Q2 2024 Simply Good Foods Co Earnings Call

Participants

Mark Pogharian; Vice President - Investor Relations, Treasury, Business Development; Simply Good Foods Co

Geoff Tanner; President, Chief Executive Officer, Director; Simply Good Foods Co

Shaun Mara; Chief Financial Officer; Simply Good Foods Co

Matthew Smith; Analyst; Stifel

Alexia Howard; Analyst; Bernstein Research

Steve Powers; Analyst; Deutsche Bank

Pam Kaufman; Analyst; Morgan Stanley

James Salera; Analyst; Stephens Inc.

John Baumgartner; Analyst; Mizuho Group

Kaumil Gajrawala; Analyst; Jefferies

Brian Holland; Analyst; D.A. Davidson

Jon Andersen; Analyst; William Blair

Presentation

Operator

Greetings. Welcome to The Simply Good Foods Company Fiscal Second Quarter 2024 conference call.(Operator Instructions)
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

Thank you, operator. Good morning. I'm pleased to welcome you to Simply Good Foods Company earnings call for the fiscal second quarter ended February 24th, 2024. Jeff Kanter, 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 A.M. Eastern time.
A copy of the release and accompanying presentation are available in the Investors section of the Company's website at w. w. w. dot Simply Good Foods Company.com. This call is being webcast and an archive of today's remarks will also be available.
During the course of today's call, management will make forward-looking statements that are subject to various risks and uncertainties that may cause actual results to differ materially. The Company undertakes no obligation to update these statements based on subsequent events.
A detailed listing of such risks and uncertainties can be found in today's press release and in 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. The presentation of this information is not intended to be considered in isolation or as a substitute for the financial information presented in accordance with GAAP.
Please refer to today's press release for a reconciliation of the non-GAAP financial measures to the most comparable measures prepared in accordance with GAAP and I'll turn the call over to Geoff Tanner, President and CEO.

