Greetings, and welcome to The Simply Good Foods Company Fiscal Third Quarter 2022 Earnings Conference Call. At this time, all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. As a reminder, this conference is being recorded. It’s now my pleasure to turn the call over to Mark Pogharian, Vice President, Investor Relations. Mark, please go ahead.

Thank you, Operator. Good morning. I am pleased to welcome you to The Simply Good Foods Company earnings call for the third quarter ended May 28, 2022. Joe Scalzo, President and Chief Executive Officer; and Todd Cunfer, Chief Financial Officer will provide you with an overview of results which will then be followed by a Q&A session. The company issued its earnings release this morning at approximately 7:00 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. Additionally, year-to-date fiscal 2022 adjusted results exclude the mark-to-market effect of the treatment of the company’s private warrants prior to those warrants being fully exercised in January 2022. We have included a detailed reconciliation from GAAP to adjusted 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 our third quarter results and provide you with some perspective on the performance of our brands. Then, I will turn the call over to Todd, who will discuss our financial results in a bit more detail before we wrap it up with a discussion of our outlook, and answer your questions. In the third quarter, we delivered solid net sales and earnings that were slightly greater than our expectations due to better-than-anticipated retail takeaway and higher customer inventory that was not drawn down as expected during the quarter. Net sales increased 11.5%, including the previously-discussed effects of the European exit, and Quest frozen pizza licensing agreement. As expected, net price realization was a high single-digit percentage point contribution in net sales growth due to the price increase we implemented in the first quarter of fiscal 2022, and elasticity was relatively in line with our estimates. Third quarter net sales growth in North America, excluding the impact of the frozen pizza licensing transaction was about 15% in line with combined measured and unmeasured channel retail takeaway. As expected, gross margin of 37.5% was in line with estimates, and sequentially improved versus Q2 gross margin of 36.6%. The 510 basis point decline versus year-ago period was due to higher supply chain cost partially offset by pricing. Of note, in the year-ago period, gross margin of 42.6% was the highest since we acquired Quest. We have good visibility into our cost structure for the remainder of fiscal 2022, and there is no change to our gross margin outlook. We expect fiscal year 2022 gross margin to decline to about 250 basis points versus the previous fiscal year. Customer service was solid during the quarter as our supply chain team…

Thank you, Joe, and good morning, everyone. I will begin with a review of our net sales. Total Simply Good Foods third quarter net sales increased 11.5% to $316.5 million due to solid retail takeaway in the quarter. North American net sales increased 12.9% driven by pricing a high single-digit percentage point benefits in net sales growth. The March agreement to license the Quest frozen pizza business to Bellisio Foods was a 1.8 percentage point headwind to North America net sales growth. As expected, the International Business declined 25.1% due to the Europe Business exit. Core international net sales growth was 8.1%. The combined Europe business exit and Quest Frozen Pizza business licensing transaction was a 2.9 percentage point impact of total company net sales growth. Moving on to other P&L items, gross profit was $118.6 million, a decline of $2.4 million versus the year-ago period. Gross margin was 37.5%, a decrease of 510 basis points versus last year and was in line with our estimates. Supply chain cost inflation in the third quarter of fiscal 2022 was partially offset by the previously discussed price increase implemented at retail in the first quarter of fiscal 2022. Net income in Q3 was $38.8 million versus $5.9 million in the year-ago period. Adjusted EBITDA was $63.3 million versus $67.5 million in the year-ago period. Selling and marketing expense increased 4.9% to $32.3 million driven by higher brand building initiatives on both brands. Note that we now expect marketing expense for the full-year fiscal 2022 to increase high single-digits on a percentage basis versus last year, versus our previous outlook for a mid to high single-digit increase. G&A expense excluding integration and restructuring expenses, as well as stock based compensation increased 2.2% to $23.6 million. Lower costs related to the European business exit…

