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Greetings and welcome to The Simply Good Foods Fiscal First Quarter 2023 Conference Call. At this time all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. [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. You may begin.

Thank you, operator. Good morning. I'm pleased to welcome you to The Simply Good Foods Company earnings call for the fiscal first quarter ended November 26, 2022. Joe Scalzo, President and Chief Executive Officer; and Shaun Mara, 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. A copy of the release and the 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 first quarter and provide you with some perspective on the performance of our brands. Then Shaun will discuss our financial results in a bit more detail before we wrap it up with a discussion of our outlook as well as your questions. We're pleased with our first quarter financial and marketplace results in a challenging cost and operating environment. Net sales increased 7% relatively in line with estimates. In the first quarter combined, measured and unmeasured channel, U.S retail takeaway growth was about 14% and as expected, outpaced net sales growth. Shaun will provide more details on the difference between net sales and point of sales growth in a bit. Our strong POS growth was driven by solid Quest performance across key forms, customers and channels. Atkins continued e-commerce growth resulted in about 4% retail takeaway for the brand in the combined measured and unmeasured channels. First quarter gross margin was 36.9%. The 450 basis point decline versus the year-ago period was slightly greater than forecast. Ingredient and packaging inflation as well as trade investment were in line with expectations. However, logistics and contract manufacturing costs were greater than estimates. Importantly, our supply chain team performed well and customer service was near target levels. Adjusted EBITDA for the first quarter was $60.8 million versus $65.6 million in the year ago period. Sales growth which included our July 2022 price increase and SG&A cost control were primarily offset by supply chain inflation. As we move into the second quarter, we're focused on executing against our plans and we are well-positioned to deliver another solid year of net sales and adjusted EBITDA growth. Simply Good Retail Takeaway in measured channels increased 11.1%. Similar to the last few quarters, total unmeasured channel growth was additive to total company POS, resulting in combined measured and unmeasured channel growth of about 14%. In Q1, Atkins and Quest combined measured and unmeasured channel growth were about 4% and 24%, respectively, with top tier performance within the measured channel segments of weight management and active nutrition. Turning to Atkins first quarter performance. Atkins Q1 retail takeaway in combined measured and unmeasured channel was up about 4% as outstanding e-commerce growth continued from the previous quarter with the IRI MULO universe essentially unchanged from the year ago period. Atkins Q1 point of sale at Amazon increased 75% with solid growth across all major forms. We estimate total unmeasured channel retail takeaway increased over 40% and is now about 13% of total Atkins retail sales. The brand continues to benefit from shopper channel shifting to e-commerce as well as improved digital marketing initiatives. Consistent with prior quarters, Q1 brand relevance and loyalty remained strong supported by a growing base of new and total buyers. In Q1 buy rate continued to improve from prior quarters, but was slightly down versus prior year. Within buy rate strength in meal replacement bars and shakes, likely driven by post Labor Day returned to work trends was offset by declines in snack bars and confections as we lapped strong pandemic consumption from those snacking occasions in the year ago period. Moving on to measured channels and the IRI MULO C-store universe, Atkins Q1 POS was about the same as a year ago period, and as expected sequentially improved from Q4. Consistent with recessionary shopper channel shifting, performance was driven by solid trends in the mass retail channel offset by softness in the food class of trade. By form, Q1 sales retail takeaway increased 7.6% driven by solid growth across all major channels. Total Atkins bars were off 6.9%. Meal bars about two-thirds of the bar business were about the same as last year and offset by the snack bar distribution loss we discussed last quarter and price sensitivity. Elasticity on some snack bar items has been greater than our estimates in brick-and-mortar channels. And as expected, confections POS improved from Q4 and Q1 confections retail takeaway was off 5.3% as we started to lap the impact of the strong year ago dessert bar launch. Importantly, the commitment to our brands in the nutritional snacking category by major retailers remain strong. Atkins distribution gains are tracking as expected and strong New Year, New You in-store merchandising and programming is in place. Let me now turn to Quest. Q1 retail takeaway were combined measured and unmeasured channel growth was up 24% and about the same as the IRI MULO C-store universe. In Q1, we estimate total unmeasured channel retail takeaway increased about 20% as e-commerce strength is partially offset by softness in the specialty channel. Quest Q1 POS at Amazon increased about 36% driven by growth across all forms. For perspective, total unmeasured channels in Q1 were about 24% of total Quest retail sales. In measured channels, Quest Retail Takeaway increased 25.4% in the IRI MULO C-store universe. Growth was driven by solid performance across all major forms and retail channels as well as increases in household penetration, base velocity, distribution, and continued success of new products. In the quarter, Quest core bar business retail takeaway increased 16.8%. Growth was solid across the original bars as well as the new minis. Consumer response in the new recipe that provides a much softer original bar has been encouraging. The snackier portion of Quest products that's cookies, confections and salty snacks continued to do well with Q1 measured retail channel takeaway up 41%. Growth was strong across all forms and was driven by increasing household penetration, distribution gains and marketing investments to drive awareness and trial. Consumer response to the price increase initiated in late in Q4 is tracking mostly as expected, although elasticity on chips so far has been greater than our estimates. The Snack segment represents nearly 45% of total Quest measured channel retail sales, and is already roughly equal to Quest bars in household penetration. So it's a sizeable and growing segment for the brand. Further, we expect the segment to continue to contribute disproportionately to total brand growth over the next few years, driven by improvements to household penetration as well as a solid pipeline of innovation. That said, given the significant and increasing size of the segment, we expect the rate of growth over the next few quarters to moderate from its current levels. In summary, we're pleased with our start to the year and our first quarter results. Our retail takeaway was relatively in line with expectations in a very challenging cost and operating environment. Recessionary economy continues to be a concern as higher prices appear to be slowing unit demand in the category and shifting shopper traffic away from grocery to more value oriented channels. That said, we remain cautiously optimistic about our business with strong POS momentum over the first 4 months of our fiscal year. We are well-positioned in the mass and e-commerce retail channels that typically do well as shoppers seek out value. As I mentioned earlier, collaboration with key customers are strong, and they are committed to our brands in the category. As such, in q2, we have good breadth and depth of merchandising and programming in place for the upcoming New Year season. While Q1 gross margin was slightly lower than our forecast, due to logistics and co-manufacturing costs, there is no change to our full year fiscal 2023 gross margin outlook. We would note that we are seeing early signs of an improving marketplace for ingredient and packaging cost for the second half of our fiscal year. We are executing against our priorities and we remain committed to doing the right thing over the near and long-term for our brands, customers and consumers. Now I'll turn the call over to my friend, trusted business partner and prior CFO, Shaun Mara, who will provide you with some greater financial details. Shaun?

