Q1 2022 Simply Good Foods Co Earnings Call

January 5, 2022

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.

Operator 3: If anyone should require operator assistance during the conference, please press star zero on your telephone keypad. As a reminder, this conference is being recorded. I would now like to turn the conference over to your host, Mr. Mark Pogharian. Thank you. You may begin.

I would now like to turn the conference over to your host Mr. Mark Bulgarian. Thank you you may begin.

Thank you operator, good morning, I'm pleased to welcome you to the simply good Foods company earnings call for the first quarter ended November 27, 2021, Joe Scalzo, President and Chief Executive Officer, and Tod Cooper, Chief Financial Officer will provide you with an overview of results, which will then be followed by a Q&A session.

Mark Pogharian: Thank you, operator. Good morning. I'm pleased to welcome you to the Simply Good Foods Company earnings call for the first quarter ended 27 November 2021. Joe Scalzo, President and Chief Executive Officer, and Todd Cunfer, 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 AM Eastern Time. A copy of the release and accompanying presentation are available under the investor section of the company's website at www.thesimplygoodfoodscompany.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 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.

The company issued its earnings release. This morning at approximately seven a M. Eastern time, a copy of the release and accompanying presentation are available under the investors section of the company's website at www Dot the simply good foods company Dot Com. This call is being webcast and an archive of today's remarks will also be available.

Mark Pogharian: 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 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.

During the course of today's call management will make forward looking statements that are subject to various risks and uncertainties that may cause actual results to differ materially the company undertakes no obligation to update these statements based on subsequent events.

A detailed listing of such risks and uncertainties can be found in today's press release and the company's SEC filings.

Mark Pogharian: A detailed listing of such risks and uncertainties can be found in today's press release in 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 business model, we evaluate our performance on an adjusted basis as it relates to EBITDA and diluted EPS. We have included a detailed 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 as a 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 to the most comparable measures prepared in accordance with GAAP.

Note that on today's call, we will refer to certain non-GAAP financial measures that we believe will provide useful information for investors.

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.

We have included a detailed 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 as a substitute for the financial information presented in accordance with GAAP. Please refer to <unk>.

Mark Pogharian: The presentation of this information is not intended to be considered in isolation or as a 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 to the most comparable measures prepared in accordance with GAAP.

Today's press release for a reconciliation of the non-GAAP financial measures to the most comparable measures prepared in accordance with gap with that I'll now turn the call over to Joe Scalzo, President and Chief Executive Officer.

Mark Pogharian: With that, I'll now turn the call over to Joseph E. Scalzo, President and Chief Executive Officer.

Thank you Mark good morning, and thank you for joining us.

Joseph E. Scalzo: Thank you, Mark. Good morning, and thank you for joining us. Today, I'll recap Simply Good Foods Q1 results and provide you with some details on the performance of our brands. Then Todd will discuss our financial results in a bit more detail before we wrap it up with a discussion of our outlook and your questions. We had a good start to the fiscal year as our Q1 results continued our strong business momentum. Q1 net sales, gross profit, and adjusted EBITDA all increased double digits on a percentage basis versus last year and were slightly better than our expectations. Net sales increased 21.7%, driven primarily by volume. Additionally, we estimate that our 15 September price increase was about a mid-single-digit percentage point benefit to the total net sales growth.

Today, I'll recap simply good foods' first quarter results and provide you with some details on the performance of our brands then Todd will discuss our financial results in a bit more detail before we wrap it up with a discussion of our outlook and your questions.

We had a good start to the fiscal year as our first quarter results continued our strong business momentum.

First quarter net sales gross profit and adjusted EBITDA, all increased double digits on a percentage basis versus last year and were slightly better than our expectations.

Net sales increased 21, 7% driven primarily by volume.

Additionally, we estimate that our September 15th price increase was about a mid single digit percentage point benefit to the total net sales growth.

Year over year increase in net sales benefited from improvements in consumer mobility, and shopper traffic versus last year as COVID-19 restrictions.

Joseph E. Scalzo: Year-over-year increase in net sales benefited from improvements in consumer mobility and shopper traffic versus last year's COVID-19 restrictions. This resulted in retail takeaway slightly greater than our estimates due to growing household penetration from our marketing investments, improved distribution, and new product innovation. Note that the impact of pricing is expected to be greater, a greater contribution to growth over the remainder of the year. Total Simply Good Foods Q1 retail takeaway increased 18.7% in the US measured channels of IRI, Nielsen, and convenience stores. Q1 net sales growth was slightly greater than consumption due to the timing of shipments at the end of Q4 and the typical seasonal inventory build related to distribution gains and New Year's retail programming.

This resulted in retail takeaway is slightly greater than our estimates due to growing household penetration from our marketing investments improved distribution and new product innovation.

Note that the impact of pricing is expected to be great a greater contribution to growth over the remainder of the year.

Total simply good foods first quarter retail takeaway increased 18, 7% in the U S measured channels of IRI, new low in convenience stores.

First quarter net sales growth was slightly greater than consumption due to the timing of shipments at the end of last quarter and the typical seasonal inventory build related to distribution gains and new year's retail programming.

Adjusted EBITDA in the first quarter increased 34, 7% to $65 $6 million, primarily due to the solid sales growth quest acquisition synergies.

Joseph E. Scalzo: Adjusted EBITDA in Q1 increased 34.7% to $65.6 million, primarily due to the solid sales growth, Quest acquisition synergies, and G&A leverage. This more than offset higher marketing investment. Gross margin increased 70 basis points versus the year ago period. As expected, supply chain costs were a headwind, but were more than offset by our price increase and favorable mix. Additionally, we experienced steady improvement in customer service performance during the quarter. As we stated in previous conference calls, we expected supply chain costs to be a significant headwind in fiscal 2022, largely offset by our price increase. However, our supply chain costs over the remainder of the year are now projected to be higher than our previous outlook, driven mostly by ingredient costs. Therefore, the full year gross margin impact is greater than our prior estimates.

And G&A leverage.

This more than offset higher marketing investment.

Gross margin increased 70 basis points versus the year ago period.

As expected supply chain costs were a headwind.

But were more than offset by a price increase and favorable mix.

Additionally, we experienced steady improvement in customer service performance during the quarter.

As we stated in previous conference calls, we expected supply chain cost to be a significant headwind in fiscal 2000 22020 too.

Largely offset by a price increase.

However, our supply chain cost over the remainder of the year are now projected to be higher than our previous outlook driven mostly by ingredient costs.

Therefore, the full year gross margin impact is greater than our prior estimates.

We will discuss this in greater detail in just a moment.

Joseph E. Scalzo: We'll discuss this in greater detail in just a moment. That said, we are confident in our strong top-line growth and our ability to manage these higher costs and are increasing our full year net sales and adjusted EBITDA outlook. We are focused on driving sales and earnings growth and competing effectively while navigating a challenging supply chain environment. We'll continue to execute against our strategies and believe we are well-positioned to continue to deliver net sales and earnings growth that we expect will create value for all shareholders while doing the right things over the long term for our business, our customers, and our consumers. Simply Good Foods retail takeaway in measured channels increased 18.7% in the quarter.

That said, we are confident in our strong topline growth and our ability to manage these higher costs and are increasing our full year net sales and adjusted EBITDA outlook.

We are focused on driving sales and earnings growth and competing effectively while navigating a challenging supply chain environment.

We will continue to execute against our strategies and believe we are well positioned to continue to deliver net sales and earnings growth that we expect will create value for all shareholders, while doing the right things over the long term for our business our customers and our consumers.

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Simply good foods retail takeaway in measured channels increased 18, 7% in the quarter.

Importantly, as has been the case throughout the pandemic, both our brands have outperformed their respective sub segments of weight management and active nutrition.

Joseph E. Scalzo: Importantly, as has been the case throughout the pandemic, both our brands have outperformed their respective subsegments of Weight Management and Active Nutrition. In the quarter, Weight Management segment was up 4.4%, and Atkins outperformed this segment with retail takeaway up 7.7% over the same period of time. Total Quest retail takeaway in measured channels in the quarter was up 36.2% and outpaced the Active Nutrition segment growth of 30.3%. Our e-commerce business continues to perform well as POS growth was similar to measured channels even as we anniversary strong year-ago comparables. Atkins Q1 US retail takeaway in measured channels increased 7.7%. The year-over-year increase benefited from improvements in consumer mobility and shopper traffic, particularly in the mass channel versus last year's COVID restrictions, as well as continued total buyer growth.

In the quarter weight management segment was up four 4% in.

And Atkins outperformed this segment with retail takeaway up seven 7% over the same period of time.

Total quest retail takeaway in measured channels in the quarter was up 36, 2% and outpaced the active nutrition segment growth of 33%.

And our ecommerce business continues to perform well as P. O S growth was similar to measured channels, even as we anniversary strong year ago comparable.

Atkins Q1, Q1 U S retail takeaway in measured channels increased seven 7%.

Year over year increase benefited from improvements in consumer mobility, and shopper traffic, particularly in the mass channel versus last year's Covid restrictions as well as continued total buyer growth.

In the quarter consumption of bars increased three 3% and was in line with recent trends.

Joseph E. Scalzo: In the quarter, consumption of bars increased 3.3% and was in line with recent trends. Bar buy rate remains below historic levels as there is a high correlation of bar consumption to being at work. Atkins shakes in the quarter retail takeaway was up 12.9% and sequentially improved versus Q4 of last year. Performance was particularly strong in the mass channel, up about 20%. Atkins all other product forms continue to show strong growth. These include confections, cookies, and the just-launched Atkins Protein Chips. In Q1, Atkins all other retail takeaway increased about 9%, driven by cookies, which contributed about two percentage points to total Atkins brand retail takeaway growth. Confections were up modestly as we lapped last year's successful dessert bar launch.

Bar by rate remains below historic levels as there is a high correlation of bar consumption to being at work.

Atkins shakes in the quarter retail takeaway was up 12, 9% and sequentially improved versus the fourth quarter of last year.

Performance was particularly strong in the mass channel up about 20%.

Atkins all other product forms continue to show strong growth. These include confections and cookies as well as the just launched Atkins protein chips in.

In Q1 Atkins all other retail takeaway increased about 9% driven by cookies, which contributed about two percentage points to total Atkins brand retail takeaway growth.

Infections were up modestly as we lapped last year's successful dessert bar launch.

First quarter Pos growth increased across all channels and was particularly strong in mass up about 10% driven by increased traffic.

Joseph E. Scalzo: Q1 POS growth increased across all channels and was particularly strong in mass, up about 10%, driven by increased traffic. We are pleased with Atkins e-commerce performance. Amazon, Atkins' second-largest customer, Q1 retail takeaway increased low teens% on a percentage basis versus the year ago period. Total Atkins e-commerce POS growth in the quarter was similar to measured channels. Atkins growth of total buyers remains strong. Buy rate remains at mid-single digits, below historic levels, due to the high correlation between consumption of bars in the workplace. Therefore, the improvement in Atkins buy rate remains an opportunity for the brand. Let me now turn to Quest, where Q1 retail takeaway increased 36.2% in the measured IRI, Nielsen C-store universe, and outpaced the Active Nutrition segment.

We're pleased with Atkins ecommerce performance.

Amazon Atkins second largest customer Q1 retail takeaway increased low teens on a percentage basis versus the year ago period.

Total Atkins E Commerce Pos growth in the quarter was similar to measured channels.

Atkins growth of total buyers remains strong.

