Simply Good Foods Co (SMPL) 2022 Q3 法說會逐字稿

Greetings, and welcome to The Simply Good Foods Company Fiscal Third Quarter 2022 Earnings Conference Call. (Operator Instructions) As a reminder, this conference is being recorded.

It's now my pleasure to turn the call over to Mark Pogharian, Vice President, Investor Relations. Mark, please go ahead.

Thank you, operator. Good morning. I am pleased to welcome you to The Simply Good Foods Company earnings call for the third quarter ended May 28, 2022. Joe Scalzo, President and Chief Executive Officer; and Todd Cunfer, 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 7:00 a.m. Eastern Time. A copy of the release and accompanying presentation are available under the Investors section of the company's website at www.thesimplygoodfoodscompany.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 risks and uncertainties can be found in today's press release and in 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 for investors. Due to the company's asset-light strong cash flow business model, we evaluate our performance on an adjusted basis as it relates to EBITDA and diluted EPS.

Additionally, year-to-date fiscal 2022 adjusted results exclude the mark-to-market effect of the treatment of the company's private warrants prior to those warrants being fully exercised in January 2022. We have included a detailed reconciliation from GAAP to adjusted item 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 a reconciliation of the non-GAAP financial measures to the most comparable measures prepared in accordance with GAAP.

With that, I'll now turn the call over to Joe Scalzo, President and Chief Executive Officer.

Thank you, Mark. Good morning, and thank you for joining us. Today, I'll recap our third quarter results and then provide you with some perspective on the performance of our brands, then I'll turn the call over to Todd, who will discuss our financial results in a bit more detail before we wrap it up with a discussion of our outlook and answer your questions.

In the third quarter, we delivered solid net sales and earnings that were slightly greater than our expectations due to better-than-anticipated retail takeaway and higher customer inventory that was not drawn down as expected during the quarter. Net sales increased 11.5%, including the previously discussed effects of the European exit and Quest frozen pizza licensing agreement. As expected, net price realization was a high single-digit percentage point contribution to net sales growth. Due to the price increase we implemented in the first quarter of fiscal 2022 and elasticity was relatively in line with our estimates.

Third quarter net sales growth in North America, excluding the impact of the frozen pizza licensing transaction was about 15%, in line with combined measured and unmeasured channel retail takeaway. As expected, gross margin of 37.5% was in line with estimates and sequentially improved versus Q2 gross margin of 36.6%. The 510 basis point decline versus year ago period was due to higher supply chain costs, partially offset by pricing.

Of note, in the year ago period, gross margin of 42.6% was the highest since we acquired Quest. We have good visibility into our cost structure for the remainder of fiscal 2022, and there is no change to our gross margin outlook. We expect fiscal year 2022 gross margins declined about 250 basis points versus the previous fiscal year. Customer service was solid during the quarter as our supply chain team performed well in a very challenging environment.

As expected, adjusted EBITDA in the third quarter was $63.3 million versus the year ago period of $67.5 million due to the aforementioned gross margin decline. We executed well against our priorities in the quarter and remain committed to do the right things for our brands, customers and consumers. We're confident in the strength of our business and the diversification of our portfolio across forms, customers and retail channels that provide us with multiple ways to win in the marketplace and deliver shareholder value.

Simply Good Foods retail takeaway in measured channels increased 14.4%. And as has been the case throughout the pandemic, both our brands have outperformed their respective subsegments of weight management and active nutrition. In Q3, the weight management segment declined 4.7%. Atkins outperformed the segment with retail takeaway up 3.4% over the same time frame. Importantly, Atkins performance in unmeasured channels is outpacing measured more on this in a bit.

Total Quest retail takeaway in measured channels in Q3 increased 30.6% and outpaced the Active Nutrition segment growth of 18.9%. We estimate U.S. retail takeaway in unmeasured channels, primarily the e-commerce and specialty channels increased about 15% versus last year. As expected, e-commerce growth was more than offset by declines in the specialty channel.

Atkins Q3 U.S. retail takeaway in the IRI MULO + C-store universe increased 3.4%. Shopper trips tended lower in the quarter and was most likely a headwind to overall brand growth in measured channels. Atkins Q3 retail takeaway in Amazon increased 39% driven by strong growth in shakes. We estimate total unmeasured channel retail takeaway increased about 22% and is approximately 12% of total Atkins retail sales.

Given the strong growth at Amazon, Atkins Q3 retail takeaway and the combined measured and unmeasured channel was up about 6% versus prior year as fewer shopper trips in brick-and-mortar were offset by strong e-commerce growth. Atkins growth in total buyers in the quarter remained strong, up double digits on a percentage basis versus the year ago period. However, buy rate remains mid-single digits below historic levels and going forward remains an opportunity for the brand.

Atkins third quarter measured channel retail takeaway for our core bar and shake business increased 3.5%, driven by solid shakes growth of 14.1%, partially offset by a decline in bars of 4.2%. Of note, bar consumption has been impacted by fewer at-work consumption occasions as well as high substitution with Atkins shakes. Atkins Q3 measured channel retail takeaway of other forms. This includes confections, cookies and chips, increased 3.2%. Growth was driven by cookies that continue to do well and contributed about 2.7 points to total Atkins brand measured channel retail takeaway growth.

