Simply Good Foods Co (SMPL) 2022 Q1 法說會逐字稿

Greetings and welcome to The Simply Good Foods Company Fiscal First Quarter 2022 Call. (Operator Instructions)

As a reminder, this conference is being recorded.

I would now like to turn the conference over to your host, Mr. Mark Pogharian. Thank you. You may begin.

Thank you, operator. Good morning. I'm pleased to welcome you to The Simply Good Foods Company earnings call for the first quarter ended November 27, 2021. 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 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 uncertainty 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 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. 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 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 Simply Good Foods' first quarter results and provide you with some details on the performance of our brands. Then Todd will discuss our financial results in a bit more detail before we wrap it up with a discussion of our outlook and your questions.

We had a good start to the fiscal year as our first quarter results continued our strong business momentum. First quarter net sales, gross profit and adjusted EBITDA all increased double digits on a percentage basis versus last year and were slightly better than our expectations.

Net sales increased 21.7% driven primarily by volume. Additionally, we estimate that our September 15 price increase was about a mid-single-digit percentage point benefit to the total net sales growth. Year-over-year increase in net sales benefited from improvements in consumer mobility and shopper traffic versus last year's COVID-19 restrictions. This resulted in retail takeaway slightly greater than our estimates due to growing household penetration from our marketing investments, improved distribution and new product innovation. Note that the impact of pricing is expected to be a greater contribution to growth over the remainder of the year.

Total Simply Good Foods first quarter retail takeaway increased 18.7% in the U.S. measured channels of IRI MULO + Convenience Stores. First quarter net sales growth was slightly greater than consumption due to the timing of shipments at the end of last quarter and the typical seasonal inventory build related to distribution gains and New Year's retail programming.

Adjusted EBITDA in the first quarter increased 34.7% to $65.6 million primarily due to the solid sales growth, Quest acquisition synergies and G&A leverage. This more than offset higher marketing investment.

Gross margin increased 70 basis points versus the year ago period. As expected, supply chain costs were a headwind but were more than offset by our price increase and favorable mix. Additionally, we experienced steady improvement in customer service performance during the quarter.

As we stated in previous conference calls, we expected supply chain costs to be a significant headwind in fiscal 2022, largely offset by our price increase. However, our supply chain costs over the remainder of the year are now projected to be higher than our previous outlook driven mostly by ingredient costs. Therefore, the full year gross margin impact is greater than our prior estimates. We'll discuss this in greater detail in just a moment.

That said, we are confident in our strong top line growth and our ability to manage these higher costs and are increasing our full year net sales and adjusted EBITDA outlook. We are focused on driving sales and earnings growth and competing effectively while navigating a challenging supply chain environment. We'll continue to execute against our strategies and believe we are well positioned to continue to deliver net sales and earnings growth that we expect will create value for all shareholders while doing the right things over the long term for our business, our customers and our consumers.

Simply Good Foods retail takeaway in measured channels increased 18.7% in the quarter. Importantly, as has been the case throughout the pandemic, both our brands have outperformed their respective subsegments of weight management and active nutrition.

In the quarter, weight management segment was up 4.4%, and Atkins outperformed this segment with retail takeaway up 7.7% over the same period of time. Total Quest retail takeaway in measured channels in the quarter was up 36.2% and outpaced the active nutrition segment growth of 30.3%. And our e-commerce business continues to perform well as POS growth was similar to measured channels even as we anniversary strong year ago comparables.

Atkins Q1 U.S. retail takeaway in measured channels increased 7.7%. The year-over-year increase benefited from improvements in consumer mobility and shopper traffic, particularly in the mass channel, versus last year's COVID restrictions as well as continued total buyer growth. In the quarter, consumption of bars increased 3.3% and was in line with recent trends. Bar buy rate remains below historic levels as there is a high correlation of bar consumption to being at work. Atkins Shakes in the quarter retail takeaway was up 12.9% and sequentially improved versus the fourth quarter of last year. Performance was particularly strong in the mass channel, up about 20%.

Atkins' all other product forms continue to show strong growth. These include confections and cookies as well as the just launched Atkins protein chips. In Q1, Atkins all other retail takeaway increased about 9% driven by cookies, which contributed about 2 percentage points to total Atkins brand retail takeaway growth. Confections were up modestly as we lapped last year's successful dessert bar launch.

First quarter POS growth increased across all channels and was particularly strong in mass, up about 10% driven by increased traffic. We are pleased with Atkins' e-commerce performance. Amazon, Atkins' second largest customer, Q1 retail takeaway increased low teens on a percentage basis versus the year ago period. Total Atkins e-commerce POS growth in the quarter was similar to measured channels.

Atkins growth of total buyers remains strong. Buy rate remains at mid-single digits, below historic levels due to the high correlation between consumption of bars and the workplace. Therefore, the improvement in Atkins buy rate remains an opportunity for the brand.

Let me now turn to Quest, where first quarter retail takeaway increased 36.2% in the measured IRI MULO C-store universe and outpaced the active nutrition segment.