Thanks, Todd. Our solid year-to-date results position as well to deliver against our full-year targets. Looking at the key metrics of our full-year fiscal 2022 outlook, we expect net sales to increase 14% to 15% versus last year, including a two percentage point headwind related to the European business exit and the licensing of the Quest frozen pizza business, our previous guidance for net sales growth of 13% to 15%. There is no change to our gross margin outlook. As we stated earlier, we expect gross margin to decline about 250 basis points versus last year. Adjusted EBITDA is expected to increase slight less than the net sales growth rate. Marketing is expected to increase high single digits on a percentage basis compared to last year versus our previous outlook for mid- to high-digit increase. Additionally, we anticipate significant G&A leverage. And the decline in interest expense should result in adjusted diluted EPS growing faster than adjusted EBITDA. We are excited about the growth opportunities that exist within our business and our category. Atkins and Quest provide us with two uniquely positioned brands that are aligned around the consumer mega trend of wellness, snacking, convenience, and meal replacement. And consumer feedback indicates that these mega trends will become increasing more relevant as consumers return to more normal post pandemic routines. We’re executing against our strategies and increasing household penetration that should continue to drive short and long term sales and earnings growth. A strong balance sheet and cash flow generation enable us to invest in our business, evaluate M&A opportunities, and to buy back shares of our stock as path to increasing shareholder value. We appreciate everyone’s interest in our company. And now, we’re available to take your questions. Operator?

Thank you. We'll be conducting a question-and-answer session. [Operator Instructions] Thank you. Our first question today is coming from Chris Growe from Stifel. Your line is now live.

Thank you. Good morning.

Good morning, Chris.

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

Yes, maybe a little bit of a background will be helpful, Chris, to understand how the category and our business behaves on a typical year. We typically see a first-half inventory build timed around seasonal programming at retail. And the amount can vary, but it’s been historically pretty consistent that we add inventory leading up to the kind of January, February, March merchandizing. And then, almost immediately after that, we see that inventory start to burn off such that by the time we get to the summer, it’s typically back to pretty normal levels of the inventory, so, nothing that we really have to do other than service customers in the build up in support for the programming. So, it’s a normal cycle that we see in our business. We saw the inventory build mostly in Q2 of this year. We would have expected it to start coming out in Q3, that didn’t happen. We are starting to see it now in June. And we’re pretty confident it will behave pretty similar to that it has historically. And my guess will be we will see it all out, and we will return to more normal inventory by the end of the summer.

Yes, I’ll just add on, Chris, just to give you a perspective as well, I mean we typically have four to five weeks of inventory on average with retailers. We are now five to six. So, we not talking large amount of incremental inventory. We are talking about a week. So, as Joe said, we are starting to see it come out. There is no guarantee that it’s going get out by the end of the year, but we are pretty confident we will manage through it.

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

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

Thank you.

Thanks. Your next question is coming from Jason English from Goldman Sachs. Your line is live.

Hey, good morning, folks. Thanks for [squatting] [Ph] me in. Joe, your comments on the Endulge business, the confection business and consumers being perhaps less engaged with -- less interested in keto confection, that and combined what we are seeing in retailer, so it looks a little concerning because we are seeing both your confection business suffers from pretty sizeable volume declines and your bars business. Is it possible that we’re on the front end of a new dive cycle? Like is keto fading?

Guys, let me step back first. If I look at the Atkins, it’s helpful to have it in total perspective as opposed to zoom into one piece of the business. We’ve been pretty successful over the last 18 months in growing new buyers on Atkins. So, the interest in the category, which I would broadly characterize as better for you snacking for people who care about weight on our brand has been particularly good. And we have outperformed the category on a consistent basis. Now, when you dig into we are growing buyers, but buy rate has not hit historic levels. They have been kind of two drivers to that. The first as you mentioned it already. Our bars biz, there are fewer snacking occasions because people are less at work than they were pre-COVID. And so, our bar business has been the most impacted by that. The second has been and this has been a more recent phenomenon I will call it since September - October, are our confection business has slowed and the buy rate has slowed on our confection business. And we can see two drivers of that. The first driver and it is probably the more important, we had very successful dessert bar confection launch a year ago. We are anniversarying those numbers. And we drove a lot of customer programming, a lot of communication around that. And we’re on the downside of that obviously comping those numbers. The second is we know all throughout COVID and even a little bit before, confections were benefiting from the interest in keto. And if you look at some of the competitive keto launches, they are all typically confection-like products. Keto interest is off by half right now. Obviously, we are seeing some impact on our confection business from that declining interest. And obviously that will be something that will burn off over time. Do I think it’s a long-term trend in the business? No, I don’t. If we were seeing declining interest in the brand, we would see a fall off in buyers. And we’re not seeing that. In fact, we are seeing double digit growth in buyers. And we’ll burn -- I am pretty confident we will burn through the buy rate issues of bars and confections over time and get back to more normal consumption behaviors.