Geoff Tanner

Thank you, Mike. Good morning. Thank you for joining us today. I'll recap Simply Good Foods financial results and the performance of our brands. Then Sean will discuss our financial results in more detail before we wrap it up with a discussion of our fiscal 2024 outlook and your question Simply Good Foods second quarter results were led by continued quest growth as well as strong gross margin improvements.
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 expectation. E-commerce POS growth for both Quest and Atkins continued to be solid.
Quest's retail takeaway was on track with our plan, driven by strong salty snacks growth. While Atkins performance was off versus our estimates, Akins had solid plans in place that was ultimately disadvantaged on two fronts during the quarter.
First, it lapped a onetime 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 and the 2024 new year new year's season.
This category participants had adequate supply to service its base business we have been layered in extensive merchandising programs and promotions during the season, which greatly reduce the overall in-store share of voice for the Atkins brand and others in March as we exited the new year new year's 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 consumptions 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.
Let me now turn to Quest. In Q2. Retail takeaway in measured channels increased 13.1% growth was solid across the key product forms and retail channels, driven by an increase in both household penetration and buy rate. In Q2, we estimate total unmeasured channel retail takeaway increased about 10% as e-commerce strength was partially offset by softness in specialty channels.
Quest's Q2 e-commerce POS remained solid and increased about 14%. For perspective, total unmeasured channels in Q2 were nearly 24% of total Quest retail sales quoted by and snacks retail takeaway in measured channels increased 6% and 21%, respectively, were particularly pleased with our salty snacks POS growth of about 40%, which was a standout in the category and now represents about 25% of Quest's retail sales.
Additionally, we continue to see new Quest consumers coming into the brand via chip and then trying our other products such as bars, cookies or confections.
The success of Quest chips continues to be a proof points of the brand's ability to extend beyond its core and disrupt other large snacking categories where we can offer high-protein low-sugar and great tasting options for consumers over the remainder of the year, we continue to expect low double digit POS growth and continued household penetration and buy rate gain driven by innovation, distribution and the new marketing campaign.
In March, we announced the launch of a new advertising campaign entitled. It's basically cheating campaign features Academy Award and Emmy nominated rider actor and comedian to mall. Now Johnny play fully and strategically delivers a core campaign idea that Quest products, I saw good tasting better for you that it basically feels like choosing Quest has been one of the most innovative brands in the category and is supported by a best-in-class R&D team.
Multiyear pipeline is strong, and we expect innovation to be a lever of growth for a long time. In March, we launched strawberry frosted cookies and one of my favorites iced coffee. This 10 gram protein Pack 10 ounce drink at minimal sugar, only 90 calories and 200 milligrams of caffeine today.
I'm also excited to announce a new bike shop platform for the fall of 2024. As we've seen with Chip, this is an opportunity to disrupt a large snacking category, sweet baked goods with high protein, low sugar and great tasting muffins and a brownie like Quest chip.
We believe this new platform will bring new consumers to the active nutrition category and expand by rate through another usage occasion based on conversations with key retail customers, we expect very strong support for the launch that will also be underpinned by a comprehensive marketing plan as part of the it's basically cheating campaign.
Turning to action, Q2 retail takeaway in the IRI MULO plus C-store universe and the combined measured and unmeasured channels was off 11% and 8%, respectively. Strong e-commerce growth continued driven by Amazon with POS growth was 13% in Q1, e-commerce was nearly 17% of total actions.
Retail sales up from 11% only three years ago, e-commerce retail sales are over $2 million to a week, driven by a mix of new consumers and some heavy users, but and migrating to this channel from brick and mortar and performance in brick and mortar channels was softer than expected.
This was primarily due to greater than anticipated in-store competitive merchandising and programming that also impacted several other brands. As I noted earlier last year, actions received incremental onetime merchandising and promotional support due to the supply challenges of a category participant, which is why the 2024 new year new year was a challenging headwind.
However, as you'll note in the chart in the middle of the slide, as we exited the new year new you season retail takeaway trends have improved over the remainder of the year, we expect a more normalized level of competitive in-store merchandising and programming.
We also have a strong advertising plan in place and are excited about the quality of the new products we will soon bring to market. Therefore, we anticipate full year fiscal year 2024 combined measured and unmeasured channel POS to be off around 7% versus our previous estimate of 3% to 4%.
We continue to have tremendous faith in the long-term potential of the brand, especially given the increased cultural relevance and conversation about weight wellness. We continue to make progress against the five point revitalization plan we've talked about on previous calls.
However, as you may recall, is going to take time before all the elements of the plan are collectively in the marketplace. I'm particularly pleased with the progress we're making in accelerating innovation, which is a critical driver of business performance.
As previously stated, a lack of quality innovation has been a headwind to Atkins performance, but getting this back on track has been a focus area for us. Significant improvements we've made should enable us to have 15 new product launches in calendar year 2024 across all product forms.
At the bottom of this slide, I'd like to point out at strong high protein shake developed specifically for consumers on a weight loss drug off the shelf is just seeking higher levels of protein for consumers experience, rapid weight loss either through medications, surgery or dieting.
I protein levels are important to help maintain muscle mass and strong protein shakes delivered 30 grams of protein with one gram of sugar and have also been formulated with seven grams of prebiotic fiber to support gut health.
This beneficial level of fiber is lacking in many RTD shakes in the market today and is a highly relevant nutrient for many folks on the new medication primary research continues to suggest that the Atkins approach can be an effective off-ramp for those who choose to transition off the medication. And we're working to optimize our communications to ensure the brand is seen as a way to maintain weight loss benefits after taking the drug.
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 any other time as the conversation of 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 IPO 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 that 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 Sean, who will provide you with some greater financial details.

