Simply Good Foods Co Q1 FY2026 Earnings Call

Greetings. Welcome to Simply Good Foods Company's First Quarter Fiscal Year 2026 Earnings Call. Please note that this conference is being recorded. I will now turn the conference over to Joshua Levine, Vice President of Investor Relations and Treasury. Thank you. You may now begin.

Thank you, operator. Good morning, and welcome to The Simply Good Foods Company's First Quarter Fiscal Year 2026 Earnings Call for the period ended November 29, 2025. Today, Geoff Tanner, President and CEO; and Chris Bealer, CFO, will provide you with an overview of our results, which were provided in our earnings release issued earlier this morning. Our prepared remarks will then be followed by a Q&A session. A copy of the release and accompanying presentation are available on the Investors section of the company's website. This call is being webcast, and an archive of today's remarks will be made available. During the course of today's call, management will make forward-looking statements, which 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. On today's call, we will refer to certain non-GAAP financial measures that we believe provide useful information for investors. Due to the company's asset-light 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 a reconciliation of our non-GAAP financial measures to their most comparable measures prepared in accordance with GAAP. Finally, all retail takeaway data included in our discussion today, reflects a combination of Sircana's MULO+C measured channel data, and the company estimates for unmeasured channels for the 13 weeks ended November 30, 2025, as compared to the prior year. I will now turn the call over to Geoff Tanner, President and CEO.

