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. [Operator Instructions] As a reminder, this conference is being recorded.

It is now my pleasure to introduce your host, Mark Pogharian, Vice President of Investor Relations. Thank you, Mr. Pogharian. You may begin..

Thank you, operator. Good morning. I'm pleased to welcome you to The Simply Good Foods Company earnings call for the fiscal first quarter ended November 25, 2023. Geoff Tanner, President and CEO; and Shaun Mara, CFO, 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 07:00 A.M. Eastern Time. A copy of the release and the accompanying presentation are available under the investor section of the company's website at www.thesimplygoodfoodscompany.com. This call is being webcast and an archive of today's remarks will also be available.

During the course of today's call, management will make forward-looking statements that are subject to various risks and uncertainties that may cause actual results to differ materially. The company undertakes no obligation to update these statements based on subsequent events.

A detailed listing of such risks and uncertainties can be found in today's press release and the company's SEC filings. Note, that on today's call we will refer to certain non-GAAP financial measures that we believe will provide useful information for investors.

Due to the company's asset-light strong cash flow business model, we evaluate our performance on an adjusted basis as it relates to EBITDA and diluted EPS. We have included a detailed reconciliation from GAAP to adjusted items in today's press release.

We believe these adjusted measures are a key indicator of the underlining performance of the business. The presentation of this information is not intended to be considered in isolation or the substitute for the financial information presented in accordance with GAAP.

Please refer to today's press release for 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 Geoff Tanner, our President and CEO..

Thank you, Mark. Good morning. Thank you for joining us. Today, I'll recap Simply Good Foods financial results and the performance of our brand. Then Shaun 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.

We're pleased with our fiscal first quarter results that were in line with estimates. Retail takeaway and the combined measured and unmeasured channels was slightly more than 8% and, as expected, outpaced net sales growth primarily due to the timing of shipments versus the year-ago period.

We anticipate that shipments and consumption should be largely in line by the end of Q2. Net sales increased 2.6% to $308.7 million, driven by continued Quest momentum. First quarter gross margin was 37.3% and in line with our forecast. The 40 basis point increase versus a year ago period was primarily due to lower ingredient and packaging costs.

Adjusted EBITDA in the first quarter was $62 million, an increase of 2% versus last year. Higher growth profit was partially offset by higher SG&A versus a year ago period, reflecting investments in marketing growth initiatives and G&A capabilities.

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, or opportunistically buy back our shares. Our Q1 results are a positive start to the year, and while early, Q2 is off to a good start.

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. We're pleased with the progress we've made on the acceleration plan for Quest and the revitalization plan for Atkins.

As such, we reaffirm our full year fiscal 2024 outlook. The next slide provides you with a perspective of our retail takeaway performance within the IRI MULO + C-store universe and in the combined measured and unmeasured channels.

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

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. Simply Good Foods retail takeaway in the measured channel increased 7.1% driven by Quest volume growth of 20%. Atkins performance was similar to last quarter.

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

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

A major focus for us is working with those retail partners to find additional space and merchandising opportunities for the brands. In Q1, we estimate total unmeasured channel retail takeaway increased about 14% as e-commerce strength was partially offset by softness in specialty channels. There is no denying Quest momentum.

With nearly $700 million in net sales in fiscal 2023, we have essentially doubled the business since we acquired it in November 2019. Quest retail sales in US measured and unmeasured channel this past year was $945 million. So we clearly expect it will be a $1 billion retail sales brand in fiscal 2024, with a footprint across multiple forms.

It's no small feat for a brand that's barely a dozen years old. In Q1, Quest bar business retail takeaway increased 16%. The snackier portion of Quest products continued to do well, with Q1 measured channel retail takeaway up 24%. But particularly pleased with our salty snacks performance that we believe has a long runway of growth.

