Q4 2022 Simply Good Foods Co Earnings Call
At this time all participants are in a listen only mode. A question and answer session will follow the formal presentation. If anyone should require operator assistance. During the conference. Please press star zero on your telephone keypad.
As a reminder, this conference is being recorded I would now like to turn the conference over to your host Mr. Mark Magarian, Vice President Investor Relations for simply good Foods company. 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 period ended August 27, 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 earnings release. This morning at approximately seven a M. A copy of the release and the company presentation are available under the investors section of the company's website at Www simply good Foods company Dot Com. This call is being webcast an archive of today's remarks will also be available.
Turning to disclaimer 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 listing of such risks and uncertainties can be found in today's press release and the company's SEC filings.
On today's call, we will refer to certain non-GAAP financial measures that we believe will provide useful information to 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 the substitute for the financial information presented in accordance with GAAP. Please refer to today's press release for a reconciliation of our non-GAAP financial measures to the most comparable measures prepared in accordance with GAAP.
With that I'll now turn the call over to Joe Scalzo, President and Chief Executive Officer.
Thank you Mark good morning, and thank you for joining us today I'll recap simply good foods' fourth quarter and full fiscal year results and provide you with some perspective on the performance of our brands entitled discuss our financial results in a bit more detail before we wrap it up with a discussion of our outlook and take your questions.
I was pleased with our full year marketplace performance and financial results in a challenging operating environment full year net sales growth of 16, 2% was slightly greater than our expectations, while adjusted EBITDA increased 13% and was in line with.
Our estimates.
Combined measured and Unmeasured channel U S retail takeaway growth for the full year up 15.5% exceeded our expectations driven by solid quest performance across all forms and channels.
Atkins significant e-commerce growth resulted in mid single digit full year retail takeaway for the brand and the combined measured and unmeasured channels.
Importantly, we continue to grow share in the sub segments of active nutrition and weight management.
Our supply chain team performed well during the year and overcame many challenges to ensure customer service levels approached our typical targets.
I'm extremely proud of all of our employees have shown tremendous tenacity adaptability to overcome these challenges due to their efforts we were able to continue our winning ways with retail customers and consumers.
Growing market share.
As expected full year fiscal 2022 supply chain cost deflation was up mid teens, resulting in gross margin contraction of 260 basis points.
Inflation was primarily related to ingredients and packaging costs.
Importantly, cash flow from operations was solid and provided us with the financial flexibility to pay down debt and Opportunistically buy back shares.
We executed well against our priorities for the year and are well positioned to succeed in fiscal 2023.
The current recessionary conditions.
And its impact on shopping behavior, and consumer demand provide a challenging environment for our categories and brands.
Specially in light of our high retail prices.
That said, we're cautiously optimistic of our growth prospects.
In the first quarter of fiscal 2023, we're off to a good start as retail takeaway has improved time with post labor day back to work trends.
For the six weeks ended October eight point of sale growth in the combined measured and unmeasured channels was up about 14%.
In fiscal 2023, we expect supply chain cost to be greater than last year, and anticipate cost of goods inflation of low double digits.
Similar to last year, it's mostly driven by higher ingredient and packaging cost.
We projected our late fourth quarter price increase last year, along with cost savings initiatives will offset projected dollar cost inflation. This year, assuming input costs stay at current levels.
Therefore in fiscal 2023, we expect adjusted EBITDA to increase in line with the net sales growth rate.
Gross margin is expected to contract with most of that decline occurring in the first quarter.
You may recall, we had not yet experienced significant supply chain cost inflation in the first quarter of last year.
In summary, we're confident in the strength of our business and the diversification of our portfolio across brands products and channels.
And the current recessionary environment, our business is well positioned.
Our branch over index in mid to upper income consumers.
Have little private label competition.
And a strong presence in the mass channel that typically does well with shoppers during recessionary periods.
We believe this will enable us to deliver on our sales and earnings objectives.
Turning to the fourth quarter net sales growth of five 5% was slightly greater than our expectations due to better than anticipated retail takeaway.
Q4, combined measured and Unmeasured channel U S retail takeaway growth.
Was about 12% and as expected outpaced net sales growth.
The expected retail inventory draw down during Q4 resulted in more typical retail inventory levels as we exited the fiscal year.
Fourth quarter gross margin was 37, 1%.
But 210 basis point decline versus the year ago period was slightly greater than forecast.
Todd will have a bit more on this in a second.
Importantly, during the quarter, our supply chain team continued to perform well in a challenging environment as our customer service performance approach target levels.
Adjusted EBITDA in the fourth quarter was about $51 million, an increase of five 2% and in line with estimates.
Sales growth in G&A cost control, partially offset higher supply chain costs.
For the full year fiscal 2020 to simply good foods retail takeaway in measured channels increased 15%.
And both of our brands outperformed their respective sub segments of active nutrition and weight management.
Total quest full year fiscal 2022 retail takeaway in measured channels was up 32, 3% and greater than active nutrition segment growth of 24%.
For fiscal 2022, the weight management segment declined two 4%.
Atkins outperform that outperform the segment with retail takeaway up three 2% over the same timeframe.
Importantly, Atkins performance in Unmeasured channels continues to significantly outpace measured channels.
More on this in a bit.