Thank you, Josh, and thank you for joining us for our call. I'm pleased with our Q1 performance, and I want to reiterate our confidence in our plan for the balance of the year. As a result, we are reaffirming our full year outlook for net sales and adjusted EBITDA. Consumption in Q1 grew 2%, led by double-digit growth from Quest and OWYN, which combined to generate 71% of our net sales. This was offset by expected declines on Atkins. Quest and OWYN continue to benefit from expanded distribution and marketing with added contribution from recent innovation. Growth was also supported by another robust quarter of the nutritional snacking category, which grew 10%. We are executing well on initiatives to drive the top line and to rebuild our gross margin. Specifically, with respect to our margin, recent pricing actions are now reflected on shelf with elasticities to date, in line with our expectations, albeit data remains limited. Our robust productivity program, which we started 18 months ago is delivering results taking cost out of the system and ensuring we have a multiyear pipeline of initiatives for the future. These gains, which will be easier to see in the second half once we're past the peak levels of inflation, is a testament to the hard work from everyone in our organization, particularly the supply chain and operations team. Finally, we took advantage of the opportunity to extend supply coverage at attractive year-over-year prices on several key inputs, most notably cocoa, where we have now locked in incremental supply at sequentially more favorable level, which will begin to flow into the P&L late in Q4 and into fiscal 2027. We know our results for the first half of this fiscal year for reasons we've discussed previously, are below our longer-term expectations. However, we remain confident that our top and bottom line performance will improve once we get beyond Q2. And as mentioned, we are reaffirming our full year outlook. With this in mind, and with our stock at levels that we believe discounts our long-term growth opportunity, we borrowed an incremental $150 million during the quarter that allowed us to accelerate our share buyback program. Since the start of the year, we have repurchased over 7% of our common stock. And as you saw in our press release today, the Board authorized a $200 million increase to our existing share repurchase program. Our decision to repurchase our stock reflects our continued confidence in our long-term runway, and we expect to continue with this program as long as the opportunity remains attractive. Simply Good Foods is well positioned as a leader in the nutritional snacking category. The growth is being propelled by the mainstreaming of consumer demand for high-protein, low-sugar and low carb product. We have a strong foundation for sustainable top line growth, which coupled with our history of strong margin and a proven track record of successfully converting a significant percentage of adjusted EBITDA into free cash flow, I believe will create shareholder value for the long term. Turning to our brand. Quest had another solid quarter, delivering 12% consumption growth and nearly 10% growth in net sales. Key brand metrics are up nicely. Household penetration reached nearly 20% this quarter, up 200 basis points year-over-year and up 50 basis points versus last quarter, a continuation of sequential momentum we've observed for some time. Our salty snacks business once again performed very well in the quarter, with consumption up 40%, reflecting underlying distribution gains and velocity growth as well as somewhat easier year-ago comp when we were supply constrained. As a result, household penetration for Quest Salty surpassed 10% this quarter, up 220 basis points over the last 12 months. Our Salty innovation strategy has been focused on developing and launching a full suite of exciting flavors, which continue to prove highly incremental. This is enabling us to build a highly visible brand block on shelf that enhances our leadership position. We're also introducing channel-specific packs, helping us attract new households and expand product usage occasions. To put this into perspective, ACV was up nearly 5 points in the quarter versus the prior year, and average items per store were up 34%. With visibility to further distribution gains and strong merchandising ahead, we remain confident and sustained growth for our Salty business. Quest Bars consumption was flat versus the prior year in Q1 with solid results from our Taste Forward Crispy line and new Overload platform. As I've said in the past, reaccelerating growth in our Bar business is a critical imperative with Overload the first step. Beginning in the second half, we expect to benefit from several additional initiatives, which are already underway, including further platform innovation and improved in-store activations and merchandising to drive trial. We are hyper-focused on ensuring strong execution of these initiatives and improving performance in this important segment. Lastly, we continue to see solid performance of our new 45-gram Protein Milkshake, which during the quarter gained an additional 8 ACV points. We are gaining trial-focused placements across the store including a number of new opportunities we've secured at several retailers this winter and spring. In addition, our high protein donut launched this quarter, initially on e-commerce and more recently with a large mass retailer. We expect ACV to ramp in the coming months as more retailers reset their shelves, which will provide us with a better read on performance. As we look ahead in the short term, we have a robust new year new merchandising