Shaun Mara

Thank you, Jeff, and 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 growth. North America and international net sales increased 5.1% and 12.3%, respectively.
As Jeff 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, POS 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 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 in 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 billion to $25.4 million.
Finally, net interest income and interest expense were $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 has grown approximately 5.5%.
The difference is principally due to some incremental trade investment made in the first half of fiscal '24. That said, we expect POS 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 cost 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. 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.
The next slide provides you with a reconciliation of reported and adjusted diluted EPS. Second quarter reported EPS was $0.33 per share diluted compared to $0.25 per share diluted for the comparable period of 2023.
Adjusted diluted EPS was $0.4 compared to $0.32 in the year-ago period. Note that we calculate adjusted diluted EPS as adjusted EBITDA, less interest income, interest expense and income taxes. Please refer to today's press release for an explanation and reconciliation of non-GAAP financial measures.
Moving to the balance sheet and cash flow. As of February 24, 2024, the company had cash of $135.9 million year to date, cash flow from operations was about $94 million, an increase of 76% or $40.6 million, principally due to adjusted EBITDA growth and improvements in working capital.
During the quarter, the company repaid $35 million of its term loan debt. And at the end of the second quarter, the outstanding principal balance was $240 million. Capital expenditures in Q2 and year-to-date period were $300,000 and $1.1 million, respectively, in fiscal 2024.
We continue to expect CapEx to be in the $8 million to $10 million range in fiscal 2024. We anticipate net interest expense to be around $17 million to $19 million, including non-cash amortization expense related to the deferred financing fees.
Not a wrap up, as Jeff stated earlier, due to softer than anticipated consumption trends in Q2, we updated our full year outlook. We continue to expect that ingredient and packaging costs will be lower in fiscal 2024 compared to last year and drive solid gross margin expansion.
This provides for the flexibility to invest in marketing initiatives that we expect will drive near and long-term growth and generate solid earnings growth.
Therefore, for full year fiscal 2024, we anticipate net sales growth driven by volume to increase around the midpoint of the Company's long-term algorithm of 46%, including the benefit of the 53rd week, adjusted EBITDA is now anticipated to increase 6% to 8% versus last year. We appreciate everybody's interest in our company, and we're now available to take your calls.

Question and Answer Session

Operator

Thank you. We will now be conducting a question and answer session. (Operator Instructions)
Matthew Smith, Stifel. Please proceed with your question.

Matthew Smith

Hi, good morning, Jeff and John. My morning. The overall active nutrition category growth slowed in the first calendar quarter of the year, and 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 we move past March.

Geoff Tanner

And yes, now that the category continues to show strong growth 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 six or 7%, which is where the category was pre pre COVID. And additionally, it continues to be a standout category versus most of the same store, right? Where as you know, the volumes are flat and that reflects some underlying drivers of health and wellness trends, snacking and 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 expected to be and retailers see that, too. That's why we're working with Thermo, how to how to even further accelerate that growth.

Matthew Smith

Thank you, Jeff. And as a follow-up, the lowered revenue guidance includes a 7% reduction in POS 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 POS perspective that yes, that's what it is that obviously were disappointed how Atkins performed in January, February and obviously we will turn to some tough competitive merchandising comp.

Geoff Tanner

Yes, we still remain confident in the long-term vitality of the business. And as we look forward, we certainly have seen trends improve, have come out of January and February and certainly for the balance of the year, we did have easier comps and and that's why we expect the business to return more to that mid digit decline.
And that if you look at it by for Q3 and Q4 than Q3 is relatively in line with what we saw in Q2, slightly better in Q4 because we get some easier laps, as you said, overall. So we're not expecting drastic changes in the trajectory in the next X period of time.

Matthew Smith

Thank you over there.

Operator

Thank you.
Alexia Howard, Bernstein. Please proceed with your questions.

Alexia Howard

Good morning, everyone. Morning and again, 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 probably work some of which has and what metrics do you use to make sure innovation is successful and sustainable in the marketplace and how do you track that overtime to make sure that you're calling things that aren't going to work and obviously supporting things that are?

Geoff Tanner

Yes, Alexia, I'd probably point to the innovation on Quest, which has been a standout and a major driver of growth and very successful on. If you look at chips, for example, we see 40% growth on that business and it continues to be highly incremental, and we are excited about the bike shop platform that we have coming up.
On Quest, 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 and I've been quite transparent about this on previous calls, we were very disappointed with the quality and level of innovation on actions over the past couple of years, which has contributed to the slowdown in the brand.
And it's why we have jumpstarted innovation on Atkins 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 Nick, it will come starting in the fall and thereafter is much stronger.

