Q2 2023 Simply Good Foods Co Earnings Call
Speaker 2: Greetings. Welcome to the Simply Foods Company's fiscal second quarter 2023 conference call. At this time, all participants are in listen-only mode. A question-and-answer session will follow the formal presentation.
Speaker 2: If anyone should acquire operator assistance during the conference, please press star 0 from your telephone keypad.
Speaker 2: Please note that this conference is being recorded.
Speaker 2: At this time, I'll now turn the conference over to Mark, Bulgarian Vice President of Best Relations. Mark, you may now begin.
Speaker 3: Thank you, operator. Good morning. I am pleased to welcome you to the Simply Good Foods Company earnings call for the fiscal second quarter ended February 25th, 2023. Joe Scalzo, Chief Executive Officer, Sean Marra, CFO , and Jeff Tanna, President, COO, and CEO elect are with me today. Joe and Sean will provide you with an overview of the
Speaker 3: foodfoodscompany.com. This call is being webcast and an archive of today's remarks will be available.
Speaker 3: 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.
Speaker 3: The company undertakes no obligation to update these statements based on subsequent events. A detailed list of such risks and uncertainties can be found in today's press release and in the company's SEC filings.
Speaker 3: Note that on today's call we will refer to certain non-GAAP financial measures that we believe will provide useful information for investors.
Speaker 3: Due to the company's asset-light, strong cash flow business model, we evaluate our performance on an adjusted basis in relation 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 key indicators of the underlying performance of the business.
Speaker 3: The presentation of this information is not intended to be considered in isolation or the substitute for the financial information presented in accordance with GAAP. Please refer to today's press release for a reconciliation of the non-GAAP financial measures to the most comparable measures prepared in accordance with GAAP. With that, I'll now turn the call over to Joe Scalzo.
Speaker 4: Thank you Mark, good morning, and thank you for joining us.
Speaker 4: Today I'll recap Simply Good Food's second quarter and provide you with some perspective on the performance of our business.
Speaker 4: Then, Sean will discuss our financial results in more detail, before we wrap it up with a discussion of our outlook and take your questions.
Speaker 4: As most of you know, on January 30th, we announced that Jeff Tanner would be joining us as President and CEO of LEPT.
Speaker 4: Throughout his career, Jeff has been primarily focused on marketing, sales, and innovation within the food sector. So he brings superior experience along with credentials as a terrific leader and as you'll learn incredible passion to everything he does.
Speaker 4: The board and I are confident that under his leadership the company will continue its track record of growth and profitability and I look forward to partnering with him to achieve a smooth transition.
Speaker 4: I'll now turn the call over to Jeff for some introductory remarks.
Speaker 5: Thanks Joe. I'm honored that on July 7th I'll become the next CEO of the Simply Good Foods Company.
Speaker 5: As you know, Simply Good Foods is a special company with two great brands fueled by passionate employees and loyal consumers.
Speaker 5: These attributes have delivered top-tier sales and earnings growth and will continue to do so going forward.
Speaker 5: Although my official start day was two days ago, April 3rd, I was eager to get a running start to learn about the business.
Speaker 5: and meet with many of the employees via Zoom and phone.
Speaker 5: I learned what many of you already know. We have a remarkable energised team who come to work every day with a strong sense of purpose.
Speaker 5: That purpose is to lead the nutritious snacking movement with trusted brands that offer a variety of convenient, innovative, great tasting, better for you snacks meal replacements.
Speaker 5: I want to say a special thank you to the Simply Good Foods team, many of whom listen in to this call.
Speaker 5: It's clear their passion and dedication along with our strong brands and growth investments.
Speaker 5: will continue to contribute to our further success.
Speaker 5: Both Joe and I have worked with Jim Kilts earlier in our careers so it's no surprise we have similar beliefs as to the drivers of growth and value creation.
Speaker 5: Therefore, as I transition to the CEO role, you will continue to see a focus on the core drivers of brand growth.
Speaker 5: Namely, marketing and media, innovation, category management, and fundamental sales execution.
Speaker 5: I call this approach the Brand Growth Flywheel and it's all in service of expanding household penetration to accelerate growth.
Speaker 5: We participate in a unique fast growing category fueled by strong underlying consumer trends that show no sign of slowing.
Speaker 5: The statistic that perhaps excites me the most is that household penetration of this category is only about 50% which is very low compared to most food and beverage categories in North America.
Speaker 5: Working with our talented team and partnering with retailers, we will continue to fuel the Brand Growth Flywheel to increase household penetration and continue to drive growth.
Speaker 5: Also, following in the footsteps of Jim, Dave, West, Joe and others, I will ensure a continuous improvement mindset across everything we do to deliver results and provide the fuel we need to deliver the growth that's in front of us.
Speaker 5: I want to underscore my optimism about Simply Goods Future. I couldn't be more excited to lead the Simply Goods company.
Speaker 5: While it's not prudent for me to participate in today's conference call, Q&A, again this being day three for me, please know that I look forward to working with all of you as we focus on building value for all Simply Good Food stakeholders.
Speaker 5: I'll now turn it back over to Joe, who will provide details about second quarter results.