We are excited by the potential of our recently launched protein chips, however, performance is too early to read with distribution in early stages of building. Confections POS was off 8.1% in the quarter as we lapped last year's strong performance related to our dessert bars launch and lower consumer interest in keto confections. Atkins all other snacks, confections, cookies and chips [are] about 30% of total Atkins measured channel retail sales. We have a solid pipeline of innovation for the brand that we believe will enable us to provide consumers with new products, a variety of news to drive growth.

Let me now turn to Quest, where third quarter retail takeaway increased 30.6% in the measured IRI MULO + C-store universe and outpaced the Active Nutrition segment. Growth versus the year ago period was driven by increases in household penetration, strong consumption across all major forms and success in new products. Quest's core bar business in the quarter, measured channel retail takeaway increased 14.1%, with solid growth across all major channels.

The snackier portion of Quest products that's cookies confections and chips continue to do well with third quarter measured channel retail takeaway up 65%. Growth was strong across all forms and was driven by increasing household penetration of these forms, distribution gains and marketing investments to drive growth. We have a solid pipeline of innovation and expect that snacks slightly greater than 40% of the total Quest measured channel retail sales will continue to generate solid growth over the next year and long term.

We had another solid quarter of performance across to all key retail channels with growth that similar across all major classes of trade. Quest third quarter retail takeaway at Amazon increased 23%. As expected, e-commerce growth more than offset declines in the specialty channel, resulting in total third quarter unmeasured retail takeaway of about 12%. We estimate unmeasured channels are about 25% of total Quest retail sales. In summary, we're pleased with our third quarter results that were better than we expected.

Consistent with our previous estimate, we anticipate low double-digit retail takeaway in the second half of the year with fourth quarter retail takeaway estimated in the high single digits on a percentage basis versus last year. We entered the fourth quarter with slightly higher customer inventory levels as we shipped ahead of consumption for the fiscal year-to-date period. Therefore, in the fourth quarter, we expect retail takeaway growth to be better than net sales performance as customers adjust inventory to more normal fiscal year-end levels.

We have good visibility into our cost structure and our costs are largely covered for the balance of the year. Therefore, there is no change to our fiscal 2022 supply chain cost inflation and gross margin outlook. Implementation of the price increase announced this April is primarily a benefit in fiscal 2023 and is progressing as planned. We're executing against our plans, and we believe we're in a position to deliver another year of solid net sales and adjusted EBITDA growth as a path to increasing shareholder value.

With that, I'll now turn the call over to Todd, who provide you with some greater financial details.

Thank you, Joe, and good morning, everyone. I will begin with a review of our net sales. Total Simply Good Foods third quarter net sales increased 11.5% to $316.5 million due to solid retail takeaway in the quarter. North America net sales increased 12.9%, driven by pricing a high single-digit percentage point benefit to net sales growth. The March agreement to license the Quest frozen pizza business to Bellisio Foods was a 1.8 percentage point headwind to North America net sales growth. As expected, the international business declined 25.1% due to the Europe business exit. Core international net sales growth was 8.1%. The combined Europe business exit and Quest frozen pizza business licensing transaction was a 2.9 percentage point impact of total company net sales growth.

Moving on to other P&L items. Gross profit was $118.6 million, a decline of $2.4 million versus the year ago period. Gross margin was 37.5%, a decrease of 510 basis points versus last year and was in line with our estimates. Supply chain cost inflation in the third quarter of fiscal 2022 was partially offset by the previously discussed price increase implemented at retail in the first quarter of fiscal 2022. Net income in Q3 was $38.8 million versus $5.9 million in the year ago period. Adjusted EBITDA was $63.3 million versus $67.5 million in the year ago period.

Selling and marketing expense increased 4.9% to $32.3 million, driven by higher brand-building initiatives on both brands. Note that we now expect marketing expense for the full year fiscal 2022 to increase high single digits on a percentage basis versus last year versus our previous outlook for a mid- to high single-digit increase. G&A expense, excluding integration and restructuring expenses as well as stock-based compensation increased 2.2% to $23.6 million. Lower costs related to the European business exit was offset by higher corporate expense.

Moving to other items in the P&L. Interest expense declined $3.1 million to $4.9 million due to the repricing in the second quarter and pay down of the term loan. Our effective tax rate in Q3 was about 23%, slightly lower compared to 27% in the year ago period due to timing of equity compensation. Year-to-date results are as follows: Net sales increased 19.9% to $894.5 million. Gross profit was $343.7 million, an increase of 12.6%. Gross margin of 38.4% declined 250 basis points versus the year ago period. Adjusted EBITDA increased 15.3% to $183.1 million due to the higher gross profit and G&A leverage. Selling and marketing expenses increased 15.4% to $94.8 million. The increase was driven by higher marketing investments. G&A expenses increased 3.1% or $2.0 million. This excludes charges of $9.3 million related to integration costs, restructuring expenses, stock-based compensation and other expense.

