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spk01: Greetings and welcome to the Simply Good Foods Fiscal First Quarter 2023 Conference Call. At this time, all participants are in a listen-only mode. A question and answer session will follow the formal presentation. If anyone should require operator assistance during the conference, please press star zero on your telephone keypad. As a reminder, this conference is being recorded. I would now like to turn the conference over to your host, Mr. Mark Bergarian, Vice President of Investor Relations for Simply Good Foods Company. Thank you. You may begin.
spk05: Thank you, Operator. Good morning. I am pleased to welcome you to the Simply Good Foods Company earnings call for the fiscal first quarter ended November 26, 2022. Joe Scalzo, President and Chief Executive Officer, and Sean Marra, Chief Financial Officer, will provide you with an overview of results, which will then be followed by a Q&A session. The company issued its earnings release this morning at approximately 7 a.m. Eastern. A copy of the release and accompanying presentation are available under the investor section of the company's website at www.simplygoodfoodscompany.com. This call is being webcast and an archive of today's remarks will also be available. During the course of today's call, management will make forward-looking statements that are subject to various risks and uncertainties that may cause actual results to differ materially. The company undertakes no obligation to update these statements based on subsequent events. A detailed listing of such risk and uncertainties can be found in today's press release and the company's SEC filings. Note that on today's call, we will refer to certain non-GAAP financial measures that we believe will provide useful information to investors. Due to the company's asset-light strong cash flow business model, we evaluate performance on an adjusted basis as it relates to EBITDA and diluted EPS. We have included a detailed reconciliation from GAAP to adjusted items in today's press release. We believe these adjusted measures are a key indicator of the underlying performance of the business. The presentation of this information is not intended to be considered in isolation or as a substitute for the financial information presented in accordance with GAAP. Please refer to today's press release for reconciliation of the non-GAAP financial measures to the most comparable measures prepared in accordance with GAAP. With that, I'll now turn the call over to Joe Scalzo, President and Chief Executive Officer.
spk08: Thank you, Mark. Good morning, and thank you for joining us. Today, I'll recap Simply Good Foods' first quarter and provide you with some perspective on the performance of our brands. Then Sean will discuss our financial results in a bit more detail before we wrap it up with a discussion of our outlook as well as your questions. We're pleased with our first quarter financial and marketplace results in a challenging cost and operating environment. Net sales increased 7% relatively in line with estimates. In the first quarter, combined measured and unmeasured channel U.S. retail takeaway growth was about 14%, and, as expected, outpaced net sales growth. Sean will provide more details on the difference between net sales and point-of-sales growth in a bit. Our strong POS growth was driven by solid quest performance across key farms, customers, and channels. Atkins' continued e-commerce growth resulted in about 4% retail takeaway for the brand in the combined measured and unmeasured channels. First quarter gross margin was 36.9%. The 450 basis point decline versus the year-ago period was slightly greater than forecast. Ingredient and packaging inflation as well as trade investment were in line with expectations. However, logistics and contract manufacturing costs were greater than estimates. Importantly, our supply chain team performed well and customer service was near target levels. Adjusted EVDA for the first quarter was $60.8 million versus $65.6 million in the year-ago period. Sales growth, which included our July 2022 price increase and SG&A cost control, were primarily offset by supply chain inflation. As we move into the second quarter, We're focused on executing against our plans, and we are well-positioned to deliver another solid year of net sales and adjusted EBITDA growth. Simply good retail takeaway in measured channels increased 11.1%. Similar to the last few quarters, total unmeasured channel growth was additive to total company POS, resulting in combined measured and unmeasured channel growth of about 14%. In Q1, Atkins and Quest combined measured and unmeasured channel growth were about 4% and 24% respectively, with top-tier performance within the measured channel segments of weight management and active nutrition. Turning to Atkins' first quarter performance, Atkins' Q1 retail takeaway in combined measured and unmeasured channel was up about 4%. as outstanding e-commerce growth continued from the previous quarter, with the IRI MULO universe essentially unchanged from the year-ago period. Atkins Q1 point of sale at Amazon increased 75%, with solid growth across all major farms. We estimate total unmeasured channel retail takeaway increased over 40%, and is now about 13% of total Atkins retail sales. The brand continues to benefit from shopper channels shifting to e-commerce, as well as improved digital marketing initiatives. Consistent with prior quarters, Q1 brand relevance and loyalty remained strong, supported by a growing base of new and total buyers. In Q1, buy rate continued to improve from prior quarters, but was slightly down versus prior year. Within buy rate, strength in meal replacement bars and shakes likely driven by post-Labor-Day return-to-work trends, was offset by declines in snack bars and confections as we lapped strong pandemic consumption from those snacking occasions in the year-ago period. Moving on to measured channels in the IRI-MULO C-Store universe, Atkins Q1 POS was about the same as the year-ago period and, as expected, sequentially improved from Q4. Consistent with recessionary shopper channel shifting, Performance was driven by solid trends in the mass retail channel, offset by softness in the food class of trade. By form, Q1 sales retail takeaway increased 7.6%, driven by solid growth across all major channels. Total Atkins bars were off 6.9%. Meal bars, about two-thirds of the bar business, were about the same as last year, and offset by the snack bar distribution loss we discussed last quarter and price sensitivity. Elasticity on some snack bar items has been greater than our estimates in brick-and-mortar channels. And as expected, confections POS improved from Q4. In Q1, confections retail takeaway