Merely Good Meals Firm (SMPL) has reported encouraging monetary outcomes for the fiscal second quarter ending February 24, 2024, with a 5.3% enhance in internet gross sales and a major enchancment in gross margin. Regardless of a softer efficiency from its Atkins model, the corporate has revised its full-year fiscal 2024 outlook with an anticipated internet gross sales enhance on the midpoint of its long-term 4% to six% goal. The corporate’s focus stays on innovation and advertising and marketing to assist shopper wellness objectives, in addition to rising family penetration and purchase charges by way of new promoting and product innovation.

Key Takeaways

• Internet gross sales rose by 5.3% to $312.2 million within the second quarter, outpacing retail takeaway.
• Gross margin improved by 280 foundation factors, resulting in a gross revenue of $116.9 million.
• Adjusted EBITDA elevated by 13.6% to $57.8 million.
• Full-year fiscal 2024 outlook up to date; internet gross sales anticipated to extend across the midpoint of the 4% to six% vary.
• Quest model retail takeaway grew by 13.1%, whereas Atkins noticed an 11% decline in retail takeaway.
• New bake store platform to launch in fall 2024.

Firm Outlook

• Full-year internet gross sales progress projected on the midpoint of the 4-6% long-term algorithm.
• Gross margin enlargement and a 6-8% enhance in adjusted EBITDA anticipated.
• Continued deal with innovation and advertising and marketing to drive progress.
• Confidence within the long-term vitality of the Atkins model, with improved efficiency anticipated within the second half of the 12 months.

Bearish Highlights

• Softer than anticipated consumption tendencies for Atkins.
• Atkins retail takeaway confronted an 11% lower attributable to aggressive in-store merchandising.
• Out-of-stock challenges and elevated competitors famous within the New 12 months, New You class.

Bullish Highlights

• Quest model continues robust progress with a 13.1% enhance in retail takeaway.
• The corporate stays a trusted class advisor for retailers within the well being and wellness sector.
• Optimistic impression of recent promoting and autumn shelf resets on gross sales.
• Sturdy stability sheet with a leverage ratio under half a flip.

Misses

• The corporate is addressing underperforming Atkins gadgets and expects to see improved tendencies by summer season.
• Competitors anticipated to normalize as main opponents resolve provide points.

Q&A Highlights

• Firm executives assured in Atkins’ position as a complement to GLP-1 medication.
• Quest model efficiency in step with expectations for the quarter.
• Advertising spend focused at 9-10% of gross sales, with gross margins anticipated to enhance.
• 53rd week of the 12 months to be excluded from subsequent 12 months’s outcomes.
• Firm plans to make use of extra free money stream for debt paydown, share repurchases, and potential M&A alternatives.

Merely Good Meals’ robust second-quarter efficiency showcases the corporate’s resilience and strategic deal with innovation and advertising and marketing. Regardless of some challenges, notably with the Atkins model, the corporate is taking steps to enhance its choices and market positioning. With a wholesome stability sheet and a transparent technique for progress, Merely Good Meals goals to proceed its momentum within the well being and wellness sector, capitalizing on shopper tendencies and aggressive alternatives. Buyers and customers alike shall be watching carefully as the corporate updates its progress in late June with its third-quarter outcomes.

InvestingPro Insights

Merely Good Meals Firm (SMPL) has demonstrated resilience in its fiscal second-quarter outcomes, with a notable 5.3% enhance in internet gross sales. Whereas the corporate’s Atkins model confronted challenges, the Quest model’s robust efficiency and the general gross margin enchancment are indicators of a strong strategic route. To offer additional context to those outcomes, let’s delve into some real-time information and insights from InvestingPro.

InvestingPro Information:

• The corporate at present has a market capitalization of $3.22 billion.

• SMPL’s P/E ratio stands at 23.17, which suggests a premium valuation relative to near-term earnings progress.

• Income for the final twelve months as of Q2 2024 reached roughly $1.27 billion, with a progress price of 6.56%, aligning carefully with the corporate’s up to date full-year fiscal 2024 outlook.

InvestingPro Ideas:

• Analysts have not too long ago revised their earnings expectations downwards for SMPL within the upcoming interval, which can impression investor sentiment.

• Regardless of the worth lower during the last three months, the corporate’s liquid belongings exceed its short-term obligations, and it operates with a average stage of debt, indicating a robust stability sheet.

It is also price noting that SMPL doesn’t pay a dividend, which can affect the funding choices of income-focused shareholders. For traders searching for a complete evaluation, there are further InvestingPro Ideas obtainable at https://www.investing.com/professional/SMPL, which might present a deeper understanding of the corporate’s monetary well being and market place. Keep in mind to make use of coupon code PRONEWS24 to get an extra 10% off a yearly or biyearly Professional and Professional+ subscription. With these insights, stakeholders can higher gauge Merely Good Meals’ potential within the evolving well being and wellness sector.

Full transcript – Simplicity (SMPL) Q2 2024:

Operator: Greetings, and welcome to the Merely Good Meals Firm Fiscal Second Quarter 2024 Convention Name. At the moment, all individuals are in a listen-only mode. An issue-and-answer session will comply with the formal presentation. [Operator Instructions]. Please notice this convention is being recorded. I’ll now flip the convention over to Mark Pogharian, Vice President of Investor Relations. Thanks, chances are you’ll start.

