Greetings, and welcome to The Simply Good Foods Company Fiscal Fourth Quarter 2023 Conference Call. At this time, all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. As a reminder, this conference is being recorded. I would now like to turn the conference over to your host, Mr. Mark Pogharian, Vice President, Investor Relations for Simply Good Foods Company. Thank you. You may begin.

Thank you, Operator. Good morning. I'm pleased to welcome you to The Simply Good Foods Company earnings call for the fiscal fourth quarter and full year ended August 26, 2023. Geoff Tanner, President and CEO; and Shaun Mara, CFO, will provide you with an overview of the 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. A copy of the release and accompanying presentation are available under the Investors section of the company's website. 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 list of such risks and uncertainties can be found in today's press release and the company's SEC filings. Note that on today's call, we will refer to certain non-GAAP financial measures that we believe will provide useful information for investors. Due to the company's asset-light strong cash flow business model, we evaluate our performance on an adjusted basis as it relates to EBITDA and diluted EPS. We have included a detailed reconciliation from GAAP to adjusted items in today's press release. We believe these adjusted measures are a key indicator of the underlying performance of the business. The presentation of this information is not intended to be considered in isolation or as a substitute for the financial information presented in accordance with GAAP. Please refer to today's press release for a reconciliation of the non-GAAP financial measures to the most comparable measures prepared in accordance with GAAP. With that, I'll now turn the call over to Geoff Tanner.

