Earnings Call Transcript - SMPL Q3 2024

Operator, Operator

Greetings and welcome to The Simply Good Foods Company Fiscal Third Quarter 2024 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 of Investor Relations for The Simply Good Foods Company. Thank you, sir. You may begin.

Mark Pogharian, Vice President of Investor Relations

Thank you, operator. Good morning. I'm pleased to welcome you to The Simply Good Foods Company earnings call for the fiscal third quarter ended May 25th, 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 07:00 A.M. Eastern Time. A copy of the release and accompanying presentation are available under the Investors section of the Company's website at www.thesimplygoodfoodscompany.com. This call is being webcast and an archive of today's remarks will also be available. During the course of today's call, management will make forward-looking statements that are subject to various risks and uncertainties that may cause actual results to differ materially. The Company undertakes no obligation to update these statements based on subsequent events. A detailed listing of such risks and uncertainties can be found in today's press release and the Company's SEC filings. Note that on today's call, we will refer to certain non-GAAP financial measures that we believe will provide useful information for investors. Due to the Company's asset-light, strong cash flow 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 company completed the acquisition of OWYN in the fourth quarter of fiscal '24. Therefore, results for the 13 and 39 weeks ended May 25th, 2024 exclude OWYN. Additionally, the reference to the legacy Simply Good Foods during today's conference call encompasses The 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, and good morning. Thank you for joining us. Today, I will recap Simply Good Food's 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're pleased with our fiscal third quarter financial results that were slightly better than our estimates. Simply Good Food's third quarter results were led by continued Quest growth as well as strong gross margin improvement. Retail takeaway in the combined measured and unmeasured channels was about 5% and as expected outpaced net sales growth of 3.1%. Quest retail takeaway was driven by strong salty snacks growth and Atkins performance sequentially improved by month during the quarter. Additionally, e-commerce growth for both Quest and Atkins continued to be solid, more on this in a bit. Q3 gross margin was 39.9%, a 320 basis point increase versus the year ago period, primarily due to lower ingredient and packaging costs. Higher gross profit enabled investments in growth initiatives, while also resulting in an increase in Q3 adjusted EBITDA of 7.9% to $71.9 million. The OWYN acquisition closed earlier this month and the business is tracking to the acquisition model and full calendar year 2024 net sales we initially outlined. I'm pleased to announce that Mark Olivieri, CEO of OWYN, has joined Simply Good Foods as the SVP and GM of OWYN, and is a member of our Executive Leadership team. Mark and I are excited to work together to unlock the value of our combined business and deliver shareholder value through both revenue growth, margin expansion, and cost synergies. We're very pleased with our execution in Q3. Quest acceleration and Atkins revitalization plans are on track and we reaffirm our full-year fiscal 2024 net sales outlook for the legacy business. Specifically, we expect net sales to increase around the midpoint of the company's long-term algorithm of 4% to 6%, including the benefit of a 53rd week. The OWYN acquisition closed on June 13th, and we anticipate Q4 net sales to be in the $25 million to $30 million range. Total company adjusted EBITDA growth is expected to increase about 8% compared to last year and versus our previous estimate of 6% to 8%. Shaun will provide greater detail on our performance in the subsequent section. 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 growth in the measured channel universe was 6.4%, driven primarily by volume. This category continues to be a standout performer and is increasingly a focus of our retail partners as they look for growth opportunities. Legacy Simply Good Foods retail takeaway in measured channels increased 2.9%, driven by Quest volume growth. Atkins performance improved compared to last quarter but was still off versus last year. Our e-commerce business continues to do well and resulted in legacy combined measured and unmeasured channel POS growth of 5%. Note that if we had acquired OWYN at the beginning of Q3, retail takeaway in measured channels in the combined measured and unmeasured universe would have been 6.4% and 8%, respectively. Let me now turn to Quest. In Q3, retail takeaway in measured channels increased 13.5%, driven by volume. Growth was solid across key retail channels, driven by an increase in both household penetration and buy rate. Quest retail takeaway improved sequentially from Q2 to Q3, with a key driver being the new Quest advertising campaign that began in March. We're pleased with the advertising that we believe will continue to drive higher household penetration and overall brand growth. In Q3, we estimate total unmeasured channel retail takeaway increased about 12% as e-commerce strength was partially offset by softness in specialty channels. Quest Q3 e-commerce POS was solid and increased about 16%. For perspective, total unmeasured channels in Q3 were nearly 23% of total Quest retail sales. Quest bar and snacks retail takeaway in measured channels increased about 2% and 27%, respectively. We're particularly pleased with our salty snacks POS growth of nearly 50%, which is a standout in the category and represents about 25% of Quest's measured channels retail sales. The new advertising debuted with a strong emphasis on Quest chips, which is where we have seen the largest increase in household penetration, as we witnessed the explosive growth of chips. The size of the total addressable salty snacks market suggests significant and continued upside on this business. As a result, we are working on a multifaceted acceleration plan that includes growth levers such as flavors, pack types, and channel expansion. In Q3, bar segment growth within the nutritional snacking category slowed to about 1%. This was primarily due to better-for-you bars that have significantly less protein, if any, that declined low-single-digits