Mark Pogharian: Thanks, operator. Good morning. I am happy to welcome you to The Merely Good Meals Firm (NASDAQ:) earnings name for the fiscal second quarter ended February 24, 2024. Geoff Tanner, President and CEO; and Shaun Mara, CFO, will give you an outline of outcomes which can then be adopted by a Q&A session. The corporate issued an earnings launch this morning at roughly 07:00 A.M. Jap Time. A duplicate of the discharge and accompanying presentation can be found below the investor part on the corporate’s web site at www.thesimplygoodfoodscompany.com. This name is being webcast and an archive of at this time’s remarks may also be obtainable. Through the course of at this time’s name, administration will make forward-looking statements which are topic to varied dangers and uncertainties which will trigger precise outcomes to vary materially. The corporate undertakes no obligation to replace these statements based mostly on subsequent occasions. An in depth itemizing of such dangers and uncertainties could be present in at this time’s press launch and the corporate’s SEC filings. Observe, that on at this time’s name we are going to consult with sure non-GAAP monetary measures that we consider will present helpful data for traders. Because of the firm’s asset-light robust money stream enterprise mannequin, we consider our efficiency on an adjusted foundation because it pertains to EBITDA and diluted EPS. We’ve got included an in depth reconciliation from GAAP to adjusted gadgets in at this time’s press launch. We consider these adjusted measures are a key indicator of the underlining efficiency of the enterprise. The presentation of this data shouldn’t be meant to be thought of in isolation or as an alternative to the monetary data introduced in accordance with GAAP. Please consult with at this time’s press launch for reconciliation of the non-GAAP monetary measures to essentially the most comparable measures ready in accordance with GAAP. I am going to now flip the decision over to Geoff Tanner, our President and CEO.

Geoff E. Tanner: Thanks Mark. Good morning. Thanks for becoming a member of us. At the moment I’ll recap Merely Good Meals monetary outcomes and the efficiency of our model. Then Shaun will talk about our monetary leads to extra element earlier than we wrap it up with a dialogue of our fiscal 2024 outlook and your questions. Merely Good Meals second quarter outcomes have been led by continued Quest progress in addition to robust gross margin enchancment. Internet gross sales elevated 5.3%, pushed by quantity and as a result of timing of shipments final quarter, outpaced retail takeaway of about 3%. Retail takeaway in measured channels was lower than our expectations. E-commerce POS progress for each Quest and Atkins continued to be strong. Quest retail takeaway was on observe with our plans pushed by robust salty snacks progress whereas Atkins efficiency was off versus our estimates. Atkins had strong plans in place, however was in the end deprived on two fronts in the course of the quarter. First, it left a onetime merchandising and promotional profit that it had within the 2023 New 12 months, New You season, as a result of out of inventory challenges of a class participant. And second, within the 2024 New 12 months, New You season this class participant had sufficient provide to service its base enterprise. It then layered in in depth merchandising packages and promotions in the course of the season, which drastically decreased the general in-store share of voice for the Atkins model and others. In March as we exited the New 12 months, New You season and moved previous the troublesome lap, Atkins tendencies improved. Extra on that in a bit. We have been very happy with the Q2 gross margin of 37.4%. The 280 foundation level enhance versus the 12 months in the past interval was primarily attributable to decrease ingredient and packaging prices. Greater gross revenue enabled investments in our enterprise, and a rise in Q2 adjusted EBITDA of 13.6% to 57.8 million. Nonetheless, as a result of softer than anticipated Q2 Atkins consumption tendencies, we’ve up to date our full 12 months fiscal 2024 outlook. We count on internet gross sales to extend across the midpoint of the corporate’s long run algorithm of 4% to six%, together with the advantage of a 53rd week. We beforehand anticipated internet gross sales to extend on the excessive finish of the long-term algorithm. We proceed to count on strong gross margin enlargement, and adjusted EBITDA is now anticipated to extend 6% to eight%, pushed by strong gross margin enlargement. Let me now flip to Quest. In Q2, retail takeaway measured channels elevated 13.1%. Development was strong throughout the important thing product varieties and retail channels, pushed by a rise in each family penetration and by price. In Q2, we estimate whole unmeasured channel retail takeaway elevated about 10% as e-commerce power was partially offset by softness in specialty channels. Quest Q2 e-commerce POS remained strong and elevated about 14%. For perspective, whole unmeasured channels in Q2 have been almost 24% of whole Quest retail gross sales. Quest bar and snacks retail takeaway and measured channels elevated 6% and 21% respectively. We’re notably happy with our salty snacks POS progress of about 40%, which is a standout within the class and now represents about 25% of Quest retail gross sales. Moreover, we proceed to see new Quest customers coming into the model by way of chips after which making an attempt our different merchandise similar to bars, cookies, or confections. The success of Quest chips continues to be a proof level of the model’s potential to increase past its core and disrupt different giant snacking classes the place we will provide excessive protein, low sugar, and nice tasting choices for customers. Over the rest of the 12 months we proceed to count on low double digit POS progress and continued family penetration and purchase price positive aspects pushed by innovation, distribution, and a brand new advertising and marketing marketing campaign. In March, we introduced the launch of a brand new promoting marketing campaign entitled It is Mainly Dishonest. The marketing campaign options Academy Award and Emmy nominated author, actor, and comic Kumal Nanjiani, who playfully and satirically delivers a core marketing campaign concept that Quest merchandise are so good tasting and higher for you that it mainly looks like dishonest. Quest has been one of the crucial modern manufacturers within the class and is supported by a finest at school R&D workforce. The multi-year pipeline is powerful, and we count on innovation to be a lever of progress for a very long time. In March, we launched Strawberry Frosted Cookies and one in every of my favorites Iced Espresso. This 10 gram protein packed 10 ounce drink has minimal sugar, solely 90 energy, and 200 milligrams of caffeine. At the moment, I am additionally excited to announce a brand new bake store platform for the autumn of 2024. As we have seen with chips, this is a chance to disrupt a big snacking class candy baked items with excessive protein, low sugar, and nice tasting muffins and a brownie. Like Quest chips we consider this new platform will deliver new customers to the lively diet class and develop by proper by way of one other utilization event. Primarily based on conversations with key retail clients we count on very robust assist for the launch that may also be underpinned by a complete advertising and marketing plan as a part of the Its Mainly Dishonest marketing campaign. Turning to Atkins, Q2 retail takeaway within the IRI MULO + C-store universe and the mixed measured and unmeasured channels was off 11% and eight% respectively. Sturdy e-commerce progress continued, pushed by Amazon (NASDAQ:), whose POS progress was 13%. In Q1 e-commerce was almost 17% of whole Atkins retail gross sales up from 11% solely three years in the past. E-commerce retail gross sales are over $2 million per week pushed by a mixture of new customers and a few heavy customers which are migrating to this channel from brick and mortar. Atkins efficiency in brick and mortar channels was softer than anticipated. This was primarily attributable to larger than anticipated in-store aggressive merchandising and programming that additionally impacted a number of different manufacturers. As I famous earlier, final 12 months, Atkins obtained incremental one time merchandising and promotional assist as a result of provide challenges of a class participant, which is why the 2024 New 12 months, New You was a difficult headwind. Nonetheless, as you will notice within the chart in the midst of the slide, as we exited the New 12 months, New You season, retail takeaway tendencies have improved. Over the rest of the 12 months, we count on extra normalized stage of aggressive in-store merchandising and programming. We even have a robust promoting plan in place and are excited concerning the high quality of the brand new merchandise we are going to quickly deliver to market. Subsequently, we anticipate full 12 months fiscal 12 months 2024 mixed, measured and unmeasured channel POS to be off round 7% versus our earlier estimate of three% to 4%. We proceed to have large religion within the long-term potential of the model, particularly given the elevated cultural relevance and dialog about weight wellness. We proceed to make progress towards the five-point revitalization plan we have talked about on earlier calls. Nonetheless, as chances are you’ll recall, it will take time earlier than all the weather of the plan are collectively within the market. I am notably happy with the progress we’re making in accelerating innovation, which is a essential driver of enterprise efficiency. As beforehand acknowledged, our lack of high quality innovation has been a headwind to Atkins efficiency, so getting this again on observe has been a spotlight space for us. The numerous enhancements we have made ought to allow us to have 15 new product launches in calendar 12 months 2024 throughout all product varieties. On the backside of this slide I might prefer to level out Atkins Sturdy, a excessive protein shake developed particularly for customers on a weight reduction drug, or for consumers simply searching for greater ranges of protein. For customers skilled fast weight reduction both by way of medicines, surgical procedure, or weight-reduction plan, excessive protein ranges are vital to assist preserve muscle mass. Atkins Sturdy protein shakes ship 30 grams of protein with 1 gram of sugar, and have additionally been formulated with 7 grams of prebiotic fiber to assist intestine well being. This useful stage of fiber is missing in lots of RTD shakes available in the market at this time, and is a extremely related nutrient for a lot of people on the brand new medicines. Lastly, analysis continues to counsel that the Atkins strategy could be an efficient off-ramp for many who select to transition off the remedy, and we’re working to optimize our communications to make sure the model is seen as a method to preserve weight reduction advantages after taking the medication. To summarize, Merely Good Meals is uniquely positioned as a U.S. chief in dietary snacking. The dietary snacking class is extra related at this time than at every other time, because the dialog of well being and wellness continues to extend. Moreover, our class continues to be a standout versus many different middle of retailer classes. As such, we’re leveraging our position as class advisor at most retailers, and proceed to work with our clients to develop and assist initiatives within the aisle to additional speed up class progress with a specific deal with gaining more room. Shoppers belief our manufacturers to assist them obtain their wellness objectives, and we’re accelerating our innovation and advertising and marketing plans to offer customers with merchandise to assist them of their wellness journey. We are going to proceed to execute our strategic priorities, specializing in doing the suitable factor for our clients and customers. They’ll allow us to ship on our long-term progress targets that in the end drive elevated shareholder worth. Now, I’ll flip the decision over to Shaun who will give you some larger monetary particulars.

