The Simply Good Foods Company

Q4 2021 Earnings Conference Call

10/22/2021

spk_0: welcome to the simply good food company fiscal fourth quarter of two thousand and twenty one conference call at this time or participants on with the only mode the question and answer session will follow the formal presentation that he wants require operators systems during the conference these posters zero one your telephone keypad as a reminder this conference is being recorded now my pleasure to introduce more for gary vice president of investor relations thank you you may go
spk_1: thank you operator good morning i am pleased to welcome you to simply get good company earnings call for the fourth quarter and for your ended aug twenty eighth two thousand twenty one jos galvao president and chief executive officer and toward comfort chief financial officer will provide you with an overview of results which will then be all about you in a session the company issued it's earnings release this morning at approximately seven am eastern time a copy of the will be from the company presentation are available on to the abductor section of the company's website at www dot the simply good boots company dot com this call is being webcast in an archive of today's remarks will also be available during the course of today's called management will make for looking statements are subject to various risk and uncertainty that may cause actual results to differ materially the company under takes no obligation to up a few statements based on subsequent events a detailed listening of such risk and uncertainty can be found in today's press release and the company's happy feet violence know that today's call we will refer to certain naga financial measures that we will be will provide useful information to investors due to the company gotta wait strong casual business model we evaluate our performance on the just the pieces as up with a pity that are deluded dps additionally adjusted result exclude the mark to market affected the treatment of the companies private ones we have included a detailed reconciliation from gap to adjusted items in today's press release we believe these adjusted measures are a key indicator of the underlying performance or 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 gap please refer to today's pop release were reconciliation of the non gaap financial measures to the most comparable measures appeared in accordance with gap without on i'll turn to call over the job skills or president and chief executive officer
spk_2: thank you mark good morning and thank you for joining us it our recap simply good foods fourth quarter results of provide you with some details on the performance of her brands then title discuss or financial results as a bit more detail and will wrap it up with a discussion of or how book before opening it up to your questions despite the challenging environment throughout school twenty twenty one or business is in the second half of the year with both of our brand generating nice games we executed well and exceeded our plan is next cells surpassed one billion dollars in fiscal twenty twenty one the diversification of our business provides us with multiple ways to wait in the marketplace for particularly pleased with their growth in twenty twenty one across brands to customers and products new product launches were successful and or innovation pipeline to strong and focused on new formats the give us an increasing access to new snacking occasions looking back on the year or entire supply chain team perform well in a challenging external and barb we responded quickly to the changing environment to minimize the effect on our business customers and consumers the collaborative work of our team with suppliers manufacturers and distributors enabled us to service or retail and ecommerce customers as well as expand gross margin in an increasingly inflationary period that grew more challenging just the your progress as many of our us food group appears of discussed the cost and service challenges during the past six to nine months related to such things as preterm labor and transportation will most likely continue throughout the coming year importantly the price increase we announced in june that was effective september twelve provides us with a significant of set against these cost headwinds or as a said like outsourced business model has proven to be a competitive advantage in these difficult times importantly despite volatility in both demand and supply or margins have been stable and or cash flow steady and sufficient to support future growth lastly i want to recognize or employees of leadership team who have performed superbly while operating remotely they executed well against our plans emitted uncertain operating environment that enabled us to make investments in our brands in our organization to position as to deliver sustainable sales in earnings growth as consumers in the economy continue to recover from the pandemic we had a solid fourth quarter with net sales up sixteen point nine percent as expected workplace mobility was similar to last quarter and growth was relatively in line with her expectations improvements in consumer mobility and shopper traffic vs last year's cobra restrictions resulted in favorable product and cost remix and combined with favorable trade promotion more than offset supply chain cost inflation as a result fourth quarter gross margin increase sixty basis points versus the year ago period just a be the a in the fourth quarter increased thirty point nine percent to forty eight point five million primarily due to the salad sales growth favorable tray promotion and g and a cost controls this more than offset higher marketing investments and in and incentive compensation total simply good food to for retail take away increased eighteen point seven percent in the us measure channels of i arrived you low and convenience stores with no meaningful change of workplace mobility retail sales were about the same as last core throughout the pandemic we've executed well and remain committed to doing the right things over the long term for business or customers and are concerned in the first there for fiscal year twenty twenty one and attritional snacking cook category decline low single digits due to covert nineteen driven movement restrictions in the second half of the year the category rebounded is increased about twenty four percent shopper traffic increased versus the year ago period the budget foods performance outpaced the category in the first half of the fiscal year and was relatively in line with the category in the second importantly our brains gain share in their respective sub segments of weight management and act of nutrition across all time frames during the year yeah and attrition segment of the category which includes quest increased thirty five percent in the second half of the fiscal twenty twenty one as it is done all year quest outperform the segment and was up forty four and a half percent over the same period in the second half of the year the weight management segment was up about a percent atkins outperform the segment with retail take away up twelve percent and we're extremely pleased with a ecommerce performance in the fiscal year four year retail take away a forty percent exceeded measure channel growth as expected with brick and mortar shopper traffic increasing and second half of the year
