Earnings Call Transcript - SMPL Q4 2024

Operator, Operator

Ladies and gentlemen, good morning. And welcome to The Simply Good Foods Company Fiscal Fourth Quarter 2024 Conference Call. At this time, all participant lines are in a listen-only mode. A brief question-and-answer session will follow the formal presentation. As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Mark Pogharian, Vice President of Investor Relations. Please go ahead, sir.

Mark Pogharian, Vice President of Investor Relations

Thank you, operator. Good morning. I'm pleased to welcome you to The Simply Good Foods Company fourth quarter earnings call. Note that fiscal Q4 and full-year amounts reflect results for the 14 and 53 weeks ended August 31, 2024. Geoff Tanner, President and CEO; and Shaun Mara, CFO will provide you with an overview of results which will then be followed by a Q&A session. The company issued its earnings release this morning at approximately 7 a.m. Eastern Time. A copy of the release and presentation slides are available under the Investor section of the website at www.thesimplygoodfoodscompany.com. This call is being webcast and an archive of today's remarks will also be available. During the course of today's call, management will make forward-looking statements as subject to various risks and uncertainties that may cause actual results to differ materially. The company undertakes no obligation to update these statements based on subsequent events. A detailed listing of such risks and uncertainties can be found in today's press release and the company's SEC filings. Note that on today's call, we will refer to certain non-GAAP financial measures that we believe will provide useful information for investors. Due to the company's asset-light, strong cash flow business model, we evaluate our performance on an adjusted basis as it relates to EBITDA and diluted EPS. Please refer to today's press release for a reconciliation of the historical non-GAAP financial measures to the most comparable measures prepared in accordance with GAAP. The acquisition of OWYN was completed on June 13, 2024. Therefore, the company's fourth quarter and full year 2024 results include about 11 weeks of OWYN performance. The reference to legacy Simply Good Foods encompasses Simply Good Foods' business excluding OWYN. I'll now turn the call over to Geoff Tanner, President and CEO.