on a percentage basis versus last year. Sports performance bars, which primarily have higher levels of protein, increased mid-single-digits, driven by the increased distribution of some new entrants into the measured channel universe. Quest bar growth is in line with the total bar segment, but it's not what we expect from the leading protein bar brand in the market. In response, we have accelerated our bar innovation and we're very excited about these innovative products that are tracking to launch in the second half of fiscal 2025 and beyond. Over the remainder of the year, we expect low-double-digit POS growth and continued household penetration and buy rate gains, driven by innovation, distribution, and the new marketing campaign. Quest has been one of the most innovative brands in the category, supported by a world-class R&D team; the multi-year pipeline is strong and we expect innovation to be a lever of growth for a long time. March new product launches such as Strawberry Frosted Cookies and Iced Coffee are progressing nicely and are in line with our estimates. As we mentioned last quarter, I'm very excited for the upcoming bake shop platform, starting with high-protein muffins and brownies that launch in the fall of 2024. Based on conversations with retail customers, we expect very strong support for the bake shop launch, that will also be underpinned by a comprehensive marketing plan as part of the It's Basically Cheating advertising campaign. Turning to Atkins Q3, retail takeaway in the IRI MULO + C-store universe and the combined measured and unmeasured channels were off 9% and 5%, respectively. Strong e-commerce growth continued, driven by Amazon, whose POS growth was 16%. In Q3, the competitive in-store merchandising and programming comp was more normalized versus Q2, and as you'll note in the chart on the slide, Atkins POS trends sequentially improved during the quarter. The Atkins revitalization plan is progressing as scheduled. Some elements of the plan are in the market now, and we expect all elements to be in the market in the second half of fiscal year 2025. While early, the innovation we accelerated to market is performing well and is in line with our estimates. We're also pleased with the amount and quality of innovation we're bringing to market in the coming months, some of which you'll see in the middle of the slide. While fall shelf set discussions continue, our fiscal 2025 innovation pipeline has helped us greatly during our discussions with retailers. Most retailers will be replacing non-performing items with these new products. As a result, we believe we'll maintain distribution at most brick-and-mortar retailers, with the exception of the club channel. Now, it's not uncommon for club customers to wait and decide on innovation after they analyze performance in other retail channels. The second major revitalization pillar is new advertising. Over the past year, the relevance and cultural conversation around weight has changed and significantly increased in volume, much of it driven by the new weight loss drugs. In response to the shift, earlier this month, we shot new advertising that will be on air in late summer. The revised advertising refocuses on weight management, more strongly communicates the benefit of the brand's unique macronutrient profile, and emphasizes Atkins as a sustainable and diet-free way to weight management. We believe this messaging links better to the evolving consumer views and conversation on weight wellness. While still early, overall, we feel like we're tracking towards stabilizing the business and we're somewhat encouraged by the consumption trends that have slightly improved each month this past quarter. Given the strong execution of the revitalization plan, and as we look to fiscal 2025, we're now in a position to move to the next phase of the Atkins journey. Specifically, we'll focus on Atkins ROI and optimizing our investment levels on the brand as part of ensuring Atkins is a long-term, sustainable, and profitable business. Historically, we've always done this evaluation. However, the COVID slowdown and the innovation outage that followed resulted in some low ROI investments to support short-term performance and preserve shelf space. As we look to fiscal 2025 and beyond, we'll work to eliminate trade and marketing investments that don't meet specific ROI hurdles. This will have a short-term impact on sales growth, but it's necessary to build Atkins back to a sustainable brand for the long term. To conclude, I'm very pleased with how the team is executing. We're confident we have the right plans in place to bring Atkins back to growth. However, as we have previously stated, it will take some time to get there. Turning to OWYN, the acquisition closed on June 13th. This is a strategically and financially compelling acquisition of a fast-growing, on-trend protein shake in our aisle. OWYN increases our exposure in the shake segment by about 400 basis points to 23% of our total sales. Importantly, OWYN's growth is outpacing the category and we expect the brand to benefit from continued distribution and velocity gains given our go-to-market scale, capabilities, and category adviser relationships with almost all top retailers. OWYN reaches a new consumer segment for Simply Good, namely consumers thinking plant-based, allergy-free, simple ingredient options. However, as we have discussed, what's equally exciting is that OWYN is increasingly crossing over to appeal to mainstream consumers. In this sense, OWYN further strengthens our leadership position with retailers as we jointly work with them to accelerate category growth. We remain confident in our ability to effectively integrate OWYN into our business and deliver on the acquisition model commitments. To align with our fiscal year-end 2025, we will achieve the majority of the synergies on the onset or first day of fiscal 2026. To summarize, Simply Good Foods is uniquely positioned as the $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 on their journey. I'm thankful every day for our talented employees. Our team is excited and passionate about our brands and helping consumers achieve their goals. We will continue to execute our strategic priorities that should enable us to deliver on our long-term growth objectives that ultimately drive increased shareholder value. Now I'll turn the call over to Shaun who will provide you with some greater financial details.