Thank you, Joe. Good morning, everyone. Before I get into our first quarter results, let me start by saying it's great to be back in the CFO chair. In my CPG career I've worked with Joe for nearly 20 years. We first crossed paths at Gillette in 2000 or we became proficient in the Jim Kilts approach to managing the business. Joe and I ran Atkins together when it was PE owned. And as some of you may remember, I was CFO for the Simply Good Foods first conference call as a publicly traded company in 2017. I then stepped away to recharge and did some consulting. Midyear 2019 Joe convinced me to come back to the company in a different role, running strategy, M&A, and projects, biggest of which was the integration of Quest and the ERP implementation. It was a great opportunity for me to get reengaged with the business, helping to build out the organizational structure, systems and processes and drive the company priorities across the newly designed organization. With Todd leaving, it comes full circle. I'm excited to be back in the CFO role and believe our category and our brands have a long runway for growth. I look forward to helping the company execute against this strategy and increasing shareholder value. Let me now provide you with an overview of our financial performance beginning with sales. Total Simply Good Foods first quarter net sales increased 7% to $300.9 million. Net price realization was about 9.8 percentage points and volume was off about 1.7 percentage points. The March 2022 agreement to license the Quest frozen pizza business was a headwind of 1.1 percentage points. As Joe stated, here, retail takeaway outpaced net sales growth. On the bottom of this slide, we attempt to reconcile Q1 POS of 14% to Q1 North American net sales growth of about 8%. I'm going to walk you through the reconciliation starting with the first line, double pricing of about 1 percentage point. Recall, in the year ago period, some retailers did not increase retail price points until early November, despite being invoiced at a higher price point from mid September. Therefore the POS in the current period reflects the benefit of two price increases from a few retailers up over that period. The timing of trade promotion investment was a 2 percentage point headwind and as previously stated the licensing of pizza was about a 1 percentage point drag. Finally, recall in the year ago period, some customers are likely to build atypically higher inventory levels starting in Q1 of fiscal '22 and continuing through Q2 due to supply chain concerns last year. We expect the retail inventory built in the first half of fiscal year '23 to return to more normal levels. As a result, in Q1 we estimate the change in retail inventory compared to last year to be about 2 percentage point decline. Moving on to other P&L items for Q1. Gross profit was $111 million, a decline of $5.6 million from the year ago period, resulting in gross margin of 36.9%. The 450 basis points decline versus the year ago period was slightly higher than forecast. Ingredient and packaging cost inflation as well as trade investment was in line with expectations, while logistics and contract manufacturing costs were greater than estimates. Net income was $35.9 million versus $21.2 million last year. The year ago period was impacted by the fair value change of private warrant liabilities of $17.3 million. Adjusted EBITDA was $60.8 million, a decline of $4.8 million from the year ago period. Selling and marketing expenses were $28.5 million versus $30.5 million, a decline of 6.5% due to the timing of spend within the year. That said, [indiscernible] spend in Q1 was greater than the year ago period. GAAP G&A expense was $25.6 million, including stock-based compensation of 3.3 million and increased 8.2% versus last year. Excluding stock-based compensation in the current year ago periods, G&A increased 5.8% to $22.3 million. The $1.2 million increase versus last year was primarily due to employer related costs and corporate expenses. We continue to expect the full year selling and marketing and G&A expense will be about the same as the year ago period. Moving to other items in the P&L, interest expense increased $700,000 to $7.1 million due to higher variable interest rates related to the term loan. And our tax rate in Q1 was about 21.3% versus 25% last year. The tax rate in the year ago period excludes the impact of the charge related to the noncash, non-tax deductible warrant liability. The lower tax rate in the first quarter of fiscal '23 is primarily due to the timing of equity compensation. We continue to anticipate the full year fiscal 2023 tax rate to be about 25%. Turning to EPS. First quarter reported EPS was $0.36 per share diluted compared to $0.22 per share diluted for the comparable period of 2022. In fiscal Q1 '23, depreciation and amortization expense was $4.9 million and similar to the year ago period and stock-based compensation of $3.3 million increased $700,000 versus last year. Adjusted diluted EPS which excludes these items was $0.42 compared to $0.43 for the year ago period. Note that we calculated adjusted diluted EPS as adjusted EBITDA less interest income, interest expense and income taxes. Please refer to today's press release for an explanation and reconciliation of non-GAAP financial measures. Moving to the balance sheet and cash flow as of November 26, 2022, the company had cash at $54.1 million. Cash flow from operations of $8.7 million was affected by the timing of working capital. The company continues to anticipate full year fiscal 2023 cash flow from operations will be greater than last year. In the first quarter, the company repurchased shares worth $16.4 million at an average cost of $30.11. As of November 26, 2022, approximately $71.5 million remains available under the company's current authorization. In Q1, the company paid down $6.5 million of its term loan, and at the end of the first quarter, the outstanding principal balance was $400 million with capital expenditures at $1.2 million. We anticipate net interest expense to be around $28 million to $30 million, including noncash amortization expense related to the deferred financing fees. This is higher than our previous estimate of $25 million to $26 million due to the continuing rising rate environment. I would now like to turn the call back over to Joe for closing remarks.