spk_1: e commerce point of sale moderated and was similar to measure channel retail take away growth
spk_2: atkins to for us retail take away measure channels increased eight point seven percent growth in total buyers and increasing shopper trips particularly in the mass channel along with improve consumer mobility result is in growth across all forms and key retail channels in the quarter bars and shakes increased about three percent and eleven percent respectively infections queue for retail take away increase eight point nine percent benefiting from at home snacking uses occasions and recent innovation and we're pleased with atkins ecommerce performance amazon atkins second largest customer to for retail take away increase low teens on a percentage basis versus the year ago period total lakins ecommerce point of sale in the quarter was similar to measure chance atkins buyer growth remain strong up double digits for the quarter and the year bahrain remain below historic levels by need single digits due to the high correlation between consumption of africans bars and being at work therefore the improvement in actions by rate remains the single biggest opportunity for the brain but mean now turned the quest were fourth quarter retail take away increased thirty four point nine percent in the measured ideal bulow see store universe and outpaced the category growth was driven by the increase in household penetration improving shopper traffic a rebel the bars and success of new product forms west bars retail take away in the quarter increase twenty three point nine percent more than fifty percent greater than the segment growth rate because quest bars or about sixty percent of total quest retail sales is that your portion of quest products continue to do well and increase the hundred and five percent in the quarter driven by continued strong performance of chips cookies and confections we continue to see robust chips demand as we manage supply within our network we have taken action to ensure there are no disruptions retail and of dial back trade promotions and programming of these items and as we stated last quarter will be increasing chips supply during this fiscal year we had another good quarter growth across all t channels we were particularly pleased with the increase for traffic both mass and convenience stores combine the mass channel and see store universe represents about forty percent of quest sales and a queue for pos growth a nice important channels was up about forty and fifty percent respectively bessie commerce business nearly twenty five percent of total quest us sales continues to do well with key for retail take away up thirty percent a business at amazon remain strong and growth was south across all major force in this fiscal year we anticipate the marketing will increase in line with sales growth a new act and rob lowe advertising campaign is beginning to pair now will be advertising across all forms with messaging focused on bars or back and taking a healthier approach to life and i'm very excited to announce it in the fiscal year question addition to their digital marketing efforts will be on air with television advertising for the first time with the brand's history the fun campaign focused on for individuals and out harold nfl and w m b a rookie as well as to working professionals to change careers to pursue their passion common theme is that they're all fueled by athlete worthy nutrition in pursuit of their own personal quests a marketing and advertising was a supporter new product launches some of what you see on the slide we have a strong innovation pipeline and into fiscal year have a good balance of new products across both brands and of course summary or pleased with our fourth quarter results as we look to fiscal twenty twenty two we position well to build on of a bad a deliver solid net sales and adjusted he but the a growth which is predicated on any meaningful change of workplace mobility we expect the both brands web a solid start to the fiscal year with a growth in the first half of the year stronger than the second half as the latter period as more difficult year ago comparisons and as i discussed earlier we have a good balance of innovation in advertising and place that we believe should generate retail and consumer excited he continued to expect supply chain cost inflation will be a significant edwin in the year pricing and cost and savings initiatives are in place to medicate this impact were executing well against our plans and delivering on our financial objectors with flexibility to best in the business as a path to increasing shareholder that
spk_1: our and the call of it a tired or provide you with some greater financial details
spk_2: of and and are prepared march with greater details and assumptions related to our outlook god thank you joe a good morning everyone i will begin with a review of our net sales total simply good third fourth quarter net sales increase sixteen point nine percent to two hundred and sixty million the core north america business contribute seventeen point one percentage points to total company growth driven primarily by atkinson quest volume across major
spk_3: forms and channels that prep net price realization and queue for with a slight benefit driven by lower trade promotion
spk_2: a core international business was a two point one percentage point benefit benefit the sales growth driven by strong gains in australia for both hack and quest
spk_3: and the simply protein brand divestiture and the european business exit were a combine two point three percentage points at
spk_2: moving onto the other tnl items gross profit was one hundred and four point five million dollars an increase of eighteen point six percent versus last year gross margin of forty point two percent increase sixty basis points versus the year ago period
spk_3: as expected supply chain inflation with a headwind this quarter however it was more than offset by the previously mentioned lower trade promotion as well as favorable product and customer child next
spk_4: at jokes cost we anticipate significant supply chain inflation fiscal twenty twenty two due to higher costs related to raw materials packaging and logistics a price increase that went to attack last month along with cost saving initiatives should largely offset the cost pressures barring a significant step up and cost inflation and crew