Shaun Mara

And where we've tried to push is innovation, that's more incremental. So the business more platform focused on that, but we do know that on Atkins, what we're trying to do is hold onto to shelf space and replaced underperforming items with that with the innovation.
So the jobs, the different on innovation for both businesses right now on Atkins is replacing underperforming items with better items on Quest. It is about innovation that is incremental to the business and incremental to the category.
I'm just going to touch on Europe 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

Really appreciate the detail from both of you. I'll pass it on. Thank you for your.

Operator

Thank you.
Steve Powers, Deutsche Bank. Please proceed with your question.

Steve Powers

Thanks, guys. Sorry, I was on mute there hung up. First question on on Atkins and weight management category dynamics in general you talked about we expectation that the competitive environment, if 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 Tanner

Yes. Now the reality is that this time last year, as we talked about in the prepared remarks, one of our major competitors had supply challenges, and that was particularly acute over the January and February period. And as a result, Atkins benefited significantly, particularly in a few customers from outsized merchandising and promotional support, which we obviously didn't get this year.
So that was going to be a difficult lap and that competitor is now back and able to service the business. So it was an inevitable difficult New Year you season, but we will lap that. And as we've come out of January, February trends have improved. And I'd say by around the summer we should be largely lap. That effect should be largely lapped, which is why our comps should get easier.
Okay. Yes, look, it makes sense. And then pivoting over to Quest, you have you highlighted just the ready-to-drink coffee innovation, which is that which is interesting to me. I guess as you think about the pipeline of requests and from an innovation perspective.
I'm wondering how big a role do you think percentages will play versus are there further endeavors in food and beverages are envisioned as a kind of a material driver of the franchise going forward, how you think about prioritizing future consumption occasions versus immediate consumption occasions and you see the complexities of reaching different channels, especially on the immediate consumption side?
Yes. I mean, the thing. This has driven the success of Quest innovation as the brands are flipping, we can flipping the macros on large snacking categories, start flipping the macros from high sugar and high cap, high protein and low sugar, which is what we've done with our iced coffee launch.
And I'm excited to see how that performs. It's certainly early days and we monitor it closely. And if we continue to do well, we'll continue to double down there.
The question on beverage, so rest assured, we're looking at it.
It's obviously it's a large category and if we can find a way to go in and disrupt that category in a way, similar to how we plan to disrupt sweet baked goods, we would certainly look at that and even during a broader sample where we see those opportunities to give Quest consumers the same quality and taste that they desire of large snacking categories, we're looking at it Okay. Thank you.

Steve Powers

Thank you very, very much.

Operator

Thank you.
Pam Kaufman, Morgan Stanley. Please proceed with your question.

Pam Kaufman

Hi, good morning. Sir, 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 Tanner

I'll start and I'll turn it over to Sean. I'd say the upside as we are moving into easier what we believe will be easier comps on Atkins, and we do remain confident in that revitalization plan. The new advertising, we're confident in the new innovation that's launching, albeit towards the end of our fiscal, and we're ready to walk into easier comps.
So there could be some upside there. And OnQuest the momentum that we've seen just looking at March and mid double digit is very encouraging. And we've just launched new advertising that launch in beginning of March. And so that gives us a lot of confidence.
And then Quest two is bringing some pretty exciting innovation to market. So there could be some upside there. But I'll turn it over to Sean.

Shaun Mara

I mean, I think if you take a look at the brands I mean, Quest, we're assuming from a consumption standpoint, low double digits. And as Jeff said, through March, so only four weeks and were 13% a little bit higher than that so feel like we're trending a little above where we thought we'll see what happens. So I feel pretty good with that.
We also have the advertising we've 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 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, items is basically consistent with the decline we saw in Q2 for q three slightly better as a rig in Q4.
I'm sorry. And then as it relates to the 1st month of the quarter were trending down about 6% as I think you saw on the slides, which is better than 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.

Pam Kaufman

All right. 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 plan for the year?
Yes.