was off 5.3% as we started to lap the impact of the strong year-ago dessert bar launch. Importantly, the commitment to our brands and the nutritional snacking category by major retailers remain strong. Atkins distribution gains are tracking as expected, and strong new year, new you in-store merchandising and programming is in place. Let me now turn to Quest, Q1 retail takeaway, where combined measured and unmeasured channel growth was up 24%, and about the same as the IRI Mule Low C-Store universe. In Q1, we estimate total unmeasured channel retail takeaway increased about 20% as e-commerce strength is partially offset by softness in the specialty channel. Quest Q1 POS and Amazon increased about 36%, driven by growth across all forms. For perspective, total unmeasured channels in Q1 were about 24% of total Quest retail sales. In measured channels, Quest retail takeaway increased 25.4% in the IRI Mule OC store universe. Growth was driven by solid performance across all major forms and retail channels, as well as increases in household penetration, base velocity, distribution, and continued success of new products. In the quarter, Quest core bar business retail takeaway increased 16.8%. Growth was solid across original bars, as well as the new minis. Consumer response to the new recipe that provides a much softer original bar has been encouraging. The snackier portion of Quest products, that's cookies, confections, and salty snacks, continued to do well, with Q1 measured retail channel takeaway up 41%. Growth was strong across all forms and was driven by increasing household penetration, distribution gains, and marketing investments to drive awareness and trials. Consumer response to the price increase initiated in late in Q4 is tracking mostly as expected, although elasticity on chips so far has been greater than our estimates. The snack segment represents nearly 45% of total Quest measured channel retail sales and is already roughly equal to Quest bars in household penetration. So it's a sizable and growing segment for the brand. Further, we expect the segment to continue to contribute disproportionately to total brand growth over the next few years, driven by improvements to household penetration as well as a solid pipeline of innovation. That said, given the significant and increasing size of the segment, we expect the rate of growth over the next few quarters to moderate from its current levels. In summary, we're pleased with our start to the year and our first quarter results. Our retail takeaway was relatively in line with expectations and a very challenging cost and operating environment. Recessionary economy continues to be a concern as higher prices appear to be slowing unit demand in the category and shifting shopper traffic away from grocery to more value-oriented channels. That said, we remain cautiously optimistic about our business with strong POS momentum over the first four months of our fiscal year. We are well positioned in the mass in e-commerce retail channels that typically do well if shoppers seek out value. As I mentioned earlier, collaboration with key customers is strong and they are committed to our brands in the category. As such, in Q2, we have good breadth and depth of merchandising and programming in place for the upcoming New Year season. While Q1 gross margin was slightly lower than our forecast due to logistics and co-manufacturing costs, there is no change to our full-year physical 2023 gross margin outlook. We would note that we are seeing early signs of an improving marketplace for ingredient and packaging costs for the second half of our fiscal year. We are executing against our priorities, and we remain committed to doing the right thing over the near and long term for our brands, customers, and consumers. Now I'll turn the call over to my friend, trusted business partner, and prior CFO, Sean Marra, who will provide you with some greater financial details. John?
spk02: Thank you, Joe. Good morning, everyone. Before I get into our first quarter results, let me start by saying it's great to be back in the CFO chair. In my CPG career, I've worked with Joe for nearly 20 years. We first cross-passed at Gillette in 2000, where we became proficient in the Jim Kills approach to managing the business. Joe and I ran Atkins together when it was PE-owned, and as some of you may remember, I was CFO for the Simply Good Foods first conference call as a publicly traded company in 2017. I then stepped away to recharge and did some consulting. Mid-year 2019, Joe convinced me to come back to the company in a different role, running strategy, M&A, and projects, biggest of which was the integration of Quest and the ERP implementation. It was a great opportunity for me to get re-engaged with the business, helping to build out the organizational structure, systems, and processes and drive the company priorities across the newly designed organization. With Todd leaving, it comes full circle. I'm excited to be back in the CFO role and believe our category and our brands have a long runway for growth. I look forward to helping the company execute against this strategy and increasing shareholder value. Let me now provide you with an overview of our financial performance beginning with sales. Total Simply Good Foods first quarter net sales increased 7% to $300.9 million. Net price realization was about 9.8 percentage points, and volume was off about 1.7 percentage points. The March 2022 agreement to license the Quest frozen pizza business was a headwind of 1.1 percentage points. As Joe stated earlier, retail takeaway outpaced net sales growth. On the bottom of this slide, we attempt to reconcile Q1 POS of 14% to Q1 North American net sales growth of about 8%. I'm going to walk you through the reconciliation, starting with the first line, double pricing of about one percentage point. Recall, in the year-ago period, some retailers did not increase retail price points until early November, despite being invoiced at a higher price point from mid-September. Therefore, the POS in the current period reflects the benefit of two price increases from a few retailers over that period. The timing of trade promotion investment was a two percentage point headwind, and as previously stated, the licensing of pizza was about a one percentage point drag. Recall in the year-ago period, some customers elected to build atypically higher inventory levels starting in Q1 of fiscal 22 and continuing through Q2 due to supply chain concerns last year. We expect the retail inventory build in the first half of fiscal year 23 to return to more normal levels. As a result, in Q1, we estimate the change in retail inventory compared to last year to be about 2 percentage point decline. Moving on to other P&L items for Q1, gross