Turning to Atkins fourth quarter performance consistent with prior quarters brand relevance remains strong supported by a growing base of buyers.
Total buyers increased 11% in the year and the buy rate was consistent with previous quarters.
Atkins Q4 retail takeaway in the combined measured and unmeasured channels was up slightly as outstanding E. Commerce growth continued from previous quarters, and offset softness in the IRI <unk> universe.
Atkins Q4, Pos at Amazon increased 75% driven by solid growth across all major forms.
We estimate total unmeasured channel retail takeaway increased about 40% and is now approximately 12% of total Atkins retail sales.
For perspective, you may recall that three years ago e-commerce represented less than 5% of total lack in sets.
Of course shakes and meal bars performance improved as consumers continued recent returned to work trends.
Specifically Q4 shakes retail takeaway increased five 5% driven by solid growth in the food and club channels and meal bars.
About two thirds of our bar business strengthened during the quarter and were flat versus last year.
Cookies and chips growth are progressing and are still in early stages of driving awareness and trial.
Brand consumption and buy rate was most impacted by soft confections and snack bar performance due to distribution losses, and lapping of last year dessert bar launch.
As we entered the new year Atkins has experienced improving Pos growth.
For the six weeks ended October 8th combined measured and Unmeasured channel retail takeaway is up about three 5%.
Performance was driven by continued strong e-commerce growth and improving core shake and meal bars with a ladder likely tied to post labor day.
Return to work trends.
Let me now turn to Kras, where Q4 retail takeaway increased 24, 6% in the measured IRI, new low C store universe and outpaced the active nutrition segment.
Growth was driven by solid performance across all major forums and retail channels as well as increases in household penetration strong consumption and success of new products.
Q4, Unmeasured channel retail takeaway was in line with measured channels is Amazon growth more than offset declines in the specialty channel.
In Q4, Questcor bar retail takeaway increased 11, 1% and outpaced bar category segment growth of seven 8%.
The snack your portion of quest products, that's cookies confections and chips continued to do well with Q4 at measured channel retail takeaway up 51%.
Both are strong across all forums that was driven by increasing household penetration distribution gains and marketing investments to drive trial.
We have a solid pipeline of innovation expected snacks today slightly greater than 40% of total retail.
Total quest measured channel retail sales will continue to generate solid growth over the near and long term.
In fiscal 2023, Qwest innovation is solid and we have a good balance of new products across all forms.
In summary, the simply good foods company competes in an attractive category with two scale lifestyle nutrition snacking brands that are well developed across multiple forms and snacking occasions.
Our brands are aligned with the consumer megatrends of healthy snacking with the nutritional profile that is protein rich and low in carbs and sugar.
The profile has broad appeal to consumers interested in health and wellness as a means to achieving their goals whether they're at home in the office or on the go.
Low category penetration and the aforementioned megatrends of wellness snacking should continue to be tailwind and long term growth levers.
With a steady improvement and return to work trends, we expect improving relevance related to convenience portability and on the go meal replacement.
As we look to fiscal 2023, we believe we are well positioned to build on our momentum and deliver solid net sales and earnings growth.
Pricing and cost savings initiatives are in place to offset projected supply chain dollar cost inflation.
Broad spot market prices of ingredient and packaging have softened versus the peak, although we have not yet seen meaningful cost declines for our key inputs.
Therefore, we expect gross margins to decline, although at a lower rate than the last fiscal year.
Most of the decline will occur in the first quarter as gross margins in the year ago period, and yet two experienced significant supply chain cost inflation.
Our advantaged business model with lean infrastructure enables strong cash flow generation and provides us with financial flexibility.
We are executing against our strategies and positioned for long term sustainable net sales and earnings growth that we expect will create value for our shareholders.
Now I will turn the call over to Todd who will provide you with some greater financial detail.
Thank you Joe and good morning, everyone I will begin with a review of our net sales total simply good foods fourth quarter net sales increased five 5% to $274 $2 million slightly greater than our estimate due to better than expected retail takeaway.
Net price realization was a nine five percentage point contribution to net sales growth and volume was off about four percentage points.
As Joe stated earlier Q4, total retail takeaway was 12% and as expected resulted in a draw down of the higher customer inventory, we discussed last quarter. As a result, we exited the year with more typical retail inventory levels.
North American net sales increased six 4%.
The <unk> agreement to license the quest frozen Pizza business was a <unk> nine percentage points headwinds in North America net sales growth.
The international business declined 16, 6% due to the Europe business exit poor international net sales was about the same as the year ago period.
The combined Europe business exit in quest frozen pizza business licensing transaction with a one six percentage point impact on total company net sales growth.
Moving on to other P&L items for Q4 gross profit was $101 $8 million, a decline of $2 6 million versus the year ago period.
Gross margin was 37, 1% a decrease of 310 basis points versus last year.
Input cost inflation was in line with expectations, while unfavorable onetime co manufacturer startup cost and inbound freight due to higher diesel costs were greater than estimates.
Adjusted EBITDA was $51 million versus $48 5 million, an increase of five 2% versus the year ago period.
And marketing expenses were $26 9 million versus $30 8 million or 12, 6% decline versus the year ago period was due to a step up in brand investments in the year ago period.