The rate remains at mid single digits below historic levels due to the high correlation between consumption of bars in the workplace.

Therefore, the improvement in Atkins buy rate remains an opportunity for the brand.

Let me now turn to quest, where first quarter retail takeaway increased 36, 2% in the measured IRI, new low C store universe and outpaced the active nutrition segment.

Growth versus the year ago period was driven by the increase in household penetration improving shopper traffic it rebounded bars and success of new product forms.

Joseph E. Scalzo: Growth versus the year ago period was driven by the increase in household penetration, improving shopper traffic, a rebound in bars, and success of new product forms. Quest bars first quarter retail takeaway in measured channel increased 22.8%. Recall, Quest bars are nearly 60% of total Quest measured channel retail sales. The snackier portion of Quest products, about 40% of US retail sales, continued to do well and increased 106% in the quarter, driven by strong performance of chips, cookies, and confections. We continue to see robust chips demand and are on track for incremental supply to come online as the year progresses. We had another good quarter of growth across all key retail channels. Increased foot traffic in the mass channel and convenience stores was solid. Q1 POS growth in these channels were up about 50% and 40% respectively.

Quest bars first quarter retail takeaway in measured channel.

Increased 22, 8%.

Recall quest bars are nearly 60% of total quest measured channel retail sales.

The snack your portion of quest products about 40% of U S. Retail sales continued to do well and increased 106% in the quarter driven by strong performance of chips cookies and confections.

We continue to see robust chips demand and are on track for incremental supply to come online as the year progresses.

We had another good quarter of growth across all key retail channels increased foot traffic in the mass channel and convenience stores with solid.

Q1, Pos growth in these channels were up about 50% and 40% respectively.

Quest E Commerce takeaway increased about 22% versus last year.

Joseph E. Scalzo: Quest e-commerce takeaway increased about 22% versus last year. As expected, due to strong performance in the year ago period, the growth rate moderated somewhat. Our business at Amazon remained strong and growth was solid across all major forms. In summary, we're pleased with our Q1 results that were better than what we expected. That said, retail takeaway growth in H1 will be stronger than H2 as comparables become significantly more challenging. We have a good balance of innovation as well as consumer and customer programming in place that we believe will drive solid retail takeaway and net sales growth throughout the year. Our customer service levels have improved during the quarter and we are approaching more normal performance. We expect that supply chain costs will be a significant headwind during the fiscal year.

As expected due to strong performance in the year ago period, the growth rate moderated somewhat.

Our business at Amazon remains strong and growth was solid across all major forms.

In summary, we're pleased with our first quarter results that were better than what we expected.

That said retail takeaway growth in the first half of the year will be stronger than the second half of the year as comparable has become significantly more challenging we.

Have a good balance of innovation as well as consumer and customer programming in place that we believe will drive solid retail takeaway and net sales growth throughout the year.

Our customer service levels have improved during the quarter and we are approaching more normal performance.

We expect that supply chain costs will be a significant headwind during the fiscal year.

Pricing and cost savings initiatives are in place to mitigate the impact of inflation.

Joseph E. Scalzo: Pricing and cost savings initiatives are in place to mitigate the impact of inflation. However, as I mentioned earlier, supply chain costs remain high and we now expect them to linger at elevated levels throughout this fiscal year and into the fiscal 2023. Therefore, we are updating our previous view and expect total fiscal year 2022 gross margins to decline about 250 basis points versus last year. As we have stated on numerous occasions, we believe our gross margin and overhead cost structure offer us the ability to invest in the future growth of our brands and organization.

However, as I mentioned earlier supply chain costs remain high and we now expect them to linger at elevated levels throughout this fiscal year and into the fiscal 2023.

Therefore, we are updating our previous view and expect total fiscal year 2022 gross margins to decline about 250 basis points versus last year.

As we have stated on numerous occasions, we believe our gross margin and overhead cost structure offer us the ability to invest in the future growth of our brands and organization.

As we assess the impact of lingering supply chain cost inflation over the balance of this fiscal year and into fiscal 2023, we will consider all options available to us to protect our cost structure, including further pricing action.

Joseph E. Scalzo: As we assess the impact of lingering supply chain cost inflation over the balance of this fiscal year and into fiscal 2023, we will consider all options available to us to protect our cost structure, including further pricing action. As we move into Q2, we expect retail takeaway growth to be similar to Q1. That said, we remain cautious about consumer seasonal participation and return to work trends due to the recent surge in COVID-19 cases from the Omicron variant. We're executing well against our plans, and we believe we're in position to deliver another year of solid net sales and adjusted EBITDA growth as a path to increasing shareholder value. I'll now turn the call over to Todd, who will provide you with some greater financial details. I'll then end our prepared remarks with details and assumptions related to our revised outlook.

As we move into Q2, we expect retail takeaway growth to be similar to Q1.

That said, we remain cautious about consumer seasonal participation and returned to work trends due to the recent surge in COVID-19 cases from the omni crowd variant.

We're executing well against our plans and we believe we're in position to deliver another year of solid net sales and adjusted EBITDA growth as a path to increasing shareholder value.

Ill now turn the call over to Todd who will provide you with some greater financial detail.

And our prepared remarks with details and assumptions related to our revised outlook.

Thank you Joe and good morning, everyone I will begin with a review of our net sales total simply good foods first quarter net sales increased 21, 7% to $281 million.

Todd Cunfer: Thank you, Joe, and good morning, everyone. I will begin with a review of our net sales. Total Simply Good Foods Q1 net sales increased 21.7% to $281 million. North American net sales increased 24.5% and was primarily driven by volume. As Joe stated, due to the timing and implementation of the previously announced price increase, we estimate pricing was a mid-single-digit percentage point benefit to total net sales growth. Therefore, pricing will be a greater contribution to sales growth over the remainder of the year. The international business declined 27.3% due to the European business exit. Core international net sales growth was 3%, and the European business exit was a 1.6 percentage point headwind to total company sales growth. Moving on to other P&L items.

North American net sales increased 24, 5% and was primarily driven by volume as.

As Joe stated due to the timing and implementation of the previously announced price increase we estimate pricing was a mid single digit percentage point benefit to total net sales growth, therefore pricing will be a greater contribution to sales growth over the remainder of the year.

The international business declined 27, 3% due to the European business exit.

Core International net sales growth was 3% and the European business exit was a one six percentage point headwind to total company sales growth.

Moving on to other P&L items gross profit was $116 $6 million, an increase of 23, 9%.

Todd Cunfer: Gross profit was $116.6 million, an increase of 23.9%. Gross margin of 41.4% increased 70 basis points versus the year ago period. As expected, supply chain cost inflation was a headwind this quarter. However, it was more than offset by the previously mentioned price increase, lower trade promotion, favorable product and customer channel mix, and carryover coverage of select raw materials. As Joe mentioned, we anticipate significant supply chain inflation in fiscal 2022 due to higher costs related to raw materials, packaging, and logistics. Pricing and cost savings programs are in place to help offset these costs. Adjusted EBITDA increased 34.7% to $65.6 million due to the higher sales and G&A leverage.

Gross margin of 41, 4% increased 70 basis points versus the year ago period as expected supply chain cost inflation was a headwind. This quarter. However, it was more than offset by the previously mentioned price increase lower trade promotion favorable product to product and customer channel mix and Carey carryover.

Average of select raw materials.

As Joe mentioned, we anticipate significant supply chain inflation in fiscal 'twenty, two due to higher costs related to raw materials packaging and logistics.

<unk> and cost savings programs are in place to help offset these costs.

Adjusted EBITDA increased 34, 7% to $65 $6 million due to the higher sales and G&A leverage.

Selling and marketing expense increased 21, 2% to $35 million driven by higher brand building initiatives on both brands do.

Todd Cunfer: Selling and marketing expense increased 21.2% to $30.5 million, driven by higher brand-building initiatives on both brands. Due to a large ramp-up of marketing expense in the H2 of fiscal 2021, the majority of the increase in the fiscal 2022 marketing accrual will occur in the H1 of the year. G&A expense, excluding Quest integration costs, restructuring expenses, stock-based compensation, and other costs, were about the same as the year ago period. Higher incentive compensation was offset by lower corporate expense and integration synergies. We anticipate solid G&A leverage this year and expect leverage will be greater in the H2 of the year due to the timing of when we began to accrue incentive compensation in fiscal 2021. Moving to other items in the P&L.

Due to a large ramp up of marketing expense in second half of fiscal 2021. The majority of the increase in the fiscal 2022 marketing accrual will occur in the first half of the year.

G&A expense, excluding quest integration cost restructuring expenses stock based compensation and other costs were about the same as the year ago period.

Higher incentive compensation was offset by lower corporate expense and integration synergies.

We anticipate solid G&A leverage this year and expect leverage will be greater in the second half of the year due to the timing of when we began to accrue incentive compensation in fiscal 2021.

Moving to other items in the P&L interest expense declined $2 million to $6 4 million due to the pay down of the term loan.

Todd Cunfer: Interest expense declined $2 million to $6.4 million due to the pay down of the term loan. In Q1 of fiscal 2022, the non-cash charge related to the remeasurement of our private warrant liabilities was $17.3 million. In the year ago period, we recorded a non-cash $20.5 million gain related to the warrants. Our statutory tax rate in Q1, excluding the charge related to the warrant liability, was about 25%. We continue to anticipate that our full year tax rate will be approximately 27%. Net income in Q1 was $21.2 million versus $43 million in the year ago period. Turning to EPS. First quarter reported EPS was $0.22 per share diluted compared to $0.23 per share diluted for the comparable period of 2021.

In the first quarter of fiscal 2022, the noncash charge related to the Remeasurement of our private warrant liabilities was $17 $3 million.

In the year ago period, we recorded a noncash $25 million gain related to the warrants.

Our statutory tax rate in Q1, excluding the charge related to the warrant liability was about 25%.

We continue to anticipate that our full year tax rate will be approximately 27%.

Net income in Q1 was $21 2 million versus $43 million in the year ago period.

Turning to Etfs first quarter reported EPS was <unk> 22 per share diluted compared to 23% 23 per share diluted for the comparable period of 2021 and.

In addition to the previously mentioned warrant liability impact depreciation and amortization expense was $4 $7 million and similar to a year ago period Doctor.

Todd Cunfer: In addition to the previously mentioned warrant liability impact, depreciation and amortization expense was $4.7 million and similar to the year ago period. Stock-based compensation of $2.6 million increased $1.5 million versus last year. Costs associated with Quest integration and restructuring was $0.1 million versus $3.8 million last year. Adjusted diluted EPS, which excludes these items, was $0.43, an increase of $0.14 versus the year ago period. Note that we calculated adjusted diluted EPS as adjusted EBITDA, less interest income, interest expense, and income taxes. Additionally, the calculation of adjusted diluted EPS in Q1 assumes fully diluted shares outstanding of 102.5 million versus 97.9 million under GAAP.

Stock based compensation of $2 6 million increased $1 $5 million versus last year and.

And costs associated with quest integration and restructuring was zero point $1 million versus $3 $8 million last year.

Adjusted diluted EPS, which excludes these items was <unk> 43, an increase of 14 versus a year ago period.

Note that we calculated adjusted diluted EPS as adjusted EBITDA less interest income interest expense and income taxes.

Additionally, the calculation of adjusted diluted EPS in Q1 assumes fully diluted shares outstanding of $102 5 million versus 97 9 million under GAAP.

The difference versus gap 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.