Quest Snacks segment now represents nearly 45% of total Quest measured channel retail sales and is roughly equal to Quest bars and household penetration. We expect that Quest will have a strong year behind innovation, distribution gains, and a new 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 competitors, and this campaign has the potential to further accelerate growth. Turning to Atkins.

Q1 retail takeaway in the IRI MULO + C-store universe and the combined measured and unmeasured channel as expected was similar to last quarter, up about 6% and 4%, respectively. As has been the case for a while, Atkins heavy users migrate to e-commerce, where we continue to see good growth. Specifically, Atkins Amazon POS increased 12%.

As a result, e-commerce was additive to Atkins' measured channel POS. For perspective, in Q1, e-commerce was about 15% of total Atkins retail sales. In Q1, Atkins' retail takeaway trend stabilized from when we entered the quarter. October marketplace performance was somewhat better than September and November.

Note, that given the consumption seasonality in November and December, we were not on air with advertising and we had minimal in-store merchandising. Now that the calendar has turned to January, we will heavy up on advertising and merchandising for the new year, New Year season.

We continue to have tremendous faith in the long-term potential of the brand, and in support, we're making good progress against the five-point Atkins revitalization plan we talked about on our last conference call. However, as you may recall, it's going to take some time before all of the elements of the plan are collectively in the marketplace.

As a reminder, the Atkins five-point revitalization plan includes enhanced merchandising and assortment of select customers, new advertising supported with a reach-based media model, greater focus on a near and longer term robust innovation funnel, product upgrades on our bar portfolio and new packaging, and multiple work streams targeting GLP-1 weight loss drug users.

Getting Atkins back to green is our focus and we believe we have the plans in place to improve marketplace performance over the remainder of the year. In summary, we're pleased with our start to the year, particularly our first quarter marketplace results.

The Simply Good Foods Company competes in an attractive category and is uniquely positioned as the US leader in the nutritional snacking category with two scaled lifestyle nutritional snacking brands that are well developed across multiple forms of snacking occasions.

Nutritional snacking category continues to be resilient with top tier volume growth propelled by the consumer mega trends of healthy snacking with a nutritional profile that is protein rich, low in carbs and sugar.

This profile has broad appeal to consumers across all generations, but particularly with Gen X, Gen Z and millennial consumers that look to our brands as a means of helping them achieve their goals.

Given the future growth runway of 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 from in the store to support new and emerging formats.

We're executing against our priorities 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 Shaun who will provide you with some great financial details..

Thank you, Geoff. 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 2.6% versus the year ago period. With our July 2022 price increase behind us, the Q1 net sales increase is driven by volume growth.

North America and international net sales increased 2.6% and 0.7%, respectively versus last year. As Goeff stated earlier, as expected, retail takeaway of 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 $115.1 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 was 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 $28.5 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 to $0.3 million to $22.7 million. Finally, net interest income and interest expense was $4.9 million, a decline of $2.1 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 of 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 $0.35 per share diluted compared to $0.36 per share diluted for the comparable period of 2023. Adjusted diluted EPS was $0.43 compared to $0.42 in the year ago period. Note, that we calculate adjusted diluted EPS as adjusted EBITDA, less interest income, interest expense, and income taxes.

Please refer to today's press release for an explanation and reconciliation of non-GAAP financial measures. Moving to the balance sheet and cash flow, as of November 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, subsequent to the close of the quarter, the company repaid an additional $25 million of its term loan debt, bringing the outstanding principal balance to $250 million. Capital expenditures in Q1 was $0.7 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 non-cash amortization expense related to deferred financing fees. Now to wrap up, as Goeff stated earlier, we are on plan across all key metrics in Q1 and therefore we reaffirmed the 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. This 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 of 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 is anticipated to increase slightly greater than net sales growth rate, and adjusted diluted EPS will increase 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. [Operator Instructions] Our first question comes from Matt Smith from Stifel. Please proceed..

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

Good morning, Matt..