Thanks, Shaun. With the challenging economic environment we believe we are well-positioned to deliver on our fiscal '23 financial objectives. Year-to-date, retail takeaway is tracking as expected and we have momentum as we enter Q2. We're tracking to our initial full year gross margin target with pricing and cost initiatives offsetting the dollar impact of ingredient and packaging cost inflation. Additionally, we have made significant marketing and organizational investments in the business over the last few years. And we believe it will result in continued growth of our consumer base and distribution. As such, we continue to expect the total SG&A expense dollars will be about the same as last year. Therefore we reaffirm our full fiscal year '23 net sales, gross margin and adjusted EBITDA outlook. Specifically, we anticipate net sales to increase slightly greater than our 4% to 6% long-term algorithm including a headwind of almost 1 percentage point related to the previously discussed pizza licensing agreement. Gross margin is expected to decline, although at a lower rate than fiscal '22. Full fiscal year adjusted EBITDA is expected to increase in line with the net sales growth rate and adjusted diluted EPS is expected to increase although less than the adjusted EBITDA growth rate. As we proceed through the balance of the year, we remain cautiously optimistic about our POS performance. Net sales growth by quarter is expected to be choppy as we anniversary last year's second quarter significant retail inventory build and the second half inventory destock. As we look to the second quarter of fiscal '23, retail takeaway is off to a good start with December POS up about 16% and strong merchandising and customer programming in place for the upcoming New Year season. However, we anticipate that Q2 net sales will be slightly lower versus the year ago period as we expect customers will not repeat last year's abnormally high retail inventory build. Adjusted EBITDA in Q2 is expected to decline upper single digits on a percentage basis compared to last year. Profitability is pressured as a result of lower sales and gross margin contraction due to higher ingredient and packaging costs compared to the year ago period. Given the early signs of an improving outlook related to ingredient and packaging costs, we anticipate gross margin in the second half of the year will be slightly higher versus the comparable year-ago period. This is an improvement from our October forecast where we anticipated gross margins to be slightly down in the second half of the year. We're excited about our near and long-term growth prospects and we're executing against our strategies as a path to increasing the value for our shareholders. We appreciate everyone's interest in our company. And we're now available to take your questions. Operator?

[Operator Instructions] Our first question comes from the line of Chris Growe with Stifel. Please proceed with your question.

Hi, good morning.

Hey, Chris.

Good morning, Chris.

Hi. I just had a quick question to follow-up on some of the differential in sales between consumption versus takeaway essentially. And I did see that bridge in the slides, which is very helpful. I guess, I just want to ask, first of all, on the kind of the double pricing. Did that occur again with the most recent price increases, understand that's on could be an ongoing factor. And then maybe related or secondary to that the timing of trade promotion investment was that was promotion up in the first quarter of '23 or was it more of a comparison to the prior year that causes differential in the first quarter?

So on the doubled pricing piece, Chris, the reality of that as it didn't happen in the second price increase. Retail prices went up pretty quickly after we saw the price increase out there that you're not going to see that going forward. That was just an impact in Q1. As it relates to trade specifically take a step back a bit on trade. So for the year, for trade, we're going to hold trade as a percentage of sales consistent with what we had last year. So that's not going to change overall, what you're seeing is really a shift in trade a little bit earlier in the year more in the first half, principally around display, promotional packs, some of that stuff was shipped into Q1. So effectively what that is is just a timing thing. And it impacted from gross and the net overall.