Shaun Mara

I mean, it's at a high level We're not really changing our strategy. The impact that we felt on Atkins in January February 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 we're bringing to market, the new packaging graphic work that's underway, product upgrade work that's underway, the new advertising, and we're certainly going to stay the course there, but we'll make adjustments if we need to, but certainly wouldn't overreact to and merchandising and difficult merchandising lap in January February.

Pam Kaufman

Thank you. I'll pass it on.

Shaun Mara

Thank you.

Operator

Thank you.
James Salera, Stephens. Please proceed with your questions.

James Salera

Hey, guys, good morning. Thanks for taking our question. And I think I wanted to drill down a little bit on Atkins, strong offering, some exciting to see you guys expand the RTD shake offering. Obviously, it's been a really hot category and 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 will 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 Tanner

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

Shaun Mara

Yes, I think on the capacity side, just to take a step back. When I go back about a year, year and a half ago, we had some capacity constraints basically got a another comment on board in terms of additional capacity that we have expanded the capacity that we have for REITs in general overall, and we're actually I think we have enough to support both that business as well as the continuing business we have overall. So we feel like we're pretty good shape there.

James Salera

Okay, great. And then maybe if I could ask a broader question, just on the consumer. As we've heard from other companies, there's kind of this bifurcation of the higher income consumers still powering forward and lower income consumer, maybe feeling a little bit more ''' since your products tend to skew towards the middle to higher income consumer.
Do you have what's your confidence level as the year progresses and that the higher-income consumer will continue to be resilient relative to the overall kind of economic uncertainty.

Geoff Tanner

And yes, I mean, we we continue to seec the category perform the category performance year after year after year.
And I think in part it is for the reason that you cite is that we do over-index with higher income consumers. And so I think we're a little more insulated. I would point to a relative lack of private label in the category. I would point to the relative lack of heavily heavy promotional activity in the category.
And I think it shows the underlying consumer demand, which to your point, I think is reflective that we over-index with kids with higher-income educated consumers.

James Salera

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

Geoff Tanner

Thank you.

Operator

Thank you.
John Baumgartner, Mizuho Group. Please proceed with your questions.

John Baumgartner

Good morning.
Thanks for the question for joining Orangina. Philippe, first off, Jack, 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 are there also any heightened activity from new innovation hitting the shelves for a larger intensity also mapping feature and display activity?

Geoff Tanner

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, right? Innovation can play a role. And you've certainly seen what we've been able to do with Quest chips with which was essentially to create a category or segment that didn't exist.
The heightened level of competitive activity that we've talked about in the prepared remarks really does relate to have out-of-stock challenges on shakes and <unk>.
Yes, the industry with constraints had been constrained for a couple of years. And obviously with that being turned back on, you've seen demand being able to be supplied. But I wouldn't Connacher 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 it and in the new year New Year period. But now with us supply back, I'd say we're going to return to normal levels.

Shaun Mara

Yes, I think, John, if you take a step back and look at last year with, you know, one of the key competitors in this marketplace for RTD.s, 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. So four packs, a packs, 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 usually see out there.

John Baumgartner

So we stepped up our merchandising activity and programming it just the share of voice was less than what it was comparatively to everybody else. Does that help?
Yes, definitely. And I guess sticking with that theme, I guess last quarter it sounded like your initial perceptions on new marketing coming out of auto was was pretty encouraging in the early days. I guess building on your on your point that Sean made, you get the sense that the ROI on that marketing, does it does it require further increases in spending from here? Just 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? So those should those autumn resets really give used material catalyst or disappoint?

Geoff Tanner

Yes, the advertising, we're really pleased with the new advertising we debuted in October. We saw the business respond. 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 it's a first pass of that would come out of the New Year New Year period.
And trends on the business have improved, as I said, the ad 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 try to your question on distribution cannot recall were category advisor to the majority of our key retailers. And as such, we have a lot of dialogue with them about the category and brand dynamics.
And we recently wrapped up a roadshow visiting all those customers talking about the brands and in particular, Atkins and I a an emphasis of those conversations was the new conversation and renewed cultural relevance, I would say, of of weight because of these weight loss drives them what consumers on those drugs looking for and how they want an off-ramp and the retailers get it.
They appreciate our transparency. They're supportive of the revitalization plan on and we're currently in conversations with them about them Inlog modulars, and they will play out over the coming two to four months.

