Earnings Call Transcript - SMPL Q2 2024

Operator, Operator

Greetings, and welcome to the Simply Good Foods Company Fiscal Second 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. Please note this conference is being recorded. I will now turn the conference over to Mark Pogharian, Vice President of Investor Relations. Thank you, 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 second quarter ended February 24, 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 an earnings release this morning at approximately 7:00 A.M. Eastern Time. A copy of the release and accompanying presentation are available under the investor section on the company's website. This call is being webcast and an archive of today's remarks will also be available. During the course of today's call, management will make forward-looking statements that are subject to various risks and uncertainties that may cause actual results to differ materially. The company undertakes no obligation to update these statements based on subsequent events. A detailed 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. We have included a detailed reconciliation from GAAP to adjusted items in today's press release. We believe these adjusted measures are a key indicator of the underlying performance of the business.

Geoff E. Tanner, President and CEO

Thank you Mark. Good morning. Thank you for joining us. Today I will 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 2024 outlook and your questions. Simply Good Foods' second quarter results were led by continued Quest growth as well as strong gross margin improvement. Net sales increased 5.3%, driven by volume and due to the timing of shipments last quarter, outpaced retail takeaway of about 3%. Retail takeaway in measured channels was less than our expectations. E-commerce point-of-sale growth for both Quest and Atkins continued to be solid. Quest retail takeaway was on track with our plans driven by strong salty snacks growth while Atkins' performance was off versus our estimates. Atkins had solid plans in place, but was ultimately disadvantaged on two fronts during the quarter. First, it lost a one-time merchandising and promotional benefit that it had in the 2023 New Year, New You season, due to the out of stock challenges of a category participant. And second, in the 2024 New Year, New You season, this category participant had adequate supply to service its base business. It then layered in extensive merchandising programs and promotions during the season, which greatly reduced the overall in-store share of voice for the Atkins brand and others. In March as we exited the New Year, New You season and moved past the difficult lap, Atkins trends improved. More on that in a bit. We were very pleased with the Q2 gross margin of 37.4%. The 280 basis point increase versus the year ago period was primarily due to lower ingredient and packaging costs. Higher gross profit enabled investments in our business, and an increase in Q2 adjusted EBITDA of 13.6% to 57.8 million. However, due to the softer than anticipated Q2 Atkins consumption trends, we have updated our full year fiscal 2024 outlook. 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. We previously expected net sales to increase at the high end of the long-term algorithm. We continue to expect solid gross margin expansion, and adjusted EBITDA is now anticipated to increase 6% to 8%, driven by solid gross margin expansion.

Shaun Mara, CFO

Thank you, Geoff. Good morning, everyone. Total Simply Good Foods' second-quarter net sales of $312.2 million increased $15.6 million, or 5.3% versus the year ago period, and was driven by Quest volume growing. North America and international net sales increased 5.1% and 12.3% respectively. As Geoff stated earlier, as expected, net sales growth was greater than retail takeaway of about 3%, primarily due to the timing of shipments last quarter. Recall, in Q1, point-of-sale growth of about 8% outpaced the net sales increase of nearly 3%. Moving on to other P&L items for the quarter, gross profit was $116.9 million, an increase of $14.1 million from the year ago period, resulting in a gross margin of 37.4%. The 280 basis point increase versus the year ago period was primarily due to lower ingredient and packaging costs. Adjusted EBITDA was $57.8 million, an increase of $6.9 million from the year ago period. Selling and marketing expenses were $34.6 million versus $29.9 million, an increase of 15.7%, largely due to higher marketing investments and growth initiatives. GAAP G&A expenses were $29.9 million, an increase of $4 million versus last year, primarily due to higher employee-related costs, stock-based compensation, and corporate expenses. Excluding stock-based compensation, G&A increased $2.5 million to $25.4 million. Finally, net interest income and interest expense was $4.7 million, a decline of $3.6 million versus Q2 last year. The decline was due to lower debt balances versus the year ago period. Our Q2 tax rate was about 24% versus 25% in the year ago period. As a result, net income was $33.1 million versus $25.6 million last year. Moving on to year-to-date results, net sales were $620.9 million, increasing about 4% versus last year. This is slightly below year-to-date retail takeaway in the combined measured and unmeasured channels, which is growing approximately 5.5%. The difference is principally due to some incremental trade investment made in the first half of fiscal 2024. That said, we expect point-of-sale growth and net sales growth to be largely in line for the full year. Gross profit was $232 million, resulting in a gross margin of 37.4%, a 160 basis point increase versus the year ago period. We have good visibility into supply chain costs over the remainder of the year and anticipate gross margin will continue to improve and could approach 39% in the second half of the year. Adjusted EBITDA was $119.8 million, an increase of 7.3% from the year ago period. Net interest income and interest expense was $9.6 million, a decline of $5.7 million versus last year. The year-to-date tax rate was 24.1% versus 22.7% last year. We continue to anticipate the full year effective tax rate to be around 25%. As a result, net income was $68.7 million versus $61.5 million last year.

