The Simply Good Foods Company (SMPL) Q2 2022 Earnings Report, Transcript and Summary

Greetings, and welcome to The Simply Good Foods Company Fiscal Second Quarter 2022 conference call. At this time, all participants have been placed in a listen-only mode. A question-and-answer session will follow the formal presentation. [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 am 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 AM Eastern Time. A copy of the release and accompanying presentation are available under the Investors section of the company's Web site at www.thesimplygoodfoodscompany.com. This call is being webcast, and an archive of today's remarks will also be available. During the course of today's call, management will make forward-looking statements that are subject to various risks and uncertainties that may cause actual results to differ materially. The company undertakes no obligation to update these statements based on subsequent events. A detailed listing of such risks and uncertainties can be found in today's press release and in the company's SEC filings. Note that on today's call, we will refer to certain non-GAAP financial measures that we believe will provide useful information for investors. Due to the company's asset-light strong cash flow business model, we evaluate our performance on an adjusted basis as it relates to EBITDA and diluted EPS. 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 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. 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 two percentage point benefit this quarter. Adjusted EBITDA in the second quarter increased 27.1%, [to] (ph) $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 with challenging supply chain operating environment, customer service performance improved during the quarter. While we're not at target service levels, our performance has improved during the first-half of the year. We're 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 sub-segments 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 timeframe. Total Quest retail takeaway in measured channels in Q2 was up 40.1%, and outpaced the Active Nutrition segment growth of 20.5%. We estimate the 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 and 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 continued 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 six 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 successful dessert bar launch. Performance of key customers was solid for Atkins retail takeaway up across all channels. We're 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, with Q2 retail takeaway increased 40.1% in the measured IRI MULO C-store universe, and outpaced the Active Nutrition segment. Growth versus 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 are 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 net 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. Our customer service levels are improving, we anticipate that 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 are 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 American 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 for 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 cost 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 cost 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 re-price of a term loan in the second quarter and pay down of term loan debt. In the second quarter of fiscal 2022, the non-cash charge related to the re-measurement of our private warrant liability for $12.7 million in the year ago period. We recorded a non-cash 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 is 38.9% declined 100 basis points versus the year ago period. Adjusted EBITA increased 31.2% to $120 million, primarily due to the higher gross profit. Selling and marketing expenses increased 21.7% to $2.5 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 P&L, interest expense declined $4.7 million to $11.6 million due to the re-price of the term loan and the pay down of the term loan debt. The year-to-date non-cash charge related to the re-measurement of our private warrant liabilities was $30.1 million versus $24.9 million in the year ago period. As 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 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 has 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 in fully diluted shares outstanding under GAAP as the private warrants were previously a liability on our balance sheet. Please refer to the 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 and 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 months net debt to adjusted EBITDA ratio was 1.6 times. 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 non-cash amortization expense related to the deferred financing fees. This is less than our previous estimate of about $25 million, due primarily to the re-pricing of our term loan. Capital expenditures in the second quarter and year-to-date period was $1.6 million and $6.3 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, Scott. The strong results in the first-half of the year position as well to deliver in 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. A forecast does not include any meaningful improvements in workplace mobility. And assumes that will 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 two 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 margin 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. A 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 at the path to increasing shareholder value. We appreciate everyone's interest in our company, and we're now available to take your questions.

Thank you. At this time, we'll be conducting a question-and-answer session. [Operator Instructions] Thank you. Our first question comes from the line of Jason English with Goldman Sachs. Please proceed with your questions.

Hey, good morning, folks. Thanks for slotting me in. 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? Yes, oh, 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 two points, because of the European exit, we licensed pizza. So, that's about two point negative impact to the second-half. 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 that back in Q1, more in Q2, we had some key customers who wanted the shipments earlier than normal. There were 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 two points of growth out of Q2 into Q3. So, there's -- the question is how much of this de-load is going to stick and how much is going to stay, or leave us here.? Most of it is going to go away. So, there's probably at least five or six points of that de-load that's going to impact the second year. So, if I take the high-end at 6.5, I add the two points to get to kind of an organic 8.5, and then there's a five or six points of a de-load. That's why we're saying POS is probably going to be in the low double-digits in the second-half. Hope that helps.

No, it's super helpful. Thank you. And the statistics on Quest, 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% bars-driven. So, the contribution from these other forms has been meaningful. Can you replicate that on Atkins, like, 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 -- you know, if we consider, Jason, bars and shakes, is 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 now we've got enough consumer data surrounding our salty snack business to know that the consumer base for Atkins will find -- will 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.

Helpful, I appreciate it. I'll pass it on.

Thanks, Jason.

Thank you. Our next question comes from the line of Kaumil Gajrawala with Credit Suisse. Please proceed with your question. Kaumil, your line is live.

