Q1 2024 Simply Good Foods Co Earnings Call

Greetings and welcome to the Simply Good Foods Company fiscal first quarter 2024 conference call. At this time, all participants are in a listen-only mode. A brief question and answer session will follow the formal presentation.

Greetings and welcome to the simply good Foods company fiscal first quarter 'twenty 'twenty four conference call.

At this time all participants are in a listen only mode. A brief question and answer session will follow the formal presentation.

If anyone should require operator assistance during this conference, please press star zero on your telephone keypad. As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Mark Pogrin, Vice President of Investor Relations. Thank you, Mr. Pogrin. You may begin.

Anyone should require operator assistance. During this conference. Please press star zero on your telephone keypad. As a reminder, this conference is being recorded it is now my pleasure to introduce your host Marc Griffin Vice President of Investor Relations. Thank you. Mr Program you may begin.

Mark Pawgrin: 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 25th, 2023. Jeff Tanner, President and CEO , and Sean Marra, CFO , will provide you with an overview of results, which will then be followed by a Q&A session.

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 25th 2023, Jeff Kantor, President and CEO and Sean Marett CFO will provide you with an overview of adults, which will then be followed by a Q&A session.

Mark Pawgrin: The company issued its earnings release this morning at approximately 7 a.m. Eastern Time. A copy of the release and the accompanying presentation are available under the investor's section of the company's website at www.simplygoodfoodscompany.com. This call is being webcast and an archive of today's remarks will also be available.

The company issued its earnings release. This morning at approximately seven a M. Eastern time, a copy of the release and the accompanying presentation are available under the investors section of the company's website at Www simply good Foods company Dot Com. This call is being webcast and an archive of today's remarks will also be available.

Mark Pawgrin: 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 filing.

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.

Speaker Change: Note that on today's call we will refer to certain non-GAAP financial measures that we believe will provide useful information for investors.

Today's call, we will refer to certain non-GAAP financial measures that we believe will provide useful information for investors due to the company's asset light strong cash flow business model, we evaluate our performance on an adjusted basis as it relates to EBITDA and diluted EPS. We have included a detailed reconciliation from GAAP to adjusted items in today's press release.

Speaker Change: 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 underlining performance of the business.

We believe these adjusted measures are a key indicator of the underlying performance of the business.

Speaker Change: 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. I'll now turn the call over to Jeff Tanner, President and CEO . Thank you, Mark. Good morning, and thank you for joining us.

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.

Now I'll turn the call over to Jeff Kantor, President and Chief Yeah. Thank.

Thank you Mike Good morning, and thank you for joining us today I'll recap simply good financial results and the performance of our brands.

Jeff Tanner: Today, I'll recap Simply Good Food's financial results and the performance of our brand.

Jeff Tanner: then Sean will discuss our financial results in more detail before we wrap it up with a discussion of our fiscal 2024 outlook and we take your questions.

And Shawn will discuss our financial results in more detail before we wrap it up with a discussion of our fiscal 'twenty 'twenty four outlook and we take your questions.

Sean: We're pleased with our fiscal first quarter results that were in line with this.

We're pleased with our fiscal third quarter results that were in line with the estimate.

Sean: Retail takeaway in the combined measured and unmeasured channels was slightly more than 8 percent and, as expected, outpaced net sales growth primarily due to the timing of shipments versus the year-ago period.

Retail takeaway in the combined measured and unmeasured channels.

Any more than 8% and as expected outpaced net sales growth, primarily due to the timing of shipments versus a year ago period.

Sean: We anticipate that shipment and consumption should be largely in line by the end of Q2.

We anticipate that shipments and consumption should be largely in line by the end of Q2.

Sean: Net sales increased 2.6% to $308.7 million, driven by continued quest momentum.

Net sales increased 2.6% to $308 7 million driven by continued price momentum.

Sean: This quarter gross margin was 37.3% and in line with our forecast.

Let's call that gross margin was 37, 3% and in line with that forecast.

Sean: The 40 basis point increase versus a year ago period was primarily due to lower ingredient and packaging costs.

40 basis point increase versus a year ago period was primarily due to lower ingredient and packaging costs.

Sean: Adjusted EBITDA in the third quarter was 62 million and increased the 2% growth of last year.

Adjusted EBITDA in the first quarter was 62 million, an increase of 2% versus last year.

Sean: Higher gross profit would partially offset a higher FG&A versus a year ago period, reflecting investments in marketing growth initiatives and G&A capabilities.

Higher gross profit, partially offset by higher SG&A versus the year ago period, reflecting investments in marketing cost initiatives and G&A capabilities.

Sean: Cash flow generation continues to be strong and provides us with financial flexibility to invest in organic growth, pursue value-enhancing acquisitions, pay down debt, or opportunistically buy back our shares.

Cash flow generation continues to be strong and provides us with financial flexibility to invest in organic growth to see value enhancing acquisition pay down debt, while opportunistically buy back our shares.

Sean: Our Q1 results are a positive start to the year, and while early, Q2 is off to a good start.

Our Q1 results and a positive start for the year and while early Q2 is off to a good start.

Sean: Additionally, we have strong marketing and promotional plans in place for the New Year New Year season, which started this week and which will run through the second quarter of fiscal 2024.

Additionally, we had strong marketing and promotional plans in place with them.

New year season, which started this week and which will run through the second quarter of fiscal 2024.