Todd Cunfer: The difference versus GAAP is due 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 an explanation and reconciliation of non-GAAP financial measures. Moving to the balance sheet and cash flow. In November 2021, the company paid down $25 million of its term loan, and at the end of Q1, the outstanding principal balance was $431.5 million. In Q1, the net cash used in operating activities was $7.3 million. Note that this was affected by the timing of working capital, tax payments, and an increase in incentive compensation payments versus the prior year.

Please refer to today's press release for an explanation and reconciliation of non-GAAP financial measures.

Moving to the balance sheet and cash flow in November 2021, the company paid down $25 million of its term loan and at the end of the first quarter. The outstanding principal balance was $431 5 million.

In the first quarter the net cash used in operating activities was $7 3 million note that this was affected by the timing of working capital tax payments and an increase in incentive compensation payments versus the prior year.

The company continues to anticipate full year fiscal 2022 cash flow from operations will be greater than last year.

Todd Cunfer: The company continues to anticipate full-year fiscal 2022 cash flow from operations will be greater than last year. As of 27 November 2021, the company had cash of $35.4 million, and the trailing twelve-month net debt to adjusted EBITDA ratio was 1.8 times. Capital expenditures in the first quarter were $2.7 million. Full year CapEx is expected to be about $5 to 6 million. We anticipate GAAP interest expense to be about $25 million, including non-cash amortization expense related to the deferred financing fees. I would like now to turn the call back to Joe for closing remarks.

As of November 27, 2021, the company had cash of $35 4 million and the trailing 12 month net debt to adjusted EBITDA ratio was one eight times.

Capital expenditures in the first quarter were $2 $7 million full year Capex is expected to be about $5 million to $6 million.

We anticipate GAAP interest expense to be about 25 million.

I'm quoting noncash amortization expense related to the deferred financing fees.

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

Thanks, Scott our strong first quarter results are a good start to the year.

Joseph E. Scalzo: Thanks, Todd. Our strong Q1 results are a good start to the year. Our retail takeaway trends remain solid, and we have marketing, customer programming, and new product plans in place to continue to drive growth. This gives us confidence to increase our full-year net sales and adjusted EBITDA outlook versus our previous estimate. Note that our forecast does not assume any meaningful changes in workplace mobility. Looking at the key metrics of our updated full-year fiscal 2022 outlook, we expect net sales to increase 12% to 14% versus last year, and this includes a one percentage point headwind related to the European business exit.

Our retail takeaway trends remain solid and we have marketing customer programming and new product plans in place to continue to drive growth.

This gives us confidence to increase our full year net sales and adjusted EBITDA outlook versus our previous estimate.

Note that our forecast does not assume any meaningful changes in workplace mobility.

Looking at the key metrics of our updated full year fiscal 2022 outlook.

We expect net sales to increase 12% to 14% versus last year and this includes a one percentage point headwind related to the European business exit.

As I stated earlier higher supply chain costs versus our previous outlook driven mostly by ingredients remains a headwind in 2022 and will result in full year gross margin contraction of about 250 basis points with the biggest impact in the second and third quarter.

Joseph E. Scalzo: As I stated earlier, higher supply chain costs versus our previous outlook, driven mostly by ingredients, remains a headwind in 2022 and will result in full-year gross margin contraction of about 250 basis points, with the biggest impact in Q2 and Q3. Adjusted EBITDA is anticipated to increase slightly less than the net sales growth rate. We continue to expect that marketing expense will increase versus last year, although at a lower rate than the net sales increase. Additionally, we anticipate benefiting from significant SG&A leverage. The decline in interest expense should result in an increase of adjusted diluted EPS greater than the adjusted EBITDA growth rate. We anticipate the net sales growth in H1 of the year will be stronger than H2 as the year-over-year comparisons are significantly more difficult as we proceed through the year.

Adjusted EBITDA is anticipated to increase slightly less than the net sales growth rate.

We continue to expect that marketing expense will increase versus last year, although at a lower rate than the net sales increase.

Additionally, we anticipate benefiting from significant SG&A leverage.

And the decline in interest expense should result in an increase of adjusted diluted EPS greater than the adjusted EBITDA growth rate.

We anticipate that net sales growth in the first half of the year will be stronger than the second half as the year over year comparisons are significantly more difficult as we proceed through the year.

Additionally, we expect our retail takeaway growth rate in the second quarter of fiscal 2022 to be similar to the first quarter and due to higher cost. We expect Q2, adjusted EBITDA growth will be less than the net sales growth rate.

Joseph E. Scalzo: Additionally, we expect our retail takeaway growth rate in Q2 of fiscal 2022 to be similar to Q1. Due to higher costs, we expect Q2 adjusted EBITDA growth will be less than the net sales growth rate. We're excited about the growth opportunities that exist within our business and this category. We're executing against our strategies and increasing household penetration that is resulting in solid sales and earnings growth. Our strong balance sheet and cash flow generation enable us to invest in our business and evaluate M&A opportunities as a path to increasing shareholder value. We appreciate everyone's interest in our company, and we're now available to take your questions.

We're excited about the growth opportunities that exist within our business in this category.

Executing against our strategies and increasing household penetration that is resulting in solid sales and earnings growth.

Our strong balance sheet and cash flow generation enable us to invest in our business and evaluate M&A opportunities as a path to increasing shareholder value.

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

Thank you at this time well be conducting a question and answer session. If you'd like to ask a question. Please press star one on your telephone keypad.

Operator 3: Thank you. At this time, we'll be conducting a question-and-answer session. If you'd like to ask a question, please press star one on your telephone keypad. A confirmation tone will indicate your line is in the question queue. You may press star two if you'd like to remove your question from the queue. For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star keys. In the interest of time, we ask that you each keep to one question and one follow-up. Thank you. Our first question comes from the line of Chris Growe with Stifel. Please proceed with your question.

Operator: Thank you. At this time, we'll be conducting a question-and-answer session. If you'd like to ask a question, please press star one on your telephone keypad. A confirmation tone will indicate your line is in the question queue. You may press star two if you'd like to remove your question from the queue. For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star keys. In the interest of time, we ask that you each keep to one question and one follow-up. Thank you. Our first question comes from the line of Chris Growe with Stifel. Please proceed with your question.

A confirmation tone will indicate your line is into question Kim.

May press star two if you'd like to remove your question from Mccann.

For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star keys and.

In the interest of time, we ask that you each keep to one question and one follow up thank you.

Our first question comes from the line of Chris Growe with Stifel. Please proceed.

Hi, good morning, guys.

Chris Growe: Hi, good morning, guys.

Good morning, Chris Good morning, I, just had a question for you and there's been a couple of a popular topic on you know on many companies' calls, but you know inflation just seems to keep going and you took pricing in <unk>.

Joseph E. Scalzo: Morning, Chris.

Todd Cunfer: Morning, Chris.

Chris Growe: Good morning. I just had a question for you know, and it's been kind of a popular topic on, you know, on many companies' calls, but, you know, inflation just seems to keep going and you took pricing and as a result it's not totally offsetting the cost inflation. At least there's gonna be some gross margin effect from that. I wonder if you could give me, or if you could talk about the level of inflation you now expect. Then I guess we're not looking for forward prospects here for pricing, but just in a world where you look to utilize the gross margin to reinvest back in the business, are you limited in that regard this year because of the gross margin outlook you have for the business now?

As a result, it's not totally offsetting the cost inflation at least theres going to be some gross margin effect from that I Wonder if you could give me or if you could talk about the level of inflation you now expect and then I guess, we're not looking for forward prospects here for pricing, but just in the in a world where you look to utilize the gross margin to reinvest back in the business are you.

Limited in that regard this year because of the gross margin to all of you for the business though.

Yeah, So I'll take that one Chris So first of all just to be clear, we are very comfortable with our ability to navigate the P&L, even with this incremental supply chain costs. As you heard we raised both our top and bottom line guidance, we feel terrific about that.

Todd Cunfer: Yeah. I'll take that one, Chris. First of all, just to be clear, we are very comfortable with our ability to navigate the P&L, even with this incremental supply chain cost. As you heard, we raised both our top and bottom-line guidance. We feel terrific about that. You know, regarding levels of inflation, you know, going into the year, you know, there was significant inflation with a significant price increase, and the inflation that we were seeing was probably high single digits. It's now increased to kinda low double digits for our total business. That's the new outlook for commodity costs. It is significant. You know, we love the shape of our P&L. We love our ability to invest in our business.

Regarding levels of inflation going into the year, we kind of you know there were significant inflation with a significant price increase in the inflation that we were seeing was probably high single digits. It's now increased to kind of low double digits for our total business. So that's that's the.

New new outlook for commodity costs. So.

What is significant.

We love the shape of our P&L.

We love our ability to invest in our business you can count on us to increase marketing and this year. It may not be at the same level of growth rate that we've done in the previous years is as you know we've increased marketing substantially well ahead of net sales over the last several years. So we're close to 10% of net sales from our marketing investment.

Todd Cunfer: You can count on us to increase marketing in this year. It may not be at the same level of growth rate that we've done in the previous years. As you know, we've increased marketing substantially well ahead of net sales over the last several years. We're close to 10% of net sales from a marketing investment, which we feel great about. We'll increase it. It may not be at the level and the growth rate we've done in the past, but you can expect us to continue to invest in our business.

We feel great about we'll increase it may not be at the level and the growth rate. We've done in the past, but you can expect us to continue to invest in our business.

And just to be clear on that is how it is do you have do you have better visibility of those input costs out of city of more coverage. I guess is the question that would allow you to have the comfort in that yeah.

Chris Growe: Just to be clear on that, Todd, is do you have better visibility in those input cost audits? Do you have more coverage, I guess, is the question that would-

Todd Cunfer: Yeah.

Chris Growe: Allow you to have the comfort in that?

Yeah, and so whereabouts whereabout, 75% covered for this year. So we do have a little bit of exposure a little bit risk to the rest of the year, but again, we do have levers in our P&L to manage that we're very very comfortable and obviously if this thing continues to linger.

Todd Cunfer: Yeah. We're about 75% covered for this year. We do have a little bit of exposure, a little bit risk to the rest of the year. Again, we do have levers in our P&L to manage that. We're very, very comfortable. Obviously, if this thing continues to linger, you know, we will not hesitate to take some additional pricing action.

You know, where we will not hesitate to take some additional pricing action.

Okay and I had just one quick follow up on the on the Atkins brand. It sounds like a buy rate is mostly unchanged. It's just more buyers is that was there any measurable change in that sequentially from from the fourth quarter.

Chris Growe: Okay. I had just one quick follow-up on the Atkins brand. It sounds like buy rate is mostly unchanged, it's just more buyers. Was there any measurable change in that sequentially from Q4?

Yeah, we're still Chris we're still seeing what we've been experiencing which is.

Joseph E. Scalzo: No. We're still, Chris, we're still seeing what we've been experiencing, which is strong interest in the brand, evidenced by the number of buyers participating. We continue to see growth in buyers. The bar form, in particular for Atkins, the number of snacking occasions of bars is being impacted negatively by people not being back at work. Now, the good news is, as we mentioned in our prepared comments, our kind of all other forms, non-shake, non-bar business is doing really well. Those are incremental consumption occasions, highly less correlated to being at work, and that's starting to pick up some of the slack from a buy rate standpoint.

Strong interest in the brand evidenced the number of buyers participating so we continue to see growth in buyers.

And the bar form in particular for Atkins the number of snacking occasions have bars is being impacted negatively by people not being back at work now the good news is as we mentioned in our prepared comments are kind of all other forms non shake.