Got it. Okay, understood. Thanks. I’ll pass it on.

Right. Thanks, Jason.

Thank you. The next question today is coming from Ben Bienvenu from Stephens. Your line is now live.

Yes, hello. This is Jack Hardin filling in for Ben Bienvenu.

Morning, Jack.

Good morning. One quick question here, what does your product innovation pipeline currently look like?

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

Okay, awesome. Thank you so much. I’ll pass it on.

Thanks. Your next question is coming from Alexia Howard from Bernstein. Your line is now live.

Good morning, everyone.

Good morning.

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

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

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

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

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

Great, thank you very much. I'll pass it on.

You're welcome.

Thank you. Next question today is coming from John Baumgartner from Mizuho Securities. Your line is now live.

Good morning, thanks for the question.

Good morning, John.

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

Yes, so let me kind of unpack your questions. First of all, I think we're still in really early stages when it comes to cookies. So, you mentioned, I think you were referring to Quest, Quest is probably three years into its cookie launch. So, conventional cookies were launched, protein cookies were launched about three years ago, we're continuing to build distribution on those. We have frosted cookies that would just launch, where I think in the 40s percent ACV on those and still building, and those have so far have performed really well in store. And Atkins just launched its cookie. So, I would say we're kind of in early innings on cookies with Quest about three years old, but innovating on that platform. And look I'm pretty optimistic about the format. I think there's a lot of innovation opportunities in that space in both the type of cookies, flavor, sizes, and textures. So, I think you should expect this to continue to innovate there and we're not going to stop distribution pushes until we start getting top items near 70% ACV at retail. So, we're pretty bullish. And it's a very, the reason we're excited about it, it's an incremental consumption occasion to our core bar business and shake business. So, you pick up more, the way to think about is you can bring more people in from it. But you also can get buy rate because people will eat these at different occasions. So, we're pretty bullish about the segment, and we're bullish about our pipeline of products that's coming. So, we like it.

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

We're already in -- it's a great question, historically, I'm going to go back seven, eight years historically, the mindset of our business in the category is if you kind of win January, February, March kind of resolution season, you win the year. And we challenge that conventional wisdom a long time ago and said, we actually think that the seasonality of the business is more skewed by how manufacturers invest their marketing dollars. And we started spreading our marketing dollars out both media as well as customer programming. So, we have major programming now, January, March, May and September, and our spending from a programming standpoint is more balanced than it's ever been before. And we've seen our business become less seasonal because of it. From a media investment standpoint, we're big believers in as best as you can, your round spending. So, as opposed to trying to own January and March, we like to be on air as long as we can be on air with decent levels of support. And that has proven out in our business, our businesses, both of our businesses are less seasonally dependent than they've ever been before. So, and that's all been driven by good returns, right? So, if you think about it, if you're trying to win January and March, you spend all your money in January and March, the next incremental dollar gives you a less return because everybody else is spending their money in that period of time. And you've got too much investment and you lose your efficiency as you start spreading that out, your returns in other parts of the year are better. And so we're always driving it based on what we can see from an ROI standpoint. And that has told us weeks on air is the key metric at some decent level of weights, and that's the way we've been allocating our spending over for a number of years now based on the math that we see from a marketing science standpoint. Does that answer your question?

Thanks, yes, absolutely. Thanks, Joe. Very detailed, appreciate it.

All right, yes. Have a good day.

Thank you. Next question is coming from Cody Ross from UBS. Your line is now live.

Hey, good morning, folks. Thanks for taking our question. In the Nielsen scanner data, we can see the price you implemented on a four week basis. However, volume decelerated, largely driven by outright declines in the last two weeks; can you discuss the underlying demand that you're seeing right now, and then more broadly discuss your outlook for elasticity of the brands?