Does that help? That does help. Yes. Thank you. Just one other follow-up question. You talked about seeing some early signs of relief run input costs, I just want to get a sense of how hedged you are currently. And then are there any signs of competition in the category, they might force you to have to give some of that back or get a little more aggressive on promotional spending? I know you've seen a bit of an increase here from a timing standpoint, but any signs of having to get a little more aggressive on the promotional side.

Let me start with the commodity piece. I think what you're really trying to get to is kind of what we think the commodities are going out and where are we overall. I think it take a step back. I'm just going to reiterate what we said at the beginning, I guess about 3 months ago, give or take, so we thought we'd have a double-digit increases in cost of goods sold. And with that, we thought margins will be down versus the prior year, but not as much. Most of that would be in the first half of the year. And with modest declines in Q3, and Q4, as we sit here today, we've seen the softening in the dairy protein market, that gives us confidence that gross margins will be up slightly in Q3 and Q4 from our previous estimates. As it relates to the coverage, we're about 60% covered in ingredient and packaging requirements. So roughly through March, and quite candidly, we want to kind of see what plays out in the marketplace right now[to commit to] (ph) more of that as we think there's more downward pressure than upward pressure. So we can kind of see where we are, as we get towards the later in the year. But things are volatile, we'll see where we are, if we go forward more of a much better picture on that by the time we get to the second quarter earnings call.

And to answer your second part, Chris, no our business is predominantly a turn business, about 80% -- 85% of the volume turns off the shelf. So we're not seeing and then we don't have unlike I think a lot of other food categories we're not particularly, because there's so many different forms, so many different price points. There's no one competitive price comparison or brand price comparison that's relevant. So we're not seeing any pressure to deal back from a pricing standpoint. If we would be spending back, it would probably be in reaction to kind of unexpected elasticity response from the most recent price increase, right. So -- and so far, we've done a little bit of that in the first quarter and we're just kind of reading the marketplace and will react as time moves on.

Okay. That was great, Color. Thanks so much.

All right, Chris. Have a good day.

You too.

Thank you. [Operator Instructions] Our next question comes from the line of Cody Ross with UBS. Please proceed with your question.

Good morning. Thank you for taking our questions. You called out logistics and contract manufacturer costs as drivers of the lower-than-expected gross margin. How much did gross margin come in below your expectations? And can you just describe what's driving those costs?

Yes, sure for Cody. So let's take a step back. So the Q1 miss versus our expectation was about a $1 million in a rate basis, right. So it's about $2 million overall. Good news and bad news here. I say the good news is the miss had nothing to do with ingredient and packaging costs increase. Those were aligned with our estimates for the quarter obviously mentioned in the remarks and just talked about the we expect that to improve in the second half. The bad news is the miss in Q1, principally related to a few items we did not properly budget for in Q1 that we knew about in Q4. The recurring charges in [nature] (ph) and should have been included in the estimate. Specifically, they relate to some charges from our co-mans for PPV, or materials, they purchased directly, some normal monthly charges from our logistics provider that we didn't properly reflect and some inventory cleanup. We put some additional processes in place to improve the collaboration here between the groups. And we'll make sure that those costs are reflected in the results as well as the forecast. We don't anticipate this being an issue going forward.

Great. Thank you for that. And then just one follow-up. You noted how you expect sales to be down in the second quarter due to the timing of shipments last year and lapping that. Back of the envelop math suggests that you expect sales to be up about 10% in the back half. Is our math correct? And then what would drive sales to be up so strong in the second half? Thank you.

Cody, as that second part of the question again, I followed you on the first part, I didn't follow that you follow you on the second part?

Just if our math is correct, I would suggest that sales would be up 10% in the second half. And then what's just driving the hockey stick bounce in sales growth in the second half this upcoming year.

Yes, so well, I'm not sure whether you're asking me an inventory question or a question about the overall health of the business in the second. To Be clear. So I make sure I answer your question.

Yes, more so around the health of the business.

So look, we're really, if you just step back as we stand here, four months into the year, we're really pleased about where we are. So year-to-date, consumption has been strong. And as we've moved into kind of into December and early stages of kind of the New Years, we're actually picking up some speed. So we feel really good about we feel really good about the progress of the business. I don't particularly like the economic environment right now, right. And as we said is, as we've said, in our prepare marks, we're cautiously optimistic about the prospects of growth, kind of as we move through the Q2 into the balance of the year, but the current economic environment facing consumers, I think warrants a fair amount of Caution as we move through the second half of the year, and we're going to come up against a little bit more challenging comparables, and particularly on Quest. But if you look at the dynamic of the environment -- economic environment, you're seeing in food in general category volume has slowed as prices have rise, shopping, be consumers are responding in how they shop so their behaviors have shifted towards value retailers, pretty much across the store, you're seeing the growth of private label, volume is on the rise. And then we're at a point at least in our business, and in this category where prices are - the consumers are facing – are at their historic high. So, why we like our business. We like our business momentum, the environments, not the greatest environments, unclear to me what the second half is going to look like, is it - are we going to see worsening conditions, are the current conditions going to continue? So, we believe caution, like where we are from a business standpoint, like our business momentum, we think caution is warranted in the second half of the year. We'll be keeping a close eye on our consumer response as we move through the second quarter. And then we can give you an update on how we feel about and in the next quarter.