Growth versus the year ago period was driven by the increase in household penetration, improving shopper traffic and rebound in bars and success of new product forms. Quest bars' first quarter retail takeaway in measured channel increased 22.8%. Recall Quest bars are nearly 60% of total Quest measured channel retail sales.

The snackier portion of Quest products, about 40% of U.S. retail sales, continued to do well and increased 106% in the quarter driven by strong performance of chips, cookies and confections. We continue to see robust chips demand and are on track for incremental supply to come online as the year progresses.

We had another good quarter of growth across all key retail channels. Increased foot traffic in the mass channel and convenience stores was solid. Q1 POS growth in these channels were up about 50% and 40%, respectively.

Quest e-commerce takeaway increased about 22% versus last year. As expected, due to strong performance in the year ago period, the growth rate moderated somewhat. Our business at Amazon remains strong and growth was solid across all major forms.

In summary, we're pleased with our first quarter results that were better than what we expected. That said, retail takeaway growth in the first half of the year will be stronger than the second half of the year as comparables become significantly more challenging. We have a good balance of innovation as well as consumer and customer programming in place that we believe will drive solid retail takeaway and net sales growth throughout the year.

Our customer service levels have improved during the quarter, and we are approaching more normal performance. We expect that supply chain costs will be a significant headwind during the fiscal year. Pricing and cost savings initiatives are in place to mitigate the impact of inflation. However, as I mentioned earlier, supply chain costs remain high, and we now expect them to linger at elevated levels throughout this fiscal year and into the fiscal 2023. Therefore, we are updating our previous view and expect total fiscal year 2022 gross margins to decline about 250 basis points versus last year.

As we have stated on numerous occasions, we believe our gross margin and overhead cost structure offer us the ability to invest in the future growth of our brands and organization. As we assess the impact of lingering supply chain cost inflation over the balance of this fiscal year and into fiscal 2023, we will consider all options available to us to protect our cost structure, including further pricing action.

As we move into Q2, we expect retail takeaway growth to be similar to Q1. That said, we remain cautious about consumer seasonal participation and return to work trends due to the recent surge in COVID-19 cases from the Omicron variant. We're executing well 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.

I'll now turn the call over to Todd, who will provide you with some greater financial details. I'll then end our prepared remarks with details and assumptions related to our revised outlook.

Thank you, Joe, and good morning, everyone. I will begin with a review of our net sales.

Total Simply Good Foods first quarter net sales increased 21.7% to $281 million. North American net sales increased 24.5% and was primarily driven by volume. As Joe stated, due to the timing and implementation of the previously announced price increase, we estimate pricing was a mid-single-digit percentage point benefit to total net sales growth. Therefore, pricing will be a greater contribution to sales growth over the remainder of the year.

The international business declined 27.3% due to the European business exit. Core international net sales growth was 3%, and the European business exit was a 1.6 percentage point headwind to total company sales growth.

Moving on to other P&L items. Gross profit was $116.6 million, an increase of 23.9%. Gross margin of 41.4% increased 70 basis points versus the year ago period. As expected, supply chain cost inflation was a headwind this quarter. However, it was more than offset by the previously mentioned price increase, lower trade promotion, favorable product and customer channel mix and carryover coverage of select raw materials.

As Joe mentioned, we anticipate significant supply chain inflation in fiscal 2022 due to higher costs related to raw materials, packaging and logistics. Pricing and cost savings programs are in place to help offset these costs.

Adjusted EBITDA increased 34.7% to $65.6 million due to the higher sales and G&A leverage.

Selling and marketing expense increased 21.2% to $30.5 million driven by higher brand-building initiatives on both brands. Due to a large ramp-up of marketing expense in the second half of fiscal 2021, the majority of the increase in the fiscal 2022 marketing accrual will occur in the first half of the year.

G&A expense, excluding Quest integration costs, restructuring expenses, stock-based compensation and other costs, were about the same as the year ago period. Higher incentive compensation was offset by lower corporate expense and integration synergies. We anticipate solid G&A leverage this year and expect leverage will be greater in the second half of the year due to the timing of when we began to accrue incentive compensation in fiscal 2021.

Moving to other items in the P&L. Interest expense declined $2 million to $6.4 million due to the paydown of the term loan. In the first quarter of fiscal 2022, the noncash charge related to the remeasurement of our private warrant liabilities was $17.3 million. In the year ago period, we recorded a noncash $20.5 million gain related to the warrants.

Our statutory tax rate in Q1, excluding the charge related to the warrant liability, was about 25%. We continue to anticipate that our full year tax rate will be approximately 27%.

Net income in Q1 was $21.2 million versus $43 million in the year ago period.

Turning to EPS. First quarter reported EPS was $0.22 per share diluted compared to 23% -- $0.23 per share diluted for the comparable period of 2021.

In addition to the previously mentioned warrant liability impact, depreciation and amortization expense was $4.7 million and similar to the year ago period.

