Q3 2020 Simply Good Foods Co Earnings Call
Greetings and welcome to simply good food companies fiscal third quarter 2020 conference call.
The site all participants are the listen only mode. A question answer session will follow the formal presentation. If anyone should require operators. This its during the conference. Please press star Zero I know telephone keypad. Please note. This conference is being recorded I will now turn the conference over to Mark Bulgarian Vice President.
Investor Relations. Thank you you may begin.
Thank you.
Good morning, I'm pleased to welcome each of the should be good stage earnings call for the quarter ended May 30 gets 2020 jokes Galileo President and Chief Executive Officer, and taught console Chief Financial Officer will provide you with an overview breakout which will then be followed by a Cuban a session.
Any issued its earnings press release this morning at approximately 75 eastern time.
Copy of the release in the accompanying presentation are available under the Investor section the company's website at www simply but each company dot com [laughter] policy webcast in an archived registered eternal Mark will also be available.
During the course of today's call management will make forward looking treatments 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 to that.
Detailed listings such risks and uncertainties can be found in today's press release and the company that's easy filing.
No that on today's call. He will report if you're in non-GAAP financial measures that we believe.
Useful information for investors.
Presentation on this information is not intended to be considered in isolation or to substitute the financial information because that's been in accordance with gap.
Can you just talked in today's press release for a reconciliation of non-GAAP and these trends that you're gonna most comparable measures prepared in accordance with GAAP.
In addition, we don't that management's Revpas legacy Yadkin during todays presentation. Your remarks inconsistently good each business excluding [laughter].
With that it has now my pleasure to trying to call over to drink Scalzo, President and Chief Executive Officer.
Thank you Mark good morning, and thank you for joining us.
Today, I'll recap simply could foods third quarter results and provide you with some details on the performance of Iraq and and quest brands.
Then Todd will discuss our third quarter financial results in a bit more detail when were wrap up the discussion [laughter] with a and outlook perspective, and then open the call to questions.
Before we get into the details of our Q3 results I'd like to discuss the impacts were saying with respect to covert 19.
[laughter] first on behalf of the company's board of directors of leadership I want to say, thank you [laughter] to our entire organization, especially our supply chain team and their related partners [laughter], They operated flawlessly and the quarter with no major issues.
Teams worked collaboratively to meet the increased demand in the first half of March.
In short raw materials production and distribution of our products occurred seamlessly throughout the quarter.
[laughter] during early March in the early stages of covert 19, U.S. consumers pantry loading in anticipation of stay at home restrictions.
Our category in brands experience accelerated growth during this period.
A state restrictions were instituted in late March pantry loading behavior ended for our category a shopping trips declined significantly and for the most part remain that way until restrictions began to east later in the quarter.
With the declines in shopping trips the category in our business was pressured as store trips focused on staples.
Within retail hours smaller format grocery appeared to do better than larger format retail like mass merchants likely driven by shoppers desires to afford people.
During the entire quarter, we saw a step up improvement in E commerce, as well as brick and mortar click and collect pickup and delivery.
Again as consumers are to avoid nonessential social contact.
Beyond these changes in shopping behavior. There were two other factors impacting our business in the quarter [laughter] first there were lower on the go usage occasions, especially for our bar business, which is highly dependent on away from home consumption.
Second our brand benefits of weight management, an active nutrition with less relevant to consumers during the early stages of home confinement.
Of note the more snack oriented portion of our portfolio that is consumed mostly at home.
Like Yadkins indulge confections and quest protein chips, and cookies [laughter] did very well and were up nicely during the quarter.
Importantly, as we exited April marketplace trends for simply good foods and the nutritional snacking category steadily improved.
I believe the improvement was due to easing of stayed home restrictions that resulted in increasing shopping trips increased brand relevance and higher incidences of on the go consumption.
Despite the unprecedented volatility of covert 19, we remain focused on long term growth and doing what's right for the long term health of our employees our brands and our business.
Packaged sunquest third quarter results were impacted by covert 19 movement restrictions that were in place for most of the fiscal third quarter.
These restrictions resulted in unprecedent changes in consumer and shopper habits and practices as day to day lives were disrupted nearly overnight.
With the majority of the population sheltering in place shopping trips were down and there were fewer on the go usage occasions for our brands.
As a result, our sales and consumption declined.
[laughter] gross and EBITDA margin expansion exceeded our expectations and were driven by lower trade promotion solid cost control over outsource supply chain and lower SGN a expenses.
As we stated at the end of May Quest integration and the air ERP implementation are on track and progressing as planned.
But couldn't to simply good foods total company retail take away, we outpaced the category driven by Atkins indulged inquest cookies and chips offset the declines in bars, our largest segment.
Our bar segment is about 55% of our business. It was pressured due to lower on the go usage occasions.
And by lower merchandising as retailers focused on shelf replenishment and dial back on promotion.
Turning to the third quarter net sales increased 54.2%.
Legacy Atkins that sales declined 8.3% as accelerating E commerce growth was offset by declines in measured channels.
Contribution from Quest was a 62.5% benefit to net sales growth.
On a comparable basis quest Q3 sales were modestly lower versus the year ago period.
The increase in adjusted EBITDA as a direct result of higher gross profit driven by the inclusion of quest and a decline of legacy Atkins SGN a expenses.
[laughter] legacy Atkins total gross profit was slightly down due to lower volumes, but encouragingly gross margins were up due to lower trade promotion and improved supply chain costs.