Great, Thank you all. Pass it on

Great. That's good. Thank you.

Our next question comes from line of Alexia Howard with Bernstein. Please proceed with your question. Good morning, everyone. Morning. Alexia, can I ask about the international business? I imagine it's a pretty small portion of the total. But you did talk about it being down 16%. And I think you said velocities have come off there. How big is that business? How long are the sales likely to be pressured like this? Just wondering what the outlook is that is there. Thank you. Let's say you're lucky because one of one of one of Sean's response prior responsibilities was running International. So you have somebody that's really familiar with the business, right? Yes, sure. It's about an $8 million business overall international. And that is principally basically called Down Under, which is Australia and New

Great. Thank you. I will pass it on.

Happy Day. Nice for [indiscernible].

Thank you. Our next question comes from the line of Alexia Howard with Bernstein. Please proceed with your question.

Good morning, everyone.

Good morning.

Hey, Alexia.

Can I ask about the international business. I imagine it's a pretty small portion of the total, but you did talk about it being down 16%. And I think you said Velocities have come off that. How big is that business? How long are the sales likely to be pressured like this. Just wondering what the outlook is that. Thank you.

Alexia, you’re lucky because one of Shaun's response prior responsibilities was running international. So you have somebody that’s really familiar with the business.

Great. Thank you.

It's about an $8 million business overall international and that is principally [indiscernible] which is Australia and New

Great. Thank you. And as a quick follow-up, I know the first question was about this gap between consumer takeaway and your reported organic sales growth. As we look forward, do we expect that gap to close? And if so how quickly? And I'll pass it on? Thank you.

Yes, so. good question. And let me see if I can simply explain kind of what the situation is, right. So in a typical year, in this business, we build inventory -- retailers build inventory in the first half of the year. And they depleted in the second half of the year. On average, an average year. That's about a week, maybe in some years might be 2 weeks of inventory. Typically it goes in the first and second quarter. Typically it comes out in the third and fourth quarter, by the time you get to the summer, you're back to kind of a steady state level kind of normal level of inventory. Fiscal Year '22 was not a normal year. In fact, it was highly abnormal, given and you have to understand context, right? So supply chains were disrupted. Customers were sending in orders, orders were getting cut. So there was a high degree of sensitivity from retailers not having the inventory they need. So they took a pretty aggressive inventory position. We're not unique in this but they took a pretty aggressive inventory position on our business and the way that played out is in the first half of the year, three to four times the normal of inventory levels built in the first half of the year. And then most of that came out in the second half, and most of that within the fourth quarter. So as we come up against those comparisons in particular in the second quarter, we're not going to be repeating that inventory build from last year. So that shows up as net sales far below net sales rate far below consumption rate. What's really happening is we're not building the inventory then that we then have to take out in the second half of the year. So what's going to happen in q2, our guidance is to be slightly down versus prior year, what's going to happen is what doesn't happen in q2, will then get reversed out in Q4, where we actually pulled a fair amount of inventory out of retail in the fourth quarter. That helps?

That helps a lot. Thank you so much for the explanation. I'll pass it on. And Alexia,just one more comment on that whole thing. As you think about that reconciliation from POS down to a sales try to do obviously, there's a little bit of, I think the Point I make is, as you look to Q2, the only things that will be impacted, there is pizza, which is about a point and a half, and then the inventory build or the non-build. So the inventory change overall are the only two things. So as you go forward, that will be the reconciling items. Great. Thank you.

Thank you. Our next question comes from the line of Jason English with Goldman Sachs. Please proceed with your question.

Hey, good morning, folks. So scrubbing my prior year notes, I've got about a $25 million headwind for 2Q, based on lapping that inventory accumulation retails that roughly right?

Okay. So that’s about .a little north of 8 points of drag. You put on 1.5., you got about 1o point. So sales down

Okay, so that's about a little north of eight points of dry, you put on one and a half, you got about a 10 point drag. So if sales down modestly, it seems to suggest that you're forecasting POS, high singles, sort of maybe let's call it 70% range which should be a [indiscernible] from the 14 points that you're showing this past quarter. What would drive that [indiscernible]? The aforementioned cautious optimism.

