Simply Good Foods Co (SMPL) 2022 Q2 法說會逐字稿

Greetings, and welcome to The Simply Good Foods Company Fiscal Second Quarter 2022 Conference 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, Vice President of Investor Relations for Simply Good Foods Company. Thank you, sir. You may begin.

Thank you, operator. Good morning. I'm pleased to welcome you to The Simply Good Foods Company earnings call for the second quarter ended February 26, 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 the company's SEC filings.

Note that on today's call, we will refer to certain non-GAAP financial measures that we believe will provide useful information to investors. Due to the company's asset-light strong cash flow business model, we evaluate 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 second quarter results, and I'll provide you some perspective on the performance of our brand. 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.

In the second quarter, we delivered strong net sales and earnings growth that exceeded our expectations and position us well to deliver on our full year objectives. U.S. retail takeaway in the quarter was in line with our expectations and similar to Q1 despite the surge in COVID cases from the Omicron variant.

Price increase instituted in our fiscal first quarter of this year is tracking in line with our expectations and was a high single-digit percentage point contribution to our sales growth. Net sales increased 28.7%, driven by retail takeaway and the timing of shipments. Specifically, Q2 POS increased 19.6% in the U.S. measured channels of IRI MULO and convenience stores.

As is typically the case this time of year, trade inventories grew during the quarter in support of seasonal in-store merchandising. Q2 sales growth also benefited from the timing of shipments to support earlier-than-expected Q3 customer programs. We also estimate that the storms that negatively impacted sales in the year ago period was about a 2 percentage point benefit this quarter.

Adjusted EBITDA in the second quarter increased 27.1% to $54.2 million, primarily due to the sales growth and G&A leverage. As expected, gross margin declined 250 basis points versus the year ago period. Higher supply chain costs were partially offset by the price increase and favorable mix. And while still a challenging supply chain operating environment, customer service performance improved during the quarter. While we are not at target service levels, our performance has improved during the first half of the year. We are pleased with our progress in a continuing difficult environment. We executed well against our priorities in the second quarter to ensure we deliver on our short- and long-term objectives. We are focusing on driving sales and earnings growth and competing effectively while navigating a challenging supply chain environment.

As such, due to lingering supply chain cost inflation, which we expect to continue into fiscal 2023, earlier this week, we notified customers of a price increase effective in our fiscal fourth quarter. Additionally, in March, we entered into an agreement to license the Quest frozen pizza business to Bellisio Foods, which has held the license for Atkins frozen meals for several years.

Simply Good retail takeaway in measured channels increased 19.6% despite the significant surge in cases from the Omicron variant that was dominant during the quarter. And as has been the case throughout the pandemic, both our brands have outperformed their respective subsegments of weight management and active nutrition. In Q2, the weight management segment was up 0.4%, Atkins outperformed the segment with retail takeaway up 6.4% over the same time frame. Now the Quest retail takeaway in measured channels in Q2 was up 40.1% and outpaced the active nutrition segment growth of 20.5%. We estimate that U.S. retail takeaway in unmeasured channels, primarily e-commerce and specialty, increased low double digits on a percentage basis versus last year.

As expected, due to strong performance in the year ago period, the growth rate in unmeasured channels moderated. Atkins Q2 U.S. retail takeaway in measured channel increased 6.4%. The year-over-year increase benefited from improvements in the mass and club channels as well as continued total buyer growth. Atkins growth in total buyers in the quarter remained strong, up double digits on a percentage basis versus the year ago period. However, the buy rate remains mid-single digits below historic levels due to fewer snacking occasions from the high correlation between consumption of Atkins bars and the workplace. Therefore, the return to pre-pandemic routines continues to be a big opportunity for the brand.

Atkins Shakes Q2 retail takeaway was up 11.7%, with growth solid across all major retail channels. In Q2, bar consumption was up modestly versus prior year. Growth slowed a bit from the previous 6 months. We suspect due to the impact of the Omicron variant that the CDC reported infected over 20 million adults in January alone.

Atkins all other product forms continued to show strong growth. These include confections, cookies and chips. In Q2, Atkins all other retail takeaway increased 9.8% driven by cookies and contributed about 2.6 percentage points to Atkins total brand retail takeaway growth. Confections POS was slightly lower as we lapped last year's successful dessert bar launch. Performance of key customers was solid with Atkins retail takeaway up across all channels. We are particularly pleased with Q2 mass channel retail takeaway of bars and shakes, which increased 7% and 10%, respectively.

And our Atkins e-commerce business is also doing well. Amazon Atkins second largest customer, Q2 retail takeaway increased about 20% on a percentage basis versus the year ago period.

Let me now turn to Quest, where Q2 retail takeaway increased 40.1% in the measured IRI MULO C-store universe and outpaced the active nutrition segment. Growth versus the year ago period was driven by an increase in household penetration, a rebound in bars and success in new product forms. Quest bars' Q2 retail takeaway increased 22%, driven by higher shopper trips versus the year ago period in C-stores and mass channel. Recall Quest bars are about 55% of total Quest measured channel retail sales.