Shaun Mara: Thanks, Geoff. Good morning, everybody. Whole Merely Good Meals second quarter internet gross sales of $312.2 million elevated $15.6 million, or 5.3% versus the 12 months in the past interval, and was pushed by Quest quantity rising. North America and worldwide internet gross sales elevated 5.1% and 12.3% respectively. As Geoff acknowledged earlier, as anticipated, internet gross sales progress was larger than retail takeaway of about 3%, primarily as a result of timing of shipments final quarter. Recall, in Q1 POS progress of about 8% outpaced the web gross sales enhance of almost 3%. Shifting on to different P&L gadgets for the quarter, gross revenue was $116.9 million, a rise of $14.1 million from the 12 months in the past interval, leading to gross margin of 37.4%. The 280 foundation level enhance versus the 12 months in the past interval was primarily attributable to decrease ingredient and packaging prices. Adjusted EBITDA was $57.8 million, a rise of $6.9 million from the 12 months in the past interval. Promoting and advertising and marketing bills have been $34.6 million versus $29.9 million, a rise of 15.7%, largely attributable to greater advertising and marketing investments and progress initiatives. GAAP G&A bills have been $29.9 million, a rise of $4 million versus final 12 months, primarily attributable to greater employee-related prices, stock-based compensation, and company bills. Excluding stock-based compensation, G&A elevated $2.5 million to $25.4 million. Lastly, internet curiosity earnings and curiosity expense was $4.7 million, a decline of $3.6 million versus Q2 final 12 months. The decline was attributable to decrease debt balances versus the 12 months in the past interval. Our Q2 tax price was about 24% versus 25% within the 12 months in the past interval. In consequence, internet earnings was $33.1 million versus $25.6 million final 12 months. Shifting on to year-to-date outcomes, internet gross sales have been $620.9 million, rising about 4% versus final 12 months. That is barely under year-to-date retail takeaway within the mixed measured and unmeasured channels, which is rising roughly 5.5%. The distinction is principally attributable to some incremental commerce funding made within the first half of fiscal 2024. That stated, we count on POS progress and internet gross sales progress to be largely in line for the complete 12 months. Gross revenue was $232 million, leading to a gross margin of 37.4%, a 160 foundation level enhance versus the 12 months in the past interval. We’ve got good visibility into provide chain prices over the rest of the 12 months and anticipate gross margin will proceed to enhance and will strategy 39% within the second half of the 12 months. Adjusted EBITDA was $119.8 million, a rise of seven.3% from the 12 months in the past interval. Internet curiosity earnings and curiosity expense was $9.6 million, a decline of $5.7 million versus final 12 months. The year-to-date tax price was 24.1% versus 22.7% final 12 months. We proceed to anticipate the complete 12 months efficient tax price to be round 25%. In consequence, internet earnings was $68.7 million versus $61.5 million final 12 months. The subsequent slide offers you with a reconciliation of reported and adjusted diluted EPS. Second quarter reported EPS was $0.33 per share diluted in comparison with $0.25 per share diluted for the comparable interval of 2023. Adjusted diluted EPS was $0.40 in comparison with $0.32 within the 12 months in the past interval. Observe that we calculate adjusted diluted EPS as adjusted EBITDA, much less curiosity earnings, curiosity expense, and earnings taxes. Please consult with at this time’s press launch for an evidence and reconciliation of non-GAAP monetary measures. Shifting to the stability sheet and money stream, as of February 24, 2024 the corporate had money of $135.9 million. 12 months-to-date money stream from operations was about $94 million, a rise of 76% or $40.6 million, principally attributable to adjusted EBITDA progress and enhancements in working capital. Through the quarter, the corporate repaid $35 million of its time period mortgage debt and on the finish of the second quarter, the excellent principal stability was $240 million. Capital expenditures in Q2 and year-to-date interval have been $300,000 and $1.1 million respectively. In fiscal 2024, we proceed to count on CAPEX to be within the $8 million to $10 million vary. In fiscal 2024, we anticipate internet curiosity expense to be round $17 million to $19 million, together with non-cash amortization expense associated to the deferred financing charges. Now to wrap up, as Geoff acknowledged earlier, as a result of tender meals anticipated consumption tendencies in Q2, we up to date our full 12 months outlook. We proceed to count on that ingredient and packaging prices shall be decrease in fiscal 2024 in comparison with final 12 months and drive strong gross margin enlargement. This offers us with the pliability to spend money on advertising and marketing initiatives that we count on will drive close to and long-term progress and generate strong earnings progress. Subsequently, for full 12 months fiscal 2024, we anticipate internet gross sales progress pushed by quantity to extend across the midpoint of the corporate’s long-term algorithm of 4% to six%, together with the advantage of the 53rd week. And adjusted EBITDA is now anticipated to extend 6% to eight% versus final 12 months. We recognize everyone’s curiosity in our firm, and we’re now obtainable to take your questions.