Geoff E. Tanner, President and CEO

To summarize, Simply Good Foods is uniquely positioned as a U.S. leader in nutritional snacking. The nutritional snacking category is more relevant today than at any other time, as the conversation about health and wellness continues to increase. Furthermore, our category continues to be a standout versus many other center of store categories. As such, we're leveraging our role as category advisor at most retailers, and continue to work with our customers to develop and support initiatives in the aisle to further accelerate category growth with a particular focus on gaining more space. Consumers trust our brands to help them achieve their wellness goals, and we are accelerating our innovation and marketing plans to provide consumers with products to help them in their wellness journey. We will continue to execute our strategic priorities, focusing on doing the right thing for our customers and consumers. They will enable us to deliver on our long-term growth objectives that ultimately drive increased shareholder value. Now, I will turn the call over to Shaun who will provide you with some greater financial details.

Operator, Operator

Thank you. Our first questions come from Matt Smith with Stifel. Please proceed with your questions.

Matthew Smith, Analyst

Hi, good morning Geoff and Shaun.

Geoff E. Tanner, President and CEO

Good morning.

Matthew Smith, Analyst

The overall active nutrition category growth slowed in the first calendar quarter of the year, that's during the key diet season. You talked about the competitive dynamic impacting Quest and Atkins. But from a high level, was the performance of the overall category in line with your expectations and are you seeing any signs of a pickup in growth in the categories as we move past March?

Geoff E. Tanner, President and CEO

Yes. No, the category continues to show strong growth. It certainly has slowed versus the past couple of years. If you look backwards, you see a bump coming out of COVID and then you've had a lot of inflation-driven growth. We're now back to around 6% or 7%, which is where the category was pre-COVID. Additionally, it continues to be a standout category versus most of the standard store where, as you know, volumes are flat. And that reflects some underlying drivers, health and wellness trends, snacking convenience. It's got low household penetration that we've talked about before and it over-indexes with younger consumers. So we continue to be excited where the category is performing. It's right where we expect it to be. And retailers see that too. It's why we're working with them on how to even further accelerate that growth.

Matthew Smith, Analyst

Thank you Geoff and as a follow-up, the lower revenue guidance includes a 7% reduction in point-of-sale for Atkins for the year. Does that outlook consider improving dollar consumption from here, are you looking at dollar consumption for the Atkins brand and believing you can hold that level and then you benefit from easier comparisons in the second half of the year from a point-of-sale perspective?

Geoff E. Tanner, President and CEO

Yes, that's what it is. Obviously, we're disappointed how Atkins performed in January and February. And we walked into some tough competitive merchandising comps. We still remain confident in the long-term vitality of the business, and as we look forward, we certainly have seen trends improve that have come out of January and February. And certainly, for the balance of the year, we do have easier comps, and that's why we expect the business to return more to that mid-single-digit decline.

