The Simply Good Foods Company

Greetings. Welcome to the Simply Good Foods Company's first quarter fiscal year 2026 earnings call. At this time, all participants will be in listen-only mode. The question and answer session will follow the formal presentation. If anyone should require operator assistance during the conference, please press star zero from your telephone keypad. Please note this conference is being recorded. At this time, I'll turn the conference over to Joshua Levine, Vice President of Investor Relations and Treasury. Thank you. You may now begin.

Thank you, Operator. Good morning and welcome to the Simply Good Foods Company's first quarter fiscal year 2026 earnings call for the period ended November 29, 2025. Today, Jeff Tanner, President and CEO, and Chris Beeler, CFO, will provide you with an overview of our results, which were provided in our earnings release issued earlier this morning. Our prepared remarks will then be followed by a Q&A session. A copy of the release and accompanying presentation are available This call is being webcast, and an archive of today's remarks will be made available. During the course of today's call, management will make forward-looking statements which are subject to various risks and uncertainties that may cause actual results to differ materially. The company undertakes no obligation to update these statements based on subsequent events. A detailed listing of such risks and uncertainties can be found in today's press release and the company's SEC filings. On today's call, we will refer to certain non-GAAP financial measures that we believe provide useful information for investors. Due to the company's asset-like business model, we evaluate our performance on an adjusted basis as it relates to EBITDA and diluted EPS. Please refer to today's press release for a reconciliation of our non-GAAP financial measures to their most comparable measures prepared in accordance with GAAP. Finally, all retail takeaway data included in our discussion today, unless otherwise noted, reflects a combination of Cercana's MULO++C measured channel data and the company estimates for unmeasured channels for the 13 weeks ended November 30, 2025, as compared to the prior year. I will now turn the call over to Jeff Tanner, President and CEO.

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

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

Thank you. We'll now be conducting a question and answer session. If you'd like to ask a question at this time, you may press star 1 from your telephone keypad, and a confirmation tone will indicate your lines in the question queue. You may press star 2 if you'd like to withdraw your question from the queue. For participants that are using speaker equipment, It may be necessary to pick up your handset before pressing the star keys. Thank you. And our first question will come from the line of Peter Grom with UBS. Let's just see if there are questions.

Thank you, Operator, Jeff, Chris, Josh. Good morning. Happy New Year. Jeff, I appreciate the commentary on the path forward, but can you maybe just elaborate on the confidence in the back half inflection that's embedded in the guidance and just, you know, what remains an uncertain, volatile environment for the industry? Maybe where do you have the highest degree of competence or visibility? Conversely, where are, you know, what do you see as some key risks or watch points? And I guess, as you think about the shape of the year, just given the 1Q and the Q2 guidance, is it playing out as you anticipated?

Thank you. So it's playing out, you know, very much as expected and as we previously communicated. Our plan from the start has known about certain first half headwinds, you know, for example, some shifted promotional activity out of third half and second and known about some second half tailwinds, which we communicated on a last call. You know, if I break that down, On the top line, as we look to the second half, we have line of sight to new distribution, some wins there, some merchandising gain, particularly on Quest. I'm very pleased with our innovation pipelines that we have that will start shipping in the spring and then through the summer. Atkins will start moving past some of its larger distribution labs, for example, at And we expect, as we normally see, elasticity to burn off from pricing. So on the top line, just listing a few drivers there that underpin our confidence in the second half. On the bottom line, we have line of sight to improve gross margin, underlying profit growth. Because we mentioned in the script, we'll have the full benefit of pricing. We'll have the full benefit of productivity. I'm very pleased with the productivity progress we've made as an organization, setting us up for a strong second half, but also into 27. And as mentioned, we've taken more favorable positions in COCA, which has come down materially. So on the top and on the bottom, certainly have a lot of confidence that the business will start to inflect through the second half. and then to 27.

And then B, just as Chris, I'd just build on Jeff's answer. Consistent with our prior outlook, our EBITDA is generally going to track pretty closely to the gross margin trajectory. Q3 gross margins, for example, will be flattish year over year. And Q4 will be the strongest position for us, both gross margin and EBITDA. And EBITDA, as an example, we expect it to be up about double digits. And I think, you know, importantly for me, that sets us up, you know, nicely for FY27 on a margin standpoint. Great. Thank you so much. I'll pass it on.

Thanks, Dave. Our next questions are from the line of Ryan Holland with DA Davidson. Please proceed with your question.

