Q2 2022 Simply Good Foods Co Earnings Call
Keypad as a reminder, this conference is being recorded I would now like to turn the conference over to your host Mr. Mark Magarian, Vice President of Investor Relations for simply good Foods company.
Sir you may begin.
Thank you operator, good morning, I'm pleased to welcome you to the simply good Foods company earnings call for the second quarter ended February 26, 2022, Joe Scalzo, President and Chief Executive Officer, Tod Cooper, 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.
The 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. The simply good Foods company Dot Com. This call is being webcast and an archive of today's remarks will also be available.
During the course of today's call management will make forward looking statements 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.
Note that on today's call, we will refer to certain non-GAAP financial measures that we believe will provide useful information to investors due.
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 our business the presentation.
This information is not intended to be considered in isolation or the substitute for the financial information presented in accordance with GAAP.
Please refer to today's press release for a reconciliation of the non-GAAP financial measures to the most comparable measures prepared in accordance with GAAP.
With that I'll now turn the call over to Joe Scalzo, President and Chief Executive Officer. Thank you Mark Good morning, and thank you for joining us.
Today, I'll recap simply good foods' second quarter results and provide you some perspective on the performance of our brand.
The entitled discuss our financial results in a bit more detail before we wrap it up with a discussion of our outlook and your questions.
In the second quarter, we delivered strong net sales and earnings growth that exceeded our expectations and position us well to deliver on our full year objectives.
U S retail takeaway in the quarter was in line with our expectations and similar to Q1, despite the surge in Covid cases from the army ground variance.
Price increase instituted in our fiscal first quarter of this year is tracking in line with our expectations. It was a high single digit percentage point contribution to our sales growth.
Net sales increased 28, 7% driven by retail takeaway in the timing of shipments.
Specifically Q2 P. O S increased 19, 6% in the U S measured channels of IRI, new low in convenience stores.
As is typically the case this time of year trade inventories grew during the quarter in support of seasonal in store merchandising.
Q2 sales growth also benefited from the timing of shipments to support earlier than expected Q3 customer programs.
We also estimate that the storms that negatively impacted sales in the year ago period was about a two percentage point benefit this quarter.
Adjusted EBITDA in the second quarter increased 27, 1%.
The $54 $2 million, primarily due to the sales growth and G&A leverage.
As expected gross margin declined 250 basis points versus the year ago period.
Higher supply chain costs were partially offset by the price increase and favorable mix.
While still a challenging supply chain operating environment customer service performance improved during the quarter.
While we are not at target service levels. Our performance has improved during the first half of the year.
We are pleased with our progress in a continuing difficult environment.
Okay.
We executed well against our priorities in the second quarter to ensure we deliver on our short and long term objectives were.
We're focusing on driving sales and earnings growth and competing effectively while navigating a challenging supply chain environment.
As such due to lingering supply chain cost inflation, which we expect to continue into fiscal 2023 earlier. This week, we notified customers of a price increase effective in our fiscal fourth quarter.
Additionally in March we entered into an agreement to license the quest frozen pizza business to police the O foods, which is held a license for Atkins frozen meals for several years.
Simply good retail takeaway in measured channels increased 19, 6%. Despite the significant surge in cases from the army Crown variant that was dominant during the quarter.
And as has been the case throughout the pandemic, both our brands have outperformed their respective sub segments of weight management and active nutrition.
In Q2, the weight management segment was up 0.4%.
Atkins outperform the segment with retail takeaway up six 4% over the same timeframe.
Total quest retail takeaway in measured channels in Q2 was up 41% and outpaced the active nutrition segment growth of 25%.
We estimate that U S retail takeaway in unmeasured channels, primarily ecommerce and specialty increased low double digits on a percentage basis versus last year as.
As expected due to strong performance in the year ago period, the growth rate in unmeasured channels moderated.
Atkins Q2 U S retail takeaway in measured channel increased six 4% the year over year increase benefited from improvements in the mass and club channels as well as continued total buyer growth.
<unk> growth in total buyers in the quarter remained strong up double digits on a percentage basis versus the year ago period.
However, the buy rate remains mid single digits below historic levels due to fewer snacking occasions from the high correlation between consumption of vacuum bars and the workplace.
Therefore, the return to pre pandemic routines continues to be a big opportunity for the brand.
Atkins shakes Q2 retail takeaway was up 11, 7% with growth solid across all major retail channels.
In Q2 bar consumption was up modestly versus prior year.
<unk> slowed a bit from the previous six months, we suspect due to the impact of the omni crown varied that the CDC reported infected over 20 million adults in January alone.
Atkins all other product forms continue to show strong growth. These include confections cookies and chips.
In Q2 Atkins all other retail takeaway increased nine 8% driven by cookies and.
<unk> contributed about two six percentage points to Atkins total brand retail takeaway growth.
Confections Pos was slightly lower as we lap last year's successful dessert bar launch.
Performance of key customers was solid with Atkins retail takeaway up across all channels, we were particularly pleased with Q2 mass China retail takeaway of bars, and shakes, which increased seven and 10% respectively.
Interactive E Commerce business is also doing well Amazon <unk> second largest customer Q2 retail takeaway increased about 20% on a percentage basis versus the year ago period.