program in place, including significant off shop displays, both in and outside our aisle. I want to remind you, as we said last quarter, the consumption growth in Q2, will be below the full year outlook in large part due to business with a key club customer shifting from Q2 focus last year to more balanced across the rest of the year. However, we remain confident that the strong in-store activation and trial driving activity will deliver continued household penetration gains, positioning the brand for a strong second half. As a result, Quest remains on track to deliver high single-digit consumption growth consistent with our outlook from last quarter. The brand is our largest and highest-margin business, Retailers view us as the innovation leader in the category, which is why we are benefiting from significant distribution and merchandising gains today with line of sight for further expansion in the spring. Finally, we continue to invest heavily in marketing, brand building and new capacity and production capabilities to support ongoing demand. Shifting to Atkins. Consumption declined 19%, consistent with our outlook. Declines were largely driven by lost distribution at several key retailers, which accounted for 2/3 of the headwind. As we've said previously, we continue to work strategically with our retail partners to find the proper breadth and assortment for the brand and to repurpose space from Atkins tail in favor of incremental gains to more productive Quest and OWYN SKUs, all in an effort to get a core assortment with a clear differentiated position in the category focused around weight. These actions are consistent with our fiscal year outlook for the brand, which continues to call for consumption declines around 20%, driven mostly by distribution losses. Over the last few months, many of our initiatives to modernize the Atkins brand have begun to hit the market. These include introducing a 4-pack within our meal bar portfolio, offering consumers a more attractive entry price point, new packaging across nearly every SKU and updated website and refreshed marketing. Our shift to sharpen our opening price points with a 4-pack and meal bars is doing what was intended with unit velocities on average up high single digits year-over-year, building trial and repeat rates and a 300 basis point increase in the percentage of new buyers added to the brand. As we are only 1 quarter into this initiative, we will continue to assess the benefits of the lower price point versus the overall revenue that the business generates over time. I would highlight that improved brand health, including new buyers and repeat rates is an important series of KPIs we will monitor and consider as we work to stabilize the business. The core promise of Atkins has always been to help consumers reach and maintain their weight goals backed by science and proven results. As we continue to see a segment of consumers turn to GLP-1 drugs to help them with their weight loss, we recently concluded a pilot clinical study to assess the effectiveness of Atkins for consumers using GLP-1 drugs. The study showed several encouraging results, including positive data around muscle mass retention, digestive comfort and certain metabolic markers important to consumers with diabetes. GLP-1 drugs are clearly a game changer for many people and how they lose weight, and we're excited in the coming months to share more information about our research into how Atkins nutritional approach can help these consumers achieve their goals. Moving on. We were pleased to see OWYN's performance in market this quarter with consumption up 18%, benefiting from distribution-led growth for RTDs and powders and an ongoing test in some club stores. Household penetration was up 100 basis points to 4.5%. In the near term, consistent with our outlook from last quarter, we expect Q2 consumption growth to slow somewhat due to the impact of initial elasticities following the recent pricing actions, lapping elevated prior year promotional levels and a lingering impact on velocity from the product issues we talked about on our last call. I'm pleased with our team's effort to address the product quality issues. We've seen our ratings level improve versus the summer, helped by our new and improved formula, which has been shipping since August. But we also know we have work to do to rebuild the quality perception with some consumers. As we look ahead, we remain confident in the brand and we will leverage the full scale and capabilities of Simply Goods to drive growth of the business. This includes leveraging our sales force to fill ACV opportunities, narrowing the gap for leading peers increasing marketing double digits this year with marketing as a percentage of sales expected to exceed 10%. Household penetration is only 4.5% and brand awareness is only 20%, pointing to a significant opportunity for more consumers to discover the brand. And lastly, launching both close-in and platform innovation, building upon the brand's strong position and authenticity in the fast-growing clean label movement. To summarize, with only 1 quarter of the year completed, we are reiterating our full year outlook. We are on track and remain confident in our plan. I want to close by thanking our team. They have attacked marketplace challenges head on with resilience and agility. Our nimble and flexible operating model, short- and long-term growth opportunities for Quest and OWYN and strong margins and balance sheet position us well. We are taking the right actions for the business to enhance our growth vectors and to position the company to win for the long term. I'll now hand the call over to Chris.