spk_2: current levels adjusted ebitda increased thirty point nine percent to forty eight point five million to the higher sales and costs control spelling and marketing spent increased six point three million driven by incremental brand building investments on both atkins and quest
spk_3: during an expense increased to one point two million has fire and of compensation was partially offset by lower corporate expense and quest acquisition synergy this excludes fourth quarter of fiscal twenty one charges a three point three million dollars related to quest integration cost restructuring spencer's stock based compensation and nine poor legal expenses
spk_2: moving to other items and paranal interest expense declined one point seven million to seven point two million dollars to pay down term one in the fourth quarters of twenty and twenty one the non noncash nodded packs deductible charge relate to the read measurement of our private warrant liabilities was fifty one point seven million and five point five million respectively the income tax rate was thirty two point seven percent this includes a five point five percentage point impact for way to the non cash not deductible by point five million dollar loss on the fair fair value change a private warrant liabilities then incoming few for was eighteen point two million dollars versus a loss of thirty nine point three million and the year ago period boyer results are as follows net sales increased twenty three point one percent to one billion five million dollars for them by the acceleration of our business in the second half of gross profit was four hundred nine point eight million an increase of twenty six point three percent gross profit the prior year was affected by a nightcap seven point five million dollar inventory purse the council step up adjustment related to the quest acquisition recall the noncash inventory purchase accounting step up impacted for your twenty twenty gross margin by ninety basis points excluding this amount bros proper was three hundred and thirty one point eight million dollars last year and gross margin was forty point six percent therefore four year fiscal twenty twenty one gross margin of forty point seven percent increase ten basis points versus the year ago period adjusted ebitda increased thirty four point seven percent to to earn seven point three million primarily due to the higher gross profit telling and marketing expenses increase banking point five percent two hundred twelve point nine million dollars the increase was driven by higher brand building initiatives and a full year impact of quest
spk_3: dna expenses increased about eleven percent or nine million dollars due to higher instead of compensation and enclosure quest this excludes charges the fifteen point five million relate to quest integration cost restructuring expensive stock based compensation and not for legal experts
spk_2: moving to other items in opinion l combined interest in common interest expense was about thirty one point five million dollars about the same as the year ago period note of cash savings from debt pay down during the year was partially offset by noncash amortization expense of deferred financial
spk_1: the income tax rate was forty nine point four percent this includes a twenty two point three percentage points impact related to the noncash non deductible sixty six point two million dollar loss on the fair value change of quiet private warrant liabilities barring an increase in the tax rate by federal
spk_3: state authorities we anticipate a full year fiscal twenty twenty two twenty twenty two tax rates to be similar to last year around twenty seven percent net income for the full year was already point nine million versus sixty five point six million in a year ago period that cli of twenty four point eight million dollars is primarily due to the read measurement of the private warrant liabilities
spk_2: trying to keep yes fourth quarter report a dps was making cents per share diluted compared with he loss of forty one cents per share diluted for the comparable period of twice twenty q for twenty two i wanna we recorded on operating noncash charge five point five million dollars due to the change and fair value of the outstanding private wants this was about forty six billion dollars lower than last year depreciation and amortization expense was four point seven million dollars similar to the year ago period and costs associated with quest integration and restructuring were zero point eight million four point six million lower vs last year adjusted to lose he ps which which excludes these items as was twenty nine cents an increase of nine cents versus a year ago period
spk_1: note that we calculated just the deluded dps as adjusted ebitda less interesting come interest expense and income taxes
spk_2: oh yeah reporter dps was forty two cents while for year adjusted deluded dps was a dollar twenty six vs ninety one sense in the year ago period know that the calculation just a deluded dps in a queue for and four year period costumes only deluded shares outstanding of one hundred two point five million and one hundred and one one hundred one point five million shares respectably vs nine seven point eight million and ninety seven point four million hundred gap
spk_1: the difference vs gap is doing is due to the exclusion of a private warrants and fully go to the shares outstanding hundred gap due to and private warrants been classified as a liability on our balance sheet
spk_3: please refer to today's press release for an explanation and reconciliation of non cap financial matters
spk_2: go into the belgian cash flow went to school twenty twenty one the company pay down one hundred fifty million dollars of it's charm one and at the end of the year they have any of principal balance was for up four hundred and fifty fifty six point five million dollars in the fourth quarter the company generate about forty one million dollars of cash resulting and for your cat
spk_3: as blow for operations of one hundred and thirty two million dollars know that this is impacted by higher level that in and tory as were carrying a bit more given the growth or business as well as the need for higher status stocks as of august twenty twenty twenty one the company had cache of seventy five point three million and a trailing twelve month net debt to adjusted eat at that ratio was one point three times
spk_2: capital expenditures for full year were five point nine million dollars driven primarily by equipment for a new warehouse fiscal twenty twenty two capital expenditures are expected to be similar to last year depreciation and amortization for the full year was teaching point two million dollars
spk_3: we anticipate jaffa interest expense to be about twenty five million including noncash amortization expense related to that differed financing feats