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

From a high level, could you talk about the trend supporting the strong consumption growth in the category? Are we seeing a period of accelerated household penetration growth or is the buy rate increasing at a greater rate than it has historically as the category remains relevant with consumers? Could you just help us understand what's driving the strong category relative to the rest of the store?.

Yes, good morning, Matt. This is Goeff. I appreciate the question. Yes, no, you're right. The nutritional snacking category has grown recently and consistently low double digits versus standard store, which is closer to 1% to 2%. And as you noted and you questioned, most of that growth is now volume.

And it is a significant difference, which I think is due to several factors. The category is certainly benefiting from health and wellness and convenience snacking trends.

But in addition, the high protein, low carb, low sugar macros of the category are increasingly emerging as the nutrients of choice, particularly for younger millennial Gen Z consumers, perhaps in contrast to high carb, high sugar products. So those are two macro drivers of the category.

I think what's interesting is, despite the strength we're seeing in the category versus standard store, I still think we're in the early innings and that this momentum has a lot of continued runway. Just a few thoughts on that. Household penetration is only at 50% versus high 80s, low 90s for standard store.

While the nutritional snacking category largely grew up on bars and shakes as we bring new formats to market, for example, our salty platform on Quest, it's increasingly driving buy rate as well as penetration. Retailers, and I've met with all of them, most of them recently, they're certainly seeing the growth.

They're looking to us as category advisors to the majority of those accounts and saying, how can we capitalize? Where can we find more space? And lastly, while in the early innings, we're on the right side of the GOP1 drives, which are in the early stage, but I think that's a future tailwind as well.

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

Thanks, Goeff. I'll pass it on..

Thank you..

Thanks, Matt..

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

Hi. Good morning. Happy New Year..

Happy New Year to you..

Thanks. You are now a quarter into the Atkins revitalization plan that you announced at Q4 results.

Can you talk about what actions you've taken so far and remind us how you're thinking about the trajectory of Atkins improvement and milestones to gauge the improvement?.

Yes, that's a good question, Pam. 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 too. 80% of consumers looking to lose and maintain weight. The brand's highly trusted. The macros work.

The products taste great. And we've put the five- point revitalization plan into market. And I outlined those elements in our scripted remarks. Now I'm pleased with the progress the team is making. As we talked last quarter, we've set a 12 month to 18 month timeframe for when all of those elements will be to market.

So some of them take a little longer than others, for example, the packaging refresh. But some of the elements have -- are in market today. That would be the new configuration in the club store, which has shown a marked improvement in trends in that channel. The new advertising is out. It was out in October.

As we noted, we tend to throttle back more in November, December, but we're pleased with how that advertising tested and as we move into January, February, March, we'll be heavying up that advertising and then we're pleased with some of the new innovation and how that's turning, for example, the bake bars and the break bars.

So some of the elements are in market, and I'm pleased with our execution. But I think the most critical period for us to evaluate how we're performing is January, February, March, when we'll have more sustained advertising in market, more merchandising in market. As you know, it's a critical seasonal period for us.

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

Great, thank you. And just wanted to ask about your capital allocation priorities. It seems you've paid down debt recently. Your balance sheet is in strong shape.

So how do you think about the capital allocation options that you have in M&A versus buybacks and more debt pay down?.

Yes, Pam, I think, overall, we spend a fair amount of time looking to evaluate the best return of our cash to our shareholders. That includes, obviously, as you said, debt pay down, 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 in our books.

We evaluate opportunities to buy back shares pretty consistently as well as looking at other ways of spending them overall. But I think, if we take a step back, we're going to evaluate these opportunities as they come up.

I wouldn't say they're, right now, we've thought the best use of cash in Q1 was the debt pay down, and we'll continue to evaluate that on a quarterly basis.

But we are very fortunate to be in a position where we have a lot of cash from operating activities that allows us to quickly pay down debt, as well as provide other opportunities for our shareholders..

Thank you, I'll pass it on..

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

Hey, guys. Good morning. Thank you..

Good morning, Steve..