Let me now turn the quest for Q2 retail takeaway increased 41% in the measured IRI, new low C store universe and outpaced the active nutrition segment.
Growth versus year ago period was driven by an increase in household penetration a rebounded bars and success in new product forms.
But as far as Q2 retail takeaway increased 22% driven by higher shopper trips versus the year ago period in C stores and mass channel.
Recall quest bars are about 55% of total quest measured channel retail sales.
The snack year portion of quest products about 40% of total Quest U S. Retail sales continued to do well and increased 88% in Q2, driven by continued strong growth of chips cookies as well as confections, we continue to see robust growth across all these forms.
We had another good quarter of growth across all key retail channels.
Increased foot traffic of the mass channel and convenience stores are solid.
Diving combined Q2, Pos growth in these channels of nearly 45%.
Quest E Commerce takeaway increased about 14% versus last year.
As expected due to strong performance in the year ago period, the growth rate moderated from previous quarters.
In summary, we're pleased with our second quarter results that were better than we expected.
Over the remainder of the year, we anticipate that retail takeaway will continue to be solid although as we mentioned previously the growth rate in the second half of the year is more challenging due to more difficult year over year comparisons.
We have a good balance of innovation as well as in store merchandising and programming that we will that we believe will enable us to deliver on our retail takeaway targets.
Due to the timing of Q2 shipments discussed earlier, we expect net sales growth in the second half of the year to be less than the retail takeaway increased.
Additionally, given the unknown timing of one employees will return to the office and the unpredictable nature of COVID-19 over the remainder of the fiscal year, we don't anticipate any meaningful improvements in workplace mobility.
While our customer service levels are improving we anticipate that supply chain operating environment will remain challenging.
We have good visibility into our cost structure for the balance of the fiscal year and our input costs are largely covered.
Therefore, there was no meaningful change to our fiscal 2022 supply chain cost inflation.
Or gross margin outlook.
The price increase announced earlier this month is primarily about it benefit in the fiscal 2023.
We're executing well against our plans and we believe we're in a position to deliver another year of solid net sales and adjusted EBITDA growth as a path to increasing shareholder value now I'll turn the call over to Todd to provide you some greater details in our financial results. Thank you Joe and good morning, everyone. I will begin with a review of our net.
Total simply good foods second quarter net sales increased 28, 7% to $297 million North American net sales increased 31, 5% and was primarily driven by volume as.
As Joe stated, we estimate the pricing was a high single digit percentage point contribution to our sales growth.
The international business declined 25, 1% due to the European business exit.
International net sales growth was six 1% in the European business exit with a one five percentage point headwind to total company net sales growth.
Moving on to other P&L items gross profit.
$108 5 million, an increase of 22% gross margin declined 250 basis points to 36, 6% and was in line with our expectations.
Gross margin decline was driven by the previously discussed supply chain cost inflation, partially offset by pricing and favorable product form and retail channel mix.
As Joe mentioned over the remainder of the year, we have good visibility into our cost structure and our input costs are largely covered.
In the second half of the year gross margin is greater than the Q2 seasonal low and is anticipated to be in the 37, 5% to 38% range with Q4 greater than Q3.
Adjusted EBITDA increased 27, 1% to $54 $2 million due to higher sales and G&A leverage selling.
Selling and marketing expense increased 22, 2% to $32 million driven by higher brand building initiatives on both brands.
Note that the ramp up of marketing expense in the second half of fiscal 2021 impacts the marketing accrual in fiscal 2022, we expect marketing expense this year to increase mid to high single digits with substantially all of the growth in the first half of the year.
G&A expense, excluding integration and restructuring expenses as well as stock based compensation increased four 8% to $22 $9 million lower costs related to the European business exit was more than offset by higher professional fees and the timing of research and development spending.
We anticipate solid G&A leverage this year and expect leverage to be higher 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 7 million to $5 3 million due to the reprice of the term loan in the second quarter and pay down of term loan debt.
In the second quarter of fiscal 2022 of the noncash charge related to the Remeasurement of our private warrant liabilities was $12 7 million in the year ago period, we recorded a noncash charge of $45 3 million.
As previously disclosed on January <unk> 2000, 2022, the private warrants were exercised on a cashless basis.
Our statutory tax rate in Q2, excluding the charge related to the warrant liability was about 25%.
Net income in Q2 was $18 $5 million versus a loss of $26 2 million a year ago period.
Year to date results were as follows net sales increased 25, 2% to $578 million. The drivers of growth are similar to Q2.
Gross profit was $225 $1 million, an increase of 22, 1% gross margin of 38, 9% declined 100 basis points versus the year ago period.
Adjusted EBITDA increased 31, 2% to $120 million, primarily due to the higher gross profit.
Selling and marketing expenses increased 21, 7% to $2 $5 million. The increase was driven by higher brand building initiatives.
G&A expenses increased three 6% or $1 $5 million. This excludes charges of $6 $1 million related to integration expenses.
Related to integration costs restructuring expenses stock based compensation and other expenses.
Moving to other items in the P&L interest expense declined $4 $7 million to $11 6 million due to the repricing of the term loan and the pay down of the term loan debt.