spk_2: i would now like a trying to call back a joke the close remarks thanks dad in fiscal twenty twenty two will build on our momentum and expect to deliver solid net sales that adjusted even grow we're confident in our business as both atkins inquest of strong advertising marketing and innovation plans in place to drive growth
spk_1: looking at the key metrics for the full fiscal twenty twenty two assuming no meaningful change it workplace mobility we expect net sales to increase eight to ten percent versus last year
spk_2: this includes a one percentage point head when related to the european business exit we expect supply chain cost inflation in the fiscal year and anticipate the gross margins will be modestly lower versus the year ago period the price increase that went into effect last month and cost savings initiatives should largely offset the cost pressures barring a significant step up and cost inflation from current levels marketing expenses expected to increase in line with sales growth and had a leverage a result in an increase of adjusted the be a slightly greater than the net sales growth rate and the decline in interest expense should result in an increase of adjusted deluded fps greater than the adjusted ebitda a grocery we anticipate that that the first half of the year will be stronger than the second half of the year from a growth rates damn point as the year over year comparisons are more difficult as we proceed through the year learning to the first quarter weeks back net sales growth to be similar to the fourth quarter of fiscal twenty twenty one by chain cost inflation will be a headwind in the quarter however due to existing raw material coverage as well the price increase in cost savings initiatives gross margins should be relatively flat vs prayers your supply chain cost inflation is expected to be a greater headwind but the balance of the year as we merged with the challenges of covert ninety our business stronger and organization is more capable as such we make confident in our short and long term growth prospects we're executing against our strategies that position as to deliver on our financial objectors with the ability to invest in our business is a path to increasing shareholder value over the long term
spk_5: we appreciate everyone's interest in our company and we're now they'll build to take your questions
spk_0: operator thank you will now be conducting question and answer session to like to ask a question please press star one on your telephone keep had a confirmation channel indicate your line is in the question que he may press starchy if you'd like to remove your question from the queue for participants using speaker equipment he may be necessary to pick up your handset before pressing the starches one moment please while we pay for your questions
spk_2: our first questions of the line of jason english with goldman sachs please proceed with your questions
spk_6: eight many folks and thinks it's not me any congrats on i can agree here
spk_7: and two questions
spk_2: erskine on service levels capacity you reference chips vienna bit capacity constraints can you give us to quantification of how much they're told you back and when you check the capacity be back on minor or ursonate back on my but expanded to be limited man i'm in name also related to you walk through the situation across from your the categories obviously this is a lot of there is no disruption in the industry and gives the status of of were
spk_3: you stand with available patty and service levels of things like bars to shake that cetera
spk_2: yeah after up with chip so we did pull back from as pounds emotional activity on in the fourth quarter that for the reason why tara with favorable price realization so we work we were type on ships and kinda worked up in cute for up going into this year that has been resolved wrestling a much better position on on what of those products with your really good about a gaudy church terms or customers this year adjacent answer your question regarding kind of other categories you know there's no one single issue in our supply chain in of the on would tie just covered a we're experiencing episodic panic this kind nobody's in our supply chain the create a bullwhip effect from a service level so you kind of deal with those on a case by case basis you know nothing really different than i think everybody's experiencing right now in the sector where service levels are challenge days you deal with an ingredient not showing up work oh man not being able staff a shift we're dealing with those things a pretty much every day yeah yeah yeah makes sense but it sounds like nothing too serious the second question leverage now below two times quest integration of i to be can complete and what is your acquisition appetite now in light of those conditions and what do you seen the marketplace anything interesting a reason valuations well are always hungry and would you know we obviously have the capacity now two are to to look at assets so of the market is a busy so we keep busy looking at those assets and as we've added explains externally different we like of things and our i'll we like staying in our category because understand the category of fits our supply chain two sets or selling our capability and we're we're in the first screen for us is always how strong as the brand how well the we understand the consumer targets do we think there's opportunity to accelerate innovation and marketing communication to build a brand so we we were staying pretty busy right now and and i would just be patient the find the right thing as we always are
spk_8: goodyear they fall passing on
spk_0: i could jason
spk_9: thank you and were next questions come from the line of chris grow with stiefel please proceed with your questions hi good morning now in my argument is is as well as quarter and as of their hum finished first in relation to quest and know you're just just it can have a demographic profile he will let users is is that different from atkinson color you didn't would you stuck to his mobility improves ah
spk_2: the nutrition and for weight managers the kind oh it's that hopefully happens throughout the official twenty two if of the target i added to the interesting thing for such a guaranteed notice the interesting thing is a kind of the macro nutrient kind of the nutritional philosophy of both brands is pretty similar right on class that it's majors and protein because of its actors consumer benefit and of minors and low carb and low sugar were afghans with the weight management benefit majors and low carbs and low sugar and got to minors and protein but the for the most part to the terminal profiles are very very similar the consumer benefits and the consumer targets are very different so on class that to bow how being active and fueling your ability to to be active so it tends to be younger tends to be fitter tend to be more physically active so that it think of the target audience adults under thirty thoughts