profit was $111 million, a decline of $5.6 million from the year-ago period, resulting in gross margin of 36.9%. The 450 basis point decline versus the year-ago period was slightly higher than forecast. Ingredient and packaging cost inflation as well as trade investment was in line with expectations, while logistics and contract manufacturing costs were greater than estimates. Net income was $35.9 million versus $21.2 million last year. The year-ago period was impacted by the fair value change of private warrant liabilities of $17.3 million. Adjusted EBITDA was $60.8 million, a decline of $4.8 million from the year-ago period. Selling and marketing expenses were $28.5 million versus $30.5 million, a decline of 6.5%. due to the timing of spend within the year. That said, on-air spend in Q1 was greater than the year-ago period. GAAP G&A expense was $25.6 million, including stock-based compensation of $3.3 million, and increased 8.2% versus last year. Excluding stock-based compensation in the current and year-ago periods, G&A increased 5.8% to $22.3 million. The $1.2 million increase versus last year was primarily due to employer-related costs and corporate expenses. We continue to expect that full-year selling, marketing, and G&A expense will be about the same as the year-ago period. Moving to other items in the P&L, interest expense increased $700,000 to $7.1 million due to higher variable interest rates related to the term loan, and our tax rate in Q1 was about 21.3%. versus 25% last year. The tax rate in the year-ago period excludes the impact of the charge related to the non-cash, non-tax deductible warrant liability. The lower tax rate in the first quarter of fiscal 23 is primarily due to the timing of equity compensation. We continue to anticipate the full year fiscal 2023 tax rate to be about 25%. Turning to EPS, first quarter reported EPS was $0.36 per share diluted compared to 22 cents per share diluted for the comparable period of 2022. In fiscal Q1-23, depreciation and amortization expense was $4.9 million and similar to the year-ago period, and stock-based compensation of $3.3 million increased $700,000 versus last year. Adjusted diluted EPS, which excludes these items, was 42 cents compared to 43 cents for the year-ago period. Note that we calculated adjusted diluted EPS as adjusted EBITDA, less interest income, interest expense, and income taxes. Please refer to today's press release for an explanation and reconciliation of non-GAAP financial measures. Moving to the balance sheet and cash flow as of November 26, 2022, the company had cash of $54.1 million. Cash flow from operations of $8.7 million was affected by the timing of working capital. The company continues to anticipate full-year fiscal 2023 cash flow from operations will be greater than last year. In the first quarter, the company repurchased shares worth $16.4 million at an average cost of $30.11. As of November 26, 2022, approximately $71.5 million remains available under the company's current authorization. In Q1, the company paid down $6.5 million of its term loan, And at the end of the first quarter, the outstanding principal balance was $400 million, with capital expenditures at $1.2 million. We anticipate net interest expense to be around $28 to $30 million, including non-cash amortization expense related to the deferred financing fees. This is higher than our previous estimate of $25 to $26 million due to the continuing rising rate environment. I would now like to turn the call back over to Joe for closing remarks.
spk08: Thanks, Sean. In a challenging economic environment, we believe we are well-positioned to deliver on our fiscal 23 financial objectives. Year-to-date retail takeaway is tracking as expected, and we have momentum as we enter Q2. We are tracking to our initial four-year gross margin target with pricing and cost initiatives, offsetting the dollar impact of ingredient and packaging cost inflation. Additionally, we have made significant marketing and organizational investments in the business over the last few years, and we believe it will result in continued growth of our consumer base and distribution. As such, we continue to expect that total SG&A expense dollars will be about the same as last year. Therefore, we reaffirm our full fiscal year 23 net sales, gross margin, and adjusted EBITDA outlook. Specifically, we anticipate net sales to increase slightly greater than our 4% to 6% long-term algorithm, including a headwind of almost one percentage point related to the previously discussed pizza licensing agreement. Gross margin is expected to decline, although at a lower rate than fiscal 22. Full fiscal year adjusted EBDA is expected to increase in line with the net sales growth rate An adjusted diluted EPS is expected to increase, although less than the adjusted EBDA growth rate. As we proceed through the balance of the year, we remain cautiously optimistic about our POS performance. Net sales growth by quarter is expected to be choppy as we anniversary last year's second quarter significant retail inventory build and the second half inventory destock. As we look to the second quarter of fiscal 23, retail takeaway is off to a good start with December POS up about 16% and strong merchandising and customer programming in place for the upcoming new year season. However, we anticipate that Q2 net sales will be slightly lower versus the year ago period as we expect customers will not repeat last year's abnormally high retail inventory build. Adjusted EBDA in Q2 is expected to decline upper single digits on a percentage basis compared to last year. Profitability is pressured as a result of lower sales and gross margin contraction due to higher ingredient and packaging costs compared to the year-ago period. Given the early signs of an improving outlook related to ingredient and packaging costs, we anticipate gross margin in the second half of the year will be slightly higher versus the comparable year-ago period. This is an improvement from our October forecast where we anticipated gross margins to be slightly down in the second half of the year. We're excited about our near and long-term growth prospects, and we're executing against our strategies as a path to increasing the value for our shareholders. We appreciate everyone's interest in our company, and we're now available to take your questions. Operator?
spk01: Thank you. If you'd like to ask a question, please press star 1 on your telephone keypad. A confirmation tone will indicate your line is in the question queue. You may press star 2 if you'd like to remove your question from the queue. For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star keys. Our first question comes from the line of Chris Grohe with Stifel. Please proceed with your question.
