The Simply Good Foods Company - Earnings Call - Q2 2025

Executive Summary

• Q2 FY25 delivered a clean beat and healthy growth: net sales rose 15.2% to $359.7M, Adjusted EBITDA +17.6% to $68.0M, and Adjusted Diluted EPS $0.46 vs $0.40 LY; management reaffirmed FY25 outlook and raised OWYN sales guidance to $140–150M.
• Against S&P Global consensus, SMPL beat on revenue ($359.7M vs $354.4M*) and Primary/Adjusted EPS ($0.46 vs $0.40*), with gross margin also above expectations (36.2% vs 34.38%) despite a 120 bps YoY decline driven by OWYN mix; FY25 interest expense and tax rate guidance moved lower; estimates via S&P Global.
• Quest continued to power the portfolio (60% of sales) with salty snacks up 45% and strengthened merchandising/distribution; OWYN accelerated distribution/velocity with a path to double sales in 3–4 years; Atkins remained a drag as management proactively rightsizes spend and shelf space.
• Key catalysts: nationwide club test for Quest chips (not in FY25 outlook), launch of Quest 45g Protein Milkshakes, lower net interest expense from term loan repricing and debt paydown, and continued OWYN distribution wins; watch 2H input cost inflation and tariff headwinds (estimated $5–10M in FY25).

What Went Well and What Went Wrong

What Went Well

• Strong top-line and earnings momentum: net sales +15.2% to $359.7M, Adjusted EBITDA +17.6% to $68.0M, Adjusted Diluted EPS $0.46; CEO: “Strong top-line enabled Adjusted EBITDA growth of 18% year-over-year”.
• Portfolio execution: Quest salty snacks grew 45%, retail takeaway +13%; OWYN takeaway +52% with both distribution and velocity gains; CEO: “We are executing well, adding new doors, winning with innovation”.
• Balance sheet and cost actions: $50M term loan repayment in Q2 (YTD $100M) with repricing cutting the margin by 60 bps (~$2M annualized); net leverage 0.7x TTM Adjusted EBITDA.

What Went Wrong

• Gross margin compression: GM fell 120 bps YoY to 36.2% (OWYN mix + 10 bps inventory step-up headwind); full-year GM still expected down ~200 bps vs FY24 with inflation/tariffs in 2H.
• Atkins headwinds: retail takeaway -10%; distribution losses at a key club and reduced low-ROI spend to pressure 2H; full-year POS now down low double digits (from high single digits).
• Working capital drag: YTD cash from operations ~$63.3M vs $94.0M LY on higher working capital needs.

Transcript

Operator (participant)

Greetings and welcome to The Simply Good Foods Company's fiscal year 2025 second quarter conference call. At this time, all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. If anyone should require operator assistance, please press star zero from your telephone keypad. As a reminder, this conference is being recorded. At this time, it is now my pleasure to introduce Josh Levine, Vice President of Investor Relations. Thank you, Josh. You may now begin.

Josh Levine (VP of Investor Relations)

Thank you, Operator. Good morning and welcome to The Simply Good Foods Company fiscal year 2025 second quarter earnings call for the 13-week period ended March 1st, 2025. Today, 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 7:00 A.M. Eastern Time. A copy of the release and accompanying presentation are available on 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 and business model, we evaluate our performance on an adjusted basis as it relates to EBITDA and diluted EPS. Please refer to today's press release for reconciliation of the historical non-GAAP financial measures to the most comparable measures prepared in accordance with GAAP. The acquisition of Only What You Need, Inc., OWYN, was completed on June 13th, 2025. Therefore, the company's year-ago performance for the 13 weeks ended February 24th, 2024, does not include results of the OWYN business. The reference to organic or legacy Simply Good Foods refers to Simply Good Foods' business, excluding OWYN.

All retail takeaway data included in our discussion today, unless otherwise noted, is for the 13 weeks ended March 2nd, 2025, and reflects a combination of MULO++C performance and company estimates for unmeasured channels as compared to the prior year. Finally, please note that today's earnings release includes a new table summarizing net sales by geography and brand for the current and prior year periods. I will now turn the call over to Geoff Tanner, President and CEO.

Geoff Tanner (President and CEO)

Thank you, Josh. Good morning, everyone, and thank you for joining us. I'll begin by reviewing our performance during the quarter. Shaun will discuss our financial results in more detail before we wrap it up with a discussion of our fiscal year 2025 outlook and your questions. Before I begin, I want to acknowledge the announcement we made back in January that our CFO, Shaun Mara, will be retiring this summer following a long and successful career. Shaun has been with the company in multiple senior management roles for many years, including as CFO of Atkins Nutritionals prior to the IPO and as the leader of the highly successful integration of Quest. More recently, in addition to leading our finance organization since late 2022, Shaun has been instrumental as a partner to me and as a strategic thinker and phenomenal financial executive.

On behalf of everyone at Simply Good, I wish Shaun continued success in retirement. I'm also thrilled to welcome Chris Beeler to Simply Good Foods. Chris joined us last week as Senior Vice President of Finance and is expected to succeed Shaun upon his retirement in July. Chris brings almost 23 years of experience in consumer-packaged goods and consumer durables in North America and global markets and, like Shaun, has extensive financial, strategic, and operating experience. Chris is here with us today. However, given it's day seven for him, he won't be available for questions. Turning to our results, our momentum continues with double-digit growth for Quest and OWYN, more than offsetting declines for Atkins. Specifically, first-half retail sales for Quest and OWYN, which collectively represent approximately 70% of our net sales today, increased 12% and 57%, respectively.

Across the company, we are executing well, adding new doors, winning with innovation, and driving brand awareness and household penetration. Specific to the quarter, net sales increased 15% versus last year, with 4% organic growth driven by Quest performance. Assuming OWYN was included in the year-ago period, retail takeaway for total Simply Good Foods grew 7%, and adjusted EBITDA increased 18%. Shaun will provide you with more details on our Q2 results shortly. Our growth and long-term strategy are underpinned by solid category fundamentals. We remain excited by the trajectory of the nutritional snacking category, as well as the interest and engagement from our retail partners. Total nutritional snacking category growth was 12% in Q2, marking the 16th consecutive quarter with category growth of at least high single digits. Category growth reflects the continued mainstreaming of consumer demand for high-protein, low-sugar, low-carb food and beverage options.