Good morning, Steve..

So two questions, if I could. The first one is just a little more tactical 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 roundabout mid-single digit consumption on the year.

I'm just trying to think about how the phasing in your mind is going to work and kind of specific to 2Q and just because if you're going to catch up to consumption, just trying to figure out what you're trying to imply for shipments in the second quarter if I could? And then broader, Goeff, you talked about the category advisory conversations that you've been having with the retailers.

I guess I'd love a little bit of elaboration on that and kind of what are the points of emphasis that you're bringing to those conversations and trying to impart to retailers so that they can pay good on further category success..

Yes, thanks Steve. Maybe I'll start on the guidance question, turn it over to Shaun, and then I'll come back on the category advisor question. As we noted, Q1 consumption was a little better than we expected, but as we said also, we're comfortable when we reaffirmed our guidance.

As you know, the seasonality of this category, January, February, March, is a critical period for us. And that's going to give us a much clearer picture on how Quest and Atkins will perform for the year. We're very pleased with our Quest retail takeaway, plus 19 in Q1. We're in the early innings of the Atkins revitalization plan.

But if we get another quarter and we'll have a much better view of the year and then we'll think through longer term how to think about that. But I'll turn it over to Shaun for any added color there..

Yes, just reiterating a little bit, I guess, overall. I mean, Q2 was better than we expected a little bit. Q1, I'm sorry, Q1, excuse me. I hope Q2 is better than expected. 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 what the results were. And I think as we've talked about it internally on plan through Q1, like what we have for plans in place for Q2, 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..

I'll come back on the category advisor question. It's a good one. I've certainly 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, nutritional snacking category is now consistently disproportionately showing growth versus standard store.

And retailers are seeing that, and they're seeing that discrepancy.

They're looking for growth, and they're coming to us and saying, how much additional opportunity can we get after? What do we have to put in place to take further advantage of what seems to be a long-term trend, particularly around the nutrients as more and more consumers switch to protein forward.

They want to take out sugar, they want to take out carbs from their diets. And so, we are working with them. We're investing a considerable amount in understanding the category, projecting out where the category is going to go over the next several years. And then we started on building plans with them 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 or further out? How do we take advantage of the omni-channel, because this category does lend itself to heavy online purchases? How do we drive more traffic down the aisle? How do we use our combined marketing capabilities? They see the growth and they're looking to us and say, how can we build it together? You bring your resources, we'll bring our resources, because it is a bright spot.

And so we've just started those conversations in earnest with several of the customers, the 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 -- the continued growth of the category..

That's great. Thanks so much. Thanks to you both..

Thanks..

Thank you..

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

Good morning, everyone..

Good morning..

Good morning..

Hi, there. So can I ask you -- you commented about how the gross margin improvement this quarter is going to give you an opportunity to invest in organisational capabilities? Can you give us a little bit more colour on exactly what you're hoping to accomplish there and I'll pass it on. Thank you..

Yes, I'll take that. So it is -- we're fortunate to have some flexibility. And as I mentioned in the scripted remarks, our focus is on delivering consistent growth quarter-to-quarter, but 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 joint business plans with retailers, Alexia. It's a different muscle to build two to three to four year growth plans at the category level.

So that's been an investment we've made. As you saw in the financials, we've increased our investment in marketing, taking up to just over 9%. And we've also invested in bolstering our long-term innovation capabilities. As I talked on the last quarter, we were disappointed with the lack of innovation on Atkins. We don't want that to happen again.

So we're invested in building and bolstering our pipeline. And as you know, innovation is kind of a lifeblood of Quest. So 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 from when I came to Simply. Very pleased with the progress we're making there.

Shaun, anything you'd add?.

Just one more thing [indiscernible] I threw out there.

Just the capability wise, I think, we also kind of made some assessment as we kind of get into this year and talk about what the plans we have going forward and the pillars that Goeff 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 the organization to support that. So one other area I said 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 goals..