Moving to other items in the P&L. Interest expense declined $7.8 million to $16.5 million due to the repricing and the pay down of the term loan. The year-to-date non-cash charge related to our remeasurement of our private warrant liabilities was $30.1 million versus $60.7 million in the year ago period. Our year-to-date effective tax rate, excluding the charge related to the warrant liability was about 24%. We anticipate the full year fiscal 2022 tax rate to be in the 25% to 26% range. Net income was $78.4 million versus $22.6 million in the year ago period. The increase of $55.8 million is largely due to the remeasurement of the private warrant liabilities.

Turning to EPS. Third quarter reported EPS was $0.38 per share diluted compared to $0.06 per share diluted for the comparable period of 2021. In fiscal Q3 2022, depreciation and amortization expense was $4.8 million and similar to the year ago period. Stock-based compensation of $3 million increased to $0.8 million versus last year and costs associated with Quest integration were $0.2 million. Adjusted diluted EPS, which excludes these items, was $0.44, an increase of $0.01 versus the year ago period. Note that we calculate adjusted diluted EPS as adjusted EBITDA less interest income, interest expense and income taxes. Year-to-date reported EPS was $0.78, and adjusted diluted EPS was $1.23. 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. Year-to-date net cash provided by operating activities was $67.4 million. This is affected by the timing of tax payments for the full fiscal year in addition to our decision to carry higher levels of inventory to facilitate better customer service levels. As of May 28, 2022, the company had cash of $56.7 million. In Q3, the company repaid $25 million of its term loan. And at the end of the quarter, the outstanding principal balance was $406.5 million, and the trailing 12-month net debt to adjusted EBITDA ratio was 1.5x.

During the third quarter, the company repurchased $8.1 million of its common stock at an average cost of $37.16 per share. And on April 13 this year, the Board of Directors approved a $50 million increase to the existing stock repurchase program. As of May 28, 2022, approximately $69.3 million remained available under the stock repurchase authorization. We anticipate GAAP interest expense to be around $22 million for the full fiscal year, including non-cash amortization expense related to the deferred financing fees. Capital expenditures in the third quarter and year-to-date were 0.4 and $4.7 million, respectively. Full year CapEx is expected to be about $6 million.

I'd now like to turn the call back to Joe for closing remarks.

Thanks, Todd. Our solid year-to-date results position us well to deliver against our full year targets. Looking at the key metrics of our full year fiscal 2022 outlook, we expect net sales to increase 14% to 15% versus last year, including a 2 percentage point headwind related to the European business exit and the licensing of the Quest frozen pizza business. Our previous guidance for net sales growth of 13% to 15%. There is no change to our gross margin outlook.

As we stated earlier, we expect gross margin to decline about 250 basis points versus last year. Adjusted EBITDA is expected to increase slightly less than the net sales growth rate. Marketing is expected to increase high single digits on a percentage basis compared to last year versus our previous outlook for mid- to high single-digit increase. Additionally, we anticipate significant G&A leverage. And the decline in interest expense should result in adjusted diluted EPS growing faster than adjusted EBITDA.

We're excited about the growth opportunities that exist within our business and our category. Atkins and Quest provides us with 2 uniquely positioned brands that are aligned around the consumer megatrends of wellness, snacking, convenience and meal replacement. And consumer feedback indicates that these megatrends will become increasingly more relevant as consumers return to more normal post-pandemic routines.

We're executing against our strategies and increasing household penetration that should continue to drive short- and long-term sales and earnings growth. Our strong balance sheet and cash flow generation enable us to invest in our business, evaluate M&A opportunities and to buy back shares of our stock as a path to increasing shareholder value. We appreciate everyone's interest in our company, and now we're available to take your questions. Operator?

(Operator Instructions) Our first question today is coming from Chris Growe from Stifel.

I just had a quick question, if I could, for you in relation to the inventory levels. And obviously, this quarter did not show much of a change in the reduction in inventory at retail. I guess my question, Joe, just be around your ability to control that. I mean, at the end of the day, you've got retailers have taken higher levels overall. Can -- is this a matter of discussions, kind of negotiations with the retailers? To what degree can you sort of influence that, if you will, here in the fourth quarter?

Yes. Maybe a little bit of background will be helpful, Chris, to understand kind of how the category and our business behaves on a typical year. We typically see a first half inventory build timed around seasonal programming at retail. So -- and the amount can vary, but it's been historically pretty consistent that we add inventory leading up to the kind of January, February, March merchandising. And then almost immediately after that, we see that inventory start to burn off such that by the time we get to the summer, it's typically back to pretty normal levels of inventory.

So nothing that we really have to do other than service customers in the buildup in support for the programming. So it's a normal cycle that we see in our business. We saw the inventory build mostly in Q2 of this year. We would have expected it to start coming out in Q3 that didn't happen. We're starting to see it now in June, and we're pretty confident it will behave pretty similar than it has historically. And my guess will be we'll see it all out and we'll return to more normal inventory by the end of the summer.

Yes. I would just add on, Chris, just to give a perspective as well. I mean we typically have 4 to 5 weeks of inventory on average with retailers. We're now at 5% to 6%. So we're not talking large amounts of incremental inventory. We're talking about a week. So as Joe said, we're starting to see it come out. There's no guarantees. It's going to get out by the end of the year, but we're pretty confident we'll manage through it.