spk_7: the atkins tends to be a little bit a way to lose tend to be a little bit older both groups demographically financially a little bit better a little bit better educated with and that a little bit of weight to lose on atkins and tend to be older over thirty five so no very very little overlap between the breasts
spk_2: and as you look through the year you guys are him was your second question is a route as if protect our as as as coach if we think mobility improves our was effect or branch you know interesting way enough we've seen we've seen quest excellarate during the second half of the year even the quest bar business is done extremely well a part of that his channel development see store for traffic is better amazon is the largest customers queso the businesses been channel that
spk_10: it is by boosting even the bar business start to accelerate
spk_2: atkins you know we have will really encouraged by the growth so second half growth was around twelve percent or what it on a absolute level and of the third and fourth quarter consumption was about the same rate as lot to do with what happened last year but the composition of atkins's encouraging fire growth for the year up double digits in which been holding atkins back has been the bahrain which is kind of down mid single digits right so in doing our analysis on actions we understand being at work is an important driver to snacking occasions and has been holding down by rate so we we didn't build this into our assumptions
spk_9: on our business but it's mobility improved we would see we would expect to see upside on our business and in particular ron atkinson and particular on bars
spk_1: because this are helpful thank you i just a profile of and or anything at a question around shelf research and shelf space and agassi their of some self reset what you're seeing right now from high level in instrument and in his you look at the shelf sat here for your brands
spk_2: get so ah talk a little history first we saw good grope on both brands in the last fiscal year shall sets are are happening the ones to happen in the fall happening as we speak we expected to be pretty positive force or as we've said pretty consistently the new product pipeline or both brands is is pretty good that we would expect
spk_1: pretty good performance there in the i would also say retailers have we learned the importance of large brands to drive category
spk_9: consumers to the to the to the category and to the aisle and so we see them kind of focusing in general focusing on larger more important brands to keep the riles healthy and keep the categories healthy so we're benefiting from those those talents
spk_11: that seem to work well this past year yes thank you look at that the screen appreciate your you times when it
spk_0: thanks chris
spk_12: thank you our next questions come from the line of when he nicholson with study these for see with your questions
spk_1: i am two questions first short term on do think there's any need for more pricing it's great that the pricing you took in june has gone through but you think that there's been sufficient either commodity your for inflation need to take more am and second question longer term i know he talked about favorable operating leverage as enabling adjusted
spk_13: he the doctor grow faster than gross profit but you've been able to reduce as a now for i think three years in a row as a percentage of sales and i'm wondering how much further you have to go you doing a great job advertising more is how much more he upset is their engine a before you start to cut into muscle from a productivity
spk_3: perspective thanks
spk_2: yeah celtic the first one so from our pricing rosewater perspective for to start off and say we're were rich super proud of our ability to expand gross margins by sixty basis points into for and ten basis points for four years given this
spk_14: supply chain environments out there right now second we saw the inflation coming priced very aggressively
spk_15: to manage that
spk_2: flash and
spk_3: and feel really good about the execution of that liar sales salesforce
spk_16: commodities are not slowing down
spk_3: to be frank we we we
spk_2: thought more the price increase we might see some leveling off specially in our second half of the year we're not seen that yet we're still have over and see that but you have some some commodities are slowing down our a still growing accelerate rate so right now we feel good about the gods with given we don't feel like we need to
spk_3: yeah do any additional pricey if we do see some modest increase in our cost assumptions i think we can manage that through trade expats pulling back there a little bit ah but if we see an acceleration beyond what or expect expectations are you know all letters are in play we will price that we have to
spk_2: regarding regarding the
spk_3: cst in a leverage
spk_2: i said if this two reasons why we're getting so much leverage right now one is that the quest integration and centers we got them that obviously we were do some headcount with the combined companies but some great synergy that with executed on this fully at this point that has helped second this just the growth in the business mean you're growing you know ten fifteen twenty percent topline you can you can gee and angel and grow and maybe four or five percent you get some significant leverage self i don't see us pulling back on shell
spk_17: have absolute dollars in injury and a but i think will continue to get leverage in our piano as the business accelerates
spk_2: gotta it wasn't great yes the wendy this is just one it up the add a little bit of code or with todd said any being modest his team is done a phenomenal job of seeing him a cost inflation soon enough and estimated it well enough that it put us in a position to take what was a pretty aggressive price increase in september we don't see the need to price again so in have made the upper single digit pricing we feel like we're very good shape to fiscal year we would have to see a significant acceleration of commodity cost inflation relative to where it is right now in the second half of the year to even think about pulling that lover and we finally think that's a relatively low probability so we really congratulations to touch team part of our success has been seeing it early enough and not being too optimistic that it's not going to be too bad we took a very aggressive cost inflation point of view that that compelled
spk_12: us the takes on aggressive pricing in the marketplace that sounds fantastic and and very very rare among your peers so definitely congratulations on that front arms the just as a blow up you did talk about sort of lower levels of promotion and to the extent you see on an increase in mobility and you're eager to remind those people that they need to buy either act and request as they go
spk_2: back to work what type of step up in your promotional spending a promotional activities do you have embedded in your forecast for fiscal twenty two or how much flexibility do you have to step up their promotional activities