Shaun Mara, CFO

Thank you, Geoff. Good morning, everyone. Total Simply Good Foods' third quarter net sales of $334.8 million increased $10 million or 3.1% versus the year ago period and was driven by Quest volume growth. North American net sales increased 3.2% and international net sales declined 2.4% versus the year ago period. As Geoff stated earlier, retail takeaway of 5% in combined measured and unmeasured channels was greater than the net sales growth. This was largely due to incremental trade investments supporting Atkins. Moving on to other P&L items for the quarter, gross profit was $133.6 million, an increase of $14.4 million from the year ago period, resulting in a gross margin of 39.9%. The 320 basis point increase versus the year ago period was primarily due to lower ingredient and packaging costs as well as reduced freight costs. Including OWYN, we expect total company Q4 gross margin to be around 38%, excluding the typical non-cash inventory step-up related to the acquisition. Adjusted EBITDA was $71.9 million, an increase of $5.2 million from the year ago period. Selling and marketing expenses were $36.5 million versus $30.2 million, largely due to higher marketing investments and growth initiatives. GAAP G&A expenses were $31.5 million, an increase of $1 million versus the year ago period. The increase was primarily due to higher employer-related costs, stock-based compensation, and corporate expenses, excluding stock-based compensation, as well as fees associated with last year's term loan amendment and executive transition costs, Q3 G&A increased $3 million to $26.5 million, driven by higher employer-related costs. Finally, net interest income and interest expense was $4.1 million, a decline of $3.1 million versus Q3 last year. The decline was due to lower debt balances versus the year ago period. Our Q3 effective tax rate was 24.5%, about the same as the year ago period. We continue to anticipate our full year fiscal 2024 effective tax rate to be around 25%. As a result, net income was $41.3 million versus $35.4 million last year. Moving on to year-to-date results, net sales of $955.6 million increased nearly 4% compared to last year. Gross profit was $365.6 million, resulting in a gross margin of 38.3%, a 220 basis point increase versus the year-ago period. We're pleased with our gross margin progress in fiscal 2024. However, we anticipate that input cost inflation will be a headwind and most likely will result in gross margin compression in fiscal 2025, particularly in the second half. Adjusted EBITDA was $191.7 million, an increase of 7.5% from the year ago period. Net interest income and interest expense was $13.8 million, a decline of $8.7 million versus last year. The year-to-date tax rate was 24.2%. As a result, net income was $110 million versus $96.9 million last year. The next slide provides you with a reconciliation of reported and adjusted diluted EPS. Third quarter reported EPS was $0.41 per share diluted compared to $0.35 per share diluted for the comparable period in 2023. Adjusted diluted EPS was $0.50 compared to $0.44 in the year ago period. Note that we calculated adjusted diluted EPS as adjusted EBITDA less interest income, interest expense, and income taxes. Please refer to today's press release for an explanation and reconciliation of non-GAAP financial measures. Moving to the balance sheet and cash flow, as of May 25th, 2024, the company had cash of $208.7 million. Year-to-date cash flow from operations was $167 million, an increase of about 50% or $56 million, principally due to adjusted EBITDA growth and improvements in working capital. Term loan debt at the end of the third quarter was $240 million. Subsequent to the Q3 quarter end on June 13th, we completed the OWYN acquisition. The cash purchase price of $280 million was funded through a combination of cash on our balance sheet and incremental borrowings under our outstanding credit facility of $250 million. The company expects to pay down a portion of the $490 million in total term loan debt during the balance of fiscal 2024 and is targeting a net debt to adjusted EBITDA ratio of around 1.25 times by fiscal year-end August 2024. Capital expenditures in Q3 and year-to-date were $0.7 million and $1.8 million, respectively. In fiscal 2024, we continue to expect CapEx to be in the $8 million to $10 million range. In fiscal 2024 we anticipate net interest expense to be around $22 million to $24 million, including non-cash amortization related to the deferred financing fees. Now to wrap up, as Geoff stated earlier, we're on track and feel good about the remainder of the year. We reaffirm our full-year fiscal 2024 net sales outlook for the legacy business. Specifically, we expect net sales to increase around the midpoint of the company's long-term algorithm of 4% to 6%, including the benefit of the 53rd week. OWYN's 11-week contribution to Q4 net sales is expected to be in the $25 million to $30 million range. We continue to expect that ingredient and packaging costs will be lower in Q4 versus last year. As I stated earlier, including OWYN, we expect total company Q4 gross margin to be around 38% excluding the non-cash inventory step-up related to the acquisition. In Q4, OWYN adjusted EBITDA contribution is negligible. Given our solid year-to-date performance, we have narrowed our total Simply Good Foods adjusted EBITDA outlook. Specifically, we now expect adjusted EBITDA to increase about 8% compared to last year and versus our previous estimate of 6% to 8%. We appreciate everybody's interest in our company and we're now available to take your questions.