spk11: Hi, good morning. Hey, Chris. Morning, Chris. Hi. I just had a quick question to follow up on some of that differential in sales between consumption versus takeaway, essentially. And I did see that bridge in the slides, which is very helpful. I guess I just wanted to ask, first of all, on kind of the double pricing. Did that occur again with the most recent price increase? Just understand if that could be an ongoing factor. And then maybe related or secondary to that, the timing of trade promotion investment, was promotion up in the first quarter of 23% or is it more of a comparison to the prior year that caused this differential in the first quarter?
spk02: So on the double pricing piece, Chris, the reality of that is it didn't happen in the second price increase. Retail prices went up pretty quickly after we put the price increase out there. So you're not going to see that going forward. That was just an impact in Q1. As it relates to trade specifically, take a step back a little bit on trade. So For the year for trade, we're going to hold trade as a percentage of sales consistent with what we had last year. So that's not going to change overall. What you're seeing is really a shift in trade a little bit earlier in the year, more in the first half, principally around display, promotional packs, some of that stuff we shipped into Q1. So effectively what that is is just a timing thing, and it impacted from gross to net overall. Does that help?
spk11: That does help, yes. Thank you. And just one other follow-up question. You talked about seeing some early signs of relief around input costs. I just want to get a sense of how hedged you are currently. And then are there any signs of, you know, say competition in the category that might force you to have to give some of that back or get a little more aggressive on promotional spending? I know you're seeing a bit of an increase here from a timing standpoint, but any signs of having to get a little more aggressive on the promotional side?
spk02: Let me start with the commodity piece here. I think what you're really trying to get to is kind of what do we think the commodities are going out and where are we overall? I think take a step back. I'm just going to reiterate what we said at the beginning of, I guess, about three months ago, give or take. So we thought we'd have double-digit increases in cost of goods sold. And with that, we thought margins would be down versus the prior year, but not as much. Most of that would be in the first half of the year with modest declines in Q3 and Q4. As we sit here today, We've seen the softening in the dairy protein market that gives us confidence that gross margins will be up slightly in Q3 and Q4 from our previous estimates. As it relates to the coverage, we're about 60% covered in ingredient and packaging requirements, so roughly through March. And quite candidly, we want to kind of see what plays out in the marketplace right now before we commit to more of that. We think there's more downward pressure than upward pressure, so we can kind of see where we are as we get to later in the year. But, you know, things are volatile. We'll see where we are as we go forward. We'll have a much better picture on that by the time we get to the second quarter earnings call.
spk08: And answer your second part, Chris. No, you know, our business is predominantly a turn business. About 85% of the volume turns off the shelf. So, you know, we're not seeing – and then we don't have, unlike I think a lot of other food categories, we're not particularly – because there's so many different forms, so many different price points, there's no – one competitive price comparison or brand price comparison that's relevant. So we're not seeing any pressure to deal back from a pricing standpoint. If we would be spending back, it would probably be in reaction to kind of unexpected elasticity response from the most recent price increase, right? And so far, we've done a little bit of that in the first quarter, and we're just kind of reading the marketplace, and we'll react as time moves on.
spk11: Okay. That was great, Cullen. Thanks so much. All right, Chris. Have a good day. You too.
spk01: Thank you. Ladies and gentlemen, to allow us to get to as many questions as possible, we ask that you keep to one question and one follow-up each. Our next question comes from the line of Cody Ross with UBS. Please proceed with your question.
spk12: Good morning. Thank you for taking our questions. You called out logistics and contract manufacturer costs as drivers of the lower than expected gross margin. How much did gross margin come in below your expectations? And can you just describe what you're driving those costs?
spk02: Yeah, sure. Sure, Cody. So let's take a step back. So the Q1 miss versus our expectation was about a million dollars on a rate basis, right? So it's about $2 million overall. Good news and bad news here. I say the good news is the MIS had nothing to do with ingredient and packaging cost increase. Those were aligned with our estimates for the quarter. Obviously, we mentioned in the remarks and just talked about that we expect that to improve in the second half. The bad news is the MIS and Q1 principally related to a few items we did not properly budget for in Q1 that we knew about in Q4. They're recurring charges in nature and should have been included in the estimate. Specifically, they relate to some charges from our commands for PPV, our materials they purchased directly, some normal monthly charges from our logistics provider that we didn't properly reflect, and some inventory cleanup. We put some additional processes in place to improve the collaboration here between the groups, and we'll make sure that those costs are reflected in the results as well as the forecast. We don't anticipate this being an issue going forward.
spk12: Great. Thank you for that. And then just one follow up. You noted how you expect sales to be down in the second quarter due to the timing of shipments last year and lapping that. That back of the envelope math suggests that you expect sales to be up about 10 percent in the back half. Is our math correct? And then what would drive sales to be up so strong in the second half? Thank you.
spk08: Cody, ask that second part of the question again. I followed you on the first part. I didn't follow you on the second part.
spk12: Just if our math is correct, I would suggest that sales would be up 10% in the second half. And then what's just driving the hockey stick bounce in sales growth in the second half this upcoming year?
spk08: Yeah, so, well, I'm not sure whether you're asking me an inventory question or a question about the overall health of the business in the second year. Can you be clearer? So I make sure I answer your question.
spk12: Yeah, more so around the health of the business. All right.