But year to date noncash charge related to the Remeasurement of our private warrant liabilities was $30 $1 million versus $24 9 million in the year ago period.
Year to date statutory tax rate, excluding the charge related to the warrant liability was about 25%.
We anticipate the full year fiscal 2022 tax rate to be about 26% versus our previous estimate of 27%.
Net income was $39 6 million versus $16 7 million in the year ago period.
Turning to EPS second quarter reported EPS was <unk> <unk> per share diluted compared to a loss of 27 per share diluted for the comparable period of 2021. In addition to the previously mentioned a warrant liability impact in Q2, depreciation and amortization expense was $4 8 million.
And similar to the year ago period stock based compensation of $3 $1 million increased <unk> 6 million versus last year and costs associated with quest integration and restructuring was <unk> 3 million versus $2 2 million last year.
Adjusted diluted EPS, which excludes these items was 36 cents, an increase of 11 versus the year ago period.
Note that we calculated adjusted diluted EPS as adjusted EBITDA less interest income interest expense and income taxes.
Year to date reported EPS was <unk> 40.
And adjusted diluted EPS was <unk> 79.
Additionally, the calculation of adjusted diluted EPS in Q2 assumes fully diluted shares outstanding of $102 4 million versus $100 four.
4 million under GAAP. The difference is due to the exclusion of the private warrants and fully diluted shares outstanding under GAAP.
As the private warrants were previously 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 the second quarter net cash provided by operating activities was $37 $7 million an increase of 50 350.
53% versus the year ago period.
Year to date net cash provided by operating activities was $33 million and we anticipate full year fiscal 2022 cash flow from operations will be about the same as last year due to due to the timing of tax payments versus the year ago period.
As of February 26, 2022, the company had cash of $51 $5 million. The outstanding principal balance of the company's term loan debt was $431 5 million and the trailing 12 month net debt to adjusted EBITDA ratio was one six times.
During the second quarter, the company repurchased $24 million of its common stock at an average cost of $35 68 per share as of February 26, 2000, 22020 to approximately $27 $5 million remains available under the existing stock repurchase authorization.
<unk>.
We anticipate GAAP interest expense to be about $23 million, including noncash.
Amortization expense related to the deferred financing fees. This is less than our previous estimate of about $25 million due primarily to the repricing of our term loan.
Capital expenditures in the second quarter and year to date period were one six and $4 million, respectively. Full year Capex is expected to be about $6 million.
I would now like to turn the call back to Joe.
In your remarks.
Thanks, Todd our strong results in the first half of the year position us well to deliver on our full year objectives.
In the second half of the year, we have marketing customer programming innovation plans in place to continue to drive sales growth.
And retail takeaway.
This gives us confidence to increase our full year net sales and adjusted EBITDA outlook.
Our forecast does not include any meaningful improvements in workplace mobility and assumes that we'll continue to perform well in navigating the challenging supply chain operating environment.
Looking at the key metrics of our updated full year fiscal 2022 outlook.
We expect net sales to increase 13% to 15% versus last year. This.
This includes a two percentage point headwind related to the European business exit and the licensing of the quest frozen pizza business.
There is no change to our gross margin outlook as we stated earlier, we continue to anticipate supply chain cost inflation and expect gross margins to decline about 250 basis points versus last 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 significant G&A leverage.
And the decline in interest rate interest expense should result in adjusted diluted EPS growing faster than adjusted EBITDA.
A couple of things to note in the second half of the year.
Our comparisons are more difficult weeks.
We expect retail takeaway to increase low double digits versus prior year.
Net sales growth will lag retail takeaway due to the first half trade inventory build.
And as we stated in January we anticipate year over year performance across key financial metrics to improve from the third quarter to the fourth quarter.
We're excited about the growth opportunities that exists within our business and the category.
We're executing against our strategy in increasing household penetration that should continue to drive short and long term sales and earnings growth.
Our strong balance sheet and cash flow generation enable us to invest in our business evaluate.
Evaluate M&A opportunities and Opportunistically buy back shares of our stock 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, 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 and 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 Jason English with Goldman Sachs. Please proceed with your question.
Hey, good morning folks thanks for slotting them.
A couple of questions first on top line I believe your guidance for the back half of the year implies sales growth of low to mid single digits.
Which seems a lot lower than I would expect given the momentum in the business, but maybe you can impact some of the puts and takes.
Gold some yeah Oh go ahead I'll, let you run with it go with it yeah. So I mean, the high end of the guidance is around six 5% net sales growth for the back half so.
We have about two points.
Because of the European exits we licensed pizza. So that's about two point negative impact to the second half. So that gets you to about eight 5% at the high end, obviously, we built inventory in the first half some of it was we exited the year a little bit like we built some of it back in Q1 more in Q2, we had some key customers.
Who wanted to shipments earlier than normal.
Normal March shipments that occurred in February for some spring activity and then don't forget we had that storm, Texas storm last year that ripped through the country right at the end of our Q2 last year that took about two points of growth out of Q2 into Q3. So there.
The question is how much of this de load is going to stick and how much is going to stay most.
Or leave US here most of it is going to go away. So theres, probably at least five or six points of the de load that's going to impact the second year. So if I take the high end of six and a half I add two points to get to kind of an organic eight and a half and then theres a five or six points of a de load. That's why we're saying <unk> is probably going to be in the low.