Speaker 4: Thanks Jeff and welcome to the team. We're pleased with our second quarter performance that was greater than our expectations.
Speaker 4: During the important New Year season,
Speaker 4: Simply Good Foods Q2 retail takeaway in the US combined measured and unmeasured channels increased about 16%.
Speaker 4: As expected, US retail takeaway growth outpaced the net sales change principally due to the significant prior year retail customer inventory build. Sean will provide more details on the difference between net sales and POS growth in just a bit. POS growth was driven by both brands.
Speaker 4: retail's performance was better than our expectations due to solid retail takeaway.
Speaker 4: although net sales were affected by some customer inventory reductions in the quarter.
Speaker 4: Additionally, international net sales were softer than our estimate due to the impact of the second price increase initiated earlier this year.
Speaker 4: Second quarter gross margin was 34.6% versus 36.6% in the year ago period.
Speaker 4: The 200 basis point decline was greater than expectations.
Speaker 4: due to lower ingredient costs flowing through at a slower rate than anticipated, and marginally higher other costs within our supply chain.
Speaker 4: Importantly, our supply chain team performed well with customer service near target levels.
Speaker 4: Adjusted EBITDA in the quarter was $50.9 million versus $54.2 million in the year ago period.
Speaker 4: The $3.3 million decline was better than our estimate due to North American sales performance greater than our expectations and solid SG&A cost control that was partially offset by supply chain cost inflation.
Speaker 4: International softness was greater than our forecast.
Speaker 4: Simply Good Foods retail takeaway and measure channels increased 14.2% with a good contribution from pricing and buying.
Speaker 4: Specifically, we estimate the Q2 measure channel POS was driven by about nine points of price and five points of buy.
Speaker 4: Similar to the last few quarters, total unmeasured channel growth was added to total company point of sale, resulting in combined measured and unmeasured channel growth of about 16%. In the second quarter, Atkinson Quest combined measured and unmeasured channel growth of about 16%.
Speaker 4: We're about 6% and 26% respectively.
Speaker 4: with performance tops here within the measured channel segments of weight management and active nutrition.
Speaker 4: Turning to Atkins second quarter performance, Atkins second quarter retail take away and the combined measured and unmeasured channels sequentially improved versus the first quarter and increased about 6%.
Speaker 4: Atkins second quarter POS at Amazon increased 35%.
Speaker 4: We estimate total unmeasured channel retail takeaway increased more than 25% and is about 13% of total Atkins retail sales.
Speaker 4: The brand continues to benefit from shopper channel shifting to e-commerce as well as improved digital marketing.
Speaker 4: shifting to ecommerce as well as improve digital marketing initiatives.
Speaker 4: Brand relevance and loyal remain strong supported by a growing base of new and total buyers.
Speaker 4: Buy rate was down slightly in Q2, although it improved from the first quarter.
Speaker 4: Moving on to measured channels in the IRI, YOLO, and C-Store universe, Atkins' second quarter POS increased 3.3% and, as expected, sequentially improved from the first quarter. Consistent with recessionary shopper channel shifting, performance was driven by solid trends in the mass channel, offset by softness in the food class trade.
Speaker 4: By form, Q2 Shake's retail take away increased 13.5% driven by solid growth across all major channels
Speaker 4: Total Atkins bars were all 3.9%, a 300 basis point improvement for the first quarter. Mule bars, about two-thirds of the bar business increased 2.5% and were offset by snack bar distribution losses that we discussed last quarter and some pricing sensitivity for March reply pricing.
Speaker 4: As expected, Convention POS improved for the first quarter and Q2, Confection's retail takeaway was off 1.5% as we lacked the strong year-ago performance of our dessert bar innovation.
Speaker 4: Importantly, the commitment to our brands and nutritional snacking categories by major retailers remain strong. Although in the third quarter, we expect POS to slow as we face tougher e-commerce comps on Atkins and anniversary promotions at the club channel that will not repeat.
Speaker 4: Let me now turn to Quest's second quarter retail takeaway where the combined measured and unventured channel growth was 26% and continues to outpace the nutritional snacking category.
Speaker 4: In the second quarter, we estimate total unmeasured channel retail takeaway increased 21% as e-commerce strength was partially offset by softness in specialty channels.
Speaker 4: West's second quarter POS at Amazon increased about 30% driven by growth across all forms.
Speaker 4: For perspective, total unmeasured channels in the second quarter were about 24% of total Quest retail sales. In measured channels, Quest retail take away increased 27.2% in the IRI, Muhlo, and C-Store universe.
Speaker 4: Grow the boost driven by solid performs across all major forms and retail channels, as well as increases across all major metrics, specifically household penetration, based velocity, distribution, and continued new product success.
Speaker 4: In the second quarter, Quest's core bar business retail takeaway increased 24.1%.
Speaker 4: Growth is solid across the original bars as well as the new minis. Consumer response to the new recipe that provides a much softer original bar is positive and driving growth. Additionally, the hero bar is beginning to gain momentum driven by distribution gains and higher velocities. Snack your portion of Quest products as cookies confect...
Speaker 4: as expected although elasticity on chips so far has been slightly greater than our estimates.