Thank you, Mark. Good morning. Thank you for joining us. Today, I will recap Simply Good Foods' financial results and the performance of our brands. Then Shaun will discuss our financial results in more detail before we wrap it up with a discussion of our fiscal 2024 outlook and take your questions. We ended the year with strong Q4 net sales growth of about 17%. As expected, net sales outpaced retail takeaway due to the retail customer drawdown last year. Gross margin was slightly greater than our expectations, primarily due to lower supply chain costs. Full year fiscal 2023 organic net sales increased nearly 7%. This performance reflects our diversified portfolio across brands, retail channels, customers, and product forms. We believe we exited the year with trade inventory at normal levels. Gross margin improved during the year, and we expect to build on this momentum in fiscal 2024. In my nearly 7 months tenure at the company, I'm even more convinced of the long-term growth outlook of the nutritional snacking category and our business. Category growth in Q4 and the year was 15% and 17%, respectively. With low household penetration of about 50% versus legacy U.S. snacks at 90% plus, coupled with the twin tailwinds of snacking and health, we believe the category will continue to maintain its multi-year growth trajectory and outperform U.S. packaged foods and snacks. As the preeminent category leader and category adviser for the majority of our customers, we will continue to invest in our brands and partner with retailers to accelerate category growth. I believe over time this category will be twice its current size. I don't have the exact sequence of pacing that the opportunity is there. Total Simply Good Foods combined measured and unmeasured channel U.S. retail takeaway broke in Q4 and the year was about 11% and 13%, respectively. In fiscal 2023, POS for Quest and Atkins increased 24% and 1%. Atkins retail takeaway slowed in the second half of the year and was up about 3%. Atkins performance is currently below our expectations and well below its full potential, which is why a comprehensive revitalization plan has been deployed to stabilize the brand and return it to growth. More on this in a bit. As we look to fiscal 2024, we're excited about the prospects for our category and our business. We're making investments in brand building and growth initiatives as well as investments to enhance capabilities that accelerate growth. In fiscal 2024, net sales growth will be driven by volume as we've lapped the pricing actions of the prior year. Specifically, we expect net sales to increase at the high end of our 4% to 6% long-term algorithm, including the benefit of a 53rd week. Gross margin expansion should be solid, supporting the aforementioned investments and an increase of adjusted EBITDA slightly higher than the net sales growth rate. In addition, our advantaged business model results in strong cash flow generation and provides us with the financial flexibility to pursue value-enhancing acquisitions, pay down debt, or opportunistically buy back our shares. We're confident in the strength of our business and our diversified portfolio across brands, products, and channels. The investments that we've made and will continue to make in the business will enable us to deliver on our net sales and earnings objectives. The next slide provides you with the full year perspective of retail takeaway in the IRI MULO + C-store universe and in the combined measured and unmeasured channels. Similar to the last few quarters and years, total unmeasured channel growth driven by e-commerce was additive to total company PLM. Let me now turn to Quest performance, where retail takeaway was strong and consistent during the year. Q4 and full year retail takeaway growth in measured and unmeasured channels were similar, about 24%. What I like is how balanced the growth profile continues to be on the brand, balanced across product forms and retail channels, balanced across key drivers namely distribution, base velocity, and innovation and balanced across household penetration and buy rate. More consumers buying more products in more stores. In my experience, when you rely on 1 or 2 drivers, they can tap out; the balanced growth profile on Quest, however, points to a long and sustained runway for growth. In Q4, IRI MULO + C-store POS growth was 26%, driven by volume, a 22 percentage point contribution, reflecting solid distribution gains and new product performance during the year and price that was about a 4 percentage point benefit. Measured channel Q4 POS growth of bars and snacks were similar, up about 25%. Gains were driven by distribution, base velocity, and new product success. Salty snacks were particularly strong with POS growth of about 40% proving the ability of Quest to expand beyond the core and create new incremental segments in the category. In Q4, we estimate total unmeasured channel retail takeaway increased about 15%. E-commerce growth of approximately 18% was partially offset by softness in specialty channels. In fiscal 2024, we project that Quest will have another strong year, driven by volume growth. We're making investments in the brand that will continue to result in near- and long-term growth across retail channels and forms. A particular focus will be investments in marketing. Despite the size of the business, household penetration is only 15%. During the year, we will debut a new marketing campaign and a higher reach-based media plan that we believe will drive greater awareness and household penetration. Additionally, we're partnering closely with retailers, viewing Quest as the leader and pioneer of the nutritional snacking category. They're excited about the investments we're making in the brand as well as the innovation pipeline we've shared with them. This should continue to drive distribution gains related to annual shelf resets. Before getting into detail of the Atkins pre-vitalization plan, let me provide you with a quick overview of Q4 performance. Q4 retail takeaway in the combined measured and unmeasured channels was up 4%. Clearly, we're not happy with the performance of the business, which we believe is well short of its full potential. As has been the case all year, several users of the product are leveraging the convenience of e-commerce. As a result, Amazon has been additive to Atkins measured channel PLM. Q4 retail takeaway in this channel increased 12% with solid bars and shakes performance that were up 11% and 16%, respectively. In the IRI MULO + C-store universe, Q4 retail takeaway was up 5.6%. Although ready-to-drink shakes performance, as well as POS at our largest mass retail customer, is positive. To stabilize the brand and get it through its full potential, we've developed a comprehensive revitalization plan, and I'll share this with you in the coming slides. Over the past several months, we've conducted consumer research on the Atkins brand to inform revitalization efforts. The work strongly reaffirmed our belief in the high potential of the brand. What we heard is that 80% of consumers are looking to maintain or lose weight and that Atkins is distinctly and uniquely positioned as the most trusted leader in low-carb, low-sugar solutions. In addition, when consumers try our products, they are pleased and delighted. The research suggests there is clearly significant potential for the brand. Similar to some of the things we've developed over the last year, I will also identify some opportunities we need to address. Specifically, strengthening innovation, addressing executional misses at some retail customers, and enhancing and modernizing the brand experience. Starting with innovation, we clearly dropped the ball on innovation, particularly snack bars and indulgent confections. Innovation, variety, and new news are critical drivers of the business, especially in the bar segment. We fell short, and that resulted in distribution losses. Second, we had some execution misses with a few key customers that resulted in suboptimal assortments and price points. Third, we found that some potential consumers don't understand the benefits of the product or are skeptical of Atkins being a delicious and easy way to maintain weight. Let's move to the next slide and tell you what we're doing to address these issues, which I really view as opportunities. To address our innovation gap, we have quickly accelerated some new items to market to bring variety and new news to the brand. In the second half of fiscal 2024, we expect that we'll have even more meaningful innovation. Importantly, we've enhanced our efforts to build a robust multiyear pipeline. We're also working on product upgrades to deliver a better taste experience. Consumers like the products we’ve identified as an opportunity to deliver a superior taste experience. In some cases, this may also reduce costs and provide greater shelf life. To address gaps with key customers, our plan includes optimizing assortment and getting to the right price points. An example of this is our recent transition from variety packs to straight packs in the club channel and hitting a key price point in that channel. Additionally, we're doubling down at customers where we have strong momentum. For example, Amazon has been additive to Atkins measured channel POS, and we will continue to invest with them and other winning customers to accelerate growth. In terms of improving brand perception, a comprehensive advertising and marketing plan is underway to enhance Atkins overall appeal and relevance with the goal of continuing to bring new users to the business. As we indicated last quarter, we believe the GLP class of weight-loss drugs will be a tailwind for our business. As strong proponents of weight wellness, we’re excited consumers have another option to help with what can be a difficult struggle. We recently conducted our own proprietary research of consumers on the drug. The result showed our products are perfect complements for consumers when they're on the drug, offering smaller and more nutritious options. Furthermore, our research suggests that the majority of GLP users want to eventually come off the drug. What we found is that our products are a perfect offering when they do, as a way to hold on to the physical and emotional benefits of the weight loss. Importantly, remaining mindful of privacy, we are working with several external partners to build a sizable addressable audience of consumers who are interested in or using the drug, to whom we will deliver targeted communication, brand messaging, and offers about how our products can be used as a suppressant companion and/or off-ramp. We expect to be in the market with this campaign later in the fiscal year. Lastly, we're working on a packaging refresh project that will modernize the brand and make it easier to shop. The goal of the revitalization plan is to stabilize marketplace performance and then deliver the brand to its full potential. To execute this plan with excellence and a sense of urgency, we've established a new leadership team and structure. We have a very strong and experienced team and are confident in our collective ability to reshape the strategy and growth trajectory of the brand. I'll not spend a lot of time here, but on this slide, you'll see some of the accelerated innovation currently making its way into the marketplace and the refinement and optimized pack types in the club and e-commerce channels. We are category advisers at most retailers, and we will continue to work with them to ensure our product is optimally positioned on the shelf. I want to close the update on the revitalization plan with some additional perspective on the new advertising and marketing campaigns. The campaign addresses feedback that some potential new buyers are unaware or skeptical of the brand benefits and how delicious the products taste, entitled the “Food New” campaign, giving voice to the skeptics as well as our core existing consumers. It reinforces that you can eat and enjoy these delicious products while maintaining or losing weight. Rob Lowe remains our brand ambassador, embodying the brand benefits. Joining him in a playful dialogue and converting a skeptic into an Atkins consumer is renowned comedian and skeptic. We've created three plots that will rotate over the coming months. Each ad focuses on a different aspect of the business, which has positioned us nicely for the upcoming New Year, New Year season. Consumer testing shows the spots drive greater appeal among light and non-users that also resonate strongly with existing users. We are taking a slightly different approach to where consumers will see our advertising, which will increase our reach. Most recently, we debuted our new ads on October 12 during Thursday Night Football and on October 22 during Sunday Night Football. We will continue to see our ads throughout the year across cable, streaming, and digital channels. We know what we need to do to change the trajectory of the brand performance. We're beginning to deploy the plan, and it will continue to build during the year and into fiscal 2025. I look forward to keeping you up to date with that progress. In summary, I'm pleased with our overall fiscal 2023 results. We compete in an attractive category that is well positioned against the mega trends of healthy snacking, with a focus on convenient products across multiple forms that are high in protein and low in carbs and sugar. In fiscal 2024, driven by quick marketplace momentum, our plan is to deliver solid net sales growth driven by volume. As such, we're excited about our plans, our business, and the opportunities ahead. Lastly, I want to thank our amazing employees who work tirelessly every day to provide delicious and convenient food options for consumers. Our team believes food should work for people, not against them, and they're passionate about helping consumers live a healthy lifestyle. I'm very grateful for their passion and commitment. Now I'll turn the call over to Shaun, who will provide you with some greater financial details.