Geoff Tanner, President and CEO

Thank you, Mark. Good morning. Thank you for joining us. Today, I'll recap Simply Good Foods' financial results and the performance of our brand. Then Shaun will discuss our financial results in more detail before we wrap it up with a discussion of our fiscal 2025 outlook and your questions. We're pleased with our fiscal fourth quarter financial results with net sales increasing 17.2%. The acquisition of OWYN in the 53rd week are a 9 and 8 percentage point contributor to growth. On a like-for-like basis, North America Quest net sales increased about 5% and Atkins declined about 5%. Quest performance was less than expected due to temporary chip supply constraints and Atkins was in line with our estimate. Our gross margin improvement continued in the fourth quarter and resulted in adjusted EBITDA of $77.5 million, an increase of 15% compared to the year-ago period. Total Simply Good Foods retail takeaway, including OWYN and the combined measured and unmeasured channels, was about 8% for both the Q4 and full fiscal year 2024 periods. Quest and OWYN full-year POS was about 13% and 80% and Atkins was off 5%. Importantly, the nutritional snacking category growth remained strong, driven by volume. Key sub-segments of the category, including bars, shakes, and chips, all increased in both Q4 and full-year fiscal 2024. We are category advisors at most retailers and will continue to work with our customers to develop and support initiatives in the aisle to further accelerate category growth. Given the twin tailwinds of snacking and health and wellness, as well as low household penetration, the category is expected to maintain its momentum and its multi-year growth trajectory. As we look to fiscal 2025, we're excited about the prospects for our category and our business, and we believe we are well-positioned to deliver on our objectives. We'll execute against our strategic initiatives, focusing on innovation, marketing, and increased physical availability that we expect will drive trial and increased household penetration. The OWYN acquisition closed early in Q4 and the integration work is progressing as planned. We continue to be very pleased with this brand and believe the combination of our two businesses will create future significant shareholder value through revenue growth, margin expansion, and cost synergies. Shaun will provide you with the details of our fiscal 2025 outlook, but assuming a comparable full year of OWYN results are included in fiscal 2024, as well as the exclusion of the 53rd week in fiscal 2024, fiscal 2025 is expected to be in line with the company's long-term algorithm. Specifically, net sales growth in the 4% to 6% range and adjusted EBITDA growth slightly greater than the net sales increase. The next slide provides you with a perspective of nutritional snacking category growth, as well as our retail takeaway performance within the IRI MULO + C-store Universe and in the combined measured and unmeasured channels. Nutritional snacking category Q4 growth in the measured channels was 7.3%, driven primarily by volume. The category continues to be a standout performer and is increasingly a focus of our retail partners as they look for growth opportunities. Quest and OWYN retail takeaway in measured channels increased about 9% and 112%, and outpaced the category. Atkins performance down about 8% in measured channels was similar to last quarter. Our e-commerce business continues to do well. As a result, retail takeaway in unmeasured channels is nearly 2 percentage points additive to total Simply Good Foods measured channel POS. Let me now turn to Quest. In Q4, retail takeaway growth in measured and combined measured and unmeasured channels was 9% and 10%. Consumption slowed versus Q3, primarily due to temporary chips capacity constraints that resulted in stockouts at retailers. Additionally, we saw increased competitive distribution and promotions in the bar category. In Q4, we estimate total unmeasured channel retail takeaway increased about 16%, driven by strong e-commerce growth of 21%, that was nearly 450 basis points greater than Q3. E-commerce strength was partially offset by softness in specialty channels. Quest snacks and bars retail takeaway in the combined measured and unmeasured channels increased about 17% and 1% respectively. Despite the chips supply challenges, we continue to be pleased with our salty snacks POS growth of 34%, which is a standout in the category and represents about 25% of Quest retail sales. Chips retail takeaway slowed during the quarter due to temporary capacity constraints that impacted our ability to keep retail shelves fully stocked. We brought on a second chips manufacturing line during the quarter and it took some time to get up the learning curve. As we exit the first quarter in November, we anticipate supply will be back to normal with now two chips production lines. This positions us well for the upcoming New Year, New You season and any new distribution wins. The bar segment competition increased, driven by distribution of some new entrants into the measured channel universe. In response, we will increase promotional activity at select retailers starting in Q1 of fiscal 2025 and we have accelerated the launch of the Quest overload bar platform to February. These bars are loaded with inclusions and have a unique texture and mouth feel that will bring variety, news, and excitement to the bar segment. Therefore, in fiscal 2025, we expect that Quest will have another strong year driven by volume that should result in retail takeaway growth of 9% to 10%. As I mentioned earlier, chips recovery has already begun. With two production lines, we have the flexibility to meet increased demand for this fast-growing business. In the fourth quarter of fiscal 2024, we partnered with a large club customer on a small regional trial of Quest chips. Due to the success, in the second half of fiscal 2025, we will have a broader nationwide test with this retailer that could lead to an expanded presence. At the bottom of the slide, you'll note images of the key innovation items in fiscal year 2025 that I just discussed. Additionally, the rollout of the bake shop line began in late fiscal 2024. It is ongoing and while early, it's progressing nicely and in line with our estimates. Importantly, Quest core products and innovation will be supported with a full year marketing campaign. Recall the successful, 'it's