The snackier portion of Quest products, about 40% of total Quest U.S. retail sales continued to do well and increased 88% in Q2, driven by continued strong growth of chips, cookies as well as confections. We continue to see robust growth across all these forms. We had another good quarter of growth across all key retail channels, increased foot traffic in the mass channel and convenience stores were solid, driving combined Q2 POS growth in these channels of nearly 45%. Quest e-commerce takeaway increased about 14% versus last year. As expected, due to strong performance in the year ago period, the growth rate moderated from previous quarters.

In summary, we're pleased with our second quarter results that were better than we expected. Over the remainder of the year, we anticipate that retail takeaway will continue to be solid, although as we mentioned previously, the growth rate in the second half of the year is more challenging due to more difficult year-over-year comparisons. We have a good balance of innovation as well as in-store merchandising and programming that we believe will enable us to deliver on our retail takeaway targets.

Due to the timing of Q2 shipments discussed earlier, we expect next sales growth in the second half of the year to be less than the retail takeaway increase. Additionally, given the unknown timing of when employees will return to the office and the unpredictable nature of COVID-19 over the remainder of the fiscal year, we don't anticipate any meaningful improvements in workplace mobility. While customer service levels are improving, we anticipate that the supply chain operating environment will remain challenging. We have good visibility into our cost structure for the balance of the fiscal year and our input costs are largely covered.

Therefore, there is no meaningful change to our fiscal 2022 supply chain cost inflation or gross margin outlook. The price increase announced earlier this month is primarily a benefit in the fiscal 2023. 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.

Now I'll turn the call over to Todd to provide you some greater details in our financial results.

Thank you, Joe, and good morning, everyone. I will begin with a review of our net sales. Total Simply Good Foods second quarter net sales increased 28.7% to $297 million. North America net sales increased 31.5% and was primarily driven by volume. As Joe stated, we estimate the pricing was a high single-digit percentage point contribution to our sales growth. The international business declined 25.1% due to the European business exit.

Core international net sales growth was 6.1%, and the European business exit was a 1.5 percentage point headwind to total company net sales growth.

Moving on to other P&L items. Gross profit was $108.5 million, an increase of 20.2%. Gross margin declined 250 basis points to 36.6% and was in line with our expectations. The gross margin decline was driven by the previously discussed supply chain cost inflation partially offset by pricing and favorable product form and retail channel mix. As Joe mentioned, over the remainder of the year, we have good visibility into our cost structure, and our input costs are largely covered. In the second half of the year, gross margin is greater than the Q2 seasonal low and is anticipated to be in the 37.5% to 38% range, with Q4 greater than Q3.

Adjusted EBITDA increased 27.1% to $54.2 million due to higher sales and G&A leverage. Selling and marketing expense increased 22.2% to $32 million, driven by higher brand-building initiatives on both brands. Note that the ramp-up of marketing expense in the second half of fiscal 2021 impacts the marketing accrual in fiscal 2022. We expect marketing expense this year to increase mid- to high single digits with substantially all of the growth in the first half of the year.

G&A expense, excluding integration and restructuring expenses as well as stock-based compensation, increased 4.8% to $22.9 million. Lower costs related to the European business exit was more than offset by higher professional fees and the timing of research and development spending. We anticipate solid G&A leverage this year and expect leverage to be higher 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 $2.7 million to $5.3 million due to the reprice of the term loan in the second quarter and pay down of term loan debt. In the second quarter of fiscal 2022, the noncash charge related to the remeasurement of our private warrant liabilities was $12.7 million. In the year ago period, we recorded a noncash charge of $45.3 million. As previously disclosed on January 2, 2022, the private warrants were exercised on a cashless basis.

Our statutory tax rate in Q2, excluding the charge related to the warrant liability, was about 25%. Net income in Q2 was $18.5 million versus a loss of $26.2 million in the year-ago period.

Year-to-date results are as follows: net sales increased 25.2% to $578 million, the drivers of growth are similar to Q2. Gross profit was $225.1 million, an increase of 22.1%. Gross margin of 38.9% declined 100 basis points versus the year ago period.

Adjusted EBITDA increased 31.2% to $120 million, primarily due to the higher gross profit.

Selling and marketing expenses increased 21.7% to $62.5 million. The increase was driven by higher brand-building initiatives.

G&A expenses increased 3.6% or $1.5 million. This excludes charges of $6.1 million related to integration expense, related to integration costs, restructuring expenses, stock-based compensation and other expenses.