On the bar business is doing really well those are incremental.

Consumption occasions, highly less correlated to being at work and Thats starting to pick up some of the slack from a buy rate standpoint.

Okay. Thanks, so much for your time.

Chris Growe: Okay. Thanks so much for your time.

Thank you. Our next question comes from the line of Jason English with Goldman Sachs. Please proceed with your question.

Speaker 0: Thank you. Our next question comes from the line of Jason English with Goldman Sachs. Please proceed with your question.

Okay.

Hey, good morning folks a.

Jason English: Hey, good morning, folks. A couple of quick questions. First, quick back of the envelope math, it looks like you're cutting your gross profit forecast for the full year by around 2%. A, is this correct? And b, with EBITDA actually moving higher in context of gross profit moving lower, where are the offsets?

Couple of quick questions first quick back of the envelope math it looks like Youre cutting your gross profit forecast for the full year by around 2%.

This is correct and b with EBITDA actually moving higher in context of gross profit has been lower where are the offsets.

Yes, I think Matthew I think your math is generally correct. So first of all we have significant G&A leverage in our P&L.

Todd Cunfer: Yeah. I think your math is generally correct. First of all, we have significant G&A leverage in our P&L. You know, the good news is when you're taking the volume up, not only do you get obviously incremental profit from the volume, but from a percentage basis, from a margin perspective, you get a nice kicker at the EBITDA margin line with, you know, G&A flat to growing very modestly for the year. Then as I you know talked about with Chris Growe's question, look, we're going to increase marketing. We have the ability to toggle that back, you know, depending on where we see the gross margin come in.

Good news is when you're taking the volume up.

Do you get obviously incremental profit from the volume, but from a percentage basis from a margin perspective, you get a nice kicker at the EBITDA margin line with G&A.

Flat to growing very modestly for the year and then as you know as I talked about with Chris <unk> question look where we're going to increase marketing we have the ability to toggle that back.

Depending on where we see the gross margin come in it'll be an increase this year, but we're still at a very healthy level of marketing. So we have the ability to have some more modest increases in marketing if necessary.

Todd Cunfer: It'll be an increase this year, but we're still at a very healthy level of marketing, so we have the ability to have some more modest increases in marketing if necessary.

So to put a finer point on your answer Todd. It sounds like you are planning to spend less marketing than you initially planned coming into the year did I hear that correctly.

Jason English: To put a finer point on your answer, Todd, it sounds like you're planning to spend less marketing than you initially planned coming into the year. Did I hear that correctly?

A little bit depending on how the year plays out yes, we are.

Todd Cunfer: Probably a little bit, depending on how the year plays out. You know, our initial guidance when we were having, you know, 8% to 10% net sales growth, was for that to be basically in line, so implying kind of a high single digit growth initially. It's probably gonna be a bit lower than that.

<unk> guidance, when we were having 8% to 10% net sales growth was for that to be basically in line. So implying kind of a high single digit growth initially, it's probably going to be a bit lower than that.

Got it and you started so confident on your gross margin outlook last year and now here. We are a few months later and it looks back of the envelope like you're raising your ingredient forecast by 15% or so for the full year.

Jason English: Got it. You sounded so confident on your gross margin outlook last year. Now here we are a few months later, and it looks back of the envelope, like you're raising your ingredient forecast by 15% or so for the full year. We, on the outside, are looking at spot markets that look like a little up, a little down, but kind of just moving sideways. What's really caught you off guard? What changed so much over the last three months?

What.

We on the outside or looking at spot markets that looked like a little up a little down but kind of just moving sideways.

It's really caught you off guard what changed so much over the last three months.

This is Joe there our original view of the marketplace was that it would not stay at the sustained high levels that we were experiencing as we moved into the year.

Joseph E. Scalzo: Yeah. This is Joe. Our original view of the marketplace was that it would not stay at the sustained high levels that we were experiencing as we moved into the year. Our view of it now is, looks like it's gonna linger longer than what we expected. It's not a matter of costs are going up, they're just not abating as what we expected. Frankly, that view is a pretty recent view. We're starting to, you know, we're just starting the process of stepping back and say, "Okay, this is gonna linger a while." In our prepared comments, we said kind of H2 of the year, we expect them to linger into the next fiscal year. What are our options, and what are we gonna do about it?

And our view of it now is it looks like it's going to linger longer than what we expected. So it's not a matter of costs are going up theyre, just not abating as what we what we expected and frankly that view is a pretty recent view. So we're starting to we're just starting the process of stepping back and say.

Okay. This is going to linger a while in our prepared comments, we said kind of the second half of the year, we expect them to linger into the next fiscal year, what are our options and what are we going to do about it and we've been pretty clear with the market from the very beginning we think the shape of our P&L as a competitive advantage gross margins over 40% marketing investment around 10.

Joseph E. Scalzo: We've been pretty clear with the market from the very beginning. We think the shape of our P&L is a competitive advantage. Gross margin's over 40%, marketing investment around 10%, EBITDA as a percent of sales around 20%. Right? If these costs seem to be lingering, you can expect us to act in order to maintain our margin structure.

EBITDA.

As a percent of sales around 20% right. So.

If if these costs seem to be lingering you can expect us to act in order to.

Maintain our margin structure.

Got it understood and congrats on the strong demand momentum by the way I'll pass it on thank you.

Jason English: Got it. Understood. Congrats on the strong demand momentum, by the way. I'll pass it on. Thank you.

Hey, Jason.

Joseph E. Scalzo: Thank you, Jason.

Thank you. Our next question comes from the line of Wendy Nicholson with Citi. Please proceed with your question Hi.

Speaker 0: Thank you. Our next question comes from the line of Wendy Nicholson with Citi. Please proceed with your question.

Operator: Thank you. Our next question comes from the line of Wendy Nicholson with Citi. Please proceed with your question.

Hi, My first question is just on the supply chain in terms of your availability on the labor side in terms of the work you have at the car manufacturers are you seeing any challenges I know you talked about strength in the Atkins shake business, obviously, that's off a very low base, because it's a new product, but can you talk about borrowers are some shakes if youre seeing any specific challenge.

Chris Growe: Hi. My first question is just on the supply chain, in terms of your availability on the labor side, in terms of the work you have with the co-manufacturers. Are you seeing any challenges? I know you talked about strength in the Atkins shake business. Obviously, that's off a very low base because it's a new product. Can you talk about bars versus shakes, if you're seeing any specific challenges in getting product in the door?

Wendy Nicholson: Hi. My first question is just on the supply chain, in terms of your availability on the labor side, in terms of the work you have with the co-manufacturers. Are you seeing any challenges? I know you talked about strength in the Atkins shake business. Obviously, that's off a very low base because it's a new product. Can you talk about bars versus shakes, if you're seeing any specific challenges in getting product in the door?

Jayson and getting product in the door.

Yeah good.

Good question as we said in our prepared comments our performance improved during the quarter. So we were below our expectations on customer service and frankly it was it was not one thing.

Joseph E. Scalzo: Yeah. Wendy, good question. As we said in our prepared comments, our performance improved during the quarter. We were below our expectations on customer service. Frankly, it was not one thing. Throughout the supply chain, we've run into challenges from ability to get access to customers' docks, to the ability to get products from co-man, the ability to get ingredients to get products from co-man. Pretty much you're playing supply chain Whac-A-Mole on a daily basis. That said, our supply chain team has done a particularly outstanding job in Q1 of addressing those challenges and improving our customer service, such that when we exit Q1, we're getting pretty close to or where we expect our customer service performance to be. Look, I don't

So throughout the supply chain, we've run into challenges from ability to get access to customers docs to the.

The ability to get products from co man the ability to get ingredients to get products from comment pretty much.

<unk> supply chain whack, a mole on a daily basis.

That said our supply chain team has done a particularly outstanding job in the first quarter of <unk>.

Addressing those challenges and improving our customer service such that when we exit the first quarter, we're getting pretty close to.

Or where we expect our customer service performance to be so.

Look I don't.

Are we out of the woods from a supply chain standpoint, no I expect I expect that will continue to be challenged on a daily basis with issues. Nothing is smooth right now, but our team has shown the ability to manage through that and we're pretty confident.

Joseph E. Scalzo: Are we out of the woods from a supply chain standpoint? No, I expect it will continue to be challenged on a daily basis with issues. Nothing is smooth right now, but our team has shown the ability to manage through that, and we're pretty confident.

And on the Atkins Shake business, obviously, you know protein shakes.

Wendy Nicholson: On the Atkins shake business, obviously, you know, protein shakes, great category, rapidly growing, but also very competitive. You know, the Atkins brand obviously speaks for itself in terms of brand recognition, but just can you remind us kind of how is that positioned and how do you intend to kinda carve out a niche in a, in what is a very crowded category right now?

Great category rapidly growing but also very competitive.

Atkins brand, obviously speaks for itself in terms of brand recognition, but just can you remind us kind of how is that positioned and how do you intend to kind of carve out a niche.

And what is a very crowded category right now yes.

Yes, So let me dispel.

Joseph E. Scalzo: Yeah. Let me dispel that it's a category. It is not. Very unusual in this nutrition category, you've got products and forms that don't compete with each other. Let me give you the simplest example. Ensure and Boost, high protein, carbs and sugar sources and interact very little with Atkins and Premier Protein because the consumer benefit is fundamentally different. Consumer targets are different, consumer benefits are different. If you try to group anything that's a shake, that's high protein, low carbs and low sugar together, you're actually making a mistake on how to think about the category. I think what's happening is because people are home more, there are more usage occasions of those shakes across the consumer targets and across the consumer benefits. I think you're seeing that.

But it's a category it is not so very unusual in this nutrition category, you've got products in forms that don't compete with each other so let me give you. The simplest example.

Insure and boost.

High protein low carbs, and sugar source and interact very little with Atkins and premier protein.

Because the consumer benefit is fundamentally different.

<unk> targets are different consumer benefits are different so if you try to group anything Thats a shake this high protein low carbs and low sugar together, youre actually making a mistake and on how to think about the category I think what's happening is because people are home more shakes or are there more usage occasions of those <unk>.

<unk> across the consumer targets and across the consumer benefits I think youre seeing that second.

If you can supply the product youre getting preferential treatment among retailers because you can get you can service. It you can get display and keep your shelf stock we've not had issues with our shake business and we're benefiting a little bit from that but again, there's not a lot of interaction.

Joseph E. Scalzo: Second, if you can supply the product, you're getting preferential treatment among retailers because you can service it, you can get display, and keep your shelf stocked. We've not had issues with our shake business, and we're benefiting a little bit from that. Again, there's not a lot of interaction. It's very unusual. You've got identical products that do not interact with each other because the consumer targets and the benefits are so fundamentally different.

It's very unusual you've got a denticle products that do not interact with each other because there's consumer targets and the benefits are so fundamentally different.

Fair enough.

And then my last question. It was just one of the comments you made.

Wendy Nicholson: Fair enough. Then my last question, it was just one of the comments you made at the very beginning was about the shipments outpacing inventory a little bit in anticipation of sort of normal inventory build and New Year's promotions. I guess my question is just in the first, you know, whatever, two weeks of the year with Omicron and whatnot, are you seeing any delay in purchases, people going back to the stores? I'm just wondering if there's that inventory build means there's gonna be excess inventory on store shelves for some time to come.

At the very beginning was about the shipments outpacing inventory a little bit in anticipation of sort of normal inventory build in and new year's promotions, but I guess my question is just in the first you know whatever two weeks of the year with omicron and whatnot are.