With a diversified portfolio of three uniquely positioned brands aligned with these consumer megatrends, we believe Simply Good is well-positioned to lead this generational shift in food and beverage. Let me now turn to Quest, which delivered another quarter of strong double-digit retail takeaway and net sales growth. Quest now represents 60% of the company's net sales, is one of the leading brands in the nutritional snacking category, and is arguably the pioneer of the mainstreaming of this category. As Quest approaches $1 billion in net sales, we continue to see a long runway for growth led by three key drivers. First, leading with innovation. By leveraging our world-class R&D and supply chain teams, we will build upon current platforms and enter new adjacent categories ripe for disruption. Our Salty Snacks platform is a great example where we've grown to a $300 million+ business in just the last few years.

Second, expanding physical availability of our products. We continue to seek ways to grow our presence across the store and online. This includes continuing to expand distribution in our current aisle, introducing the Quest brand in mainline snacking aisles, and increasing displays and merchandising everywhere, as well as penetrating new channels. Third, increasing brand awareness. Quest's disruptive, it's basically cheating campaign last year was a tremendous success, driving both a short and long-term increase in net sales. Since we dropped the ads, household penetration is up over 100 basis points. However, at only 15% unaided brand awareness for the brand today, we have lots of room for further upside. Q2 retail takeaway for the brand was up 13%. There were several key drivers of Quest growth in the quarter.

First, we saw continued broad-based growth from our Salty Snacks platform, which was up 45% in the quarter and which now represents approximately 35% of total Quest retail sales. Growth was enabled by the doubling of manufacturing capacity last fall that supported strong customer service levels and very strong merchandising and display support. An exciting element of our growth on Quest Salty was a successful national test at a key club customer, which was a nearly three-point benefit to our consumption growth in the quarter. We are in active dialogue about further opportunities with this customer, where we're confident we can build a robust business in the quarters and years to come. Considering the size of the broader Salty Snacks category, low household penetration and awareness, leading loyalty rates, strong velocities, and high incrementality, we remain very confident there is a long runway for growth for our Salty Snacks business.

The second driver of Quest growth was the continued success of our Bakeshop platform, which is proving to be highly incremental to the brand and the category. We are excited about the future expansion we have coming on this platform in the fall. Third, as mentioned, the ongoing effect of our award-winning It's Basically Cheating advertising campaign. Turning to Quest bars, we are particularly excited about the launch of our new Overload Bar platform, which you should have already begun to see show up on shelves and online. As a reminder, our delicious Overload Bars come in three highly indulgent flavors and are loaded with inclusions. Finally, as we announced last month, we recently launched a line of delicious ready-to-drink Quest Milkshakes.

Sticking to Quest's disruptive ethos of flipping the macros, each milkshake features 45 grams of complete protein from ultra-filtered milk with only 2 g of sugar and 4 g or less of net carbs. We have been encouraged by initial retail acceptances for our three flavors of vanilla, chocolate, and strawberry, and we're excited about the opportunity. Similar to our Overload Bars, you should expect ACV to build through the calendar year. To wrap it up on Quest, we're pleased with our Q2 performance and we've increased our retail takeaway assumptions for the year, with growth now expected to be in the low double-digit range. We continue to be very excited about the momentum and continued runway for the brand. Turning to Atkins, consumption declined 10%, with combined January and February down low double digits.

As we discussed on our Q1 conference call, accelerated declines were expected due to not repeating significant year-ago volume-driving displays and bonus pack programs at several key customers. Not repeating these events accounted for almost all of the incremental declines relative to -4% takeaway growth in Q1. Importantly for Total Simply, we were able to successfully partner with retailers to shift display support into Quest and OWYN, which both saw expanded features and displays to begin the calendar year. Similarly, at a key club customer, where Atkins is losing significant distribution this year, we have partnered to replace lost SKUs with wins for more productive Quest and OWYN SKUs. You will see those contributions build over the next year and be a benefit to growth for the total company. At roughly 30% of our net sales today, we know that Atkins trends are a meaningful drag on growth.

As discussed, our goal is to right-size investment levels on the brand in support of building a sustainable, healthy business. These decisions will create short- to medium-term headwinds. Specifically, the declines we've observed since January will continue through Q3 and into Q4. Again, these declines are due to lapping significant low ROI merchandising from the year-ago period and distribution losses at club. Again, to reiterate, we are partnering to offset those space declines with increases for Quest and OWYN that will show up over the next 6 to 12 months. As a result of our first-half performance and modestly reduced retail takeaway expectations for the second half, we now expect full-year POS to decline in the low double-digits range.

While we expect a smaller footprint for Atkins moving forward, our consumer research and customer conversations continue to reinforce a strong need for a brand to help consumers with their weight loss journey. An important subset are those on GLP-1 drugs, where our research clearly shows an opportunity to position Atkins as an ally to consumers using or coming off these drugs. We remain committed to supporting the brand with strong innovation, new packaging, a new website, and new advertising. This includes building upon our recently introduced Atkins Strong platform, which is resonating with new and existing households. All in, we believe the actions we are taking will improve the trajectory of the brand over time in support of building a healthier, more profitable, and sustainable long-term business. Moving on, OWYN had another strong quarter with retail takeaway up 52%.

Ready-to-drink shakes grew 53%, with distribution up 22%, helped by expanding into new doors and by adding more SKUs per store. OWYN remains one of those rare gems that can grow distribution and velocity in parallel. Even as we lap significant distribution gains at club from a year ago, we continue to be very optimistic about the year, supported by ongoing velocity growth and some incremental distribution gains beginning this spring. OWYN is one of the fastest-growing brands of scale in the category. However, while we're very pleased with trends on the business today, there are several reasons why we believe we are still in the early innings of OWYN's growth story.