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

Yes. Yes, we hear you.

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 strange environment, is there risk of things like force majeure, or the caps may be on certain inputs that we should be paying attention to?

Yes. So, no financial contracts, it's 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 are 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, let me just step back for a second. Two years ago, we had leverage over four times when we purchased Quest. So, job number one was to get that -was to de-leverage our balance sheet. So, we ended this quarter down to 1.6 times, 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, the stock market; 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.

Okay, great. Thank you.

Thank you. Our next question comes from the line of Rob Dickerson with Jefferies. Please proceed with your question.

All right, great, thanks so much. Just wanted to ask about the incremental pricing, I guess firstly, I think originally the expectation for the year was, 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 -- something in another round coming in, and maybe kind of squeaks in some time towards the end of Q4. If we're just thinking, I guess, one, about kind of the reason for the need to despite your being covered, kind of why did you think you kind of needed more pricing, or did you think you just kind of could get it, because [Indiscernible] so far is pretty good, and then, secondly just any color around magnitude of that pricing, as we think about next year will be great? Thanks.

Yes, Rob, thanks. 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 hold 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, cost inflation is going to continue based on our view right now. So, the combination of where we are today didn't take enough pricing this year, the environment that we see as we move into fiscal '23 continued to be inflationary, you know, caused us to move forward and take a second price increase. That price increase will have 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, you know, now for some time, you've been kind of factoring in no real improvements and consumer mobility, which I fully understand, but for sitting here now, early April, I guess, kind of the direct question, is there -- things I'll have, is there anything that you've seen kind of coming through March, already, that could suggest some positive potential in terms of increased mobility expectations, or again, it's just like way too early to tell, and you just kind of find keeping it flat on go-forward? That's all. Thanks.

Yes. 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're sitting in October-November, we're in pretty good shape from a COVID. You know, 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 and about 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 to 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 effective has been Atkins bar business, and in Q2, we actually saw -- Q1 to Q2, we saw improvements in by rate on bars. Certainly not back to full potential, certainly a lot of opportunity, but as company started to go back to work, the number of a bar snacking occasions went up, and we saw the by 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 conservativism, as we think about the second-half of this year is appropriate, given what we've experienced over the last two years, and it appears this correlation factor on snacking and work on bars, appears to in 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 got to pick up.

All right, super. Thanks, Joe.

Thank you. Our next question comes from the line of John Baumgartner with Mizuho. Please proceed with your question.

Good morning, thanks for the questions. I guess, first of all, Joe, just hoping to hear your thoughts in terms of merchandising at retail. I mean, 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 sales cycle, 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 lost some space. So, I don't think it's that. And for the most part, I think it's there are two factors that 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, the actually loss of TDPs and 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 Nielsen right now. And that approximates what Quest did in its first year, I think going back to 2018. What are your early reads in terms of incrementality from new customers and consumers, any degree of cannibalization from cookies impacting confections, 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 related to slotting at the retail? Thank you.

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, they 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 in different 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 lead states in used occasions, which is a 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 lead states and products.

Great. Thanks, Joe.

Yes, thanks for the questions.

Thank you. Our next question comes from line of Cody Ross with UBS. Please proceed with your question.

Hey, good morning, folks. Thanks for taking our question. 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 is about 19% and the North American business grew around 30%. So, there was definitely approximately 10 points of timing.

Got it. And then, you guys raised --

Just so we're clear, some of that inventory was make-up for low inventory levels going into the year. Some of its timing and it's 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, weeks of inventory gets bigger for one 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 for if you remember our fourth quarter of the summer of last year, that's when all the supply chain logistic issues were starting to occur with us and in our peer group. So, we struggled to get to fulfill orders and get orders out the door, so we ended August with lower, they're not bad, but lower than normal retailer inventory. So, we built some of that back in Q1, we build it 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 two of them into our works, typically in the four to six weeks of inventory for a retailer out there. And so, we're a little bit higher than normal. Again, like 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 out there, 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 raising 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 we -- 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've seen not pulled back, but were covered for the year, we feel very, we felt competent 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.

Great, thank you.

Thank you. Our next question comes from the line of Ben Bienvenu with Stephens Inc. Please proceed with your question.

Hi, guys, good morning, [indiscernible] on for Ben. If I can ask a couple 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 so that 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 instruction a bit?

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 as you're starting to see the emergence of private label again, which tells you to consumers are starting to get a little bit more price sensitive, and I think it has to do with the current economic environment, gas prices, 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, as we think about pricing, obviously, we're concerned, 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 margin, so we're pricing the cover to commodity cost, and we'll be conservative in our estimates of what we think the elasticity will be as we move forward.