Are you seeing any delay in purchases people going back to the stores and so I'm. Just wondering if there was that inventory build means there's going to be excess inventory on store shelves for some time to come.

Yes, I think our prepared comments to be clear our prepared comments at two factors in that first we ended last year at a lower trade inventory level than what we would've expected and it had to do with <unk>.

Joseph E. Scalzo: Yeah, I think our prepared comments, to be clear, our prepared comments had two factors in that. First, we ended last year at a lower trade inventory level than what we would have expected, and it had to do with our ability to flow products to customers, both on the customer side and our side. We had some makeup to do in the quarter. Second, you rightfully pointed out, you know, the build up for merchandising at retail in New Year's. Really too early to call New Year's consumption yet, right? We haven't gotten that kind of first complete week of January from a POS standpoint, so it's hard to tell exactly what the consumer offtake is gonna be in New Year's. Yeah.

Our ability to flow products to customers both on the customer side and our side. So we had some makeup to do in the in the quarter and then second you rightfully pointed out.

The buildup for merchandising at retail in new year's really too early to call new year's consumption, yet right. So we havent gotten that.

Kind of first complete week of January from a Pos standpoint, so it's hard to tell exactly what the consumer offtake is going to be a new year's fair enough. Good.

Wendy Nicholson: Fair enough. Thanks.

Thank you Wendy.

Joseph E. Scalzo: Good news.

Wendy Nicholson: Yeah.

Joseph E. Scalzo: Thank you, Wendy.

Thank you. Our next question comes from the line of Camille.

Speaker 0: Thank you. Our next question comes from the line of Kaumil Gajrawala with Credit Suisse. Please proceed with your question.

<unk> with credit Suisse. Please proceed with your question.

Hi, guys good morning.

Kaumil Gajrawala: Hi, guys. Good morning. If I could follow up a little bit on the supply chain commentary you just made. Do you have a sense or an idea on the impact it might have had on overall top line, or was it as simple as, you know, just the customer service wasn't where you wanted it to be?

Just follow up a little bit on the supply chain commentary you just made do you.

You have a sensor an idea and the impact it might have had on an overall topline or was it as simple as just a customer service wasn't where you wanted it to be.

First quarter again.

Joseph E. Scalzo: Q1, again, ability to service the customer impacts your revenue, when you are out of stock, right? If you miss a sale because somebody comes into a store and you're out of stock, that's the challenge of the business. We had out of stocks in the Q1. We saw those as the quarter progressed steadily get better. Obviously we're a little bit more optimistic. Our service is better. Out of stocks are being reduced. The ability to flow product to the shelf is smoother than it was as we went into the quarter. That's all good news.

Ability to service the customer impacts your revenue.

When you are out of stock right. So if you Miss a sale because somebody comes into a store and you're out of stock. That's the challenge of the business, we had out of stocks in the first quarter.

So.

We saw those as the quarter progressed steadily get better.

So obviously, we're a little bit more optimistic our services better out of stocks are being reduced the ability to flow product to the shelf is smoother than it was as we went into the quarter. That's all good news.

Okay, Great and then just talk a little bit more on household penetration in the context of market share.

Kaumil Gajrawala: Okay, great. To talk a little bit more on household penetration in the context of market share, you know, you've benefited from mobility, but you've benefited from a lot of brand momentum recently as well. Since you're in so many categories, it's a little difficult for us from the outside to get a good sense on where the share trends look. I would anticipate they're up nicely, but if you could give any more context or color on where you sit in terms of share in the context of how you look at your brands.

<unk> benefit from mobility, but you are benefiting from a lot of brand momentum recently as well since you are in so many categories. Its a little difficult for us from the outside to get a good sense on where the trend share trends look I would anticipate they're up nicely, but if you could give any more context or color on where you sit in terms of share in the context of how.

You look at your.

Joe brands.

Yes, so weak.

Joseph E. Scalzo: Yeah. Maybe it would be helpful. Sounds like you may be sub-segmenting the brands by form. It would be our strong recommendation that you look at sub-segments of Weight Management for Atkins regardless of form and on Quest, regardless of form, Active Nutrition, which would include brands like Premier Protein, to name a few, right? In both of those segments, Atkins has outperformed the Weight Management segment and Quest has outperformed the Active Nutrition segment. That's what we track. There's so much interaction within our brands, within the forms. It is more accurate to take a brand view, therefore a brand consumer benefit view, than it is trying to sub-segment chips, cookies, shakes, and bars. Because the brand will interact so much within those, you get a false read of what's really going on.

Maybe it would be helpful. It sounds like you may be sub segmenting the brands by form it will be our strong recommendation that you look at sub segments of weight management for Atkins, regardless of form and on quest, regardless of form active nutrition, which would include brands like premier protein to name a few right. So.

And both of those segments Atkins is outperform the weight management segment.

Quest has outperformed the active nutrition segment.

And that's what we track there is so much interaction within our brands with in the forms.

It is more accurate to take a brand view, therefore, a brand consumer benefit view than it is trying to subsegment chips, and cookies and shakes and bars, because the brand will interact so much within those you get a false read of what's really going on.

I'll give you. An example, the highest interaction of Atkins meal bars as Atkins shakes.

Joseph E. Scalzo: To give you an example, the highest interaction of Atkins meal bars is Atkins shakes. So if we're on a roll on shakes because of innovation, because of merchandising, because of good communication, we see an impact in our meal bar business and vice versa. So look at the brand from a consumer benefit, Weight Management, Active Nutrition, and evaluate the total brand against those segments. What you'll see is we've been steadily growing share in both of those sub-segments.

So if we're on a roll on shakes because of innovation because of merchandising because of good communication, we see an impact in our meal bar business and vice versa. So look at the brand from a from a consumer benefit weight management active nutrition and evaluate the total brand against those segments and what you'll see is we've been steadily grown.

Share in both of those sub segments.

It's useful thank you.

Todd Cunfer: Useful. Thank you.

Kaumil Gajrawala: Useful. Thank you.

Thank you. Our next question comes from the line of Alexia Howard with Bernstein. Please proceed with your question.

Speaker 0: Thank you. Our next question comes from the line of Alexia Howard with AllianceBernstein. Please proceed with your question.

Operator: Thank you. Our next question comes from the line of Alexia Howard with AllianceBernstein. Please proceed with your question.

Good morning, everyone.

Rachel Smith: Good morning, everyone.

Alexia Howard: Good morning, everyone.

Good morning Alexia.

Joseph E. Scalzo: Morning, Alexia.

Todd Cunfer: Hi, Alexia.

Hi, so.

Rachel Smith: Hi. Going into this year, I know we're entering Q2 for you guys now, but the level of uncertainty is unprecedented. Just given the pandemic, given the input cost inflation, all the other moving pieces, supply chain disruption and so on. If you had to rank order from here what the key sort of uncertainties are in terms of risks and opportunities, given the change in guidance that we've just seen from you, how would you rank order the things that you don't know, or that you don't have visibility into from here? Thank you. I have a follow-up.

Alexia Howard: Hi. Going into this year, I know we're entering Q2 for you guys now, but the level of uncertainty is unprecedented. Just given the pandemic, given the input cost inflation, all the other moving pieces, supply chain disruption and so on. If you had to rank order from here what the key sort of uncertainties are in terms of risks and opportunities, given the change in guidance that we've just seen from you, how would you rank order the things that you don't know, or that you don't have visibility into from here? Thank you. I have a follow-up.

This going into this year and I know, we're entering the second quarter for you guys now, but the level of uncertainty is unprecedented just given the pandemic given the input cost inflation.

All the other moving pieces of supply chain disruption and so on if you had to rank order from here, what the key sort of.

$17 intensive risks and opportunities given the changing guidance that we've just seen from you how would you how would you rank order the things that you don't know.

Visibility into from here. Thank you my follow up.

That's a killer question Alexia.

Joseph E. Scalzo: That's a killer question, Alexia. What keeps me up at night? All right, I think any change to consumer mobility and shopping behavior. That would be the first, right? We saw at the beginning of the pandemic that led to huge levels of volatility from a consumption standpoint. If you remember the early stages, consumption spiked and then it declined, and shopper traffic was down, and channel mix changed. If you were looking at risks to the business, the Omicron variant's impact on people's shopping behaviors and their mobility. Are they out and about? Or is life at least reasonably similar to when it's been in this kind of post-COVID consumer mobility world? That would be the first. I think the second in our business is we took a price increase on 15 September.

What keeps me up at night.

Alright, so I think any change to consumer mobility and shopping behavior.

That would be the first right. We saw at the beginning of the pandemic that led to huge levels of volatility.

From a consumption standpoint, if you remember the early stages consumption Spike and then a decline in shopper traffic was down in channel mix change. So if if if if you were looking at risks to the business the omni crime Omnicom crime variance impact on pill people shopping behaviors.

And there.

Mobility are they out and about.

His life at least reasonably similar to what it's been in this kind of.

Post Covid consumer mobility world that would be the first I think the second in our businesses. We took a price increase on September 15th for the most part doesn't start really to hit the shelves until early November so retailers don't move price that quickly. So we don't.

Joseph E. Scalzo: You know, for the most part it doesn't start really to hit the shelves until early November, so retailers don't move price that quickly. We don't really have a lot of data on the impact on volume of the price increase. That's an H2 risk, I think. That one keeps me up a little bit. And then I think third, just in general, we know we're gonna be chasing supply chain challenges for the year, right? Our ability to be responsive to those challenges, and our team has done a phenomenal job, but they are playing Whac-A-Mole every day, right? And they're chasing issues that you typically don't deal with in a year. Nothing's flowing steadily.

Really have a lot of data on the impact on volume of the price increase so that's a second half of the year risk I think so.

So that one keeps me up a little bit.

And then I think third just in general we know we're going to be chasing.

Supply chain challenges for the year.

So our ability to be responsive to those challenges and our team has done a phenomenal job, but they are playing whack a mole everyday right and theyre chasing issues that you typically don't deal with in a year nothing's flowing.

Steadily so our customer service has gotten significantly better, but like a duck on the water look smooth, but we're working really hard to make that happen I would say in the cost environment.

Joseph E. Scalzo: You know, our customer service has gotten significantly better, but like a duck on the water looks smooth, but we're working really hard to make that happen. I would say in the cost environment, you know, I think the absolute price has been pretty steady. I think somebody said that in their comments. For us now, it's how long is it gonna linger, and then what do we wanna do about it? I'm less concerned about the price because it appears to have plateaued. The fundamental question is how long is it gonna be around, and then how do we address it going forward?

I think we.

The absolute price has been pretty steady I think somebody said that in their comments. So for US now how long is it going to linger and then what do we want to do about it so I'm less concerned about.

I'm less concerned about the price because it appears to have plateaued. The fundamental question is how long is it going to be around and then how do we address it going forward.

It makes perfect sense and thank you. So much just a real quick follow up you mentioned favorable mix in the press release this morning.

Rachel Smith: Makes perfect sense. Thank you so much. Just a real quick follow-up. You mentioned favorable mix in the press release this morning. What is that attributable to, and how long is it likely to continue?

Alexia Howard: Makes perfect sense. Thank you so much. Just a real quick follow-up. You mentioned favorable mix in the press release this morning. What is that attributable to, and how long is it likely to continue?

What is that attributable to and how long is it likely to continue.

Yes.

During COVID-19 during the height of Covid.