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

Thanks..

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

Yes, 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 focus 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. So 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 messaging around the advertising campaign was to try to address some misconceptions about the brand.

So I'm just curious if you're seeing any early results from that and where exactly the better than expected consumption is coming from?.

Yes, the consumption was slightly better than we had forecasted. Actually it was across both Atkins and Quest. I'll start with Atkins. As we said in the scripted remarks, October was a pretty good month for us versus the previous month as we came into the quarter. And….

Still below our expectations..

Yes, not happy with the number in absolute, but on a relative basis 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, but it's 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 Atkins I think comes in January, February, but we were encouraged with what we saw in October when we did have several of these revitalization plan elements in market, particularly the advertising. But in addition, Quest had came in stronger than we had forecasted as well.

What's interesting about Quest is, if you go back two, three years, the majority of growth on Quest was coming from penetration, which was very distribution-driven. Now you look at the drivers of growth, and it's roughly 50-50 balance across penetration and buy rate, as consumers are coming in to buy chips, and they're buying bars and vice versa.

And so we've just seen a more balanced growth profile on Quest that I think is carrying the momentum through. And what's really interesting about Quest is, despite the size of the business, and it will be a $1 billion retail brand this year.

Brand awareness is still relatively low versus a lot of key competitors and we're excited to debut new advertising in February on Quest. So yes, the consumption was a little better than we thought. Both brands, the critical period for us is again January, February, March..

Yes, appreciate the color Goeff. And fully recognizing we're just a few days into new year, new you, I'll ask anyway, just curious what, if anything, you are seeing either from the competitive landscape, i.e.

innovation, 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 watching that closely..

Yes, we're blowing it away. 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. Everything is in the storage, you see the displays, you see a lot of the activity ready to go in all of our key retailers.

There's some advertising that dropped for Atkins specifically on January 1st and you'll see that continuing through there. We've got 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 still early. I mean, it's very early.

We haven't even got early results other than a day in and day out basis. So I can't really comment on progress, but we feel confident in our plans..

It is obviously early, but we feel very confident in the consumer and retail plans we have as we enter this critical period..

Thanks, Shaun. Thanks, Goeff. Best of luck..

Thanks..

Our next question comes from Jim Salera from Stephens Inc. Please proceed..

Thanks for taking our question.

We'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 buy rates versus consumers that are increasingly health conscious kind of engaging with these protein dense low calorie snacks?.

Yes, it's a good question. I don't have that information at a category level. As we look at our brands, we certainly see a balance -- balanced across both household penetration and buy rate. And as I said again to Matt's question, this category largely grew up as bars and shakes.

And over time has expanded well beyond that, new format, new usage occasions, new day parts. So that's a big driver of buy rate. But we continue to see also consumers increase -- we still continue to see household penetration increase. So it's both.

And I think the opportunity for us is to continue to drive both, to continue as -- particularly as category leaders to continue to bring consumers into the space. That's the job of advertising. And then to continue to drive buy rate, which is the job of innovation.

I think the biggest driver here underlying all of this is protein has really emerged as the nutrient of choice, particularly for younger consumers. Sugar, they don't want sugar, they don't want carbs.

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 their looking for and to power their lifestyle. But we still believe the category has tremendous runways, both on buy rate and penetration..

Yes, and I think just building off that a little bit, I think Goeff mentioned the -- bringing consumers in through advertising, getting the innovation, but then also working with the retailers to continue to expand their shelf space that allows us to have new formats that are out there.

I think Quest, as Goeff said in the prepared remarks, has actually expanded into other formats pretty successfully, which is great because salty snacks, I think, is about a $300 million business at retail.

So it's grown from just a bar and shake -- bar business particularly and then into these other categories and we see that expansion opportunity really in other categories as well -- other formats as well..

When Quest was acquired the business was by far majority a bar business. Now bars represent just about 50% of sales. So that shows you the expansion opportunities, and it shows you the opportunity on, particularly I think there 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 GLP-1 drugs, that they gravitate more towards Atkins versus Quest?.