spk_18: it we all we tend to always lean and in the first half of the year believing that the sales were calm and nibble at back and room dispenser were leaning into our marketing programming as we speak and will continue to do that through january february
spk_0: terrific thanks very much
spk_19: thank you our next questions come from the line of steve hours with deutsche bank please proceed with your questions
spk_7: hey thanks guys so you mentioned earlier in the conversation chris some of the successes particular around quests that you've had when you cases that maybe less tied to mobility than they do the been the assumption the past seeming to kicking around things like chips and cookies i was hoping you could talk about how that experience may be influencing your decisions around our deportation and whether you see more opportunity now to you the fact cultivate more those occasions
spk_2: add that are independent of consumers the on the go or if that's not how your think about it as you know it's our focus on what mark is point is the snack your portion of our portfolio you know was under way before we acquired class and accelerated under the phenomenal or and a team led by journey ib so the focus on it and the reason for it is it's incremental use occasions in need states to bars and shakes we knew that for baggins because we had a really big and very strong confection business from the earliest days and now we have a cookie business and a chip this this and in that and a growing confection business on quests and we kind of understood that that those would be incremental consumption occasions along comes cove covert and and then we learned that while at a bar consumption is case in particular on actions is consumed at work and in tran is it so we kind of with we're a little fortunate in that are diversification by form and the additional need states use occasions became and nice offset to our bar business by the way we're not the emphasizing are bar business where emphasizing the opportunity to grab new use occasions through
spk_7: other forms and should expect us to continue to do that and will continue to innovate and bars because it's a big and important portion of our business
spk_2: great great and and then you you mention leaning into advertising is you know in the first half of the year and he talked to the petition but some initiatives both and i can then and now quest keith just didn't elaborate on what you're hoping to achieve especially on the the quest time of that if it is it ties into a were just talking about in terms of yeah the broadening of those occasions yeah so this category is under penetrated and the marketing challenge pretty would be pretty much guard lots of a brand you're running is to grow household penetration and bring more buyers and so we are i have eight years of experience with actions a single biggest correlation to growth has been our ability to grow buyers so we always are focused on how to do that in the case of africans it's a high brand awareness brand virtually everybody knows the brand's the marketing challenge with atkins was to change their point of view of what they do and the marketing efforts are all built around that the repositioning of the bread away from a programatic weight loss ran into a life low carb lifestyle weight management expert by know i think we've done a pretty good job doing that we feel really good about the growth prospects in the case of quest big brand growing fast still relatively modest brand awareness to over the last few years people have met the brand by showing up at the shelf and finding really great products that they try fraternity on classed as to dry brand awareness shape people's point of view about what the brand is about which are new campaign does and a doing so you know you create pressure at the top of the final i pre brand awareness dries brand consideration accelerates a trial and repeat so in the same
spk_7: the same strategy you gotta you gotta do it fast dry buyer penetration but two different marketing challenges wine is about changing people's points of view about what they thought about the brand the other is introducing them to the brand and in a we've got marketing efforts and marketing investment designed to do those two things okay that's awesome thanks yeah if i could squeeze one more and scumbag decent asked about
spk_2: yeah that initiatives to add progressive capacity in snacks i guess maybe gives a little bit of a sense of the pacing of that true twenty years to fiscal twenty two and then he we're you
spk_11: it gets kind of expect your theoretical capacity shit starting pistol twenty three relative to where we been at the fiscal twenty one number eight thinking about arctic it off and then i'll turn it over to tide is been closer to it you know the first thing i would say is are challenges on ships and peanut butter cups or because of the consumer response far exceeded our
spk_2: expectations of both
spk_1: so we did not go into the marketplace for leaving week we're gonna have a supply challenge that this is not about
spk_2: a supplier falling short of what they provided up with said they were going to provide is this is about us not seeing the consumer response to would have been to really great products and so as we a on ships last year as we move through the year every time we got more supply we absorbed it with demand and so we were not able to build inventory we weren't able to keep up with service so we you know it knowing that changes and capacity take some time we slow demand down to build inventory so we could serve as the business at what is it appropriate level and i'll turn it over time you can talk to about adam the moves that were making to add capacity on ships as we speak guess over again both on ships and cuts we were as we talked about earlier we were shorts are very title supplies got into cubes for
spk_3: that is largely behind us at that point at this point we've added capacity on both products
spk_2: the in the last month or so so we're actually pretty good shape right now for for f y twenty two we actually have or capacity coming on had the end of this year and the beginning of a boy twenty three mod chips and cups and some other products so i think we're pretty good shape for this year and then as given to f twenty three
spk_20: you actually have expanded capacity to grow the business
spk_0: okay thanks to both present
spk_21: and you our next questions come from the line of john anderson with william blair please proceed with your questions
spk_7: modi everybody and congratulations on a great year i wanted to ask a little bit about helpful penetration or come back to that because the is he said joe it
spk_3: the highest correlation with the grow up to give the atkins brand and where do you see it today