Shaun Mara, CFO

Yes, Matt, if you analyze it for Q3 and Q4, Q3 is relatively consistent with what we observed in Q2, and Q4 is slightly better due to easier comparisons, as you mentioned. Overall, we do not anticipate significant changes in the trajectory in the near future.

Matthew Smith, Analyst

Thank you, I will leave it there.

Operator, Operator

Thank you. Our next questions come from the line of Alexia Howard with Bernstein. Please proceed with your questions.

Alexia Howard, Analyst

Good morning everyone.

Geoff E. Tanner, President and CEO

Good morning.

Alexia Howard, Analyst

Just a couple of quick questions here. You've got innovation stepping up and it feels as though we've been through a few cycles of innovation over the last few years, some of which haven't worked, some of which have. What metrics do you use to make sure innovation is successful and sustainable in the marketplace and how do you track that over time to make sure that you're calling things that aren't going to work and obviously supporting things that are?

Geoff E. Tanner, President and CEO

Yes. I mean, Alexia, I'd probably point to the innovation on Quest, which has been I think, a standout and a major driver of growth and very successful. If you look at chips, for example, we're seeing 40% growth in that business, and it continues to be highly incremental. We're excited about the bake shop platform that we have coming up on Quest. So I'd say the innovation on Quest has been incredibly successful and certainly retailers view it that way and continue to reward us with more space. If you look at Atkins, I’ve been quite transparent about this on previous calls, we were very disappointed with the quality and level of innovation on Atkins over the past couple of years, which has contributed to the slowdown in the brand. It's why we have jump started innovation on Atkins. It was certainly one of my priorities coming into the role. And I think the quality of the innovation we're bringing to market on Atkins over the coming months is much stronger. Where we've tried to push is innovation that's more incremental to the business, more platform-focused. But we do know that on Atkins, what we're trying to do is hold on to shelf space and replace underperforming items with the innovation. So the jobs are different on innovation for both businesses. Right now, on Atkins, it's replacing underperforming items with better items. On Quest, it is about innovation that is incremental to the business and incremental to the category.

Shaun Mara, CFO

Alexia, just to touch on your process question, I think, a little bit there. When we kind of launch any new innovation, we go through a process internally, what the metric we kind of look at as we go out there, our ACV build then turns per week and then related to that kind of repeat purchase. So those are the metrics we kind of model out before we launch anything and then we evaluate that performance, if you want to call it that, over the first six months or so of the launch to see how successful it would be.

Alexia Howard, Analyst

Really appreciate the details from both of you. I'll pass it on. Thank you.

Operator, Operator

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

Stephen Powers, Analyst

Thanks guys, sorry I was on mute there. Hey, a first question on Atkins and weight management category dynamics in general. You talked about the expectation that the competitive environment, the competitive dynamics would normalize as we go through the calendar year. I guess a little bit more perspective on where your confidence comes from in that and yes, we'll take it from there?

Geoff E. Tanner, President and CEO

Yes. The reality is that this time last year, one of our major competitors faced supply challenges, especially in January and February. As a result, Atkins gained significantly from increased merchandising and promotional support, which we didn't have this year. This made for a tough comparison. That competitor is now back and able to serve the business, leading to an inevitably challenging New Year, New You season. However, we're confident that we will overcome that. As January progresses, trends have started to improve, and by around summer, we expect to have largely overcome that impact, which is why we anticipate our comparisons will become easier.

Stephen Powers, Analyst

Okay. Yes. Okay, makes sense. And then pivoting over to Quest, you highlighted, Geoff, the ready-to-drink coffee innovation, which is interesting to me. I guess as you think about the pipeline for Quest from an innovation perspective, how big a role do you think beverages will play versus further endeavors in food and if beverages are envisioned as kind of a material driver of the franchise going forward, how do you think about prioritizing future consumption occasions versus the media consumption occasions and just the complexities of reaching different channels, especially on the immediate consumption side?

