Geoff E. Tanner: Yes, John, just one more color here. I think as you think about the rest of the year and the guidance we gave on EBITDA, one thing should be clear on that, I hope, overall, the gross margin should meaningfully improve in the next couple of quarters approaching 39% in both Q3 and Q4, a little better in Q4 than Q3. With that, we’re continuing to invest in the brand. So we did not reduce marketing spend to get to that number. That wasn’t what we did, we basically took the benefit that we had for gross margin in Q2 and what we’re seeing in Q3 and Q4 that allowed us to continue to invest, and you’re going to see meaningful increases, particularly on Quest with new advertising in Q3 and Q4.
John Baumgartner: Thanks Shaun, thanks Geoff.
Geoff E. Tanner: Thank you.
Operator: Thank you. Our next questions come from the line of Kaumil Gajrawala with Jefferies. Please proceed with your questions.
Kaumil Gajrawala: Maybe if I could follow up on the comment on ad spend. Can you maybe just talk a little bit more about what’s the right percentage of sales for ad spend, particularly in the context of there’s so many new innovations this year, does it need to be at some higher level for a temporary period of time and then sort of taper off or is where you’re going linked to what you mentioned before, some of that GM benefit that you’re about to feel?
Shaun Mara: So we would historically target spending 9% to 10% on marketing. What I will say is that is a high level of spend in the food beverage category in general. And certainly, a very high level of spend within our category. And that’s the role that we play as category leaders. As to your question on how to support innovation as well as the core business, what you’ll see in both campaigns is that they have been developed to enable us to do that. So I don’t know if you’ve seen the new ads on Quest, but they’ve been constructed to enable us to support the multitude of different products on the brands while also driving the overall brand awareness and delivering the positioning of the brand. So what we don’t like having a choice between support the core business or innovation. What I’d like to do is have advertising that you can input innovation into that ad and it still works.
Geoff E. Tanner: 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, try to get to gross margins around 40%, try to get to advertising or marketing spend in the 9% to 10% range and EBITDA margins around 20%. And I think we’re getting back to that after some issues we had the last couple of years for some commodity inflation. As it relates to the total marketing spend, you probably saw and the results were up 100-plus basis points for the quarter in the first half of the year. That will continue in the second half of the year. So you’ll see marketing spend closer to 9-ish% for the rest of the year.
Kaumil Gajrawala: That’s useful, thank you. And just a quick follow-up boring question. 53rd week, any context on contribution and do we just take it out of next year?
Geoff E. Tanner: Yes, absolutely taken out of next year, yes. Let me get to that one first. 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 52 — and I say, “Here’s how much to 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 until mid-September. So it’s just a little more than one point of growth overall. We don’t have the specifics of that at this point in time. We’ll have better clarity on that, I hope, in Q3.
Kaumil Gajrawala: Thank you.
Operator: Thank you. Our next questions come from the line of Brian Holland with D.A. Davidson. Please proceed with your questions.
Brian Holland: Yeah, 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 a two-part question here. One, I guess I’m a little bit surprised to hear the attribution for the weakness 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 it’s having on bars and everything else, so maybe a little bit more color around just understanding why you think that is particularly impacting Atkins because I guess I’m surprised that 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 and 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 at a magnitude greater than expected. So — was the impact of that supply coming back online just greater than what you thought in the consumer response to it greater than you thought because it doesn’t seem like something that we didn’t know was coming?
Geoff E. Tanner: Yes, that’s fair. I’ll address your first question, which is the observation on bars. I guess the first thing I would comment is, while bars growth has slowed, Quest has proven to be an exception to that, Quest bars are up mid-single digits, and we’re very pleased with that level of growth. But certainly, you have seen shakes growth outstrip bar growth. And honestly, as we’ve talked about, that’s not really a supply — not a surprise because supply was constrained for two years, so I think as Shaun said in response from an earlier question, what you’re seeing was shaped essentially two years of growth in one. And that dynamic has played out January, February, and will until we’re finished with that lap, which is more towards the summer.