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

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

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

Well, I think first of all, the track record is pretty good evidence that we can be successful in multiple forms. So, if you look at the Atkins business, about 20% to 25% of its in confections already, so core business a barn shake, we have a really strong confection business already, we ran that playbook on Quest with confections, peanut butter cups, clusters. And it's already a pretty strong business Quest was even before our acquisition well down the path on chips, which has become for Quest they close to $200 million retail business already. So, I'd say that conventional wisdom around ability to innovate, I think is proven to be incorrect on these businesses and I think part of it is these are lifestyle brands, they stand for something other than just the product that they market. And so therefore with in the case of Atkins, it's a nutritional philosophy in the case of Quest, very similar active lifestyle with a kind of macronutrients philosophy around it to fuel that lifestyle, so that those promises enable more than just a single product. And so as long as you're true to those promises, I think you have the ability to innovate. Now, I would say there's a few executional differences that we believe in, we believe in the strength of the brand and a brand block in the store and owning the aisle that we're in. So, you're not going to see us for the most part playing in other people's parts of the store. I think that is difficult to pull off, because you don't have scale. You're not a major player in the aisle. There are people that are and you have difficulty controlling your brand and those other sections of the store. So, I would probably…

Great. Thank you for the detailed explanation. I appreciate it.

Thank you. Our next question today is coming from Steve Powers from Deutsche Bank. Your line is now live.

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

Yes, we've done a fair amount of work on recession behavior. You have to look back 15 years for the last recession. And there's very little data on our category because the category was really nascent. So, we're trying to -- we're trying to build our IQ around that right now how to -- how will these -- how do we think these businesses of this category and our brands will behave during a recession? High level, we tend to have better social economic consumers buying our brands, so for the most part, we're not dealing with the lower end of the consumer purchase, households. We tend to do with more -- deal with more affluent consumers. But if you step back and look at the last recession, here's what we've been able to piece together. And it's starting to guide how we think about it first. During the last recession, eating out was pretty significantly impacted versus grocery shopping and eating, and so a little bit of the COVID behavior people ate in more, so that's probably good news for food and grocery and stores, right? Second there was a significant amount of channel shifting due to in the last recession, so people shopped in fewer stores. We're starting to see that behavior right now, fewer shopping occasions, people started limiting the stores that they shop in, and in general they tend to shop in more discounters. So, more away from grocery, more towards mass merchants, dollar stores and some of the other discounted formats, right that tends to be a behavior that we've seen. Snacking in general, I'm talking broad snacking better for you and more indulgent snacking less impacted than center store food categories. So, in general, I think you rationalize it with and people are still going to have small indulgences. That's a relatively low cost way of enjoying yourself in an economy where you're not feeling particularly good. And then center of store you saw private label start winning over brand. So, in general, that's kind of the playbook that we're starting to construct. How we think about our business, and frankly, I'm all -- we're taking a second price increase, we're going to be at price points we haven't experienced before, combined with what appears to be a pretty good recession. So, we're going to be pretty cautious about what we believe around volume growth, and stay focused on are we recruiting consumers to the category maybe you're going to see a little bit of a buy rate decline because of that, but stay focused on keeping our marketing focused on recruiting consumers. Keeping people coming into the brand and then we'll deal with kind of impact if there's any on buy rate as we deal -- as we say that occur during the year upcoming, but I'm concerned and I think anybody that's running a food company right now should be concerned about what consumers are facing.

Okay. Thanks for that color. I appreciate it.

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

Understood, thank you.

You're welcome.

Thank you. Next question is coming from Eric Larson from Seaport Research Partners. Your line is now live.

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

Yes, better than it's been not as good as it needs to be. So, part of it, I think is part of it is there are fewer, there are fewer snacking occasions because not everybody's back to full work as they were prior recession. We also know, that there's high levels -- within Atkins, there's high levels of switching between our shakes and our bars, and in particular our meal bar, so we're seeing strong growth in shakes right now kind of mid-teens growth. It's been pretty consistent for the last, call it three quarters and I think that's having an impact on our bar business. Our shakes tend to be a slightly different, eating occasion, they tend to be more meal replacement than snacking, but they are used for snacking. But I suspect we're seeing that, we're seeing some switching to shakes as a format. So, and that's clearly in our history, we've seen that pretty consistently bars and shakes have high interactions. If you have strong growth on one form, it does have a reverse impact on the other form. I think that's happening right now and our shake businesses been really strong for a sustained period of time. I know that's impacting the business. So, look, I think that -- I think that the upside for our business continues to be bars back in full potential. We're paying attention to our ability to recruit new consumers that appears to be exceeding our expectations. I expect by rate to come back. I expect us to be starting to grow by rate again as we move forward. So, I'm cautiously optimistic about our ability to do that over the next 12 months.