Thanks, Geoff. Good morning, everyone. Thank you for joining us. Overall, we delivered a solid start to the year relative to our plan with net sales and adjusted EBITDA modestly ahead of our expectations. Quest continued to be the engine of growth on the top and bottom line, most notably in salty snacks with solid execution across the organization as we position the company for improved results in the second half. First quarter reported net sales of $340.2 million were essentially flat versus a year ago. Quest net sales grew nearly 10%, driven by robust consumption growth of 12%, while Atkins and OWYN declined 17% and 3%, respectively. For Atkins, while challenged versus prior year, net sales paced slightly ahead of the expectations we provided last quarter as retailer reductions in trade inventory proved less of a headwind than we had expected. On OWYN, Q1 net sales lagged consumption meaningfully, driven by lingering product quality issues and the related impact on retailer inventory levels, which began the quarter in an elevated position. As we enter New Year New You, inventory balances are now more aligned for shipments to match consumption. Gross profit of $109.9 million declined 15.8% on a reported basis from the year ago period, driven primarily by an elevated inflationary costs, most notably cocoa and our first full quarter of tariffs, which were approximately $4 million. Gross margin was 32.3% on a GAAP basis, a decline of 590 basis points versus prior year, largely reflecting higher input costs and about 120 basis points impact from tariffs, which were only partially offset by productivity and mix. Excluding approximately $2.6 million of one-time OWYN integration expenses in the current period and $1 million of noncash purchase accounting inventory step-up expenses in Q1 of fiscal 2025, gross margin declined 540 basis points to 33.1%. Selling and marketing expenses of $29.7 million declined 10.1% versus prior year, primarily the result of planned pullback in Atkins marketing. Quest and OWYN marketing in aggregate increased nearly 10%. G&A expenses of $38 million were flat year-over-year. Excluding stock-based compensation, one-time integration and other costs, including $2.8 million related to the extension and upsizing of our term loan and revolving credit facilities, G&A declined 4.4% to $28.3 million, driven by cost synergies related to the OWYN acquisition and cost management across the organization. As a result, adjusted EBITDA was $55.6 million, down 20.6% due to the margin pressures I spoke about a moment ago. Net interest expense of $3.8 million was down nearly 50% versus the prior year as a result of lower average debt balances, while the effective tax rate was 25.3%. Net income was $25.3 million, a decline of 34% versus last year due primarily to the aforementioned margin challenges and one-time costs. Diluted earnings per share was $0.26 versus $0.38 in the year ago period. Adjusted diluted earnings per share was $0.39 versus $0.49 in the year ago period. Please note that we calculate adjusted diluted EPS as adjusted EBITDA less interest income, interest expense and income taxes divided by diluted shares outstanding. Moving to the balance sheet and cash flow. As of the end of Q1, the company had cash of $194.1 million and an outstanding principal balance on its term loan of $400 million, bringing our net debt to trailing 12-month adjusted EBITDA to approximately 0.8x. Cash flow from operations of $50.1 million represented an increase from approximately $32 million last year due to improved working capital. Capital expenditures were approximately $2.1 million. Higher cash and debt balances at quarter end reflected the company's strategic decision to borrow an additional $150 million as part of the refinancing and extension of our credit facilities, which closed in November. I would highlight that despite upsizing our credit facility, we were able to maintain a consistent spread over SOFR of our Term Loan B, reflecting the credit market's confidence in our long-term story, our cash flow and our balance sheet today. With the additional liquidity and our stock trading at attractive levels, we aggressively increased our rate of share repurchases since we last spoke with you in October. For Q1, we repurchased 5 million shares for $100 million. And on a fiscal year-to-date basis through January 6, the company has spent nearly $150 million to repurchase more than 7% of the shares outstanding at the beginning of this fiscal year. Finally, as Geoff mentioned, with our prior authorization nearly exhausted and our stock remaining at attractive levels, the Board of Directors recently approved an additional $200 million increase to the company's existing stock repurchase program, building on the $150 million incremental authorization announced last quarter. As of today, the company has approximately $224 million remaining under its current stock repurchase program. At current prices, we see share repurchases as a very attractive use of cash. Moving on to our discussion of our outlook. Reflecting our Q1 results and continued confidence in the return to growth on the top and bottom line in the second half, we are reaffirming our outlook for fiscal year 2026. Specifically, we continue to expect the following: net sales growth is expected to be in the range of negative 2% to positive 2%, with growth from Quest and OWYN offset by Atkins. Gross margins are expected to decline in the range of 100 to 150 basis points and adjusted EBITDA year-over-year is expected to be in the range of negative 4% to positive 1%. This includes increased marketing spend on Quest and OWYN to support growth while focusing on profitability for Atkins. Management is focused on the long-term growth of the total company and we'll look to provide more fuel should we find the opportunities to do so. Following the increase in the company's borrowings and accelerated rate of share repurchases, we are updating our outlook for certain below-the-line items. Net interest expense is now expected to be in the range of $19 million to $21 million, while the weighted average diluted share count is expected to be approximately 96 million shares. Our expected full year effective tax rate remains 25%. As we look at the shape of fiscal year 2026, consistent with what we laid out last quarter, we continue to expect that the second half will be stronger on both the top and bottom line than our first half. Specifically, consistent with our prior outlook, we assume Q2 will be the weakest quarter for consumption and net sales growth versus prior year. While we will see the underlying benefit of recent distribution gains on Quest and OWYN, growth will be muted by a combination of initial price elasticities, lingering impacts from the product quality issues on OWYN and challenging laps for Quest and OWYN, both of which benefited in the prior year from stronger New Year New You merchandising programs. All in, we expect Q2 net sales to decline in the range of 3.5% to 4.5%. Below net sales, we expect to deliver sequential improvement in year-over-year gross margin declines as compared to Q1, with Q2 gross margins down approximately 300 basis points versus prior year, helped by the contribution from pricing and productivity, which we expect will begin to offset headwinds from historically high cocoa prices, recent increases in whey and tariffs. As a result, adjusted EBITDA is now expected to decline double digits, slightly below our previous outlook given the impact of more elevated weight costs than we had previously expected. By the second half, we expect growth to improve meaningfully on both the top and bottom line. Specifically, net sales growth is expected at the higher end of our full year range, benefiting from distribution growth, including some recent wins, normalizing elasticities, lapping the initial impacts from OWYN's product issues and an exciting slate of innovation launches across our brands. On the gross margin line, consistent with our outlook from last quarter, we expect second half levels to be roughly in line with or slightly better than our full year fiscal 2025 gross margin on a GAAP basis. This implies flattish year-over-year gross margins in Q3 before Q4 expansion of nearly 200 basis points on a year-over-year basis. I would also highlight that this reaffirmed outlook includes modest tailwinds towards the end of the year from lower expectations for cocoa costs and tariffs given recently secured supply commitments and announced trade agreements and exemptions. These new benefits will be offset by higher assumptions for whey across the year. For adjusted EBITDA, consistent with what we have said last quarter, phasing should generally track the shape of our expectations for gross margins with much stronger results by Q4, which we expect will be our strongest period of profit growth, up double digits year-over-year. We continue to expect capital expenditures to be in the $30 million to $40 million range due mainly to the ongoing previously discussed co-investment with a key co-man partner to support additional capacity in our fast-growing salty snacks business. Finally, I would note that our outlook assumes current economic conditions, consumer purchasing behavior and prevailing tariff rates will remain generally consistent across the company's fiscal year. While our outlook includes a number of important assumptions, there remain several uncertain swing factors outside of our control that could represent risk to our outlook. For a comprehensive summary of our full year outlook, please see Slide 15 in our presentation. Thank you for your time and interest in our company. We are now available to take your questions.