basically cheating' advertising debuted in mid-March and drove an almost immediate lift in consumption, particularly chips, as this is where a large portion of the advertising was focused. In fiscal 2025, we will have a full year benefit of the campaign at even higher media weights, which we expect will drive greater awareness and household penetration of all Quest products. Turning to Atkins. Q4 retail takeaway in measured and combined measured and unmeasured channels was off 8% and 5%. Strong e-commerce growth continued, driven by Amazon, whose POS growth was 15%. In Q4, Atkins retail dollar sales were relatively consistent, specifically during the last 11 weeks of Q4, average weekly dollars in measured channels were $10.6 million and very similar on a week-to-week basis. This was partially due to RTD shakes where retail takeaway improved and was about the same as a year ago period in the combined measured and unmeasured channels. We continue to believe in the long-term vitality of the brand, given the renewed cultural relevance and conversation on weight, and we are confident we have the right plans in place to bring Atkins back to growth. I'm pleased with the execution of the Atkins revitalization plan that is progressing as scheduled. Some elements of the plan are in the market now, and we expect all elements to be in the market as we exit fiscal year 2025. While early, the innovation rolling out in the marketplace, in conjunction with the fall shelf resets, is tracking to our estimates. We have a full suite of innovation across forms, including the Atkins Strong ready-to-drink 30-gram protein shake, a new wafer bar, and Atkins Endulge confectionery gummy bears and truffles. Our innovation enabled us to maintain distribution at key food and mass customers. However, we do anticipate that some items in the more space-constrained club channel could be at risk in the spring shelf reset. Product upgrades or reformulation work is progressing, as well as new packaging. The Atkins Strong shake packaging is an indication of what you'll see. Note the fresh new look, including a bold ‘A’ in the middle as our new, more modern logo, more to come here soon. As we exited fiscal 2024, new Atkins advertising was on air and the Atkins.com website was refreshed. If you haven't seen it, the revised advertising; one, more clearly communicates and owns the benefit of weight management; two, more strongly communicates the brand's unique macronutrient profile focused on weight; and three, emphasizes Atkins as a sustainable and diet-free eating approach to weight wellness. We believe this messaging links better to the evolving consumer views and conversation on weight wellness. Notably, one of the spots positions Atkins as a diet-free and sustainable way for GLP-1 users or anyone who has lost weight to hold on to their gains. The refreshed Atkins.com website has been contemporized and is user-friendly. As has always been the case, it is loaded with customizable tools to help consumers achieve their weight wellness goals. While we work on revitalizing the brand, we also recognize the need to ensure Atkins is a long-term sustainable business. As such, beginning in fiscal 2025, we will work to optimize ROI and investment levels, specifically eliminating trade and marketing investments that don't meet specific ROI hurdles. This will impact fiscal 2025 sales growth as we expect some volume declines due to the reduction in spending as well as some distribution losses. We'll also discontinue our breakeven Canada export business. As such, we anticipate Atkins' full-year fiscal 2025 retail takeaway to decline high single digits, half of which is due to the aforementioned planned lower spend. To conclude, we're making progress and positioning the brand to succeed in the future. However, as we have previously stated, it will take some time to get there. Turning to OWYN. This brand continues to deliver on the potential we envisioned. Retail takeaway in the measured and unmeasured channels is strong with both distribution and velocity growth. Assuming a full year of OWYN operations, Q4 and full fiscal year 2024 net sales and retail takeaway are relatively in line with each other. And it's not one customer or channel. OWYN growth has significantly accelerated across all major retail customers. In the measured channel universe, OWYN is the third largest sports nutrition multi-pack brand in the U.S. and growing the fastest in dollar sales. We remain confident in our ability to effectively integrate OWYN into our business and deliver on the acquisition model commitments. In 2024, OWYN benefited from increased distribution into new customers. With solid ACV in fiscal 2025, we expect POS growth of 20% to 30%, driven by higher velocities and increased items or SKUs at select retailers. As such, in fiscal 2025, we expect OWYN net sales to be in the $135 million to $145 million range. Also, a 20% to 30% increase versus the last year. The integration work is underway and progressing as planned. As a reminder, to align with our fiscal year-end 2025, we will achieve the majority of the synergy, about 80%, at the onset or first day of fiscal 2026. This should result in OWYN fiscal 2026 adjusted EBITDA margin of high to mid-teens. To summarize, Simply Good Foods is uniquely positioned as a $1.4 billion net sales leader in the nutritional snacking category, with a diversified portfolio across brands and product forms. The relevance of the category and demand for our products only continues to increase as more and more consumers turn away from high-carb, high-sugar foods, seeking high-protein, low-sugar, low-carb options. We believe our category and our brands represent the future of food and beverage, and we have three uniquely positioned brands that are aligned around these consumer megatrends. Consumers trust our brands to help them achieve their wellness goals. As such, we're focused on our innovation and marketing plans to provide consumers with products to help them in their journey. We will continue to execute our strategic priorities that we expect will enable us to deliver on our long-term growth objectives that ultimately drive increased shareholder value. The work we're doing in fiscal 2025 positions us well for fiscal 2026, which should enable us to achieve results at the high end of our long-term algorithm. Now, I will turn the call over to Shaun, who will provide you with some greater financial details.