Just a second question or a follow-up in relation to the incremental or increase in marketing you expect now for the year. I guess the simple question of you, where are you focusing those investments? So I've been impressed by the number of Atkins users you've added, but a little bit of a lower buy rate in this environment. Can the marketing change that consumer behavior? Is that where you're focusing the dollars or where are the dollars kind of going as you look at these incremental investments? I'm finished there.

Yes. Going to both brands based upon return, and I think you hit on the right issue. We're constantly focused on is marketing, driving new consumers to our brands, and that has been a pretty positive story for us this year and throughout COVID. We've seen strong consumer interest as we build awareness, consideration and trial. We felt particularly good about our ability to recruit buyers to our brand. And that's why we're leaning in as we move through the fourth quarter.

Your next question is coming from Jason English from Goldman Sachs.

Joe, your comments on the Endulge business, the Confection business and consumers being perhaps less engaged with less interested in keto confection. That is -- and combine what we're seeing in retail. So it looks a little concerning because we're seeing both your confection business suffer some pretty sizable volume declines [in] your bars business. Is it possible that we're on the front end of a new diet cycle? Like is keto fading?

Jason, let me step back first. If I look at the Atkins, it's helpful to have it in total perspective as opposed to zoom into one piece of the business. We've been pretty successful over the last 18 months and growing new buyers on Atkins. So the interest in the category, which I would broadly characterize as better-for-you snacking for people who care about weight on our brand has been particularly good. And we've outperformed the category on a consistent basis. Now when you dig into we're growing buyers, but buy rate is not at historic levels. There have been kind of 2 drivers to that. The first, as you mentioned it already. Our bar is there's fewer snacking occasions because people are less at work than they were pre-COVID. And so our bar business has been the most impacted by that. The second has been and this has been a more recent phenomenon, call it since September, October, our confection business has slowed and the buy rate has slowed on our confection business. And we can see 2 drivers of that.

The first driver is -- and it's probably the more important. We had a very successful dessert bar confection launch a year ago. We're anniversarying those numbers. And we drove a lot of customer programming, a lot of communication around that. And we're on the downside of that, obviously comping those numbers. The second is we know all throughout COVID, and then even a little bit before, confections were benefiting from the interest in keto. And if you look at some of the competitive keto launches, they are all typically confection like products. Keto interest is off by half right now.

Obviously, we're seeing some impact on our confection business from that declining interest. And obviously, that will be something that will burn off over time. Do I think it's a long-term trend on the business? No, I don't. If we were seeing declining interest in the brand, we would see a fall-off in buyers, and we're not seeing that. In fact, we're seeing double-digit growth in buyers. And we'll burn through -- I'm pretty confident we'll burn through the buy rate issues of bars and confections over time and get back to a more normal consumption behaviors.

Your next question today is coming from Ben Bienvenu from Stephens.

Yes. This is Jack Hardin filling in for Ben Bienvenu. One quick question here. What does your product innovation pipeline currently look like?

Well, we don't -- Jack, we typically don't talk a little -- much about what could happen in our business. We'd like to talk about what's happened. I would say we have a robust new product pipeline. We feel pretty confident. If you look at our most recent history, a lot of our innovation is focused on other snacking farms. So we look at our business and we see bars and shakes as a core. On the Atkins business, we have a strong bar and shake business on the Quest business. We have a very strong bar business. That's our core. We always innovate in that because we have to provide consumers news and variety. Our focus on innovation beyond that has been in other forms. So very strong [salty snack with tortilla chips]. We have a very strong confection business on both brands, and we're building a cookie business on both brands over time. You would expect our pipeline to continue to explore those opportunities as we go farther and also look at other snacking forms to drive more purchase occasions.

Your next question is coming from Alexia Howard from Bernstein.

Can I ask about the gross margin trend from here? It looks as though this might have been the low point with the sort of big decline in the adjusted gross margin. Given your guidance for the full year and the fact that it's been down 250 basis points year-to-date, it looks that there's a sequential improvement next quarter. Is that because more pricing is kicking in? Is that because the cost situation is getting easier? Is it operating -- probably isn't operating leverage because the sales are slowing down next quarter. So I'm just curious about what's driving that? And if we are at an inflection point?

Sure. So a couple of factors. So number one, last year's gross margin was very, very high. It was the highest we've had since the acquisition of Quest. Just kind of everything hit last year. We had favorable mix. We got bars back in. And most importantly, we didn't -- Q3 was really the last quarter that we didn't see a big increase and start to see the increase in commodities. So we were covered through Q3 of last year. Q4 of last year is when we started to see input prices accelerate. So Q3 was a high threshold. And as you move into this year, yes, we had some pricing, but we are lapping a very high gross margin, significant increase in input cost ingredient cost. Ingredient costs year-over-year for the quarter were actually up over 20% total supply chain costs kind of more in the mid-teens, but significant year-over-year impact just based on timing of last year. So that's the big driver. And yes, this will be the low point from a year-over-year change sequentially. We will be -- the actual gross margin will be higher in Q4. And year-over-year, the guidance kind of implies we're about down 200 basis points in Q4.