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

Like long-term, we love the shape of our P&L. We think it's a competitive advantage, it allows us, if we can get gross margins around 40% and spend 9% to 10% on marketing and have very attractive EBITDA margins. We think we have effects creates a sustainable model for us, and that's the shape of the P&L that we want. Obviously, as we came into the year, we've thought with the price increase that we took that we would be able to not get, maintain margins all the way, but be pretty close because prices were rising pretty quickly. Prices continued to accelerate, obviously and then we took our guidance down for the year and then I had to take another price increase announced in April, which will take -- start to hit from shipment perspective in about a month or so. So, yes, it's the inflation has obviously gotten ahead of just about everybody, our long-term goal is to maintain gross margins and ultimately get back to a 40%. Is that going to happen next year? Probably not, over time over our strategic planning horizon. Do we think we can get back to 40%? Yes. And that's and we're going to do everything we can to get to get back there. But it's really important for us to maintain gross margins this quarter, obviously, was an anomaly one lapping last year, just to the timing of where we had coverage and acceleration of commodities this year, just at one quarter year-over-year, just that's what drops a 500 basis point decline. And as I said earlier, you can expect more like down 200 as we go into Q4. So, strange times we're living in, but long-term, gross margin and the pricing that we do and the efficiencies that we want to get out of the system. Getting back to 40% are imperative for us to drive growth over the long-term.

Okay, thanks, Todd and Joe, I appreciate your comments.

Okay.

Thank you. Next question is coming from John Anderson from William Blair. Your line is now live.

Hi, good morning. Thanks for the questions. A couple of quick ones; one, spending, innovation, and growth, I guess, I'm curious to hear with the core categories and then some of the extensions you've done into the snack, your portions of the portfolio. It seems like you have certain day parts pretty well covered. The breakfast day part, perhaps not as much and so as you think about innovation, more occasions, helping drive the buy rate, is that something that you think Quest and Atkins can play a role there as well, I mean, in terms of contributing over time? Thanks.

Yes, I like the way you think, you want a job. No, I think you look, you think about it the same way we do, which is, where are occasions today day part and then what are the various snacking formats, right. So, if you quite simply, we look at all the day parts, what's our development? Where might there be gaps, core bars tend to be for the most part, earlier in the day than later than the day confections and chips tend to be later in the day, right. So, that's you're thinking exactly the right way. And then I would say, if you walked around a grocery store, and you looked at all the snacking categories that are low and good things like fiber and protein and high and bad things like carbs, and sugars, where we think we can design a product that has no taste trade off, that provides you a better for your experience, you can expect us to be trying to innovate in that space. And if we can get a product that we think, consumers think tastes great, then you would expect us to start thinking about trying to innovate there. So, yes, we divide the world up part of it is how do you segment it? And then how do you go innovate it against one of it's across all the parts of the day. And then the other one is all the categories that exist, where there isn't a low carb protein rich proxy in the category that we think we can design a great tasting product. And I just say, I don't like to talk about future innovation. The pipeline is exciting. We've got a lot of -- we have a really talented R&D team. And we've got some fantastic products coming, right. So, stay tuned.

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

So, your last question, first, very little impact in this year, this is all about FY '23. So, very small impact to Q4 in the fiscal year for the price increase. Let me just run you through how the math works on Q4. So, at the high end of the guidance, it implies that net sales growth of about 1%. So, just illustrative purposes here, regarding the high-single-digit, so if we're at 9% consumption in Q4, you take a point off for the pizza licensing, you're at 8%. We've built about $35 million worth of inventory through the first nine months of the year. Some of that was we were a little bit late as we exited the year, but most of it was higher, that extra week of inventory, that's $20 million to $25 million of extra inventory that's in our system right now. That was in the process of coming out. So, that $20 million to $25 million is approximately 7%. So, that's how you get, if you've got consumption at 9%, you take a point off for pizza. I mean, you take 7% out for that one week of inventory you get to the high end of 1%. Now where are we going to end on inventory? It's always tough to know, we've got some people who can swing it back and forth. We're confident we can manage through it, but it's always a wildcard.

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

Okay, great. And just the magnitude of the second price increase, I know it's a fiscal 2023 benefit, but generally, and we talked about the magnitude of it?

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

Great, super helpful. Thanks so much, guys.

Thank you.

Thanks. Our final question today is coming from Pamela Kaufman from Morgan Stanley. Your line is now live.

Hi, good morning.

Good morning.

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

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

Okay, that's helpful. And can you comment on how you're feeling about the current M&A landscape and any opportunities? Thanks.

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

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

Got it. Thanks. That's helpful.

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

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

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