Shaun Mara, CFO

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 $375.7 million increased 17.2% versus the year-ago period. The primary drivers of growth were the OWYN acquisition and the 53rd week that were about a 9 and 8 percentage point benefit, respectively, to net sales growth. Legacy net sales growth, excluding the extra week, increased about 1%. Full-year net sales of $1.33 billion increased 7.1% versus the year-ago period. OWYN was a 2.4 percentage point contribution to net sales growth. Legacy net sales increased 4.8%, including the benefit of the 53rd week that was slightly less than a 2 percentage point benefit. As we exited fiscal 2024, retail inventory returned to normal levels, but slightly below fiscal 2023. The reduction in retail inventory levels combined with additional incremental trade investments resulted in full-year legacy retail takeaway slightly greater than net sales growth. Moving on to other P&L items for the quarter. Gross profit was $146 million, an increase of $25.5 million from the year-ago period, driven by lower legacy business ingredient and packaging costs, partially offset by a non-cash $3.2 million inventory purchase accounting step-up adjustment related to the OWYN acquisition. As a result, gross margin was 38.8%, a 120 basis point increase versus last year. The non-cash inventory purchase accounting step-up adversely affected gross margin by 90 basis points. Adjusted EBITDA was $77.5 million, an increase of $10.2 million from the year-ago period. Selling and marketing expenses increased $10 million to $40.8 million, primarily due to increased investments in marketing growth initiatives and the inclusion of OWYN. GAAP, G&A expenses were $41.3 million, an increase of $11.8 million versus last year. The increase was primarily due to higher employee-related costs, the inclusion of OWYN, stock-based compensation, as well as executive transition and integration costs. Excluding stock-based compensation, as well as executive transition and integration costs, Q4 G&A increased $8.7 million to $32.1 million. Additionally, in the fourth quarter of fiscal 2024, the company incurred costs related to the OWYN acquisition of $11.8 million. Finally, net interest income and interest expense were $8 million, an increase of $1.6 million versus the fourth quarter of fiscal 2023. The increase versus the year-ago period is primarily driven by a higher debt balance due to the OWYN acquisition. And our Q4 effective tax rate was about 28.3%, slightly higher than the year-ago period due to the OWYN acquisition. As a result, net income was $29.3 million versus $36.6 million last year. Moving on to full-year results. Gross profit was $511.6 million, an increase of $58.1 million compared to the year-ago period. The increase was driven by the legacy business due to lower ingredient and packaging costs, partially offset by a non-cash $3.2 million inventory purchase accounting step-up adjustment related to the OWYN acquisition. As a result, gross margin was 38.4%, a 190 basis point increase versus last year. The non-cash inventory purchase accounting step-up adversely affected gross margin by 20 basis points. We're pleased with our gross margin progress in fiscal 2024, however, in fiscal 2025, we anticipate that input cost inflation will be a headwind and result in gross margin contraction of about 200 basis points. Note, this includes OWYN as about a 50 basis point headwind to total company gross margin. Adjusted EBITDA was $269.1 million, an increase of 9.6% versus last year. In addition, for the full fiscal year 2024, the company incurred costs related to the OWYN acquisition of $14.5 million. Net interest income and interest expense was $21.7 million, a decline of $7.2 million versus last year. The interest expense component decline was due to a lower term loan debt balance prior to the OWYN acquisition versus the year-ago period. Our fiscal 2024 tax rate was about 25%, and we anticipate fiscal 2025 to be similar. As a result, net income was $139.3 million versus $133.6 million last year. The next slide provides you with a reconciliation of reported and adjusted diluted EPS. Fourth quarter reported EPS was $0.29 per share diluted compared to $0.36 per share diluted in 2023. Adjusted diluted EPS was $0.50 per share compared to $0.45 in a year-ago period. Note that we calculated 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 and full year cash provided by operating activities was about $49 million and $216 million. Strong cash generation is a hallmark of the company. As a result, at August 31, 2024, the company had cash of $132.5 million. In fiscal 2024, the company repaid $135 million of its term loan, and at the end of the year, the outstanding principal balance was $400 million, resulting in a trailing 12-month net debt to adjusted EBITDA ratio of 1x. Capital expenditures in 2024 were $5.7 million. In fiscal 2025, CapEx is expected to be in the $10 million to $15 million range. In fiscal 2025, we anticipate net interest expense to be around $25 million to $27 million, including non-cash amortization expense related to the deferred financing fees. We currently anticipate our net debt to adjusted EBITDA ratio to be about half a term or better by year-end fiscal 2025. Now to wrap up. While early, retail takeaway is off to a good start, and we believe we're on track to deliver our fiscal year 2025 plans. We continue to execute against our strategic initiatives, and we are making investments in the business that we expect will strengthen our brands in the marketplace. OWYN integration work is well underway and progressing as planned. We expect strong Quest and OWYN net sales and retail takeaway growth in fiscal 2025, driven by greater velocity, increased distribution, innovation, and marketing investments. As Geoff discussed earlier, in fiscal 2025, we're focusing on optimizing Atkins ROI related to brand investments. This will affect Atkins net sales and retail takeaway in fiscal 2025, but we believe this is necessary to ensure Atkins remains a sustainable and profitable business over the long term. In fiscal 2025, the company continues to expect input cost inflation. Solid productivity and cost savings initiatives are in place, partially offset these higher costs. However, given the unprecedented increase in the cost of select inputs, we anticipate gross margin compression in fiscal 2025. Therefore, in fiscal 2025, total company reported net sales are expected to increase 8.5% to 10.5%. Embedded in that, we anticipate OWYN full fiscal year 2025 net sales to be in the $135 million to $145 million range. Total company reported adjusted EBITDA is expected to increase 4% to 6%. Note that the 53rd week in fiscal 2024 comparison year is about a 2 percentage point headwind to both net sales and adjusted EBITDA growth in full-year fiscal 2025. Lastly, assuming a comparable full year of OWYN results are included in fiscal 2024, as well as the exclusion of the 53rd week in fiscal 2024, fiscal 2025 is expected to be in line with the company's long-term algorithm. Specifically, net sales growth in the 4% to 6% range and adjusted EBITDA growth slightly greater than the net sales increase. Just as importantly, we believe the work we're doing in fiscal 2025 positions us very well for fiscal 2026, which should enable us to achieve top and bottom line results at the high end of our long-term algorithm. We appreciate everybody's interest in our company and we're now available to take your questions.