G&A expense, excluding integration and restructuring expenses as well as stock based compensation declined four 4% to $24 1 million a decrease versus last year was primarily due to lower compensation and corporate expenses.
Moving to other items in the P&L interest expense declined $1 $9 million to $5 4 million due to the repricing in the second quarter and pay down of the term loan.
Our tax rate in Q4 was 19, 4% versus 27, 2% last year.
The tax rate in year ago period excludes the impact of the charge related to the noncash non tax deductible warrant liability.
The lower tax rate in the fourth quarter of fiscal 2022 is primarily driven by favorable international and state tax.
Full year results are as follows net sales increased 16, 2% to $1 billion $169 million gross profit was $445 6 million, an increase of eight 7% versus the year ago period.
Gross margin was 38, 1% for the full fiscal year relatively in line with expectations and a decrease of 260 basis points versus last year the decline.
That's primarily due to supply chain cost inflation.
Actually offset by the previously discussed price increase.
Adjusted EBITDA increased 12, 9% to $234 million due to higher gross profit and G&A leverage.
Selling and marketing expenses increased seven 8% to $121 7 million the increase was driven by higher marketing investments.
G&A expenses increased 1% or <unk> $9 million.
<unk> excludes charges related to integration costs restructuring expenses and stock based compensation.
Moving to other items in the P&L interest expense declined $9 7 million to $21 $9 million due to the repricing and pay down of the term loan.
The full year noncash charge related to the Remeasurement of our private warrant liabilities was $30 1 million versus $66 2 million in the year ago period.
The full year effective tax rates, excluding the charge related to the warrant liability was 23, 2% versus 27, 2% in the year and a year ago period due to favorable international and state impacts.
Anticipate the full year fiscal 2023 tax rate to be around 25%.
Net income was $108 6 million versus $40 9 million in the year ago period.
The increase of $67 $6 million is largely due to the re measurement of the private warrant liabilities.
Turning to EPS fourth quarter reported EPS was <unk> 30 per share diluted compared to <unk> 19 per share diluted for the comparable period of 2021.
In fiscal Q4, 2020 to depreciation and amortization expense was $4 $9 million and similar to the year ago period, and stock based compensation of $3 million increased <unk> $5 million versus last year.
Adjusted diluted EPS, which excludes these items was 36 and.
An increase of seven versus versus the year ago period.
Note that we calculate adjusted diluted EPS as adjusted EBITDA less interest income interest expense and income taxes.
Full year reported EPS was $1 eight and adjusted diluted EPS was $1 59.
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 fiscal 2022, the company repaid $50 million of its term loan and at the end of the year. The outstanding principal balance was $406 $5 million.
For the fourth quarter and full year cash provided by operating by operating activities was $43 3 million and $110 $6 million respectively.
As of August 27, 2022 of the company had cash of $67 5 million and a trailing 12 month net debt to adjusted EBITDA ratio was one four times.
In the fourth quarter, the company repurchased shares worth $31 million at an average cost of $33 69.
Bringing the full year repurchase amount to $60 million at an average cost of $34 79 per share. Additionally, in the fiscal first quarter of 2023, we repurchased 16 $4 million of our common stock at an average price of $30 and 11.
On October 19, 2022, the board of directors approved a $50 million increase its existing stock repurchase program and $71 $5 million remains available under the updated authorization.
Capital expenditures in Q4, and the full year fiscal 2022 was <unk> 5 million and $5 $2 million, respectively. In fiscal 2023, Capex is expected to be about $5 million to $6 million.
In fiscal 2023, we anticipate net interest expense to be around 25% to $26 million, including noncash amortization expense related to the to the deferred financing fees.
I would now like to turn the call back to Joe for closing remarks.
Thanks Todd.
We're cautiously optimistic about our growth prospects over the next 12 months.
In a challenging external economic environment. We believe we are well positioned to generate solid net sales and adjusted EBITDA growth.
In the year.
We continue to expect supply chain costs will be higher in fiscal 2023.
However, the list price increase effective late in the fourth quarter of last year and cost savings initiatives are in place to offset dollar cost inflation.
Additionally, we have made significant marketing and organizational investments in the business over the past few years that we believe will contribute to the growth of our consumer base shelf presence and market share gains.
Therefore, the company anticipates the following fiscal 2023.
Net sales to increase slightly greater than our 4% to 6% long term algorithm, including a headwind of approximately one percentage point related to the previously discussed pizza licensing agreement.
Gross margin is expected to decline, although at a lower rate than last year.
As previously discussed most of the decline will occur in the first quarter higher costs over the remaining three quarters of the year should only slightly impact gross margin.
Full year fiscal 2023, adjusted EBITDA is expected to increase in line with the net sales growth rate and.
And adjusted diluted EPS is expected to increase similar to the adjusted EBITDA growth rate.
Note that in fiscal 2023, adjusted diluted EPS growth is affected by higher interest expense due to an increase in the term loan variable interest rate, partially mitigated by fewer shares outstanding.
We appreciate everyone's interest in our company and we're now available to take your questions.
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.
Formation tone will indicate your line is another question Kim you may start to if you would like to remove your question from the queue for participants using speaker equipment. It may be necessary to pick up your handset before pressing the star keys.
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.
Hi, good morning.