Not between brands. 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 is suppressed, but they're looking for smaller, more convenient, healthier, high protein, low sugar options. That's where our category majors in that.

In talking to consumers on the drugs, we certainly see an increased interest in products from Atkins and Quest. That's why I do think our category is on the right side of these drugs. That's why we've got out of the gate early. 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, we think both Atkins and Quest have a strong role to play here. It's not one versus the other..

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

Thank you..

Our next question comes from [Kamil Sarawalla] (ph) from Jeffreys. Please proceed..

Hey guys, good morning.

If I could follow up on that -- on your last response on GLP-1, is M&A part of the strategy on trying to leverage the opportunity that's in front of you as it relates to GLP-1?.

Not explicitly. Would it be something that we would look at if a right asset came along. Yes, but I think we're very much in the early innings on GLP-1. We've got a lot to learn. I don't think it would be front and center as an M&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 in general? You mentioned a few times kind of value enhancing acquisition. What does the M&A environment look like? Have multiples come down? There's obviously debates about asset prices and interest rates.

How do you see the environment at the moment?.

Yes, I mean, I guess take a step back. We love the cash flow, right? And we believe the potential to double that is there over the next, pick a time frame, five, 10 years. We look at a lot of assets that come into our space, especially those that are complementary to our portfolio where we can get synergies.

To your point about seller expectations, they're still high. And we're not going to overpay quick [handling] (ph). We evaluate, continue to evaluate complementary brands and businesses of size, preferably shelf stable, warehouse delivered, and really in or adjacent to our aisle. That's what we think the synergies really are.

So our targets really here are strong consumer brands that are complementary. We've got a strong balance sheet. We've talked about it already that allows us to do those things, but we're not going to overpay for anything either.

So we evaluate everything that comes up in the space, and we kind of assess 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. Thanks for the question..

Good morning, John..

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, but the resilience and velocities at the same time has been pretty surprising.

And I'm wondering, Goeff, can you speak to anything different in the retail programming, the merchandising, even maybe the composition of the store doors when you're gaining the TDPs, that sort of explains the velocity resilience there at a time when a number of categories are seeing softness in higher priced brands?.

Yes, 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 at Simply. But more recently, we've seen growth be more balanced across not just distribution, as I mentioned, but also buy rate.

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. 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 Quest consumers expect and demand. They look to Quest to come into snacking categories, flip the macros, and come out with a great tasting product that has high protein and low sugar.

And this is what consumers want from the brand and we have an incredible R&D organization, best I've ever worked with in my career that has been able to develop wonderfully tasting products that deliver on these macros. Retail partners see it too. It's why they continue to support the brand.

It's why they continue to give us great merchandising, support our innovation. We're having the longer term space conversations as we show them the pipeline.

But I think at the very heart of your question is the strength of the Quest brand and in particular the demand of Quest consumers for the brand to come into snacking categories and flip those macros and offer them snacking occasions for different day parts, different usage occasions, different products.

I think that is what, in my opinion, is unique about Quest versus almost any other brand I've seen in my career..

Thanks for that.

And then just on Atkins, you're looking back to [indiscernible] the non-programmatic portion of the consumer base has been the big growth on mock over the years and I'm curious as the GLP-1 awareness sort of takes hold, do you see the programmatic dieting consumer sort of also making a comeback? Shaking off some of the dormancy there on growth? Or, as you're 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 growth opportunities for the brand. I think that we do have those consumers who do look to Atkins as a regime. That's why the buy rate on the brand is virtually double any other I've ever worked with. And we think that obviously those consumers are very critical to us.

They're front and center in our media planning. And I think they will be very open to Atkins on GLP-1. But we also think the opportunity for Atkins is to expand, continue to expand the funnel, bring in new users, introduce them to the brand, the benefits it offers.