Operator, Operator

Thank you. At this time, we'll be conducting a question-and-answer session. Our first question comes from the line of Matt Smith with Stifel. Please proceed with your question.

Matthew Smith, Analyst

Hi. Good morning. The category growth profile remains a standout for food at home and you've talked about a successful shelf reset for Atkins. So a couple of questions here. Can you provide more detail on why you're lowering investment spend behind the brand, despite the strong category and scale Atkins has? And how are you thinking about the growth potential of Atkins next year, given the lower investment spend?

Geoff Tanner, President and CEO

Yeah, good morning. Yeah, no, you're right. The nutritional snacking category continues to be a standout, especially versus the rest of the store, most recent trends, plus six, plus seven, and almost all of that volume, obviously, fueled by more and more consumers seeking the macro profile that our products offer. High protein, low sugar, low carb. And obviously, we're seeing an increase in demand for beverage and hydration. And we continue to believe the category has a long runway for growth. And as leaders, category captains at most retailers, we believe we're uniquely positioned to continue to lead that growth. To your question on investment, and particularly on Atkins, we look at across the portfolio, Matt, Quest as a scaled growth driver, we now have OWYN in the mix. So a component of the decision on Atkins is taking a step back and evaluating investment through a portfolio lens. As we dive deeper into Atkins, it's clear that to some extent we've overinvested in marketing and trade as a percentage of sales. And we've looked with more of an ROI lens and identified some low-performing ROI trade events, low-performing marketing events, and as we work to build Atkins to be a long-term sustainable business, we believe that we have an opportunity to take a harder look at some of these investments. And again as we think about investing across the portfolio, what is the best use of our investment, as we think now across three brands. Now with that being said, we still believe in Atkins, still very confident in the future growth of that business, especially given the increased focus on weight management. We're fully committed to the revitalization plan. As we've noted before, it will take some time. But as we said on the scripted remarks, we do expect a one-time impact from just taking a harder look at some of those lower ROI events and investments in marketing and trades.

Matthew Smith, Analyst

Thanks, Geoff. And Shaun you called out some gross margin pressure in fiscal '25 due to inflation. Is that for the legacy business or are you including the headwind from the mix of OWYN acquisition? And how are you thinking about the pricing dynamic in the category? We've seen some large brands announce incremental pricing. Do you expect overall category growth to benefit from pricing or do you expect that to be more targeted kind of brand-by-brand?