Our first question will come from Peter Grom with UBS.

Happy New Year. Geoff, I appreciate your insights on the path ahead. Could you elaborate on the confidence regarding the anticipated improvement in the latter half of the year included in the guidance, especially in light of the uncertain and volatile environment facing the industry? Where do you feel the most confident or have the best visibility? On the other hand, what do you see as some significant risks or critical points to watch? As we consider the progression of the year, do the first and second quarter forecasts align with your expectations?

Yes, it is unfolding as we anticipated and as we mentioned previously, our plan has accounted for certain challenges in the first half, such as some promotional activities that have been moved to the second half, and we are aware of expected advantages in the second half that we outlined in our last call. Looking ahead to the second half, we see potential for new distribution opportunities and some successes in merchandising, especially for Quest. I am quite pleased with our innovation pipeline that will begin shipping in the spring and continue through the summer. Atkins is set to move beyond some of its larger distribution hurdles, like those in Club. Additionally, we expect the usual elasticity effects from pricing to diminish. On the top line, these factors contribute to our confidence in the second half. Regarding the bottom line, we anticipate improved gross margins and underlying profit growth, as we mentioned earlier, we will fully benefit from pricing and productivity. I am happy with the productivity advancements we've made as a company, which positions us well for a robust second half and into 2027. Moreover, we have secured more favorable positions in cocoa, which has significantly decreased in price. Thus, both in terms of revenue and profit, we have strong confidence that our business will begin to gain momentum in the second half and into 2027.

And then Peter, it's Chris. I'll just build on Geoff's answer. Consistent with our prior outlook, our EBITDA is generally going to track pretty closely to the gross margin trajectory. Q3 gross margins, for example, will be flattish year-over-year. And Q4 will be the strongest position for us in both gross margin and EBITDA. And EBITDA as an example, we expect it to be up about double digits. And I think importantly, for me, that sets us up nicely for FY '27 on a margin standpoint.

I wanted to ask about Quest Bars, which are clearly underperforming compared to the broader category. Innovation is contributing positively, and Overload is off to a good start, as you mentioned. However, this also indicates that the core or legacy SKUs are generally declining. My first question is about innovation, which is vital since the category benefits from new product announcements. It's encouraging that you have accelerated that pipeline. What needs to be done regarding the legacy bar business given its size and scale? Should we focus more on merchandising, as you've mentioned before, or is there a need to adjust the number of some of these tail SKUs in that brand?

Yes. If you look at Quest Bars in the quarter, Q1, they were flat, but we started a little bit more recently, more recent weeks, which we expected. As we mentioned, lapping some prior year promotional events through New Year, New Year, some shift in timing. And we always see a higher initial impact from pricing, which we took on Quest Bar. So what we're seeing on Quest bar right now is very consistent with what we expected and what we said on the last call. But to your question, we're obviously not happy with flat. That doesn't work. It's unacceptable. We are the leader in the bar segment, and we should be driving it. I think I've talked about this in the past. Over the past year, in response to that, we have developed a comprehensive plan to reaccelerate our bar business, and that includes platform innovation, which you'll see in the spring. It includes additional merchandising and new distribution that we have line of sight to. And additional marketing that we're going to put behind bars. So right now, we're flat. That's unacceptable. To your point, it's a multipronged plan to reaccelerate bars, inclusive of innovation, but also driving our core bar business through merchandising, through distribution and through marketing. Obviously, this is a multiyear plan. It will take time, but I'm very confident in the plan, and you should start to see the impact of that in the results in the second half.

I appreciate the information. Now, turning to OWYN for a moment, there’s quite a bit happening regarding the increased marketing spend, addressing product quality issues, and managing old inventory. As we look ahead, you are providing metrics on brand awareness and household penetration. I have a two-part question: Looking at household penetration, I believe the branded awareness is around 4.5% or aided awareness is approximately 20%. Is that the correct difference today, and does it indicate better or worse conversion of that awareness compared to other brands you've worked with? As we move forward, how should we assess the increase in marketing investment and your success in converting? Should we focus on the relationship between household penetration and the brand awareness you are building over time?

Yes. That relationship between 20% aided awareness and 4-ish, 4.5% household penetration pretty standard. So what it does point to is the significant upside opportunity we have on this brand. So while the relationship is pretty standard, those numbers are very low. And that really is a key opportunity for us to drive awareness, which is why we've increased marketing substantially, which then should translate into increased household penetration. One of the ways in which we plan to accelerate that in addition to marketing is to expand the footprint of OWYN. So right now, we've got a really good shakes business. We'll continue to drive that. We've got distribution upside. We've got a smallish powders business that's growing 50% plus that we plan to put more effort behind. And then you should expect us to bring platform innovation that will expand the footprint of the brand further. So the key ways to expand household penetration, marketing, which we've increased more than double, innovation to expand the footprint and then continuing to drive our distribution. We see this brand having a tremendous runway where we acquired it's on the leading edge of the clean movement, and we plan to pull all of those levers to drive awareness and drive household penetration.