Geoff E. Tanner, President and CEO

The success of Quest innovation has been driven by the transformation in the snacking category, specifically shifting from high sugar and high carbs to low sugar. This change was exemplified with our Iced Coffee launch, and I'm eager to see its performance. It's still early, and we will keep a close eye on it. If it continues to do well, we will invest further in that area. Regarding beverages, we are definitely considering it, as it is a significant category. If we can find a way to disrupt it like we plan to with sweet baked goods, we will pursue that. Overall, we are identifying opportunities to provide Quest consumers with the quality and taste they expect from large snacking categories.

Stephen Powers, Analyst

Okay, thank you. Thank you very much.

Operator, Operator

Thank you. Our next questions come from the line of Pamela Kaufman with Morgan Stanley. Please proceed with your questions.

Pamela Kaufman, Analyst

Hi, good morning. How are you thinking about your revenue progression over the back half of the year and what gives you confidence that you can deliver on the updated revenue guidance, I guess where do you see potential for upside or downside to your new outlook?

Geoff E. Tanner, President and CEO

Yes, I'll start and then hand it over to Shaun. I believe we are entering a period with easier comparisons for Atkins. We remain confident in our revitalization plan and the new advertising campaign. The new innovations set to launch towards the end of our fiscal year also bolster our confidence. There could be some potential for upside there. Regarding Quest, the momentum we've seen in March, with mid-double digit growth, is very encouraging. We have just launched new advertising in early March, which adds to our confidence. Additionally, Quest is bringing some exciting innovations to the market, so there might be some upside there as well. Now, I'll turn it over to Shaun.

Shaun Mara, CFO

Yes. I mean if you take a look at the brands, I mean, Quest, we're assuming from a consumption standpoint, low double digits. And as Geoff said, through March, we are at 13%, a little bit higher than that. So I feel like we're trending a little above what we thought. We'll see what happens. So feel pretty good with that. We also have the advertising we turned on, which I think is going to help overall from a consumer awareness and household penetration standpoint. So I feel very comfortable with where we are with Quest. On Atkins, I think we have put ourselves in a position where we have a, I'll say, realistic target to chase in the second half of the year. As I mentioned, Atkins is basically consistent with the decline we saw in Q2 for Q3, slightly better in Q4. And then as it relates to the first month of the quarter, we're trending down about 6%, as I think you saw in the slides, which is better than what we thought from a standpoint of the quarter. So again, early one month in, but feel like we're tracking ahead of where we thought we were going to be.

Pamela Kaufman, Analyst

Okay. That's helpful. And then can you talk about any adjustments that you're making to your strategy this year given the performance and competitive dynamics you saw during the second quarter? You mentioned that you're accelerating some innovation like the protein shakes, can you expand on any other changes in your innovation timing or changes to advertising or promotional plans for the year?

Geoff E. Tanner, President and CEO

Yes, I mean I said at a high level, we're not really changing our strategy. The impact that we felt on Atkins in January, February, it was a one-time difficult lap, as we talked about in the prepared remarks, but we remain confident in the future vitality of the brand. We remain confident in the revitalization plan we've talked about. The innovation with brand to market, the new packaging graphic work that's underway, the product upgrade work that's underway, the new advertising, and we're certainly going to stay the course there. We'll make adjustments if we need to, but certainly wouldn't overreact to a difficult merchandising lab in January, February.

Pamela Kaufman, Analyst

Thank you. I will pass it on.

Operator, Operator

Thank you. Our next questions come from the line of Jim Salera with Stephens. Please proceed with your questions.

James Salera, Analyst

Hi guys, good morning. Thanks for taking our questions. I wanted to drill down a little bit on Atkins Strong offering. Exciting to see you guys expand the ready-to-drink shake offering. Obviously, it's been a really hot category. At the same time, it's also a category that has pretty well-known capacity constraints. So if you could offer any color on co-manufacturing partners, how much capacity you guys think you'll have when that product kind of comes to market and if we should expect it to be maybe just in club or just in mass or kind of how the channel rollout will be as you expand that 30-gram offering?