First, while OWYN has emerged as the clear plant-based leader, with RTDs turning 50% faster than our nearest competitor in MULO channels, the brand's superior taste profile is increasingly attracting mainstream consumers, which make up the lion's share of the high-growth $8 billion category. Second, the brand has low single-digit household penetration and awareness. Third, despite such low awareness levels, OWYN's velocities in MULO channels today are already among the industry leaders in its core four-pack subsegment, with continued double-digit momentum at many retailers. Fourth, we average about seven SKUs per store today, well below most competitors. As we proved with Quest, our sales force is highly effective at driving distribution growth. With continued velocity increases and our plan to add new doors, channels, flavors, and pack sizes, we remain confident we can double net sales of the core business in the next three to four years.

The integration is progressing well, and with synergy capture starting at the onset of fiscal 2026, we are confident OWYN will deliver on its adjusted EBITDA margin targets. To summarize, Simply Good is uniquely positioned as the leader in the fast-growing nutritional snacking category. Obviously, it's a dynamic time with a lot of uncertainty and pressure on consumer sentiment. That said, by far the majority of our products are made and sold in the United States. We have a very agile supply chain using co-packers for all our products and our category over-indexes with high-income consumers with relatively low levels of private label and promoted volume. Despite today's uncertain backdrop, we plan to be at the forefront of the generational shift as demand for high-protein, low-sugar, and low-carb food and beverage products continues to mainstream.

We will do this by continuing to introduce innovative and delicious new products, expanding our physical availability across the store and through our brand-building initiatives. With approximately 70% of our portfolio through Quest and OWYN driving aggregate double-digit growth, we are confident in our ability to deliver sustainable growth and create meaningful shareholder value. I'll now turn the call over to Shaun, who will provide you with details of our financial results.

Shaun Mara (CFO)

Thank you, Geoff. Welcome, Chris, and good morning, everyone. I will begin with an overview of our net sales. Total Simply Good Foods' second-quarter net sales of $359.7 million increased 15.2% versus last year, driven by the year-one contribution from OWYN of $33.8 million, or 10.8%, as well as 4.4% organic growth. Quest net sales grew 16.5% in the quarter, benefiting from strong retail takeaway and the expected timing benefit of Q1 shipments that slipped into Q2.

First-half shipments and consumption growth were essentially in line for Quest, as expected. Atkins net sales declined 11.5% due to lower consumption versus prior year, as well as the expected reduction in trade inventory this year as a result of a lost club distribution, which compared to a trade build in Q2 of last year. OWYN had another strong quarter with retail takeaway again up strong double digits. Gross profit was $130.1 million, an increase of $13.3 million, or 11.4% from the year-ago period, driven by volume growth and the inclusion of OWYN. From a margin perspective, gross margin was 36.2%, a 120 basis point decline, with modestly favorable legacy input costs offset primarily by the inclusion of OWYN in our results. The non-cash inventory step-up purchase accounting adjustment, which is now completed, was a headwind of $438,000, or 10 basis points to gross margin in the quarter.

GAAP selling and marketing expenses of $35.1 million were up modestly versus prior year, driven by the inclusion of OWYN to the portfolio, offsetting declines on the legacy business. GAAP G&A expenses were $36 million, an increase of $6.1 million versus last year. Excluding stock-based compensation, one-time OWYN integration costs, and term loan transaction fees, Q2 G&A increased $3 million to $28.6 million, driven primarily by the addition of OWYN to the portfolio. Adjusted EBITDA was $68 million, an increase of $10.2 million, or 17.6% from the year-ago period. Net interest expense was $5.6 million, an increase of approximately $1 million versus last year. The year-over-year increase was primarily driven by a higher debt balance due to the OWYN acquisition. Our Q2 effective tax rate was 25% compared to 23.7% in the year-ago period. As a result, net income was $36.7 million, reflecting 10.9% growth versus last year.

On a first-half basis, trends were similar to Q2, with gross profit and adjusted EBITDA growth of 12.3% and 15.2%, respectively, driven by net sales growth, favorable commodities, and cost discipline. I want to commend our teams for their excellent focus on delivering strong results so far this year. Second quarter reported EPS was $0.36 per diluted share versus $0.33 in Q2 last year. Adjusted diluted EPS was $0.46 compared to $0.40 in the year-ago period. Note that we calculated adjusted diluted EPS as adjusted EBITDA, less interest income, interest expense, and income taxes. Please refer to the press release for an explanation and reconciliation of non-GAAP financial measures.

Moving to the balance sheet and cash flow, as of March 1st, 2025, the company had cash of $103.7 million and outstanding principal balance on its term loan of $300 million, bringing our net debt to trailing 12-month adjusted EBITDA to 0.7x. During the quarter, the company repaid $50 million of its term loan debt and has voluntarily repaid $100 million since the beginning of the fiscal year. I would also highlight that during the quarter, we opportunistically repriced our term loan, lowering the effective margin on the debt by 60 basis points, or nearly $2 million on an annualized pre-tax basis at the time of the refinancing. Fiscal year-to-date cash flow from operations was approximately $63.3 million compared to $94 million last year. The decline was primarily due to higher uses of working capital, principally inventory. Capital expenditures in the first half were $800,000.

I will now discuss our updated outlook for the year. As you saw in this morning's press release, due to solid retail takeaway and adjusted EBITDA growth to start the year, we are reaffirming our fiscal year 2025 outlook. Therefore, in fiscal year 2025, total reported net sales are expected to increase 8.5%-10.5%, with organic net sales growth driven primarily by volume. Embedded in that, we anticipate OWYN net sales to be in the $140 million-$150 million range, and total company adjusted EBITDA is expected to increase 4%-6%, with gross margins expected to be down approximately 200 basis points versus last year. To be clear, our gross margin guidance for the year, which has not changed, continues to incorporate higher inflationary pressures in the second half, as well as a preliminary estimate for the anticipated costs related to recently announced tariffs.