Sean: We're pleased with the progress we've made on the Acceleration Plan for Quest and the Revitalization Plan for Action.

We're pleased with the progress we've made on the acceleration plan for quest.

Globalization plan for Atkins.

Sean: As such, we reaffirm our full-year fiscal 2024 outlook.

We reaffirm our full year fiscal 'twenty 'twenty four outlook.

Sean: The next slide provides you with a perspective of our retail takeaway performance within the IRI New LabCost C-Store universe and in the combined measured and unmeasured channels.

The next slide provides you with a perspective about retail takeaway performance.

In the IRI <unk> plus C store universe, and then the combined measured and unmeasured channels.

Sean: The nutritional snacking category growth in the measured channel universe was 12%, driven primarily by volume or unit growth.

The nutritional snacking category growth in the measured channel unit that was 12% driven primarily by volume or unit cost.

Sean: The category continues to be a standout performer within brick and mortar and e-commerce, and as a result, is increasingly a focus of our retail partners as they look for growth opportunities.

The category continues to be a standout performer within brick and mortar and E Commerce and as a result is increasingly a focus of our retail partners as they look for growth opportunity.

Sean: We have category advisors at most major retailers and we're working closely with them on how to further capitalize on the growth potential of this category.

We have a category adviser at most major retailers and we're working closely with them on.

How to further capitalize on the growth potential of this category.

Sean: Simply could foods retail takeaway in the measured channel increase 7.1% driven by quest volume growth of 20%. Actance performance with some

Simply good foods retail takeaway in the measured channel increased seven 1% driven by quest volume growth of 20%.

Atkins performance was similar to last quarter.

Sean: And our e-commerce business continues to do well and resulted in total company combined measured and unmeasured channel POS growth slightly better than 8%.

And our ecommerce business continues to do well and resulted in total company combined measured and Unmeasured channel T O S got slightly better than 8%.

Sean: Now let me turn to Quest Q1's retail take away with combined measured channel growth with 20 percent.

Now, let me turn to quiet Q1 retail takeaway with combined measured channel growth was 20%.

Sean: Grows was driven by solid performance across all major forms in retail channels, driven by an increase in both household penetration and buy rate.

Growth was driven by solid performance across all major forms and retired channels driven by an increase in both household penetration and buy rate.

Sean: Our retail customers view Quest as the pioneer of the category and they're excited about our near and long-term innovation pipeline and growth initiatives that we have in place.

Our retail customers to be close as the pioneer of the category and we're excited about our near and long term innovation pipeline and cost initiatives that we have in place.

A major focus for us, it's working with retail partners to find additional space and merchandising opportunities for the brand.

In Q1, we estimate total I'd imagine channel retail takeaway increased about 14% E. Commerce strength was partially offset by softness in specialty channels.

There is no denying question the main thing that's.

With nearly $700 million and net thousand fiscal 'twenty to 'twenty three we have essentially doubled the business since we acquired it in November 2019.

Quest retail sales and used to measure the unmeasured channel. This past year with 945 million. So we clearly expect it would be a 1 billion dollar retail sales ban in fiscal 2024 with a footprint across multiple forms.

It's no small feat for a brand that's barely a dozen key adult.

In Q1 quite bad business retail takeaway increased 16%.

The snack yet portion of credit products continue to do well.

She wasn't measured channel retail takeaway up 24%.

But particularly plays without salty snacks performance that we believe has a long runway of growth.

Quite snack segment now represents nearly 45% that's titled Quest measured channel retail sales and is roughly equal to quest bad and household penetration.

We expect the quest will have a strong year behind innovation distribution gains and in your marketing campaign.

I'm, particularly excited to announce that we will debut a new advertising campaign in February that will be supported by a reach based media model.

Despite the size of the business the brand awareness of quest is significantly below several competitive and this campaign has the potential to further accelerate growth.

Yeah.

Turning to action.

She wasn't retail takeaway in the IRI <unk> plus they still universe and the combined measured unmeasured channels as expected. It was similar to last quarter off about 7% and 4% respectively.

As has been the case for awhile Atkins heavy users migrate to E Commerce, where we continue to see good growth.

Specifically Atkins Amazon P O S increased 12%.

As a result e-commerce was additive to Atkins measured channel P O N E.

For perspective in Q1 E Commerce was about 15% of title Atkins retail sales.

In Q1, Atkins retail takeaway trends stabilize from when we entered the quarter.

Type of marketplace performance was somewhat better than September and November not to given the consumption seasonality in November and December we've been not only it with advertising and we had minimal installed merchandising now.

Now that the calendar is turned to January it will hit me up on advertising and merchandising for the new year, New year's season.

We continue to have tremendous faith in the long term potential of the brand and in support we're making good progress against our five point Atkins revitalization plan, we talked about in our last conference call.

However, as you may recall, it's going to take some time before all of the elements of the plan.

Collectively in the marketplace.

As a reminder, the Atkins five point revitalization plan.

Includes enhanced merchandising and assortment at select customers.

You're advertising supported with the REIT space media model greatest focused on our near and longer term robust innovation funnel.

Product upgrades on our bond portfolio and your packaging and multiple work streams targeting G. L. P. One weight loss drug users.

Getting Atkins Baxter grain is our focus and we believe we have the plans in place to improve market performance over the remainder of the year in.