I wanted to stick with OWYN, if we could. So underlying consumption in the quarter clearly strong, I think a bit better than you had actually laid out when we talked last quarter, talked about kind of the gap and the destock related to some of the quality issues in inventory. I wondered if you could just give a little bit more color on how that kind of came up during the quarter, whether it was driven by one or multiple customers? And then just, Chris, I think you said as you move into the New Year and New You period, you'd expect shipments to better align with consumption. Should we interpret that as there was still maybe a gap at the start of this quarter and it should close as we move through the second quarter? Just trying to kind of understand your level of confidence in consumption, which is clearly strong kind of matching shipments as we move through the balance of the quarter.

Yes, I'll start and turn it over to Chris. To your point, we were pleased with how consumption came in, in Q1, led by some distribution gains at mass test and a club customer. RTDs were solid, as I mentioned earlier, previous question. Powders growing 50%. And this does underscore the leadership position we have in plant-based and clean label, which grew 20%. In terms of bridging the gap to sales, as Chris mentioned, the primary driver of Q1 was we came in heavier on inventory, and we had some lingering impact from the quality issue.

Megan, to expand on that, we believe we are now in a better position regarding shipping relative to consumption. As you mentioned, the ERP cutover significantly contributed to our slightly elevated inventory levels at the start of Q1. We deemed this a necessary step to avoid any supply disruptions. Additionally, the ongoing effects of product issues also impacted the quarter. Overall, we believe that over the long term, consumption is the most accurate indicator of brand health. As I indicated, we feel more aligned in Q2 regarding shipment to consumption.

Okay. That's helpful. And then, Chris, just a follow-up, if I could, on the margin. I think you said at the end of your response to Pete's question that you'll be set up nicely in fiscal '27 from a margin standpoint. I guess when we look at the shape of this year, I think you'll end the year and exit kind of in that mid-36% range on the gross margin and understand there can be kind of seasonality and you probably don't want to give fiscal '27 guidance right now, but is that a good jumping off point as we think about fiscal '27, just that exit rate on 4Q, particularly as you talked about some of the favorability you expect from cocoa?

Yes. As I talked about, I think, last quarter as well, we do have good line of sight with our supply coverage. And we do obviously know what we paid last year for cocoa and for other commodities, we can see where the prices are. So we feel very confident about our overall gross margin. I think the mid-36s range that you mentioned on Q4 is directionally right. And I think that is, as you said, a good jumping off point for F '27. But clearly, at this point, I'm not going to be guiding on F '27. But all else equal, probably a decent assumption in terms of the starting point for the year.

Can I ask about margins? I seem to remember that when you first bought OWYN, it was a pretty low-margin business, but you're obviously in the middle of extracting a lot of cost synergy from that. And I also seem to remember that you commented recently on quite a wide discrepancy between where the Quest margins are and the lower margins for Atkins. And if we look out over the next 18 months, do we see sort of a major ramp on the margin side, both on the gross margin side and on the operating margin side, driven by things like cutting off the tail of unprofitable SKUs and the ongoing cost synergy realization at OWYN, other drivers that you anticipate? I'm really thinking about the gross margin getting back to that sort of 37% territory is there line of sight into that?

Thanks, Alexia. Yes, in terms of improving our margins back into the 37% range, the main factors are pricing and productivity. We recognize there is a lag, which we discussed previously, between pricing productivity and inflation. This lag is expected to start diminishing in the second half of this year. Additionally, we have good visibility on costs for cocoa and other commodities, with a favorable trend from cocoa set to begin in the fourth quarter of this year and extending into fiscal 2027. However, we also face inflation on whey, which will partially offset this benefit. These elements are significant drivers for our margins and well within our control, giving me confidence in restoring our margins. Moreover, as we transition from Atkins to Quest, we anticipate a long-term structural advantage for margins. Furthermore, as you mentioned in your question, we've achieved substantial synergies from the integration of OWYN, which will contribute throughout this fiscal year and are reflected in the mid-36% range for Q4. This incorporates a fully loaded OWYN margin. Lastly, as we increase OWYN’s scale and develop platform innovations, I expect these will further enhance the brand's margin.

The only build I would have on that is Alexia about 18 months ago, we did put in place a very robust and enhanced productivity program. That took 6 or so months to ramp. But as we sit here today, we have strong visibility based on terrific work from this team and our supply chain team, the R&D team, and that will enable us to continue to support our margin that will allow us to continue to support investment in the business.