Stock-based compensation of $2.6 million increased $1.5 million versus last year.

And costs associated with Quest integration and restructuring were $0.1 million versus $3.8 million last year.

Adjusted diluted EPS, which excludes these items, was $0.43, an increase of $0.14 versus the year ago period. Note that we calculate adjusted diluted EPS as adjusted EBITDA less interest income, interest expense and income taxes. Additionally, the calculation of adjusted diluted EPS in Q1 assumes fully diluted shares outstanding of 102.5 million versus 97.9 million under GAAP. The difference versus GAAP is due to the exclusion of the private warrants and fully diluted shares outstanding under GAAP due to the private warrants being classified as a liability on our balance sheet. Please refer to today's press release for an explanation and reconciliation of non-GAAP financial measures.

Moving to the balance sheet and cash flow. In November 2021, the company paid down $25 million of its term loan. And at the end of the first quarter, the outstanding principal balance was $431.5 million.

In the first quarter, the net cash used in operating activities was $7.3 million. Note that this was affected by the timing of working capital, tax payments and an increase in incentive compensation payments versus the prior year. The company continues to anticipate full year fiscal 2022 cash flow from operations will be greater than last year.

As of November 27, 2021, the company had cash of $35.4 million, and the trailing 12-month net debt-to-adjusted EBITDA ratio was 1.8x.

Capital expenditures in the first quarter were $2.7 million. Full year CapEx is expected to be about $5 million to $6 million.

We anticipate GAAP interest expense to be about $25 million, including noncash amortization expense related to the deferred financing fees.

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

Thanks, Todd.

Our strong first quarter results are a good start to the year. Our retail takeaway trends remain solid, and we have marketing, customer programming and new product plans in place to continue to drive growth. This gives us confidence to increase our full year net sales and adjusted EBITDA outlook versus our previous estimate. Note that our forecast does not assume any meaningful changes in workplace mobility.

Looking at the key metrics of our updated full year fiscal 2022 outlook, we expect net sales to increase 12% to 14% versus last year, and this includes a 1 percentage point headwind related to the European business exit. As I stated earlier, higher supply chain costs versus our previous outlook driven mostly by ingredients remains a headwind in 2022 and will result in full year gross margin contraction of about 250 basis points with the biggest impact in the second and third quarter.

Adjusted EBITDA is anticipated to increase slightly less than the net sales growth rate. We continue to expect that marketing expense will increase versus last year, although at a lower rate than the net sales increase. Additionally, we anticipate benefiting from significant SG&A leverage. And the decline in interest expense should result in an increase of adjusted diluted EPS greater than the adjusted EBITDA growth rate.

We anticipate that net sales growth in the first half of the year will be stronger than the second half as the year-over-year comparisons are significantly more difficult as we proceed through the year. Additionally, we expect our retail takeaway growth rate in the second quarter of fiscal 2022 to be similar to the first quarter. And due to higher cost, we expect Q2 adjusted EBITDA growth will be less than the net sales growth rate.

We're excited about the growth opportunities that exist within our business in this category. We're executing against our strategies and increasing household penetration that is resulting in solid sales and earnings growth. Our strong balance sheet and cash flow generation enable us to invest in our business and evaluate M&A opportunities as a path to increasing shareholder value.

We appreciate everyone's interest in our company, and we're now available to take your questions.

(Operator Instructions) Our first question comes from the line of Chris Growe with Stifel.

I just had a question for you, and it's been kind of a popular topic on many companies' calls. But inflation just seems to keep going and you took pricing, and, as a result, it's not totally offsetting the cost inflation. At least, there's going to be some gross margin effect from that. I wonder if you could give me -- or if you could talk about the level of inflation you now expect.

And then I guess we're not looking for forward prospects here for pricing, but just in a world where you look to utilize the gross margin to reinvest back in the business, are you limited in that regard this year because of the gross margin outlook here for the business now?

Yes. So I'll take that one, Chris. So first of all, just to be clear, we are very comfortable with our ability to navigate the P&L even with this incremental supply chain cost. As you heard, we raised both our top and bottom line guidance. We feel terrific about that.

Regarding levels of inflation, going into the year, we kind of -- there was significant inflation with a significant price increase. And the inflation that we were seeing was probably high single digits. It's now increased to kind of low double digits for our total business. So that's the new outlook for commodity costs. So it is significant.

We love the shape of our P&L. We love our ability to invest in our business. You can count on us to increase marketing in this year. It may not be at the same level of growth rate that we've done in the previous years. As you know, we've increased marketing substantially well ahead of net sales over the last several years. So we're close to 10% of net sales from a marketing investment, which we feel great about. We'll increase it. It may not be at the level and the growth rate we've done in the past, but you can expect us to continue to invest in our business.

And just to be clear on that, Todd, is -- do you have better visibility on those input costs now? So do you have more coverage, I guess, is the question that would allow you to have the comfort in that?