Thank you, Geoff, and good morning, everyone. I will begin with an overview of our net sales. Total Simply Good Foods fourth quarter net sales of $320.4 million increased 16.9% versus the year-ago period. Looking at the Q4 drivers of growth, net price realization was about 3.5 percentage points and volume was about 13.4%. As Geoff stated earlier, net sales growth outpaced retail takeaway. At the bottom of this slide, we have reconciled Q4 POS of 11% to Q4 North America net sales growth of 17%. The biggest driver is in the prior year period due to the retail customer inventory drawdown last year. As we've discussed throughout the year, in fiscal 2022, retailers increased their inventory levels to address supply chain challenges and depleted this inventory in Q4 of fiscal 2022, which is atypical. This year, we returned to a more normalized pattern, where retailers built a week or two of inventory in the first half of the year and depleted the majority of it in Q3 with minimal change in Q4. Full year net sales of $1.24 billion increased 6.3% versus the year-ago period. As we exited fiscal years 2021 and 2022, inventory at retail moved around due to supply chain issues. However, as we exit 2023, we believe we ended the year with more normal retail inventory levels. Therefore, in fiscal 2024, we anticipate that full year net sales and retail takeaway growth will be largely in line. Moving on to other P&L items for Q4. Gross profit was $120.5 million, an increase of $18.6 million from the year-ago period, resulting in a gross margin of 37.6%. The 50 basis point increase versus the year-ago period was primarily due to lower ingredient packaging costs. Adjusted EBITDA was $67.3 million, an increase of $16.3 million from the year-ago period. Selling and marketing expenses were $30.8 million versus $26.9 million, an increase of 14.8%, largely due to the timing of spend within the year. GAAP G&A expenses were $29.5 million, an increase of $2.4 million versus last year, primarily due to executive transition costs. Excluding these costs as well as stock-based compensation, G&A declined $900,000 to $23.2 million. Finally, net interest income and interest expense increased by $1 million to $6.4 million due to higher variable interest rates related to the term loan. As expected, our Q4 tax rate was about 25%. As a result, net income was $36.6 million versus $30.1 million last year. Turning now to full year results. Gross profit was $453.4 million, an increase of 1.8% versus the year-ago period. Adjusted EBITDA increased by $11.6 million to $245.6 million due to higher gross profit and SG&A leverage. Selling and marketing expenses declined 1.8% to $119.5 million. GAAP G&A expenses were $111.6 million, including stock-based compensation, executive transition costs, and term loan transaction fees. Excluding these costs, G&A declined $800,000 to $91.3 million. Net income was $133.6 million versus $108.6 million in the year-ago period. Note that the year-ago period includes $30.1 million related to the remeasurement of the private warrant liabilities. Turning to EPS, fourth quarter reported EPS was $0.36 per share diluted compared to $0.30 per share diluted for the comparable period of 2022. Adjusted diluted EPS was $0.45 versus $0.36 in the prior year-ago period. Full year reported EPS was $1.32 and adjusted diluted EPS was $1.63. Note that we calculate adjusted diluted EPS as adjusted EBITDA less interest income, interest expense, and income taxes. Please refer to today's press release for an explanation and reconciliation of non-GAAP financial measures. Moving to the balance sheet and cash flow. Fourth quarter and full year cash provided by operating activities was $61 million and $171 million, respectively. As of August 26, 2023, the company had cash of $87.7 million. In fiscal 2023, the company repaid $121.5 million of its term loan and at the end of the year, the outstanding principal balance was $285 million. Capital expenditures in 2023 were $11.6 million. Fiscal 2024 CapEx is expected to be in the $8 million to $10 million range. In fiscal 2024, we anticipate net interest expense to be around $18 million to $20 million, including noncash amortization expense related to the deferred financing fees. Now to wrap up, in a challenging macroeconomic environment, the nutrition snacking category growth continues to be strong. We expect the ingredients and packaging costs to be lower in fiscal 2024 compared to last year, resulting in solid gross margin expansion. This provides us with the flexibility to invest in capabilities and marketing initiatives that will drive near and long-term growth. As such, while early, in fiscal 2024, we are on track to deliver solid net sales and adjusted EBITDA growth. Specifically, we anticipate the following for the full fiscal year 2024: net sales growth driven by volume to be at the high end of our company's long-term algorithm of 4% to 6%, including the benefit of the 53rd week. Adjusted EBITDA is anticipated to increase slightly greater than the net sales growth and adjusted diluted EPS will increase greater than adjusted EBITDA growth. We appreciate everyone's interest in our company, and we're now available to take your questions.