As a reminder, the 53rd week in fiscal year 2024 is approximately 2 percentage point headwinds to growth for net sales and adjusted EBITDA in fiscal year 2025. Below adjusted EBITDA, we now assume net interest expense will be in the range of $21 million-$23 million, inclusive of non-cash amortization expense related to deferred financing fees. This is an improvement from last quarter, reflecting the additional $50 million reduction of our term loan balance and the opportunistic repricing of our term loan that closed in January. Our effective tax rate is now expected to be 24%, while we continue to assume capital expenditures will be $10 million-$15 million for the year.

By fiscal year-end, we expect to have repaid essentially all of the $250 million we borrowed to finance the OWYN acquisition less than a year ago, with net leverage expected to finish the fiscal year around 0.5x. Finally, I would note that our outlook assumes current economic conditions and consumer purchasing behavior remain generally consistent over the balance of the company's fiscal year. For a comprehensive summary of our updated assumptions, see slide 16 in our presentation. That concludes our prepared remarks. Thank you for the interest in our company. We are now available to take your questions.

Operator (participant)

Thank you. We'll now be conducting a question-and-answer session. If you'd like to ask a question, please press star one on your telephone keypad, and a confirmation tone will indicate your line is in the question queue. You may press star two to remove yourself from the queue.

For participants using speaker equipment, it may be necessary to pick up the handset before pressing the star keys. One moment, please, while we poll for questions. Thank you. Our first questions are from the line of John Baumgartner with Mizuho Securities. Please proceed with your questions.

John Baumgartner (Managing Director and Equity Research Analyst of Food and Healthy Living)

Hi, good morning. Thanks for the question.

Shaun Mara (CFO)

Morning.

Geoff Tanner (President and CEO)

Morning, John.

John Baumgartner (Managing Director and Equity Research Analyst of Food and Healthy Living)

Maybe two from me. First off, on Atkins, Geoff, in light of the reduction in sales guidance for FY 2025, now down low doubles versus the prior down high singles, can you walk through what's driving that reduction? I guess specifically, I'm curious as to what you're learning about the Atkins consumer as you move through these adjustments. Is the consumer proving more promo-dependent than maybe you perceived? Are you seeing a larger spillover drag on baseline volumes resulting from lower promo? Any insights would be appreciated.

Geoff Tanner (President and CEO)

Yeah. Our full POS year guidance is nailed down low double digits versus high single digits. I want to point out that first-half consumption is in line with our forecast, with Q1 slightly ahead, Q2 slightly behind. As we stated in the January call, we expected accelerated declines in Q2 as a result of not repeating significant display space from last year. As an example, John, one of our largest customers, display space was down 70% through the new year-new-year period, which I will say we did manage to offset with some gains for Quest and OWYN, but that was a significant decline in display space for Atkins, which is what we expected. The new news is that over the balance of the year, we did lose a little more distribution at a key club customer than we thought.

That is the extent of the change in our guidance for the back half of the year. Again, we expect to largely offset this decline at this customer with gains for Quest and OWYN with a bit of a lag, but those offsets will go into place. The story here is that we have very strong customer relationships. We are category advisors to most customers. In conversations with those customers, which we have had over the last three or four months, where we see opportunities to switch out tailed SKUs, underperforming SKUs on Atkins with faster-turning Quest and OWYN SKUs, we will do this. That is the story on Atkins, largely as we expected, just with that additional reduction from a club customer.

Shaun Mara (CFO)

John, just to—I'm sorry. Before we leave, let me add a couple of points here.

In addition to maintaining our shelf space for the portfolio, the shift from Atkins space to Quest is actually accretive to the company's overall contribution margin. Quest contribution margin percentage is about 10 points higher than Atkins. I bring this up as historically, we've said contribution margins of the brands are basically similar. A couple of things have driven this over the last few years. First of all is inflation. Inflation on the majority of the Atkins portfolio has been significant with cocoa and CLI and our bars and confections. While Quest has seen this inflation as well, the growth in Quest in the last few years is really driven by chips, where we've seen little inflation in the ingredients.

Second, as we talked about over the last year, investment levels on Atkins have remained high despite the sales declining and are above the investment levels for Quest. As a result of that, the contribution margins of the two brands have diverged. Just one last point as we think going forward, once we get the synergy capture for OWYN, its contribution margin should be in line with Atkins beginning next year. I just want to dimensionalize it a little bit.

Geoff Tanner (President and CEO)

That is a great point, Shaun. What we are really doing here, John, is where it makes sense, tailed SKUs, underperforming SKUs for Atkins, we are switching in faster-turning, more profitable SKUs on Quest and OWYN.

John Baumgartner (Managing Director and Equity Research Analyst of Food and Healthy Living)

Yep. Great.

Secondly, just sticking with Quest and the relaunch of the shakes, the brand's participated in that segment for probably five years or so, but there's been pretty large variations in distribution and I think very little brand investment. What prompted you to pursue this relaunch in shakes now? How are you thinking about positioning in the category given the changes to the protein base, to the packaging? Should we expect higher mentality as we're seeing with Bakeshop? Maybe just, Geoff, high level, what do you anticipate will be different relative to version 1.0?

Geoff Tanner (President and CEO)

It's a great point. What I'll say is 1.0, which I think was launched around the time of the acquisition, was essentially just another 30 g meat shake. And the ethos of what Quest does is it flips the macros on generally unhealthy categories. So replacing high carb, high sugar with high protein, low sugar.

When Quest launched what we had met with a meat product, it did not do very well. We challenged ourselves. Obviously, we look at the size of the shakes category, the growth of it. How would Quest enter this category? How would we do it in a Quest way? The concept is, we cannot flip the macros on a 30 g regular shake, but we can flip the macros on a milkshake. Our research showed that the indulgence of a milkshake was one of a huge unmet demand for our consumer base. We said, how would we flip those macros on a milkshake? That led us to this concept, which we then backed up by taking protein levels up to a category-leading 45 g, highest in the category, 2 g of sugar, 4 g or less in net carbs.