Moving to other items in the P&L. Interest expense declined $4.7 million to $11.6 million due to the reprice of the term loan and the paydown of the term loan debt. The year-to-date noncash charge related to the remeasurement of our private warrant liabilities was $30.1 million versus $24.9 million in the year ago period. Our year-to-date statutory tax rate, excluding the charge related to the warrant liability was about 25%. We anticipate the full year fiscal 2022 tax rate to be about 26% versus our previous estimate of 27%. Net income was $39.6 million versus $16.7 million in the year ago period.

Turning to EPS. Second quarter reported EPS was $0.18 per share diluted compared to a loss of $0.27 per share diluted for the comparable period of 2021. In addition to the previously mentioned warrant liability impact, in Q2, depreciation and amortization expense was $4.8 million and similar to the year ago period. Stock-based compensation of $3.1 million increased $0.6 million versus last year. And costs associated with Quest integration and restructuring was $0.3 million versus $2.2 million last year.

Adjusted diluted EPS, which excludes these items, was $0.36, an increase of $0.11 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 $0.40, and adjusted diluted EPS was $0.79.

Additionally, the calculation of adjusted diluted EPS in Q2 assumes fully diluted shares outstanding of 102.4 million versus 100.4 million under GAAP. The difference is due to the exclusion of the private warrants and fully diluted shares outstanding under GAAP as the private warrants were previously 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 the second quarter, net cash provided by operating activities was $37.7 million, an increase of 53% versus the year ago period. Year-to-date, net cash provided by operating activities was $30.3 million, and we anticipate full year fiscal 2022 cash flow from operations will be about the same as last year due to the timing of tax payments versus the year ago period.

As of February 26, 2022, the company had cash of $51.5 million. The outstanding principal balance of the company's term loan debt was $431.5 million, and the trailing 12-month net debt to adjusted EBITDA ratio was 1.6x. During the second quarter, the company repurchased $20.4 million of its common stock at an average cost of $35.68 per share. As of February 26, 2022, approximately $27.5 million remained available under the existing stock repurchase authorization. We anticipate GAAP interest expense to be about $23 million, including noncash amortization expense related to the deferred financing fees. This is less than our previous estimate of about $25 million due primarily to the repricing of our term loan. Capital expenditures in the second quarter and year-to-date period were $1.6 million and $4.3 million, respectively. Full year CapEx is expected to be about $6 million.

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

Thanks, Todd. Our strong results in the first half of the year position us well to deliver on our full year objectives. In the second half of the year, we have marketing, customer programming and innovation plans in place to continue to drive sales growth and retail takeaway. This gives us confidence to increase our full year net sales and adjusted EBITDA outlook. Our forecast does not include any meaningful improvements in workplace mobility and assumes that we'll continue to perform well in navigating the challenging supply chain operating environment.

Looking at the key metrics of our updated full year fiscal 2022 outlook, we expect net sales to increase 13% to 15% versus last year. This includes a 2 percentage point headwind related to the European business exit and the licensing of the Quest frozen pizza business. There is no change to our gross margin outlook. As we stated earlier, we continue to anticipate supply chain cost inflation and expect gross margins to decline about 250 basis points versus last year.

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 significant G&A leverage. And the decline in interest expense should result in adjusted diluted EPS growing faster than adjusted EBITDA.

A couple of things to note in the second half of the year. Our comparisons are more difficult. We expect retail takeaway to increase low double digits versus prior year. Net sales growth will lag retail takeaway due to the first half trade inventory build. And as we stated in January, we anticipate year-over-year performance across key financial metrics to improve from the third quarter to the fourth quarter. We're excited about the growth opportunities that exist within our business and the category. We're executing against our strategy 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 opportunistically buy back shares of our stock 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 Jason English with Goldman Sachs.

A couple of questions. First on top line. I believe your guidance for the back half of the year implies sales growth of low to mid-single digits, which seems a lot lower than I would expect given the momentum in the business. But maybe you can unpack some of the puts and takes. So I think you pulled some -- yes, go ahead. I'll let you run with it. Go with it.

Yes. So I mean, the high end of the guidance is around 6.5% net sales growth for the back half. So we have about 2 points because of the European exit we licensed pizza. So that's about a 2-point negative impact to the second half. So that gets you to about 8.5% at the high end. Obviously, we built inventory in the first half, some of it was we exited the year a little bit light. We built some of it back in Q1, more in Q2. We had some key customers who wanted the shipments earlier than normal, normal March shipments that occurred in February for some spring activity.

And then don't forget, we had that storm -- Texas storm last year that ripped through the country, right at the end of our Q2 last year that took about 2 points of growth out of Q2 into Q3. So there is -- the question is how much of this deload is going to stick and how much is going to stay. Most -- or leave us here. Most of it is going to go away. So there's probably at least 5 or 6 points of the deload that's going to impact the second year. So if I take the high end of 6.5%, I add the 2 points to get to kind of an organic 8.5% and then there's 5 or 6 points of deload, that's why we're saying POS is probably going to be in the low double digits in the second half. I hope that helps.