spk08: So look, you know, we're really, if you just step back, you know, as we stand here four months into the year, we're really pleased about where we are. So year-to-date consumption has been strong. And as we've moved into kind of into December and early stages of kind of the new years, we're actually picking up some speed. So we feel really good about We feel really good about the progress of the business. I don't particularly like the economic environment right now, right? And as we've said in our prepared marks, we're cautiously optimistic about the prospects of growth kind of as we move through the Q2 and into the balance of the year. But the current economic environment facing consumers, I think, warrants a fair amount of caution as we move through the second half of the year. And we're going to come up against a little bit more challenging comparables, and particularly on Quest. But if you look at the dynamic of the environment, economic environment, you're seeing in food in general, category volume has slowed as prices have rised. Shopping, consumers are responding in how they shop, so their behaviors have shifted towards value. Retailers, pretty much across the store, you're seeing the growth of private label. volume you know in is on the rise and then we're at a point at least in our business and in this category where prices are the consumers are facing or they're at their historic high so you know why we like our business we like our business momentum the environments not the greatest environments unclear to me what the second half is going to look like it's a good are we going to see worsening conditions are the current conditions going to continue so you know we believe caution Like where we are from a business standpoint, like our business momentum, we think caution is warranted in the second half of the year. We'll be keeping a close eye on our consumer response as we move through the second quarter, and then we can give you an update on how we feel about that in the next quarter.
spk12: Great. Thank you. I'll pass it on.
spk08: All right. Have a good day.
spk12: Thanks, Cody.
spk01: Thank you. Our next question comes from the line of Alexia Howard with Bernstein. Please proceed with your question.
spk10: Good morning, everyone. Good morning. Hey, Alexia. Can I ask about the international business? I imagine it's a pretty small portion of the total, but you did talk about it being down 16%, and I think you said velocities have come off there. How big is that business? How long are the sales likely to be pressured like this? Just wondering what the outlook is there. Thank you.
spk08: Alexia, you're lucky because one of – One of Sean's prior responsibilities was running international, so you have somebody that's really familiar with the business.
spk02: Great. Thank you. Sure. It's about an $8 million business overall, international, and that is principally basically called down under, which is Australia and New Zealand overall. So if you break that decline down, I'd say about a third of that is exchange. So about a million dollars is kind of also core business overall. And of that, I think the majority of that business decline is the Atkins business. And they've had some issues overall with the pricing increases and trying to get the product on shelf down there as we kind of work through the challenges through that. I think it's a transitional thing. Talking to the folks down there, they feel like they're making good progress with the two big retailers. And with that, they should see that pop a little bit more towards the second half of the year.
spk08: But, Alexia, just higher level products, We have the number one and I think number two brands in the marketplace in Australia and New Zealand. So at two, they have been on a tear for the last few years. So double digit growth in their marketplaces as we bought Quest and moved that from a distributor market to a direct sale market. They've done a terrific job of building the business. So this has been, you know, the most recent performance has been a pause on what has been a pretty terrific multi-year run for that team.
spk10: Great, thank you. And as a quick follow-up, I know the first question was about this gap between consumer takeaway and your reported organic sales growth. As we look forward, do we expect that gap to close? And if so, how quickly? And I'll pass it on. Thank you.
spk08: Yeah, so good question. And let me see if I can simply explain kind of what the situation is, right? So in a typical year in this business, We build inventory, retailers build inventory in the first half of the year, and they deplete it in the second half of the year. On average, in an average year, that's about a week, maybe in some years, might be two weeks of inventory. Typically, it goes in in the first and second quarter. Typically, it comes out in the third and fourth quarter. By the time you get to the summer, you're back to kind of a steady state level, kind of normal level of inventory. Fiscal year 22 was not a normal year. In fact, it was highly abnormal given, and you have to understand context, right? So supply chains were disrupted. Customers were sending in orders, orders were getting cut. So there was a high degree of sensitivity from retailers not having the inventory they need. So they took a pretty aggressive inventory position. We're not unique in this, but they took a pretty aggressive inventory position on our business. And the way that played out is in the first half of the year three to four times the normal of inventory levels built in the first half of the year and then most of that came out in the second half and most of that within the fourth quarter so as we come up against those comparisons in particular in the second quarter we're not going to be repeating that inventory bill from last year so that shows up as a net sales far below net sales rate, far below consumption rate. What's really happening is we're not building the inventory that we then have to take out in the second half of the year. So what's going to happen in Q2, our guidance is to be slightly down versus prior year. What's going to happen is what doesn't happen in Q2 will then get reversed out in Q4 where we actually pull the fair amount of inventory out of retail in the fourth quarter. Does that help?
spk10: That helps a lot. Thank you so much for the explanation. I'll pass it on.
spk02: And Alexa, just one more comment on that whole thing. As you think about that reconciliation from POS down to sales, what you try to do, obviously there's a little bit, but I think the point I make is as you look to Q2, the only things that will be impacted there is pizza, which is about a point and a half, and then the inventory build or the non-build. So the inventory change overall are the only two things. So as you go forward, that will be the reconciling items.
spk10: Great. Thank you.
spk01: Thank you. Our next question comes from the line of Jason English with Goldman Sachs. Please proceed with your question.
spk09: Hey, good morning, folks. So scrubbing my prior year notes, I've got about a $25 million headwind for 2Q based on lapping that inventory accumulation at retail. Is that roughly right?
spk08: You keep good notes.
spk09: Okay, so that's about a little north of eight points of drag. You put on one and a half, you've got about a 10-point drag. So if sales down modestly, it seems to suggest that you're forecasting POS high singles, sort of maybe it's called a 7% to 10% range, which would be a decent decel from the 14 points that you're showing this past quarter. What would drive that decel? The aforementioned cautious optimism. Okay. And some of that caution to my ears was coming on the snack side of Quest, which is in part just sort of base effect. Can you size that a bit more for us? How large is that as a percentage of Quest sales? And specifically, zoom in a bit on chips, because in your prepared remarks, you sound a little bit more guarded on chips, where I think it's the one and only spot where you mentioned that elasticity was exceeding expectations.