The credit risk.
I just want to ask a question if I could first and I think what we heard from in your prepared remarks around the brands are pretty robust suite of new products for both brands Atkins and quest and just wanted to get a sense of to what degree that how that compares against the prior year, you're seeing are you seeing more activity and then kind of rolling that into shelf resets.
Kind of what to expect.
These fall shelf resets for the brands.
Yes, Chris I would say pipeline remains robust I would say.
I'd say, it's any better or any worse than prior years, but a pretty good pipeline both in.
Our core core products, where youre, replacing weaker items with new innovations on flavors as well as innovation and new for them. So it feels it feels.
More of the same which has been a pretty good pipeline.
Over the last few years and.
From a research standpoint.
I think we're going to continue to see movement from retailers towards bigger brands.
And away from shiny objects, I think retailers continue to be concerned about foot traffic.
I understand bigger brands in the category drive foot traffic into their stores. So they are very focused on getting the bigger brands right from a distribution standpoint in ink and filling in around them.
I would expect that to continue to be the case. So we just saw.
Walmart's reset.
In August and the bigger brands benefited from that reset we saw a significant uptick in our business with both brands from that reset and I think that's going to play out as the year plays out as the <unk> plant.
Okay.
Thank you for that and I had just a follow up question on <unk>.
Just the Atkins brand in general and it's been a little bit of an improvement there and the underlying growth rate I think you cited shakes and obviously meal bars.
I just want to get a sense of you know.
From the like is there still continued call it diet weight management category sort of drag here for mobility, you were talking about kind of post labor day getting back to work do we start to lap that to where we see more normalized trends in the Atkins brand and then underneath that you know are you seen it seems like we've seen a little bit more momentum here.
And shakes and confectionary, which can hopefully help drive better growth in the coming year.
Yes. Thanks for that question. Good question I think first and foremost I don't think we ever had a just a broadly a weight management issue I E people not looking to lose weight.
The brand relevance as indicated by household penetration has continued to be strong interest in the brand remains.
Really well our challenges have been a buy rate challenge tied around pandemic snacking and meal replacement behaviors.
As we have seen.
People go back to work, we've seen a steady improvement in the brand over the fourth quarter and into the first quarter a little bit of what investors haven't seen is there has been a significant uptake in Atkins in E Commerce, which has been added call. It three in some cases four points of growth.
Two the low growth that you can see so theres been that shifting that I think that I think investors have not seen the business has been a little bit stronger than what you would you would pick up in measured channels as people have gone back to work we've seen the core kind of meal replacement that kind of portable meal replacement.
Snacking occasion that is kind of it tends to be work driven we've seen improvement in that business. So our core shake business is strong we're seeing our meal Neil bar business perform really well. So that's been really encouraging from a brand standpoint, I would say there is.
You pointed added in are in your question. There are two like tactical issues on Atkins that we're addressing as we speak. The first is we saw a slowdown in our snack bar business. It was driven around distribution losses in the spring.
Items items went out as we put in cookies.
Cookies and chips, we got we got to fix that and that's well underway and then second we've been lapping some confection law.
New products from last year. So there is a pipeline and confection items thats going to be coming into the marketplace. So I would expect as the first half plays out we would see improving trends in both of those farms.
Okay that was great color Joe Thanks for all your time.
Hey, Chris.
Our next question comes from the line of Steve Powers with Deutsche Bank. Please proceed with your question.
Great Hey, guys, Thanks, and good morning.
Maybe maybe maybe first a question for Todd just.
To dig into the inflation and gross margin outlook.
The low double digit inflation that you called out I guess I guess I'm curious.
Just how.
How much of that is locked in through hedging and sort of.
Definitive in your planning versus.
More more subject to some variability number one and then Relatedly you talked about most of the gross margin degradation happening in the first quarter, but I'm just trying to reconcile just trying to figure out what the curve looks like and do you expect any margin recovery as.
As the year progresses or is gross margin is expected to be down kind of throughout the year, but obviously weighted to the first quarter.
So.
Your first question, we're about 50% covered right now.
If rigs.
Regarding Q1 last year, our gross margin excuse me was up about 70 basis points. So we still have not seen much of the inflation hit in Q1 of last year, we still have a fair amount of coverage on so this will be.
At the time, where we experienced a lot of year over year inflation for the first quarter for the first quarter of this year just to give you a perspective.
Commodities and packaging last year are up about 20% and we anticipate something close to that again. This year now obviously freight is going to be less for us from a growth rate co man inflation cost will be less so the overall total inflation will be more in the teens, but the actual input cost are extremely significant.
Overcome those 15 to 18 month period.
We are right now the way we've done our budget, we will have some gross margin declines in the back part of the year, but not big and as we've mentioned we have not assumed that the cost structure gets battery, we've kind of assumed it stays where it is.
We are hopeful that trend line will continue as the year goes on we've already started to see a little bit of.
Hawaii at the end of the tunnel here, where some of our input costs are starting to soften up as we potentially go into a recession.
Is a decent chance that may continue so we.
We may be in a better position on our next quarter call that gross margin for the second half of the year looks a little bit better, but right now the big hit will be in Q1, because we're lapping strong gross margin expansion last year, and then were expecting some slight margin contraction for the remainder of the year.