No, that's super helpful. And the statistic on class 55% now bars, correct me if I'm wrong, but I think if we rewind the clock to maybe 2018 or so, it was around 80% in bars driven. So the contribution from these other forms has been meaningful. Can you replicate that on Atkins? Like what is the early -- what are the early results telling you with cookies and chips, now that they're in market. Can they have similar success? Or should we temper our expectations given the weight management set?

Well, let's -- if we consider, Jason, bars and shakes as our core business on both brands. We've already replicated it on Atkins, our Confection business is about 25% of the Atkins portfolio. So I think the question you're asking, can we get bigger than 25%? I think the answer to that is yes. Still in the early stages of cookies on Atkins appear to be pretty successful. We just shipped -- started shipping chips too early to call, but we've got enough consumer data surrounding our Saudi snack business to know that the consumer base for Atkins we'll find the product pretty appealing. So we're pretty confident. And in fact, we think as a percentage of our portfolio, kind of the all other forms, the non bar and shake forms will continue to become a larger and larger piece of the portfolio.

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

Sorry about that, guys. Is that better? I'm in the airport.

Yes.

Great. May I ask, the first question maybe just on the mechanics of your input cost coverage for the year. Is it mostly financial hedges? Is it contracts on supply? And I guess the reason why I ask is in such a kind of strange environment, is there risk of things like force majeure? Or are there caps may be on certain inputs that we should be paying attention to?

Yes. So no financial contracts. It was just normal. We contract either with our co-mans or directly with ingredient suppliers, highly confident that we're going to get the ingredients. We're over 90% covered now for the year. So we feel very, very good about where we are from an input cost perspective.

Okay. Great. And then a follow-up on the share repurchase. Does that indicate or say anything about how you're feeling about the M&A environment, M&A opportunity?

Yes. No. I mean just to step back for a second, 2 years ago, we had leverage over 4x when we purchased Quest. So job #1 was to get that -- was to deleverage our balance sheet. So we ended this quarter down to 1.6x, obviously, a very, very comfortable place to be to do M&A, potentially continue to pay even more debt down or to opportunistically buy some shares.

So we're very active in looking at M&A opportunities. Basically, we saw the stock pullback just with the craziness of the stock market. We we bought the $35 range, very attractive prices in our view. So we now just have the capital allocation flexibility to remain active in M&A to continue to pay down term loan or if the shares remain at attractive levels, we will not hesitate to buy more stock.

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

I just wanted to ask you about the incremental pricing. I guess, firstly, I think originally, the expectation for the year, let's call it, I don't know, maybe 6% or plus. I think you said in your prepared remarks, Q2 was up high single digit. And then now there's another -- sounds like another round coming that maybe kind of squeaks in sometime towards the end of Q4. If we're just thinking I guess, one, about kind of the reason for the need despite you're being covered, kind of why did you think you needed more pricing? Or did you think you just could get it because volume so far are pretty good. And then secondly, just any color around magnitude of that pricing as we think about next year would be great.

Yes, Rob. Thanks for the question. This is Joe. First, we're sitting at gross margins, 250 basis points erosion this year in gross margin with a stated target of trying to have gross margins around 40%. We believe that's a competitive advantage to us. It provides us the necessary marketing support to drive household penetration and growth in our business. So we're in the middle of the year and below our own expectations.

So inflation, in fact, this year exceeded our expectations, and our pricing this year plus cost savings were insufficient to whole gross margin. As we look at the environment -- as we said in our prepared remarks, as we look at the environment into fiscal year '23, it -- cost inflation is going to continue based on our view right now.

So the combination of where we are today, it didn't take enough pricing this year. The environment that we see as we move into fiscal '23 continue to be inflationary, caused us to move forward and take a second price increase. That price increase will have a minimal impact on this fiscal year and in fact, is more about as we move into the first half of next year.

Okay. Fair enough. And then just kind of a general question for you, Joe. I know now for some time, you've been kind of factoring in no real improvements in consumer mobility, which I fully understand. But if we're sitting here now early April, I guess kind of the direct question is there -- all I have, is there anything that you've seen kind of coming through March already that could suggest some positive potential in terms of increase increased mobility expectations? Or again, it's just like way too early to tell, and you just kind of find keeping it flat on the go forward.

I would just think going forward, it's really difficult to see how this is going to play out, right? So I would have told you I thought when we were sitting in October, November, we're in pretty good shape from a COVID. The variant hit, 20 million people had reported cases of the new variant, and we weren't locked down, but we certainly weren't -- people weren't out in the bot like they were prior to that. So we're really reluctant to declare victory on COVID and to say that companies will go back to closer to what they were prior in the pre-COVID period just because it's been very, very difficult to predict it. So we're taking a conservative view on it.