spk08: I would say our optimism is not brand and form-based. It's just overall economy related. So, you know, we're in the process of throwing a pretty big New Year, New Year party. We want to make sure consumers show up, right? Nothing worse than having displays out, have a lot of customer programming, and the consumption not occur. Right. And we saw a little of that as you remember last year, Jason, that was clearly the case. We just didn't see the consumer offtake. So if you just step back and look at what's going on right now, consumers are not shopping in grocery stores. They're moving towards online and mass. They're making value choices. In our business, there's not private label alternative. So what happens is buy rate gets hit, right? So you don't see the buy rate. They pass on a consumption occasion. They maybe buy one less time. That's what we're concerned about. There's no one product, form, brand thing, one customer thing I'm worried about. I'm more worried about the overall economic environment. Now, You know, we feel pretty good as we move from November into December. POS started to pick up as we start reading. Merchandising that is in place right now feels pretty good, but, you know, we still got two-plus months to go. And, you know, we're going to be – until it happens, we're going to be cautious about it.
spk09: Okay. That makes sense. I'll pass it on, and I'll keep my eyes open for that invite to the party. Thank you.
spk02: Yeah, thank you. It's out there, Jason.
spk01: Thank you. Our next question comes from the line of John Baumgartner with Mizuho. Please proceed with your question.
spk07: Good morning. Thanks for the question. Hey, John. I wanted to ask about buyer growth at Atkins, Joe. As it is, the growth has been pretty strong. And I'm not sure if you can drill into how much of that is driven by your core demographic relative to non-core demographic. But as you build Atkins as a lifestyle brand, how do you think about either extending your existing consumers for longer or also raising the appeal to non-core buyers? Are there opportunities for more age-specific innovation or age-specific marketing, maybe appealing to older folks who become lapsed buyers over time? Can you creep down a bit to younger consumers? How do you think about building the next phase of growth at Atkins from a demographic perspective?
spk08: Thank you. Wow, great question. I wish we had an hour. What I would tell you is this. Look, the core demographic is, if you think about the positioning change on the brand, we moved from a core demographic of what we would call programmatic dieters, people looking to want to lose 15 pounds with an event in mind over a certain period of time. Our shift in that demographic moved from those folks to folks who on average, are worried about their health and their weight every day, right? Not looking to lose large amounts of weight, but looking to eat healthier and potentially look better, right? The math on that demographic was 4x the demographic. So we had about 8 million, 9 million programmatic diet or target to something around that 34, 35, 36 million kind of, we call them self-directed low-carbers, people that want to control carbs, right? Our progress against that has been pretty outstanding. So the program, when we started this, and this is relatively new data, when we started this, buyers of the brand at any one time that were that were actively using the program to lose weight was about 15% of our buyers. That is now down to single digits. So we, in large part, have shifted the mix of our brand to these lifestyle consumers, which then begs the question, how do you feel about buy rates since dieters probably comply more? Lifestyle consumers, new piece of data, lifestyle consumers from a buy rate standpoint buy at the same rate as the average for Atkins. So we're not seeing a tail off in consumer consumption based upon a move towards a more lifestyle consumer. So good news all around. The thing that I think you're asking is talk to us about Are you looking at different demographic groups? I'm assuming you mean age, ethnicity, and, frankly, we do a lot of that in our digital platform, right? So a lot of social digital marketing to those groups within. And we can handle that question for you offline in a little bit more detail. And, frankly, we get you in front of some of the marketing people to talk about some of those things. Great. Thanks, y'all. Appreciate it. Okay, have a good day.
spk02: Thanks, Joe.
spk01: Thank you. Our next question comes from the line of Pamela Kaufman with Morgan Stanley. Please proceed with your question.
spk05: Good morning, Pam.
spk00: Hi, good morning. I just had a follow-up question on gross margin. So given that gross margin fell short of your expectations in the quarter, but you still expect gross margin for the full year to be in line with your prior outlook, Can you talk about the cadence of the growth margins over the rest of the year? And what's improved in your expectations for growth margins for the back half of the year? What's changed there?
spk02: Yeah, I would say the commodity costs are probably the biggest piece of it, obviously. And we talked about what we think we're seeing in the dairy protein and how much we locked in already. So I think from a standpoint of commodities, that's in better shape than we have. You know, The way we look at this for the year, we see GM improving slightly in the second half of the year, as we said. However, I think if you take a step back on margin, we did have a 450 basis point decline in Q1. I would say the inflationary pressures that we had that led to our second price increase did not start impacting COGS until mid-Q2. So remember, in Q1 of last year, our GM was actually up 75 basis points. So as we look at the rest of the year, we expect gross margin to decline in Q2 and for the total year. And just to dimensionalize it a little bit, we expect the total year margin to decline over 100 basis points and the margin decline in Q2 to exceed that. So I don't know if that gives you more context and perspective.
spk00: Yeah, that's helpful. Thank you. And then I also just had a follow-up question to John's question on Atkins Performance. I guess in general, what do you believe is driving the divergence in performance between Atkins and Quest? Why do you think that the brands are seeing such different trends? And does it come back to the occasions and the demographics that they cater to? And what's working well for Quest? Could you apply any of those initiatives to Atkins?