I have a few questions. First, sales were flat for the quarter. Could you provide some insight into the sales composition? How much did pricing contribute in the first quarter, and how will pricing impact the second quarter and the second half of the year? Additionally, I would like to ask about Atkins. Last quarter, you mentioned that 10% to 15% of the Atkins business was underperforming, being in the lower quartile of velocities. Is there any update on that? I'm really interested in where you currently stand in optimizing the assortment for Atkins.

Jon, I'll address the top line question, while Geoff may want to handle the Atkins inquiry. For the first quarter, it's important to note that we were roughly flat year-over-year, but slightly exceeded our expectations and guidance at the beginning of the year. We're pleased with how Q1 turned out for both Quest and Atkins, as they performed better than anticipated. Regarding OWYN, as we've mentioned, it fell short for reasons previously stated. In terms of pricing, there was almost no benefit in Q1 due to the effective date on shelf being at the very end of October, which resulted in a minimal impact for that quarter. We expect a low single-digit benefit moving forward, consistent with our previous statements.

Yes. I'll take the Atkins question. I think it's important to point out that the majority, 2/3 of the declines we're seeing on Atkins today are driven by lost distribution, particular impact at club, which will be almost fully passed in April. But to your question, Atkins, if you look at the business today, as we said in the past, 75% of Atkins sales today come from SKUs in the top half of category velocity, which, in my experience, is generally considered safe. If you look at just the lowest quartile, 10% to 15%, which typically would be at risk. So no change there. I hope that helps dimensionalize the risk. And we'll say that rather than just lose those SKUs, we believe the right thing to do for the brand, the category and the company is to partner with retailers to drive to an assortment that would include replacing those SKUs with Quest and with OWYN, faster turning SKUs. I think that's the benefit of the category and the company. What I would say is I have been pleased that we've seen more flowback than we had forecasted on Atkins in Q1 where we've lost distribution. So early days there, but the level of flowback we are seeing into the business, I think partially explains why Atkins had a better than forecasted quarter.

Chris, just a follow-up question on cost visibility and tariff expense. You called out a $4 million headwind from tariffs in the quarter. When would you expect to start to see relief given the revised trade agreements? Should you start to see tariff favorability relative to your previous guidance in the second half of the year? Or does that really start to flow through in fiscal '27?

Yes. Thanks, Matt. I think importantly, again, as we look at total cost, and we see that we have good visibility out. We did get a little bit of relief since we set guidance on tariffs with the especially Annex 3 exemptions. And that will start to flow through. It's going to be flowing through really starting in the second half of the year. Again, when you think about cost of inventory and as it flows through our inventory and we ultimately ship it, there is a timing lag. So that will be more of a second half benefit and into next year. Again, I'll just refer back to, yes, we have some tariff benefit coming in, in the second half. We have cocoa benefit that's going to start flowing in Q4. But we do have a new sort of headwind that's come in, which is the way inflation. So all in, not concerned overall on cost, and that's why we haven't changed our gross margin guidance for the year. And actually pretty much right on the same number for Q4 in terms of what we were thinking. But yes, from a tariff standpoint, benefit will start playing in the second half.

That's a good question. We haven't altered our approach to capital allocation. M&A is certainly something we consider, and we have a strong history with it. Currently, we view our stock price as significantly undervalued, so we believe the best use of cash right now is to buy back our stock, reflecting our confidence in the long-term health of the business. M&A is always on our radar, and while there are targets available, we aim to acquire them at the right price. Our buyback strategy is opportunistic since we see our stock as undervalued, and we think the best course of action is to buy it back at these low levels.

I would like to expand on Geoff's response regarding our strong balance sheet. We capitalized on our stock price and took advantage of a refinancing opportunity to slightly increase our debt, remaining below a turn at this time. We anticipate that it will hover around a turn by year-end. We utilized the additional funds to boost our stock buyback while our shares are undervalued. The recent $200 million increase in authorization by our Board reflects our confidence in the long-term viability of our business and our balance sheet. As long as share prices remain appealing, we will continue to manage our cash in this manner.

I wanted to dig a little deeper into the clinical study that you're conducting on GLP-1 users and you say these are users who are following the Atkins nutritional approach. Can I assume that this means that you followed users who are on the Atkins diet? And if so, what's the next step, Geoff? Like what would you do with the results of this study to help you market the brand? How would you use it to help you retain distribution with retailers? Just a little bit more info on like what you intend to do with the results.