Geoff E. Tanner, President and CEO

Yes. We're also really excited about this launch. It was designed, as we've seen these weight loss drugs emerge and adoption increase, and we've learned that consumers on those drugs are seeking higher levels of protein to maintain muscle mass when they lose weight. And we've also heard that when they're on the drugs, many experience gut health issues. So we developed this product for consumers on those weight loss drugs. But we know that there's consumers out there who are seeking higher levels of protein. So we're excited to bring that to market. We're going to put a lot of support behind it. Retailers have been candidly very impressed with how quickly we moved to develop a product for consumers on these drugs. To your question on capacity, we feel we're in a good spot. It is not a limited launch. We will launch it nationally, and we've had extremely strong support.

Shaun Mara, CFO

Yes. Looking back about a year to a year and a half ago, we faced some capacity constraints. We brought another co-manufacturing partner on board to increase our capacity. As a result, we have expanded our overall capacity for Atkins, which allows us to support both that business and our existing operations. Therefore, we believe we are in a strong position regarding capacity.

James Salera, Analyst

Okay, great. I’d like to ask a broader question about consumers. We've heard from other companies that there’s a divide where higher-income consumers are still moving forward while lower-income consumers might be feeling more pressure. Since your products are generally aimed at middle to higher-income consumers, how confident are you that as the year continues, higher-income consumers will remain resilient amidst the overall economic uncertainty?

Geoff E. Tanner, President and CEO

Yes. I mean we continue to see the category perform. The category has performed year after year after year. A part of this for the reason that you cite is that we do over-index with higher income consumers. So I think we're a little more insulated. I would point to the relative lack of private label in the category. I would point to the relative lack of heavily promotional activity in the category. I think it shows the underlying consumer demand, which, to your point, is reflective that we over-index with higher income or educated consumers.

James Salera, Analyst

Great. Appreciate the color guys. So I'll hop back in the queue.

Operator, Operator

Thank you. Our next questions come from the line of John Baumgartner with Mizuho. Please proceed with your questions.

John Baumgartner, Analyst

Good morning, thanks for the question.

Geoff E. Tanner, President and CEO

Good morning John.

John Baumgartner, Analyst

Maybe first off, Geoff, you mentioned the heightened category competition around New Year, New You. I think you called out one specific competitor. But I'm curious, can you expand a bit on competition more broadly. Are you seeing competition based solely on pass-through of lower input costs and that moderates throughout the year as those tailwinds also moderate or is there also any heightened activity from new innovation hitting the shelves or a larger intensity also impacting future display activity?

Geoff E. Tanner, President and CEO

Yes, I mean, I would probably take a step back and say the level of activity in this category, I think, is what you would expect. Innovation can play a role and we have certainly seen what we've been able to do with Quest chips, which was essentially to create a category or a segment that didn't exist. The heightened level of competitive activity that we talked about in the prepared remarks really does relate to some out-of-stock challenges on shakes. And the industry was constrained, had been constrained for a couple of years. With that being turned back on, you've seen demand being able to be supplied. I wouldn't say that this is a new level of competitive activity. I think it was an inevitable lap and one that we were always going to be on the wrong side of in the New Year, New You period. But now with supply back, I'd say we're going to return to a normal level.

Shaun Mara, CFO

Yes. I think, John, if you take a step back and look at last year, with one of the key competitors in this marketplace for ready-to-drink, having less availability or capacity, the shelf space they had was less. So now they got that back, and they've actually added not so much innovation, but if you want to call it, pack size configurations, four packs to eight packs or 12 packs as well as maybe more space devoted to that competitor for display. So you're really seeing, I think, two years of growth in one quarter versus what we've usually seen out there. So we stepped up our merchandising activity and programming. It's just the share of voice was less than what it was comparatively to everybody else. Does that help?