Yes. And so we're about 75% covered for this year. So we do have a little bit of exposure, a little bit risk for the rest of the year. But again, we do have levers in our P&L to manage that. We're very, very comfortable. And obviously, if this thing continues to linger, we will not hesitate to take some additional pricing action.

Okay. And I had just one quick follow-up on the Atkins brand. It sounds like buy rate is mostly unchanged. It's just more buyers. Was that -- was there any measurable change in that sequentially from the fourth quarter?

No. We're still -- Chris, we're still seeing what we've been experiencing, which is strong interest in the brand evidenced by the number of buyers participating. So we continue to see growth in buyers. And the bar form in particular for Atkins, the number of snacking occasions of bars is being impacted negatively by people not being back at work.

Now the good news is -- as we mentioned in our prepared comments, are kind of all other forms, non-shake, non-bar business, is doing really well. Those are incremental consumption occasions, highly less correlated to being at work, and that's starting to pick up some of the slack from a buy rate standpoint.

Our next question comes from the line of Jason English with Goldman Sachs.

A couple of quick questions. First, quick back-of-the-envelope math. It looks like you're cutting your gross profit forecast for full year by around 2%. A, is this correct? And b, with EBITDA actually moving higher in context of gross profit being lower, where are the offsets?

Yes. So I think -- I mean, I think your math is generally correct. So first of all, we have significant G&A leverage in our P&L. When you're -- the good news is when you're taking the volume up, not only do you get obviously incremental profit from the volume, but from a percentage basis, from a margin perspective, you get a nice kicker at the EBITDA margin line with G&A flat to growing very modestly for the year.

And then as I talked about with Chris Growe's question, look, we're going to increase marketing. We have the ability to toggle that back as -- depending on where we see the gross margin come in. It'll be an increase this year, but we're still at a very healthy level of marketing. So we have the ability to have some more modest increases in marketing if necessary.

So to put a finer point on your answer, Todd, it sounds like you're planning to spend less marketing than you initially planned coming into the year. Did I hear that correctly?

Probably a little bit depending on how the year plays out. Yes, we -- our initial guidance when we were having 8% to 10% net sales growth was for that to be basically in line, so implying kind of a high single-digit growth initially. It's probably going to be a bit lower than that.

Got it. And you sounded so confident on your gross margin outlook last year. And now here we are a few months later, and it looks, back of the envelope, like you're raising your ingredient forecast by 15% or so for the full year. What -- and we on the outside are looking at spot markets that look like a little up, a little down but kind of just moving sideways. What's really caught you offguard? What changed so much over the last 3 months?

Our -- this is Joe. Our original view of the marketplace was that it would not stay at the sustained high levels that we were experiencing as we moved into the year. And our view of it now is it looks like it's going to linger longer than what we expected.

So it's not a matter of costs are going up. They're just not abating as what we expected. And frankly, that view is a pretty recent view. So we're starting to -- we're just starting the process of stepping back and say, okay, this is going to linger awhile. In our prepared comments, we said kind of the second half of the year. We expect them to linger into the next fiscal year. What are our options? And what are we going to do about it?

And we've been pretty clear with the market from the very beginning. We think the shape of our P&L is a competitive advantage. Gross margin is over 40%; marketing investment, around 10%; EBITDA as a percent of sales, around 20%, right? So if these costs seem to be lingering, you can expect us to act in order to maintain our margin structure.

Got it. Understood. And congrats on the strong demand momentum, by the way.

Thank you, Jason.

Our next question comes from the line of Wendy Nicholson with Citi.

My first question was just on the supply chain in terms of your availability; on the labor side in terms of the work you have with the co-manufacturers. Are you seeing any challenges? I know you talked about strength in the Atkins shake business. Obviously, that's off a very low base because it's a new product. But can you talk about bars versus shakes, if you're seeing any specific challenges in getting product in the door?

Yes. Wendy, good question. As we said in our prepared comments, our performance improved during the quarter. So we were below what we -- our expectations on customer service. And frankly, it was not one thing. So throughout the supply chain, we run into challenges, from ability to get access to customers' docks to the ability to get products from co-man, the ability to get ingredients, to get products from co-man. Pretty much, you're playing supply chain whack-a-mole on a daily basis.

That said, our supply chain team has done a particularly outstanding job in the first quarter of addressing those challenges and improving our customer service such that when we exit the first quarter, we're getting pretty close to where we expect our customer service performance to be.

So look, I don't -- are we out of the woods from a supply chain standpoint? No. I expect it will continue to be challenged on a daily basis with issues. Nothing is smooth right now, but our team has shown the ability to manage through that, and we're pretty confident.

And on the Atkins shake business, obviously protein shakes, great category, rapidly growing but also very competitive. The Atkins brand obviously speaks for itself in terms of brand recognition. But just can you remind us kind of how is that positioned? And how do you intend to kind of carve out a niche in a -- in what is a very crowded category right now?