spk_7: on how so penetration for the two brands he had household penetration growth has been strong to your point of double digits this year are you seen a strong growth on both of the brands
spk_12: in in who are these new consumers that you're tracking is it the snap year consumer based on the kind of innovation and occasions that
spk_7: you're capturing
spk_2: so any commentary around that kind of that kind of the current state of health penetration the growth in the complication of that growth in helpful patricia thanks you're talking with your talk and my the thing ice ice the i don't sleep about all the time right which is where are they gonna come from and who are we getting so and growing penetration on both brands atkins is vienna we identified are are positioning shift which happened around the time we went public was a move from focusing on what we called low carb program dieters
spk_22: to and at the time but we did the study we thought they were somewhere around eight million of those and we're done a nice job and the previous eight years targeting those and having successful growth
spk_2: the that the research that we did said there were about thirty three million more low carb consumers lifestyle consumers to i kind of weight management as at one of their consumer benefit so it's not about weight loss it's about living with my weight every day and how do i keep that under control and we've been targeting that consumer ed led to with a shift in consumer communication around fast weight loss you know lose to talk thousand eight weeks the up with pre and post pictures of people that if you know are celebrities pre and post to rob lowe skinny due to never had a lose weight because he knows how to eat and east any any liza act as lifestyle so we've been going after those that consumer target and i hadn't seen a study in the last year but when we last time we looked at it those
spk_1: self directed low carb years with a source of growth not a surprise
spk_2: in the case outclassed were gathering our database on question a consumer's standpoint here's what i do know the single biggest contributor to quests household penetration growth has been the growth of chips the other forms have been more stable from up from a a house or penetration standpoint but we brought in a significant number of do buyers on ships and they were incremental to the brain which then leads to a series of marketing questions why do they buy bars how do we get there by more as products and i worry at all those questions in the marketing team is working on those things the other thing i want to know about quest that we're still trying to learn is when i bring him in do they stay how much do they buy longer they stay right some the things that are fundamental
spk_7: to effective marketing what's their lifetime value and we're we're in they were in the middle of that work and as soon as i know more i'll share it with you
spk_21: that's helpful you anticipated the my next question their slowly pose for a shirt off of that you but one other follow up on that the the as you extend the brand into to deal with other products for me to serve additional occasions and particular thinking about quo west which is you mentioned earlier is about
spk_20: nutrition active lifestyles of fit individual and you're moving the brand from could have a of a bar orientation into more indulgent occasions fraught with frosted cookies this year for instance do do you worry that you you may be lose that a part of that core act
spk_1: if fit positioning or is it just human at figure out to the right way that it's open ended and an a in you don't you don't risk losing that kind of that are turned off the court consumer that and it has brought you to where you are with it thanks
spk_23: you know a great question and it was core to the change in strategy and communication so if the campaign that was being run prior to the one that just one on air was our was around the
spk_1: the up
spk_2: snacks that you crave with the macros that you love right so no compromise i can get a snack those things that i would see on a super bowl cable for a job you know for table those are the things i really crave and i want to have those every day but i don't want bad macros right i don't have to be low high in carbs and sugar and lower protein right so that with the positioning before around crave ability of snack the the positioning now which is that evolution of where we were is around athlete worthy nutrition even though you don't need to be an athlete and or it's around that fueling people's desire for whatever they're trying to achieve so it's about south's to some degree about self actualization without compromise so great tasting products that fuel my desire to achieve what i want to achieve that we moved away from crave ability now the products themselves there's there's elements of this that are highly indulgent like you mentioned there are a cookies but frankly it's still around it's it's a red guard list of the snack form it it is completely about ah athlete worthy nutrition even though you don't need an athlete and so we were very choice for in the campaign we picked aspiring professional athlete so we pick to
spk_1: in nfl rookie and a w n b a rookie because they're still they're still there still on a quest to be successful in their professional careers
spk_2: and art and our target audience find them very aspiration on and we picked two people kind of who change their change their career midstream a former professional football player who became a firefighter a former office that person who became a yoga instructor right so again it's about fueling their aspirations and their quest life and death
spk_7: we we think the positioning addresses that question that exact question that you asked
spk_0: very helpful thanks so much
spk_3: thank you our next questions come from milan of erik larson with seaport research partners please proceed with your questions
spk_21: yeah everybody in austin my congratulations as well
spk_3: i guess
spk_24: my question is probably more for todd year but just trying to get a little bit
spk_3: you are clear cadence on height of gross profit margins are going to work for you price and you you know in june and you price of temur twelve so you want gonna get your all but maybe a few days of your pricing
spk_2: on is what's holding up the margins of you're still seeing in the first half favorable our channel and customer and product mix and that you might be taking a more conservative stance on a comparison basis in the second half so should we be conservative on our marked gross margins and into wage yeah so for for the first quarter we actually still with as with as we said our remarks que tu one actually gross margin should be relatively flat we still have some coverage at very attractive prices up through que on and despite what you correctly said when i can see much of a pricing benefit in the quarter or we still had some very favorable coverage and we do have a channel and product mix that you mentioned which allows that we believed to keep gross margins relatively flat que one that coverage largely goes away the as we enter que to ah so you up we do have coverage throughout the first half of the year but once we get into que to and beyond the pricing is as attractive as we've had the second half of this year and this first quarter so