Shaun Mara, CFO

A lot of questions there, Matt. Let's break them down a little bit. So as it relates to inflation next year there's going to be a little bit of impact on OWYN obviously, with the RTD business, it's going to be a lower margin business than the rest of the portfolio, and we're certainly not at a fully synergized level at this point in time. However, the bigger impact really is going to be the inflation we see on ingredients. And let me just bear with me here, I'm going to step back a little bit because it's principally cocoa we call CLI or coatings, layers, and inclusions. So if you go back in time at the end of February, when we did our Q2 results, we basically, at that point in time cocoa was spot prices about 6000 a metric ton. First couple of weeks in March, we closed the books, updated our fiscal '24 outlook. Cocoa traded sideways, but weren't too concerned because we're kind of covered through fiscal '24. Over the next two weeks, I mean when we got to the conference call on April 4th, the spot prices were now nine and a half thousand metric ton, about a 60% increase in a month. So at that point in time, it's on our radar for '25. But we're trying to determine if the 60% price increase in one month is the new norm and what that means for '25. So we're kind of remembering, if you take a step back, we don't procure cocoa directly. We basically have that like we do with like a whey or a casein. We work with our suppliers to procure that cocoa and turn it into what we call coatings, layers, and inclusions, which we use in our products. It's not a major ingredient in and of itself, but coatings, layers, and inclusions are about $125 million. So I think if you've seen the news on cocoa and where it is right now, spot prices have lingered particularly higher over the last four plus months. Commentary from our ingredient suppliers kind of changed that they're indicating that the pricing outlook for the second half of our fiscal '25, so beginning calendar year '25 is going to be significantly higher. We're typically covered about five to six months, so we have good visibility into the end of our calendar year or through the first half of '25 fiscal year. That said, I think inflation is going to be an issue potentially in the second half of the year. So the real impetus behind the push on where we think inflation is next year is really around the cocoa market. And we're going to look at all the levers we got to pull. We typically try to get productivity as an offset for that. We will continue to work on that and we are working on that, but we will look at pricing and look at pricing as a lever to pull. We've done that obviously in the past and we'll continue to look at that. So I don't know if I got all your questions, Matt, but hopefully it gives you a flavor.

Matthew Smith, Analyst

You got it. Thanks, Shaun. I'll pass it on.

Operator, Operator

Thank you. Our next question comes from the line of Alexia Howard with AllianceBernstein. Please proceed with your question.

Alexia Howard, Analyst

Good morning, everyone.

Shaun Mara, CFO

Hi.

Geoff Tanner, President and CEO

Good morning, Alexia.

Alexia Howard, Analyst

Hi, there. Just a couple of quick ones, actually sticking with the puts and takes for fiscal '25 for you, you've talked about the inflation. Are there other things on the radar? I know you're not going to give us guidance for this year, obviously, but just that the list of high-level sort of levers for next year that we should be thinking about as we pull together our models?

Geoff Tanner, President and CEO

Maybe I'll start and then hand it over to Shaun. To reiterate Matt's question, we remain very optimistic about the category, which is up 6% to 7% and maintaining that level, which is impressive. Quest continues to perform well with double-digit consumption at the moment, and consumers and retailers view it as a disruptor in the category. We will keep supporting that business with advertising, launched in March, which had a nearly immediate positive effect on sales. We have exciting innovations on the way for Quest, particularly the launch of our bake shop platform featuring high-protein muffins and brownies. There are still distribution opportunities to explore. Notably, chips are experiencing significant growth, with a near run rate of $300 million, and we see potential for further expansion in the total addressable market. I remain very optimistic about Quest’s growth prospects. Regarding Atkins, we are confident in the long-term outlook for that business, especially with the increasing conversation and cultural relevance surrounding weight, driven by weight loss medications. We will keep pushing forward with our revitalization plan and all its components. In response to Matt’s inquiry, we are closely examining some lower ROI investments in trade and marketing. We recently closed on OWYN, which is showing great momentum, providing us with many reasons to be positive. As Shaun previously mentioned, we need to address inflation, particularly cocoa-driven inflation, in the latter half of our fiscal next year. There are some challenges, but many positive aspects as well. We anticipate a short-term impact on Atkins as we eliminate the lower ROI investment. Shaun, what would you like to add?