We're also able to deliver that with ultra-filtered milk, which we believe delivers a superior taste experience for the consumers. I don't want to overburden this with high expectations, but it is a very, very different proposition that was launched. This is what was launched five years ago. Our research suggests that it is bullseye for the Quest consumer. We've been very pleased with retailer acceptances so far. That being said, it really is the first month of the launch of this platform.

John Baumgartner (Managing Director and Equity Research Analyst of Food and Healthy Living)

Thanks, Geoff. Thanks, Shaun.

Geoff Tanner (President and CEO)

Thanks, John.

Operator (participant)

Next question is from the line of Megan Clapp with Morgan Stanley. Please just use your questions.

Megan Clapp (Executive Director)

Hi, good morning. Thanks so much for taking our question. First question I just want—

Geoff Tanner (President and CEO)

Morning.

Megan Clapp (Executive Director)

Morning. First question I just wanted to ask on the gross margin guide. First half, obviously, I think much better than at least consensus.

I think you were expecting you did maintain the full year. It does seem like a part of that is tariffs. If looking at your slides, I think you called out 100 basis points from input costs and tariffs versus I think it was 150 prior and maybe a little bit more from OWYN. It just seems like there's some puts and takes. Maybe you could just help us unpack what's changing in the gross margin guide and how much visibility you have on input costs at this point. I think you said in April you expected to be covered for the year. Thank you.

Shaun Mara (CFO)

Yeah. I mean, honestly, a lot of unknowns at this point in time, especially on tariffs. Let me start with the Q2 results. I mean, our gross margin was better than we planned for two major reasons.

One, we had a slower flow-through of higher-priced cocoa and CLI than we anticipated, largely because of the fact that Atkins had a sales miss in the quarter. Said differently, the higher costs are there. They just have not hit our P&L yet and are sitting in raw material inventory at our co-man's. Second, there was favorable brand mix from Atkins to Quest helping the gross margin. I also point out that in the second quarter, we benefited from a key ingredient in our chips that was down about 50% versus the first half of last year. That was masking the unfavorable impact on inflation we have seen in whey, which basically doubled in the first half this year versus last year. We largely planned for that, but I mention that as we look to the second half, we anticipate the inflation on whey continuing.

We expect CLI and cocoa inflation to increase significantly, while the benefit we saw in the first half lapping these elevated commodity costs in our chips is going to go away as we procured that lower price in the second half of last year. The second dynamic here really is tariffs. Let me start with a caveat here. Like everybody else, we're still trying to figure this out and try to understand where we are. First and foremost, thankfully, our manufacturing network is largely based in the U.S. We have a limited number of items produced in Canada that we believe should be covered under USMCA exemptions, which at this point remain exempt from the 25% tariff imposed on imports from Canada and Mexico. As it relates to raw materials and packaging, we estimate about 15%-20% of our total cogs will be affected by tariffs.

That should be a headwind of about $5 million-$10 million in fiscal 2025, really depending a little bit on flow-through and product mix. We largely have that covered in our guidance. That said, we have not been able to estimate the impact of any retaliatory tariffs, and those are not built in. Conversely, some ingredients we're currently assuming are impacted by the tariff may be covered by USMCA exemption or other exemptions for ingredients, i.e., dairy, which would reduce the exposure. By and large, we do not estimate this as a major impact for fiscal 2025 results as we believe it is limited to raw materials and flow-through that will only impact us in the last two or three months of the year. A lot of unknowns there.

If tariffs somehow go away or are delayed further, our margins would improve, but it's likely we'll reinvest that back into the business, probably in marketing. The last point I'll make is to your question, we're largely covered for commodities through the rest of the year, so there really isn't an exposure on that. The real big exposure is going to be in tariffs. I don't know if it helps or not, but the only build I would give to that is over the past 12 months, we have stepped up our productivity initiatives. If we recall going back a year ago, cocoa spiked considerably. In response to that, we realized we needed a stepped-up productivity program, which I'm very, very pleased with how that is delivering, with results that have certainly helped us in 2025, but will flow through into 2026 to help mitigate some of these cost shocks.

Megan Clapp (Executive Director)

That's really helpful. Obviously, a very uncertain time period, so appreciate all the color. Maybe a follow-up for Geoff on Atkins to John's question earlier. Last quarter, I think you talked about you were focused on three calendar time frames. We're through two of the three now. Maybe as you think about the fall 2025 resets, maybe you can spend a little bit more time unpacking performance maybe of your new innovation. I think last quarter, you gave us some color around performance at your largest customer. Maybe you could just talk about how some of that performed through the new year and just get a sense of how you're feeling about this third calendar time frame as we head into the fall 2025 resets.

Geoff Tanner (President and CEO)

Yeah.

I mean, as we head into the fall 2025 resets, we do expect, and we said this in the script, Atkins to have a slightly smaller footprint. Coming back to John's question, as we continue to where there are opportunities to mix in faster-turning, more profitable Quest and OWYN SKUs. We expect Atkins to have a slightly smaller footprint. That being said, we do believe and remain very committed to the long-term role and vitality of this business. As you look at the demand for weight wellness solutions, it is higher than ever. 60% of people are actively looking to lose or maintain weight. The cultural conversation on weight has changed and increased, very much driven by these new GLP-1 drugs. Our research shows that Atkins is a trusted brand in this space to help consumers on their weight loss journey.

Particularly, we see GLP-1 drugs and consumers on those drugs as representing a significant opportunity, whether it be helping them when they're on the drugs or helping them as an off-ramp. While we expect a slightly smaller physical footprint moving forward, we're still committed to building this brand, stabilizing this brand. The new products that we launched are a critical component of that. If you recall last fall, we launched 17 new items, generally performing very well. At key accounts, roughly turning two times the rate the items that they replaced. Atkins Strong, which is the 30 g protein shake platform, is performing very well. We've got new packaging coming out. We've got new advertising coming out. We're certainly working with retailers as they try to figure out how to take a leadership position in weight wellness, particularly with GLP-1 consumers.

Yeah, on the one hand, in partnership with retailers, expect a smaller footprint. On the other hand, pleased with the revitalization efforts, and we're very committed to stabilizing this business going forward.