Yes. So let me dispel that it's a category. It is not. So a very unusual in this nutrition category. You've got products in forms that don't compete with each other.

So let me give you the simplest example. Ensure and Boost, high protein, low carbs and sugar, source and interact very little with Atkins and Premier Protein because the consumer benefit is fundamentally different. Consumer targets are different, consumer benefits are different. So as -- if you try to group anything that's a shake that's high protein, low carbs and low sugar together, you're actually making a mistake on how to think about the category.

I think what's happening is because people are home more, shakes are a -- there are more usage occasions of those shakes across the consumer targets and across the consumer benefits. I think you're seeing that.

Second, if you can supply the product, you're getting preferential treatment among retailers because you can get -- you can service it, you can get display and keep your shelves stocked. We've not had issues with our shake business, and we're benefiting a little bit from that.

But again, there's not a lot of interaction. It's very unusual. You've got identical products that do not interact with each other because the consumer targets and the benefits are so fundamentally different.

Fair enough. And then my last question. It was just -- one of the comments you made at the very beginning was about the shipments outpacing inventory a little bit in anticipation of sort of normal inventory build and New Year's promotions. But I guess my question is just in the first, whatever, 2 weeks of the year with Omicron and whatnot, are you seeing any delay in purchases, people going back to the stores? And so I'm just wondering if there's -- if that inventory build means there's going to be excess inventory on store shelves for some time to come.

Yes, I think our prepared comments -- to be clear, our prepared comments had 2 factors in that. First, we ended last year at a lower trade inventory level than what we would have expected. And it had to do with our ability to flow products to customers, both on the customer side and our side. So we had some makeup to do in the quarter. And then second, you rightfully pointed out, the buildup for merchandising at retail in New Year's. Really too early to call New Year's consumption yet, right? So we haven't gotten that kind of first complete week of January from a POS standpoint. So it's hard to tell exactly what the consumer offtake is going to be on New Year's.

Our next question comes from the line of Kaumil Gajrawala with Crédit Suisse.

If I could follow up a little bit on that supply chain commentary you just made. Do you have a sense or an idea on the impact it might have had on overall top line? Or was it as simple as just the customer service wasn't where you wanted it to be?

First quarter -- again, ability to service the customer impacts your revenue when you are out of stock, right? So if you miss a sale because somebody comes into a store and you're out of stock, that's the challenge of the business. We had out-of-stocks in the first quarter. So we saw those as the quarter progressed steadily get better. So obviously, we're a little bit more optimistic. Our service is better. Out-of-stocks are being reduced. The ability to flow product to the shelf is smoother than it was as we went into the quarter. That's all good news.

Okay. Great. And then just talk a little bit more on household penetration in the context of market share. You benefit from mobility, but you've benefited from a lot of brand momentum recently as well. Since you're in so many categories, it's a little difficult for us from the outside to get a good sense on where the share trends look. I would anticipate they're up nicely, but if you could give any more context or color on where you sit in terms of share in the context of how you look at your brands.

Yes. So we -- maybe it would be helpful. It sounds like you may be subsegmenting the brands by form. It would be our strong recommendation that you look at subsegments of weight management for Atkins regardless of form and on Quest regardless of form active nutrition, which would include brands like Premier Protein, to name a few, right? So in both of those segments, Atkins has outperformed the weight management segment and Quest has outperformed the active nutrition segment. And that's what we track.

There's so much interaction within our brands within the forms. It's -- it is more accurate to take a brand view, therefore a brand consumer benefit view, than it is trying to subsegment chips and cookies and shakes and bars. Because the brand will interact so much within those, you get a false read of what's really going on.

To give you an example, the highest interaction of Atkins meal bars is Atkins Shakes. So if we're on a roll on shakes because of innovation, because of merchandising, because of good communication, we see an impact in our meal bar business and vice versa. So look at the brand from a consumer benefit, weight management, active nutrition, and evaluate the total brand against those segments. And what you'll see is we've been steadily growing share in both of those subsegments.

Our next question comes from the line of Alexia Howard with Bernstein.

So this -- going into this year, I know we're entering the second quarter for you guys now, but the level of uncertainty is unprecedented just given the pandemic, given the input cost inflation and all the other moving pieces, supply chain disruption and so on. If you had to rank order from here what the key sort of uncertainties are in terms of risks and opportunities given the change in guidance that we've just seen from you, how would you rank order the things that you don't know or that you don't have visibility into from here? And I have a follow-up.

That's a killer question, Alexia. What keeps me up at night? All right, so I think any change to consumer mobility and shopping behavior, that would be the first, right? We saw at the beginning of the pandemic that led to huge levels of volatility from a consumption standpoint. If you remember the early stages, consumption spiked and then a decline. And shopper traffic was down and channel mix change. So if you were looking at risks to the business, the Omicron variant's impact on people's shopping behaviors and their mobility, are they out and about or is life at least reasonably similar to when it's been in this kind of post-COVID consumer mobility world, that would be the first.