Double digits in the second half hope that helps.
No that's super helpful. Thank you.
And the statistic on question at 55% in our bars.
Correct me, if I'm wrong, but I think if we rewind the clock to maybe 2018 or so it was around 80% and bars driven so the contribution from these other forms has been meaningful.
Can you replicate that on Atkins like what is the early what are the early results, telling you with cookies and chips now that they're in market can they have similar success or should we temper our expectations.
Given the weight management.
Well, let's let's if we consider adjacent bars and shakes as our core business on both brands, we've already replicated on Atkins, our confection business was about 25% of the <unk>.
<unk> portfolio. So I think the question you're asking can we get bigger than 25% I think the answer to that is yes still in the early stages of cookies on Atkins appear to be pretty successful. We just shipped started shipping chips too early to call, but now we've got enough consumer data surrounding our salty snack business.
To know that the consumer base for Atkins.
We'll find we'll find the product pretty appealing so we're pretty confident and in fact, we think as a percentage of our portfolio kind of the all other forms the non barge non bar and shake forms will continue to become a larger and larger piece of the portfolio.
Helpful. I appreciate it I'll pass it on.
Thanks, guys.
Thank you. Our next question comes from the line of <unk>.
With credit Suisse. Please proceed with your question.
Tamil Your line is live.
Okay.
Sorry about that guys is that better I'm in an airport yes.
So how are you.
Great.
Matt. The first question, maybe just on the mechanics of your input cost coverage for the year or is it mostly financial hedges is it contracts on supply and I guess the reason why I ask is in such a it's kind of strange environment is there risk of things like force measure are there caps may be uncertain and such that we should be paying attention to.
Yes, so no financial contracts. So just you know normal.
We contract either with our co mans or directly with with ingredient suppliers.
Clearly confident that we're going to get.
The ingredients where over 90% covered now for the year. So we feel very very good about where we are from an input cost perspective.
Okay, Great and then a follow up on the share repurchase does that indicate or say anything about how you're feeling about the M&A environment M&A opportunity.
No.
Well I mean, just just step back for a second you know two years ago, we had leverage over four times when we when we purchased quest. So job number one was to get that towards to deleverage our balance sheet. So we ended this quarter down to one six times, obviously very very comfortable place to be to do M&A.
Potentially continuing to pay even more debt down or to opportunistically buy some share so.
We're very active in looking at M&A opportunities.
Basically we saw the stock pulled back just with the craziness of the stock market.
<unk>.
$135 range very attractive prices and are in our view.
So we now just have the capital allocation flexibility to remain active in M&A to.
To continue to pay down the term loan or it's a <unk>.
Shares remain at attractive levels, we will not hesitate to buy more stock.
Okay, great. Thank you.
Yeah.
Thank you. Our next question comes from the line of Rob Dickerson with Jefferies. Please proceed with your question.
Great. Thanks, so much.
I just wanted to ask you about the incremental pricing.
So I guess, firstly I think originally the expectation.
For the year was call. It you know I don't know, maybe 6% or plus I think you said in your prepared remarks Q2 was up high single digit and then now there's another sounds like another round coming up maybe kind of squeak since some time towards the end of Q4.
If we're just thinking I guess, one about kind of the reason for the need.
Despite your being covered.
Why did you think you kind of needed more pricing or did you think you've just kind of could get it because volume so far pretty good and then secondly, just.
Any color around the magnitude of that pricing as we think about next year would be great. Thanks.
Thanks for the question this is Joe.
First we're sitting at.
Gross margins 250 basis points erosion this year and gross margin.
With a stated target of trying to have gross margins around 40%. We believe that's a competitive advantage to us it provides us the necessary marketing support to drive household penetration and growth in our business. So we're in the middle of the year and below our own expectations. So inflation in fact this year.
Exceeded our expectations and our pricing this year plus cost savings were insufficient to hold gross margin.
As we look at the environment as we said in our prepared remarks, as we look at the environment.
<unk> fiscal year 'twenty three.
<unk>.
Cost inflation cost inflation is going to continue based on our view right now so the combination of where we are today didnt take enough pricing. This year the environment that we see as we move into fiscal 'twenty three continued to be inflationary.
Caused us to move forward and take a second price increase that price increase will have minimal impact on this fiscal year and in fact is more about as we move into the first half of next year.
Okay fair enough.
And then just you know kind of a general question for you Joe I know.
Now for some time.
Didn't kind of factoring in no real improvements in consumer mobility, which I fully understand.
But if we're sitting here now you know early April .
It's kind of a direct question is there and that's all I have is there anything that you've seen you know kind of coming through March.
Already that could suggest some positive potential in terms of Chris.
Kris mobility expectations or again, it's just way too early to tell and you just kind of fine keeping it flat on the go forward that's all.
Just think going forward, it's really difficult to see how this is going to play out right. So I would have told you I thought when we were sitting in October and November were in pretty good shape from a COVID-19 .
The Varian hit 20 million people add.
Reported cases of the new variant and the <unk>.
We werent locked down, but we certainly werent.
People went out and about like they were prior to that so we're really reluctant to declare victory on.