Operator: Thanks. [Operator Instructions]. Our first questions come from the road of Matt Smith with Stifel. Please proceed along with your questions.

Matthew Smith: Hello, good morning Geoff and Shaun.

Geoff E. Tanner: Good morning.

Matthew Smith: The general lively diet class progress slowed within the first calendar quarter of the 12 months, that is throughout the important thing food plan season. You talked concerning the aggressive dynamic impacting Quest and Atkins. However from a excessive stage, was the efficiency of the general class in step with your expectations and are you seeing any indicators of a pickup in progress within the classes as we transfer previous March?

Geoff E. Tanner: Sure. No, the class continues to point out robust progress. It definitely has slowed versus the previous couple of years. For those who look backwards, you see a bump popping out of COVID and you then’ve had numerous inflation-driven progress. We’re now again to round 6% or 7% which is the place the class was pre-COVID. And moreover, it continues to be a standout class versus many of the commonplace retailer the place, as you understand, volumes are flat. And that displays some underlying drivers, well being and wellness tendencies, snacking comfort. It is bought low family penetration that we have talked about earlier than and it over-indexes with youthful customers. So we proceed to be excited the place the class is performing. It is proper the place we count on it to be. And retailers see that, too. It is why we’re working with them on the right way to even additional speed up that progress.

Matthew Smith: Thanks Geoff and as a follow-up, the decrease income steerage features a 7% discount in POS for Atkins for the 12 months. Does that outlook take into account enhancing greenback consumption from right here, are you taking a look at greenback consumption for the Atkins model and believing you’ll be able to maintain that stage and you then profit from simpler comparisons within the second half of the 12 months from a POS perspective?

Geoff E. Tanner: Sure, that is what it’s. Clearly, we’re dissatisfied how Atkins carried out in January, February. And clearly, we walked into some powerful aggressive merchandising comps. We nonetheless stay assured within the long-term vitality of the enterprise, and as we glance ahead, we definitely have seen tendencies enhance which have come out of January and February. And definitely, for the stability of the 12 months, we do have simpler comps, and that is why we count on the enterprise to return extra to that mid-single-digit decline.

Shaun Mara: Sure, Matt if you happen to have a look at it by — for Q3 and This fall, then Q3 is comparatively in step with what we noticed in Q2, barely higher in This fall as a result of we get some simpler laps as you stated, total. So we’re not anticipating drastic adjustments within the trajectory within the subsequent X time period.

Matthew Smith: Thanks, I’ll go away it there.

Operator: Thanks. Our subsequent questions come from the road of Alexia Howard with Bernstein. Please proceed along with your questions.

Alexia Howard: Good morning everybody.

Geoff E. Tanner: Good morning.

Alexia Howard: Simply a few fast questions right here. You have bought innovation stepping up and it feels as if we have been by way of just a few cycles of innovation over the previous couple of years, a few of which have not labored, a few of which has. What metrics do you employ to ensure innovation is profitable and sustainable within the market and the way do you observe that over time to just remember to’re calling issues that are not going to work and clearly supporting issues which are?

Geoff E. Tanner: Sure. I imply, Alexia, I might most likely level to the innovation on Quest, which has been I feel, a standout and a serious driver of progress and really profitable. For those who have a look at chips, for instance, we’re seeing 40% progress in that enterprise, and it continues to be extremely incremental. We’re excited concerning the bake store platform that we’ve arising on Quest. So I might say the innovation on Quest has been extremely profitable and definitely retailers view it that method and proceed to reward us with more room. For those who have a look at Atkins, and I have been fairly clear about this on earlier calls, we have been very dissatisfied with the standard and stage of innovation on Atkins over the previous couple of years, which has contributed to the slowdown within the model. It is why we’ve leap began innovation on Atkins. It was definitely one in every of my priorities coming into the position. And I feel the standard of the innovation we’re bringing to market on Atkins over the subsequent — we are going to minimize statin within the fall and thereafter it’s a lot stronger. The place we have tried to push is innovation that is extra incremental to the enterprise, extra platform centered. However we do know that on Atkins, what we’re making an attempt to do is maintain on to shelf area and changed underperforming gadgets with the innovation. So the roles are completely different on innovation for each companies. Proper now, on Atkins, it is changing underperforming gadgets with higher gadgets. On Quest, it’s about innovation that’s incremental to the enterprise and incremental to the class.