Okay perfect that all makes sense. Thank you.
And then I guess the second question.
For either one of you or both and just.
As I said.
Think about where the businesses today versus where it was.
Plus ago.
And obviously the the macroeconomic backdrop as you just alluded to.
It is also different and more challenging I guess my question is is how that changes.
Your approach to demand building.
Inclusive of the shift to e-commerce that we've seen.
Do you think about advertising and promotional plans.
How has it changed and how does the current environment and the trends of the business shift.
We're thinking in terms of how much you spend and I guess, where and how you spend it.
Well good question I would say first of all.
As we go into the year look there's there's a reason for us to be cautious right youre heading into what is.
If not by strict definition in a recessionary environment. So you would expect consumers to be tight with their patents and we're starting to see it in.
Slowing demand overall in food growth in private label shift in shopping behaviors. These consumers moving away from grocery moving to value retailers and they're being a little bit more cautious focused on value and being cautious around purchasing so it warrants us.
Being a little bit cautious.
About our outlook going forward.
It's reflected in the guidance that we provided in FY 'twenty three.
That said.
Yes, we have.
Got it got reasons to be optimistic first of all we're carrying good momentum into the first quarter, we're seeing an uptick in our POS strong performed stronger performance on both brands.
Wed like ours as Chris as I answered Chris's question, we like our pipeline going into the year, we like retailers focus on our bigger brands. So I think from our perspective, we're optimistic about the year, but cautious about the external environment as we head into it. So our view is we're going to we're going to reap.
POS and we'll make adjustments from an investment standpoint based upon how we see it.
I think Todd Todd's characterize the cost environment the way, we see it like we've planned for inflation not to improve so first second half sort of like first half. There are some lead indicators that would suggest some of thats going to come back to us we will read that situation and we will.
Make decisions based upon investments from a marketing standpoint based on how that plays out during the year.
Did I answer your question.
The only other thing I would say is you are focused on value in times, where consumers are starting to pinch pennies. So fortunately for us we tend to have value sizes, you focus on temp.
Temporary price reduction in your merchandising activities, you've tried to get more displays out to center store because foot traffic is down say your tactics shift to shopper and consumer behaviors, but overall macro we're going into the year pretty optimistic with the side of caution given the external environment.
Yes. Thank you very much that last piece really really got to the point. Thank you very much Joe and thanks to that as well.
Good day.
Thank you. Our next question comes from the line of Alexia Howard with Bernstein. Please proceed with your question.
Good morning, everyone.
Alright.
Hi, guys. Two questions first one is on price elasticity, because I know the way I would be getting a little opaque so a partial picture.
In the measured channels.
Being pretty high levels of price elasticity in that now I know that you've got stronger growth in E. Commerce I know, we got the data points of nine and a half with them pricing with volumes down 4%, but presumably that was also impacted by the retailer inventory reductions. This quarter. So if we were to include the non measured channels.
You give us any insight into overall levels of pricing and sort of run rate level.
Decline.
And then I have a sideline so alexia we're in kind of a turbulent time right now because we actually have two overlapping price increases. So we took a price increase that was sort of started being effective. This time last year. We just took one in.
In August and September so there isn't that somewhere around 15 16 points of pricing in the marketplace short period of time. So I I think so we're watching that very closely obviously as one burns off will be interested in seeing what the elasticities are I would characterize last year's price increases about what we expected from a post art.
I would say elasticities around 180 lasted a little longer than you would expect typically youll see.
Pricing elasticity start burning off after a number of purchase occasions for 345, we start seeing people get used to the new pricing I would say last year. It was a little later in coming consumer's reaction to it and lasted longer so we're heading into a more difficult recessionary.
Environment, the absolute prices are as high as we produce it at historic highs for our brand in the category.
That's one of the areas why we're being cautious about our guidance, where we want to see how consumers respond and a.
In more challenging economic environment with their decisions and their reaction to the prices.
And to your earlier point Alexia Youre right.
We were down four points in volume for the quarter, but we pulled about five points of inventory out.
In the quarter as you know we shipped ahead of consumption in the first part of the year. So.
True like for like kind of consumption volume was up about one or 2% and as Joe said, we've been seeing about one for one.
Across the board and I think our anticipation is that elasticity will kind of stay for a while.
Great. Thank you very much for those comments.
And then just as a quick follow up you mentioned co manufacturer being up which I I seem to happen for a while.
That was one of the things that was well spent.
Thank you this quarter, how much visibility do you have into those kind of manufacturing costs as we look out into fiscal 'twenty three that locked in now or could that be a synopsis. Thank.
Thank you and I'll pass it on.
Yes so.
Fourth quarter issue was an issue around startup of a new product and a new co man. So the business. So not a inflationary increase of contract manufacturing cost. So the way the the way the industry works is.
Typically when Youre doing startup runs in the contract manufacturers not getting production you pay for the line time.
So we had a number of products with a new co man in and or a new product that took longer than what we anticipated. So we had her run multiple days multiple shifts that's a fixed cost to us that was higher than typically what we would have forecasted we would view that.
That is a onetime cost.
Yes, we are so to Joe's point, we have very good visibility on the annual inflation rates on co Mans.
Those negotiated typically every every year.
Obviously inflation, but kind of single digit inflation and again very good.