John Baumgartner, Analyst

Yes, definitely. I guess, sticking with that theme, I guess, last quarter it sounded like your initial perceptions on new marketing coming out of autumn was pretty encouraging in the early days. I guess building on your point there, Shaun, I mean do you get the sense that the ROI and that marketing, does it require further increases in spending from here to sort of maintain share of voice, how do we think about that? And then for the Atkins brand milestones going forward, I guess, how impactful are you expecting the autumn shelf resets to be in terms of jump-starting sales, should those autumn resets really be used as a material catalyst or pivot point?

Shaun Mara, CFO

The advertising, we're really pleased with the new advertising we debuted in October. We saw the business response. Certainly, it's probably too early to draw a hard line on that. But just given the magnitude of the merchandising lap that I talked about in the prepared remarks, it's very difficult, if not impossible to judge the effectiveness of that advertising in January and February. And as proof to that, we've come out of the New Year, New You period and trends on the business have improved. As I said, the ads tested very well. They tested well with both current buyers and potential new buyers. But with that being said, we'll continue to monitor performance over the coming months and if we've got to make changes in the advertising, we will. To your question on distribution, I recall, we're category advisors to the majority of our key retailers. And as such, we have a lot of dialogue with them about the category and brand dynamics. We recently wrapped up a road show visiting all those customers, talking about the brands and in particular, Atkins, an emphasis of those conversations was the new conversation and renewed cultural relevance, I would say, of weight because of these weight loss drugs and what consumers on those drugs are looking for and how they want an off-ramp. The retailers get it. They appreciate our transparency. They're supportive of the revitalization plan and we're currently in conversations with them about modulars and they will play out over the coming two to four months.

Geoff E. Tanner, President and CEO

Yes, John, just one more color here. I think as you think about the rest of the year and the guidance we gave on EBITDA, one thing should be clear on that, I hope, overall, the gross margin should meaningfully improve in the next couple of quarters approaching 39% in both Q3 and Q4, a little better in Q4 than Q3. With that, we're continuing to invest in the brand. So we did not reduce marketing spend to get to that number. That wasn't what we did. We basically took the benefit that we had for gross margin in Q2 and what we're seeing in Q3 and Q4 that allowed us to continue to invest, and you're going to see meaningful increases, particularly on Quest with new advertising in Q3 and Q4.

John Baumgartner, Analyst

Thanks Shaun, thanks Geoff.

Operator, Operator

Thank you. Our next questions come from the line of Kaumil Gajrawala with Jefferies. Please proceed with your questions.

Kaumil Gajrawala, Analyst

Maybe if I could follow up on the comment on ad spend. Can you maybe just talk a little bit more about what's the right percentage of sales for ad spend, particularly in the context of there's so many new innovations this year, does it need to be at some higher level for a temporary period of time and then sort of taper off or is where you're going linked to what you mentioned before, some of that GM benefit that you're about to feel?

Shaun Mara, CFO

So we would historically target spending 9% to 10% on marketing. What I will say is that is a high level of spend in the food beverage category in general. And certainly, a very high level of spend within our category. That's the role that we play as category leaders. As to your question on how to support innovation as well as the core business, what you'll see in both campaigns is that they have been developed to enable us to do that. So I don't know if you've seen the new ads on Quest, but they've been constructed to enable us to support the multitude of different products on the brands while also driving the overall brand awareness and delivering the positioning of the brand. So what we don't like having is a choice between supporting the core business or innovation. What I'd like to do is have advertising that you can input innovation into that ad and it still works.

Geoff E. Tanner, President and CEO

A couple of data points for you. Just as you take a step back and look at this, our model has been since the beginning in terms of the P&L profile, try to get to gross margins around 40%, try to get to advertising or marketing spend in the 9% to 10% range, and EBITDA margins around 20%. I think we're getting back to that after some issues we had the last couple of years for some commodity inflation. As it relates to the total marketing spend, you probably saw and the results were up 100-plus basis points for the quarter in the first half of the year. That will continue in the second half of the year. So you'll see marketing spend closer to 9-ish% for the rest of the year.