Shaun Mara: Alexia, simply to the touch in your course of query, I feel, just a little bit there. After we form of launch any new innovation, we undergo a course of internally, what the metric we form of have a look at as we go on the market, our ACV construct then turns per week after which associated to that form of repeat buy. So these are the metrics we form of mannequin out earlier than we launch something after which we consider that efficiency, if you wish to name it that, over the primary six months or so of the launch to see how profitable it might be.

Alexia Howard: Actually recognize the small print from each of you. I am going to cross it on. Thanks.

Operator: Thanks. Our subsequent questions come from the road of Steve Powers with Deutsche Financial institution. Please proceed along with your questions.

Stephen Powers: Thanks guys, sorry I used to be on mute there. Hey, a primary query on Atkins and weight administration class dynamics basically. You talked concerning the expectation that the aggressive surroundings, the aggressive dynamics would normalize as we undergo the calendar 12 months. I assume just a little bit extra perspective on the place your confidence comes from in that and sure, we’ll take it from there?

Geoff E. Tanner: Sure. No, the truth is that this time final 12 months, as we talked about within the ready remarks, one in every of our main opponents had provide challenges and that was notably acute over the January and February interval. And in consequence, Atkins benefited considerably, notably in just a few clients, from outsized merchandising and promotional assist, which we clearly did not get this 12 months. In order that was going to be a troublesome lap. And that competitor is now again and capable of service the enterprise. So it was an inevitable troublesome New 12 months, New You season, however we are going to lap that. And as we have come out of January, February tendencies have improved, and I might say by across the summer season, we needs to be largely lapped — that impact needs to be largely lapped, which is why our comps ought to get simpler.

Stephen Powers: Okay. Sure. Okay, is sensible. After which pivoting over to Quest, you highlighted, Geoff, the ready-to-drink espresso innovation, which is attention-grabbing to me. I assume as you concentrate on the pipeline for Quest from an innovation perspective, what — how huge a job do you assume drinks will play versus additional endeavors in meals and if drinks are envisioned as form of a cloth driver of the franchise going ahead, how do you concentrate on prioritizing future consumption events versus the media consumption events and simply the complexities of reaching completely different channels, particularly on the rapid consumption aspect?

Geoff E. Tanner: Sure, I imply — the factor that has pushed the success of Quest innovation is the model flipping, we name them flipping the macros on giant snacking class. So flipping the macros from excessive sugar, excessive carb, excessive protein, and low sugar, which is what we have performed with our Iced Espresso launch, and I am excited to see how that performs. It is definitely early days, and we’ll monitor it carefully. And if we proceed to do effectively, we’ll proceed to double down there. To your query on beverage, regardless of relaxation guarantee, we’re taking a look at it, it is clearly it is a big class. And if we will discover a method to go in and disrupt that class in a method just like how we plan to disrupt candy baked items, we will surely have a look at that. And even drawing a broader circle, the place we see these alternatives to offer Quest customers the identical high quality and style that they want of enormous snacking classes, we’re taking a look at it.

Stephen Powers: Okay, thanks. Thanks very a lot.

Operator: Thanks. Our subsequent questions come from the road of Pamela Kaufman with Morgan Stanley. Please proceed along with your questions.

Pamela Kaufman: Hello, good morning. How are you interested by your income development over the again half of the 12 months and what offers you confidence you could ship on the up to date income steerage, I assume the place do you see potential for upside or draw back to your new outlook?

Geoff E. Tanner: Sure, I am going to begin and perhaps flip it over to Shaun. I might say the upside is we’re shifting into simpler — what we consider shall be simpler comps on Atkins. And we do stay assured within the revitalization plan, the brand new promoting. We’re assured within the new innovation that is launching albeit in direction of the tip of our fiscal. And we’re strolling to simpler comps. So might be some upside there. And on Quest, the momentum that we have seen, simply taking a look at March, mid-double digit could be very encouraging. We have simply launched new promoting that launched to start with of March. So that offers us numerous confidence. After which Quest too is bringing some fairly thrilling innovation to market. So there might be some upside there, however I am going to flip it over to Shaun.

Shaun Mara: Sure. I imply I feel if you happen to check out the manufacturers, I imply, Quest, we’re assuming from a consumption standpoint, low double digits. And as Geoff stated, by way of March, so solely 4 weeks, we’re at 13%, just a little bit greater than that. So I really feel like we’re trending just a little above what we thought. We’ll see what occurs. So really feel fairly good with that. We even have the promoting we turned on, which I feel goes to assist total from a shopper consciousness and family penetration standpoint. So I really feel very snug with the place we’re with Quest. On Atkins, I feel we’ve put ourselves able the place we’ve a, I am going to say, sensible goal to chase within the second half of the 12 months. As I discussed, Atkins is mainly in line with the decline we noticed in Q2 for Q3, barely higher and as — in This fall, I am sorry. After which because it pertains to the primary month of the quarter, we’re trending down about 6%, as I feel you noticed within the slides, which is healthier than what we thought from a standpoint of the quarter. So once more, early one month in, however really feel like we’re monitoring forward of the place we thought we have been going to be.

Pamela Kaufman: Okay. That is useful. After which are you able to discuss any changes that you just’re making to your technique this 12 months given the efficiency and aggressive dynamics you noticed in the course of the second quarter, you talked about that you just’re accelerating some innovation just like the protein shakes, are you able to develop on every other adjustments in your innovation timing or adjustments to promoting or promotional plans for the 12 months?

Geoff E. Tanner: Sure, I imply I stated at a excessive stage, we’re probably not altering our technique. The impression that we felt on Atkins in January, February, it was a onetime troublesome lap, as we talked about within the ready remarks, however we stay assured sooner or later vitality of the model. We stay assured within the revitalization plan we have talked about. The innovation with model to market, the brand new packaging graphic work that is underway, the product improve work that is underway, the brand new promoting, and we’re definitely going to remain the course there. We’ll make changes if we have to, however definitely would not overreact to a merchandising — troublesome merchandising lab in January, February.

Pamela Kaufman: Thanks. I’ll cross it on.

Operator: Thanks. Our subsequent questions come from the road of Jim Salera with Stephens. Please proceed along with your questions.