Shaun Mara

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%, 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 new invest and you're going to see meaningful increases, particularly on Quest with new advertising in Q3 and Q4.

John Baumgartner

Okay. Thanks, Sean.

Shaun Mara

Thanks.

John Baumgartner

Okay, thank you.

Operator

Thank you.
Kaumil Gajrawala, Jefferies. Please proceed with your question.

Kaumil Gajrawala

And for the 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 so many new innovations this year? Does it need to be at some higher level for a temporary period of time.
And then and then sort of taper off or is where you're going linked to what you mentioned before, some of the GM benefit that you're about to field.

Geoff Tanner

So we would historically target spending 9% to 10% on marketing. What I will say is that is and a high level of spend in the food beverage category in general and certainly and a very high level of spend within our category and that that's the role that we play as category leaders.
As to your question on data support innovation as well as the core business. And 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 there have been constructed to enable us to support the multitude of different products on the brands while also driving the overall brand awareness and at delivering the positioning of the brand.
So what we don't like having to make a choice between support the core business or innovation. What I like to do is have advertising that you can in play innovation into that ad and it still works.

Shaun Mara

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

Kaumil Gajrawala

Useful. Thank you. And I'm just a quick follow-up boring question 53rd week on any context on contribution, do we just take it out of next year? Are you actually thinking about next year?
Yes, you get to that first.

Shaun Mara

So then the 53rd week, I mean, I think historically, we've said it's a little bit more a point of growth. You just can't take 50 to about or wonder about what to do. And I'd say here's how much the work because with the way our fall resets work, we generally speaking, ship those sort of early August mid August. So we don't get the replenishment of that probably till mid-September. So it's just a little more than one point of growth overall, we don't have the specifics of at this point in time, we'll have better clarity on that. I hope in Q three.
Yes.

Kaumil Gajrawala

Thank you.

Operator

Thank you.
Brian Holland, D.A. Davidson. Please proceed with your questions.

Brian Holland

Yes, thanks. Good morning. I wanted to go back to the competitive dynamic component because we're seeing a pretty clear divergence between bars and shakes the entire bars category has been softer of late. And then within shakes, there's sort of a bifurcation between the weight management and some of the other heavier protein products.
So maybe maybe a two-part question here. One, I guess I'm a little bit surprised to hear the attribution for the weakness. Well, when it's coming from the I guess the growth is coming from shakes that you're talking about, that's where the supply is improving.
So the impact that's having on bars and everything else. So maybe a little bit more color around just understanding why do you think that is particularly impacting Atkins? Because I get them, I'm surprised, but we would see that level of shopping cross-shopping between those brands.
And then the second one is not necessarily a new dynamic. We knew that supply was coming. It's something that had been communicated something that's been ongoing. So maybe so I guess to the extent that it's hitting your business at a level or at a magnitude greater than expected.
So it was the impact of that supply coming back online just greater than what you thought. And the consumer response to a greater than you thought of because it doesn't seem like something that we didn't know was coming.
Yes.

Geoff Tanner

No, that's fair. I'll just address your first question, which is the observation on on Buyz. I guess the first thing I would comment is while buys growth had slowed request, if it's proven to be an exception to that Quest, Pfizer up mid single digits, and we're very pleased with that level of growth.
But certainly you have seen shapes have growth outstrips about growth. And honestly, as we've talked about, that's not really a supply as no surprise because supply was constrained for two years. So I think as Sean said, in response to an earlier question from what you're seeing with Shape is essentially two years of growth in one.

Shaun Mara

And that dynamic has played out January, February and will until we've finished with that lap, which is more towards the summer. And then to your to your question on why I think your question was should you have knowing more than we did about the dynamic that we were going to walk into in January and February. And I'd say the answer is yes.
And looking forward going forward, you should expect us to perhaps be more a challenge too competitive dynamics and to think about merchandising as a share of voice versus just looking at our own plans. So you should expect that change moving forward.