On Covid and to say that.
Companies will go back to closer to what they were prior to the pre Covid period, just because it's been very very difficult to predict and so we're taking a conservative view on it as.
As it pertains to <unk>.
Back to work do we see any positive signs Q2.
The business that's been the most affected has been Atkins bar business and in Q2, we actually saw Q1 to Q2, we saw improvements in buy rate on bars.
Certainly not back to full potential certainly a lot of opportunity but as.
As the as companies started to go back to work the number of our key bar snacking occasions went up and we saw the buy rate on Atkins bar improve certainly not where we want it certainly not where it can be but we did see the correlation appeared to play out in the second quarter. So.
Again, I would I think conservatism as we think about the second half of this year is appropriate given what we've experienced over the last two years and it appears this correlation factor on snacking and work on bars appears to.
B B correct. So we feel pretty confident that as companies go back to more the way they looked like pre COVID-19 . Our bar business has certainly got a pickup.
Alright Super Thanks, Joe.
Okay.
Thank you. Our next question comes from the line of John Baumgartner with Mizuho. Please proceed with your question.
Good morning, Thanks for the questions.
I guess.
So first off Joe you, just hoping to hear your thoughts in terms of merchandising at retail I mean, the Nielsen data shows a pretty striking dropoff in distribution points really across the board for general merchandise categories, and even across health and beauty care TDP or down for everything other than vitamins I mean to what extent do you see the weight management and active nutrition categories.
Sitting from this in terms of incremental space visibility during the next shelf cycle of shelf resets.
Moving forward.
Yeah.
Yes.
Im interested to hear your observation on that I had not heard that before our points of distribution on both brands up significantly since the beginning of the fiscal year I don't think.
I don't think John it's coming from expansion of our category into other space I think it's just.
I think it's a competitive pick up right. So we gained some space somebody else lost some space. So I don't I don't think it's that and.
For the for the most part I think it's there are two factors that have been driving distribution gains I think during COVID-19 retailers understood the importance of bigger brands kind of.
Key flagship brands in the category to attract foot traffic to the category and then I think we have a pretty good innovation pipeline, so enough new items interesting new items to gain incremental space. So.
I hadn't I hadn't heard that actually loss of Tvp's in other categories, but I don't I'm not seeing a benefit to our category because of that.
Okay.
And then just as a follow up coming back to Jason's question on the Cookie side I think Atkins is run rating something like north of $20 million annualized in Nielsen right now and that approximates requested in its first year I think going back to 2018.
What are your early read in terms of Incrementals from new customers, new consumers any degree of cannibalization from cookies impacting confections brownies.
Given the start you're seeing and even maybe salty snacks for Atkins as well is there anything that would sort of inhibit grow to the glide path from here in terms of passing constraints or anything relating to slotting retail. Thank you.
Yeah, Yeah cookie.
Your analysis on cookies is consistent with ours on the opportunity size, we are facing some constraints and cookie production right now due to staffing issues at the co man, but we're managing around those.
Well in both businesses frankly, but I don't expect that to be a long term drag on the business I'm very optimistic on the opportunity in all other forms.
If you think about it they use occasions for bars and shakes.
We've done a really nice job of penetrating those use occasions and will continue to grow those categories. As we grow total buyers, but the real opportunity I think going forward is the ability to pick up different use occasions, a different need states and difference in different snacks I was just looking at some data on the quest business and we're starting.
Together now that we've owned the business new buyer data on that business about half the new buyers on quest or come in from bars about half the new buyers on quest or coming from not bars.
So that is telling us we got ourselves a lifestyle brand transcends at one particular form and then we've got a suite of products that hit a lot of different need states and use occasions, which is which is a pretty powerful thing and very consistent with what we've experienced on Atkins. So we're very optimistic our pipeline is full.
All of.
Technology and products, that's going to enable us to continue to explore these other snacking need states and products.
Great. Thanks, Yeah, thanks for the questions.
Thank you. Our next question comes from the line of Cody Ross with UBS. Please proceed with your question.
Hey, good morning folks thanks for taking my questions.
Sales came in better than expected. This quarter did you guys quantify how much of that was due to the timing of shipments.
Yeah. It's I mean, it's if you look at the Pos growth.
It was about in North America was about 19%.
In the North America business grew around 30%. So there was definitely approximately 10 points of timing.
Got it and then you guys raised indoors.
Just so we're clear some of that inventory was make up for low inventory levels going into the year some of its timing and its going to come out and that's the that's the art and the science of figuring out the second half of the year, what's going to stay we have a growing business. So our weeks of inventory.
Customers tried to keep the weeks of inventory pretty consistent but as you grow the size of the business and weeks of inventory gets bigger for one week gets bigger.
So as we've provided our guidance for the second half of the year. We gave our best estimate of how much is going to stick and how much of it is in fact, just timing and the shipments will come out in the second half of the year.
Understood piggybacking on that how much inventory our retailers carrying right now and how much do you expect them to carry going forward. If you have any visibility to that.
Again, we ended the year Hello.
If you remember our fourth quarter the summer of last year, that's where and all the supply chain logistic issues were starting to occur with us and our peer group. So we struggled to get.