Speaker 4: The SNACs portion represents nearly 45% of total Quest measured channel retail sales. It is already roughly equal to Quest bars in household penetration.
Speaker 4: We expect Quest Next to continue to be a driver of the brand's growth over the next few years, driven by household penetration as well as a solid pipeline of innovation.
Speaker 4: However, given the meaningful size of this part of the business, we expect the rate of growth over the next few quarters to moderate from its current levels.
Speaker 4: And sorry.
Speaker 4: The company is uniquely positioned as a US leader in the fast growing nutritional snacking category. We have two scale lifestyle nutrition brands that are well developed across multiple forms of snacking occasions. Our brands are aligned with the consumer megatrends of healthy snacking for the nutritional profile that's protein rich.
Speaker 4: and low in carbs and sugar. This profile is brought up to the consumers interested in health and wellness as a means to achieving their goals whether they are at home in the office or on the go.
Speaker 4: This category remains well under-penetrated from a consumer standpoint, indicating a long runway for growth. This is evident in our second quarter retail takeaway of 16% that exceeded our forecast.
Speaker 4: However, as I mentioned earlier, net sales were affected by some retail customer inventory reductions.
Speaker 4: However, as I mentioned earlier, net sales were affected by some retail customer inventory reductions. This is a watch out as we make our way through the third quarter.
Speaker 4: Our positive business momentum continued into the third quarter as March retail take away increased about 12%.
Speaker 4: We remain cautiously optimistic about our prospects over the remainder of the year.
Speaker 4: That said, we expect retail takeaway will moderate from current levels as we lap large year ago comps.
Speaker 4: and continue in an uncertain economic environment.
Speaker 4: While we expect four-year fiscal 2023 gross margins to be below last year, we anticipate an improving cost environment in the second half of the year.
Speaker 4: with sequentially improving margin from the second quarter to the fourth quarter.
Speaker 4: We will continue to execute against our priorities and remain committed to doing the right thing over the near and long term for our brands, our customers and our consumers.
Speaker 4: Now I'll turn the call over to Sean and we'll provide you with some greater financial details.
Speaker 4: Thank you Joe. Good morning everyone. I will begin with an overview of our net sales. Total Simply Good Foods second quarter net sales of $296.6 million was about the same as the year ago period. This resulted in year to date net sales of $597.5 million, an increase of 3.4% versus last year.
Speaker 4: Looking at the Q2 drivers of growth, net price realization was about 8.2 percentage points and volume was off about 6.9 percentage points.
Speaker 6: The March 2022 agreement to license the Quest Frozen Pizza business was a headwind of 1.3 percentage points.
Speaker 6: As Joe stated earlier, retail takeaway growth outpaced the net sales change. On the bottom of this slide, we attempt to reconcile Q2 POS growth of 16% to Q2 North American net sales growth of 0.3%.
Speaker 6: The biggest driver of this difference is the impact of the year-ago period retail inventory build. As a reminder, in a typical year, we see retailers build inventory by one to two weeks in the first half of the year to support the new year, new you season. This build typically comes out in Q3.
Speaker 6: Last year was atypical, as most retail customers elected to build significantly higher inventory levels in the first half of fiscal 2022 and did not deplete it until the fourth quarter of 2022 due to their supply chain concerns last year.
Speaker 6: We estimate the impact of this change in retail inventory compared to last year to be about an 11% percentage point headwind or about $30 million for the second quarter of fiscal 2023. Additionally, as Joe mentioned, the current period inventory reduction by some retailers was about a 3% percentage point impact or approximately $10 million.
Speaker 6: Lastly, the licensing of pizza was about a 1 percentage point drag.
Speaker 6: Moving on to other IPNL items for Q2, gross profit was $102.7 million as a client of $5.8 million from the year ago period, resulting in gross margin of 34.6%. The 200 basis points decline versus the year ago period was primarily due to higher ingredient packaging costs. Versus our forecast.
Speaker 6: Gross margin was off by about 50 basis points or 1.5 million dollars. Due to lowering reading costs, flowing through what a slower rate been anticipated, and marginally higher other costs within our supply chain.
Speaker 6: Net income was $25.6 million versus $18.5 million last year.
Speaker 6: The year-ago period was impacted by the fair value change of private warrant liabilities of $12.7 million.
Speaker 6: Adjusted EBITDA was $50.9 million, a decline of $3.3 million from the year ago period.
Speaker 6: Selling and marketing expenses were $29.9 million versus $32 million last year, a decline of 6.3% largely due to the timing of spend within the year.
Speaker 6: GAAP G&A expense was $25.9 million and declined 1.3% versus last year.
Speaker 6: excluding stock-based compensation, executive transition costs, restructuring, and integration expenses, GNA declined 1.8% to $22.5 million. The $400,000 decline versus last year was primarily due to lower employee related costs.
Speaker 6: For the full fiscal year 2023, we expect selling, marketing, and G&A expense to be slightly down versus the year-ago period.
Speaker 6: Moving to other items in the P&L, net interest income and interest expense increased $3 million to $8.3 million due to higher variable interest rates related to the term loan.