Operator, Operator

Thank you. Our first question comes from Brian Holland with D.A. Davidson. Please go ahead.

Brian Holland, Analyst

Yeah, thanks. Good morning. Maybe just starting with some of the recent innovation, specifically looking at Bake Shop and some of the coffee drinks, we seem to be performing quite well. You've talked before about some of the struggles from an innovation standpoint and then having gone quiet for a little while. Any perspective that you can provide about the incrementality of these launches, what you are seeing so far vis-à-vis previous innovation cycles at the company?

Geoff Tanner, President and CEO

Yeah, good morning. Let me start with innovation on Quest and specifically Bake Shop. It's a big platform launch for us. We're encouraged by the early read. If you recall, this was a muffin and a brownie, 10 grams of protein, less than one gram of sugar. Where it's in distribution, performance is on par or even better than some of our best-performing innovation. Certainly, feedback from retailers is very encouraging. That platform hits on flavor, taste, and checks all the boxes: protein, low carb, low sugar. It's also targeting a sizable addressable market, just sweet baked goods. So in the early innings, still building distribution, but very encouraging. Chips, which I'm sure we'll probably talk about on the call. As we recover supply, we continue to drive that. We've got new flavors coming out. It's about a $300 million business today, directly growing at 25% to 30%. Again, and it's a massive addressable market where we see the largest source of volume from mainstream salty snacks. So at a high level, very encouraged by what we're seeing on Quest innovation. What Quest does is it flips the macros on large addressable snacks, and inroads were made into salty snacks. Now with baked, you can believe we're looking around the store, identifying other spaces where we can disrupt. Then just to close it out on Quest, we have accelerated the launch of the Overload Bar, which is chock full of inclusions, it's delicious, and so we're also innovating on our core. On Atkins, innovation is a key driver of this business performance. And as I've stated on previous calls, when I joined the organization, the state of the pipeline on Atkins was not where it needed to be. It had contributed to the slowdown we've seen in the business. Credit to the team, we did jumpstart efforts there. The recent slate of innovation in the marketplace is performing well. In the case of Atkins, what we're doing is replacing underperforming SKUs, say at Walmart or a large customer, one, one and a half units per week, and replacing it with these new innovation items that are doing two to two and a half. So whether that be the Atkins Strong, the Gummies, the Truffles, their rule of thumb kind of doubled the velocity performance of the items that they are replacing, and it just underscores how critical innovation is on Atkins. And so we have made sure that we're filling that pipeline, so we can continue to bring items to market on Atkins, largely looking to replace underperforming items with better items, but it is now a key focus for the business.

Shaun Mara, CFO

Just kind of maybe dimension-wise a little, just on the Atkins piece I'd say, just an example, if you look at Walmart, I think they took out 17 SKUs for the fall reset. They replaced them with about 18 or 19 SKUs of innovation. That innovation to dimensionalize what Geoff was saying is turning about two times a week as opposed to one time a week for the stuff they replaced. So it's been a good early, early read on innovation for Atkins.

Brian Holland, Analyst

No, great color. I appreciate that. And then just looking into the New Year, New You, and maybe this follows on to the innovation point. I know historically that period can be volatile in both directions. You called out earlier the '24-resolution season impacted by another category participant and who didn't have adequate supply in '23, had adequate supply in '24. As you look at the setup into 2025, any sense whether we're kind of in a more stable backdrop or if there are any heightened competitive issues or somebody out of stock, in stock, whatever? I know some of that we may not know until early ’25. But as we look at fall shelf sets, do we feel like we're in a more stable place than we have been in the past couple of years?