And just one clarification, Joe mentioned private label, which is dead 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 do, it's absolute price point drive. And I've been in categories where that is clearly not the case, which is not prevalent to private labels not well penetrated here has had a great deal of difficulty over the years trying to be successful.

Okay, great. If I can actually sneak in one follow-up on that, have you guys seen any evidence of consumer trade down, whether it's into your 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.

No.

Okay, great. Thanks, guys. I'll catch you up.

Thank you. Our next question comes from the line of Steve Powers with Deutsche Bank. Please proceed with your question.

Hey, guys. Thanks. Can you hear me?

Yes.

Yes.

Okay, cool. I was having some phone issues earlier. So, thank you. I guess two 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 parallels sales as we go forward, or do you feel like you have an opportunity to accelerate that spending, to accelerate that top line and get ahead of it or conversely as a point of, if you view as a point of margin leverage as we go forward? Just how you're thinking about strategic investments, you're kind of beyond this 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 has 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 was about 6, 6.5% of net sales. We've gotten up to about 9%. So, we've exceeded marketing spend as sales growth this year, with a little bit of pressure on margins, we've 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 grow. As I mentioned, we're still going to grow in mid to high single-digit growth rate. So, it's still pretty healthy growth. We spent a lot in the fourth quarter last year, so we were jumping off 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 as you know, we will not hesitate to spend some incremental marketing in the fourth quarter if a 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 principle standpoint. We want to be around 10% of net sales and we want to have a good 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, it's always returned 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, we're 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, it was pretty clear. You didn't feel any outright urgency for M&A, but you continued to search for a right asset at the right price. I guess just an update on your thinking there and specifically what we were talking about kind of valuation expectations of sellers and then having been frothy over the past several quarters, there was some discussion about whether the current, just market backdrop was going to reset people's expectations, just any sense if you're seeing a 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 30 times 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 belief that they got to tell that owner exactly what he wants to hear or she wants to hear 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, like there's not a lot of assets we like to value. And so, you should expect us to continue to be tough on value.

All right. Thanks for that, Joe. Thanks, Todd.

Thank you.

Thank you. Our next question comes from line of Pamela Kaufman with Morgan Stanley. Please proceed with your question.

Hi, good morning. Thanks for the question. 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's 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 percentages are. 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 ties -- 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 into your products.

Right. 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 retailers are trying to protect consumers and so you run the gauntlet with 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 their pricing actions right? So, we'll see how 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, but that the price increase is justified. It's -- but to be clear, it's not going to be easy.

Right. And one last question on different topics, just in terms of the divergence that you pointed to in the bars performance, it sounds like Atkins was impacted by lower mobility because of Omicron, but Quest bars benefited from more shopper trips. So, what do you see as a different dynamics across the two 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 and 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 the 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.

Thanks, that makes sense.

Yes, thank you.

Thank you. Our next question comes from the line of Ryan Bell with Consumer Edge Research. Please proceed with your question.

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?

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 entered the Quest team and entered into the Quest Company and 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 strengths. It's not a part, 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 the hands of a partner, who's done a terrific job with our meal bar business on Atkins. So, for us, it's more about focusing on the categories that we believe our greatest growth prospects and less about a broad scale licensing, licensing thinking across the portfolio.

Thanks. 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. Have you think about that more over the medium term in terms of the household penetration opportunity where you 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 summers at 2019, 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 in new buyers and 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 interested in weight management all tailwinds for us, and they've been tailwinds for us for a decade, right. So, if you just step back, when you talk to people about weight management they go, it's kind of episodic, it's kind of, it ebbs and flows. 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 diabetes, or Type 1 diabetics or pre-diabetic, 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 as you're trying to get people to make 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, that people have to change how they eat because the path that we're on is not a healthy one, by the way the healthcare costs are mind boggling for people that are overweight and diabetic, right. So, we feel really good about the mid-term trends. The buyer growth has been very positive, we just got to get people, I think if 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 on 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, as COVID thing has shook up some of the dynamics, but every day we see those things moving back to where they were.

Thanks. And the last question for me, in terms of the opportunity gets packed towards sort of the 40% gross margin range, were you saying in terms of the pricing that you were 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-to-year basis?

Yes, I mean obviously, 40% 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 little bit dynamic, and just got exacerbated by the Ukraine-Russia ground war, and they just kind of took off again, at 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.

Great, thank you.

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

Yes, thanks, everyone. Thanks for squeezing me in. 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 did the brands perform and what would you do or not do 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 that businesses would behave in a recession are confections, quite frankly, small indulgences, snacks, right, which tend to do pretty well during recessions. So, our view going into this thing is people will continue to invest in themselves, and 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 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.

Yes, thanks, guys. Appreciate it.

Thank you.

Thank you. 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.