spk08: Yeah, well, I'll say they're in different parts of their life cycle, quite frankly. So if you think about the investment thesis that we had in Buying Quest, our fundamental belief is strong brand, large consumer target, early stages of marketing, brand awareness, penetration, growth, moving from a specialty online brand to a more food, drug, mass brand brand. from a bar only brand to a bar and other snacking brand. And so as part of the combined organization, we've been able to accelerate all those initiatives, right? And so that's why you're seeing distribution growth on bars, because she's plugged and played that into the, what is essentially the Atkins food drug mass Salesforce, right? So distribution is growing great new product pipeline and snacking and salty snacks and chips. in confections, right? So strong, they've got accelerated, the brand has got acceleration just from our ability to execute strategies that were in place when they were a freestanding company. Atkins is further along in its development. So if you just take like the largest retailer, you know, take the largest retailer in the world, Atkins has on average, I think, 65 items in Walmart. I think at last count, Quest was in the 40s. So they're at a just different part in their life cycle from a brand standpoint. And I think the brand promise, this idea of fueling your ambitions and your day is a bigger brand promise than the weight management brand promise. So bigger target audience, more people that you can go after. bigger opportunity for household penetration. And we're still in the very early stages on Quest of mainstream communication via television ramping up the spend. Atkins is just in a different part in its life cycle. So I think that's accounting for kind of what's been driving Quest. On the Atkins side, it's a brand that is highly dependent upon buy rate. So if you look at the brand, on average, if you're a multi-year brand, buyer of the brand, you're a daily slash multiple times a week eater. So 100. If you're an average buyer, you're buying 100. If you're a heavier buyer, you're buying close to 200 servings in a year. So disruptions in snacking occasions disrupt the buy rate dynamic on Atkins. And that's what we saw through COVID, right? So You know, I expect us to be able to reemerge from that, get our buy rate back up on the brand. Today it's growing at kind of the low end of our algorithm. We expect better from the brand, and there's some things that we need to address to get the buy rate back now that we're kind of seemingly out of the not-at-work cycle. pandemic point of time, there's some things that we need to clean up in the brand from an execution standpoint to get the buy rate going and do better than where we are today.
spk00: Thanks. That's very helpful.
spk08: Yeah. Have a good day.
spk01: Thank you. Our next question comes in line of Brian Holland with Cowan & Company. Please proceed with your question.
spk06: Yeah, thanks. Good morning. You've made reference to Q2 in-store merchandising and programming in a really good spot here. I know that you addressed last quarter some tactical issues with respect to Atkins. you know, losing some distribution on the bars, making ways for chips and cookies, talking about needing to fix that. Can you just update us on where you sort of stand in resetting the Atkins brand on shelf into spring?
spk08: Early stages, Brian, it'll play out over the next six plus months. So spring resets going into the summer, resets that occur towards the end of the summer. We would expect most of the solutions that we've developed to in the last four or five months will be fully implemented kind of by the end of summer. I would expect – look, again, we're not – we're at the low end of our algorithm, so we don't have a business in free fall. We've got a business that's growing 4%, right? So we – and we're not happy at 4%. We want the business to be better, right? And there's some executional things that – We could have done better, right? So we lost distribution on snack bars last spring. We've got to fix that. That's an innovation pipeline thing. So we have the innovation coming. It will start getting executed as we move through the second half of the year. On confections, we had a launch of dessert bars on confections that haven't repeated like we expected it to do. So, again, innovation fix. You need a pipeline of products to replace those things. Those things take a little bit of time, but if I just step back, the buy rate declines that are occurring from those things are starting to be nicely offset by growth in shakes and meal bars, which is those are starting to come back because the innovation is there, but also as people have gone back to work, they tend to be more meal replacement and therefore more ideal for people going back to work. So we're starting to see the business change. tempo pick up on those forms, offsetting most of the declines that we're seeing in buy rate from the other two snacking product lines.
spk06: Appreciate the color there. And then I wanted to ask about, you know, within the Atkins brand, the bifurcation between channels. Clearly on whole, it looks like new buyer growth did increase in Q1. So I guess that would, I presume that's overweighted towards the e-commerce channel. So I'm just, I guess maybe two points on this one. So clearly this isn't about consumers who were buying in one channel are now buying in another. It seems like you were picking up new consumers in the e-commerce channel. So what are you learning about the composition of that consumer in that channel towards the Atkins brand? And how strategically do you think about the placement of the Atkins brand going forward as a result of this ongoing momentum in e-commerce?
spk08: Yeah, so interestingly enough, most new buyers come into Atkins in brick and mortar. And even though the business has been flattish in the quarter, we still saw strong new buyer growth, which then points to the executional issues around buy rate on snack bars and confections. So we're going to try to get that fixed. The growth on Amazon drives buy rate, believe it or not. And in general, most shoppers tend to be multi-channel. So they're brick and mortar shoppers who go over into e-commerce and Amazon and buy more. So we're very, very targeted about how we think about that. And within those shoppers that are multi-channel over in Amazon, there are a handful of people that drive a lot of that volume. So we're very targeted in our marketing approach over there. encouraging purchases of that consumer group that's very valuable to us. And when we do it right, we don't cannibalize brick and mortar at all. So I would tell you we have a really good team there from a marketing science standpoint. They're relatively sophisticated. We know what we're doing in that channel, and we're seeing nice impact of our business. And, frankly, I just want to point out that's a – That's a benefit of having bought Quest. Quest is the number one bar on Amazon. We have a strong relationship with Amazon because of that relationship. We've learned a lot about how to market on that channel. We're applying those learnings to the Atkins business. You see Atkins is sitting online at around 13% of sales, and Quest is around 24%. So we have a lot of opportunity as we get smarter about how to market Atkins online. Great. Thanks. I'll leave it there. Best of luck.