Our first question comes from John Baumgartner with Mizuho Securities. Please proceed with your question.

Geoff, I wanted to ask about the skeptics associated with the Atkins brand. How many of them are buying other brands in the category relative to how many would be incremental? And of the folks buying other brands, do you have a sense as to whether they're buying other weight management brands or more high-protein active nutrition brands? I'm trying to think through this and understand how much of this pool of skeptics as you pursue them requires winning more of a market share gain and dislodging consumers relative to how much would be contingent on growing the category and how that impacts your engagement?

I hope you like the new advertising. When we were looking at Atkins, we took a step back. What we really heard loud and clear through the research is that Atkins is one of the best positioned brands out there focused on weight management. What we heard loud and clear is that 80% of consumers want to lose or maintain weight and Atkins is seen as the trusted leader in low-carb, no-sugar solutions. So we see nothing but tremendous potential for this brand. However, we did hear that there's a group of consumers who are either a little confused about what Atkins is or don't fully understand the benefits of being able to eat products this delicious and lose or maintain weight. That's when we started zeroing in on the idea that there are some skeptics out there, which to us represent nothing but upside to the business. Because, as you know, once we convert consumers, they become loyal very quickly and the buy rate is particularly high compared to most consumer products. So that was the goal with this new advertising: To firstly communicate that Atkins is not a weight management plan. It's not a regimented weight loss program. We have a range of delicious products that can help consumers maintain or lose weight. As I step back on the business with a fresh set of eyes, I see nothing but upside. If we can start to convert what might be very light consumers or non-consumers and start moving them down the funnel into loyal consumers with high buy rates. That was the genesis for how we arrived at that marketing strategy. What we also found is that the two new campaigns also resonate strongly with loyal consumers because it's a little nod to them.