Yeah, thanks. Good morning. I wanted to ask about Quest Bars. you know, flat, obviously underperforming vis-à-vis the broader category there. Innovation is contributing nicely, overloads off to a good start, as you mentioned, et cetera. But obviously also implies then that the core or the legacy skews sort of in aggregate are declining. So maybe first question there, just – Innovation is obviously important. The category thrives off that new product news. So that's important and obviously encouraging that you guys have accelerated that pipeline. But what needs to be done on the legacy bar business, just given the sheer size and scale? I mean, is this merchandising that we need to increasingly focus on, which I know you've talked about before? Or does there need to be some sort of right-sizing on some of these tail skews in that brand?

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

Appreciate the color. And then pivoting over to Owen briefly. Obviously, there's a lot of noise right now between the increase in marketing spend, working through the product quality issues and that, you know, old inventory. But as we start to move forward, you're giving us metrics around brand awareness, household penetration. So maybe a two-part question here. If I look at the relationship between household penetration and I think 4.5% branded awareness at or, you know, 80% or under the awareness at like 20%, is that the right delta today or does that imply better or worse conversion off that awareness than, you know, if you compare that against other brands that you've managed? And as we go forward, how should we be judging the step up in marketing investment and your ability to convert, is it watching the relationship between household penetration and brand awareness that you're building over time?

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

That's helpful. I'll leave it there. Thank you.

Thanks, Greg. Our next question is from the line of Megan Clapp with Morgan Stanley. This is your question.

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

Yeah, I'll start and send it over to Chris. To your point, we were pleased with how consumption came in in Q1, led by some distribution gains, the mass test in a club customer. ITDs were solid, as I mentioned earlier, previous question. Powdered, growing 50%. And this does underscore the leadership position we had in Park Place and Clean Label, which grew 20%. In terms of bridging the gap to sales, as Chris mentioned, the primary driver of Q1 was we came in heavier on inventory, and we had some lingering impact from the quality issue.

And then just to build on that, we do believe we're in a better position now in terms of shipping to consumption. As you mentioned in the remarks, the ELP cutover was a big piece of why we were slightly heavy on inventory coming into Q1. We thought that was a prudent action to take to make sure we didn't have any supply disruption. And then obviously, as Jeff mentioned, the lingering effects of the product issues also had an impact on the quarter. So from overall, though, in the long run, we do think consumption is the best measure of brand health. And as I said, we think we're set up now in Q2 to be much more, you know, much closer in terms of shipping to consumption.

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

Yeah, as I talked about earlier, I think last quarter as well, we do have good line of sight with our supply coverage. And we do obviously know what we paid last year for cocoa and for other commodities. We can see where the prices are. So we feel very confident about our overall gross margin. I think the mid-36s range, as you mentioned, on Q4 is direction right. And I think that is, as you said, a good jumping-off point for F27. But clearly, at this point, I'm not going to be guiding on F27. But, you know, all odds equal. probably a decent assumption in terms of the starting point for the year.

Okay, great. Thank you.

Okay.

Our next question is from the line of Alexia Howard with Bernstein. Please receive your questions.

Can we ask about margins? I seem to remember that when you first bought Owen, It was a pretty low-margin business, but you're obviously in the middle of extracting a lot of cost energy from that. And I've also been to remember that you commented recently on quite a wide discrepancy between where the Quest margins are and the other margins for Atkins. And if we look at over the next 18 months, do we see sort of a major – ramp on the margin side, both on the gross margin side and on the operating margin side, driven by things like cutting off the tail of unprofitable skews, actions, the unknown cost, the realization that, oh, and other drivers that you anticipate. I'm really thinking about the gross margin getting back to that sort of 37 territory as their line of sight into that. Thank you, and I'll pass it on.

Thanks, Alexia. Yeah, from a margin standpoint, it's really getting back and rebuilding our margins up into that sort of 37 plus range. The biggest drivers really are the pricing and productivity. You know there's a lag. We talked about it last time. Pricing and productivity lag versus inflation. That lag is going to start to overlap in half two of this year. We also, as I said, have good line of sight to cost visibility. both on cocoa and our other commodities. And we do have a nice tailwind coming from cocoa, which will start to kick in in Q4 of this year or flow more into F27. Obviously, as we talked about in the prepared remarks, we do see inflation on whey, which is going to offset that to some extent. But those are some pretty big drivers on margin and certainly very much in our control, which which makes me very confident on rebuilding our margins. In addition to that, there is the mixed impact as we mix out of Atkins, we mix into Quest. That is also obviously going to have a more long-term structural benefit on margins. And then as you mentioned, I think in the question, yes, we did drive some very nice synergies on Owen as we integrated it. Those are building, you know, through this fiscal year. So those are kind of already embedded in that 36, you know, mid-36 range. for Q4, that's already sort of fully loaded from an OIN margin standpoint. And then I guess the final piece I would just put on OIN, as we talked about, as we build, you know, scale and we build, as Jeff mentioned, platform innovation, I would hope certainly that OIN should certainly be accretive to the OIN margin as a brand.