As it pertains to back to work, do we see any positive signs. Q2 -- so the business that's been the most affected has been Atkins bar business. And in Q2, we actually saw -- Q1 to Q2, we saw improvements in buy rate on bars. Certainly not back to full potential, certainly, a lot of opportunity. But as the -- as companies started to go back to work, the number of bar snacking occasions went up, and we saw the buy rate on Atkins bar improve. Certainly not where we want it, certainly not where it can be, but we did see the correlation appeared to play out in the second quarter.

So again, I would -- I think conservatism as we think about the second half of this year is appropriate, given what we've experienced over the last 2 years. And it appears this correlation factor on snacking and work on bars, appears to be correct. So we feel pretty confident that as companies go back to more the way they look like pre-COVID, our bar business is certainly going to pick up.

Our next question comes from the line of John Baumgartner with Mizuho.

I guess, first off, Joe, just hoping to hear your thoughts in terms of merchandising at retail. The Nielsen data shows a pretty striking drop off in distribution points really across the board for general merchandise categories. And even across health and beauty care, TDPs are down for everything other than vitamins. I mean to what extent do you see the weight management and active nutrition categories benefiting from this in terms of incremental space, visibility during the next cycle of shelf resets and moving forward?

Yes. I'm interested to hear your observation on that. I had not heard that before. Our points of distribution on both brands, up significantly since the beginning of the fiscal year. I don't think, John, it's coming from expansion of our category into other space. I think it's just -- I think it's competitive pickup, right? So we gained some space, somebody else will lose some space. So I don't think it's that. And for the most part, I think it's -- there are 2 factors that have been driving distribution gains. I think during COVID, retailers understood the importance of bigger brands, kind of key flagship brands in the category to attract foot traffic to the category.

And then I think we have a pretty good innovation pipeline. So enough new items, interesting new items to gain incremental space. So I hadn't heard that actually loss of TDPs in other categories. But I don't -- I'm not seeing a benefit to our category because of that.

Okay. And then just as a follow-up, coming back to Jason's question. On the cookie side, I think Atkins is run rating something like north of $20 million annualized in Nielsen right now, and that approximates what Quest did in this first year, I think, going back to 2018. What are your early reads in terms of incrementality from new consumers, any degree of cannibalization from cookies impacting confections and brownies? And I guess given the start you're seeing and even maybe salty snacks for Atkins as well, is there anything that would sort of inhibit growth of the glide path from here in terms of passing constraints or anything relating to slotting at retail?

Yes. Cookie -- your analysis on cookies is consistent with ours on the opportunity size. We are facing some constraints in cookie production right now due to staffing issues at the co-man, but we're managing around those on both businesses, frankly. But I don't expect that to be a long-term drag on the business. I'm very optimistic on the opportunity in all other forms. If you think about it, the use occasions for bars and shakes, we've done a really nice job of penetrating those use occasions and we'll continue to grow those categories as we grow total buyers, but the real opportunity, I think, going forward is the ability to pick up different use occasions and different need states in different snacks. I was just looking at some data on the Quest business. And we're starting to gather now that we've owned the business, new buyer data on that business. About half the new buyers on Quest are coming from bars, about half the new buyers on Quest are coming from not bars.

So that is telling us we got ourselves a lifestyle brand, transcends in one particular form. And then we've got a suite of products that hit a lot of different need states and use occasions, which is pretty powerful thing and very consistent with what we've experienced on Atkins. So we're very optimistic. Our pipeline is full of technology and products that's going to enable us to continue to explore these other snacking need states and products.

Our next question comes from the line of Cody Ross with UBS.

Your sales came in better than expected this quarter. Did you guys quantify how much of that was due to the timing of shipments?

Yes. It's -- I mean it's -- if you look at the POS growth, it was about -- in North America, it was about 19% and the North America business grew around 30%. So there was definitely approximately 10 points of timing.

Got it. And then you guys raised your sales...

Some of that inventory was make up for low inventory levels going into the year. Some of it's timing and is going to come out. And that's the art and the science of figuring out the second half of the year. What's going to stay. We have a growing business, so weeks of inventory -- customers try to keep the weeks of inventory pretty consistent. But as you grow the size of the business and weeks of inventory gets bigger for 1 week gets bigger. So as we've provided our guidance for the second half of the year. We gave our best estimate of how much is going to stick and how much of it is, in fact, just timing and the shipments have come out in the second half of the year.

Understood. Piggybacking on that, how much inventory are retailers carrying right now? And how much do you expect them to carry going forward if you have any visibility to that?

Yes. I mean we -- again, we ended the year low, just -- if you remember, our fourth quarter, the summer of last year, that's when all the supply chain logistics issues were starting to occur with us and our peer group. So we struggled to get -- to fulfill orders and get orders out the door. So we ended August with lower -- not bad, but lower than normal retailer inventory. So we built some of that back in Q1. We build a little bit more back in Q2. And because of some of the just short-term shifts in customer requirements from March into February, we probably added a week or 2 of inventory. We're typically in the 4 to 6 weeks of inventory for a retailer out there. And so we're a little bit higher than normal. Again, as Joe said, most of that's going to come out in the second half, always hard to tell where you're going to land the year. But we've made our best guess. We'll probably keep a little bit of it, but some of -- most of it will come out.