Okay, and some of that caution to my ears was coming on the snack side quest, which isn't part just sort of basis act. Can you size that a bit more for us? How large is that as a percentage of Quest sales and specifically zoom in a bit on chips, because in your prepared remarks, you sound a little bit more guarded on ships where I think it's the one and only spot where you mentioned that elasticity was exceeding expectations. I would say our optimism is not brand and form related. Its jus overall economy related. So we're about -- we're in the process of throwing a pretty big New Year, New Year party. We want to make sure consumers show up, right, nothing worse than having displays out, have a lot of customer programming and the consumption not occur, right. [indiscernible] And we make a little of that as you make as you as you remember, last year, Jason, that was clearly the case, we just didn't see the consumer uptake. So if you just step back and look at what's going on right now, consumers are not shopping and grocery. They're moving towards online and mass, they're making value choices in our business. There's not private label alternative. So what happens is, buy rate gets hit, right. So you don't see the buy rate, they pass on a consumption occasion, they may be by one less time. That's what we're concerned about. There's no one product form, brand thing, one customer thing I'm worried about and more worried about the overall economic environment now. We feel pretty good as we moved from November into December, POS started to pick up as we start reading, merchandising that it's in place right now. Feels pretty good. But we still got, we still got two plus months to go. And you know, we're going to be working until it happens. We're going to be cautious about it.

Okay, That makes sense. I'll pass it on and I'll keep my eyes open for that invite to the party. Thank you.

Yes, thank you. It's out there, Kid.

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

Good morning. Thanks for the question.

Hey, John. I wanted to ask about buyer growth at Atkins. Joe, as it is the growth has been pretty strong. And I'm not sure if you can drill into how much of that is driven by your core demographic relative to noncore. But as you build Atkins as a lifestyle brand, how do you think about either extending your existing consumers for longer, or also raising the appeal to non-core buyers. And the other opportunities for more age specific innovation, or age specific marketing may be appealing to older folks who become lapsed buyers over time? Can you creep down a bit to younger consumers? Just how you think about building the next phase of growth at

Wow, great question. I wish we had an hour. What I would tell you is this, look, the core demographic is, if you think about the positioning change on the brand, we moved from a core demographic of what we would call programmatic dieters, people looking to want to lose 15 pounds in with an event in mind over a certain period of time, or shift in that, you know, that demographic right, move from those folks to folks who, on average, are worried about their health and their weight every day, right, not looking to lose large amounts of weight, but looking to eat healthier and potentially look better, right, that demographic, the math on that demographic was for estimate the Democrats. So we had about 8 million 9 million programmatic dieter target to something around that 35,34 35 36 million kind of we call them self directed low [indiscernible] people, they want to control [indiscernible], right. Our progress against that has been pretty outstanding. So the program that when we started this, and this is relatively new data, when we started this, buyers of the brand at any one time that were actively using the program to lose weight was at what was about 15% of our buyers, that is now down to single digits. So we in the in large part has shifted the mix of our brand to these lifestyle consumers, which then begs the question, how do you feel about buy rates and dieters probably complying more lifestyle consumers new piece of data, lifestyle, consumers from a buy rate standpoint, buy at the same rate as the average for Atkins. So we're not seeing a tail off in consumer consumption based upon a move towards a more lifestyle consumer. So good news all around. The thing that I think you're asking is, talk to us about, talk to us about are you looking at different demographic groups, I'm assuming you mean, age, ethnicity and frankly, we do a lot of that in our digital platform, right. So a lot of social digital marketing to those groups within and we can handle that question for you offline and a little bit more detail. And frankly, we get you in front of some of the marketing people to talk about some of those things.

Okay. Thank you. Appreciate it. Okay, have a good day. Thanks, John.

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

Good morning.

Good. Morning. I just had a follow-up question on gross margin. So given that gross margin fell short of your expectations in the quarter, but you still expect gross margin for the full year to be in line with your prior outlook? Can you talk about the cadence of the gross margins over the rest of the year? And what's improved in your expectations for gross margins for the back half of the year? What's changed there?

Yes, I would say the commodity costs are probably the biggest piece of it, obviously. And we talked about what we think we're seeing in the dairy protein and how much we locked in already. So I think from a standpoint of commodities that's in better shape than we have, we the way we look at this for the year, we see GM improving slightly in the second half of the year, as we said, however, I think if you take a step back on margin, we did have a 450 basis point decline and Q1, that I would say the inflationary pressures that we had led to our second price increase did not start impacting cogs until mid Q2. So remember, in Q1 of last year, our GM was actually up 75 basis points. So as we look at the rest of the year, we expect gross margins to decline in Q2, and for the total year. And just to dimensionalize it a little bit. We expect the total year margin to decline over 100 basis points and the margin decline and Q2 to exceed that. So I don't like give you more context and perspective.

Yes, that's helpful. Thank you. And then I also just had a follow-up question to John's question on Atkins performance. I guess in general, what do you believe is driving the divergence in performance between Atkins and Quest? Why do you think that the brands are seeing such different trends and doesn't come back to the occasions and the demographics that they cater to? And what's working well for questions? Could you apply any of those initiatives to Atkins?