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

Our next question is from the line of John Anderson with William Blair. Please proceed with your question.

Yeah, good morning, and thanks for the question. Just a couple here. On sales overall flat for the quarter, can you help us a little bit with the composition? How much did pricing help in the first quarter, and how much will pricing – how much will flow through as we move into the second quarter and second half? And then I had a question, a second question on Atkins. I think last quarter you talked about – about 10% to 15% of the Atkins business being kind of tail, meaning in the bottom quartile of velocities. Is there an update on that? And what I'm really trying to get at is, you know, where you think you are kind of in the process of getting to that optimal assortment for that right-sized assortment on Atkins. Thank you.

Hi, John. I'll take the – The top line question, and maybe Jeff will take the Atkins one. So for Q1, I think what's important to keep in mind is we had, yeah, we were roughly flat year over year, but slightly better than we had anticipated, and certainly a little bit better than we tried it at the start of the year. Christ and Atkins, you know, really quite happy with where Q1 landed. Both of them were ahead of expectations. And Aaron, as we talked about, obviously behind for the reasons we've already stated. In terms of composition of that, pricing, pricing really was almost zero benefit in Q1. The effective day on shelf was really towards the very, very end of October. So we had a very small amount flowing into Q1, so really minimal impact in Q1. And it will be posted for sort of low single-digit benefit for balance to go, which is consistent with what we said last quarter.

Yeah, I'll take the action question. I just don't think it's important to point out that The majority, two-thirds of the declines we're seeing on Atkins today are driven by loss distribution, particular impact at club, which will be almost fully passed in April. But to your question, Atkins, if you look at the business today, it's a set in the past. 75% of action sales today come from SKUs in the top half of category velocity, which in my experience is generally considered safe. If you look at just the lowest quartile, 10% to 15%, which typically would be at risk. So no change there. I hope that helps dimensionalize the risk. I will say that rather than just lose those SKUs, We believe the right thing to do for the brand, the category and the company is to partner with retailers to drive to an assortment that would include replacing those SKUs with Quest and with Owen, faster turning SKUs. The benefit of the category and the company. What I would say is I have been pleased that we've seen more flow back than we had forecasted on Atkins. in Q1 where we've lost distribution. So early days there, but the level of flow that we are seeing into the business, I mean, partially explains why I consider it a better than forecasted quarter.

Thanks so much.

The next question comes from the line of Matt Smith at CFO. Please proceed with your question.

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

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

Thank you. And, Jeff, as a follow-up to your commentary on capital allocation, the company's been running as a portfolio of brands for some time, and you've been open to adding brands. But are you seeing a change in the category given the insurgent brand dynamics and competitive activity? Is that impacting your M&A view? And when we think about the share repurchase, year-to-date has been fairly aggressive. Are you confident in the current brands that you own supporting your long-term algorithm? Thank you.

That's a good question. So obviously we haven't changed our framework for capital allocation. Certainly M&A is something we look at. I think we've got a pretty decent track record with M&A. Right now, as we look at our stock price, which we think is significantly undervalued, we think the right use of cash is to be in there and buying a stock back, given our confidence in a long-term health as a business, but M&A is something that we're always looking at. There are, you know, as you mentioned, there are targets out there. Obviously, we want to get it at the right price, so that hasn't changed. Our buyback position is opportunistic in a sense in that we view our stock as significantly undervalued. And we think the best use is to go in there and buy it back at these two levels.

And I would just, Matt, I would just build on Jeff's answer that, you know, we have a very strong balance sheet. Obviously, we took, I think, advantage of the stock price and we also took advantage of our refinancing window to increase our debt level a little bit, like modestly. Still less than a term at this present time. We project that to still be around a term by the end of the year. And we use those extra funds to accelerate our stock buyback while our stock is cheap. And I think the authorization increase from our board recently of another $200 million, I think it's just, in my mind, reflects the outcomes and the long-term strength of our business and the long-term strength of our balance sheet. And while we still have attractive share prices, we'll continue to use our cash accordingly.

Thank you. I'll pass it on. Thanks, Matt. Next question is from the line of Robert Moscow with TD Count. This is your question.