In summary, we're pleased with that start to the year, particularly after this quarter and marketplace results.

Hey, Good first company can take in an attractive category and is uniquely positioned as the U S leader in the nutritional snacking category with choose scaled lifestyle nutritional snacking brands that are well developed across multiple forms and snacking occasions.

Nutritional snacking category continues to be resilient with top tier volume propelled by the consumer mega trends of healthy snacking.

The nutritional profile that is protein bridge loan cabs and sugar.

This profile has broad appeal to consumers across all generations, but particularly with Gen X Gen Z and millennial consumers.

To our brand as a means of helping them achieve their goals.

The future garage runway at the nutritional snacking category, we continue to work closely with our retail partners on how to optimize the category today and where to source additional space for them in the store to support new and emerging format.

We're executing against that priority.

And we remain committed to delivering against our commitments, while making the necessary investments in our business that should result in sustained long term growth.

Now I'll turn the call over to Sean who will.

Provide you with some greater financial detail.

Thank you Jeff good morning, everyone.

I will begin with an overview of our net sales total simply good foods first quarter net sales of $308 $7 million increased $7 $8 million or two 6% versus the year ago period.

With our July 2022 price increase behind Us. The Q1 net sales increase was driven by volume growth.

North America, and international net sales increased two 6% and 0.7% respectively versus last year.

As Jeff stated earlier as expected retail takeaway up 8% outpaced North America sales growth, primarily due to the timing of shipments as such we would expect Q2 net sales growth to be slightly greater than consumption with shipments and consumption relatively aligned at the end of the first half of fiscal 2024.

Moving on to other P&L items for the quarter.

Gross profit was 115 point and $1 million, an increase of $4 $1 million from the year ago period, resulting in gross margin of 37, 3%.

The 40 basis point increase versus the year ago period, primarily due to lower ingredient and packaging costs.

Adjusted EBITDA was $62 million, an increase of $1 $2 million from the year ago period.

Selling and marketing expenses were $32 million versus $25 million, an increase of 12, 1% largely due to higher advertising costs and investments in growth initiatives.

GAAP G&A expenses were $27 million, an increase of $1.3 million versus last year, primarily due to higher employee stock based compensation.

Excluding this as well as executive transition costs, G&A increased zero point $3 million to $22 $7 million.

Finally, net interest income and interest expense were $4 9 million a decline of two $1 million versus Q1 last year.

The decline was due to lower debt balances versus the year ago period.

As expected our Q1 tax rate was about 25% versus 21, 3% last year. We continue to anticipate the full year 2024 tax rate to be about 25%.

As a result, net income was $35 $6 million versus $35 $9 million last year.

The next slide provides you with a reconciliation of reported and adjusted diluted EPS first quarter reported EPS was <unk> 35 per share diluted compared to 36 cents per share diluted for the comparable period of 2023.

Adjusted diluted EPS was <unk> 43 cents compared to 42 cents in the year ago period.

Note that we calculated adjusted diluted EPS and 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.

I've never heard of 25 2023, the company had cash of $121 $4 million.

Cash flow from operations in Q1 was about $47 $5 million compared to $8 $7 million last year, principally due to improvement in working capital.

During the quarter the company repaid $10 million of its term loan debt at the end of the first quarter. The outstanding principal balance was $275 million. However.

However, subsequent to the close of the quarter the company repaid an additional $25 million of its term loan debt, bringing the outstanding principal balance of $250 million.

Capital expenditures in Q1 or zero point $7 million in fiscal 2024, we continue to expect capex to be in the $8 million to $10 million range.

In fiscal 2024, we anticipate net interest expense to be about $17 million to $19 million, including noncash amortization expense related to deferred financing fees.

Now to wrap up.

Jeff stated earlier, we are on plan across all key metrics in Q1, and therefore, we reaffirmed our full year outlook. We discussed last quarter. We continue to expect that ingredient and packaging costs will be lower in fiscal 2024 compared to last year and drive solid gross margin expansion.

Provides us with the flexibility to invest in marketing initiatives that will drive near and long term growth and organizational capabilities.

Therefore for full year fiscal 2024, we anticipate net sales growth driven by volume to be at the high end of the company's long term algorithm of 4% to 6%, including the benefit of the 53rd week.

Adjusted EBITDA has dissipated the increased slightly greater than net sales growth rate and adjusted diluted EPS for increased greater than the adjusted EBITDA growth rate.

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

Thank you we will now be conducting a question and answer session. If you would like to ask a question. Please press star one on your telecom keypad.

A confirmation tone will indicate your line is in the question queue. You May press star two if he would like to remove your question from the queue for participants using speaker equipment. It may be necessary to pick up your handset before pressing starkey.

Accommodate everyone in the Q&A queue. Please limit yourself to one question one moment, please while we poll for questions.

Okay.

Yeah.

Our first question comes from Matt Smith from Stifel. Please proceed.

Hi, Good morning, and thank you for taking my question.

Added twin.

12% growth in the active or convenient nutrition category, which has been supported primarily by volume growth. That's a that's a stark contrast to the center store where volumes and Consumptions remain pressured.

From a high level could you talk about the trends supporting the strong consumption growth in the category of are we seeing a period of accelerated household penetration grows or is the buy rate increasing.

Greater rate than it has historically as the category remains relevant with consumers could could you just help us understand what's driving the strong category relative to the rest of the store.