Got it. And then last one, if you don't mind me sneaking it in. Our recent conversations with investors, there's some thought out there that your gross margin outlook might be conservative. And given your raise in sales this year slightly, 1% at the midpoint, but you held gross margin guidance. Why is that?

Yes. I mean, we're -- look, we took -- I think we took the hit on gross margin outlook, quite frankly, in our January call, right? And so we wanted to make sure we did not change it again. Commodities have not -- obviously, as you see, have not pulled back, but we're covered for the year. We feel very -- we felt confident in January. We feel now even more confident that, that minus 250 is a pretty good number. So I don't view that number as conservative. The costs are real, but we're covered.

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

Jim Salera on for Ben. If I can ask a couple of questions on the consumer side of things. Have you guys seen any consumer pushback on the price increases that you've put in so far any demand elasticity just what you're seeing in the channel? And then if no, how do you guys feel about the fourth quarter price increase? Do you have any concerns around demand structure with that?

Yes. First of all, consumer response to our price increase in September has been -- the elasticity has actually been lower than what we projected. So volume has been directionally stronger, and I think that's pretty consistent with what you're hearing from most food companies. I would say one of the metrics that we're looking at right now is you're starting to see the emergence of private label again, which tells you consumers are starting to get a little bit more price sensitive. And I think it has to do with the current economic environment, gas price is high, ground war in Europe that people are concerned about.

I think, in general, consumers are growingly more concerned about the future and real incomes and costs. So as we think about pricing, obviously, we're on -- we're always concerned about a pricing environment where consumers are feeling less than positive given the current financial situations. That said, you have to do what you have to do. And in this case, we've got to maintain our margins. So we're pricing to cover the commodity cost. And we'll be conservative in our estimates of what we think the elasticity will be as we move forward.

Yes. And just one clarification. Joe mentioned private label, which is [bought on]. We are seeing private label broadly do better in the food space. This category has very, very little private label. So not a concern at all from our end.

Yes. So as we look at elasticities, there's no -- in both of our businesses, there's no competitor and there's no private label that we have to worry about price gaps too. It's absolute price point driven. And I've been in categories where that is clearly not the case. It's just not -- it's not a prevalent -- private label is not well penetrated here as had a great deal of difficulty over the years trying to be successful.

Okay. Great. And if I could actually sneak in one follow-up on that. Have you guys seen any evidence of consumer trade down, whether it's in our category or maybe even out of the category just given the lower dollar price point per unit of consumption?

No.

No. I've not seen any evidence of that yet.

Yes.

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

Can you hear me?

Yes.

Yes.

Okay. Cool. I was having some phone issues earlier. So I guess 2 questions. The first one is just on reinvestment spending and sort of the philosophy as we go forward. I think you've been clear about your plans over the balance of '22. But as we move forward, just given what you're seeing in the environment, given your own innovation pipeline, is the thought process that, that rate of reinvestment spending kind of parallel sales as we go forward? Or do you feel like you have an opportunity to accelerate that spending, to accelerate the top line and get ahead of it? Or conversely, is the point of -- you view as a point of margin leverage as we go forward? Just how you're thinking about strategic investment kind of beyond the current year?

Sure. So Steve, I mean, look, long term, our model is we're going to maintain marketing investment with sales growth. Obviously, the last couple of years, we've exceeded that. We've been able to maintain gross margins. The top line has exceeded our plan. It's given us a lot of financial flexibility to increase investment and build up our investment, and quite frankly, in Quest, where when we bought the business, it was about 6%, 6.5% of net sales, we've gotten that up to about 9%. So we've exceeded marketing spend as sales growth.

This year, with a little bit of pressure on margins, we pulled back. We have not -- we decided not to maintain marketing growth a little bit lower than what our sales growth is just to kind of manage some of the bottom-line margin. We're still going to -- as I mentioned, we're still going to grow it in mid- to high single-digit growth rate, so it's still pretty healthy growth. We spent a lot in the fourth quarter of last year, so we were jumping off a high base. So we have a lot of -- we feel very comfortable with the amount of spending we have.

And quite frankly, if we can get some upside to the second half and we can maintain the margins, we -- as you know, we will not hesitate to spend some incremental marketing in the fourth quarter if the P&L allows us. But going forward, growing with sales is kind of the model that we predict.

And I would add to that, we're fairly quantitative about return. So when we know we've got good return for the investment, we're leaning in. Where we know we don't have good return, we're pulling back. So you can expect us just from a principal standpoint, we want to be around 10% of net sales and we want to have a good return. So both in the absolute level of spending as well as what we're spending on is always return based. Do we drive incremental sales, how much incremental sales, what's the profit worth to us? And that's how we've been as a business since we've been public, steadily increasing marketing support because the return has been good.