Geoff Tanner, President and CEO

As I look at the fall shelf sets, I'm very pleased with how we performed on both businesses and OWYN as well. To your point, last year it was somewhat of an anomaly because we were lapping – and you made this point, we were lapping a period where we had received outside support due to a large competitor being out of stock. So that was a difficult lap for us. Looking forward to this upcoming New Year, I'm encouraged by the plans we have in place. We have strong merchandising plans at every customer. To your point, it's a competitive category. We don't know what the competition is going to do at this point, but I'm very pleased with how our teams built the plans customer-by-customer, which should put us in a strong position. But again, you said it, we'll know much more in February, March.

Matt Smith, Analyst

Hi. Good morning.

Geoff Tanner, President and CEO

Hi, Matt.

Matt Smith, Analyst

I wanted to dig in a little bit about the underlying growth outlook for the legacy business in fiscal '25. I think guidance implies like 3% underlying growth on a like-for-like basis, but there's a few moving parts here, including the Quest capacity improving in the first quarter. You get some new distribution in the second half of the year. And on Atkins, you have lower or you're optimizing ROI or optimizing trade spend there. So can you help with the phasing of growth for each one of those brands due to the year, given the moving parts here?

Geoff Tanner, President and CEO

Phasing in terms of quarterly growth?

Matt Smith, Analyst

Just if there's any unique consideration we should take into account. You know when we think about Atkins pulling back on trade and merchandising support, is that changing the shape of the decline through the year that we should be considering?

Geoff Tanner, President and CEO

Yeah, I mean, I think if you take a step back and look at the kind of quarters, just in general, I'll just kind of – depending on where your guidance range is, net sales on a reported basis, reported, should be somewhat similar in Q1 to Q3, up low double digits to maybe low mid-teens. Q4 will be flattish because the year-ago period included the 53rd week and 11 weeks of OWYN. And then EBITDA, depending again where you are on guidance, should be up mid to high single digits on a reported basis the first three quarters and then down slightly in Q4. From a gross margin standpoint, we're going to benefit from lower input costs earlier in the year, so close to flat in the first quarter, and then down about two and a quarter basis points the rest of the way. That excludes the impact of the one-time step-up that we talked about on the call. So I don't know if that's what you are looking for, Matt.

Matt Smith, Analyst

No, that's great. I appreciate that.

Shaun Mara, CFO

The added color I would just give you is on Quest chips, which we talked about in the scripted remarks. We had been trending – I'll just give you an idea of how this should flow. We'd been trending in the $4.75 to $5 million per week range in measured channels. Because of the stock-outs, we ended up close to the four, and we expect to get that business back in the $5 million per week range starting the end of October. We've got a great co-man partner. We've got two sites operational. We've got a test with a large club customer coming up. So, if you look at the consumption trends and you think how it's going to flow into the new year, you should probably look at that as adding two, perhaps three points to Quest growth versus what you are seeing right now.

Geoff Tanner, President and CEO

The other thing, Matt, I'll say is, related to Atkins POS, I think you were kind of poking around there. I think you are going to see that a little softer in January through August where it's trending for the first six weeks of the fiscal year. We have not seen the cuts in the underlying investments really. That starts in kind of October-ish, and then it continues through fiscal year. So you'll see it softer as we go through the year versus where it is today.

Matt Smith, Analyst

Great. Thank you for all the detail. I'll pass it on.

Geoff Tanner, President and CEO

Thanks Matt.

Operator, Operator

Thank you. The next question is from the line of Jon Andersen from William Blair. Please go ahead.

Jon Andersen, Analyst

Hey, good morning everybody. Thanks for the questions.

Geoff Tanner, President and CEO

Good morning.

Jon Andersen, Analyst

I wanted to ask about the point-of-sale assumptions for fiscal '25 by brand. It looks like the assumption that you communicated for both Quest and Atkins are kind of in line with recent scans, but quite a bit lower for OWYN. It looks to us like OWYN's been running up closer to triple digits, and I know you've kind of communicated 20% to 30%. Can you just talk a little bit about the dynamic there for OWYN in 2025? Is it more challenging comparisons, or is there a certain element of conservatism baked in as it's a new brand for your business? Thanks.