Brian Holland

So appreciate all the color. And then just back to Atkins, you know, to carry your messaging has been fairly consistent up the patent unit since you talked about the revitalization plan and you know the potential opportunity over time with the GLP-1 complement Just curious if you've picked up anything anecdotal to increase your conviction to that end?
Because I do think that seems to be a point of contention with investors who, you know, I hear a lot of inbound, you know, kind of inquiries about, hey, they feel like this is a head that this would be a headwind to the business because of the overlap of the consumer and maybe that they may be changing their routines away from an Atkins just using the GLP-1.
So clearly, the innovation seems to be, you know, the 30 grams of protein, and that seems to be resolving some of this.
But just curious what you've picked up anecdotal that gives you increased confidence that Atkins indeed will be a complement and GLP-1 will be a tailwind for that business?

Geoff Tanner

Yes, I would say that 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, it does represent a tailwind for Atkins and a tailwind for the category. And we know that when consumers are on these drugs.
As I answered earlier, they have a need for higher protein products and they have got health issues, which is why we accelerated the launch of that and strong to market, and we're excited about the launch of that platform. And retail has given us a lot of credit for moving quickly and coming to market with something that specifically addresses that need.
I would say I'm equally, if not more excited about it, Atkins as a off-ramp as an off-ramp for consumers who want to get off the drugs, the battle going on with insurers, as you know, from our own 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 of 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. And moving forward, you should expect us to more clearly position the brand as that off-ramp as the sustainable way to keep that weight off. So I continue to believe that these GLP-1 drugs are a tailwind. But I would reiterate we are still in the early innings.

Brian Holland

I've got to forgive me if I could just sneak a really quick one in if you stated this earlier, I apologize of was Quest in line with expectations in the quarter?

Geoff Tanner

Yes.

Brian Holland

Okay, great. Thank you.

Operator

Thank you.
Jon Andersen, William Blair. Please proceed with your questions.

Jon Andersen

Thank you very much for squeezing me in a question about household penetration. You talked about the category of Active Nutrition being relatively low relative to other center-of-store categories.
Where are you today with Quest?
And where is Atkins with respect to household penetration? And then as you look forward, so what the bold or opportunity around each of the brands. So as you're innovating as you're marketing, are you looking to drive household penetration and buy rate across both brands? Is there a greater opportunity within one of those areas. I'm thinking that that may I had opportunity may differ by brand, but a little color on that would be helpful. Thanks.

Geoff Tanner

Yes, I'll start with the categories, household penetration of the categories and mid 50s. And that compares with high 80s, low 90s with most center-store categories, which is why we continue to see a long-term runway and if you look at where the category over-indexes and it is with younger consumers, millennials and Gen Gen Z, so we continue to believe that penetration of the category is only going to increase and 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 and Quest is around 16% or 17% household penetration. But as we've talked about for a brand of its size and awareness is significantly below most of its competitors, which is why we're excited about our new advertising.
And as it energy click one level lower with Quest, we believe there's an opportunity to drive increased household penetration and buy rate. And 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 by rate.
So I think on our if you look on Quest, there's an opportunity to drive household penetration up as we focus on increasing awareness. Advertising is a big driver there. Is there opportunity to drive FireEye up and in particular, I would point to the new innovation platform, SLT and the new bike 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. And I continue to believe innovation, better innovation than we have launched in the past as an opportunity with that brand.

Jon Andersen

Just real quick on the penetration you some reference point for you worked at almost 17 points for Quest right now for household penetration. If you go back a couple years, we're actually a little below 14 right. So I think we've made tremendous part of our growth that that brand has been distribution, but also household penetration and awareness. And I think we see that for future as we look at Quest as well as an opportunity. Yes, one housekeeping.
So the balance sheet's in good shape. Your leverage ratio, I think is below half a turn at this point you've paid down more debt in the quarter. What is that how are you prioritizing use of excess free cash flow going forward in the business?

Shaun Mara

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

Operator

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

Geoff Tanner

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. Have a great day.

Operator

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