I think the second in our business is we took a price increase on September 15. For the most part, it doesn't start really to hit the shelves until early November. So retailers don't move price that quickly. So we don't really have a lot of data on the impact on volume of the price increase. So that's a second half of the year risk, I think. So that one keeps me up a little bit.

And then I think third, just in general, we know we're going to be chasing supply chain challenges for the year, right? So our ability to be responsive to those challenges. And our team has done a phenomenal job, but they are playing whack-a-mole every day, right? And they're chasing issues that you typically don't deal with in a year. Nothing's flowing steadily. So our customer service has gotten significantly better. But like a duck on the water, it looks smooth. But we're working really hard to make that happen.

I would say in the cost environment, I think we -- the absolute price has been pretty steady. I think somebody said that in their comments. So for us now, it's how long is it going to linger, and then what do we want to do about it.

So I'm less concerned about the price because it appears to have plateaued. The fundamental question is how long is it going to be around and then how do we address it going forward.

Makes perfect sense. Just a real quick follow-up. You mentioned favorable mix in the press release this morning. What is that attributable to? And how long is it likely to continue?

Yes. I mean during COVID -- during the heights of COVID, both -- on both brands, the bar business really suffered. And now that we're getting back to somewhat normal consumer behavior, the bar business, particularly on the Quest side, has rebounded really nicely. And also, from a customer standpoint, you're getting a better balance between brick-and-mortar and e-comm. The C-store business on the Quest side has had a tremendous last couple of months here, and those are all positive things from a mix perspective for us.

Our next question comes from the line of Rob Dickerson with Jefferies.

Great. First, quick question. Just the top line guide obviously implies deceleration year-over-year relative to Q1. And then I realize that second half will likely grow more slowly than the first half. Just in terms of Q2, Joe, I guess, and Todd, too, just given your comments, it sounds like you have hedged a bit, so to speak, in terms of some elasticity risk for Q2. And then also, there's the implied kind of roll-off of the inventory build benefits.

So I'm just curious, as we think Q2 year-over-year top line relative to Q1, is there any kind of expectation for an increase in pricing given the timing of the pricing you've already implemented? And then two, on the volume side, is there anything in there that could decelerate a bit outside of just the inventory build benefits you got in Q1?

Yes. So, I mean, you saw the POS growth in the first quarter. And really, total consumption was in that 18% to 19% range, which is -- obviously, we're very pleased about. And what we said in our comments is we think that's going to be about the same in Q2.

Now we shipped a little bit ahead of consumption. Some of that was just getting inventory back on the shelves from what was going on during the summer period. And so we obviously shipped a bit ahead of consumption.

Our comments are we're going to -- POS consumption is going to be about the same. It's always a little bit of a wildcard where the inventory is going to fall as we end the quarter. But we're kind of in that high teens, 20% kind of consumption rate we feel comfortable about. What -- where net sales exactly falls is depending on where shipments are. It's always hard to tell, within a couple of points. But we think the POS will be very, very consistent.

And then as you get into the second half, obviously -- first half of last year, we grew 1% to 2%. Second half of last year, we grew 25%. So we're lapping much more challenging numbers. And then as Joe pointed out with the last question, we still have noise around pricing elasticity, around consumer mobility. So we're playing potentially a little bit of conservative second half assumptions here, but we have a much more difficult lap in the second half.

Yes, the thing that's a little deceptive is second half growth rate starts to step down relative to the first half. We're really confident in our ability to grow the top line, the absolute dollar sales. It's a manifestation of the year ago comparisons in the second half year, not our ability to grow the business. We're very confident in that. And we feel like we've got the products, the marketing, the programming at retail to continue to draw -- drive strong dollar sales. So we're very confident in that.

Fair enough. And then just quickly on the incremental pricing commentary. It would seem as if -- just kind of given the timing of your fiscal year, if you were to implement incremental pricing at retail and just given kind of the lag of announcement relative to when it hits the shelf, it would seem like that could be maybe kind of a late fiscal '22 event if needed but probably -- higher probability that kind of rolls into '23. Is that fair?

When you -- and maybe this will be helpful, Rob. When you make the decision to price, it takes 3 or 4 months to execute it with customers.

Yes.

So the minute you pull the trigger, it's 3 to 4 months before you can execute. And then from a retailer standpoint, another few months for them to reflect it at shelf. So there's a delay to that. And again, as I mentioned in one of the previous -- or to one of the previous questions, the -- our view of the lingering cost is a recent one. So we're just starting to evaluate our options right now.

Our next question comes from the line of Ben Bienvenu with Stephens Inc.

I want to follow up on the revenue side of the equation. You talked about among the potential risks outside of your control, one of which being consumer mobility. When you think about your ability to mitigate those risks and thinking about innovation as a growth driver and your ability to price, how comfortable do you feel in terms of the elements that are within your control to help mitigate any risk associated with external factors that are out of your control?