Megan Clapp (Executive Director)

Okay. Great. Thank you so much.

Operator (participant)

The next questions are from the line of Brian Holland with D.A. Davidson. Please proceed with your questions.

Brian Holland (Managing Director and Research Analyst of Food and Beverage)

Yeah. Thanks. Good morning. I wanted to start with OWYN, just trying to get a sense. The revenue number came in a bit light of what I was forecasting. Your full-year guide, you took it up, implying second half would accelerate from what we saw in the first half. Just curious, obviously, the consumption data has decelerated, lapping the big distribution gains, but as you pointed out, you're still growing velocity on top of that.

Just the specific catalyst driving your confidence in an acceleration in the revenue number in the second half of the year for OWYN?

Geoff Tanner (President and CEO)

Yeah. No, we did expect and plan for a decel on OWYN as we were lapping some new doors, as well as a program we did not repeat at a large customer. As you think about OWYN moving forward, we remain extremely excited about this acquisition. We are still in the early innings, and there are several reasons for that. We see continued distribution upside on the business. The brand ACV today is only 60%. We only have seven SKUs on average. We see upside relative to our peers as we look banner by banner. We have got an exciting innovation platform, and we know that new distribution is coming in April, and we expect those gains to continue based on the conversations we are having with retailers.

There is significant distribution upside. The velocities continue to impress me. The highest velocities in the plant-based shake segment, number two within four-packs and MULO channels, even compared to our dairy-based competitors. We are increasingly sourcing volume from mainstream consumers. We have got a powders business that is small, $25 million, but growing triple-digit with distribution runway, and the brand has low awareness, low single-digit. To deliver on the targets we set, we need mid-20% growth, and we believe this is very, very doable. That is without even thinking about any other vectors, whether it be expanding into bars. The Q2 results were fully in line with our forecast. We are excited about the distribution we have in the bank in spring and the conversations we are having in the fall. More broadly, we think this brand has a lot of runway and that we are in the early.

Brian Holland (Managing Director and Research Analyst of Food and Beverage)

Okay. Perfect.

I know I'm sure you want to address kind of looking 18 months out in this current backdrop is something that I'm sure you'd love to dive into, but I'll take a swing. 70% of your portfolio is growing high teens right now. As we go into next year, my math, which is, I grant you, dangerous, would suggest 70% of your sales grow double digits or 10%, and Atkins declines 5%. That already puts you at the high end of your algorithm. I'm just wondering if that's consistent with kind of how you're thinking about the setup into fiscal 2026. The reason we're looking ahead is obviously a lot of what's happening with Atkins is proactive, but there's also some proactive stuff, innovation, distribution, etc., on these other brands. If we start to put the math together, it seems compelling.

Just curious if that's consistent with how you're looking at it or thinking about it internally, or if there's any caveats there that I'm just obviously missing as we look ahead.

Shaun Mara (CFO)

Shockingly, we don't want to talk about 2026. We're only halfway through 2025. We just began planning for 2026. We're very early in the process. Obviously, with Chris joining, he clearly wants to put a stamp on things for next year. At this point in the cycle, I would say our goal is to come up with a plan to grow on Algo. So 4%-6% top and bottom line. There are a number of negative, potentially negative macro issues that could impact the guidance, including the health of the consumer, headwinds not only on inflation, but also potentially in tariffs.

On the positive side, as you said, we remain confident on Quest and OWYN. We expect the benefit of a full year of productivity, as Geoff talked about, from synergies with the OWYN integration, both in the tens of millions of dollars. Obviously, as I mentioned before, Quest growing faster than Atkins has actually a positive margin mix. Net-net, very early in the planning cycle, a lot to do between now and October when we report Q4 results.

Geoff Tanner (President and CEO)

Yeah. The only build I would give on that, and it is early and it is murky as we look forward. With that being said, our category and our company are very well positioned against this broader mainstreaming of consumer demand for high protein, low carb, low sugar products. As we said in the script, the category has had 16 quarters of consecutive high single-low, double-digit growth.

As you mentioned, 70% of our net sales are growing double digits. We have exciting innovation in the market, distribution opportunities in front of us. Now, on the bottom line, there are some headwinds. Whether that be tariffs or cocoa, as I mentioned earlier, we put a much more comprehensive productivity program in place. In that mix, it is early, but with Shaun, we'd like to think we could deliver a plan that was on algorithm. As you noted, there are uncertain times.

Brian Holland (Managing Director and Research Analyst of Food and Beverage)

Appreciate all the color. Thanks. Best of luck.

Operator (participant)

Our next questions are from the line of Matt Smith with Stifel. Please proceed with your questions.

Matt Smith (Managing Director)

Hi. Good morning. Thank you for taking my question.

Shaun Mara (CFO)

Morning.

Geoff Tanner (President and CEO)

Morning, Matt.

Matt Smith (Managing Director)

Sean, just following up on your comments regarding the contribution margin differences between the brands, the 10-point gap between Atkins and Quest, should we think of that as improving as the brand goes through this reset? Or I guess differently, is there an opportunity to narrow that gap over time, or would you expect Quest's margin to outpace any improvement in Atkins given the scale of that business?

Shaun Mara (CFO)

Yeah. I think we'd like to improve the margins on Atkins. As Geoff said, we are investing in the Atkins brand. I think overall, we don't expect that to drastically improve in the next, I'd say, 18 months or so. We do have some pressures there, as I mentioned, more on the Atkins side with inflation than we do on the Quest side. I think over time, we'd like to get that a little bit closer.

In the near term, I don't see that changing drastically from where we are today.

Matt Smith (Managing Director)

Thank you for that. As a follow-up, Geoff, you've talked about the low awareness and household penetration for OWYN as an opportunity going forward. How do you build the awareness and household penetration at this point? Is it more a story of gaining distribution and space on shelf to communicate with the consumer, or should we expect you to increase the investment level behind OWYN to drive that awareness and household penetration? Thank you, I'll pass it off.