Great. Great. And then a second question, different tact. We spoke a couple of months ago, was pretty clear, you didn't feel any outright urgency for M&A, but you continue to search for a right asset at the right price. I guess just an update on your thinking there. And specifically, when we were talking about just kind of valuation expectations of sellers and them having been frothy over the past several quarters. There was some discussion about whether the current market backdrop was going to reset people's expectations. Just any sense if you're seeing any movement there?

Early indications are we'll see if they play out. Yes, expectations are starting to change. The conversations typically start with we're going to IPO the business. But if you give us 30x earnings, we might sell it to you, right? So those kinds of conversations given what's going on in the IPO market, what's coming -- what's going on with equity values. They're less frequent now, right? So I think seller expectations are coming down.

Bankers believe that they got to tell the owner exactly what he wants to hear or she wants to hear is starting to come down. So I think the environment, as we move forward, is getting a little bit more conducive to getting some deals done. And there's a lot of assets we've liked. There's not a lot of assets we'd like to value on. And so you should expect us to continue to be tough on value.

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

Can you comment on the magnitude of the price increase that you're planning to take at the end of the fourth quarter? And will it be across the entire portfolio. And related to that, what are you seeing across the competitive landscape from a pricing standpoint? Are you observing other branded competitors raising prices at similar rates?

Yes. So the price increase we just announced this week very similar to the price increase that took effect in September is across the portfolio, differs whether product form or brand a bit. But the last price increase was about a weighted average of about 8%, and this one is similar.

And from a competitive standpoint, yes, we were probably ahead of the curve on pricing. We are now seeing our competitors take price, not always clear exactly what the percentage is, it differs. I think some are similar to our price increase. Some are kind of a little bit more modest, and the price increases we're taking, but we feel very, very good about the pricing actions we've taken.

Yes, Pamela, if you're a competitor buying dairy proteins, you better be taking pricing because the marketplace are historic highs, and they don't appear to be coming down off those historic highs anytime soon. So if you're not taking cumulatively double-digit or more pricing. You're not keeping pace with the cost coming into your products.

It seems like the first round of pricing went very smoothly from both a retailer and consumer standpoint. What has been the retailer reaction to the second round of pricing?

Too early to call. And I'm glad you think it was smooth. But the retailers are trying to protect consumers. And so you run the gauntlet with a retail or any price increase, right? So -- and they're dealing with this across the board, throughout their store, all the buyers are dealing with it. The manufacturers are taking pricing. They're on to their second, in some cases, third pricing actions, right? So we'll see how -- if it's more difficult, the same or easier than the first one, but I expect retailers to continue to behave the way they behave, which is they want you to justify your price increase based on actual cost change. And we feel pretty confident that we have that fact base to make them feel comfortable that the price increase is justified. But to be clear, it's not going to be easy.

Right. And one last question on different topic. Just in terms of the divergence that you pointed to in the bars performance. It sounds like Atkins was impacted by lower mobilities because of Omicron, but Quest bars benefited from more shopper trips. So what do you see as the different dynamics across the 2 brands? Is it mainly a function of the channel mix? Or are there other factors influencing that performance?

Yes. I think channel mix and category benefit, right? So channel mix, Quest has a very large small-format convenience store business that collapsed during COVID, right? So people just weren't going into convenience stores, gas stations to buy bars. That business has come back and is robust and is growing. Also, if you just -- you can't look at this category as generic bars. The consumer benefits are very different.

Quest is about active protein for your active lifestyle. Atkins is about helping you manage your weight. I just think the environment right now for weight management is not back to full potential. If you think about the second quarter, people were basically sheltering in home because we had 20 million-plus people with COVID.

I think right now, if you just look at what's been going on recently with the economy, with gas prices, people aren't feeling particularly positive about the future. Hard to think about a lifestyle change and start eating healthier and maybe drop a few pounds when you don't feel particularly good. We were chatting about this yesterday.

Todd and Mark come from the confections business and their experience was when people aren't feeling good, they eat a lot of chocolate, right? And I think we're seeing a little of that in the Atkins business, too. But correlates to being at work because the snacking occasions for bars are more work based, but I also think people aren't feeling great. And it's hard to think about lifestyle change when you're not feeling particularly positive about the future right now. So I think it's a combination of category and channel mix.

Our next question comes from the line of Ryan Bell with Consumer Edge Research.

I just wanted to ask a little bit about the expansion of your licensing partnerships across categories. Where do you see the size of that and maybe the opportunity for future expansion?