Visibility to what those costs are.
For the foreseeable future.
Great. Thank you so much I'll pass it on I appreciate that.
Thank you. Our next question comes from the line of John Baumgartner with Mizuho. Please proceed with your question.
Good morning, Thanks for the question.
John .
Maybe Joe first off I'd like to ask about quest and specifically the bars business I think since you made the acquisition distribution growth its really outperformed the bars category by quite a large margin across all your measured channels and I'm curious at this point, how we should think about the next phase of growth there or are there specific channels, where you think distribution in.
<unk> ability to increase further can we think about new formats with its wafers or anything like that just specific to quest bars, just your thoughts on future growth.
Yes, I think one of the strengths of the acquisition as we combined.
Two selling organizations with complementary skills. So in the case of.
In the case of food drug mass that was enacted strength youre seeing that start to play out now and distribution gains.
An inquest in in particular.
We're using a old Atkins playbook moved from singles to Multis, So thats going to continue to play out as as the year's progressed trading people up from one to four packs on our classic bars, and I think that's going to continue to see that happen second.
The quest team had a just a terrific small format right.
So do a really good job breadth and depth of penetration you're seeing the.
Classic original.
Original quest bar build distribution over time as we further penetrate those distribution channels with the with.
Better placement so more items better location in small format stores. I think you are going to continue to see that play out and then lastly, there is a nice innovation pipeline going on all of ours right. Now. So we have many bars on quest and I'll talk about those in a second but you also have dipped bar so based.
The basic two key flavors of <unk>.
Our original bars with it dipped to chocolate outer layer both of those.
Both of those are.
Moving in distribution as we speak the minis are interesting because if you've eaten a classic bars, you know that.
That can be they can be pretty.
They can be pretty satisfying right and for some people just too big so many of us are kind of smaller snack.
<unk>, a little less satiety from them and so we think they are pretty good.
Pretty innovative from a from a growth standpoint, and then lastly, we have a may if you haven't tasted the new products the product upgrade that we have on our classic bars.
It's pretty terrific. So the upgrade provides a softer longer kind of.
Better eating experience and we expect that's going to provide an uptick in our.
Our <unk> business as we go forward, so we're pretty optimistic.
The quest bar business, we think is a pretty long runway for growth will drive it through white space and through product innovation and upgrades and we think it is.
More than a few years of runway of opportunity for that business.
Okay. Thank you for that and just a follow up touching on the strength in E. Commerce for Atkins as you mentioned the growth there may be some stronger than expected is there anything unique to that brand you'd highlight as a factor behind that and is there channel specific pricing youre doing are you increasing frequency of digital specific advertising yeah. How would you characterize that supports for that accretive.
And how long do you think could persist here going forward. Thank you.
Yes, so it's been on a pretty good trajectory as we said in our prepared comments. It was under 5% of Atkins three years ago. I think if you go back four years. It was under 1%. So it's been this is we're combining with quest has been a huge advantage e-commerce the sizes the e-commerce business on quest.
From a development standpoint was ahead of <unk> and so as we put those two business together and particular at Amazon, We got a bigger seat at the table and we learned a little bit more about the opportunity on Atkins. So a lot of the growth we're experiencing right now on Atkins is.
Is due to our improvement of our catalog of products offered so we did a refocusing of our shake business as a first phase moving it to.
Trying to get the average price point on Amazon over $20, which is a key for their profitability and if they are making more money than they are more likely to push.
Push you.
From a growth standpoint. So you can promote more you can get a deal with a days and special and special promotion opportunities. So we're seeing that play out and obviously there is a.
There is an opportunity as we go further into the Atkins portfolio and get the catalog right on Atkins.
We see an opportunity for continued growth on Atkins over the next few years just to give you a benchmark Atkins is about 12% E. Commerce I think quest is around 28.
<unk> eight points of opportunities would go forward, we're going to we're going to chase that pretty hard over the next few years.
Okay. Thank you Jeff.
Good day.
Thank you. Our next question comes from the line of Jason English with Goldman Sachs. Please proceed with your question.
Hey, good morning folks.
Couple of quick questions first real quick housekeeping can you remind us the order of magnitude of that price increase that you put in August September and secondly, there's sort of one time co man line time expense that you incur in the fourth quarter can you quantify that please.
The average price increase at the end of the year was about 8% similar to the one that we took.
In September the previous year.
<unk> co.
<unk> was between one and $2 million.
Thank you.
And then bigger picture question.
Looking across the diet landscape Theres a lot of turbulence Matt.
A matter of fastest cut guidance weight watchers is struggling slimfast is down youre seeing a lot of volume pressure on Atkins, albeit I.
I concede you're assuming outperforming the market.
While these new pharma solutions, they've been approved by the FDA seemed like they are on fire like Novartis can barely keep up where they can't keep up actually with wood Gobi demand are we seeing a shift from traditional dieting into these new pharma solutions certainly looks like it is.
If so how do you think it's impacting your business and I know there's been active you've had active efforts over the years to try to transition Atkins away from core active dieters to more lifestyle can you remind us like rough split of your best guess, the rough split of consumers, how much or what percentage of our active dieters what percent are just more living an active lifestyle.
Yeah, Jason I don't.