Shaun Mara, CFO

I think it's important to step back and consider our long-term approach. We anticipate a top-line growth of 4% to 6%, with slightly higher growth on the bottom line due to leverage. While it's very early in our planning for '25 and we can't provide guidance yet, we acknowledge that the challenges we discussed regarding Atkins will affect top-line performance, and the inflation issues we raised will hit the bottom line. Therefore, we’re likely to be closer to the lower end of our range for both top and bottom lines. However, this performance should still be better than the overall food sector. Regarding OWYN, which isn't included in the earlier figures, we expect strong growth in both top and bottom lines for fiscal '25 compared to '24. This is partly due to a full year of sales versus approximately 11 weeks in the previous year, contributing to high-single-digit growth on the top line and mid-single-digit growth on the bottom line in '24. Additionally, remember that fiscal '24 is a 53-week year while fiscal '25 is a 52-week year, so you need to adjust the numbers by about one and a half points due to this difference. This should give you a clearer picture of where we currently stand.

Alexia Howard, Analyst

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

Operator, Operator

Thank you. Our next question comes from the line of John Baumgartner with Mizuho securities. Please proceed with your question.

John Baumgartner, Analyst

Good morning. Thanks for the question.

Geoff Tanner, President and CEO

Good morning.

Shaun Mara, CFO

Hi, John.

John Baumgartner, Analyst

Just maybe first off, I wanted to ask about Atkins and sort of the go-forward look for that business. You look at the distribution points in the Nielsen data, they continue to decline. In the last couple of quads in the data, the volume velocities are stabilized and are getting back to growth for bars, which is a good first step. But the distribution and volume velocities are still pretty firmly negative for a huge swath of the rest of the subcategories. I'm curious, as you go through this revitalization, I'm trying to better understand the extent to which some of these subcategories just need to be eliminated, or whether they were just originally overdistributed, and there is a role in the portfolio, but just a much smaller role going forward. How are you thinking about the breadth of subcategories going forward and maybe how far along they are in terms of distribution adjustments?

Geoff Tanner, President and CEO

Yeah. So as you said, when I came to Simply, I took a look at the true health of Atkins. It's a great brand in a sense, it pioneered this category. However, as we've discussed on previous calls, the brand was perceived as a little dated. Recent innovation had been poor, and we had an opportunity to sharpen some of our commercial execution price points. So we developed the revitalization plan. Now, one of the issues that we were addressing on Atkins was that we'd had a weak pipeline on the business for a couple of years, and as a result of that weak pipeline, we had lost some distribution to your point, Atkins, this is a business where innovation matters. It's a key driver. The buy rate on Atkins is high, almost double most other brands in the category. Those consumers are looking for variety, and when we don't bring it, we impact both velocity and distribution. So one of the first things I did when I came is we tried to really jump start innovation on Atkins. And I'm very pleased with how the team responded. We are bringing 17 new items to market, which will ship in the fall, which will largely hold our distribution flat. Still waiting for a couple of customers to come in to finalize those modular decisions, but will largely hold flat other than the club channel, where in the club channel, they tend to wait on new products to make a decision. So I'm very pleased with how the team responded. I'm pleased with the quality of innovation, the number of new items, and that has helped us largely hold distribution flat outside of club as we go into fiscal 2025. As you've said, if you just go one click lower, our ready-to-drink business is performing pretty well, strongest part of our portfolio. Where we really needed the focus was on the bars, to your point. So I'm excited to see how these new products perform, which will start shipping in the fall. And as I said, they were absolutely critical to us to hold on to distribution.

Shaun Mara, CFO

Yeah, I think, John, keep in mind is, if you look at our business, we have the fall reset and the spring reset, I'd say 75%, 80% of our customer base is in the fall reset. So holding on distribution in the fall is a pretty big win for us. And I think it holds, actually talks to the innovation that Geoff mentioned because I think it's a big part of those guys recognizing that there's opportunity for the brand to continue to grow. And the stuff that we have coming in, especially some of the RTD strong stuff, will be positive overall for the portfolio.

Geoff Tanner, President and CEO

The 17 new items, John, were all swapped, so we're not gaining shelf space. However, this innovation allows us to maintain our position.

John Baumgartner, Analyst

Okay. And then quickly on OWYN, I'm just curious if you can discuss kind of the latest thoughts regarding the sort of the immediate growth plans. How you're thinking about building distribution out of the gate, any specific channels that are a focus for you? And then in terms of investment, how are you thinking about any immediate needs for brand building or any tweak to the product itself, new flavors, formulations, any sort of reinvestment here and in the near future? Thank you.