Yes. Ryan, I don't think we see it as a strategy today. We like the category we're in. We like snacking in our aisle. We feel that deployment of resources against that is our biggest -- our highest leverage opportunity. We had -- the Quest team had entered into -- the Quest company had entered into a frozen pizza business. We ran that business for a few years. And we just came to the conclusion that it's not our core strength, a it's not our core strength in supply chain, customer relationships, category innovation. So we just thought it was a business better to put into hands of a partner who's done a terrific job with our MULO business on Atkins. So for us, it's more about focusing on the categories that we believe are the greatest growth prospects and less about a broad-scale licensing thinking across the portfolio.

And then you were talking a little bit about some of the consumer behavior shifts, where people maybe aren't feeling quite as great, but you kind of pair that against potentially needing to focus on weight management more now than ever. How do you think about that more over the medium term in terms of the household penetration opportunity, where you'd see snack here versus on-the-go demand shifting towards e-commerce and just sort of the broader evolution of that?

Yes. It's a bit of a dichotomy. So we've had since the summer -- COVID summer at 2019?

2020.

2020, we've seen double-digit growth in buyers on Atkins. So high end -- so the net takeaway of that, high interest in the brand, interest in low-carb lifestyle interested in weight management. So we've consistently experienced that since then. And the second quarter was no different. Double-digit growth of total buyers. We're bringing new buyers in. They're sticking around in loyalty.

Our challenge in the business, and I think that continues because if you look at the macro trends, on-the-go snacking, health and wellness, interest in weight management, all tailwinds for us. And they've been tailwinds for us for a decade, right? So current -- the -- if you just step back that when you talk to people about weight management, they go -- it's kind of episodic. It's kind of -- it ebbs and flows. It's -- well, we've been flowing now for a decade on weight management. And it's because 50% of Americans are obese, about equal number are type 2 or type 1 diabetics or prediabetic, right? So the numbers are staggering.

The challenge of the business has been for us by rate. And I think the challenge of the business is you're trying to get people to make a lifestyle change. right? So short term, hard to get people to think about lifestyle change when the world is kind of upside down on them. And I think that you understand that. So I think we're -- I think the business performance is being short term affected by that. The long-term trends are undeniable, right? The people have to change how they eat because the path that we're on is not a healthy one. By the way, the health care costs are mind-boggling for people that are overweight and diabetic, right? So we feel really good about the midterm trends the buyer growth has been very positive.

We just got to get people. I think as you start thinking about a lifestyle change, you're more compliant, you snack more, right? If I get people back to work, they'll snack more of my products. right? So we're pretty confident. The mega trends and the long-term trends are definitely in our direction. They have been for a long time. This COVID thing has shook up some of the dynamics. But every day, we see those things moving back to where they were.

And the last question for me. In terms of the opportunity to get packed towards sort of the 40% gross margin range, where you saying in terms of the pricing that you're expecting to take and how that would trickle through into fiscal '23. Are you expecting to migrate closer up towards that or see like some improvement on a year-over-year basis?

Yes. I mean, obviously, 40% is the target. The question is when. I mean, it's really hard to predict very early on what FY '23 is going to look like from a cost perspective. Prices continue to be incredible dynamic and just got exacerbated by the Ukraine Russia ground war, and they just kind of took off again. Is that short term? Is that going to stick for a while, very hard for us at this point to predict. So again, we're not going to comment on what gross margins are going to be next year. We took a pricing action to cover what we anticipate to be elevated input cost issues for us. But we'll come back later as we get closer to year-end and give you a little bit more color on gross margin.

But right now, too hard to tell. But very clear, 40%, we believe, is a competitive advantage, allows us to invest heavily in our business, allows us to have strong bottom-line margins. So that's clearly the goal.

Ladies and gentlemen, our final question this morning comes from the line of Eric Larson with Seaport Research.

I just have one question, Joe. And I'm sure that you've probably gone back and studied this, but you didn't own these brands or run them in the last economic recession, which is, what, 12, 13 years ago. So if U.S. goes into economic recession, how do the brands perform? And what would you do or not do or maybe you don't do anything differently than what you're doing today with a very weak U.S. economy?

Yes. I think, we've been looking for proxies. I think the best proxies to look for on how the businesses would behave in a recession are confections, quite frankly, small indulgences snacks, right, which tend to do pretty well during recession. So our view going into this thing is people will continue to invest in themselves on low-ticket items in order to make their lives a little bit better. So -- but we'll continue to look at that pretty closely.

Yes. And don't forget, we're -- on both brands, the consumer is up a pretty upper middle-class kind of consumer. So we...

More affluent.

Yes, more affluent. We believe they can probably withstand a recession a little bit better than some other categories. But yes, we're going to watch it very, very carefully for sure.

It's a good question.

Ladies and gentlemen, this concludes our question-and-answer session. I'll turn the floor back to Mr. Scalzo for any final comments.

Thank you again for your participation on today's call. We hope you continue to remain safe, and we look forward to updating you on our third quarter results in June. Have a good day.

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