Yes, well, I'll say they're in different parts of their, their lifecycle, quite frankly. So if you think about the investment thesis that we had in buying quest, our fundamental belief is strong brand, large consumer target, early stages of marketing, brand awareness, penetration growth, moving from a specialty online brand to a more Food Drug mass brand, from a bar only brand to a bar and other snacking brand. And so, as part of the combined organization, we've been able to accelerate all those initiatives, right. And so that's why you're seeing distribution growth on bars, because she's plugged in, play that into the what is essentially the Atkins Food, Drug mass, Salesforce, right. So distribution is growing, great new product pipeline, and snacking and salty snacks and chips. In confections, right? So strong, they've got accelerated the brand has got acceleration, just from our ability to execute strategies that were in place when they were freestanding company. Atkins is further along in its development. So if you just take, like the largest retailer,, take the largest retailer in the world. Atkins has on average, I think 65 items in Walmart. I think at last count Quest was in the 40s. So there is -- there they just different part in their lifecycle from a brand standpoint. So and I think the brand promise, right, this idea of fueling your ambitions, and your day, is a bigger brand promise than the weight management brand promise. So bigger target audience more people that you can go after bigger opportunity for household penetration. And we're still in the very early stages on Quest of mainstream communication via television, ramping up the spend, Atkins is just in a different parliament in its lifecycle. So I think that's accounting for kind of what's been driving Quest. On the Atkins side, it's a brand that is highly dependent upon buy rate. So if you look at the brand, on average, if you're a multiyear, buyer of the brand, your daily slash multiple times a week eater. So 100, if you're an average buyer, you're buying 100. If you're a heavier buyer, you're buying close to 200 servings in a year. So disruptions in snacking occasions, disrupt the buy rate dynamic on Atkins. And that's what we saw through Covid. Right. So, you know, I expect us to be able to reemerge from that get our buyer a backup on the brand. Today, it's growing at kind of the low Ange of low end of our algorithm, we expect better from the brand. And there's some things that we need to address to get the buy rate back now that we're kind of seemingly out of the not at work. Pandemic type point of time, there are some things that we need to clean up in the brand from an execution standpoint to get the buy rate going and do better than where we are today.

Thanks. That's very helpful.

Yes, have a good day.

Thank you. Our next question comes from line of Brian Holland with Cowen and Company. Please proceed with your question.

Yes, thanks. Good morning. You've made reference to Q2 in store merchandising and programming in a really good spot here. I know that you address last quarter some tactical issues with respect to Atkins, losing some distribution on the bars, making waves for chips and cookies talking about needing to fix that. Can you just update us on where you sort of stand in resetting the Atkins brand on shelf into spring?

Early stages, Brian, it'll play out over the next 6 plus months. So spring resets, going into the summer, reset to the current towards the end of the summer, we would expect most of the solutions that we developed in the last 4 or months will be fully implemented, kind of by the end of summer. I would expect -- look again, we're at the low end of our ag and so we don't have a business in freefall. We got a business that's growing 4%, right. So we, and we're not happy at 4% We want the business to be better, right? And there's some executional things that we could have done better, right. So if lost distribution on snack bars last spring, we got to fix that. That's an innovation pipeline thing. So we have the innovation coming, it'll start getting executed as we move through the second half of the year, on, on confections, we had a launch of dessert bars on confections that haven't repeated like we expected it to do. So again, innovation effects you need, you need a pipeline of products to replace those things, those things take a little bit of time. But if I just step back, the buy rate declines that are coming from those things are starting to be nicely offset by growth in shakes and meal bars, which is those are starting to come back because the innovations there. But also, as people have gone back to work there, they tend to be more meal replacement, and therefore more ideal for people going back to work. So we're starting to see the business. Tempo pick up on those forms, offsetting most of the declines that we're seeing, and by rate from the other two snacking product lines.

Appreciate the color there. And then I wanted to ask about, within the Atkins brand, the bifurcation between channels clearly on whole, it looks like new buyer growth did increase in q1. So I guess that would I presume that's overweighted towards the E commerce channel. So I'm just I guess maybe two points on this one. So clearly, this isn't about consumers who were buying in one channel or now buying in another, it seems like you were picking up new consumers in the E commerce channel. So what are you learning about the composition of that consumer in that channel towards the actions branch? And how strategically do you think about the placement of the Atkins brand going forward as a result of this ongoing momentum in e-commerce

Yes, so interestingly enough, most new buyers come in to Atkins in brick and mortar. And even though the business has been flattish, in the quarter, we still saw strong new buyer growth, which then points to the executional issues around buy rate on snack bars and confections. So we're going to try to get that fix the growth on Amazon drives by rate, believe it or not, so people, and in general, most shoppers tend to be multichannel. So they're brick-and-mortar shoppers who go over into e-commerce and Amazon and buy more. So we're very, very targeted about how we think about that. So and within, within those shoppers that are a multi channel over an Amazon, there are a handful of people that drive a lot of that volume. So we're very targeted in our marketing approach over there, encouraging purchases of that consumer group that's very valuable to us. So when -- and when we do it, right, we don't cannibalize brick-and-mortar at all. So we're, I would take we have a really good team there. marketing science standpoint, they're relatively sophisticated. We know what we're doing in that channel. And they're and we're seeing nice impact of our business. And, Frank, I just want to point out that's a benefit of having bought Quest. Quest is the number one bar on Amazon. We have a strong relationship with Amazon because of that relationship. We've learned a lot about how to market on that channel. We're applying those. We're applying those learnings to the Atkins business. You see Atkins is sitting online at around 13% of sales and Quest is around 24%. So we have a lot of opportunity, as we get smarter about how to market Atkins online.