James Salera: Hello guys, good morning. Thanks for taking our questions. I wished to drill down just a little bit on Atkins Sturdy providing. Thrilling to see you guys develop the RTD shake providing. Clearly, it has been a very scorching class. On the identical time, it is also a class that has fairly well-known capability constraints. So if you happen to may provide any colour on co-manufacturing companions, how a lot capability you guys assume you will have when that product form of involves market and if we must always count on it to be perhaps simply in membership or simply in mass or form of how the channel rollout shall be as you develop that 30 gram providing?

Geoff E. Tanner: Sure. We’re additionally actually enthusiastic about this launch. It was designed, as we have seen these weight reduction medication emerge and adoption enhance, and we have realized that buyers on these medication are searching for greater ranges of protein to keep up muscle mass once they drop extra pounds. And we have additionally heard that once they’re on the medication, many expertise intestine well being subject. So we developed this product the first shopper with these on a weight reduction medication. However we all know that there is customers on the market who’re searching for greater ranges of protein. So we’re excited to deliver that to market. We will put numerous assist behind it. Retailers have been candidly very impressed with how shortly we moved to develop a product for customers on these medication. To your query on capability, we really feel we’re in a great spot. It’s not a restricted launch. We are going to launch it nationally, and we have had extraordinarily robust assist.

Shaun Mara: Sure. I feel on the capability aspect, simply to take a step again, I might return a few 12 months, 12 months and half in the past, we had some capability constraints. Mainly bought one other co-man on board by way of further capability. So we’ve expanded the capability that we’ve for Atkins [ph] basically, total. And we’re really — I feel we’ve sufficient to assist each that enterprise in addition to the persevering with enterprise we’ve total. So we really feel like we’re in fairly good condition there.

James Salera: Okay, nice. After which perhaps if I may ask a broader query simply on the buyer. We have heard from different corporations, there’s form of a bifurcation of the higher-income customers nonetheless powering ahead and decrease earnings shopper, perhaps feeling just a little bit extra pressured. Since your merchandise are inclined to skew in direction of center to greater earnings shopper, do you might have — what’s your confidence stage because the 12 months progresses that the upper earnings shopper will proceed to be resilient relative to the general form of financial uncertainty?

Geoff E. Tanner: Sure. I imply we proceed to see the class carry out. The class carried out 12 months after 12 months after 12 months. And I feel part of this given that you cite is that we do over-index with greater earnings customers. So I feel we’re just a little extra insulated. I might level to the relative lack of personal label within the class. I might level to the relative lack of closely — heavy promotional exercise within the class. And I feel it reveals the underlying shopper demand, which, to your level, I feel, is reflective that we over-index with greater earnings or educated customers.

James Salera: Nice. Respect the colour guys. So I am going to hop again within the queue.

Operator: Thanks. Our subsequent questions come from the road of John Baumgartner with Mizuho. Please proceed along with your questions.

John Baumgartner: Good morning, thanks for the query.

Geoff E. Tanner: Good morning John.

John Baumgartner: Perhaps first off, Geoff, you talked about the heightened class competitors round New 12 months, New You. I feel you referred to as out one particular competitor. However I am curious, are you able to develop a bit on competitors extra broadly. Are you seeing competitors based mostly solely on pass-through of decrease enter prices and that moderates all year long as these tailwinds additionally average or is there additionally any heightened exercise from new innovation hitting the cabinets or a bigger depth additionally impacting future show exercise?

Geoff E. Tanner: Sure, I imply, I might most likely take a step again and say the extent of exercise on this class, I feel, is what you’ll count on, proper. Innovation, can play a job and we’ve definitely seen what we have been capable of do with Quest chips, which was basically to create a class or a section that did not exist. The heightened stage of aggressive exercise that we talked about within the ready remarks, actually does relate to some out-of-stock challenges on shakes. And the business was constrained, had been constrained for a few years. And clearly, with that being turned again on, you have seen demand with the ability to be provided. However I would not say that this can be a new stage of aggressive exercise. I feel it was an inevitable lap and one which we have been at all times going to be on the mistaken aspect of and within the New 12 months, New You interval. However now with provide again, I might say we will return to a standard stage.

Shaun Mara: Sure. I feel, John, if you happen to take a step again and have a look at final 12 months, with one of many key opponents on this market for RTDs, having much less availability or capability, the shelf area that they had was much less. So now they bought that again, they usually’ve really added not a lot innovation, however if you wish to name it, pack dimension configurations, 4 packs to eight packs or 12 packs in addition to perhaps more room dedicated to that competitor for show. So that you’re actually seeing, I feel, two years of progress in a single quarter versus what we have often see on the market. So we stepped up our merchandising exercise and programming. It is simply the share of voice was lower than what it was comparatively to everyone else. Does that assist?

John Baumgartner: Sure, positively. I assume, sticking with that theme, I assume, final quarter it appeared like your preliminary perceptions on new advertising and marketing popping out of autumn was fairly encouraging within the early days. I assume constructing in your level there, Shaun, I imply do you get the sense that the ROI and that advertising and marketing, does it require additional will increase in spending from right here to type of preserve share of voice, how can we take into consideration that? After which for the Atkins model milestones going ahead, I assume, how impactful are you anticipating the autumn shelf resets to be by way of jump-starting gross sales, ought to these autumn resets actually be used materials catalyst or pivot level?

Shaun Mara: The promoting, we’re actually happy with the brand new promoting we debuted in October. We noticed the enterprise response. Definitely, it is most likely too early to attract a tough line on that. However simply given the magnitude of the merchandising lap that I talked about within the ready remarks, it is very troublesome, if not inconceivable to evaluate the effectiveness of that promoting in January and February. And as proof to that, we have come out of the New 12 months, New You interval and tendencies on the enterprise have improved. As I stated, the adverts examined very effectively. They examined effectively with each present patrons and potential new patrons. However with that being stated, we’ll proceed to watch efficiency over the approaching months and if we have to make adjustments within the promoting, we are going to. To your query on distribution, I recall, we’re class advisers to nearly all of our key retailers. And as such, we’ve numerous dialogue with them concerning the class and model dynamics. We not too long ago wrapped up a highway present visiting all these clients, speaking concerning the manufacturers and particularly, Atkins, an emphasis of these conversations was the brand new dialog and renewed cultural relevance, I might say, of weight due to these weight reduction medication and what customers on these medication are on the lookout for and the way they need an off-ramp. The retailers get it. They recognize our transparency. They’re supportive of the revitalization plan and we’re at present in conversations with them about modulars and they’re going to play out over the approaching two to 4 months.