[noise] Yeah. Good morning, Matt It's Jeff I appreciate the question.

Yeah, no you're right the nutritional snacking category has grown and.

Recently, a consistently low double digits.

That's the center store, which is close to the wanted to and as you noted in your question most of that growth is now volume.

And it is a significant difference.

So I think this is due to several factors.

Category, certainly benefiting from health and wellness and convenient snacking trends.

But in addition.

The high protein low carb low sugar.

Mac crowds at the category are increasingly emerging as the nutrients of choice.

Particularly for younger millennial and Gen Z consumers, perhaps in contrast to high cap high sugar products.

So that that that that was the two macro drivers of the category I think what's interesting as this.

Despite the strength, we're seeing in the category for sustained the store I still think we're in the early innings and this momentum has a lot of continued runway.

And just a few thoughts on that household penetration is only at 50% versus high Eighty's Ninety's for sandstorm.

While the nutritional snacking category largely grew up on bars and shakes as we bring new formats to market. For example, I felt he platinum request, it's increasingly driving buy right as wireless penetration.

Retailers and I've met with all of them most of them recently.

They're certainly seeing the cross they're looking to us as category advisers to the majority of those accounts and saying how can we capitalize where can we find more space and lastly, while you know while in the early innings.

We're on the right side of the G. O P. One drugs, which you know are in the early stage, but I think that that's a future tailwind as well.

There's certainly a difference we're seeing today are you seeing it in the numbers, but I think the category nutritional snacking category has a long runway of growth in front of that and we're working as a company and in partnership with our retailers on how can we can accelerate that to take further advantage of it.

Thanks, Jeff I'll I'll pass it on thank you.

Thanks, Matt.

Yeah.

[noise].

Our next question comes from Pamela Kaufman from Morgan Stanley. Please proceed.

Hi, good morning, happy new year.

Happy new year to you yeah.

Thank you Arne.

Now a quarter into the Atkins with I don't regret it shouldn't plan that you announced on <unk>.

Q4 results can you talk about what actions you've taken so far and remind us how you are thinking about the trajectory of Atkins in truth men and milestones to gauge the improvement.

Yeah, that's a good question Pam.

You know as we talked about at the last quarter, we're not happy with the current performance of Atkins.

Especially given the long term potential we see for the brands I talked about that on the last quarter to 80% of consumers looking to.

There's the maintain weight the brand's highly trusted the Mac Curtis work the product tastes, great and we've put that the five point revitalization plan into market and I outlined does that elements in our scripted remarks.

Now I'm pleased with the progress the team is making.

As as we've as we talked last quarter, we said it 12 to 18 month timeframe.

For when all of those elements will be the market. So some of them take a little longer than others. For example, the packaging refresh.

And some of the elements have you know they are in market today.

That would be that the new configuration and the club store, which has shown a marked improvement in trends in that channel.

And then your advertising is out it was out in October as we as we noted we we tend to throttle back more in November December.

We're pleased with how that advertising tested and as we move into January February March will be giving up that advertising and then but pleased with some of the new innovation and how that's tuning for example, the bank bis and the break our stock.

Some of the elements are in market.

I'm pleased with our execution, but I think the most critical period for us to evaluate how we're performing as January February March.

When we will have more sustained advertising and marketing merchandising and market as you know, it's a critical seasonal period for us.

I just want to reiterate we are taking a 12 to 18 months viewed on the revitalization of this brand because that is how long it will take before all of the elements are in market.

Okay. Thank you.

Just wanted to ask about your capital allocation priorities I think you paid down debt recently.

Alan she doesn't strong shape. So how do you think about.

The capital allocation options that you have an M&A.

M&A versus buybacks and debt pay down.

Yeah, and I think you know overall, we spend a fair amount of time looking to evaluate the best return of our cash to our shareholders that includes obviously, if you set that debt paydown share repurchases M&A and even potentially a dividend.

We had a very strong cash from operations this quarter, we get over $100 million in cash on our books are you know, we evaluate opportunities to buy back shares pretty consistently as well as looking at other ways of spending overall, but I think you know we take a step back we're going to evaluate these opportunities as they come up I would.

Say there right now weeks I thought the best use of cash in Q1 was the debt pay down and will continue to evaluate that on a quarterly basis, but we were very fortunate to be in a position, where we haven't a lot of cash from operating activities and allows us to quickly pay down debt as well as provide other opportunities for our shareholders.

Thank you I'll pass it on.

Okay.

Yes.

Our next question comes from Steve Powers from Deutsche Bank. Please proceed.

Hey, guys. Good morning, Thank you.

Very well.

You too.

<unk>.

Yes, so two questions if I could the first one is just a little more tactical on the on the guidance I think the 8% plus consumption that we saw in the first quarter was a bit better than going in expectations. The full year guidance implies you still expect around about mid single digit consumption.

On a year I'm just trying to think about how you how the phasing in your mind isn't going to work.

Specific to <unk>, just because if you're going to catch ups of consumption. Just I'm just trying to figure out what that what you're trying to apply for shipments.

Our second quarter, if I could.

Then you know broader Jeff you know you talked about the.

The category advisory conversations you've been having.

Is.

The retailers like I guess I'm.

I'd love a little bit.

Elaboration on that and kind of what are the key points of emphasis that your.

You're bringing to those conversations you know.