And then as a follow-up, can you give us any color on the ingredient cost breakdown. We know that dairy is important for you. But these are big numbers that we're talking about 20% this time around. What is it that's going up so much? Is it mainly dairy? Are there other ingredients that you're exposed to? Is it on the sweetener side as well?

Yes, it's mostly dairy protein complex. So it's our proteins, whether it's way any dairy products story. We're seeing significant price increases over the last 12, 18 months on all proteins. So that, by far, is the largest driver.

Yes. Alexia, this is Joe. We don't sell sweetener at all. We're anti-sweetener, remember. So we're low carb, low sugar. So it's -- we have proteins, coatings and fibers are our main ingredients, and they're all up.

Next question today is coming from John Baumgartner from Mizuho Securities.

Maybe first off for Joe, coming back to cookies, I mean, you've lapped 1 year in market, and I'd appreciate your thoughts regarding next steps here. I guess, top of mind for me is ACV seems to be leveling off around 50%. How do we think about the manufacturing capacity available to grow the business going forward, new shelf sets? And I guess, competitively, how are you seeing consumers engage with Atkins relative to some of the other low-sugar, sugar free products in that category?

Yes. So let me kind of unpack your questions. First of all, I think we're still in really early stages when it comes to cookies. So you mentioned -- I think you were referring to Quest. Quest is probably 3 years into its cookie launch. So conventional cookies were launched. Protein cookies were launched about 3 years ago. We're continuing to build distribution on those. We have frosted cookies that we just launched were, I think, in the 40s percent ACV on those and still building, and those have so far have performed really well in store, and Atkins just launched its cookie. So I would say we're kind of in early innings on cookies with Quest about 3 years old, but innovating on that platform. And look, I'm pretty optimistic about the format.

I think there's a lot of innovation opportunities in that space in both the type of cookies, flavor, sizes, textures. So I think you should expect us to continue to innovate there. And we're not going to stop distribution pushes until we start getting top items near 70% ACV at retail. So we're pretty bullish. And it's a very -- the reason we're excited about it. It's an incremental consumption occasion to our core bar business and shake business. So you pick up more -- the way to think about it is you can bring more people in from it, but you also can get buy rate because people will eat these at different occasions. So we're pretty bullish about the segment, and we're bullish about our pipeline of products that's coming. So we like it.

And then just more broadly to follow-up on the phasing of the merchandising and marketing this fiscal year. It sounds as though the ROI is pretty solid. You're pleased with consumer engagement and buyers based on Chris' question. But taking that further, might there be an argument to be made the promo window, the larger investments in quality promo, should that extend later into the fiscal year as a normalized approach going forward? I mean what's been the feedback from retailers as they're thinking about seasonal merchandise and for these categories? Does it make sense to spend that out more regularly?

We're already in -- it's a great question. Historically, and I'm going to go back 7, 8 years. Historically, the mindset of our business in the category is if you kind of win January, February, March kind of resolution season, you win the year. And we challenged that conventional wisdom a long time ago and said, we actually think that the seasonality of the business is more skewed by how manufacturers invest their marketing dollars, and we started spreading our marketing dollars out, both media as well as customer programming. So we have major programming now, January, March, May and September. And our spending from a programming standpoint is more balanced than it's ever been before, and we've seen our business become less seasonal because of it.

From a media investment standpoint, we're big believers in as best as you can year-round spending. So as opposed to trying to own January and March, we like to be on air as long as we can be on air with decent levels of support. And that has proven out in our business. Our business -- both of our businesses are less seasonally dependent than they've ever been before. So -- and that's all been driven by good returns, right? So if you think about it, if you're trying to win January and March, you spend all your money in January and March, the next incremental dollar gives you a less return because everybody else is spending their money in that period of time, and you've got too much investment and you lose your efficiency.

As you start spreading that out, your returns in other parts of the year are better. And so we're always driving it based on what we can see from an ROI standpoint. And that has told us weeks on air is the key metric at some decent level of weight, and that's the way we've been allocating our spending over for a number of years now based on the math that we see from a marketing science standpoint. Does that answer your question?

Yes, absolutely. Very detailed.

Your next question is coming from Cody Ross from UBS.

In the Nielsen scanner data, we can see the price you implemented on a 4-week basis. However, volume decelerated, largely driven by outright declines in the last 2 weeks. Can you discuss the underlying demand that you're seeing right now? And then more broadly discuss your outlook for elasticity of the brands?

Yes. So we took on average, call it, 7% to 8% pricing. We estimated there would be a one-to-one relationship with volume. That's about what's happened. So if your business was growing 7% on a dollar basis, volume would be flat and it would all be pricing driven. On Atkins, we're seeing -- so you're looking at POS, can measure channels, you're seeing, call it, 5% growth. So volumes are down about 2% and the balance is pricing, and that's what we would have predicted. So nothing unusual on from an elasticity standpoint, the pricing is coming through as we would have expected and the volume impact is what we would have expected.