To fulfill orders and get orders out the door. So we ended August with lower they're not bad but lower than normal retailer inventories. So we built some of that back in Q1, we built a little bit more back in Q2 and because of some of the just short term shifts.
In in customer requirements from March into February , we probably added a week or two of inventory typically in the four to six weeks of inventory for it for a retailer out there and so we're a little bit higher than normal again like Joe said most of that is going to come up.
In the second half always hard to tell where you are going to land the year.
But we've made our best guess, we'll probably keep a little bit of it but most of it will come out.
Got it and then last one if you don't mind me sneaking it in.
Our recent conversations with investors.
<unk>.
Thought out there that your gross margin outlook might be conservative and given your raise in sales this year slightly 1% at the midpoint.
But you held the gross margin guidance.
Why is that.
Yes, I mean, we're look we took.
I think we.
We took the hit on gross margin outlook quite frankly in our January call right and so we wanted to make sure we did not change it again.
<unk>, obviously as you see have not pulled back but we're covered for the year. We feel very we felt confident in January we feel now even more confident that that minus $2 50 is a pretty good number so.
I don't view that number is conservative the costs are real but we're covered.
Great. Thank you.
Thank you. Our next question comes from the line of Ben Bienvenu with Stephens Inc. Please proceed with your question.
Hi, guys. Good morning, Tim Solar only mid band.
If I can ask a couple of questions on the consumer side of things have you guys seen any consumer pushback on the price increases that you've put in so far.
Any demand elasticity.
Just what are you seeing in the channel and then.
How do you guys feel about the fourth quarter price increase do you have any concerns around demand destruction.
Yeah first of all consumer response to our price increase in September has been.
The elasticity has actually been lower than what we projected so volume has been directionally stronger and I think that's pretty consistent with what youre hearing from most food companies I would say one of the metrics that we're looking at right now as Youre starting to see the emergence of private label again, which tells you that consumers are starting to get a little bit more.
Or price sensitive and I think it has to do with the current economic environment gas prices High ground War in Europe that people concerned about I think in general consumers are.
Growing Lee more concerned about.
The future and real incomes and costs so.
As we think about it.
As we think about pricing obviously, we're concerned we're always concerned about the pricing environment, where consumers are feeling.
Less than positive given the current financial situations.
Said.
You have to do what you have to do and in this case, we've got to maintain our margins. So we're pricing to cover the commodity cost and we will be conservative in our estimates of what we think the elasticity will be as we move forward.
Just one clarification, Joe mentioned private label, which is dead on and we are seeing we are seeing private label broadly do better in the food space. This category has very very little private label, so not a concern at all from our end.
So as we as we look at elasticity there.
No.
And both of our businesses there is no competitor and there's no private label that we have to worry about price gaps do its absolute price point, driven and I've been in categories, where that is clearly not the case, it's just not it's not a prevalent to private label is not well penetrated here.
Had a great deal of difficulty over the year is trying to be successful.
Okay, great and if I could actually sneak in one follow up on that have you.
<unk> seen any evidence of consumer trade down whether it's into your category or maybe even out of the category just given the lower dollar price point per unit of consumption.
No no I have not seen any evidence of that yet.
Okay, great. Thanks, guys I'll pass it on.
Thank you. Our next question comes from the line of Steve Powers with Deutsche Bank. Please proceed with your question.
Yeah, Hey, guys. Thanks can you hear me.
Yeah.
Okay Cool I was having some phone issues earlier so thank you.
I guess two questions. The first one is just on.
Reinvestment spending and sort of the philosophy as we go forward and I think you've been clear about your plans over the balance of 'twenty, two but as we as we move forward just given given what youre seeing in the environment given your own innovation pipeline.
Is the thought process that.
Right.
Investment spending kind of.
Parallel sales as we go forward or do you feel like you have a have an opportunity to accelerate that spending to accelerate the top line and get ahead of it or Conversely, as a point of you view it as a point of Bob.
Margin leverage as we go forward, just how youre thinking about strategic investment kind of beyond the current year.
Sure. So Steve I mean look long term our model. Our model is we're going to maintain marketing investment with sales growth. Obviously the last couple of years, we've exceeded that we've been able to maintain gross margins.
Top line.
<unk> exceeded our plan, it's given us a lot of financial flexibility to increase investment and build up our <unk>.
Investment and quite frankly, inquests, where when we bought the business it was about 665% of our.
Net sales, we've gotten up to about 9% so.
We've exceeded marketing spend as sales growth this year with a little bit of pressure on margins we've pulled back.
We have not means we decided not to maintain.
Marketing growth a little bit lower than what our sales growth is just to kind of manage some of the the bottom line margin. We're still going on as I mentioned, we're still going to grow at mid to high single digit growth rate. So it's still pretty healthy growth. We spent a lot in the fourth quarter of last year. So we were jumping off a high base. So we have a lot of we feel.
Very comfortable with amount of spending we have and quite frankly, if we can get some upside to the second half and we can maintain the margins. We as you know we will not hesitate to spend some some incremental marketing in the fourth quarter.
The P&L allows us but going forward.
Growing with sales as kind of a model that we predict and and I would add to that we're fairly quantitative about return. So when we know we've got.