Speaker 6: And our tax rate in Q2 was about 24.7%, about the same as last year. The tax rate in the year-ago period excludes the impact of the change related to the warrant liability.
Speaker 6: Year-to-date results are as follows. Gross profit was $213.7 million at decline of 5%. Gross margin of 35.8% declined 310 basis points versus the year-ago period. The decline was primarily due to higher ingredient packaging costs.
Speaker 6: Net income was $61.5 million versus $39.6 million in the year-ago period.
Speaker 6: The year-ago period was impacted by the fair value change of private warrant liabilities of $30.1 million.
Speaker 6: adjusted EBITDA decline 6.8% to $111.7 million primarily due to lower gross profit.
Speaker 6: selling the margining expenses for $58.5 million versus $62.5 million at the decline of 6.4% due to timing of spend within the year. G and A expenses increase 2.1% or $0.9 million. This excludes charges of $6.8 million related to stock based compensation, executive transition costs, integrations,
Speaker 6: 4.9% in the year ago period.
Speaker 6: The tax rate in the year-ago period excludes the impact of the charge related to the warrant liability. We anticipate the full year fiscal 2023 tax rate to be about 25%.
Speaker 6: Turning to EPS, second quarter reported EPS was 25 cents per share diluted compared to 18 cents per share diluted for the comparable period of 2022.
Speaker 6: In fiscal Q2 2023, depreciation and amortization expense was $5 million and similar to the year-ago period and stock-based compensation of $3 million was about the same as last year.
Speaker 6: Adjusted diluted EPS, which excludes these items, was 32 cents compared to 36 cents for the year-ago period. Note that we calculated adjusted diluted EPS as adjusted EBITDA, less interest income, interest expense, and income taxes.
Speaker 6: Year to date, second quarter reported EPS was $0.61 and adjusted diluted EPS was $0.73.
Speaker 6: Please refer to today's press release for an explanation and reconciliation of non-GAAP financial measures.
Speaker 6: Moving to the balance sheet and cash flow, as of February 25, 2023, the company had cash of $63.2 million. Year-to-day cash flow from operation was $53.3 million.
Speaker 6: In Q2, the company paid down $35 million of its term loan debt, and at the end of the second quarter, the outstanding principal balance was $365 million, resulting in a trailing 0.12 months net debt to adjusted EBITDA ratio of 1.3 times.
Speaker 6: Note, subsequent to the end of the quarter, we paid down an additional $15 million, so the current outstanding balance is $350 million. We anticipate net interest expense for the year to be about $28 to $30 million, including non-cash amortization expense related to the deferred financing fees.
Speaker 6: year-to-day capital expenditures for $1.7 million. I would now like to turn the call back to Joe for closing remarks. Thanks, Sean.
Speaker 4: In a challenging economic environment, we are well positioned to maintain our marketplace momentum. Over the remainder of the year, there are solid plans in place for both of our brands that we believe will drive sales and earnings growth, particularly in the fourth quarter of the fiscal year.
Speaker 4: Therefore, we anticipate the following for fiscal 2023. We reaffirm and that sells increase slightly greater than our 4-6% long-term algorithm.
Speaker 4: We continue to expect fiscal 2023 gross margins to be lower than last year.
Speaker 4: However, the overall cost environment is improving, including ingredients, in the second half of the year, and in particular in the fourth quarter.
Speaker 4: However, full year fiscal 2023, gross margins will decline greater than our previous estimate due to the year-to-date gross margin performance and slightly higher costs within our supply chain over the remainder of the year, with most of this headwind in the third quarter.
Speaker 4: We have made significant marketing and organizational investments in the business over the past three years and believe it will result in the growth of our consumer base, distribution and market share. As such, we believe total SG&A expense will be slightly lower than last year.
Speaker 4: Full year, Fiscal 2023 adjusted the EBDA will increase, but slightly less than the net sales growth rate. And adjusted, deluded, EPS will increase less than the adjusted EBDA growth rate due to the company's expectation of higher interest expense from an increase in the variable interest rate related to its term loan debt.
Speaker 4: As we look to the third quarter of the fiscal year, retail takeaway is off to a good start, with March POS up about 12%. We have customer programming in place that should enable us to maintain marketplace momentum. We expect Q3 net sales to increase slightly...
Speaker 4: decline around 100 basis points and adjusted EBITDA is expected to be about the same as the year ago period due to lower ingredient costs flowing through slower than anticipated and slightly higher cost in other areas of our supply chain. Importantly, the retail takeaway growth in our category and our brands remain compelling.
Speaker 4: As such, we are excited about the near and long term growth prospects and will continue to execute against our strategies as a path to increasing value for our shareholders. We appreciate everyone's interest in our company and are now available to take your questions.
Speaker 4: We are excited about the near and long-term growth prospects, and will continue to execute our strategies as a path to increasing value for our shareholders. We appreciate everyone's interest in our company and are now available to take your questions, operator.
Speaker 2: Thank you. We'll now be conducting the question and answer session. If you'd like to ask a question today, please press star 1 from your telephone keypad and a confirmation tone indicate your line is in the question queue.
Speaker 2: You may press start. Two of you like to remove your question from the queue, for distant ones are using speaker equipment and may be necessary to pick up your handset before pressing the star keys.