Yes. I would just follow on to your point, POS and brick-and-mortar has lightened up a little bit, particularly on Atkins, I would say it's kind of two-fold. One is we're just getting the category and we are just getting back to more normalized growth rates in total. Obviously, it was accelerated as we kind of lapped the COVID time period. So we're kind of getting back to where kind of more of a sustainable growth rate. Atkins, we've seen tremendous growth. As shopping trips with the impending consumer issues right now, shopper trips are actually down a little bit. They're starting to lag. We're seeing a big shift, particularly on Atkins to e-commerce. So you heard in Joe's comments, our e-commerce business, particularly on Amazon with Atkins, it has grown significantly over the last couple of months, and we're seeing that continue. So we're seeing some volume shift from brick-and-mortar to online in total that's we're happy with, with the performance. But yes, the work between shopper trips and kind of a little bit of a channel shift, there is a bit of an impact.

And if I can sneak one more in here. There's been a lot of discussion about Quest ability to effectively compete in the snacks category, and I'll lump in Atkins with that, too, without cannibalizing your existing business. We have many examples of brands failed attempt to jump into adjacent categories. What is different about your strategy with Quest and Atkins that will make you successful in Snacks? And what are some investors missing?

Yes. Well, I'd say, first of all, the track record is pretty good evidence that we can be successful in multiple forms. So if you look at the Atkins business, about 20% to 25% of it's in confections already. So core business of bar and shake. We have a really strong confection business already. We ran that playbook on Quest with confections, peanut butter cups, clusters, and it's already a pretty strong business. Quest was even before our acquisition, well down the path on chips, which has become for Quest a close to $200 million retail business already. So I'd say that, that conventional wisdom around ability to innovate, I think, is proven to be incorrect on these businesses. And I think part of it is these are lifestyle brands. They stand for something other than just the product that they market. And so therefore, in the case of Atkins, it's a nutritional philosophy in the case of Quest, very similar active lifestyle with a kind of macro nutrient philosophy around it to fuel their lifestyle. So that -- those promises enable more than just a single product.

And so as long as you're true to those promises, I think you have the ability to innovate. Now I would say there's a few executional differences that we believe in. We believe in the strength of the brand and a brand block in the store and owning the aisle that we're in. So you're not going to see us, for the most part, playing in other people's parts of the store. I think that is difficult to pull off. Because you don't have scale, you're not a major player in the aisle. There are people that are and you have difficulty controlling your brand and those other sections of the store.

So I would probably put into an addendum on your belief around innovation in other categories. And the addendum would be if you start spreading yourself too thin around the different parts of the store, you could run into issues. And I do believe that is the case. So not surprising, our meal bowl business on Atkins, our pizza business on Quest, we've licensed those products out. We didn't believe we had a competitive advantage in those aisles, and we put those brands in the hands of people that do, and we stay focused on our own aisle and continue to focus on having strong brand blocks where we exist.

And then I would just say, third, I think the brand promises -- the products are really unique and outstanding. If you take a look at our chip business, you're giving people what is a high carb, a really bad for you snack, and you're giving them a really good for you snack, no carbs, high protein, and it tastes pretty good. So there's almost not a trade-off. And I think when we follow that platform, peanut butter cups, what I would challenge you to take -- do your own comparison with the full blown full sugar peanut butter cup and tell me that you can taste the difference. So I think the product matters, right? So when we get great innovation that taste really good. It's got great macro nutrients, we've proven that we can be successful. Expect us to continue to do that.

Your next question today is coming from Steve Powers from Deutsche Bank.

Maybe more of a higher level question. I guess as you work through your planning and scenario modeling, I'm curious how you're balancing thoughts around normalizing mobility trends, exiting the pandemic versus the risk of constrained mobility in a recessionary scenario? And I guess, more generally, how do you -- how would you expect the business to hold up or shift maybe to your earlier commentary on Atkins moving to e-commerce as economic pressures potentially or, I guess, likely build on the consumer over the next 6, 12 months?

Yes. We've done a fair amount of work on recession behavior. You have to look back 15 years for the last recession, and there's very little data on our category because the category was really nascent. So we're trying to build our IQ around that right now, how to -- how do we think these businesses of this category and our brands will behave during a recession. High level, we tend to have better social economic consumers buying our brands. So for the most part, we're not dealing with the lower end of the consumer purchase households. We tend to do with more -- deal with more affluent consumers. But if you step back and look at the last recession, here's what we've been able to piece together and it's starting to guide how we think about it first. During the last recession, eating out was pretty significantly impacted versus grocery shopping and eating in. So a little bit of the COVID behavior. People eat in more. So that's probably good news for food and grocery in stores, right?

Second, there was a significant amount of channel shifting due to -- in the last recession. So people shopped in fewer stores. We're starting to see that behavior right now, fewer shopping occasions, people started limiting the stores that they shop in. And in general, they tend to shop in more discounters. So more away from grocery, more towards mass merchants, dollar stores and some of the other discounted formats, right? That tends to be a behavior that we've seen. Snacking in general, I'm talking broad snacking, better-for-you and more indulgent snacking, less impacted than center store food categories. So in general, I think you rationalize it with, and people are still going to have small indulgences. That's a relatively low-cost way of enjoying yourself in an economy where you're not feeling particularly good. And then center of store, you saw private label start winning over brands. So in general, that's kind of the playbook that we're starting to construct how we think about our business.