When we know we've got good return for the investment we're leaning in where we know we don't have good return we're pulling back. So you can expect us just from a principal standpoint, we wanted to be around 10% of net sales and we want to have a good return so both in the absolute level of spending as well as what we're spending on it's always return.
David do we drive incremental sales how much incremental sales, what's the what's the profit worth to us and that's how we've been as a business since we've been public steadily increasing marketing support.
Because the returns has been good.
Great Great and then a second question different tact, we spoke a couple of months ago.
It was pretty clear you didnt feel any outright urgency for M&A, but you continue to search for.
Right asset at the right price.
I guess, just an update on your thinking there and specifically.
We're talking about just kind.
Kind of valuation expectations of sellers.
Having been frothy over the past.
Several quarters.
There was some discussion about whether the current.
Backdrop, what's going to reset people's expectations, just any any sense, if youre seeing any movement there.
Early indications are we will see if they play out yes expectations are starting to change the conversations typically start with.
The IPO of the business, but if you gave US 30 times earnings we might sell it to you right. So those kinds of conversations given what's going on in the IPO market, what's coming what's going on with equity values.
They are less frequently out right. So I think seller expectations are coming down bankers belief that they got to tell the owner exactly what he wants to hear she wants to hear is starting to come down. So I think the environment as we move forward is getting a little bit more conducive to getting some deals done.
And there's a lot of assets, we've liked theres not a lot of assets, we like the value.
And so you should expect us to continue to be tough on value.
Alright, thanks for that yeah. Thanks, Todd thank.
Thank you.
Thank you. Our next question comes from the line of Pamela Kaufman with Morgan Stanley . Please proceed with your question.
Hi, good morning, Thanks for the question.
Yeah.
Can you comment on the magnitude of the price increase that Youre planning to take at the end of the fourth quarter and will it be across the entire portfolio.
And related to that.
Are you seeing across the competitive landscape from a pricing standpoint are you observing other branded competitors raising prices at similar rates.
Yes, so the price increase we just announced this week very similar to the price increase that took effect.
In September it is across the portfolio.
Differs whether product form a brand a bit but you know the last price increase was about a weighted average of about 8% and this one's similar.
And from a competitive standpoint, yes, we we were probably ahead of the curve on pricing we are now seeing our competitors.
Take price.
Not always clear exactly what the percentages are.
It differs I think somewhere similar to our price increase somewhere kind of a little bit more modest and the price increases we're taking but we feel very very good about the pricing actions. We've taken yeah, Pamela if you're if you're a competitor buying dairy proteins.
That would be taking pricing.
Because the marketplace, our historic highs and they don't appear to be coming down off those historic ties.
Historic highs anytime soon so if youre not taking.
Cumulatively double digit or more pricing youre, not keeping pace with the cost coming into your into your products.
It seems like this first.
First round of pricing went very smoothly from both retailer and consumer standpoint.
What has been the retailer reaction to second mountain can pricing.
Too early to call.
And I'm glad you think it was smooth.
But the retailers retailers are trying to protect consumers and so you run the gauntlet with retailer or any price increase.
Right, so and they are dealing with this across the board throughout their store all the buyers are dealing with it.
<unk> are taking pricing there onto their second in some cases third pricing actions right. So.
We'll see how if its more difficult the same or easier than the first one but I expect I expect retailers to continue to behave the way they behave which is they want you to justify your price increase based on actual cost change and we feel pretty confident that.
We have that fact base to make them feel comfortable that the pricing price increases justified.
To be clear, it's not going to be easy.
Right.
One last question different topic, just in terms of the divergence that you pointed to in the bars for format.
It sounds like Atkins was impacted by lower mobility because of Omicron quest bars benefited from more shopper track. So what do you see the different dynamics across the two brands, mainly a function of the channel mix or are there other factors.
And the thing that performance I think channel mix in category benefit right So channel mix.
It has a very large small format convenience store business that.
Collapsed during Covid right. So people just werent going into convenience stores gas stations to buy bars that business has come back and is robust and is growing.
Also if you just you can't look at this category is generic bars, the consumer benefits are very different.
West is about active protein for your active lifestyle Atkins is about helping you manage your weight I just think the environment right now for weight management is not back to full potential. If you think about the second quarter people were basically sheltering at home, because we had $20 million plus people with <unk>.
But I think right now if you just look at what's been going on recently with the economy with gas prices people aren't feeling, particularly positive about the future hard to hard to think about a lifestyle change and start eating healthier and maybe drop a few pounds. When you don't feel particularly good we were chatting about this yesterday.
Todd.
Mark come from the confections business and their experience was when people aren't feeling good they eat a lot of chocolate right and I think we're seeing a little of that in the Atkins business too, but correlates to being at work because the snacking occasions for bars or more work based but I also think people aren't feeling great and it's hard to think about.
Lifestyle change when youre, not feeling, particularly positive about the future right now so I think it's a combination of category and channel mix.
Okay. Thanks that makes sense, yes. Thank you.
Thank you. Our next question comes from the line of Ryan Bell with consumer Edge Research. Please proceed with your question.
Hi.
Just wanted to ask a little bit about that expansion is here <unk> seen partnerships across categories, where do you see the size of that and maybe the opportunity for future expansion.
