perception of <unk>.
Quest now post post acquisition.
Yes.
We had high aspirations and our strong belief in the brand.
And the performance of the brand has exceeded both of those so.
The business is performing.
Singularly outstanding.
And it's been kind of the recent innovation that has been a key driver of the brand so the R&D pipeline that.
We acquired with the brand has for the most part outperformed our expectations are very high on chip strong performance on cookies strong performance on.
Its entry into confections, rtd's kind of a push right, but the other forms performed really really well.
So and then we believed that there was opportunity to.
Continue to sharpen the positioning of the brand because people.
If you if you just talk qualitatively to people and focus groups, who have purchased the brand they really don't know.
For the most part with the brand stands for core user.
The protein bar, probably solid in a gym or brought it online, but it was part of that little Echo system that core user knows brand understands and knows its history believes in it a lot of the recent.
Growth in consumers.
Less.
Clear about what the brands stood for.
So our opportunity on the brand and I think we're just in the early stages of that is.
You said it we don't want a screwed up so we were slow about the positioning of the brand, but we feel like we've got.
We got a strategy.
<unk>, we've got communication execution that will grow brand awareness and create a positioning in people's mind around the brand that will enable it to continue to grow beyond just the product innovation.
Okay, and then just a quick follow up on that.
Obviously part of your household.
Penetration.
<unk> is.
Yes, potentially increased distribution, but you haven't mentioned distribution specifically.
What might be the opportunities in that for quest.
Certainly on quest that has been because we grew distribution on chips chips for outperformed all year as we grew distribution on its own and it grew household penetration.
<unk> so in the case of quest I can directly tie.
Whites filling white space with a snack item that grew significantly grew household penetration so.
I think in that case white spaces was really important to the brand. The only reason we tend to be conservative about talking forward.
On distribution is.
I've been in businesses, where you build distribution and your velocity per item falls and it's less incremental than you think so we just like to see it in the marketplace performing before we talk about it's incremental value either from a volume standpoint or penetration.
Ration standpoint.
I like our pipeline our pipeline I believe will be incremental to our core consumption. So innovating beyond bars and shakes I think will be a key strategy to our business going forward. We just liked it wait and see how it performs before we talked to you about how we feel about it.
I expect with our pipeline, we'll have nice growth in.
The breadth and the depth of penetration in the marketplace on both of our brands.
We'll see how they perform from an incremental standpoint and ability to drive new buyers to our brand our track record is pretty good.
On both of those I might add but let's wait and see and see how they perform.
Okay. Thank you for your comments Joe.
Okay.
Thank you our last question of the day comes from <unk> <unk> of Credit Suisse. Please proceed with your questions.
Alright, thanks, everybody.
With me in and I'll reiterate what everybody else has said about a well done on those pricing maneuvers. I think you guys are more of the exception than the rule.
If I may ask you a little more detail on the mix effect on on margins and maybe the mix effect that you.
Expect that margins given there is an increase.
Increase in mobility, obviously, there's a mix effect as it relates to product mixes.
Is there maybe a general idea you can give us on how just the impact of or what the impact of mix will have on your margins.
Yes.
Really two big drivers.
So it has we've lapped COVID-19.
<unk> bars got hit very hard last year during.
During the initial year of Covid is that comp has come back bars on both brands. It's the highest margin products. We have so that that's a huge plus the second piece I would say is from a channel mix perspective brick and mortar obviously got impacted.
Greatly during during Covid, particularly on our on our business.
And E Comm World went Crazy E Comm margins, we have a very good but they are a little bit below our brick and mortar so as brick and mortar and E. Comm now got more balanced from a growth perspective status that has helped as well.
To give you exact number but.
It's been probably.
It's been it's been positive and we're not talking a huge amount.
Delta here, because our margins by customer and by form are not dramatically different but.
It's been a positive benefit and I think we will continue to see that.
I can't you won in Q2 and that will help us mitigate some of the inflation impact.
Yeah.
Okay, Great and if I can ask me about e-commerce and <unk>.
The trends are any different than what youre seeing maybe in your spins data or whatever it is from a market share perspective in their channels outside.
In the tracked channels.
Yeah. So so we've done really really well.
E Com, we have gained share.
Obviously with a major with a major.
E Com player out there we.
We feel great about our business there.
The.
Specialists, particularly on the quest side.
The growth just continues to be an incredible so market share has been very positive for us for the last couple of years.
Okay, great. Thank you.
Yeah.
Thank you there are no further questions at this time.
There I would like to turn the call back over to Joe Scalzo for any closing comments.
Thanks for your participation on today's call. We hope you continue to remain safe and we look forward to updating you on our first quarter results in January have a good.
Good day.
Thank you for your participation. This does conclude today's teleconference. You may disconnect.
Your lines at this time.
A great day.