Like your theory, the data in our business doesn't support it. So we're not seeing declines in interest in brand. So you would if you're pharma if you're a farmer theory, where true in our business, we would see falloff in buyer lack of loyalty you would see an ability to recruit new buyers. So I don't think.
And snacking, we're seeing that impact on our business I am not disagreeing with your macro trends, but we're just not seeing in our business.
The slowdown in Atkins is driven by changes in snacking and meal replacement behavior, driven around the pandemic and.
Evidence of that I think is pretty strong and I think the improvement in the business has been driven by changes in that as we go forward. So I don't think Thats. The case in the case of our business. So I think part of it to your point is we've moved away from kind of fast weight loss.
Historical positioning of the brand to more lifestyle positioning.
And I don't have the most recent numbers I do remember we were about a 40 share of dieters, there were about $8 million Thats, probably for your old data now.
And lifestyle. When we started there were about 33 lifestyle lifestyle consumers. We started at about a 10 share of them.
My guess is we've grown that pretty pretty significantly over the last few years.
But even as we were doing that we werent until the pandemic, we werent seeing by rate differences right I think snacking behavior is snacking behavior and.
Lifestyle people didn't didn't show a change in buy rate from.
Typically what a annual behavior of a dieter would be so like I get I get your concept I think it's an interesting theory I don't think it's playing out in our business. If you look broader in the category too I don't think its playing out in Slimfast business, either I think Slimfast went all in on keto it turned out to be a low carb.
Bad they wrote it up and they are writing it down now and I think once that gets out of their business their business should be fun.
Alright, Thank you I appreciate it.
Thank you. Our next question comes from the line.
<unk> with Morgan Stanley . Please proceed with your question.
Hi, good morning.
Good morning, Tim.
How are you thinking about the goodwill in class conversion to Atkins for fiscal 'twenty. Three do you expect <unk> to continue to generate outsized growth relative to Atkins.
Or is it going to be more balanced given the comparisons that the brands are if anything and then just related to that how do you think there.
And in a more value oriented consumer environment.
You'd better because it has a more affluent customer base.
Second to outperform because of lower price point.
Thank you Greg.
Great questions I would expect quest continues to outperform from a growth standpoint. It is earlier in its history, it's got distribution gain distribution opportunities that frankly.
<unk> is further along and it's got a strong e-commerce business. So it's going to arrive ecommerce trends really well.
Price points on we're a little cautious about we tend not to do it how those classes compare to Atkins buy would tell you we're cautious about the price points in general.
Mr higher right Atkins or a little bit less Atkins has some value sizes. The quest doesn't have so atkins is probably better positioned from a value standpoint, but I think.
<unk> got a heck of a lot of momentum right now right. It's core bar business is growing it's got innovation, that's doing well it's on a role from a distribution standpoint, we would expect quest to outperform and I think Atkins is well positioned from a value standpoint, the ride through kind of a recessionary period.
Great. Thank you and then just I.
On the P&L.
Our EBITDA to grow in line with sales gross margin to decline. So can you talk about where you have opportunities for lots of agent in operating expenses and how youre thinking about marketing investment.
So we're going to try to keep all of SG&A relatively flat at least for now until we see a break in the commodity picture. So G&A will be very very tight on that.
That'll be very flat for the year.
Marketing right now, we'll also be flattish you've got to recall the last three or four years, we've had significant increases in market well ahead of net sales growth.
9% of net sales right now so we have over $100 million of marketing.
For our business, we have a really nice bucket of marketing funds to work from we're going to be cautious just because of the environment out there right now so we're going to hold that relatively flat from a dollar perspective, we're not going to decline, but we'll hold it flat and if we see a break in commodities.
Can count on us to start to reinvest more marketing dollars in the second half of the year.
Great. Thank you.
Thank you. Our next question comes from the line of Cody Ross with UBS. Please proceed with your question.
Good morning, everyone. Thank you for taking my questions.
I just wanted to turn to the pressure that Atkins came under this past summer.
You called out distribution losses in your prepared remarks can you just discuss what drove those distribution losses and discuss your plans to regain that lost distribution.
Yes, let's let's step back because I think you're zooming in on a portion of the story I think again, if you look take a look at what's been going on at Atkins is we've seen a change during the pandemic of snacking behavior.
And.
When youre not at work you're not the advantage of portable meal replacement work those snacking occasions, where in fact lower levels than kind of pre pandemic levels.
That had a jumbo.
In a general impact on buy rate from a brand standpoint.
So as we've seen those trends start to change are starting to see the buy rate of those products start to pick up we saw it in our meal bar business, we were seeing in our shake business I.
I did mention that there are one or two issues that happened over the spring, which were amplifiers are the trends there. The trends we are experiencing and that was we lost distribution on snack bars as we put in some items in.
In chips, and cookies, and obviously, where we're moving to fixed that issue as we speak right now so that's new product innovation on snack bars to fill in the losses that we experienced over the summer and then we have talked about this before we add a new product launch last September October when in distribution.
October November on confections, they were dessert bars.
The repeat on those hasnt been great. So obviously the fixed there is.
Innovation on indulged the confections in order to to offset those declines.