Geoff Tanner, President and CEO

Yea, no I appreciate the questions. We continue to be excited about this acquisition. It spans our presence in the fast-growing shake category. It's the fastest-growing multipack protein shake in measured channels, the last 13 and 26. We purchased this business because it reaches a new consumer, those looking for plant and clean labels, and clear and obvious cost synergies. To your point, if you look at current performance, it's exceptionally strong. It's up around 80% full outlet. Sam's Club is a big driver. You are seeing significant growth in every customer, so it's not just one customer. Our focus right now on this business is driving the core. So expanding the number of doors, perhaps adding a larger pack, and then integrating the business delivering on the synergies, which will hit in '26. In terms of why we have a lower growth number, in our fiscal '24, we saw significant growth in distribution as they got into new stores and channels. In fiscal '25, there's still distribution opportunities, but as I said, it's more around filling voids, pack sizes, and we're lacking some pipe. The recent growth is very much driven by a significant distribution push. We'll continue to look to fill voids, look to drive increased pack sizes, but it won't be at the same level that we have currently seen the benefit of.

Shaun Mara, CFO

I think in the first half of the year you are going to see OWYN consumption trends higher than they are for the full year. We really lapped that stuff in the second half of the year.

Jon Andersen, Analyst

Thanks. That's helpful. Thanks for that. Just a follow-up on marketing. I know you've tweaked, I think, the messaging around some of the marketing campaigns for Atkins. Then you have some, I guess, in-market data on Quest. It's basically cheating messaging. Can you talk about the kind of the state of the marketing programs today and your sense of the ROI you are getting there, and then your overall level of marketing spending? Are you at the right level now, by brand? Thanks.

Geoff Tanner, President and CEO

Yeah, let me start with Quest. In fiscal 2025, we will have a full year of, 'it's basically cheating' campaigns. I've been doing marketing for over 20 years, and it's very rare to see a campaign drive a significant short and long-term increase in sales. That's exactly what happened with the Quest campaign. And where we really saw that was on Chips, an almost instant significant lift in consumption. Candidly, that's what caused us to have to revisit the second site on Chips, and so we're excited to see a full year benefit there. And in fiscal 2025, you'll see over an increase, a 20% increase in advertising on Quest and getting the Quest advertising levels up to that 8%-ish range, which probably is a good zip code. On Atkins, we've recently dropped new advertising into the market. It's still early, but advertising didn't really start until September. The advertising more squarely positions Atkins as a weight brand and emphasizes our unique macronutrient profile to support that. What I will say is, in our testing, euro testing, it was one of the top-ranking ads that Nielsen has seen, particularly the spot that referenced the new weight loss drugs. So I'm encouraged and optimistic. It's a little early to tell, but I think what we're learning from this advertising is going back to the core promise of the brand, which is weight wellness, putting it in a culturally relevant context, for example, these new weight loss drugs, and being very clear that we are the solution to consumers, the 60% of consumers who want to lose weight. So now I'll close by saying, one of the areas that we are throttling back on Atkins is the level of marketing, which has gotten ahead of where we wanted it to be. Most of those cuts have come in non-working, but there will be some impact, probably mid-single digit impact to the actual media impact.

Shaun Mara, CFO

Yeah, and just in terms of level of spend, I think if you look at '24 results, we're probably no low nines as a percentage of sales. We'll probably be mid to low eights overall as a company. But as Geoff said, a big chunk of that is actually non-working media that we – our marketing that we cut back. So I think the level of spend we think is right for the business as of right now. We'll continue to evaluate that, and we'll probably look at that further as we get into '26. I just want to go back on the OWYN thing, in terms of where we are for next year for growth rates. It's a 20% to 30% growth rate. Just to dimensionalize it a little bit, if we grow 20% to 30% over the next three years, we've kind of doubled the business. So it's not like it's an insignificant growth on the overall business.

Alexia Howard, Analyst

Good morning, everyone.

Geoff Tanner, President and CEO

Good morning, Alexia.

Alexia Howard, Analyst

So just sticking with Atkins, it sounds to me as though, given the top line headwinds that you've mentioned, the pullback in promotion, a bit of a pullback in marketing, the possibility of distribution losses, are we basically saying at this point, we shouldn't expect an inflection and back to positive sales growth organically until fiscal '26?

Geoff Tanner, President and CEO

I mean, I think that's fair. So we've made these difficult, but they are the right decisions to right size investments. The focus has been on very low ROI spend on marketing. The predominant of the cuts have come in non-working, but there will be a small impact to media, and in more space constrained channels like clubs, we certainly expect to lose a slot or two. That will have a volume impact in fiscal 2026. And that is despite the positive signals we're seeing from the revitalization plans, whether it be the new innovation that is performing well, new advertising, it's early but I'm encouraged, we've got new packaging coming. But the net effect of that, Alexia, is that we should expect, we are expecting a negative accelerated decline on Atkins. But you have to remember that most of that are choices we've made, including getting out of our breakeven Canada business. Looking forward, our thinking is just a continuous sequence – we'd like to see sequential improvement, but we have to address these issues and we've decided to do it now.