So — and then to your question on — I think your question was, should you have known 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 attuned to competitive dynamics and to think about merchandising as a share of voice versus just looking at our own plan. So you should expect that change moving forward.
Brian Holland: I appreciate all the color. And then just back to Atkins, just curious, your messaging has been fairly consistent for the past — since you talked about the revitalization plan and 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 I hear a lot of inbound kind of inquiries about, they feel like this is a head — this would be a headwind to the business because of the overlap of the consumer and maybe they’d be changing their routine away from an Atkins just using the GLP-1. So clearly, the innovation seems to be the 30 grams of protein 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 E. Tanner: Yes, I would start by saying we are in the early innings of GLP-1 and we’re still learning. We’re doing our own studies. We’re talking to consumers, we’re talking to customers. We do believe that GLP-1 does represent a tailwind for Atkins and the tailwind for the category. We know that when consumers are on these drugs, as I answered earlier, they have a need for higher protein products and they have got health issues, which is why we accelerated the launch of Atkins Strong to market, and we’re excited about the launch of that platform. And retailers have given us a lot of credit for moving quickly and coming to market with something that specifically addresses that need. I would say that I’m equally, if not more, excited about Atkins as an off-ramps, as an off-ramp for consumers who want to get off the drugs.
There’s a battle going on with insurers. As you know, our 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 they’ll put the weight back on, and they’re desperate to find some sustainable program or sustainable way of eating to keep that weight off, and I think that’s where Atkins can shine. And moving forward, you should expect us to more clearly position the brand as that off-ramp, as that sustainable way to keep that weight off. So I continue to believe that the GLP-1 drugs are a tailwind. But I would reiterate, we are still in the early innings.
Brian Holland: Got it. And forgive me, if I could just take a really quick one in, if you stated this earlier, I apologize. Was Quest in line with expectations in the quarter?
Geoff E. Tanner: Yes.
Shaun Mara: Yes.
Brian Holland: Okay, great, thank you.
Operator: Thank you. Our last question will come from the line of Jon Andersen with William Blair. Please proceed with your questions.
Jon Andersen: Well, thank you very much for squeezing me in. Question about household penetration. You’ve talked about the category of active nutrition being relatively low relative to other standard store categories. Where are you today with Quest and where is Atkins with respect to household penetration? And then as you look forward, what’s the goal or opportunity around each of the brands, so as you’re innovating, as you are marketing, are you looking to drive household penetration and buy rate across both brands, is there a greater opportunity within one of those areas, thinking that, that may — that opportunity may differ by brand, but a little color around that would be helpful? Thanks.
Geoff E. Tanner: Yes. I’ll start with the categories. Household penetration of the categories are in mid-50s and that compares with high 80s, low 90s with most standard store categories, which is why we continue to see a long-term runway. And if you look at where the category over indexes, it is with younger consumers, millennials and Gen Zs. 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, Quest is around 16% or 17% household penetration. But as we’ve talked about, for a brand of its size, awareness is significantly below most of its competitors, which is why we’re excited about new advertising.
And then as you 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 buy rate. So I think as you look on Quest, there’s an opportunity to drive household penetration up as we focus on increasing awareness. Advertising is the big driver there. There’s an opportunity to drive buy rate up, and in particular, I would point to the new innovation platform salty and the new bakeshop 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 is an opportunity with that brand.
Shaun Mara: Just real quick on the penetration, just a reference point for you. We’re at almost 17 points for Quest right now for household penetration. If you go back a couple of years, we’re actually a little bit below 14%, right. So I think we’ve made tremendous — part of our growth for that brand has been distribution but also household penetration and awareness. And I think we see that for the future as we look at Quest as well as an opportunity.
Jon Andersen: One housekeeping. So the balance sheet is in good shape. Your leverage ratio, I think, is below half a turn at this point. You paid down more debt in the quarter. What is the — how are you prioritizing use of excess free cash flow going forward in the business? Thanks.