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

Yeah, so the role of actions is always going to help people lose or maintain weight. And as we saw continue to see consumers turn to GLP-1 drugs to help them with this. Two years ago, a couple of years ago, we undertook a pilot clinical study to test whether Atkins could be a valuable tool or companion to people on the drug. So we had two groups of patients who were taking the drug, one group using the Atkins diet and the other using a more traditional low-fat diet. We just got the results back in last month, so it's still very early, but those results were very encouraging. Patients on the Atkins diet have taken the drug, tended to retain more muscle mass, which is a critical issue for people on the drug, tended to experience fewer side effects, fewer headaches, nausea, less gas, and there were some other significant differences on metabolic outcomes, particularly for those. It was a pilot study, but nonetheless very, very encouraging that Atkins can play an important role with a lot more to learn. What you will start to see, to your point, is us leveraging the study results in our New Year, New You media. So starting in the next few weeks, you'll see us start to message around this. start to target around this. And literally as we speak, because these results are very fresh, our teams are in front of retailers who are also trying to figure out how to meet the needs of GLP-1 patients. So over the next few months, our selling team will be out in front of the trade, in front of retailers, talking to them about the results, talking to them about the importance of action. So it's early. It's a pilot study. With that being said, we're very encouraged, and you'll start to see us execute against us over the coming months.

Okay.

Great. Thank you. The next question is from the line of Steve Powers with Deutsche Bank. Chris, do you have a question?

Yes. Hey, great. Thank you, and good morning. Happy New Year. A couple of questions around planning assumptions. The first one is maybe just give us an update, talk about distribution gain generally in the forecast. Curious as to what your distribution outlook is on Quest Salty specifically, and if there are any, you know, gains embedded in the full year outlook, number one. Number two is just more generally on forecasting in that business. I think as I think about it, there are, kind of competing factors on the one hand favorably. I think there's a greater consumer awareness and consumer acceptance of kind of protein-based salty snacks, which is part of credit to your success. On the other hand, you know, that has brought with it, you know, increasing competition from other smaller independent brands as well as recently, you know, from conventional brands looking at the category. So just seriously, you step back and think about the... whether that has changed your approach to forecasting in the SALTI business.

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

Very clear.

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

Yes, very clear. Thank you both for that. And I know we're late in the call. Just a quick last question for me, if I could. I apologize if I missed it, but just going back to Owen, you know, you mentioned in the remarks in the slides that if you think about the long-term path to growth, that innovation in new categories will play an important role. I'm curious if fiscal 26 is too early to see some of that, or if we should expect that as the year progresses. Thank you.

You know, it's a big opportunity for us. If you remember, Steve, it's one of the reasons that we decided why we were so excited about Owen was to be able to combine our very talented R&D organization and let them lose on Owen. So there's a very strong pipeline. What I'll say is, you know, you should expect to see probably the first foray from us. I'd say certainly this fiscal is probably where I put the timing I'm really excited about the opportunity here.

Yeah, significant.

Perfect. Thank you. Our final question is from the line of Tyler Price with Stevens. Please proceed with your questions.

Good morning. Thanks for taking our question. RTV is becoming an increasingly competitive space. How should we think about growth within this part of your portfolio? And is this a unique subcategory where we could see consumption for Quest, Olin, and Atkins all positive this year?

No, RTD is certainly competitive. It's not surprising. For a while, the category was somewhat supply-constrained, which I think made limited the extent of competition. Unsurprisingly, you've seen some new entrants into the category. What I point out, the category is still growing 10% plus. in ITDs, which, you know, which is significant. When it comes to our brand, I'll start with Owen, very uniquely positioned within that category. It's not just another ITD milkshake or chocolate. It's a strawberry flavor. It is positioned as the leading clean and plant-based proposition in the market. Very differentiated. And retailers see that. consumers see that. So I feel very confident. This clean movement, I think, is in the early innings, and we intend to ride it as the leader. So I think from the perspective of Owen, very differentiated. We've been very pleased with how Quest has performed in the States. Quest has the highest protein level at 45 grams. Phenomenal tasting, which you'd expect from Quest. So it's differentiated position there, and Atkins plays a very different job in the category. Atkins is about helping consumers maintain their weight. It's a different job, and I think a differentiated job, particularly when we start to leverage the GLP-1 findings, where shapes could be a very important tool to consumers on the drug. So we believe that we have three very differentiated positioned brands inside a category that's still robust, still growing, double-digit. So we have a lot of confidence in the future growth here.

Thank you. At this time, we've reached the end of our question and answer session. I'll hand the floor back to management for closing remarks.

I just want to thank everyone for the participation today on today's call. If you have any follow-ups, please feel free to reach out to Josh. We look forward to speaking with you again on a Q2 call in April. Have a good day.

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