So if you look historically, programmatic has always been a smaller portion of the brand sales. It’s 10% to 15%. But as I mentioned, their buy rates are high, so they're critical. 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 -- I see both groups having an opportunity for GLP-1..

Yes, and I think you're also going to see the benefit of the category expansion that Goeff talked about in the growth there as we kind of -- we're in a growing category and it allows us to continue to grow with the category overall.

We haven't seen that recently with Atkins, but we're going to -- as we get through this plan, we'll see more of that overall. So I think it's all three of those things are going to drive the eventual return to the growth that we're looking for Atkins..

Thanks, Goeff. Thanks, Shaun..

Thank you..

See you, John..

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

Hi, Goeff and Shaun. Thanks for taking another question here..

Welcome back..

In past years, when 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 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 Adkin stabilization plan to the extent you're able to this year?.

Yes, it's a really good question. Shaun and I discuss this almost every day. Because we see the long-term growth of the category in the multi-year runway. We believe that that creates the opportunity for investment to take full advantage of it.

I think it was Alexia's question where she asked about where are we investing to capitalize on that runway of growth? We have increased our investment in marketing, it's now just a little bit over 9%.

We've increased our investment in innovation and we've increased our innovation in 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 in both. 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 levels we pull are a little different. The brand's -- where they are in 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 all of this is because we see the long term growth potential of this category. And we're going to get after it..

Yes, and I think over -- it is a great question. It's something 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, month, quarter review as we think of where we are overall and getting ahead of the investment and the return on those things.

It goes back to a lot of the kind of pillars that Goeff set up when we started this discussion last quarter and really throwing gasoline on fire for Quest, revitalizing Atkins, category management, and then using the fuel to fund that to be related to the, I'll say, commodity and cost savings that we have, as well as some of the cost savings productivity we have on the supply chain.

So it's a discussion we have all the time, and we balance all those things and try to make sure that we support both brands, because as Goeff said, retailers expect that. And on top of that, build for this year and for future years..

That's really it. It's about delivering the quarterly commitments 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..

Our last question is from Jon Andersen from William Blair. Please proceed. Q - Jon Andersen Good morning, everybody, and thanks for the question..

Good morning..

I want 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 is an example, it has not had the same uptake as Quest has seen outside its core.

Do you think Atkins has less permission or rationale to travel? And if so, is the intent, at least in the near to medium term to focus Atkins innovation, focus Atkins retail assortment on core bars and shakes, rather than to try and further extend the brand into other categories? Thanks..

Yes, it's a [indiscernible] question. I guess the short answer is, yes. We have -- I mentioned on the last call, I was disappointed -- I've been disappointed with the lack of innovation on Atkins, particularly in the bars segment. And that certainly has contributed to some of the trends we've seen on the business.

When I came, it was a big focus on jump starting that pipeline, getting products out now, but also building a robust innovation pipeline for the future so we're never short again. Some of the more recent products we've brought out have performed pretty well. The bake bar, for example, is turning really well. The break bar is turning very well.

But those are some of the early products from the pipeline that I think that are now a lot more robust.

To your question on chips and your comparison to Quest, I think the question there is more around, why did it work on Quest versus why did it not work on Atkins? There's very, very few brands, you can probably count them on one hand, who've been able to extend out of the core.

Quest is one of those brands and as I mentioned earlier, that is because the Quest consumer is demanding that Quest comes into snacking categories and flips the macros. On Atkins, what we've focused on is strengthening our core, strengthening our bar 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..

Yes, just two add-ons to 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 that's going to be fantastic.

It sort of took a little while for the consumer to accept it, understand it, and then kind of see the growth that we see there right now.

So, where we are with Atkins is a little early in the process and I wouldn't necessarily say it's not going to work, but to Goeff point, 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..

So I just want to thank everyone for the participation on today's call. Happy New Year, and we look forward to updating you on our second quarter results in April. Have a great day..

Thanks guys..

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