Yes, great question. I think to -- there's 2 risks, that people lock up at home or don't want to go into stores, right? Those are the 2 risks, I think. So when they lock up at home, their snacking occasions change, right?

So for us, probably the single biggest mitigator has been the growth in all other forms. So -- and what I mean by that is on both brands, we have a bar business and a shake business which I think is center-of-the-fairway, core business for us, right? And as we noted in our commentary with Atkins, that bars, especially for Atkins, highly correlate to being at work and being in transit.

The nice thing that we've learned as we've launched into cookies, chips and confections is they don't correlate to location at all. So our ability to grow those is a nice hedge against the risk that we see in consumption on bars if people would kind of go back to staying at home and not going out.

The second factor is shopping behavior. If you remember, the earliest -- I mean, it's been 2 years, but if you remember, the earliest behavior is people stopped shopping and limited the number of retail outlets they were going to. Best hedge there has been e-commerce business. So the major brick-and-mortar retailers have accelerated their e-commerce business, both ordering online and having it delivered as well as pickup and delivery. So then they, combined with Amazon, is a natural hedge to people's shopping behavior and retail doors changing.

So we feel like, yes, there's a risk out there that are probably going to be transient, but we've had some natural hedges to offset those challenges. Still keeps me up at night, though.

Okay, that's great. My second question is a follow-up on cost. You talked about, I think, 75% of your exposure is covered. Could you discuss, is that uniform across the year? Or would it be -- would the nature of that be that you're fully covered for the next several quarters and more exposed for maybe the fourth quarter? And then within that coverage, where are the buckets of least versus most coverage?

Yes. We'd rather not get into that level of specificity. There are -- to answer your question broadly, there are some commodities where we are covered for the entire year, there are some commodities and some more minor ingredients where we might be only covered for 50% to 60% of the year. So it's not uniform. But again, I don't want to get -- for competitive reasons, I don't want to get into specifics. But 75% of the year, there's not a huge difference between the commodities, but there are some commodities that we are fully covered on.

Our next question comes from the line of Steve Powers with Deutsche Bank.

I guess as you think about the cadence of fiscal '22 from a gross margin perspective, I guess I'm trying to get a better feel for your anticipated exit rate on gross margin into '23. It seems like there's a sure hit to come versus prior expectations in the next couple of quarters, but I guess I'm less clear where your guidance and current forecasts have you exiting '22 versus 3 months ago and where you want to be. Because as you said earlier, that 40%-plus gross margin is a big part of your P&L advantage. As we step away from that in the next couple of quarters, I guess how much progress can we expect to make back towards that ambition by year-end?

Yes. So as we mentioned earlier, it's -- we're going to obviously start to see the hit -- pretty significant hit here in Q2. Q3 will be the toughest comp for us not only from a '22 cost perspective, but, if you'll remember, Q3 last year, we just had a blow-out gross margin expansion. Just kind of everything was clicking. We had 140 basis points of gross margin expansion even despite a pretty difficult environment. So that's going to be a tough lap.

We saw costs start to rise in Q4 of last year a bit. Still had gross margin expansion. So again, we -- we're not completely covered for the year. And obviously, a lot of things can change in the next 6 to 9 months. But we should start to see gross margin degradation be a little bit less severe as we go into Q4.

It really depends on where commodities are for the end of the year. It really depends on whether we take any very specific actions. But it should be better in Q4. And if it's -- as we've said several times here on the call, if things are not where we want it to be, you can rest assured we will take some action that will either start to impact Q4 or, more importantly, impact '23.

Yes, okay. But I guess from a -- just what's embedded in your outlook, I guess the year-over-year dynamics because of the comps. But sequentially, are you -- you're going to take a big step down in 2Q and then kind of go sideways for the next 3 quarters? Or do you expect to see sequential improvement in gross margin given the levers you have?

Yes. I mean it'll be -- again, it depends how everything plays out. It'll be fairway as we get into Q3 and Q4. Those gross margins will be relatively the same. From an absolute basis year-over-year, there'll be some obviously changes probably just -- we said. But the absolute gross margins should be relatively equal in Q3 and Q4.

Okay, fair enough. I guess if I could, just a totally different topic. Just any comments on the M&A landscape in terms of opportunities crossing your desk as well as any change in your appetite to entertain deals just given the uncertainty you're facing we've been talking about for the last almost hour.

It's a pretty busy environment with a lot of opportunity. And as we've stated on a number of occasions, sellers have frothy expectations and buyers need to be aware. So...

Yes. Okay.

And we continue to evaluate complementary brands to our portfolio. And we're -- we like to think of ourselves as value buyers. So we're looking for assets of decent size given the size of our portfolio, the number of brands and the size of those brands. We need to understand the consumer promise as part of that, have a pretty good understanding of who the consumer target is and our ability to more effectively market that brand to that consumer target in order to grow it. And obviously, we have supply chain synergies, a strong selling organization that we could add a brand to the bag to and accelerate. But for the most part, you're looking for strong consumer brands that are complementary to our portfolio today. Those are out there, and you just -- you continue to have to chase them to see if you can get a business at a decent value.