Speaker 2: One moment please while we poll for questions. Thank you.
Speaker 2: Please, will we pull for questions? Thank you.
Speaker 7: Thanks for the first question from the line of Cody with UBBS. Please use the question. Good morning. Thank you for taking our question. The first question is just around the sales cadence for the rest of the year. We have a couple of moving pieces here. You previously noted that shipments should exceed takeaway in the back half. Given the unusual.
Speaker 7: going forward.
Speaker 4: Yes, morning Cody. This is Joe. I just said that because I think you summarized it well. But for those who may not be as familiar with the kind of cadence from last year, I want to start with just for perspective. I want to start with the overall health of our business from a demand standpoint, which can be best seen in the point of sale.
Speaker 4: Good morning, Cody. This is Joe. I just step back because I think you summarized it well, but for those who may not just be familiar with kind of the cadence from last year. So I want to start with just for perspective, I want to start with, you know, the overall health of our business from a demand standpoint can be best seen in point of sale. So, I think, you know, the overall health of our business from a demand standpoint can be best seen in point of sale from a demand standpoint can be best seen in point of sale from a demand standpoint can be best seen in point of sale
Speaker 4: Not nearly the noise that we're experiencing this year in that sale. So our POS on their business We finished the quarter plus 16 percent We're one month into the quarter that we're in at plus 12 percent You know our business overall health of our business from a demand standpoint is very healthy. We're cautiously optimistic
Speaker 4: and much of it has to do with last year.
Speaker 4: Just to remind folks of what last year was like, customers having difficulty given customer service across basically the food space. They took positions in inventory that were very atypical and in our case big inventory build. As you saw in Sean's comments about 11 point differential.
Speaker 4: relative POS to shipments from the inventory build last year. A typical year we would see far less and that inventory would come out pretty quickly, normally in the third quarter. Last year, that inventory.
Speaker 4: didn't pull down until the fourth quarter. So we have a very unusual pattern to our business. Big inventory, 3x what would have been normal. In some cases, 4x would have been normal. None of it coming out in the third quarter. A good portion of it coming out in the fourth quarter. So the headwind that we're gonna have, the headwind that we're gonna have, the headwind that we're gonna have, the headwind that we're gonna have,
Speaker 4: The headwind that we faced in the second quarter becomes a tailwind for us in the fourth quarter. And we would expect, you know, the 11 points that Sean mentioned, a good portion of that will reverse out in the fourth quarter from a comparison standpoint. Look, inventory, there are many things that we as a management team control, trade inventory flows is not one of them. So we just keep our eye on it, have conversations with customers about it.
Speaker 4: But it's not something that we control. But I would expect a good portion of that 11 point reverse out that we experienced last year that would be our tailwind. As it pertains to the year that we're in, there was we saw in the second quarter. Net curl
Speaker 4: Retailers running, but not top retailers, so they are kind of second-tier retailers. There was a three-point drag to shipments, and it's from retailers running less inventory in their systems; this tends to be tier two customers.
Speaker 4: tends to be small regional groceries, some distributors that service our small format business, but we saw drawdowns below what was typical. So we're just gonna keep our, will that continue? Hard to say, we're gonna keep our eye on it, and obviously it's one of the reasons that we're a little bit cautious about our business as we move through the second half of the year. Quick clarification and then a follow up, is that...
Speaker 7: This quarter, can you help us understand the changes that you're making so that the cost surprises and gross margin don't happen as frequently? And can you just help us understand what your expectations were for the gross margin going into the quarter? Thank you, and I'll pass it on.
Speaker 6: Okay, Cody, I'll take that one. Thanks for the question. So let me take a step back for a second. A couple of context things for you. One, yes, the margin came in about 50 basis points, I'll say worse than we thought it was going to be for the quarter. Just for context, that's about $1.5 million on about a $200 million CODS number. So I wouldn't say it's a huge thing.
Speaker 6: Really, two major themes as it relates to our supply chain or cost of goods sold. The first is the commodity environment and the evolution of this. If you go back to last year, we were seeing significant commodity increases, double-digit inflation, obviously led to our pricing actions. That said, we hit an inflection point on this and we're seeing a general easing of the inflationary costs...
Speaker 6: That's the biggest change of a gross margin for the year.
Speaker 6: Second macro trend is really a shift in focus or prioritization of our supply chain. Last year we were focused on improving fill rate, increasing capacity, inventory levels was priority one to make sure we can get to a point where we filled our customer needs. Now we're trying to maximize working capital, inventory levels, improving efficiency of supply chain, getting back to basics in my words.
Speaker 6: So, bunks and broods along the way, working with the command to get to the right finished goods inventory levels and settling into this environment. We've met anticipated charges related to production runs, purchases, and the overall operating environment. All of this is a transition issue, and we're settling into where we want to be, carrying about six weeks of finished goods inventory on average, servicing our customers in the mid-90s.
Speaker 6: the that are our balance sheet overall. So we're working with them now to get a better feel for what's out there and we put places, processes in place in the second quarter to improve that going forward. So we think we have that in place right now.