spk06: All right.
spk08: Thank you.
spk01: Thank you. Our next question comes from the line of Rob Dickerson with Jefferies. Please proceed with your question.
spk03: Great. Thanks so much. Just a kind of broader question, longer-term margin potential. You know, I mean, obviously, I understand the drivers and kind of why the gross margins pulled in. EBITDA margins obviously held in a little bit just kind of given the flat issue of your SG&A. Yeah, as you speak to kind of back half of the year gross margin, you know, potentially, you know, up slightly year over year given benefits to ingredient cost. Yeah, realize you're not speaking to 24 coming out of Q123. But again, just to kind of reiterate the thing I've heard you say before, you know, kind of that path to get back to, let's say, you know, the 40% gross margin. I just want to clarify that that is you know, really contingent, I guess, on, you know, ongoing demand, but now you have the pricing, and those ingredient costs come down, you know, are there specific needs you foresee and potential increased promotional spend or trade or what have you, you know, that would prevent you from getting back to that kind of 40% range? Or no, it's essentially, hey, if ingredient costs come down, we have some pricing and the demand's okay, then yeah, I mean, the expectation is we get back to 40%.
spk08: Yeah, the latter. So, Rob, look, going into this year, we had to make a choice based upon what we believed about what would happen in the future, right? So, the first thing is, I have been, and we have been very concerned about the economic environment that consumers are facing. You know, I don't think we've declared a recession. There are a lot of recessionary factors that are out there that consumers are clearly starting to react to and have been reacting to. So when we were seeing the cost inflation coming towards us as we moved into 23, we made a choice to try to balance our margin desires with not cooling demand, unit demand off too much. So as opposed to pricing to get back to total gross margins, we priced to cover the dollar cost of ingredients and packaging inflation. And with a fundamental belief that we could do better from a consumer recruitment standpoint, not cool off our volumes, keep our velocities on the shelf better. So we made that trade-off under a fundamental belief that ingredients and packaging wouldn't stay at these historic highs for a sustained period of time. So that's our belief. And the good news is we're starting to see, you can see it in the spot markets, we're starting to see in some of the negotiations that we're having in the second half of the year, we're starting to see those ingredients come off those highs. We would expect that to continue to play out over time. Do I anticipate that we will have to spend it back? What I would tell you is we're always, as margins get back to 40%, our ideal shape of our P&Ls, 40% gross margin, 10% spending and marketing support, 20% EBITDA margin. Ultimately, that's where we want to be. So we're going to be making investments back with that profile as we get back to 40% gross margin. We want to get back to that profile marketing spending where it needs to be, the A margin where it needs to be. Yeah, okay, makes sense.
spk03: And then just quickly, you know, look, when you came out of the de-spacking and, you know, we repackaged, innovated on the Atkins brand, there was also this fairly material impact, which I would argue was Rob Lowe. Rob Lowe has been around now for some time. I'm just curious, with your state-of-the-art sophisticated marketing platform, as we think about 23, I'm hearing shelf positioning, there's some fixes, have to manage some channel shifts, but is there anything else in there to maybe give Atkins just a little bit more of a splash? I don't know if it's another commercial or another you know, kind of brand ambassador or what have you, just kind of anything in how you're thinking about, you know, how to push the brand a little bit more versus, you know, trying to pull the consumer maybe with some other fixes.
spk08: Well, look, I think it's a good question, Rob. It's a question we ask ourselves all the time. We're always looking at those things, right? If I look at the fundamentals of the business and the kind of the facts of the business, I don't have a recruitment problem. Rob tests as strong now as he did when we first signed him. Our ability to attract consumers to the brand has been strong. If that changes, then you've got to start rethinking, kind of, do you have the right consumer pull to attract consumers? Our issue has been buy rate. It's been buy rate all through COVID. It's buy rate now due to executional issues. We're kind of focused on that. Because if we know we get the product portfolio right... that we can get buy rate back to historic levels and the business will go from where it is today at 4% to better than 4% over time. So that's what we're focused on. But to answer your question, we're always asking ourselves that. We just re-signed Rob. We just shot new commercials that are going on air as we speak. He still has... He still has... really good appeal, both demographically as well as the people that we're talking, you know, the benefits that we're talking about. So hard to replace him as kind of the figurehead celebrity. Now, we do a lot of things digitally with ambassadors to kind of target kind of micro segments within the brand. But I don't, you know, right now, all the data would suggest You keep firing on all cylinders with him, fix some of the executional issues, and your business goes from 4% growth to something much better.
spk03: Got it. Fair enough. Thanks, Joe. Yeah. Have a good day, Rob.
spk01: Thank you. Ladies and gentlemen, we've come to the end of our time allowed for questions. I'll turn the floor back to Mr. Scalzo for final comments.
spk08: Thanks again for all your participation today on today's call. We hope you continue to remain safe and look forward to updating you on our second quarter results in April. Everyone have a good day. Thank you. Thank you.
spk01: Thank you. This concludes today's conference call. You may disconnect your lines at this time. Thank you for your participation.
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