Shaun Mara, CFO

Yeah, I could just, I guess I mentioned a little bit, I think if you look at the guidance we gave on consumption, kind of high single-digit decline on Atkins, basically we break it down. We think base velocity declines are going to improve versus Q4. Effectively, innovation is going to offset distribution losses in the club channel. We're at the next phase where we assess the investment levels. We're eliminating, as Geoff said, unprofitable investments, discontinuing our breakeven business in Canada, and half of the expected decline is basically going to be decisions we make overall. I’ll also point out that all elements of the plan are not in the market until the end of fiscal '25. So as we continue to get more innovation, like we said for Walmart as an example for this fall, we're going to replace lower-performing SKUs, which should help the business overall. So I think it sets itself up nicely for '26, but there will be some impact in '25.

Jon Andersen, Analyst

Perfect. And then as a follow-up, on Quest, are you able to quantify the potential benefits from the club customer rollout? I think you said that was probably in the second half of the fiscal year. Any views as to how much distribution you'll gain as a percentage or how many percentage points on sales that might give you on the Quest brand? Thank you, and I'll pass it on.

Geoff Tanner, President and CEO

Yeah, it's a little reluctant to share specific growth numbers or dollar numbers by customer. We've had a small, very regional test with this customer, mostly on the West Coast, and we're very pleased with the performance based on that performance. We had a nationwide test. Now that's a significant customer, but it's not an insignificant amount, but I still view it as a test and we still have to prove it out. But I'm sure you can appreciate if we perform in this test, the upside potential to our business, starting with Chips, is significant.

Alexia Howard, Analyst

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

Geoff Tanner, President and CEO

Thanks Alexia.

Operator, Operator

Thank you. Ladies and gentlemen, we take the last question from the line of Jim Salera from Stephens Inc. Please go ahead.

Jim Salera, Analyst

Hey guys. Thanks for fitting us in. I appreciate all the detail on OWYN. I wanted to ask a follow-up there. If you continue to see household adoption and higher velocities, can you just give us a sense for what the capacity is for 2025, especially in light of some of the success you saw with the Quest chips leading to capacity constraints there's. Is there kind of an upper bound for OWYN, for what you guys can do for 2025?

Geoff Tanner, President and CEO

Yeah, I mean the short answer is no, we don't. There are no capacity issues, near term or even medium, long term for OWYN. I will say one of the benefits of bringing them into Simply Network is we have significantly helped them expand their capacity. And in this industry, yes, capacity was constrained, but a lot of new capacities either come online or are coming online, so capacity is not an issue at all.

Shaun Mara, CFO

Yeah, I'd also say, as we look at it, we think there's an opportunity, and we're working on it right now as we optimize that network for RTDs for the overall business for Quest, Atkins, and OWYN. I think there's an opportunity from a cost-saving standpoint. We wouldn't see that in fiscal '25, but we are looking hard at that, and that could be a meaningful synergy for us.

Jim Salera, Analyst

Great. And then one final question. Given that you guys have already levered the balance sheet back down to just 1x, just any thoughts on capital allocations into FY'25, given that it sounds like you guys have a pretty detailed plan on marketing, but I would expect there's going to be some cash left over, so any thoughts on buybacks or anything there?

Shaun Mara, CFO

Yeah, I mean, let's take a step back. I think cash generation's a hallmark of the company. I mean, I think we had a fantastic year last year. Cash from operating activities, $215 million, should be strong again this year. We have over $100 million in cash on the balance sheet right now. So we continue to evaluate what the best way to return cash to our shareholders is. We look at debt pay down, we look at share repurchases, and look at M&A. So we'll continue to evaluate that, and we'll look at opportunities to buy back shares and really finalize and continue to fine-tune our capital allocation strategy as we get into the year.

Jim Salera, Analyst

Great, thanks guys. I’ll hop back in queue.

Operator, Operator

Thank you. Ladies and gentlemen, this concludes our question-and-answer session. I would now hand the conference over to the management for closing comments.

Geoff Tanner, President and CEO

Great. Thank you so much for joining us today. I'll be available for any follow-up calls you may have, and we'll look forward to updating on our first quarter results in January.

Operator, Operator

Thank you. The conference of Simply Good Foods Company has now concluded. Thank you for your participation. You may now disconnect your lines.