Todd Cunfer: Yeah. During COVID, during the heights of COVID, on both brands, the bar business really suffered. Now that we're getting back to, you know, somewhat normal consumer behavior, the bar business, particularly on the Quest side, has rebounded really nicely. Also from a customer standpoint, you're getting a better balance between brick and mortar and e-com. The C store business on the Quest side has had a tremendous, you know, last couple of months here, and those are all positive things from a mix perspective for us.

Both on both brands to bar business really suffered and now that we're getting back to somewhat normal consumer behavior. The bar business, particularly on the quest side has rebounded really nicely and also from a customer standpoint, youre getting a better balance between brick and mortar and E comm.

The C store business on the quest side is has had a tremendous.

Last couple of months here and those are all positive things from a mix perspective for us.

Perfect. Thank you so much I'll pass it on.

Rachel Smith: Perfect. Thank you so much. I'll pass it on.

Alexia Howard: Perfect. Thank you so much. I'll pass it on.

Thank you. Our next question comes from the line of Rob Dickerson with Jefferies. Please proceed with your question.

Speaker 0: Thank you. Our next question comes from the line of Rob Dickerson with Jefferies. Please proceed with your question.

Operator: Thank you. Our next question comes from the line of Rob Dickerson with Jefferies. Please proceed with your question.

Great. Thanks, so much.

Joseph E. Scalzo: Great. Thanks so much. First quick question, just, you know, the top-line guide obviously, you know, implies deceleration year over year relative to Q1, and then I realize that H2 will likely grow more slowly than H1. Just in terms of Q2, you know, Joe, I guess, and Todd too, just given your comments, you know, it sounds like you know, have hedged a bit, so to speak, in terms of some elasticity risk for Q2. And then also there's, you know, the implied kinda roll-off of the inventory build benefits. I'm just curious, you know, as we think Q2 year over year top line relative to Q1, is there any kind of expectation for an increase in pricing given the timing of the pricing you've already implemented?

Rob Dickerson: Great. Thanks so much. First quick question, just, you know, the top-line guide obviously, you know, implies deceleration year over year relative to Q1, and then I realize that H2 will likely grow more slowly than H1. Just in terms of Q2, you know, Joe, I guess, and Todd too, just given your comments, you know, it sounds like you know, have hedged a bit, so to speak, in terms of some elasticity risk for Q2. And then also there's, you know, the implied kinda roll-off of the inventory build benefits. I'm just curious, you know, as we think Q2 year over year top line relative to Q1, is there any kind of expectation for an increase in pricing given the timing of the pricing you've already implemented?

First quick question.

The topline guide, obviously implies a deceleration year over year relative to Q1.

And then realize that second half, but likely grow more slowly than the first half just in terms of Q2.

Joe I guess and Todd too just given your comments.

Uh huh.

It sounds like you I've hedged a bit so to speak in terms of some elasticity risk.

For Q2, and then also there is the implied kind of roll off of the inventory build.

Benefits. So I'm just curious as we think Q2 year over year top line relative to Q1 is there any kind of expectation for an increase in pricing given the tightening of the pricing you've already implemented and then two on the volume side is there anything in there that could decelerate a bit you know outside of just the inventory built benefits you got in Q1.

Joseph E. Scalzo: Two, on the volume side, is there anything in there?

Rob Dickerson: Two, on the volume side, is there anything in there?

Rob Dickerson: That could decelerate a bit, you know, outside of just the inventory build benefits you got in Q1. Thanks. Is that a good follow-up?

Thanks, Patrick.

Yes, so I mean, you saw the.

Todd Cunfer: You know, you saw the POS growth in Q1, and really total consumption was in that 18% to 19% range, which is, you know, obviously we're very pleased about. What we said in our comments is, we think that's gonna be about the same in Q2. Now, we shipped a little bit ahead of consumption. Some of that was just getting inventory back on the shelves from what was going on during the summer period. We obviously shipped a bit ahead of consumption. Our comments are we're gonna, you know, POS consumption is gonna be about the same. It's always a little bit of a wild card where the inventory is gonna fall as we end the quarter.

Pos growth in the first quarter.

Quarter, and really total consumption was in that 18% to 19% range, which is obviously, we're very pleased about and when we send our commentary we think that's going to be about the same in Q2, and we shipped a little bit of ahead of consumption. Some of that was just getting inventory back on the shelves from what was going on during the summer period, and so we obviously shipped a bit ahead.

Consumption.

Our comments are.

POS consumption is going to be about the same it's always a little bit of a wildcard where the inventory is going to fall as we as we end the quarter, but we're kind of in that high teens, 20%.

Todd Cunfer: We're kind of in that, you know, high teens, 20%, you know, kind of consumption rate we feel comfortable about. Where net sales exactly falls depending on, you know, where shipments are, you know, it's always hard to tell within a couple points. We think the POS will be very consistent. Then as you get into the H2, obviously, H1 of last year, we grew 1% to 2%. H2 of last year, we grew 25%. We're lapping much more challenging numbers. Then as Joe pointed out with the last question, we still have, you know, noise around pricing elasticity, around consumer mobility.

Kind of consumption rate, we feel we feel comfortable about what more net sales exactly falls, depending on where shipments are.

It's hard to tell within within a couple of points, but we think that.

<unk> will be very very consistent and then as you get into the second half obviously first half of last year.

We grew 1% to 2% second half of last year, we grew 25%. So we're lapping much more challenging.

Number and then as Joe pointed out with the last question, we still have.

Noise around pricing elasticity around consumer mobility.

So we were playing potentially a little bit of conservative.

Todd Cunfer: you know, we're playing, you know, potentially a little bit conservative, you know, H2 assumptions here, but we have a much more difficult lap in the H2.

Second half.

Assumptions here, but we have a much more difficult lap in the second half.

Yes, the thing that I think that's a.

Joseph E. Scalzo: Yeah. The thing that's a little deceptive is, you know, H2 growth rate starts to step down relative to the H1. We're really confident in our ability to grow the top line. The absolute dollar sales, it's a manifestation of the year-ago comparisons in the H2, not our ability to grow the business. We're very confident in that. We feel like we've got the products, the marketing, the programming at retail, you know, to continue to drive strong dollar sales. We're very confident in that.

It's a little deceptive is second half growth rate starts to step down relative to the first half we're really confident in our ability to grow the top line. The absolute dollar sales, it's a manifestation of a year ago comparisons in the second half year, not our ability to grow the business, we're very confident in that and we feel like we've got the.

Products the marketing the programming at retail to continue to draw drive.

Strong dollar sales so we're very confident in that.

Fair enough and then just quickly on the incremental pricing commentary.

Rob Dickerson: Fair enough. Just quickly on the incremental pricing commentary, it would seem as if it's kind of given the timing of your fiscal year, you know, if you were to implement incremental pricing at retail and just given kind of the lag of announcement relative to when it hits the shelf, it would seem like that could be, you know, maybe kind of a late fiscal 2022 event if needed, but you know, probably higher probability that kind of rolls into 2023. Is that fair?

It would seem as if just kind of given the timing of your fiscal year.

If you were to implement incremental pricing.

At retail and just given kind of the lag of announcement relative to where it hits the shelf would seem like that could be made.

Maybe kind of a late fiscal 'twenty two event if needed but.

Probably higher probability that kind of rolls into 'twenty three is that fair.

And maybe this will be helpful. When you make the decision to price it takes three or four months to executed with customers.

Joseph E. Scalzo: Maybe this will be helpful, Rob. When you make the decision to price, takes you three or four months to execute it with customers.

Yes, so the minute you pull the trigger it's three to four months before you can execute and then from a retailer standpoint. Another few months for them to reflected itself. So there is a delay to that and again as I mentioned in one of the previous.

Rob Dickerson: Yep.

Joseph E. Scalzo: The minute you pull the trigger, it's 3 to 4 months before you can execute. From a retailer standpoint, another few months for them to reflect it at shelf. There's a delay to that. Again, as I mentioned in one of the previous questions, you know, our view of the lingering cost is a recent one. We're just starting to evaluate our options right now.

One of the previous questions.

Our view of the lingering cost is a recent one so we're just starting to evaluate our options right now.

Yep got it alright, great. Thanks, a lot.

Rob Dickerson: Yep. Got it. All right, great. Thanks a lot.

Thanks, Rob.

Todd Cunfer: Thanks, Rob.

Thank you. Our next question comes from the line of Ben <unk> with Stephens Inc. Please proceed with your question.

Speaker 0: Thank you. Our next question comes from the line of Ben Bienvenu with Stephens Inc. Please proceed with your question.

Hey, Thanks, Good morning, I wanted to follow up on the revenue side any question you talked about among the.

Ben Bienvenu: Hey, thanks. Good morning. I wanna follow up on the revenue side of the equation. You talked about among the potential risks outside of your control, one of which being consumer mobility. When you think about your ability to mitigate those risks and thinking about innovation as a growth driver and your ability to price, how comfortable do you feel in terms of the elements that are within your control to help mitigate any risk associated with external factors that are out of your control?

Ben Bienvenu [Research Analyst: Hey, thanks. Good morning. I wanna follow up on the revenue side of the equation. You talked about among the potential risks outside of your control, one of which being consumer mobility. When you think about your ability to mitigate those risks and thinking about innovation as a growth driver and your ability to price, how comfortable do you feel in terms of the elements that are within your control to help mitigate any risk associated with external factors that are out of your control?

Potential risks outside of your control.

One of which being consumer mobility. When do you think about your ability to mitigate those risks and thinking about innovation as a growth driver and your ability to price how comfortable do you feel.

In terms of the elements that are within your control to help mitigate any risk associated with external factors that are out of your control.

Yeah, Great question I think to theirs.

Joseph E. Scalzo: Yeah, great question. I think, two, you know, there's two risks that people lock up in home, or don't wanna go into stores, right? Those are the two risks, I think. When they lock up in home, their snacking occasions change, right? For us, probably the single biggest mitigator has been the growth in all other forms. What I mean by that is on both brands, we have a bar business and a shake business, which I think is center of the fairway core business for us, right? As we noted in our commentary with Atkins, that bars, especially for Atkins, highly correlate to being at work and being in transit. The nice thing that we've learned as we've launched into cookies, chips, and confections is they don't correlate to location at all.

Theres two risks that people lockup and home.

Or don't want to go into stores right. Those are the two risks I think so when they lock up in home their snacking occasions change right. So.

For us probably the single biggest mitigate or has been the growth in all other forms. So what I mean by that is on both brands, we have a bar business and a shake business, which I think is center of the fairway core business for us and as we noted in our commentary.

Atkins that.

Bars, especially for Atkins highly correlate to being at work and being in transit.

The nice thing that we've learned as we've launched into cookies chips and confections is they don't correlate to location at all.

So our ability to grow those is a nice hedge against the risk that we see in consumption on bars, if people would.

Joseph E. Scalzo: Our ability to grow those is a nice hedge against the risk that we see in consumption on bars if people would kind of go back to staying at home and not going out. The second factor is shopping behavior. If you remember the earliest, I mean, it's been two years, but if you remember the earliest behaviors, people stopped shopping and limited the number of retail outlets they were going to. Best hedge there has been e-commerce business. The major brick-and-mortar retailers have accelerated their e-commerce business, both ordering online and having it delivered, as well as pickup and delivery. As they combined with Amazon is a natural hedge to people's shopping behavior and retail doors changing.

Kind of go back to staying at home and not going out.

The second factor is shopping behavior. If you remember the earliest I mean, it's been two years, but if you remember the earliest behaviors people stopped shopping and limited the number of retail outlets they were going to.