To follow up, when considering the marketing initiatives for fiscal '24, it appears there are several non-price strategies being introduced. Do you have any insights, perhaps it's still early, but do you think your competitors are also adopting similar approaches by focusing more on non-price promotions, increased marketing, more advertising, and enhanced in-store displays instead of relying solely on significant price reductions to address the market's deflation?

I think what separates Simply Good Foods from almost the majority of our competitors is how committed we are to brand building and, in particular, marketing. We're spending right now about 9% of net sales. We know that at that level of spend, we have a very strong share of voice. As we think about Atkins, and we just talked about that marketing campaign, we're investing slightly above a year ago on Atkins, with a particular heavy focus over the first quarter. Based on our testing results, we believe the creative will perform more strongly, and we're focused on additional reach, aiming to increase our reach from 69% to 86%. Additionally, in the back half of the year, we're going to be making a significant investment in cost advertising, which really hasn't had much focus to date. So we are the market leaders. We fundamentally believe in brand building, and we believe that separates our company and our brands from our competitors.

Our next question comes from the line of Jason English with Goldman Sachs. Please proceed with your question.

A couple of questions. First, some tactical questions. You highlighted some new club products for Atkins. Is this designed for your existing customers? Or is any of this an opportunity to penetrate new customers? And then on Quest, you referenced partnering with retailers who view Quest as a pioneer in the nutrition snacking category. Part of your retailer's seems like it's par for the course. It sounds like this is probably not like the fact you’re calling it out suggests this may be something more than partnership. Can you expand and give us a little more detail and color on that initiative?

Yes, happy to, Jason. As it relates to the Atkins club program, we have moved from offering a variety pack to a straight pack, and what we've learned from our research is that there's a significant opportunity if we can hit a specific price point, which we have. We believe that effort will resonate both with existing consumers as well as bring in new consumers. So that's the goal there. With respect to your second question on Quest, yes, you're right. This category, I've talked about it before, I describe it as a teenager compared to the majority of senior store categories. You've got the twin tailwinds of snacking and health and wellness. It overindexes with millennials and Gen Z. The reason I refer to it as a teenager is the 50% household penetration versus 90% for most in-store categories. And a real, as you know, a bright spot in the same store. Retailers see that. I believe the category could double over the next 5 to 7 years; I don't know exactly when, but that's the potential, retailers see that. I've met with all of them, many multiple times since joining the company. We're also a category adviser to the majority of our customers. So one of the things I focused on in my first six months is developing multiyear partnerships with retailers to provide and build additional space and additional focus on this category. We're moving from perhaps more of a transactional approach to category leadership to a longer-term, more strategic approach where we're building plans together to double down on this category, examining how we can add more space, how to create additional merchandising opportunities, etc. Obviously, e-commerce is a major focus. Within that, innovation plays a crucial role. As you know, our retailers view Quest as the innovation pioneer in the category. So you're right to highlight it, Jason. It is a stepped-up, next-level approach to category management that will underpin what we believe will ultimately double this category over the next 5 to 7 years.

Jason, just to add a little bit on that, too, if you take a step back in the last year, we're up 25% in consumption for Quest. That's a huge growth, and retailers obviously see that and want to partner with us because they see the growth potential of the brand.

I did a poor job of asking my first question. So let me come back and ask it more directly. Are you taking these new Atkins products to Costco?

Well, as you know, we're not in Costco. We see it as an opportunity. It would represent a significant increase in the business, which would be incremental, but of course, we have to find a proposition that works for us and for Costco, but you can probably bet that we're having ongoing conversations with them.

Our next question comes from the line of Pamela Kaufman with Morgan Stanley. Please proceed with your question.

Can you talk about how you're thinking about the cadence of top-line growth throughout fiscal '24? And maybe elaborate on how you're thinking about the growth outlook by brand. And just what are you expecting from the contribution from the 53rd week?