Kaumil Gajrawala, Analyst

That's useful, thank you. And just a quick follow-up. Regarding the 53rd week, any context on contribution and do we just take it out of next year?

Geoff E. Tanner, President and CEO

Yes, we will definitely exclude it from next year. Regarding the 53rd week, historically, we have indicated that it contributes slightly more than a point of growth. You can't simply calculate based on 52 weeks, as our fall resets typically ship in early to mid-August, and we generally don't see replenishment until around mid-September. So overall, it provides just over one point of growth. We don’t have the detailed specifics at this time, but I hope to have more clarity on this by Q3.

Kaumil Gajrawala, Analyst

Thank you.

Operator, Operator

Thank you. Our next questions come from the line of Brian Holland with D.A. Davidson. Please proceed with your questions.

Brian Holland, Analyst

Good morning. I wanted to revisit the competitive landscape because we are noticing a distinct separation between bars and shakes, with the entire bars category experiencing a recent decline. Within the shakes segment, there appears to be a split between weight management products and some of the more protein-heavy options. I have a two-part question. First, I’m somewhat surprised by the explanation for the decline, as the growth seems to be in shakes, which is where supply is improving. I'm curious about why you believe this has particularly affected Atkins, as I wouldn’t expect such a significant level of crossover shopping between these brands. Second, while we were aware that supply would eventually improve, it seems this impact has hit your business harder than anticipated. Was the effect of the supply returning greater than you expected, and did consumer response exceed your forecasts, given that we knew this situation was on the horizon?

Geoff E. Tanner, President and CEO

Yes, that's fair. I'll address your first question regarding bars. First, while the growth of bars has slowed, Quest has been an exception; Quest bars have increased by mid-single digits, and we are pleased with that level of growth. However, you have seen shakes growing faster than bars. Honestly, it’s not surprising since supply was constrained for two years. As Shaun mentioned in response to an earlier question, what you're witnessing is essentially two years of growth compressed into one. This trend has been evident in January and February and will continue until we complete this cycle, which should be around the summer. Regarding your question about whether we should have anticipated the dynamics we encountered in January and February, I would say yes. Moving forward, you can expect us to be more aware of competitive dynamics and consider merchandising as part of our strategy rather than solely focusing on our own plans. You should expect that change going forward.

Brian Holland, Analyst

I appreciate all the insights. Regarding Atkins, I'm curious about your consistent messaging since discussing the revitalization plan and the potential opportunities with the GLP-1 complement. Have you noticed anything anecdotal that strengthens your conviction in this area? It seems to be a concern among investors I've spoken with, as they worry this could hinder the business due to the overlap in consumers, potentially shifting their routines away from Atkins in favor of GLP-1. The innovation with 30 grams of protein appears to be addressing some of these issues. I'm interested in any anecdotal evidence that boosts your confidence that Atkins will indeed complement GLP-1, serving as a tailwind for the business.

Geoff E. Tanner, President and CEO

Yes, I would start by saying we are in the early innings of GLP-1 and we're still learning. We're doing our own studies. We're talking to consumers, we're talking to customers. We do believe that GLP-1 does represent a tailwind for Atkins and the tailwind for the category. We know that when consumers are on these drugs, as I answered earlier, they have a need for higher protein products and they have gut health issues, which is why we accelerated the launch of Atkins Strong to market, and we're excited about the launch of that platform. Retailers have given us a lot of credit for moving quickly and coming to market with something that specifically addresses that need. I would say that I'm equally, if not more, excited about Atkins as an off-ramp, as an off-ramp for consumers who want to get off the drugs. There's a battle going on with insurers. As you know, our research suggests that most people once they've hit their weight loss goal, once you get off those drugs they know there's a good chance they'll put the weight back on, and they're desperate to find some sustainable program or sustainable way of eating to keep that weight off, and I think that's where Atkins can shine. Moving forward, you should expect us to more clearly position the brand as that off-ramp, as that sustainable way to keep that weight off. I continue to believe that the GLP-1 drugs are a tailwind. But I would reiterate, we are still in the early innings.