Speaker 2: Thank you very much, I'll pass it on. Our next questions are in the line of Steve Powers with Dredje Bank. Please just use your questions.
Speaker 3: Yes, great, thanks. Maybe just follow up on that point. Sean, can you clarify if sales are coming in?
Speaker 3: ahead of your expectations. Can you just talk a little bit more about why the ingredient costs are flowing through slower than expected? There's just a disconnect there that maybe I'm missing something.
Speaker 6: Well a couple things Steve. I would say first of all as we work through again the commodities that we have out there. The commodities are different price. I'll give you an example. One of the biggest pieces of our commodity favorability we're seeing is whey. Whey protein is actually fairly down overall. The burn through that from our commands is just coming at a slower rate than we originally had thought going forward.
Speaker 6: Obviously, Joe talked you through. So we're not seeing the volume, and we're basically adjusting that in a coman environment as well, getting to lower volumes. That's what they're making, obviously, is volume, not necessarily the price piece of that. Does that help? Yeah, that does help, okay. Just so you understand, right? So you're...
Speaker 4: We've come from an environment where you wanted as much inventory as you could have in your system. So there is when you produce to a supply plan, not to a demand plan. So as you're bringing inventory levels down to more normal levels, your actual production levels come down.
Speaker 4: So units are running slower as we bring our inventory levels down against the same demand, right? The other context here is we're talking about really small changes. As John said this, in the quarter we're talking about $1.5 million on nearly $200 million in cost.
Speaker 4: And as you dig into the due to of it, none of it is really big things. It's a smattering of small, you know, inflationary things, slightly worse than what we've anticipated. And if you just step back from all of this, we own contracts for lower ingredients.
Speaker 4: We can see the cost environment in our business changing fundamentally. It's just happening a little slower than what we anticipate.
Speaker 4: See the cost environment in our business changing fundamentally. It's just happening a little slower than we anticipated.
Speaker 3: Okay, I mean that's because that's going to, I mean that was sort of, that's the crux of my question because you know there have been these slow kind of slices that have impact your forecast and it has come, it has also come in slightly below external forecast. It has just been progressive. So the question I guess.
Speaker 3: As you look forward, maybe you just answered it, but you know, do you have the visibility and is there anything else you need to do? I mean, we've been talking about a climb back to that 40% objective over time and this far, we're a long way from it. So I'm just trying to get your thoughts on that. What is that far from it right? So the fundamental question you have to ask yourself is, is the cost environment coming down?
Speaker 4: Inflationary, right. So every surprise is a cost. Surprises in the opposite direction, right. We're seeing that environment start to emerge.
Speaker 4: Right, so the question is, can you see everything? We are much better than we were at the beginning of the year in terms of what we're seeing. In general, the cost environment is coming down. So, as we move through the second half of the year, if there are surprises, they are not likely going to go in the other direction.
Speaker 4: That's what's effective, right? Because we're zooming in on a really small difference, right? And the Sean said, no one thinks. So we can't put our finger on, it's this or it's that. What we're putting our finger on is prices have been a little... It just cost have been a little stickier higher.
Speaker 3: Talk, it sounds just relative to what you said, three-key versus four-key on the top-line cadence, it feels like more is weighted to four-key versus how at least our forecasts are structured, I think the streets as well. And a lot of that's on the inventory, you know, catch up and rebuild, you know, lapping last year. But I'm just listening to that against the context of.
you know, those smaller retailers already drawing down inventory. Is there a risk that, you know, as consumption slows, inventory rates in the trade exit the year just at a structurally lower level, and some of this margin benefit therefore slips into...
into the subsequent year. Is that ring fenced in your outlook or is that risk something that we should be thinking about? Yeah, look, I think that most of our major customers, so top five customers 70.
70 cents. 75% of our shipments are operating at normal inventory levels. So we're keeping our eye on that factor. I don't think we bake that into our estimates. I don't think it's a big issue. Obviously, it was a three-point issue in the quarter. It was a little bit of a surprise. I don't expect it to be an overhang.
We just need to be a little bit cautious. And again, just so for the quarters, the big driver of the difference in net sales performance, third quarter to fourth quarter, was last year's inventory drawdown. So, I know if you look at our shipments, it looks like a hockey stick in Q4, but the reality of it is, the inventory came out in the fourth quarter last year. We will ship greater than consumption.
So two questions, firstly, honing in on Quest. Obviously, the pace of growth and consumer takeaway is still very strong and has been for quite some time. I'm just wondering what innings you are in on the distribution gains. Is it new outlets, or is it more the expansion of SKUs in certain.
You know, I have the benefit of having watched Atkins for ten years.
and watch the progress of distribution gains on average. I think Atkins, Mulo plus C has 45 items in distribution, top retailers, 60 to 65. So Quest is in very early innings.
And you have to remember we bought a business that was principally a single business. The team, the Quest team, prior to the acquisition, started looking at multipacks. So there is an opportunity in the bar business alone for us to build out distribution and larger pack sizes. Then, you have the opportunity for us.
Everybody knows Atkins, high, high brand awareness. Quest is still relatively unknown as a brand. So the money that we've added and invested in this brand, I think when we took the brand over, the team was spending about 4% of net sales in marketing. We're now up to close to 8%.