Okay. There's a lot to unpack here. First, let me discuss the overall year and then touch on the quarter. For the full 52 weeks, we anticipate total SMPL sales to rise at the midpoint of our long-term growth target of 4% to 6%. This increase will be driven entirely by volume, as we are not factoring in any price changes for next year. We expect Quest to achieve a growth rate of at least low double digits for the year, while we anticipate slight declines in Atkins. The revitalization plan for Atkins is showing positive results. We foresee point-of-sale improvements throughout the year, with stronger consumption in the latter half compared to the first half. This reflects the overall strength of our business and the health of the category. Regarding the 53rd week, we added about a point of growth, as previously mentioned. To finalize our plan, we based the 53rd week forecast on an average of the last three years, which gives us roughly a point of growth. This is not simply a one-twelfth of the annual estimate, since we have fall resets that ship in August and won’t be replenished until mid-September. While it's still early days regarding the 53rd week, we should expect approximately a point of benefit there, subject to shipment timing. Looking at the yearly flow, retail takeaway will likely be consistent across quarters, projected to be in the mid- to high single digits overall. Regarding net sales, they will generally align with consumption, with a slight reversal between Q1 and Q2. To clarify, Q1 '24's net sales comparison to last year will be challenging for a couple of reasons. First, we had a specific program last year, the Healthy UN Cap for Quest, at a prominent mass retailer that we are not continuing this year. Second, Atkins RTD bonus packs, crucial to our New Year, New You initiative, will be shipped in Q2 this year instead of Q1 as they were last year. As Geoff mentioned earlier, we are increasing trade spend on Atkins in fiscal '24, especially in Q1, to keep our brand visible to retailers. Therefore, we expect Q1 sales to rise only in the low single digits. In contrast, we anticipate a reversal of this effect in Q2, where last year exhibited flat growth, leading us to expect this year's net sales growth to be at the higher end of our 4% to 6% range. By the end of Q1, consumption and sales should be closely aligned, with the reversal taking place between Q1 and Q2.

I also just wanted to dig into a bit more on how you plan to capitalize on the growth in GLP-1 drugs. What were the findings of the study that you conducted? And how are you thinking about the role that each Atkins and Quest can play in targeting this consumer?

We believe, based on our research, which I'll talk about, the GLP-1 drug represents a significant tailwind for both businesses. Over the past three months, we've conducted a lot of proprietary research with consumers on the drug to understand the impact it has. What we saw is, yes, there's a reduced appetite, but it's especially focused on less healthy products. Consumers using the drugs were eating smaller healthy meals and snacks, especially high-protein products, because they still need the nutrition they require. Through our research, we found great opportunities for both Atkins and Quest to serve as excellent companions when consumers are on the drug. Our research found that the majority of consumers taking the drugs don't plan to stay on them. They still want to hold on to their gains, and our products are an excellent offering when that happens—an effective off-ramp. We see this as a significant long-term opportunity. We’re clearly still in the early stages of these drugs and their adoption, but we wanted to get a head start. We've worked with several external partners to build a sizable, addressable audience of consumers who are either interested or using the drug and we plan to deliver them targeted communication, brand messaging, and offers about how our products can be a perfect companion when they are on the drug and serve as an off-ramp. Again, we’re still in the early stages of the campaign and will roll it out in the next quarter, but we see this as a long-term potential; being advocates of weight wellness, we think it’s great for consumers to have another tool at their disposal. It's just going to bring additional focus to weight loss, particularly with Atkins, which is where the brand plays.

Maybe if I could just sneak in one more. So you don't know?

No more questions for you; go back in the queue.

Our next question comes from the line of Matt Smith with Stifel. Please proceed with your question.

Geoff, if I could ask you, a number of years ago, the Atkins brand, you talked about high loyalty rates and the annual buy rates for existing consumers really being a tailwind to the brand. How do you think about the development of the overall category and the prevalence of new brands and the impact that would have on Atkins as we stand here today? Do those metrics naturally move lower over time, but the growth potential and size of the category are larger today, and therefore, it may not be negative for the brand? Or do you expect to get back to those high loyalty and repeat rates?

As I said in the remarks, since coming on board, I've delved very deep into Atkins. A lot of consumer research and analytics on the business have reaffirmed the opportunity this business has. It is uniquely positioned against a significant opportunity. As I said, 80% of consumers want to lose or maintain weight, and Atkins is seen as a trusted leader in low-carb, low-sugar solutions. The long-term potential of this business is significant. What I talked about were some executional missteps that have impacted some of those metrics, such as buy rates, for example. When you're not introducing really great innovation and you have an executional misstep with a large club customer, that's going to be reflected in those numbers. However, when we fix those, and those fixes are coming to market, and when we continue to support the business with marketing focused on both core users and some skeptics, we believe these metrics will start to turn around. Plus, the additional interest in weight management is only going to drive further interest in those brands. Therefore, the slight decline we're seeing in some of those metrics should be viewed as being driven largely by commercial missteps. We’re committed to the long-term growth of this business, which is why we're doubling down, increasing marketing efforts, introducing new innovations, and working on packaging. I’m very confident those metrics will shift positively.

Just a quick add on there, Matt, if you take a step back, the Atkins consumer has been a very loyal consumer over the years. We've seen that through the modeling we’ve done. We’ve mentioned before that we’ve seen a slight decrease in buy rates over the last period of time, principally due to pricing aspects. However, the buy rate for retained users continues to be strong. We’ll see that improve, as Geoff mentioned, with all the marketing initiatives we’re putting forth, so this remains a strength of the brand.

Our next question comes from the line of Jim Salera with Stephens Inc. Please proceed with your question.