And I'm trying to do in part to retailers so that they can.

Hey, good on on further category success.

Yeah, I think Steve maybe I'll start on the guidance question turn it over to Sean and then I'll come back on the Cat category adviser question.

Yeah as we as we noted Q1 consumption was a little better than we expected.

But as we said I'll say, we're comfortable and we reaffirmed our guidance.

As you know the seasonality of this category January February March are is a critical period for us.

And that's going to give us a much clearer picture on how question Atkins will perform for the year.

We're very pleased with how our quest retail takeaway plus 19 in Q1.

We're in the early innings of the Atkins revitalization plan, but I got another quarter and we'll have a much better view of the year.

And then more and more sense for you know longer term how to think about that but I'll turn it over to Shawn for any added color. There yeah, just reiterating a little bit I guess overall I mean Q2 was better than we expected a little bit Oh, I'm, sorry, Q1, excuse me I hope you too.

We're comfortable with our guidance overall, let's see how we execute the next quarter or so and that may impact our view on the year, but consumption in Q1 was encouraging as we look at our where results were and you know I think as we've talked about it internally on plan through Q1 like what do we have for our plans in place for Q2 I need to see.

How things turn out in the marketplace in Q2, and then we'll kind of reassess where we are as we get to the Q2 call.

And I'll come back on that [noise] category adviser question, it's a good one.

Yeah.

They've been on the road a lot over the last three months, having these conversations with retailers.

And as Matt noted in his question.

The category of nutritional snacking category is now consistently disproportionately showing growth versus same store and retailers are seeing that.

And they're seeing that discrepancy there looking for core hours.

And they're coming to us and saying.

How much additional opportunity can we get after it.

Why do we have to put in place to take further advantage of what seems to be a long term trend.

Actually around the nutrients as more and more consumers switch the propane forward I want to take out sugar or they want to take out cost from their diets and so we are working with them we're investing.

Considerable amount and.

Understanding the category projecting out where the category is going to go over the next several years.

And then were started on building plans with them on.

On how to further capitalize on that growth. So those plans will include a mix of where do we find more space whether that be from close Adjacencies will further out how do we take advantage of the omni channel because this category does lend itself to.

Our heavy online purchases, how do we drive more traffic down the aisle.

How do we use our combined marketing capabilities.

They say the garage and they're looking to us and say how can we build it together you bring your resources, we're bringing our resources because it is a bright spot.

And so we've just started those conversations and honest with several of the customers our largest customers and I'm excited to see where this goes because I think this is one of our pillars for sustained long term growth.

Which is the growth of the continued growth of the category.

That's great.

Okay.

Thank you.

Our next question comes from Alexia Howard from Bernstein. Please proceed.

Good morning, everyone.

Good morning, Good morning, Hi.

So I'm trying to ask you you commented about how the year, our gross margin improvement this quarter.

I'll give you a little opportunity to invest in organizational capability I can even give us a little bit more color on exactly what you're hoping to accomplish that and I'll pass it on thank you.

Yeah, I'll I'll take that so it is it's we were fortunate to have some flexibility and as I mentioned on the scripted remarks, our focuses on delivering.

Consistent growth quarter to quarter.

Year to year to year, one of the biggest areas. We have invested back to Steve's question is enhancing our category management capabilities.

And that includes research.

It includes bringing on some additional talent.

And bolstering our capability.

To develop these long term plans with retailers.

Our industry is pretty good at developing one year's joint business plans with retailers Alexia. It's it it's a different muscle to build two to three to four year growth plans at the category level. So that's fine and investment we've made.

With as you saw it in the financials with increased our investment in marketing.

Taking up to just over 9%.

And we've also invested and bolstering our long term innovation capabilities.

As I talked on the last quarter, we were disappointed with the lack of innovation on Atkins, you don't want that to happen again.

So were invested in building and bolstering our pipeline.

And as you know innovation kind of lifeblood of quest. So we we want to ensure that we keep our foot on the gas. There. So those are probably the three biggest areas enhanced category management additional marketing and innovation, which by the way is in a much better place a point where from when I came to simply.

Very pleased with the progress, we're making there showing anything you'd have just one more thing I took a throw out there just the capability wise I think we also have kind of made some assessment as weird as we've kind of kind of get into this year and talk about what the plans we have going forward and the pillars that Jeff talked about last quarter, and making sure. We have the right longer term capabilities to support that type of work as well as the growth associated.

With that so we've also kind of looked at that internally and added some capabilities within within that or within the organization to support that so one other area. So we've invested in but we've been very thoughtful about where that favorability is for gross margin gets reinvested and really being thoughtful about making sure. It provides us with longer term growth as well as hitting our.

Short term our.

Schools.

Great. Thank you very much I'll pass it on.

Thanks.

Our next question comes from Brian Holland from D. A Davidson. Please proceed.

Yeah. Thanks, Good morning, I wanted to maybe.

Just dive into a little bit from I guess, it sounds like first quarter consumption trends were better than expected. It sounds like that was maybe more specific to atkins, so maybe being less negative than maybe the expectations going in you can correct me if I'm wrong on any of that but just wanted to kind of.

You know focused in on that and understand exactly what you're seeing there obviously, it's a seasonally lighter quarter, but you did.

Run some fresh advertising as you said at the beginning of the quarter.