Geoff Tanner (President and CEO)

Yeah. Great. Good question, Matt. I'd say in the near term, it'll be focused on distribution. If you think back, that was the Quest playbook. The ROI on marketing is very much a function of the breadth of your distribution. We'll initially focus on building out that distribution.

As I said earlier, we only average seven SKUs on shelf. I would say for the next couple of years, the focus for us will be distribution and innovation. Obviously, the brand does some terrific marketing today. It's at lower levels. It's more digital influencer-driven. We'll keep that going. If you think about Quest, really only a year ago, maybe 18 months, did we start turning on national advertising, which was obviously a big positive for the brand. You do not really want to do that until you've built a sizable distribution footprint.

Matt Smith (Managing Director)

Thanks, Geoff. I'll leave it there.

Operator (participant)

Thank you. The next question is in the line of Rob Moscow with TD Cowen. Please proceed with your questions.

Jacob Henry (VP of Equity Research)

Hey. Good morning. This is Jacob on for Rob Moscow. I just have one question.

Geoff Tanner (President and CEO)

Good morning.

Jacob Henry (VP of Equity Research)

Good morning.

Just curious to get more details on the bar category, specifically as it relates to Quest. Our tracking data shows decent trends for the overall category, but Quest continues to underperform. Just curious if you can talk about what you're doing in addition to the overload bar to try to get back to that low single-digit growth target that you have for Quest bars.

Geoff Tanner (President and CEO)

Yeah. I'm honestly not sure I would characterize Quest as underperforming. Certainly, we can do a lot better than we have been. We are very excited about the innovation that we're bringing to market. This is a category that is highly responsive to new news and innovation. Starting only about 12 months ago, we significantly stepped up our innovation efforts on Quest bars. The overload platform, which we're very excited about, it's early. Consumer reviews, though, have been very, very, very positive.

Distribution acceptances have been very positive, but it's early. Innovation like that is what will move the bar business within Quest. It's incumbent upon us, therefore, to never let up on bringing continuous exciting innovation to market. As I look into the pipeline, I'm very pleased and excited with what we have coming in the market. I'll say if you look, one of the leading spots in the bar category is the C Store channel. It's a place where there's a lot of trial. Where you look more recently on Quest trends, we're very pleased with what we're seeing.

Jacob Henry (VP of Equity Research)

Great. Thank you. I'll leave it there.

Operator (participant)

The next questions are from the line of Jon Andersen with William Blair. Please proceed with your questions.

Jon Andersen (Partner and Equity Research Analyst)

Good morning, everybody. Thanks for the question.

Geoff Tanner (President and CEO)

Good morning.

Jon Andersen (Partner and Equity Research Analyst)

Good morning. First question is on Quest. Second is on Atkins.

On Quest, you took your full year outlook up for the brand, at least the point of sale. Wondering there what the story is with respect to your prior expectations and new expectations, if you can talk a little bit about that. Also, on Quest, as part of that question, have you found over time as you expand the brand into other categories like salty snacks, the Bakeshop line now, that there's kind of a synergistic benefit to the brand as a whole, i.e., the more penetration you make in salty snacks or Bakeshop, it has a halo effect on the bars? I want to kind of understand that dynamic. Then on Atkins, because there's so many moving parts, what should we be looking for over the next 12 to 18 months from Atkins as signals of kind of your success stabilizing that brand?

In other words, another way to ask the question would be, at what point should we maybe expect takeaway to kind of level out? Thank you.

Geoff Tanner (President and CEO)

Yeah. Great questions. Let me start with what is leading us to take up our expectation on Quest. Salty is the biggest driver here. It's currently 35% of the business, $300 million retail sales, growing well in excess of 30%. If you recall, what happened was as we went into Q4 last year, even we were caught a little bit by surprise with the growth on the business, and we were supply constrained. We started up a second site, accelerated that. We're now back in full supply. We're starting to see the real full potential of this business. If you take a step back, the addressable market where we're flipping the macros is massive.

We are finding that there's a large number of consumers who are putting Quest into the rotation from buying more mainline snacks. We've increased our merchandising and displays. Retailers are getting behind it in a big way. We had a very successful test with a large club customer, and we're in very exciting conversations about how to roll that out more broadly. As you think about what is inflecting Quest more positively than we originally thought, it's really salty. If you fast forward a year from now, Salty and Bars will be roughly the same size. That's a point worth noting because it then bridges to your second question, what's the impact of a platform like Salty back on the business?

What we are finding is that through these platforms like Salty and like Baked, which has also been earlier, but it has been very successful, we are bringing in new consumers to the full franchise. A lot of consumers coming into Bars are coming in via Chips. A lot of consumers coming into Chips are coming in via Baked as they understand the brand. As we broaden the shoulders of the brand, it is generating increased household penetration more holistically. I will point out that there are very few brands in my career that I have seen who can do this. Quest almost stands alone in its ability to pull this off, which is why we are very bullish on the continued runway of Quest, despite the fact it is doing over $1 billion in retail sales. Before I answer your Atkins questions, does that—Yep.

Jon Andersen (Partner and Equity Research Analyst)

Yep. Geoff, that is terrific.

That is, yeah. Awesome.

Geoff Tanner (President and CEO)

To your question on Atkins, great question. What you have to do is when we're looking at Atkins trends, as we've said, we expect a smaller physical footprint as we mix in more productive and profitable Quest and OWYN SKUs. That will have an impact on Atkins consumption. What we'll be looking at is underlying base velocity of the business. Obviously, we'll have to adjust for the impact of losing some shelf space, which we expect. That's the metric of this business, a base-driven business. When you X out some of the merchandising we lost, and you have to adjust a little bit for we've lost some tail SKUs, the underlying health of the base business and working to stabilize that is the key metric.

Jon Andersen (Partner and Equity Research Analyst)

Yeah. That makes sense. Thanks so much.

Geoff Tanner (President and CEO)

Thank you, Jon.

Operator (participant)

Thank you. Our next question is from the line of Steve Powers with Deutsche Bank. Please proceed with your questions.