I wanted to ask; you gave some good detail about the Atkins revitalization. When you're having these conversations with your retail partners, are there certain metrics that they want to see, whether it's from the existing Atkins on-shelf presence or maybe terms of new product innovation for you guys to win the distribution back? Any color you could offer on that would be helpful.

I just want to address your last point first: Our distribution is extremely strong right now, so that hasn't been an issue for us. I have been on the road, meeting with every retailer multiple times since I joined the company. I've had conversations about Atkins, and I've been candid about some of our commercial missteps, which I think have been appreciated. Those conversations have consistently highlighted the importance of the weight management category and how we are the clear leader in that category. Retailers want us to win. They are extremely aware of the statistics—the 80% of consumers who want to lose or maintain weight. This is a critical need, and they are committed to supporting Atkins' long-term health. They also recognize the need for incrementality. That's what Atkins brings to the category, particularly with this buy rate. In our discussions, I laid out our six-point plan for revitalizing the brand. They're excited about it, providing us the time and support to execute our strategies. They monitor this category in relation to the rest of the store and see how it's performing and its potential. We've talked about the possibility of doubling it over the next 5 to 7 years, and they understand that Atkins is a critical component of that plan. So overall, we’ve had very positive conversations with retailers.

If I could sneak a follow-up for Shaun. High-quality problem to have, but as we look forward, you guys don't really have any need to pay down debt. You don't have any CapEx expenditures as we're modeling the cash build. Should we expect share repurchases as a use of some of the excess cash? Should we just expect cash to build on the balance sheet? Will that get redirected into R&D or some advertising? Any way we can think about that moving forward?

We have, first of all, we love our model. We love the cash it generates. You know that when you look at our results overall. This year, we will continue to perform well. Right now, we're pleased to be below 1 times levered, especially considering we were over 4 times, 4.5 times about four years ago with the Quest acquisition. We have a small group that meets regularly to discuss capital allocation. We evaluate debt paydown, share buyback, and M&A opportunities as they come up. We will continue to do that in fiscal '24, and those are certainly the areas we're looking at regarding cash use.

Our next question comes from the line of Jon Andersen with William Blair. Please proceed with your question.

I have a question on Quest. The consumption obviously remains quite strong there, running up mid-20s. I'm wondering if you could talk a little bit about the composition of that growth, and the composition going forward. You referenced the household penetration rate being relatively modest, I think, at 15%. When we think about that kind of mid-20s consumption, how much of that is household penetration gain? How much is buy rate among existing users? Can you talk a little bit more about your plan to maintain strong consumption in fiscal '24 on the Quest brand?

When we acquired Quest, it was primarily a bar business; bars accounted for about 80% of the business. Today, bars are just a little over 50%. That is because in the last few years, we have successfully launched new products and formats that have really propelled the business. For example, in fiscal '24, we anticipate our salty snack platform to generate over $200 million in net sales, 25% of the Quest portfolio. To your question about growth composition, importantly, this innovation has proven to be highly incremental to the brand and, very importantly, to the category. For example, 30% of new users to the brand have come from chips. But critically, our bar business has grown 22% year-to-date. So Quest has proven it’s one of the few brands that can successfully extend across multiple product forms. I'll add that our consumers view Quest as a lifestyle brand; it’s a sort of brilliant hack, not just a product brand, and that's why they’re demanding we introduce additional formats. If you think about a large, perhaps growing carbohydrate-dense snack where we can flip the macros, we're probably looking at it. We’ve seen again that innovation to be highly incremental, bringing in new users. Retailers see it as a way to introduce new category users, which is why we’re securing their support. Lastly, you've mentioned where we’re going with the brand. Yes, we’ll continue pushing new innovations out, and there's still distribution weight space. Jason referenced that, but the next arrow we’ll pull on is marketing. Awareness levels are relatively low compared to most brands. There's an opportunity to enhance awareness and household penetration through a focused, world-class marketing campaign that we’ll launch in the new year. Those are the three drivers of Quest, but I'll reiterate—this is an incremental brand driving incremental consumers.

If you take a step back, in the '23 growth, we’ve achieved tremendous growth. We benefited like everyone else as we go through that, which we won't have this year. We’re excited about continuing to grow that brand in the mid-teens, with all growth being volume overall. Back when we conducted the acquisition, we recognized distribution as a significant opportunity. We built that this year, and we’ll continue to see it moving forward. However, the strength of the brand has been recognized by retailers, and it is truly a growth engine.

Our next question comes from the line of Rob Dickerson with Jefferies. Please proceed with your question.