Excuse me I'm, just curious what you're seeing with respect to whether you're finding a new buyer I know that some of the the messaging around the advertising campaign was to try to address some misconceptions about the brands. So I'm just curious if you're seeing any early results from that and where exactly be the better than expected consumption is coming from.

Yeah that consumption was slightly better than we than we had forecasted I'm actually it was across both Atkins and quest.

I'll start with Atkins.

You know as we as we said in his scripted remarks.

October was a was it is it pretty.

Pretty good month for us.

This is the previous month as we came into the quarter.

And still below our expectation, yeah, not happy with and with the number in absolute but on a relative basis than.

It was a much better month for us and that coincided with us dropping the new advertising and strengthening our merchandising and also having this new configuration and club.

And so you know, but its only five weeks and we don't want to overreact to five weeks of advertising because as you know we have to throttle back in November December given the seasonality. So as we've said the real test on that because I think comes in January February, but we were encouraged with what we saw in October when we did have several.

These revitalization plan elements and market it.

Secondly, the advertising.

But in addition question come in came in stronger than we had forecasted as well what's interesting about quest is.

Cause if you got back.

Two three years the majority of the Growth's on quest was coming from penetration.

Which was which was very distribution driven now you look at the drivers of Cros and it's roughly 50 50 50.

50, 50 balanced across penetration and buy rate.

As consumers are coming in via chats, and find buyers and vice versa.

And so I was just saying it more on a balanced growth profile on quest, but I think as carrying the momentum throw them, what's what's really interesting about quest is yeah.

Despite the size of the business and it would be a $1 billion retail brand this year our brand awareness.

It's still relatively low versus a lot of key competitive and we're excited to debut a new advertising in February on quest. So, yes that that the consumption with a little better than we thought first brands. The critical period for US is again January February March.

Yeah, I appreciate the color, Jeff and fully recognizing where just a few days into a new year, New you I'll ask anyway, just curious what if anything you are seeing either from the competitive landscape I E. You know basic promotion et cetera or consumer.

Engagement with the category.

Again, admittedly only a few days into the new year, but obviously given its significance I trust you're are watching that closely.

Yeah, we're blowing it away [laughter] I'm just kidding.

I think right now we are set up as we get into new year, New you to kind of get with our retailers are everything is in the stores. A few displays you see a lot of the activity ready to go in and all of our key retailers are used to do some advertising that dropped off rack and specifically on January 1st and you'll see that continuing through there.

Significant investment in both consumer communication for both brands in Q2, as well as the merchandising and promotional activity. That's out there as you said I mean, it's it's still early it's very early we haven't even got really results on that other than a day day in and day out basis. So I can't really comment on our progress.

We feel confident in our plants and it is it's obviously L a but.

We feel very confident in the consumer and retail.

Plans, we have is as we enter this critical periods.

Thanks, John Thanks.

Best of luck.

Yeah.

Our next question comes from Jim <unk> from Stephens, Inc. Please proceed.

Hi, guys. Thanks for taking our question I'm sure you've already discussed.

Some of the trends with quest in the category.

But I was wondering if you could give us a sense for how much of the broader category growth is being driven by the expansion of products and the appeal that that brings to expand by rates versus consumers that are increasingly health conscious kind of engaging with these.

Protein dense caloric low calorie snacks.

Yeah, No I'd say, it's a good question I don't have that information at a category level as.

As we look at our brands.

We certainly see a balanced excuse me balanced.

Across both household penetration and buy rate.

And as I said again to Matt with Matts question. This category largely grew up as bars and shakes and overtime has expanded well beyond that new format, new usage occasions, New day parts.

So that's a big driver of <unk>.

Right.

But we continue to say all the time consumers, we still continue to see household penetration increase.

It's it's both.

And I think the opportunity for US is to continue to drive bus to continue particularly as category leaders.

Continue to bring consumers into the into the space. That's the job of advertising and then to continue to drive.

Right, which is the job of innovation.

I think the biggest driver here and it like all of this is protein.

Really emerge as the new training choice, particularly for a younger consumer.

Sugar.

Sure that won't cabs.

And so as these nutrients become more and more broadly adopted you're seeing more and more consumers look for our products as a way of delivering against they're looking for and to power their.

Their their lifestyle.

But we still believe the category has tremendous runway both on buy rate and penetration.

And I think just building off that a little bit I think Jeff mentioned in the you know, bringing consumers into advertising and getting the innovation, but and then also working with our retailers to continue to expand your shelf space that allows us to have new formats that are out there I think quest is to just suddenly repaired prepared remarks has actually expanded into other formats pretty successfully which is great because you know southeast.

Snacks, I think is about $300 million business at retail. So it's it's grown from just a bar and shake the bar business, particularly and then into the other categories and we see that expansion opportunity are really in other categories or other formats as well when not when when quest with a quiet the business was by far the majority of that that's for sure.

Sure now buys representing just about 50% of sales. So that's that's shows you are the expansion opportunities and it shows you the opportunity on particularly I think they're on buy rate.

Great I appreciate the color and if I could sneak in maybe one follow up to that do you have a sense for consumers that are actively using the G. L. P. One drugs that they gravitate more towards Atkins versus quest.

Yeah.

No no no not between brands and we we do know from our own research, but I think you're seeing it from other research as well that when consumers are on the drugs their appetite suppressed, but they're looking for.