spk_7: margins will start to a contract as we get into to to and beyond but he can expect gross margins to be real relatively stable and in the first quarter
spk_24: okay thanks and next question is for dual saw joe you know i think you've covered a whole bunch of these points already but when you look back at your sort of your initial guidance on quest
spk_7: i i think you said well we're going to gwent quest quite slowly cause we don't wanna screw it up i think that was your comment and and you a new place you done that but if you look at quest now obviously have full penetration is a big it is a big causes of what have a is are you me
spk_24: more optimistic on quest today and
spk_2: and and just kind of give you give us our sos because the growth or has been phenomenal and i guess the question is young is because he is how sustainable does that growth and i'm just curious on your your perception of quest now post post acquisition yeah we we i aspirations and a strong belief in the brain and the performance of the brand has exceeded both of those so the businesses performing singularly outstanding and it's been kind of the research and innovation that has been a key driver of the brand so the the pipeline dead though we acquired with the brand as for the most part outperformed our expectations a very high on show ep strong performance on cookies strong performance on it it's entry into confections rg these at kind of a push paper the other forms perform really really well
spk_1: so and and we believed that there was opportunity to
spk_2: continue to sharpen the positioning of the brand because people's it if you if you just talk qualitatively to people in focus groups who have purchased the brand they really don't know for the most part with the brand stands for poor user that broke bought the protein bar probably for solid a jam about it online that was part of that little eco system that course user
spk_1: those brand stands at those it's history believes in it a lot of the recent
spk_2: in a growth and consumers last
spk_24: clear about what the brand stood for so are our opportunity on the brain and i think we're just in the early stages of that is a with a you said it we don't want to screw screwed up so we will slow about the positioning of the brand but we feel like we've got
spk_3: we got a strategy with got communication execution that will grow brand awareness and create a positioning and people's mind around the brand that will enable it to continue to grow beyond just product
spk_24: okay and so could follow up on that
spk_7: obviously part of your household
spk_2: penetration is if potentially increase distribution but you haven't met in distribution specifically what might be the opportunities in that request but certainly on quest it has been because we grew distribution on chit chat brow performed all year as we grew distribution on that so and it grew as or penetration so in the case a quest i can directly tied white filling white space with a snack item that grew significantly grew house or penetration so i i think in that case white spaces was really important to the brand the only reason we tend to be conservative about talking forward on distribution is a been in businesses where you build distribution and your velocity per item falls and it's is less incremental than you think so we just like to see it in the marketplace performing before we talk about it incremental bad you either from a volume standpoint or penetration standpoint i like are pipeline are pipeline i believe will be incremental to our core consumption so innovating behind bars and shakes i think will be a t strategy to our business going forward we just like that wait and see how it performs before we talk to you about how we feel about it i expect with our pipeline will have nice growth in
spk_24: at the brass and the depth of penetration in the marketplace on both of our parents
spk_0: we'll see how it they perform from an anchor mentality standpoint and ability to drive to buy store brand i track records pretty good on both of those are my dad but let's wait and see and see how they perform
spk_25: okay thank you for your comments your you up
spk_21: thank you our last question of the day comes from palmer guys were walla of credit suisse the for see with your question
spk_2: i think everybody for out biggest grilling me then and then i'll reiterate my everybody else is said about our well done and was pressing maneuvers i think you guys an exception than than the rope i'm if i'm asked to earn a little more detail on the mix effect on on margins maybe the next effects that you are exp paxton margins given your there's an increase of nobility obviously there's mix effect as it relates to product nexus is there may be a a general idea you could get a son on how just the impact of or what the impact of next will have on your margins yeah roy to pick drivers so as we laughed coded bars got hit very hard last year during the initial year of covergirl at that time has come back bars on both brands a margin products we have so that that a huge plus sector piece of days from a channel next perspective brick and mortar obviously got impacted
spk_25: a greatly during during college vertically or on our our business pan am pretty calm world went crazy he margins we have a very good but they are a little bit below or brick and mortar the brick and mortar and he come out got worse and balance from a growth perspective that it that has helped as well
spk_3: i can't give you exact number but you know it's should spend probably
spk_2: it's been it's been part of what i talking a huge amount of delta year because our margins by customer and and by former not dramatically different but you know it's it's it's been a positive benefit i think will continue to see that and que wanting to to and that will help us feel mitigate some the inflation and okay great if i can ask me about e commerce and i'm you know if the trends are any difference in what you're seeing the been your spins data or whatever it is from a marketing perspective in new channels outside of the attract channels
spk_26: yeah so are so we don't really really well
spk_0: in a camp we have games share
spk_2: to house the new with with a major with a major he can't play are out there are we feel great about our business their specially particularly on the quest size cause it's growth just continues to be a credible so marketshare has been very positive russia for last couple years
spk_0: irs
spk_27: okay great nicky
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