I just wanted to ask a bit about the magnitude of the new marketing campaign. If we go back historically, the platform was to run a relatively higher rate of marketing. If we go back to fiscal '17 or '18 years, selling and marketing expenses were almost at 14%, and in '23, we were below 10%. I understand over time with recapturing some of this gross margin, we should assume that level of marketing spends is stepping up. You're speaking to a new campaign; we have a new brand ambassador. I'm just trying to gauge maybe firstly, if we think about fiscal '24, like how much should we expect selling or marketing to increase year-over-year or as a percentage of sales? Also, any incremental thoughts on how gross margin expansion may manifest in fiscal '24?

So I think what you're asking is how much we will step up marketing in fiscal '24. If you take a step back, we always aimed for a marketing spend around 10%. We were probably closer to 8% in '23. We want to be closer to 9%, a little bit above that in '24. Therefore, we expect mid-teen growth in marketing for fiscal '24 versus where we are today. So that’s the plan. We will likely see more effort on Atkins in the first half of the year; then with Quest, watch for growth in the second half of the year. I don’t know if that answered your question or not, but that is the expectation.

Yes, that's good enough. Then just on gross margin, could you clarify the expansion potential in '24?

First off, we're confident in achieving meaningful gross margin improvement in fiscal '24. For the full year, we think gross margin of 38% is very attainable, driven by commodity decreases across most of our key ingredients. However, I should mention a couple of caveats. First, that’s based on current market conditions; obviously, we're not 100% covered. So if something disrupts the market, that could alter this outlook. Second, we're not going to allocate all favorable conditions to the bottom line. We've discussed that already; we're going to reinvest a significant portion back into the business. Marketing will grow in the mid-teens for both brands, and we’re reinvesting some favorability back into trade for Atkins, especially in the first half, to ensure we remain active in the eyes of retailers and consumers until the revitalization plan begins to show results.

Our next question comes from the line of Matt McGinley with Needham & Company. Please proceed with your question.

I have a follow-up on that gross margin. Can you help frame your expectations on the cadence of gross margin improvement this year? Do you expect those gains to be more front-half or back-half weighted? You mentioned higher levels of marketing—how much do you expect promotions to rise, and how much of that will be offset by input deflation?

In terms of gross margin sequential improvement, I think you'll see more in the second half of the year than in the first half. Historically, Q2 has lower gross margin due to higher trade spending to support our New Year initiative. Additionally, we allocated more trade spending into Q1 this year to kickstart the business, as I mentioned. Therefore, we should see gross margin in Q1 remain similar to that of Q4 last year. However, expect considerable gross margin growth in Q3 and Q4 this year. That means the significant expansion is weighted toward the back half. Regarding trade, our spending isn't drastically up overall; we're just trying to make sure we support the brand in the marketplace as we move through the revitalization. In the past, we've typically set promotional plans with our retailers in September and January to support resets for New Year initiatives. This year, we've also added some spending in October and February for extra support. I hope that addresses your question.

Ladies and gentlemen, our final question this morning comes from the line of Stephen Powers with Deutsche Bank. Please proceed with your question.

I guess just listening to the Atkins conversation throughout the call. It comes across that you have a pretty clear view of what the deficiencies have been and a clear vision for what needs to be done. Is there anything, Geoff, as you’ve gone through the brand that are open questions? Are there any uncertainties that still concern you and could enhance your confidence in the overall revitalization?

That's a fair question. I have a lot of confidence in the plan we’ve developed, which is based on comprehensive research regarding the business, consumer talks, and advanced analytics. We have a tremendous amount of confidence in the strategies we've outlined, and we know there are opportunities in front of us. We aim to accelerate our innovation to market shortly while building a multiyear pipeline. We've identified opportunities for product upgrades to deliver better taste and hopefully improved shelf life. We are focused on specific customers, as mentioned in terms of the club channel, and that fix is already shipping to market. We’re also concentrating on doubling down on e-commerce. Longer term, we plan to modernize the brand and enhance brand experience. You’ve seen us launch initial ads that are supported by expanded reach. We also have a packaging refresh planned, but that does take a longer time to implement. The series of initiatives we’ve outlined will come to market sequentially over the next 12 to 18 months. With the weight management drug context, our research widely indicates it represents a tailwind for the business. Overall, we have a goal to stabilize the brand and then aim for noticeable improvement by the second half of the fiscal year. Underpinning all this is a new leadership team dedicated to enhanced accountability and execution. I have quite a bit of confidence in the full potential we see for this brand. The need is only growing, and it’s our responsibility to release that potential fully. I want to thank everyone for participating on today's call. We look forward to updating you on our first-quarter results in January. I hope everybody has a good day.

Thank you.

Thank you. This concludes today's conference call. You may disconnect your lines at this time. Thank you for your participation.