Great, thanks. I'll leave it there. Best of luck.

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

Great. Thanks so much. Just kind of broader question longer term margin potential. We obviously understand the drivers have kind of why the gross margins pulled in EBITDA margins, obviously held in a little bit just kind of given the flattish year-over-year SG&A. Yes, as you speak to kind of back half of the year gross margin, potentially up slightly year-over-year given benefits to ingredient cost, realize you're not speaking to '24 [indiscernible] Q1 '23. But again, just to kind of reiterate sort of thing I've heard you say before kind of that path to get back to, let's say, the 40% gross margin, I just want to clarify that that is really contingent, I guess, on demand, but now you have the pricing as ingredient costs come down. Are there specific needs you foresee in potential increased promotional spend or trade or what have you, that would prevent you from getting back to that kind of 40% range or no? It's essentially hey, if ingredient costs come down, we have some pricing and the demand is okay, then yes, I mean, the expectation is we get back to 40.

That's just the ladder. So we have -- Rob, we -- look, we going into this year, we had to make a choice based upon what we believed about what would happen in the future, right. So the first thing is, I have been and we have been very concerned about the economic environment that consumers are facing. Why? I don't think we've declared recession. There are a lot of recessionary factors that are out there that consumers are clearly starting to react to, and have been reacting to. So when we were seeing the cost inflation coming towards us as we moved into '23, we made a choice to try to balance our margin desires with not cooling demand, unit demand off too much. So as opposed to pricing to get back to total gross margins, we price to cover the dollar cost of ingredients, and packaging inflation. So and with a fundamental belief that we could do better from a consumer recruitment standpoint, not cool off our volumes, keep our velocities on the shelf better. So we made that trade off under a fundamental belief that ingredients and packaging wouldn't stay at these historic highs for a sustained period of time. So that's our belief. And the good news is we're starting to see you can see it in the spot markets, we're starting to see in some of the negotiations that we're having in the second half of the year, we're starting to see those ingredients come off those high. We would expect that to continue to play out over time, right? Do I anticipate that we will have to spend it back? What I would tell you is we're always -- as margins, get back to 40, 40%, our ideal, our ideal shape of our P&Ls 40% gross margin, 10% spending and marketing support, 20% EBITDA margin. Ultimately, that's where we want to be. So we're going to be making investments back with that profile. As we get back to 40% gross margin, we want to get back to that profile marketing spending where it needs to be EBITDA margin where it needs to be.

Yes. Okay. Make sense. And then just quickly, look and when you came out of the destacking, repackage innovated on the Atkins brand, the results of this fairly material impact, which I would argue, as Rob Lowe probably has been around now, for some time. I just curious kind of your state-of-the-art sophisticated marketing platform, like as we think about twice rain, right, like I'm hearing, shelf positioning or some fixes, have to kind of match you some channels shifts. But, you know, is there anything else in there kind of, maybe give acting just a little bit more of a splash? By like, I don't know if it's another commercial or another kind of brand ambassador? or what have you just kind of anything in sort of how you're thinking about how to push the brand a little bit more versus trying to pull the consumer maybe with some other fixes?

Well, it looks -- I think it's good question. Robin it's the question we asked ourselves all the time, we're always looking at those things, right? If I look at the fundamentals of the business and the kind of the facts of the business, I don't have a recruitment problem. Rob Test [ph] is strong now as we did when we first signed him. Our ability to attract consumers to the brand has been strong. If that changes, then you got to start rethinking kind of do you have the right consumer poll to attract consumers? Our issue has been buy rate. It's been buy rates all through COVID? Is buy rate now due to executional issues? We're kind of focused on that. Because we if we know we get the product portfolio, right, that we can get buy rate back to historic levels, and the business will go from where it is today at 4% to better than 4% over time. So that's what we're focused on. But to answer your question, we're always asking ourselves that we just resigned Rob, we just shot new commercials that are going on air as we speak. He still has really good appeal both demographically as well as the people that we're talking about the benefits that we're talking about so hard to replace him is kind of the figurehead celebrity. Now, we do a lot of things digitally with ambassadors to kind of target kind of micro segments within the brand. But I don't know right now, all the data would suggest you keep firing on all cylinders within fix some of the executional issues and your business goes from 4% growth to something much better.

Got it. Fair enough. Thanks, Joe.

Thank you. Ladies and gentlemen, we’ve come to the end of our time allowed for questions. I will turn the floor back to Mr. Scalzo for final comments.

Thanks again for all your participation today on today’s call. We hope you continue to remain safe and look forward to updating you on our second quarter results in April. Everyone have a good day. Thank you.