Frankly, I'm all -- we're taking a second price increase. We're going to be at price points we haven't experienced before, combined with what appears to be a pretty good recession. So we're going to be pretty cautious about what we believe around volume growth and stay focused on, are we recruiting consumers to the category. Maybe you're going to see a little bit of a buy rate decline because of that, but stay focused on keeping our marketing focused on recruiting consumers, keeping people coming into the brand and then we'll deal with kind of impact, if there's any on buy rate as we deal -- as we see that car during the year upcoming. But I'm concerned, and I think anybody that's running a food company right now should be concerned about what consumers are facing.

I think our portfolio, category, our brands are well positioned relative to broad food to ride out the -- if there's a recession coming. We're well positioned to ride it out. We have high levels of marketing support. We've got good product innovation. We've got momentum on shelf. I feel pretty good about our hand. Nonetheless, I'm concerned about what we're going to face over the next 12 to 18 months.

Next question is coming from Eric Larson from Seaport Research Partners.

So 2 real quick items. Number one, I don't think you talked about this metric, Joe, which is fairly critical to the Atkins brand, kind of the return to work -- kind of the return to work metric and where we sit with that. And I know it's probably continued to improve in the quarter, but you didn't mention anything about that specifically. Where do we sit with that today?

Yes, better than it's been, not as good as it needs to be. So part of it, I think, is part of it is there are fewer snacking occasions because not everybody is back to full work as they were prior recession. We also know that there's high level -- within Atkins, there's high levels of switching between our shakes and our bars, and in particular, our meal bars. So we're seeing strong growth in shakes right now, kind of mid-teens growth. It's been pretty consistent for the last, call it, 3 quarters. And I think that's having an impact on our bar business. So shakes tend to be a slightly different eating occasion. They tend to be more meal replacement than snacking, but they are used for snacking. But I suspect we're seeing some switching to shakes as a format.

So -- and that's clearly -- in our history, we've seen that pretty consistently, bars and shakes have high interactions. If you have strong growth on one form, it does have a reverse impact on the other form. I think that's happening right now. And our shake business is been really strong for a sustained period of time. I know that's impacting the business. So look, I think that -- I think that the upside for our business continues to be bars back in full potential. We're paying attention to our ability to recruit new consumers. That appears to be exceeding our expectations. I expect buy rate to come back. I expect us to be starting to grow buy rate again as we move forward. So I'm cautiously optimistic about our ability to do that over the next 12 months.

And I just want to dive in a little bit on Alexia's question again on gross profits. So I know you were against a really, really difficult comp in this quarter. Your gross profit dollars were down about $3 million, give or take. I don't have the exact number probably, but I think you're at [$121 million last year, $118 million] or so this year. So when you -- and that was maybe a very difficult comp. So I think I've asked this question in the past, when you put a pricing strategy together, you price to protect, I believe, gross profit percentage margin, which would be a more aggressive strategy than just to protect gross profit dollars. Is that the case? And given the rate of inflation, et cetera, would you change the way you might price going forward given that inflation is so high?

Yes. Look, long-term, we love the shape of our P&L. We think it's a competitive advantage. It allows us -- if we can get gross margins to around 40% and spend 9% to 10% on marketing and have very attractive EBITDA margins. We think we have a fact creates a sustainable model for us, and that's the shape of the P&L that we want. Obviously, as we came into the year, we thought with the price increase that we took that we would be able to not get -- maintain margins all the way but be pretty close because prices were rising pretty quickly. Prices continue to accelerate, obviously, and then we took our guidance down for the year and then had to take another price increase announced in April, which will [kickstart to hit] from a shipment perspective in about a month or so.

So yes, it's -- look, the inflation has obviously gotten ahead of just about everybody. Our long-term goal is to maintain gross margins and ultimately get back to a 40%. Is that going to happen next year? Probably not. Over time, over our strategic planning horizon, do we think we can get back to 40%? Yes. And that's -- and we're going to do everything we can to get back there. But it's really important for us to maintain gross margin this quarter. Obviously, it was an anomaly 1 lapping last year, just due to the timing of where we had coverage and the acceleration of commodities this year, just that 1 quarter year-over-year, just -- that's what drives the 500 basis point decline. And as I said earlier, you can expect [more or less down 200 basis point] as we go into Q4. So strange times we're living in, but long-term gross margin and the pricing that we do and the efficiencies that we want to get out of the system getting back to 40% are imperative for us to drive growth over the long term.

Your next question is coming from Jon Andersen from William Blair.

A couple of quick ones. One, just on innovation and growth. I guess I'm curious here with the core categories and then some of the extensions you've done into the snackier portion of the portfolio, it seems like you have certain dayparts pretty well covered. The breakfast daypart perhaps not as much. And so as you think about innovation, more occasions, helping drive the buy rate, is that something that you think Quest and Atkins can play a role there as well? I mean in terms of contributing over time?