Smaller more convenient healthier high protein low sugar options that we're a category majors and that.

And talking to consumers on the drugs, we certainly see an increased interest in products from Atkins and quest.

That's why I decided to think how categories on the right side of these drugs. That's why it was we've got out of the gate early.

So I don't if we've been able to identify these consumers on Atkins, we're sending them targeted communication.

We're investing in research to better understand it but specifically to your question. When we think about Atkins and quest to have a strong role to play here, it's not one versus the other.

Great I appreciate the color guys I'll hop back in the queue.

Thank you.

Our next question comes from Carmel Sour Walmart from Jefferies. Please proceed.

Hey, guys. Good morning, if I could follow up on that on.

On your last response on G. L. P. One does is there is M&A part of the strategy on.

And you're trying to leverage the opportunity that's in front of you as it relates to G. L. P. One.

No not explicitly it would it be something that we would look at if I write asset came along yes, but I think it's a we're very much in the early innings on J L. P. One we've got a lot to learn and I don't think it would be front and center as an M.

And a driver, but it would be a factor that we would probably look at as we would look at any asset.

Got it and then how about M&A and in General you mentioned, a few times kind of value enhancing acquisition.

What does the M&A environment look like have multiples come down is obviously debates about asset prices and interest rates, how do you see the environment at the moment.

Yeah, I mean, I guess take a step back we love the category right and we believe the potential to double that is there over the next pick a timeframe 510 years.

We look at a lot of assets to come into our space, especially those that are complementary to our portfolio, where we can get synergies are to your point about seller expectations. There is still high and we're not going to overpay quite candidly, we evaluate our current even evaluate complementary brands and businesses of size preferably shelf stable warehouse delivered in.

And really in or adjacent to our I O. That's where we think the synergies really are so our target's really here, where a strong consumer brands that are complementary we got a strong balance sheet. We've talked about it already that allows us to do those things, but but we're not going to overpay for anything either so we evaluate everything that comes up in the space and we kind of assessed whether that's the right move for our shareholders.

Got it thank you.

Our next question comes from John Baumgartner from Mizuho Securities. Please proceed.

Good morning, and thanks for the question.

Morning, Jeff.

I wanted to ask about quest and specifically the snacks business. The distribution growth has remained strong in measured channels. It's been strong sequentially since the shelf reset exiting summer with resilience and velocities at the same time, it's been pretty surprising.

And I'm wondering can you speak anything different in the retail programming the merchandising and even navy the accomplishment of store doors, we were gaining TD piece that sort of explains the velocity resilience. There at a time when you know a number of categories are seeing softness in higher priced brands.

Yeah I mean.

The you're right.

Distribution was the primary driver of quest growth certainly following the acquisition, which speaks to the strength of the.

Selling organization it simply.

But more recently, we've seen growers be more balanced crop not just distribution as I mentioned, but also by rates.

And I think it just speaks to the underlying strength of this business.

It is one of the most culturally relevant on trend growth businesses I've seen him as we mentioned in the scripted remarks, it will cross $1 billion in retail sales this year.

And what's really interesting about quest versus most other brands is it has.

Not just permission.

To extend into other forms, but this is what consumers expect and demand.

They look to quest.

To come into snacking categories.

Slipped the macros and come out with a great tasting product.

That has high high protein and low sugar.

And this this is what consumers want from that brand.

And we have an incredible R&D organization.

Best I've ever worked with in my career that is being able to develop wonderfully tasting products that deliver on these macros.

Our retail partners see it too it's why they continue to support the brands. That's why they continue to give us great merchandising support our innovation.

Having no longer term space conversations as we show them that pipeline.

But I think at the very heart of your question.

It's the strength of the class brand and in particular.

The demand of quest consumers to the brand to come into snacking categories, and flip those macros and offer them snacking occasions, but different day parts different usage occasions different products I think that that is why in my opinion.

Is unique about quest versus almost any other brand I've seen in my career.

Yeah.

Thanks for that and then just looking back historically, the non programmatic portion of the consumer base has been the big growth on block over the years and I'm curious if the G. L. P. One awareness sort of takes hold do you see the programmatic diet and consumer sort of also making a comeback and you're shaking off some of the dormancy there.

Sure on growth or you know as Youre working through your five point plan for recovery are you still expecting the vast majority of growth to come from the non programmatic segment.

I would say that we would look to both segments.

As as a growth opportunities for the brand.

I think that we do have those consumers who do.

Look at look to Atkins is a regime, that's why the buy rate on the brand, especially double any other I've ever worked with.

And we think that.

Obviously that was consumers are very critical to us they are front and center in our media planning and I think that they will be very authentic Atkins on G. L. P. One.

But we also I think the opportunity for Atkins is to expand continue to expand the funnel, bringing new uses and introduce them to the brand the benefits. It offers.

So that if you do if you look historically programmatic.

It's always been a smaller portion of the brand sales, that's a 10% to 15%.

But as I mentioned, they buy right tied to their critical.

Oh, we have to continue to talk to those consumers, but we also have to bring new consumers into the funnel.

I think both groups are very.

But I think both for its having an opportunity for G. O P. One yeah and I think you're also going to see the benefit of the category expansion. That's the that Jeff talked about and the growth there as we kind of you know we're we're in a rolling category and it allows us to continue to grow with the category overall, we havent seen that recently with Atkins, who we're going to as we get through this plan will see.