Geoff E. Tanner: Sure, John, only one extra colour right here. I feel as you concentrate on the remainder of the 12 months and the steerage we gave on EBITDA, one factor needs to be clear on that, I hope, total, the gross margin ought to meaningfully enhance within the subsequent couple of quarters approaching 39% in each Q3 and This fall, just a little higher in This fall than Q3. With that, we’re persevering with to spend money on the model. So we didn’t cut back advertising and marketing spend to get to that quantity. That wasn’t what we did, we mainly took the profit that we had for gross margin in Q2 and what we’re seeing in Q3 and This fall that allowed us to proceed to speculate, and you are going to see significant will increase, notably on Quest with new promoting in Q3 and This fall.

John Baumgartner: Thanks Shaun, thanks Geoff.

Geoff E. Tanner: Thanks.

Operator: Thanks. Our subsequent questions come from the road of Kaumil Gajrawala with Jefferies. Please proceed along with your questions.

Kaumil Gajrawala: Perhaps if I may comply with up on the touch upon advert spend. Are you able to perhaps simply discuss just a little bit extra about what’s the suitable share of gross sales for advert spend, notably within the context of there’s so many new improvements this 12 months, does it have to be at some greater stage for a short lived time period after which type of taper off or is the place you are going linked to what you talked about earlier than, a few of that GM profit that you just’re about to really feel?

Shaun Mara: So we’d traditionally goal spending 9% to 10% on advertising and marketing. What I’ll say is that could be a excessive stage of spend within the meals beverage class basically. And definitely, a really excessive stage of spend inside our class. And that is the position that we play as class leaders. As to your query on the right way to assist innovation in addition to the core enterprise, what you will see in each campaigns is that they’ve been developed to allow us to try this. So I do not know if you happen to’ve seen the brand new adverts on Quest, however they have been constructed to allow us to assist the multitude of various merchandise on the manufacturers whereas additionally driving the general model consciousness and delivering the positioning of the model. So what we do not like having a alternative between assist the core enterprise or innovation. What I might love to do is have promoting you could enter innovation into that advert and it nonetheless works.

Geoff E. Tanner: A few information factors for you. Simply as you are taking a step again and have a look at this, I imply I feel our mannequin has been because the starting by way of the P&L profile, attempt to get to gross margins round 40%, attempt to get to promoting or advertising and marketing spend within the 9% to 10% vary and EBITDA margins round 20%. And I feel we’re getting again to that after some points we had the final couple of years for some commodity inflation. Because it pertains to the full advertising and marketing spend, you most likely noticed and the outcomes have been up 100-plus foundation factors for the quarter within the first half of the 12 months. That can proceed within the second half of the 12 months. So you will see advertising and marketing spend nearer to 9-ish% for the remainder of the 12 months.

Kaumil Gajrawala: That is helpful, thanks. And only a fast follow-up boring query. 53rd week, any context on contribution and can we simply take it out of subsequent 12 months?

Geoff E. Tanner: Sure, completely taken out of subsequent 12 months, sure. Let me get to that one first. So then the 53rd week, I imply, I feel traditionally, we have stated it is just a little bit extra some extent of progress. You simply cannot take 52 — and I say, “Here is how a lot to work as a result of with the best way our fall resets work, we typically talking, ship these type of early August, mid-August. So we do not get the replenishment of that most likely till mid-September. So it is just a bit a couple of level of progress total. We do not have the specifics of that at this time limit. We’ll have higher readability on that, I hope, in Q3.

Kaumil Gajrawala: Thanks.

Operator: Thanks. Our subsequent questions come from the road of Brian Holland with D.A. Davidson. Please proceed along with your questions.

Brian Holland: Yeah, thanks, good morning. I wished to return to the aggressive dynamic element as a result of we’re seeing a fairly clear divergence between bars and shakes, your complete bars class has been softer of late. After which inside shakes, there’s type of a bifurcation between the burden administration and among the different heavier protein merchandise. So perhaps a two-part query right here. One, I assume I am just a little bit shocked to listen to the attribution for the weak spot when it is coming from the — I assume the expansion is coming from shakes that you just’re speaking about, that is the place the availability is enhancing. So the impression it is having on bars and every little thing else, so perhaps just a little bit extra colour round simply understanding why you assume that’s notably impacting Atkins as a result of I assume I am shocked that we’d see that stage of purchasing — cross purchasing between these manufacturers? After which the second shouldn’t be essentially a brand new dynamic. We knew that offer was coming and one thing that had been communicated, one thing that is been ongoing. So perhaps — so I assume to the extent that it is hitting your online business at a stage at a magnitude larger than anticipated. So — was the impression of that offer coming again on-line simply larger than what you thought within the shopper response to it larger than you thought as a result of it would not seem to be one thing that we did not know was coming?

Geoff E. Tanner: Sure, that is truthful. I am going to deal with your first query, which is the statement on bars. I assume the very first thing I might remark is, whereas bars progress has slowed, Quest has confirmed to be an exception to that, Quest bars are up mid-single digits, and we’re very happy with that stage of progress. However definitely, you might have seen shakes progress outstrip bar progress. And actually, as we have talked about, that is probably not a provide — not a shock as a result of provide was constrained for 2 years, so I feel as Shaun stated in response from an earlier query, what you are seeing was formed basically two years of progress in a single. And that dynamic has performed out January, February, and can till we’re completed with that lap, which is extra in direction of the summer season. So — after which to your query on — I feel your query was, ought to you might have recognized greater than we did concerning the dynamic that we have been going to stroll into in January and February? And I might say the reply is sure. And looking out ahead, going ahead, you must count on us to maybe be extra attuned to aggressive dynamics and to consider merchandising as a share of voice versus simply taking a look at our personal plan. So you must count on that change shifting ahead.