Yes. I like the way you think you want a job. No, I think you look -- you think about it the same way we do, which is where are our occasions today, daypart and then what are the various snacking formats, right? So if you -- quite simply, we look at all the dayparts, what's our development, where might there be gaps? Core bars tend to be, for the most part, earlier in the day, then later than the day, confections and chips tend to be later in the day, right? So that's -- you're thinking exactly the right way.

And then I would say, if you walked around a grocery store and you looked at all the snacking categories that are low and good things like fiber and protein and [high and] bad things like carbs and sugars, where we think we can design a product that has no taste trade-off that provides you have better for your experience, you can expect us to be trying to innovate in that space. And we can get a product that we think consumers think tastes great, then you would expect us to start thinking about trying to innovate there.

So yes, we divide the world, part of it is how do you segment it and then how do you go innovated against it. One of it is across all the parts of the day. And then the other one is all the categories that exist where there isn't a low carb protein-rich proxy in the category that we think we can design a great tasting product. And I'd just say, I don't like to talk about future innovation. The pipeline is exciting. We've got a lot of -- we have a really talented R&D team, and we've got some fantastic products coming, right? So stay tuned.

One quick one. The guidance -- full year guidance, I think, implies it might be off on this, but it implies, I think, a modest sales decline in the fourth quarter, I think, on an organic basis, excluding the impact of licensing Quest. Can you just -- are we accurate on that and step us through how that could be given the, I think, the expectations for point-of-sale up high single digit in the quarter? And then if you could address the next price increase, it sounds like it goes into effect from a shipment standpoint early August. What -- I don't know if you talked about the magnitude or willing to talk about the magnitude of that?

Yes. So your last question first, very little impact in this year. This is all about FY '23, so very small impact to Q4 and the fiscal year for the price increase. Let me just run you through how the math works on Q4. So at the high-end of the guidance, it implies that net sales growth of about 1%. So just illustrative purposes here. We're guiding to high single digits. So if we're at 9% consumption in Q4, you take a point off for the pizza licensing you're at 8%. We've built about $35 million worth of inventory through the first 9 months of the year. Some of that was -- we were a little bit light as we exited the year.

But most of it was higher -- that extra week of inventory, that $20 million to $25 million of extra inventory that's in our system right now that is in the process of coming out. So that $20 million to $25 million is approximately 7%. So that's how you get. If you've got consumption at 9, you take a point on for pizza, I mean you take 7 out for that 1 week of inventory, you get to the high end of 1. Now where are we going to end on inventory. It's always tough to know. We've got some people who can swing it back and forth. We're confident we can manage through it, but it's always a wildcard.

The only thing we would add is we saw a pretty heavy takeout in June. Yes. So it's already underway. So I think we had got some questions earlier around why is it going to happen? Are you going to force it to happen? No, it actually happens on its own, and it started to happen. So it looks like it was a little -- on a little bit of delay. Will the full week come out, hard to say, right? So -- but your math is about right. We would expect to [under ship] consumption in the quarter based upon getting back to more normal inventory levels.

And just the magnitude of the second price increase? I know it's a fiscal 2023 benefit. But generally, maybe talked about the magnitude of it.

Yes, similar to the first one, on average, around 8%.

Your final question today is coming from Pamela Kaufman from Morgan Stanley.

I just have a follow-up question on the last question on pricing. So I guess what is your level of confidence around taking an incremental high single-digit price increase. Has your -- has the tenor of your conversations with retailers changed at all over the last couple of months as you look to take more pricing?

We're proceeding as we expected to proceed. We expect the list prices to change, call it, end of July, early August. We didn't expect it to be easy, and it isn't easy. How is that?

And can you comment on how you're feeling about the current M&A landscape? And any opportunities…

Yes, happy to do that. I thought we're going to get through a call it out of an M&A question. So look, there's been an adjustment to valuation expectations, and I think the market is paused. So we're not seeing as much activity. Typically, the pipeline is pretty full. We're constantly looking at things. Pipeline is not so full right now. And I think what's happening is with the IPO market kind of having disappeared, there's really not a lot of alternatives for private companies to transact other than to sell. So I think there's conversations that are going on between sellers and bankers right now, lowering expectations on valuations and that's kind of stall things coming to the marketplace. That be our read. So we're less busy than we've been pretty much any time since we've been public right now.

Yes. I mean look, we think long term, it's a positive. We think valuations, especially for those growthier assets that may not have the best profitability currently are getting kind of rebased. I think that will create opportunities for us over the next 6 to 12 months once those prices kind of get into the marketplace. But to Joe's point, I think sellers are trying to figure out what their value really is right now versus where they thought it was 12 months ago, and that's going to take a little bit of time. But long term, we're optimistic it's actually going to be a benefit for us.

We reached the end of our question-and-answer session. I'd like to turn the floor back over for any further or closing comments.

Yes. Thanks for your participation on today's call. We hope you continue to remain safe, and look forward to updating you on our fourth quarter results in October. Hope you all have a good day.

Thank you. That does conclude today's teleconference webcast. You may disconnect your line at this time and have a wonderful day. We thank you for your participation today.