Geoff Tanner, President and CEO

We're very excited about OWYN, which we closed a couple of weeks ago. It's both strategically and financially appealing. This acquisition increases our share in the shake segment by about 400 basis points, bringing it to 23% of our total sales. It allows us to reach a new consumer segment. What excites me most about OWYN is that the brand is beginning to appeal to mainstream consumers, significantly expanding our total addressable market. Our established go-to-market capabilities will further enhance distribution and sales velocity. OWYN is performing exceptionally well, on track for $120 million in revenue for the calendar year 2024, with strong consumption levels around 120% in measured channels and slightly lower online. We anticipate the business will at least double over the next four years. When thinking about OWYN's growth, I see it in three main areas. The first is growing the core, mainly by increasing distribution of existing products like the 20 gram and 32 gram shakes. There's a significant opportunity for more distribution, and the OWYN team continues to secure new accounts as the business performs well. The second area is maintaining appeal to mainstream consumers, leveraging a larger market share. With recent formula improvements, we are witnessing a greater crossover to mainstream consumers, which is boosting sales velocity. The last area involves expanding into new formats, such as bars and possibly chips. Regarding investments, our plan for the first year is to let OWYN operate largely independently while we handle integration. We will explore partnership opportunities, but for now, we're focused on allowing OWYN to execute their strategy effectively while we work on better integrating our capabilities to accelerate their growth.

John Baumgartner, Analyst

Thanks, Geoff. Thanks, Shaun.

Geoff Tanner, President and CEO

Thanks, John.

Operator, Operator

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

Jon Andersen, Analyst

Good morning. Thank you for the questions. I want to ask on Quest, I think you mentioned, chips have been very strong. I think you even mentioned a $300 million run rate at present. Could you comment I think another platform or another launch in recent years was a cracker under Quest. And I always kind of thought of that as another opportunity to demonstrate the ability of the brand travel. Can you update us on where you stand with respect to the Quest brand in that particular vertical? And then if you could talk a little bit about the initial reception you've received from retailers, I assume at this point you've presented bake shop and what your expectations are in terms of distribution on that, that new launch in the fall? Thanks.

Geoff Tanner, President and CEO

Yeah. So I'll talk about chips and then address the cracker question, and come back on bake. So you're right, Quest is somewhat unique in that it has proven its ability to crossover to other categories. Quest is seen as the disruptor in the category and we are certainly disrupting the salty snacks category. As I mentioned, run rate just crossed $300 million in retail sales and it's growing at about 50%. And certainly, chips has been the big driver of the increase in household penetration on Quest. Not only new to the brand, but also new to the category, which is why retailers are getting behind it in a big way. What excites me the most is the size of that addressable market. And as we continue to see the chips phenomenon, we continue to challenge ourselves on how big could this be? We have a rallying cry internally. We call it think like a chip company, and we're in the process of executing a multi-levered plan to really accelerate that growth. Now, I would argue crackers, as underneath that salty snack platform. It's one of my favorite products that we make. We got into some, I'd say, supply challenges with one of our co-packers, and we have just moved that over to a new one, which will free up capacity to be able to put support behind that. So in a sense, we had to throttle that demand down, couldn't promote it. Throttled back on driving new points of distribution, didn't advertise it. But now that we've moved to the new co-packer, that will enable that. And then to your question on bake, I'm excited. My favorite product in the portfolio is the brownie, 10 grams of protein, barely any sugar. And we have received tremendous support from customers. This is a disruption of the large salty snacks category and the retailers have really got behind this launch. We're going to launch it in a big way. It will be part of the, It's Basically Cheating campaign. And retailers look at this as just another example of expanding usage occasions and likely bringing new consumers into the category, which is why they're really getting behind it in a big way. I'm excited for this launch in the fall.

Jon Andersen, Analyst

That's helpful. One quick housekeeping on OWYN. I was wondering if you could talk about any seasonality in the sales of that business? How we should be thinking about that going forward? And then just remind me on that the cadence of synergies, how much of the 10% I think you're targeting of OWYN revenue will kick in at the start of fiscal '26 and how much will come later than that? Thanks.

Shaun Mara, CFO

Yeah, I think on the synergy side, almost all the synergies will basically hit in the first month of fiscal year '26.

Geoff Tanner, President and CEO

About 80%. And then on seasonality, OWYN performs like the rest of the category, right. So the seasonality profile and the bump that we typically see New Year, New You, but there's nothing distinct in OWYN in terms of it being different, seasonality being different than the shakes category.

Jon Andersen, Analyst

Great. Thank you very much.

Operator, Operator

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

Stephen Powers, Analyst

Hey, thanks, and good morning.