Steve Powers (Equity Research Analyst)

Good morning. Thanks, everybody. Congrats again, Shaun, and welcome, Chris. I got a couple of follow-up questions. The first one is probably for you, Shaun, on tariffs. I guess as we think about what you're talking about in terms of ingredient sourcing and your co-manufacturing footprint, should we think of those as effectively fixed as you look forward due to contract provisions or ingredient scarcity? Or do you see a potential to alternatively source some ingredients or shift production domestically just in the event that tariff conditions persist or extend?

Shaun Mara (CFO)

No. We're looking at a number of potential mitigants as we look into fiscal 2026 and beyond. I think we're working through those.

Yes, there are some limitations on how fast you can get there based on contracts that we have. We have been working honestly on this for a little while. We have some, as Geoff said, we have some productivity initiatives that are out there that are going to help, should help offset this. In process.

Steve Powers (Equity Research Analyst)

Okay. Very good. Thank you. Geoff, you highlighted, you highlighted a couple of times this morning the successful club test this quarter for Quest and the prospects for a continued or expanded relationship there. I guess just wanted to, if I could, get you to clarify just the degree to which your remainder of your outlook includes continued sales to that customer and then whether some of the discussions you have referenced could lead to upside in the near term or whether that is more of a fiscal 2026 and beyond consideration.

Geoff Tanner (President and CEO)

Yeah.

I'd say the remainder of 2025 does not include another rotation at the customer. We've got some business in the business side, but the real volume that we expect to come is going to be at 2026.

Steve Powers (Equity Research Analyst)

Okay. That's what I assumed, but thank you for clarifying.

Geoff Tanner (President and CEO)

Which we expect to build out over time, region by region, expanding on the test that we did this year.

Steve Powers (Equity Research Analyst)

Yeah. Yeah. Makes sense. Okay. Thank you very much.

Operator (participant)

The next question is coming from the line of Jim Salera with Stephens. Please proceed with your questions.

Jim Salera (Equity Research Analyst of Packaged Food, Beverage, and Restaurants)

Yeah. Hey, John. Good morning. Thanks for fitting us in. I wanted to ask maybe kind of a total company level, if we net out the Quest and OWYN gains with the Atkins losses, where does that shake out at kind of a total SKU level at Club? Are we about the same?

Is there still a little bit of loss there? Is there actually some upside?

Geoff Tanner (President and CEO)

Sorry. You specifically asking about Club?

Jim Salera (Equity Research Analyst of Packaged Food, Beverage, and Restaurants)

Yeah. That's correct.

Geoff Tanner (President and CEO)

Yeah. Probably slightly positive in terms of total space. But certainly, the losses we're going to see on Atkins will be offset by gains on Quest and OWYN. The timing may not line up exactly because of the different reset timings that the different categories have there. Minimally an offset, I think over time, a net positive.

Jim Salera (Equity Research Analyst of Packaged Food, Beverage, and Restaurants)

Okay. Great. Geoff, you had mentioned in, I think, a year's time, Salty and Bars should be roughly the same at Quest. Can you just talk about the positioning in the store on the Salty for Quest?

Are you seeing more retailers either actively placing it with kind of traditional salty or, if not placing it there, open to that, maybe getting some kind of end cap or display around the traditional snacking aisle versus kind of the other section of the store, the rest of your product set?

Geoff Tanner (President and CEO)

Yeah. I appreciate the question because what you're poking at is what I think is one of the biggest upside opportunities for Quest and even more broadly, which is increased physical availability of our products. If you think about where Quest Chips started, it started in the nutritional snacking aisle, which on the one hand, we love that aisle. We're category leaders. It's our home base. But it has a lower household penetration and foot traffic.

One of the things I've challenged our organization with is as this category is mainstreaming, as consumer demand for high protein, low carb, low sugar products is mainstreaming, increasing the physical availability of our products is a huge long-term growth vector for us, and particularly products that are more impulse-driven like Chips. We have a significant initiative in the organization to do that. What does that look like? We have a test in place at a large mass customer where we're in the mainline aisle, and we were just expanded a number of doors there. We have put in place a new retail execution team focused on driving displays out of our aisle, gaining distribution in additional channels like the club customer we just talked about represents an upside. We'll probably start looking even further afield where you see a lot of impulse snacking.

I would say that while we're very excited about the size of the Chips business, and as I mentioned, it'll be roughly the same as Bars in a year, what I would suggest is as a result of this increased physical availability, the runway on this business is significant and that we are in the early innings of our Salty expansion.

Jim Salera (Equity Research Analyst of Packaged Food, Beverage, and Restaurants)

Great. Appreciate the detail. I'll hop back in with you.

Geoff Tanner (President and CEO)

Thanks, Jim.

Operator (participant)

Thank you. Our final question is from the line of [Sidney Lynn] with Bernstein. Please proceed with your questions.

Hi. Good morning. This is Sidney dialing in for Alexia Howard at Bernstein. Morning. I just wanted to—Hey, good morning. I just wanted to jump back to the OWYN distribution comment earlier. Can you talk a little bit more about the velocities of the product?

I'm just trying to get a sense of how much growth is driven from new stores versus recurring customer purchases, especially since you cited low customer awareness as a big growth opportunity.

Geoff Tanner (President and CEO)

Yeah. Yeah. It's roughly 50/50. Half the growth coming from new doors, new SKUs, and half of it coming from velocity increases, which is unusual to see growth both in distribution and velocity. What you'll normally see with most brands is as you increase distribution, the velocity rates will decline. That's not happening here.

Yeah. Exactly. It's impressive. Thanks so much.

Operator (participant)

Thank you. There are no further questions at this time. I'd like to turn the floor back to Shaun Mara for closing remarks.

Shaun Mara (CFO)

Yeah. Just my last call. I just wanted to thank the Simply team for all the support over the years to me.

Big shout-out to my team in FP&A, accounting, IT, and IR for the great support and help they've given over the years. I'm really proud of what we've built here at Simply. I wish the team continued success in the future.

Geoff Tanner (President and CEO)

Thanks, Shaun.

Operator (participant)

Thank you. This does conclude today's teleconference. We thank you for your participation. You may now disconnect your lines at this time.