Best hedge there has been.

E Commerce business, so the major brick and mortar retailers have accelerated there.

Our e-commerce business, both ordering online and having it delivered as well as pickup and delivery. So.

Then they combined with Atkins with Amazon is a natural hedge to people shopping behavior and retail doors changing so we feel like yes, there is a risk out there probably.

Joseph E. Scalzo: We feel like, yes, there's a risk out there, probably gonna be transient, but we've had some natural hedges, to offset those challenges. Still keeps me up at night, though.

Probably going to be transient, but we have some natural hedges to offset those challenges still keeps me up at night, though.

Okay. That's great. Thanks, and my second question is a follow up on cost you talked about.

Ben Bienvenu: Okay, that's great. Thanks. My second question is a follow-up on cost. You talked about, I think 75% of your exposure is covered. Could you discuss, is that uniform across the year or would it be, you know, would the nature of that be that you're fully covered for the next several quarters and more exposed for maybe Q4? And then within that coverage, where are the buckets of least versus most coverage?

Ben Bienvenu [Research Analyst: Okay, that's great. Thanks. My second question is a follow-up on cost. You talked about, I think 75% of your exposure is covered. Could you discuss, is that uniform across the year or would it be, you know, would the nature of that be that you're fully covered for the next several quarters and more exposed for maybe Q4? And then within that coverage, where are the buckets of least versus most coverage?

I think 75% of your exposure is covered.

You discussed is that uniform across the year or would it be.

What the nature of that would be that you're fully covered for the next several quarters and more exposed for maybe the fourth quarter and then within that coverage where are the buckets of lease versus most coverage.

Yes.

We'd rather not get into that level of specificity.

Todd Cunfer: Yeah. I would rather not get into that level of specificity. To answer your question broadly, there are some commodities where we are covered for the entire year. There are some commodities and some more minor ingredients where we might be only covered for 50% to 60% of the year. It's not uniform. Again, I don't want to get into specifics for competitive reasons. 75% of the year, there's not a huge difference between the commodities, but there are some commodities that we are fully covered on.

There are two to answer your question broadly there are some commodities, where we are covered for the entire year. There are some commodities and some more minor ingredients, where we might be only covered for 50% to 60% of the year. So it's not uniform.

But again I don't want to get for competitive reasons don't want to get into specifics, but.

75% of the year Theres not a huge difference between the commodities, but there are some commodities that we are fully covered on.

Okay fair enough. Thanks, so much and best of luck with the rest of the year.

Ben Bienvenu: Okay, fair enough. Thanks so much, and best of luck with the rest of the year.

Ben Bienvenu [Research Analyst: Okay, fair enough. Thanks so much, and best of luck with the rest of the year.

Thank you.

Yeah.

Todd Cunfer: Thank you.

Thank you. Our next question comes from the line of Steve Powers with Deutsche Bank. Please proceed with your question.

Speaker 0: Thank you. Our next question comes from the line of Steve Powers with Deutsche Bank. Please proceed with your question.

Yes, hey, thanks, good morning, guys.

Steve Powers: Yes. Hey, thanks. Good morning, guys.

Steve Powers [Equity Research Analyst: Yes. Hey, thanks. Good morning, guys.

Good morning.

Todd Cunfer: Morning.

I guess could you.

Joseph E. Scalzo: Hey, Steve.

Steve Powers: I guess as you think about the cadence of fiscal 2022 from a gross margin perspective, I guess I'm trying to get a better feel for your anticipated exit rate on gross margin into 2023. It seems like there's a sure hit to come versus prior expectations in the next couple of quarters, but I guess I'm less clear where your guidance and current forecasts have you exiting 2022 versus three months ago and where you wanna be. As you said earlier, that 40%, you know, plus gross margin is a big part of your P&L advantage. So as we step away from that the next couple of quarters, I guess, you know, how much progress can we expect to make back towards that ambition by year-end?

Steve Powers [Equity Research Analyst: I guess as you think about the cadence of fiscal 2022 from a gross margin perspective, I guess I'm trying to get a better feel for your anticipated exit rate on gross margin into 2023. It seems like there's a sure hit to come versus prior expectations in the next couple of quarters, but I guess I'm less clear where your guidance and current forecasts have you exiting 2022 versus three months ago and where you wanna be. As you said earlier, that 40%, you know, plus gross margin is a big part of your P&L advantage. So as we step away from that the next couple of quarters, I guess, you know, how much progress can we expect to make back towards that ambition by year-end?

Think about the cadence of fiscal 'twenty two from a gross margin perspective I guess.

Trying to get a better feel for your anticipated exit rate on gross margin into 'twenty three it seems like there's a share hit to come versus prior expectations. In the next couple of quarters, but I guess I am less clear where.

Your guidance on current forecasts have you exiting 'twenty two versus three months ago, and where you want to be because as you said earlier about 40%.

Gross margins a big part of your P&L advantage.

As we step away from that in the next couple of quarters I guess, how much progress can we expect to make back towards that.

Towards that ambition by year end.

Yes.

As we mentioned earlier.

Todd Cunfer: As we mentioned earlier, you know, we're gonna obviously start to see the hit, pretty significant here in Q2. Q3 will be the toughest comp for us, not only from a 2022 cost perspective, but if you remember Q3 last year, we just had a blow out gross margin expansion. Just kind of everything was clicking. We had 140 basis points of gross margin expansion, even despite, you know, a pretty difficult environment. That that's gonna be a tough lap. We saw costs start to rise in Q4 of last year a bit, still had gross margin expansion.

We're going to obviously start to see the hit pretty significant hit here in Q2, Q3 will be the toughest comp for us not only from a 22 cost perspective, but if you remember Q3 last year, we just had a blow out gross margin expansion.

Just kind of everything was clicking a 140 basis points of gross margin expansion, even despite a.

A pretty difficult environment. So.

That's going to be a tough lap we saw.

All cost start to rise in Q4 of last year a bit.

<unk> had gross margin expansion so.

Todd Cunfer: you know, again, we're not completely covered for the year, and obviously, a lot of things can change in the next, you know, 6 to 9 months, but, you know, we should start to see gross margin degradation be a little bit, you know, less severe as we go into Q4. Really depends on where commodities are for the end of the year, really depends on whether we take any very specific actions. But, it should be better in Q4. If it's, as we've said, you know, several times here on the call, if things are not where we want it to be, you can rest assured we will take some action that, you know, will either start to impact Q4 or more importantly, impact 2023.

Again, we haven't we're not completely covered for the year.

A lot of things can change in the next six to nine months, but we should start to see gross margin.

Degradation be a little bit less severe as we go into Q4 really depends on where commodities are for the end of the year really depends on whether we take any very specific actions but.

It should be better in Q4, and if it's as we've said several times here on the call. If things are not where we want it to be you can rest assure we will take some action that will either start to impact Q4, or more importantly impact 'twenty three.

Yeah Okay.

Steve Powers: Yeah. Okay. I guess from a just a what's embedded in your outlook, I get the year-over-year dynamics because of-

Steve Powers [Equity Research Analyst: Yeah. Okay. I guess from a just a what's embedded in your outlook, I get the year-over-year dynamics because of-

From a just to what's embedded in your outlook I get the year over year dynamics because of the comps, but sequentially or are you going to take a big step down in <unk> and then kind of go sideways for the next three quarters or do you expect to see sequential improvement in gross margin.

Todd Cunfer: Yeah

Steve Powers: ... the comps. Sequentially, are you're gonna take a big step down in Q2 and then kinda go sideways for the next three quarters? Or do you expect to see sequential improvement in gross margin, given the levers-

Steve Powers [Equity Research Analyst: ... the comps. Sequentially, are you're gonna take a big step down in Q2 and then kinda go sideways for the next three quarters? Or do you expect to see sequential improvement in gross margin, given the levers-

Given the levers.

It will be again it depends it depends how everything plays out it'll be fairly as we get into Q3 and Q4. Those those gross margins will be relatively the same from an absolute basis year over year there'll be some obviously changes.

Todd Cunfer: Yeah.

Steve Powers: Yeah, I mean, it'll be.

Steve Powers [Equity Research Analyst: Yeah, I mean, it'll be.

Todd Cunfer: Again, it depends how everything plays out. It'll be fairly flat as we get into Q3 and Q4. Those gross margins will be relatively the same from an absolute basis year over year. There'll be some obvious changes from what I just said, but the absolute gross margins should be relatively, you know, equal in Q3 and Q4.

We said, but the absolute gross margins to be relatively.

Equal in Q3 and Q4.

Okay fair enough and I guess, if I could just.

Steve Powers: Okay. Fair enough. I guess if I could, just totally different topic. Just any comments on the M&A landscape in terms of opportunities crossing your desk, as well as any change in your appetite to entertain deals just given the uncertainty you're facing we've been talking about for the last, you know, almost hour?

Steve Powers [Equity Research Analyst: Okay. Fair enough. I guess if I could, just totally different topic. Just any comments on the M&A landscape in terms of opportunities crossing your desk, as well as any change in your appetite to entertain deals just given the uncertainty you're facing we've been talking about for the last, you know, almost hour?

Totally different topic.

Just any comments on the M&A landscape in terms of opportunities crossing your desk.

As well as any change in your appetite to entertain deals just given the uncertainty youre facing we've been talking about for the last.

Almost hour.

A pretty busy environment.

Joseph E. Scalzo: It's a pretty, busy environment with a lot of opportunity. As we've stated on a number of occasions, sellers have frothy expectations and buyers need to beware.

With a lot of opportunity.

And as we've stated.

A number of vacation.

Sellers have frothy expectations and buyer needs to buyers need to be aware.

So yes, we continue to evaluate complementary brands to our portfolio and.

Steve Powers: Yep. Okay.

Steve Powers [Equity Research Analyst: Yep. Okay.

Joseph E. Scalzo: We continue to evaluate complementary brands to our portfolio. We like to think of ourselves as value buyers. We're looking for assets of decent size, given the size of our portfolio, the number of brands, and the size of those brands. We need to understand the consumer promise as part of that, have a pretty good understanding of who the consumer target is, and our ability to more effectively market that brand to that consumer target in order to grow it. Obviously, we have, you know, supply chain synergies, a strong selling organization that we could add a brand to the bag, too, and accelerate. For the most part, you're looking for strong consumer brands that are complementary to our portfolio today.

We.

We are.

Like to think of ourselves as value buyers. So we're looking for.

We're looking for assets of decent size given the size of our portfolio the number of brands and the size of those brands, we need to understand the consumer promise as part of that.

A pretty good understanding of who the consumer target is and our ability to more effectively market that brand to that consumer target in order to grow it and obviously we have.

Supply chain synergies, a strong selling organization that we could add a brand a brand to the bag too and accelerate but for the most part you are looking for strong consumer brands that are complementary to our portfolio. Today. Those are out there and you. Just you continue to have to chase them to see if you can.

Joseph E. Scalzo: Those are out there, and you just, you know, you continue to have to chase them to see if you can get a business at a decent value.

Get a business at a decent value.

I appreciate it thanks a lot.

Steve Powers: Appreciate it, Joe. Thanks all around.

Steve Powers [Equity Research Analyst: Appreciate it, Joe. Thanks all around.

Alright, Thanks have a good day.

Joseph E. Scalzo: All right.

Todd Cunfer: Thank you.

Joseph E. Scalzo: Have a good day.