Got to keep the pressure on there to keep the brand awareness and trial growing because it's still not particularly well-known as a brand, and you can see the brand promises big. This is a big business still with relatively low brand awareness and still growing, with a lot of opportunity in trial.
So that's the game, and I'm really excited. Jeff is exactly the guy to make that happen. Right, and a quick follow-up: now that you can sort of see the light at the end of the tunnel on the supply chain and input cost pressures, are you beginning to see?
expectations that promotional activity will step up in retail or is that still on the back burner for now? Thank you. Really early innings right so no we're not seeing you know you're asking the question as costs get better so I appreciate that question.
How do you see investing? How will you invest back? For us, we would be looking to get marketing investment back to what we feel like is a healthy level. As gross margins approach 40%, we want to get the marketing spend up in the 9-10% range.
We will be spending back with customers on a tactical basis. Especially we've seen some issues with pricing elasticity on some of our products. So you might start using temporary price reduction or base price reduction to get those more in line with where consumers see the value.
But those are decisions that Jeff and the team will start wrapping their minds around as we start thinking about the next fiscal year and where costs are going to come in and how we want to deploy those funds.
Great, thank you very much, I'll pass it on. Have a good day, I'll ask you. Next question, from the line of John Baumgartner with Mizzou Host Security. Please proceed with your questions. Good morning, thanks for the question.
Great, thank you very much, I'll pass it on. Have a good day, I'll miss you. Next question, from the line of John Baumgartner with Mizzou Host Security. Please proceed with your questions. Good morning, thanks for the question.
I wanted to ask about elasticity. You noted the downside to sales from international that was tied to the price increases, but I think elasticity isn't something we're really seeing in the US up to this point in the category at least. I think we're also even seeing better lips on promo relative to pre-COVID. So would you say the street factors in attacking non-US markets that are driving the world?
Based on sell-through, the environment in the US would be better than retailers are hunkering down.
Yeah, let's start with our Australian New Zealand business. We are the market leader there. Atkins is the number one brand, number three brand, Quest, quickly in a move, going to move into the number two, number one position. So we have a very, very good business. We have a general manager there that has been leading that business for over a decade. We feel really good about the business.
If you understand the business in Australia - and obviously, we're lucky with Jeff coming home. Forward Jeff is a Kiwi, so he knows the markets pretty well. Fact: you just came back from a trip from New Zealand. It is a two retailer marketplace. Woolworths and Coles own the market.
And we're not seeing in our category there much pricing. So when we came in with a price increase, our second one, we got put in the penalty box with one of the two retailers.
So it's not pricing elasticity as we have spanked, right? Lose distribution, lose promotion opportunities, right? So that's what's going on there. In the US, we're seeing elasticity for the most part on our two businesses, like we would have expected, with a little sensitivity in a few areas. So that's what's going on there.
So we're just keeping our around those chips being one of them and our kind of confection snack bar business being the other. And we're just watching it. It's slightly elevated. You know, typically what you see with the price increase is you see full elasticity early. You see a burn rate. So it starts declining over time. So when those products...
or do you expect to see any benefits for the category in terms of higher visibility display in the store, maybe more momentum to get out of the HPC aisle? Anything coming out of COVID as retailers sort of reset these aisles and categories that you think could sustain growth for your areas going forward? Thank you.
Yeah, I love that. It's a great question. So we just step back and think about this from a category management story from a customer standpoint. So we're in the part of the store where most of the other categories think cough, cold, oral care are infrequently less frequently purchased.
traffic driver to the aisle. So we actually bring people to the aisle at a greater rate than their normal shopping patterns. So we serve a purpose for them in helping them build Basket in a part of the store that's a higher margin part of the store, better, you know, just a part of the store they want to build the business in.
So, as you think about out-of-aisle displays, we are a really good category for those things because it drives people down the aisle, gets shoppers in there, and builds their market basket. This behavior was true throughout COVID-19 and we are seeing that behavior continue. In fact, it is part of our category management story.
This is important, this is an important category for you in this aisle and we have two of the premier lifestyle brands that bring people to the aisle.
Thank you, Joe. Appreciate it. You're welcome. Have a good day. Our next question is in the line of Pamela Kaufman with Morgan Stanley . Please receive your question.
Hi, good morning. Just a question on Atkins. You mentioned that the rates are down year-on-year. Given that mobility is improving, can this continue to improve and are you now comparing against periods of lower Atkins rates?
Why are they continuing to move down and how are you thinking about stimulating Atkins purchasing going forward among existing customers? Thank you. Right in my wheelhouse, I love these questions. So first and foremost, the overall health of the brand is strong. Our ability to grow buyers continues to be simply outstanding.
So we feel very comfortable household penetration, total number of buyers, total of new buyers, people are coming to the brand and that's really important. So during COVID, buy rate was driven by snacking behavior changes. And we've seen a rebound kind of from the
Worst part of those snacking. Behavior changes affect on byyrate and now we're. Byyate is almost flat, the driver of the buyate, and we've seen a rebound on bars. So it's - we're not facing any of the not working bar declining issues.