The role of Atkins has always been to assist individuals in losing or maintaining weight. With the rising trend of consumers turning to GLP-1 drugs for support, we initiated a pilot clinical study two years ago to determine if Atkins could serve as a valuable companion for users of this medication. We divided the participants into two groups: one group followed the Atkins diet while the other adhered to a traditional low-fat diet. We received the results last month, and while it's still early, the findings are promising. Patients on the Atkins diet who were also taking the drug retained more muscle mass, which is crucial for those on the medication, and reported fewer side effects like headaches and nausea. Additionally, there were notable differences in metabolic outcomes, especially among diabetic patients. Although it was a pilot study, we are optimistic about Atkins' potential role and recognize that there's more to explore. Moving forward, we plan to leverage these study results in our "New Year New You" media campaign, beginning in a few weeks. Our teams are currently engaging with retailers who are looking to address the needs of GLP-1 patients. Over the next few months, our sales team will actively discuss the results and emphasize the importance of taking action with retailers. While it’s early in the process, we are encouraged and intend to move forward with these insights in the upcoming months.

I have a couple of questions regarding planning assumptions, particularly about Quest Salty. First, could you provide an update on the distribution outlook for Quest Salty specifically? Are there any distribution gains included in the full year forecast? Secondly, more generally about forecasting in that area, I've noticed there are conflicting factors at play. On one hand, there’s increasing consumer awareness and acceptance of protein-based salty snacks, which contributes to your success. On the other hand, this has led to heightened competition from smaller independent brands as well as traditional brands entering the category. I'm curious if these dynamics have influenced your forecasting strategy for the salty business.

Steve, we could not be more pleased with our salty business, plus 40% in the quarter. Admittedly, we had some easier laps a year ago, but could not be more pleased. The core drivers are innovation. We've got new flavors, new forms, pack sizes, exclusives retailers, which are performing extremely well. We continue to build distribution, gain merchandising, displays across the store, away from home, gym, airports, hotels. And I'm not sure if you've seen our new campaign, but it's pretty heavily weighted towards salty. So those are the key drivers. As we look to the second half, we're very confident in the continued momentum of Salty. We have line of sight to new distribution. We have line of sight to significant merchandising gains. And part of this is because retailers view Salty as highly incremental to the category. And as a result, they're rewarding us with new distribution and new merchandising. So a lot of confidence in the momentum. As we think long term, I do want to remind that Quest is the pioneer of this segment. We built it from the ground up. It's been growing for a year at a high clip, and that reflects that we know we have a superior product. And really importantly, consumers trust Quest and trust our salty business has tremendous authenticity in the space. Salty is a $50 billion category. We only have 10% household penetration. Awareness is still relatively low. I've seen the multiyear pipeline. You should expect us to be looking at other forms of salty. We have no intention of taking our foot off the gas. Obviously, we've been operating under the assumption that competition is coming. The growth, the demand for this product just makes it obvious. But we're highly confident in the strength of our brand, strength of our product, our competitive moat from a supply chain perspective. And both near term and long term, we have tremendous confidence in this business.

Just want to add, Steve, to what Geoff said. Look, if you think about Quest as a brand and look at the areas that we're already building strong businesses, I think it's very important for me that Quest as a brand can absolutely play across the entire salty universe. Today, we have a business that's really an enormous chips business, but there's a lot of other areas in salty across the store where I strongly believe that Quest can build a meaningful business. And for that reason, that's one of the reasons we've been resourcing against that, both internally and with our co-manufacturers.

No RTD is certainly competitive, which is not surprising. For a while, the category faced some supply constraints that limited the extent of competition. It's expected to see new entrants in the category. It's worth noting that the category is still growing at over 10% in RTDs, which is significant. Starting with OWYN, it is very well positioned within that category as not just another RTD milk shake or flavor like chocolate or strawberry. It stands out as the leading clean and plant-based option in the market, which retailers and consumers recognize. I am quite confident that this clean movement is just beginning, and we plan to capitalize on it as a leader. From this perspective, OWYN is quite distinctive. We've also been very pleased with Quest's performance in this space, as it has the highest protein content at 45 grams and tastes fantastic, which is expected from Quest. So, it holds a unique position there. Atkins serves a different purpose in the category by helping consumers maintain their weight. This is a distinct role, especially as we start to leverage GLP-1 findings where shakes could be a useful tool for consumers using the drug. Therefore, we believe we have three distinctively positioned brands within a category that remains strong and continues to grow at double digits. So, we are very confident about future growth in this area. I just want to thank everyone for their participation today on today's call. If you have any follow-ups, please feel free to reach out to Josh, and we look forward to speaking with you again on our Q2 call in April. Have a good day.

Thank you. This will conclude today's conference. You may disconnect your lines at this time. We thank you for your participation. Have a wonderful day.