Just to be clear I mean, absolutely snack bars down and distribution total distributions has been in good shape, it's been flat to up over the last year and as Joe mentioned earlier, we did really well in the Walmart reset on both brands. So youll start to see those TDP growth to increase probably already.
And the data and we're optimistic.
Our fall resets to come in November will be positive as well so distribution continues to be a strength for us.
Great. Thank you for that clarification, and then I just wanted to discuss your snacks platform did you really launched into that really two years ago can you just give us a state of the union of your snacks segment right now how big is that platform. How is it doing relative to your expectations and then where do you see it going over the next two to three years. Thank you.
I'm, assuming you're talking about just in general non bars and shakes innovation.
Yes.
So yeah, just step back look we have a core business, our core business as bars and shakes bars predominantly on quest bars and shakes on Atkins just from an innovation standpoint, given the buy rates of these businesses I think it's easy to Miss this point, but we add businesses that in.
Just general Snacking terms have really high buy rates.
So if youre an atkins buyer you are multiyear Atkins buyer youre buying to snacks a week on average right. So.
Innovation variety even in the core business has become very important.
So then as you think about non core we have our confection business strong on both brands Big business growing fast on quest as it entered it last year, you have cookies and chips quest, obviously multiple years into that chips has been a in salty snacks beyond that has been.
A growth engine for the business that's been driving household penetration, it's a source of new buyers into the brand.
It's doing really well, we intend to continue to build on that and then obviously a base platform with cookies has done very well, we innovated with frosted cookies a year ago that continues to be a strong platform. So as a company we view those forms as an opportunity to get into different.
Snacking occasions, and different day parts, so our core business tends to be or prior to lunch. So as you start innovating in those other forums tend to be more later in the day and different snacking occasions confection stand to be late in the afternoon early in the evening its kind.
Sweet tooth thing chips, and cookies tend to be for the most part between lunch and dinner. So.
Trying to penetrate those occasions and then what we'd look at is can we can we create a snack food product that kind of turns the macros of traditional snack foods upside down right good and protein.
LOE in the stuff that you don't want carbs and sugar, if we can make a good tasting product and it's a sizable kind of conventional snacking category, we like entering those because we can give people a better for you option.
That tastes great.
And just to be clear.
We are very very cognizant of that core bar and shakes has to be healthy it has to be growing. So we're not relying on these new new worst snack platforms to drive the growth we have to drive the growth of bars and shakes. So that core is about 55% on quest the snack pieces the rest it's grown.
Very very nicely the snack piece, but the bar business as you know it's growing in the teens as well. So that's what we need to do going in the future right now bars and shakes is about 75% of Atkins and so we like the fact that meal bars and shakes are doing really really well right. Now we're just starting to launch the cookies and the chips keeping a close.
Hi on that but at the core.
Core <unk>.
Platforms on both brands are not doing well, we're not going to be successful.
Thank you for the color I'll pass it on.
Thank you ladies and gentlemen, our final question. This morning will come from the line of Ben <unk> with Stephens Inc. Please proceed with your question.
Hey, guys students learn on for Ben.
No question.
I wanted to ask the strategy.
Standing some of these new snacking Skus, if you have the consumer that maybe isn't a quest buyer on the bar side.
What's the thought process about getting them to be an incremental buyer whether it be the.
Protein chips cookies.
So you guys have been you like cheese Cracker out can you just talk maybe about the strategy to get incremental buyers into the category that might not be in that core demographic.
I think.
The answer is similar to the answer from the last question right.
We look to penetrate as many snacking occasions and need states as we can.
No.
Cheese cracker.
In a salty snack is a different snacking occasion in the confection product. So you are trying to penetrate less about who are the consumers looking at that more about offering more snack.
Snacking occasions, and more need states that we can fill with our existing portfolio now the reality of it as you pointed to it really well.
We're able to in particular with our chip business salty snack business, we're bringing in a lot of new buyers in fact, I think I saw that data that.
Our our salty snack business already has the same household penetration as our bar business, so were bringing consumers on that in that form into the franchise now it's our job to.
To strengthen the positioning of the brand to get them to see it as more than just the salty snack brand to get them to buy cross purchases in other forms and obviously part of our marketing is designed to do that both online and in.
And.
Mainstream media. So you build the brand you get people to use multiple forms you bring them in one form do you get them to try the others and that's our strategy going forward. So it's less about who are the consumers we understand who the target is for quest, it's more about giving them.
The snacking occasions, and the need states that they're looking for so they don't have to go anywhere else for their snacking.
Products.
And to answer your question and maybe if I could.
Actually if I could just.
A follow up do you guys know the composition just to use like chips. As an example, do you know the composition of buyers what percentage are existing quest bar or she consumers versus incremental to the category. They don't jump west and they just started buying the chips.
Yes, we know the people that we're bringing in new to brand on quest on chips, and we know those that are actually already bar box yes.
So you can see that they are you guys able to give them, obviously you guys enough.
Sure.
I'm sorry.
Well it should be able to give a percentage breakdown.
No I don't think we'll share that data now.
Okay.
Great. That's all for me thanks for the color guys.
Thank you for your participation today on today's call. We hope that you continue to be safe and we look forward to updating you on our first quarter results in January have a good day.
Thank you. This concludes today's conference call you may disconnect. Your lines at this time. Thank you for your participation.