Thank you. Our next question comes from the line of Pamela Kaufman with Morgan Stanley. Please proceed with your question.

Speaker 0: Thank you. Our next question comes from the line of Pamela Kaufman with Morgan Stanley. Please proceed with your question.

Operator: Thank you. Our next question comes from the line of Pamela Kaufman with Morgan Stanley. Please proceed with your question.

Hi, good morning.

Ben Bienvenu: Hi. Good morning.

Pamela Kaufman: Hi. Good morning.

Good morning.

Joseph E. Scalzo: Morning.

I know that it's a very dynamic environment, but I was curious if you are observing any changes in demand from the recently renewed Verizon Covid cases, and would you expect any short term headwinds from changes in consumer mobility.

Pamela Kaufman: I know that it's a very dynamic environment, but I was curious if you are observing any changes in demand from the recent renewed rise in COVID cases. Would you expect any short-term headwinds from changes in consumer mobility? What, if anything, have you factored into your outlook from Omicron?

What if anything have you factored into your outlook from all the time.

Yeah, we've not first prepared remarks, we have not factored any changes either positive or negative from a demand standpoint. So our view is it remains where it is on.

Joseph E. Scalzo: Yeah, we've not, you know, first prepared marks. We've not factored any changes, either positive or negative, from a demand standpoint. Our view is it remains where it is. You know, Omicron has been recent phenomenon. If you think about it, last month it was in South Africa, now it's 95% of the cases in the United States. It's a little too early to call. We're not seeing dramatic foot traffic changes. We're not seeing dramatic changes in consumption behavior or apparently movement. You know, you have to keep your eyes open. This thing is pretty dynamic and pretty volatile.

On the Crown has been recent phenomenon and if you think about it last month. It was in South Africa announced 95% of the cases in the United States.

So it's a little too early to call, we're not seeing dramatic foot traffic changes, we're not seeing dramatic changes in consumption behavior or apparently movement.

But you have to keep your eyes open this thing is pretty dynamic and pretty volatile.

Okay.

Pamela Kaufman: Okay. I have a broader question on Quest. Quest has seen very strong growth over the last several years. How are you thinking about the midterm growth rate for the brand? What do you see as the key drivers? How much would you expect to come from increasing household penetration versus distribution expansion, innovation?

Then I have a broader question on quest Quest has seen very strong growth over the last several years. How are you thinking about the mid term growth rate for the brand.

And what do you see as the key drivers how much would you expect to come from increasing household penetration first is distribution expansion and innovation.

Let me let me define let me tell you how we think about it and then.

Joseph E. Scalzo: Well, let me tell you how we think about it and then it might give you some insights, right? For us, the key metric from a marketing standpoint is household penetration. All the other factors are derivative factors to help that. Share of voice of marketing, white space from a distribution standpoint, product innovation all accelerates our ability to drive household penetration. The Quest brand has benefited in the last, call it year or so, from two big factors. Factor number one has been that the bar business has started to recover from COVID confinement, and in particular, channel has helped the brand. We have a big C-store business, small format business. That team has done a phenomenal job at kickstarting the bar business for Quest as foot traffic has improved there.

It might be give you some insights right. So.

For us the key metric from a marketing standpoint is household penetration.

All the other factors are derivative factors to help that.

<unk> share of voice of marketing white space from a distribution standpoint product innovation, all accelerates our ability to drive household penetration.

So the quest brand has benefited.

In the last call it year or so from two big factors factor number one has been the bar business has started to recover from Covid.

Confinement, and then particular channel has helped the brand we have a big C store business small format business that team has done a phenomenal job of Kickstarting. His foot traffic has improved their kickstarting the bar business for quest, So youre seeing a rebound in bars.

Joseph E. Scalzo: You're seeing a rebound in bars, which is 60% of the Quest business. That's been a big factor for us. The second is kinda all other forms, what Mark calls the snackier portion of the Quest portfolio. All have done, with the exception of our RTD business for Quest, all of the snackier portion of the portfolio has done extremely well. Cookies continue to grow. Chips, we've been supply constrained, the demand has been so strong. Confections have done extremely well. Those have driven oversized growth rates in the business. I think collectively in our prepared remarks up 100% year on year. Law of large numbers will eventually affect the growth rate. We would expect Quest to continue to outperform the sub-segment of the category, the Active Nutrition category that they're in on a sustainable basis.

60% of the quest business.

So that's been a big factor for US. The second is kind of all other forms would what mark calls the snack year portion of the quest portfolio. All have done with the exception of our RTD business request all of the snack year portion of the portfolio has done extremely well.

<unk> continued to grow chips, we've been supply constrained.

<unk> has been so strong confections.

Have done extremely well those have drove driven oversized growth rates in the business I think collectively in our prepared remarks up 100% year on year Youre not going to law law of large numbers will eventually affect the growth rate, but we would expect quest to continue to outperform.

Form the sub segment of the category of the active nutrition category that they're in on a sustainable basis.

Thank you.

Pamela Kaufman: Thank you.

And then just a quick question on pricing pricing was mid single digit benefit in the quarter.

Joseph E. Scalzo: You're welcome.

Pamela Kaufman: Just a quick question on pricing. Pricing was a mid-single digit benefit in the quarter, but you indicated that it should continue to build over the course of the year. How should we think about the magnitude of contribution from pricing over the remainder of the year?

<unk> indicated that it had continued to build over the course of the year.

How should we think about the magnitude of contribution from pricing over the remainder of the year.

Yes, we took a we took a price increase that averaged about.

Todd Cunfer: Yeah, we took a price increase that averaged about, you know, 7.5, 8%. Because of the timing of the price increase, we didn't get the full benefit in Q1, only, you know, around 5, 6%. So we'll get an extra 2 points from pricing. Now that's, you know, that's the good news. The question is what's the impact on volume, you know, and elasticities. From a pure pricing perspective, we'll get an extra 2 points for the remainder of the year.

Seven and a half a percent and because of the timing of the price increase we didn't get the full benefit in Q1.

Only around 5%, 6%, so we'll get an extra two points from.

From pricing now that's that's the good news. The question is what what's the impact on volume.

Elasticity, but from a pure pricing perspective, we'll get an extra two points for the remainder of the year.

Okay. Thank you that's helpful.

Pamela Kaufman: Thank you. That's helpful.

Speaker 0: Thank you. Our next question comes from the line of Eric Larson with Seaport Global Securities. Please proceed with your question.

Operator: Thank you. Our next question comes from the line of Eric Larson with Seaport Global Securities. Please proceed with your question.

Thank you. Our next question comes from the line of Eric Larson Seaport Global Securities. Please proceed with your question.

Yeah, Thanks, guys and congrats on a good quarter. So Joe I, just wanted to dial back to the kind of the category growth the total nutrition category.

Pamela Kaufman: Yeah, thanks guys, and congrats on a good quarter. Joe, I just wanna dial back to the total nutrition category. You folks in your sub-segments are outperforming your peers. In Q1, maybe this is just a timing issue and what happened a year ago, and maybe these numbers really aren't all that important from a one-quarter perspective. What segments of the nutritional snacking category are actually growing faster than you? And maybe it's not sub-segments, maybe it's what value proposition segments are growing faster, and are they sustainable? I mean, how are you looking at the total category?

Eric Larson: Yeah, thanks guys, and congrats on a good quarter. Joe, I just wanna dial back to the total nutrition category. You folks in your sub-segments are outperforming your peers. In Q1, maybe this is just a timing issue and what happened a year ago, and maybe these numbers really aren't all that important from a one-quarter perspective. What segments of the nutritional snacking category are actually growing faster than you? And maybe it's not sub-segments, maybe it's what value proposition segments are growing faster, and are they sustainable? I mean, how are you looking at the total category?

You folks in your sub segments are outperforming.

Your P.

Here's but in.

In the first quarter and maybe this is just a timing issue and what what happened a year ago. Maybe these numbers really aren't all that important from a one quarter perspective, but.

What segments of the of the nutritional snacking category are actually growing faster than U S.

And maybe it's not so take this maybe it's a vet what what value propositions segments are growing faster and are they sustainable what I mean.

Looking at the total K, yes.

Yes, you hit it right on the nose, we don't compete and we see the category three pieces active nutrition with quest Premier protein a number of brands weight management with Atkins and then we see nutritious bars clif kind.

Joseph E. Scalzo: Yeah, you hit it right on the nose. We don't compete and we see the category in three pieces. Active Nutrition with Quest, Premier Protein, a number of brands, Weight Management with Atkins, and then we see nutritious bars, Clif, KIND, as the third segment. That category is experiencing right now against very easy comparables, strong growth. It, along with Active Nutrition, is outperforming weight management on a year on year basis. That'll moderate as the comparables get more challenging, right? Bars really got slammed in COVID. The nutritious bar segment is comping some easy comps. They'll get difficult as you move through the year. We're really comfortable overall. If you look at the total category, we're comfortable we can outperform the total category.

As the third segment that category is experiencing right now against very easy comparable strong growth. So it is along with active nutrition.

Is outperforming weight management on a year on year basis that will moderate as the comparables get more challenging right. So bar is really got slammed in COVID-19.

So the nutritious bar segment is comping, some easy comps they'll get difficult as you move through the year, we're really comfortable overall, if you look at the total category. We're comfortable we can outperform the total category in any one quarter half year, given what's been going on in Covid you may.

Joseph E. Scalzo: In any one quarter, half year, given what's been going on in COVID, you know, you may see some segments outperform some other segments. Over the long term, we're pretty comfortable in our ability to outperform the total category.

See some segments outperformed some other segments, but over the long term, we're pretty comfortable in our ability to outperform the total category.

Yeah got it so it's just a comp issue and it's just a lot of noise in the quarter and that will kind of flat that'll that'll work its way out over the next.

Eric Larson: Yeah, got it. It's just a comp issue, and it's just a lot of noise in the quarter, and that will kind of, that'll work its way out over the next, you know, 2 to 3 or 4 quarters. Thank you. I appreciate the comments.

Two to three or four quarters. So thanks, Joe I appreciate the comments.

Youre welcome looking at two year stacks right now is a very useful exercise.

Joseph E. Scalzo: You're welcome. Looking at two-year stacks right now is a very useful exercise, 'cause you drive yourself crazy with year ago.

Drive yourself crazy with year ago.

Yeah I agree thank you.

Eric Larson: Yeah, I agree. Thank you.

Youre welcome.

Joseph E. Scalzo: You're welcome.

Thank you ladies and gentlemen, this concludes our time I'll ask for questions I'll now turn the floor back to Mr. Scalzo for any final comments.

Speaker 0: Thank you. Ladies and gentlemen, this concludes our time allowed for questions. I'll now turn the floor back to Mr. Scalzo for any final comments.

Operator: Thank you. Ladies and gentlemen, this concludes our time allowed for questions. I'll now turn the floor back to Mr. Scalzo for any final comments.

Yeah. Thanks for your participation on today's call and the terrific questions. We hope.

Joseph E. Scalzo: Yeah, thanks for your participation on today's call and the terrific questions. We hope you continue to remain safe, and we look forward to updating you on our Q2 results in April. Have a good day.

You continue to remain safe and we look forward to updating you on our second quarter results in April.

Good day.

Thank you. This concludes today's conference you may disconnect. Your lines at this time. Thank you for your participation.

Speaker 0: Thank you. This concludes today's conference. You may disconnect your lines at this time. Thank you for your participation.

Operator: Thank you. This concludes today's conference. You may disconnect your lines at this time. Thank you for your participation.

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