Shaun Mara, CFO

Good morning, Steve.

Geoff Tanner, President and CEO

Hey, Steve, how are you?

Stephen Powers, Analyst

I'm well, thank you. So, Geoff, you started off talking about some of the, I guess, promising ROI you had seen on advertising and the March campaign around Quest. I couldn't quite glean from the commentary, whether that was validation of your expectations or if the ROI was sort of ahead of expectations. And I'm just curious if what the answer there is and if it's making you kind of think about leaning in further into kind of broad-based brand marketing, take advantage of the returns you're seeing.

Geoff Tanner, President and CEO

Yeah. No, I mean, the short answer is that the advertising has performed ahead of my expectations. It's not normal to see a very short-term impact on sales with advertising, tends to be more of a medium-term build, medium-to-long. With Quest, it's very clear we've seen a short-term effect and a long-term effect on the business. It has clearly helped accelerate Quest versus our own internal forecast. And we're absolutely going to increase our investment as we head into fiscal '25. And this is part sort of ties back a little bit to the question on Atkins and thinking about the portfolio. When you have a brand that's growing double digits like Quest, and you turn on advertising and you see a result like we're seeing, we have to increase our investment behind that. So we're excited to keep investing in it. And I also say that the It's Basically Cheating campaign idea, Steve, based on consumer reaction, social media monitoring, et cetera, has really resonated with consumers.

Stephen Powers, Analyst

Okay, perfect. That helps. And then I guess just kind of pivoting to Atkins, on the one hand, I hear you're broadly on track with the revitalization plan, which is good. But then it does seem like there's some incrementality in what you're saying around fiscal '25 and some emphasis on cutting out some of those ineffective trade efforts and the like. So on the one hand, you're on track, but on the other hand I'm kind of hearing that the timeline of stabilization might be a bit further out in the horizon base case, so just want to play that back and see if that was fair?

Geoff Tanner, President and CEO

I believe that's a reasonable evaluation. Initially, our main focus was to assess the brand's health. We have accelerated our innovation efforts and are introducing new marketing strategies this fall, with an emphasis on product upgrades and packaging updates. As we examine this further, we applied an ROI perspective to all our trade and marketing investments. There are certain investments that we believe are not suitable as we aim to establish a sustainable long-term business. However, this should not be viewed as a negative reflection on the brand's health. It is entirely geared towards creating a brand that ensures long-term profitability for us. This is a critical step we need to take in fiscal 2025, which is why we anticipate some short-term sales impact, and we wanted to highlight that for you. Therefore, I think your assessment is correct.

Shaun Mara, CFO

Yeah, I would also say, I mean, I think we knew when we started the revitalization plan, it was going to be a multi-quarter time frame. So I'm not so sure it's particularly different than we thought it was going to be. It's just maybe expectations got a little ahead of that as we saw some progress there. So I think we're tracking pretty much where we thought we were going to be at this point in time, and certainly not where we think it is longer term. And I think all these investment decisions we're making are right for the portfolio and for the company overall. And honestly, I think it's the right aspect for us to take a look at now because I think we know where we are in the revitalization plan and now it's time to kind of relook at where the investments are and what the right return on those are.

Geoff Tanner, President and CEO

What excites me about Atkins is the changing cultural conversation around weight, influenced by new weight loss drugs. This signifies a new level of relevance for Atkins, not only for those using the drugs but also for individuals who have achieved their weight loss goals. There's a growing media presence highlighting success stories and the desire to maintain weight loss, which is why we recently created new advertising for Atkins to assist consumers on their journey. I'm encouraged by our revitalization efforts and particularly the innovation that has allowed us to maintain distribution. It’s wise to reassess lower ROI and trade investments for the long-term benefit. Overall, Atkins has a significant role to play in consumers' lives within this category, and we are committed to investing in the business to reach our goals.

Stephen Powers, Analyst

Great. Thank you both. Geoff, when is the new advertising likely to air?

Geoff Tanner, President and CEO

You should see that in the fall, Steve.

Stephen Powers, Analyst

Okay, very good. Thank you very much.

Operator, Operator

Thank you. I'll turn the floor back to Mr. Tanner for any final comments.

Geoff Tanner, President and CEO

Thank you very much for joining us today for our third quarter conference call. We'll talk to you guys all again next time in October, when we report fiscal fourth quarter and full year 2024 results. Thank you.

Shaun Mara, CFO

Thank you.

Operator, Operator

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