We're seeing self-inflicted issues around the mix of our business So if you look at what's growing on the brand right now, it's strong shake growth strong chip growth Relative to bars those are all from a unit purchase standpoint Tray down in service So bars a five pack or an eight pack
A chip is a single. A shake is a four pack. So we're ending, we have a mixed issue with the business and it's around the pipeline of innovation that we've got. We've got to get back in the bar innovation business. We've got to fill out our pipeline there. My work is underway.
And as we move through the spring and the summer, we would expect those trends to improve as products hit the marketplace. But we don't have a COVID work issue anymore, we don't have a COVID issue. We don't have a bar issue driven by snacking behavior. We have an innovation pipeline mix issue in the business that we need to fix. And it's a good quality problem to have because we're bringing a lot of people to the brand right now. So we just gotta get our mix better. Thank you everyone for listening to our program. These events are being recorded and will be available on BENJI andmaking newsalex.gov. In the marketplace and also1 FinancialSH Hannah67 Buckner and Michael target for denominator. If you're Sutton's
Got it. That makes sense. That's helpful. And then my second question is just on e-commerce and just generally growth in unmeasured channels. You continue to see strong performance in e-commerce and Amazon in particular. What's driving that and how are you thinking about e-commerce growth in the second half?
It was a part of how the brand grew up.
So when we bought the business we bought a lot of institutional knowledge around e-commerce in a big seat at the table with Amazon We've now and if you look at the Quest business
Our e-commerce plus specialty is around 24% of the business today. So big portion of the business. Atkins has come a long way in a short period of time. It's about 13% of the Atkins business. So what we've learned from our Quest experience is you got to get your catalog right.
You got to get the right items, the right fewer items so that you bring consumers on the catalog to fewer items, more eyeballs that enable you to promote. And getting the right items also is important to Amazon's profit mix.
So we're running that playbook. So last year, you saw Akins spike. We started that Cadog rollout, which shaped or shaped the business, had a significant step up. We're now running that playbook through the rest of the Akins lineup, and just to give you a little bit of a sense, that's the Akins average.
price point on Amazon was somewhere around 10, 11 bucks, more like 22, 23, 24 bucks on Quest. So we got room to go, right? And we need to continue to improve it. As it pertains to the second half of the year, you know, well, against much bigger numbers, right? So growth is still good. We still feel really confident about the growth, but you're gonna come up against that.
75% - 80% growth that we saw last year and so the rates are going to come down a little bit. We would expect that over the next few years, e-commerce - Amazon, will outstrip brick-and-mortar growth and become a larger portion of the business - 20%. That should be a nice target for packins to achieve over time.
Thank you. You're welcome. Thank you. Our last question comes from Rob Dickerson with Jefferies. with Jeffrey. Please proceed with your questions.
Great. Joe, I just wanted to circle back to the comment you made, I guess from Pam's question on shakes, bars, and what's going on in Atkins. On the bar side, clearly you see it, we see it in tracked channels. The volumes are still somewhat pressured. You're basically just saying...
It's just a bit of the absolute price points the consumer, given pack size, is just kind of too high and too big. So, like with all hands on deck, we should be assuming, I guess, that we would see maybe some smaller pack size and kind of smaller absolute price point, such that velocity.
What have a higher probability of improving is that. Just try down. So it's even. It's even simpler than that. When we, you know your. You have to step back on Atkins, right? Atkins is a high consumption brand. So, and there are very few brands in the store like this, right. So if you're a first-year buyer, you're buying about 35 servings. If you're second, third year, BU.
determines how people purchase.
Last spring, we innovated on chips and cookies and shakes, and our pipeline in particular on snack bars was not strong enough. So we saw significant distribution losses on snack bars.
Double-digit distribution losses. We have to fix that, and the reason that affects the buy rate is just think, I'll do this simply. I'll do the simple example. If I swapped out a weak snack bar for a shipip, and the consumer comes to the shelf to buy a unit, I just traded them from a five-unit purchase or five.
we're going to fix.
So I makes yeah yeah, I know; that makes complete sense, and I mean, you know.
Also just asking a question because I feel like it does kind of all flow through, right? Just in terms of kind of the inventory or the inventory kind of deload on bars from last year, kind of then what kind of reverses and flows through this year. But then in terms of, you know, if you're a retailer, you're saying, you know, I'm getting higher velocity on these products, they're bringing me innovation.
Yeah, maybe I'll take a little bit more inventory, but not bring me as much on bars. Maybe I'm not as quick, right, to get that inventory, then the buyer is not as good and therefore the costs don't flow through as much, blah, lah, lot. I was fully lot of question is that: does that make sense?
Numbers of decline, so we're not talking about big declines. In vibrant, it is small, it's mix-driven, it's innovation-driven, and we will fix it.
Perfect. That's all I had. Thanks, guys. Have a good day. Thank you. We've reached the end of the question and answer session. I'll turn the call over to Joe Scalzo for closing remarks. Thank you for your participation on the call. We look forward to talking to you at the end of our third quarter. We hope you all have a good day.
This concludes today's conference. You may disconnect your lines at this time. Thank you for your participation.