Brian Holland: I recognize all the colour. After which simply again to Atkins, simply curious, your messaging has been pretty constant for the previous — because you talked concerning the revitalization plan and the potential alternative over time with the GLP-1 complement. Simply curious if you happen to’ve picked up something anecdotal to extend your conviction to that finish as a result of I do assume that appears to be some extent of competition with traders who I hear numerous inbound form of inquiries about, they really feel like this can be a head — this could be a headwind to the enterprise due to the overlap of the buyer and perhaps they’d be altering their routine away from an Atkins simply utilizing the GLP-1. So clearly, the innovation appears to be the 30 grams of protein that appears to be resolving a few of this. However simply curious what you have picked up anecdotal that offers you elevated confidence that Atkins certainly shall be a complement and GLP-1 shall be a tailwind for that enterprise?

Geoff E. Tanner: Sure, I might begin by saying we’re within the early innings of GLP-1 and we’re nonetheless studying. We’re doing our personal research. We’re speaking to customers, we’re speaking to clients. We do consider that GLP-1 does signify a tailwind for Atkins and the tailwind for the class. We all know that when customers are on these medication, as I answered earlier, they’ve a necessity for greater protein merchandise and they have well being points, which is why we accelerated the launch of Atkins Sturdy to market, and we’re excited concerning the launch of that platform. And retailers have given us numerous credit score for shifting shortly and coming to market with one thing that particularly addresses that want. I might say that I am equally, if no more, enthusiastic about Atkins as an off-ramps, as an off-ramp for customers who wish to get off the medication. There is a battle happening with insurers. As you understand, our personal analysis means that most individuals as soon as they’ve hit their weight reduction aim, when you get off these medication they know there is a good likelihood they will put the burden again on, they usually’re determined to search out some sustainable program or sustainable method of consuming to maintain that weight off, and I feel that is the place Atkins can shine. And shifting ahead, you must count on us to extra clearly place the model as that off-ramp, as that sustainable method to hold that weight off. So I proceed to consider that the GLP-1 medication are a tailwind. However I might reiterate, we’re nonetheless within the early innings.

Brian Holland: Acquired it. And forgive me, if I may simply take a very fast one in, if you happen to acknowledged this earlier, I apologize. Was Quest in step with expectations within the quarter?

Geoff E. Tanner: Sure.

Shaun Mara: Sure.

Brian Holland: Okay, nice, thanks.

Operator: Thanks. Our final query will come from the road of Jon Andersen with William Blair. Please proceed along with your questions.

Jon Andersen: Nicely, thanks very a lot for squeezing me in. Query about family penetration. You have talked concerning the class of lively diet being comparatively low relative to different commonplace retailer classes. The place are you at this time with Quest and the place is Atkins with respect to family penetration? After which as you look ahead, what’s the aim or alternative round every of the manufacturers, in order you are innovating, as you might be advertising and marketing, are you trying to drive family penetration and purchase price throughout each manufacturers, is there a larger alternative inside a kind of areas, considering that, which will — that chance might differ by model, however just a little colour round that may be useful? Thanks.

Geoff E. Tanner: Sure. I am going to begin with the classes. Family penetration of the classes are in mid-50s and that compares with excessive 80s, low 90s with most traditional retailer classes, which is why we proceed to see a long-term runway. And if you happen to have a look at the place the class over indexes, it’s with youthful customers, millennials and Gen Zs. So we proceed to consider that penetration of the class is just going to extend. And definitely, retailers see that which is why they’re excited to work with us on initiative to speed up class penetration. As you have a look at the respective manufacturers, Quest is round 16% or 17% family penetration. However as we have talked about, for a model of its dimension, consciousness is considerably under most of its opponents, which is why we’re enthusiastic about new promoting. After which as you click on one stage decrease, with Quest, we consider there’s a possibility to drive elevated family penetration and purchase price. And particularly, the brand new innovation platforms are serving to to drive purchase charges, proper. As a result of we’re providing customers further snacking events and that simply will increase purchase price. So I feel as you look on Quest, there’s a possibility to drive family penetration up as we deal with rising consciousness. Promoting is the large driver there. There’s a possibility to drive purchase price up, and particularly, I might level to the brand new innovation platform salty and the brand new bakeshop platform, which is providing a totally new utilization event proper, disrupting a candy baked items. On Atkins, the attention ranges are fairly excessive. And so that’s much less of a possibility on that model. The chance on Atkins, I feel, is to proceed to make sure that customers see the model as a sustainable method to preserve weight. And I proceed to consider innovation, higher innovation than we’ve launched prior to now is a chance with that model.

Shaun Mara: Simply actual fast on the penetration, only a reference level for you. We’re at virtually 17 factors for Quest proper now for family penetration. For those who return a few years, we’re really just a little bit under 14%, proper. So I feel we have made large — a part of our progress for that model has been distribution but additionally family penetration and consciousness. And I feel we see that for the long run as we have a look at Quest in addition to a possibility.

Jon Andersen: One housekeeping. So the stability sheet is in good condition. Your leverage ratio, I feel, is under half a flip at this level. You paid down extra debt within the quarter. What’s the — how are you prioritizing use of extra free money stream going ahead within the enterprise? Thanks.

Shaun Mara: Sure, we had a terrific quarter, clearly, for money era and money from operations that we proceed to see that as a aggressive benefit for us, and we’ll proceed to see that within the second half of the 12 months. We spent a good period of time evaluating the very best return of money for our shareholders, debt pay down, share repurchases, central M&A alternatives, we’ll proceed to judge that for the second half of the 12 months and do what we expect is finest for return to our shareholders.

Jon Andersen: Thanks.

Operator: Thanks. We’ve got reached the tip of our question-and-answer session. I might now like to show the ground again over to Geoff Tanner for closing remarks.

Geoff E. Tanner: Sure, I simply wish to thank everybody for his or her participation on at this time’s name, and we sit up for updating you on our third quarter leads to late June. So have a terrific day.

Operator: Thanks. This does conclude at this time’s teleconference. We recognize your participation. You might disconnect right now. Get pleasure from the remainder of your day.

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