Yes, Ryan I don't think we see it as a strategy today, we like the category. We're in we like snacking in our aisle, we feel that deployment of resources against that is our biggest our highest leverage opportunity.
We added the quest team and entered into the Quest company had entered into a frozen pizza business, we ran that business for a few years.
And we just came to the conclusion that it's.
It's not our core strengths, it's not apart, it's not our core strength in supply chain customer relationships category innovation. So we just thought it was a business better to put into the hands of a.
If a partner who has done a terrific job with our <unk> business on Atkins So for US it's more about focusing on the categories that we believe our greatest growth growth prospects and less about a broad scale licensing.
Licensing thinking across the portfolio.
Thanks, and then you were talking a little bit about some of the consumer behavior shifts.
Maybe arent scaling quite as great.
You kind of pair that against essentially needing to.
Our focus on weight management more now than ever how do you think about that more and more over the medium term in terms of the household penetration opportunity, where you see snack year versus on the go demand shifting towards e-commerce , and just sort of a broader evolution of that.
Yes.
It's a bit of a die.
Dichotomy, so we've had since.
The summer Covid summers at 2019, 2020 2021 .
We've seen double digit growth in buyers on actions.
So high and so the net takeaway that high interest in the brand interest and low carb lifestyle interested in weight management. So we consistently experience that since then and the second quarter was no different double digit growth of total buyers were bringing new buyers and they are sticking around and loyalty are.
Challenge in the business and I think that continues because if you look at the macro trends on the go snacking health and wellness interested in weight management, all tailwind for us and they've been tailwind for us for a decade.
So current.
If you if you just step back that when you when you talk to people about weight management. They go.
Of episodic it's kind of it.
It ebbs and flows it's while we've been flow in now for a decade on weight management and it's because 50% of Americans are obese about equal number of type two or type one diabetics are pre diabetic right. So the numbers are staggering.
The challenge of the business has been for us by rate and I think the challenge of the business as Youre trying to get people to make lifestyle change.
So short term hard to get people to think about lifestyle change when the world kind of upside down on them and I think you understand that so I think we're I think the business performance is being short term effected by that the long term trends are undeniable right that people have to change how they eat because the path.
That one is not a healthy one by the way the health care costs are mind boggling for people that are overweight and diabetic right. So we feel really good about the mid term trends. The buyer growth has been very positive. We just got to get people I think of as you start thinking about a lifestyle change youre more compliant you snack more right if I get it.
People back to work the snack more of my products right. So we're pretty confident that the mega trends in the long term trends are definitely in our direction. They had been for a long time. This COVID-19 thing has shook up some of the dynamics.
But every day, we see those things moving back to where they were.
Thanks.
The last question for me in terms of the opportunity get towards sort of a 40% gross margin.
<unk>.
Are you seeing in terms of the pricing that you were expecting to take and how that would trickle through into fiscal 'twenty. Three are you expecting to migrate closer up towards that or like some improvement on a year over year basis, Yeah. I mean, obviously, 40% the target. The question is when I mean.
It's really hard to predict very early on what FY 'twenty three is going to look like from a cost perspective.
Prices continue to be incredibly dynamic.
Just got exacerbated by the Ukraine, Russia ground War and they just kind of took off again, it's that short term is that going to stick for a while very hard for us at this point to predict so again, we're not going to comment on what gross margins are going to be next year.
We took a pricing action to cover what we anticipate to be elevated input cost issues for us.
But we will come back later.
As we get closer to year end and give you a little bit more color on gross margin, but right now too hard to tell but very clear 40%. We believe is a competitive advantage allows us to invest heavily in our business allows us to have strong bottom line margins. So thats clearly the goal.
Yes.
Great. Thank you.
Thank you ladies and gentlemen, our final question. This morning comes from the line of Eric Larson with Seaport Research. Please proceed with your question yes.
Yeah. Thanks, everyone. Thanks for squeezing me in I just have one question Joe.
Hum.
I'm sure that you've probably gone back and studied this but you didnt own these brands or run them.
In the last economic recession, which is what 12 to 13 years ago. So.
U S goes into economic recession.
The brands perform and what would you do or not do and maybe you don't do anything differently than what youre doing today with a very weak U S economy.
Yes, I think we've been looking for proxies I think the best proxy to look for on how their businesses would behave in a recession, our confections quite frankly, small indulgences snacks, right, which tend to do.
Tend to do pretty well during recession so.
Our view going into this thing is people will continue to invest in themselves on.
Low ticket items in order to make their life.
A little bit better so, but we'll continue to look at that pretty closely and don't forget.
On both brands the consumer is up is a pretty.
Upper Middle class consumer.
So we are affluent yes more affluent.
We believe they can probably withstand a recession a little bit better.
And then some other categories, but we're going to watch it very very carefully for sure.
It's a good question.
Yeah. Thanks, guys I appreciate it thank you.
Thank you ladies and gentlemen. This concludes our question and answer session I will turn the floor back to Mr. Scalzo for any final comments. Thank.
Thank you again for your participation on today's call. We hope you continue to remain safe and we look forward to updating you on our third quarter results in June have a good day.
Thank you. This concludes today's conference you may disconnect. Your lines at this time. Thank you for your participation.