More of that overall, so I think it's all three of those things are going to drive the eventual return to it.

So the growth that we're looking for for Atkins.

Thanks, Sean.

Thank you Sandra.

Our next question comes from Matt Smith from Stifel. Please proceed.

Hi, Jeff It's Sean Thanks for taking another question here you can come back.

In past years, we would simply has benefited from stronger consumption. The company has elected to increase its investments behind the business given the strong returns on those investments given the strong input cost favorability and the consumption trends today I know, it's early days, but.

But is it reasonable given what you're seeing from investments you're making now and then when you look at the business today, how do you balance investment behind quest to maintain momentum and drive growth versus the ability to accelerate the Atkins stabilization plant to the extent you're able to this year.

Yeah. It's a great question, it's a really good question, Sean and I discussed this almost every day right.

Because we see the long term cost of the category and the multi year runway.

We believe that that creates the opportunity for investment to take full advantage of it I think it was Alexia as question. She asked about where are we investing.

Two to capitalize on that run rate on that runway of growth.

We have increased our investment in marketing, it's now just a little bit of a 9%.

We've increased our innovation.

Desperate and innovation.

And we've increased our innovation and category management.

Because we think and we see the potential for those investments to pay off over the long term.

To your question on.

Quest versus Atkins, we have to invest and stuff.

Both brands are critical they play a critical role in the category as I mentioned I've been on the road a lot over the last three months talking to consumers about the category and the role that Atkins and quest play.

To a retailer they're committed to supporting both brands each brand plays a different role and so we need to invest in both businesses.

The investment obviously is a little different the levers we pull a little different the brand's lifestyle and they went out and their life stages is a little different. So that's why the plans are different but the commitment to investing in both is there and.

And all of that just because we see the long term growth potential of this category and we're going to get after it.

Yeah, and I think over its a great question.

When we talk about pretty much all the time and I think it's something that we balance as we go through each really I'd say a month quarter review as we think of where we are overall in getting ahead of the investment and the return on those things. It goes back to a lot of the kind of pillars of Jeff set up when we started this discussion last quarter and really.

No.

Throwing gasoline on fire for Quest revitalizing Atkins category management, and then using the fuel to fund that to be related to the offtake commodity and cost savings that we have as well as some of the cost of your productivity. We have on the supply chain. So it's a discussion when we have all the time and we balance all.

Those things and tried to make sure that we support both brands because as Jeff said retailers expect that and on top of that bill for this year and for future years, that's really yeah, it's about delivering quarterly commitments, where Mike we're making but also ensuring we're set up for sustained long term growth.

Got it. Thank you for your perspective, and I'll pass it on.

Thanks, Matt Thanks.

Yeah.

Our last question is from Jon Andersen from William Blair. Please proceed.

Good morning, everybody and thanks for the question.

Yeah.

I wanted to take a different angle on Atkins and potential outcome of the revitalization plan.

You know it seems that some of the Atkins innovation outside the core so outside of bars and shakes, let's say chips as an example.

Had the same uptake.

Quest has seen outside its core do you think Atkins has less permission a rationale to travel and if so is the intent at least in the near to medium term too.

Focus Atkins innovation focus Atkins retail assortments on core bars and shakes.

Other than to try and further extend the brand into other categories.

Yeah, that's a it's an astute question.

I guess the short answer is yes.

We have I mentioned on the last call I was disappointed I think disappointed with the lack of innovation on asking them, particularly in the <unk> segment.

And that certainly has contributed to some of the trends we've seen on the business.

When I came that was a big focus on Jumpstarting that pipeline.

Getting products out now, but also building a robust innovation pipeline for the future said whenever short again.

Some of the more recent products. We've brought out has performed pretty well the bank by for example is trending really well.

The breakdown is turning very well.

That that was that some of the early products from the pipeline that I think that there's now a lot more robust to your to your question on chips.

And in your comparison to quest I think I think the question there is more around.

And why did it work on quest [laughter]. This is why does it not work on Atkins.

Very very few brands, you could probably count them on one hand.

They've been able to extend out of the core.

Quest is one of those brands and as I mentioned earlier that is because the quake consumer is demanding the quest comes into snacking categories and flipped the macros.

On Atkins.

We're focused on strengthening our core <unk>.

Strengthening our buy business.

And strengthening our shakes business as part of an overarching revitalization plan.

So on quest it is about pushing beyond where we are today on Atkins right now it is about focusing on the core and strengthening the core and revitalizing the brand.

Just to add onto that I think just if you go back in time, when we did we looked at quest before we bought them. It took a while for I'll say salty snacks to become what it is today. It wasn't like an immediate success and it was a linear grow every year. This can be fantastic as sort of took a little while for the consumer to except it understand it and then.

Kind of see the growth that we see there right now so you know where we are with Atkins as well early in the process and I wouldn't necessarily say, it's not going to work, but just when I think the point. We're trying to do is we need to make sure the core business and the core bars and shakes business is really humming before we start talking about expansion into other areas. So that's where we're kind of getting.

Back to basics there.

That's really helpful. Thank you.

Yeah.

So I just want to thank everyone further participation.

Today's call I'm happy new year, and we look forward to updating you on our second quarter results in April have a great day.

This concludes today's question and answer session I would like to turn the floor back over to Jeff Tanner for closing comments.

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