Our next question comes from the line of Pamela Kaufman with Morgan Stanley.

I know that it's a very dynamic environment, but I was curious if you are observing any changes in demand from the recent renewed rise in COVID cases. And would you expect any short-term headwinds from changes in consumer mobility? And what, if anything, have you factored into your outlook from Omicron?

Yes, we've not -- first, prepared remarks, we've not factored any changes, either positive or negative, from a demand standpoint. So our view is it remains where it is. Omicron has been a recent phenomenon. If you think about it, last month it was in South Africa. Now it's 95% of the cases in the United States. So it's a little too early to call.

We're not seeing dramatic foot traffic changes. We're not seeing dramatic changes in consumption behavior or apparently movement. But you have to keep your eyes open. This thing is pretty dynamic and pretty volatile.

Okay. And then I have a broader question on Quest. Quest has seen very strong growth over the last several years. How are you thinking about the midterm growth rate for the brand? And what do you see as the key drivers? How much would you expect to come from increasing household penetration versus distribution expansion, innovation?

Yes. Well, let me define -- let me tell you how we think about it, and then it might be -- give you some insights, right?

So for us, the key metric from a marketing standpoint is household penetration. All the other factors are derivative factors to help that. So share of voice of marketing, white space from a distribution standpoint, product innovation all accelerates our ability to drive household penetration.

So the Quest brand has benefited in the last, call it, year or so from 2 big factors. Factor number one has been the bar business has started to recover from COVID confinement. And in particular, channel has helped the brand. We have a big C-store business, small-format business. That team has done a phenomenal job at kickstarting -- as foot traffic has improved there, kickstarting the bar business for Quest. So you're seeing a rebound in bars, which is 60% of the Quest business. So that's been a big factor for us.

The second is kind of all other forms, what Mark calls the snackier portion of the Quest portfolio. All have done -- with the exception of our RTD business for Quest, all of the snackier portion of the portfolio has done extremely well. Cookies continue to grow. Chips, we've been supply constrained, but demand has been so strong. Confections have done extremely well. Those have driven oversized growth rates in the business, I think collectively, in our prepared remarks, up 100% year-on-year. You're not going to -- the law of large numbers will eventually affect the growth rate, but we would expect Quest to continue to outperform the subsegment of the category, the active nutrition category that they're in, on a sustainable basis.

And then just a quick question on pricing. So pricing was a mid-single-digit benefit in the quarter, but you indicated that it should continue to build over the course of the year. So how should we think about the magnitude of contribution from pricing over the remainder of the year?

Yes, we took a price increase that averaged about 7.5%, 8%. And because of the timing of the price increase, we didn't get the full benefit in Q1, only around 5%, 6%. So we'll get an extra 2 points from pricing. Now that's the good news. The question is what's the impact on volume and elasticities. But from a pure pricing perspective, we'll get an extra 2 points for the remainder of the year.

Our next question comes from the line of Eric Larson with Seaport Global Securities.

Congrats on a good quarter. So Joe, I just want to dial back to the kind of the category -- the total nutrition category.

You folks in your subsegments are outperforming your peers. But in the first quarter, and maybe this is just a timing issue on what happened a year ago and maybe these numbers really aren't all that important from a 1-quarter perspective. But what segments of the nutritional snacking category are actually growing faster than you? And maybe it's not subsegments, maybe it's a -- what value proposition segments are growing faster? And are they sustainable? What -- I mean, how are you looking at the total category?

Yes, you hit it right on the nose. We don't compete in -- we see the category in 3 pieces: active nutrition with Quest; Premier Protein, a number of brands; weight management with Atkins. And then we see nutritious bars, Clif, Kind, as the third segment. That category is experiencing right now, against very easy comparables, strong growth. So it is, along with active nutrition, is outperforming weight management on a year-over-year basis. That will moderate as the comparables get more challenging, right? So bars really got slammed in COVID. So the nutritious bar segment is comping some easy comps. They'll get difficult as you move through the year.

We're really comfortable overall. If you look at the total category, we're comfortable we can outperform the total category. In any one quarter, half year, given what's been going on in COVID, you may see some segments outperform some other segments. But over the long term, we're pretty comfortable on our ability to outperform the total category.

Yes, got it. So it's just a comp issue and there's just a lot of noise in the quarter, and that will kind of -- that'll work its way out over the next 2 to 3 or 4 quarters.

Looking at to 2-year stacks right now is a very useful exercise. So you'll drive yourself crazy with year ago.

Yes, I agree.

Ladies and gentlemen, this concludes our time allowed for questions. I'll now turn the floor back to Mr. Scalzo for any final comments.

Yes, thanks for your participation on today's call and the terrific questions. We hope you'll continue to remain safe, and we look forward to updating you on our second quarter results in April. Have a good day.

Thank you. This concludes today's conference. You may disconnect your lines at this time. Thank you for your participation.