Brian Holland, Analyst

Got it. And forgive me, if I could just take a really quick one in, if you stated this earlier, I apologize. Was Quest in line with expectations in the quarter?

Geoff E. Tanner, President and CEO

Yes.

Shaun Mara, CFO

Yes.

Operator, Operator

Thank you. Our last question will come from the line of Jon Andersen with William Blair. Please proceed with your questions.

Jon Andersen, Analyst

Thank you for fitting me in. I have a question regarding household penetration. You've mentioned that the active nutrition category is relatively low compared to other standard store categories. Can you share where Quest currently stands, as well as Atkins, in terms of household penetration? Looking ahead, what are your goals or opportunities for each brand? As you focus on innovation and marketing, are you aiming to increase household penetration and purchase frequency for both brands? Is there a greater opportunity in one area compared to the other, and could you provide some insights on that? Thank you.

Geoff E. Tanner, President and CEO

Yes. I'll start with the categories. Household penetration of the categories are in mid-50s and that compares with high 80s, low 90s with most standard store categories, which is why we continue to see a long-term runway. If you look at where the category over indexes, it is with younger consumers, millennials and Gen Zs. We continue to believe that penetration of the category is only going to increase. Certainly, retailers see that which is why they're excited to work with us on initiative to accelerate category penetration. As you look at the respective brands, Quest is around 16% or 17% household penetration. As we've talked about, for a brand of its size, awareness is significantly below most of its competitors, which is why we're excited about new advertising. As you click one level lower, with Quest, we believe there's an opportunity to drive increased household penetration and buy rate. In particular, the new innovation platforms are helping to drive buy rates, right. Because we're offering consumers additional snacking occasions and that just increases buy rate. So I think as you look on Quest, there's an opportunity to drive household penetration up as we focus on increasing awareness. Advertising is the big driver there. There's an opportunity to drive buy rate up, and in particular, I would point to the new innovation platform salty and the new bake shop platform, which is offering a completely new usage occasion right, disrupting a sweet baked goods. On Atkins, the awareness levels are quite high. And so that is less of an opportunity on that brand. The opportunity on Atkins, I think, is to continue to ensure that consumers see the brand as a sustainable way to maintain weight. I continue to believe innovation, better innovation than we have launched in the past is an opportunity with that brand.

Shaun Mara, CFO

Just to quickly touch on penetration, for your reference, Quest currently has a household penetration rate of almost 17%. A couple of years ago, it was slightly below 14%. Our growth in that brand has been driven not only by distribution but also by increased household penetration and awareness. We see ongoing potential for Quest in the future.

Jon Andersen, Analyst

One housekeeping item. The balance sheet is in good shape. Your leverage ratio is currently below half a turn. You have paid down more debt in the quarter. How are you prioritizing the use of excess free cash flow going forward in the business? Thanks.

Shaun Mara, CFO

Yes, we had a great quarter, obviously, for cash generation and cash from operations that we continue to see that as a competitive advantage for us, and we'll continue to see that in the second half of the year. We spent a fair amount of time evaluating the best return of cash for our shareholders, debt pay down, share repurchases, and potential M&A opportunities. We'll continue to evaluate that for the second half of the year and do what we think is best for the return to our shareholders.

Jon Andersen, Analyst

Thank you.

Operator, Operator

Thank you. We have reached the end of our question-and-answer session. I would now like to turn the floor back over to Geoff Tanner for closing remarks.

Geoff E. Tanner, President and CEO

Yes, I just want to thank everyone for their participation on today's call, and we look forward to updating you on our third quarter results in late June. So have a great day.

Operator, Operator

Thank you. This does conclude today's teleconference. We appreciate your participation. You may disconnect at this time. Enjoy the rest of your day.