Retail takeaway trends of our business tracks well within the category pre covert 19 and during post covert 19 stayed home restrictions.
The three periods of this chart provide you with a good visual how our business has performed by week in calendar 2020.
Remember they track channel Pos accounts for most of Bakkens revenue, but only about 55% of quest given its large business into convenience store specialty an ecommerce channels.
Pre covert 19, we enjoyed strong growth outperformance was in line with plan and we were on track to deliver another year above category performance.
From early to mid March our brands in the category benefited from stocked up purchasing behavior by consumers anticipating soon to be impose movement restrictions [noise].
This pantry loading pair it was relatively short lived at about three weeks.
As most of the country entered home confinement, we saw a marked decrease in shopping trips and fewer use occasions for affordable and convenient on the go products, especially our large bar business.
These two factors resulted in a steep decline in retail take away for our brands and the category starting in late March.
As home confinement restrictions began to ease in may shopping trip steadily improved from the trough in April and consumer interest in weight management, an active nutrition steadily increased.
With these increases in shopping trips and brand relevance our brand retail takeaway trends also strengthened.
In Q3, Atkins confections momentum continue with retail take away up 12.4%.
The strength was offset by softness in bars, which performed slightly better than the category and shakes.
We estimate that about 40% of consumption of actions products occurs away from home [noise].
Therefore, lower on the go usage occasions impacted our large convenient and portable nutritious bar business.
The bright spot in Q3 was our online business, specifically Atkins ecommerce sales increased 125% in the third quarter driven by mix of existing and new T E Commerce shoppers.
We estimate that ecommerce contributed about six percentage points to actions net sales growth in the quarter.
Year to date E Commerce is up about 85% and represents about 9% of actions total gross house.
For perspective on the growing importance of this channel legacy atkins's nearly tripled its E commerce business over the last two and a half years and we anticipate continued growth over our strategic planning cycle has stayed home restrictions of accelerated shoppers adoption of online grocery shopping.
We also made solid gains a retailer click and collect pickup and delivery and are working on initiatives to ensure we retain these consumers.
[noise] changing shopping behavior also impacted offtake in Q3 trips it large format retailers, our biggest channel or improving but there's still lower than year ago.
Traditional grocery channel trips are better as his actions performance there.
Our brands are responsive is trips improve and we believe the weight management and healthy snacking benefits of actions will become increasingly more relevant as movement restrictions or relaxed.
From a consumer metrics standpoint, the declining shopping trips lower on the go usage occasions, and the lower relevance of weight management during confinement impacted two key buyer metrics during the quarter.
The brand experience lower by rate as well as a significant slowdown in new buyer growth with the two contributing most of the declines in overall brand consumption.
Not surprising as restrictions of east both of these buyers metrics have improved which reinforces the clear correlation between retail take away and less stay at home behavior.
Let me now turn the quest for Q3 retail takeaway increased 5.2% in a measured I or I MULO universe.
As a reminder, quest generates about 55% of its U.S. sales in the IR I knew low universe of traditional food drug mass and club channels.
The other 45% of quest U.S. sales are generated in convenience store class of trade and the and measure to E commerce and specialty channels, which are not track by higher I or Nielsen.
[noise] chips in core and cookies performed extremely well with retail takeaway up a combined 54% in Q3.
Retailer in consumer demand for these products is exciting and represented about 24% of the quest business during the quarter.
[laughter] quest bars were pressure during the quarter down 17.6% and relatively in line with a category due to fewer shopper trips decrease brand relevance and lower on the go consumption.
In Q3, the specialty and C store channels underperformed the measured universe.
We expect these classes of trade to be a headwind over the near term given the significant slowdown in shopping occasions in these channels.
As movement restrictions of East West has outperformed the category and track channels.
And in June Quest retail take away was up across all measured channels, giving us confidence that the brand will continue to be responsive as consumers returned to more normal shopping in consumption patterns.
After pulling back on marketing and retail merchandising in April as movement restrictions began to ease and retailers returned to more normal promotion activities, we increased trade promotion and marketing in late May.
We expect these investments have greater on air advertising and trade promotion to continue throughout Q4.
Our initiatives are focused on the combination of advertising, both TV and digital strong in store merchandising and display support and innovation time to the upcoming fall shelf resets.
In summary, the simply good food company competes in a highly attractive category and were to scale lifestyle brands, the transcend forms and usage occasions.
As we stated in art May 27th press release, the quest integration as well as the ERP implementation is on track.
I have tremendous confidence in the leadership team as we execute on our growth vision of being.
Leading company in nutritious snacking category.
We have preserve distinct brand building teams dedicated to the unique characteristics of our brands, while simultaneously, establishing the right foundation to leverage the scale of our combined organization in the areas of sales marketing and product innovation.
It also provides improved efficiency in our supply chain and customer service functions.
Militates enhanced go to market strategies.
We believe this structure will help us drive meaningful net sales and earnings growth into the future.
The Atkins inquest brands are tightly aligned with consumer Mega trends for healthy snacking with an attrition nutritional profile, that's protein rich and low and carbs and sugar.
This profile has broad appeal to consumers interested in better for you as well as weight management and active nutrition shoppers looking to achieve their goals.
[noise], assuming home confinement restrictions continue to east, we anticipate that our brands will become increasingly more relevant to our target consumers.
As such over the remainder of the fourth quarter and into fiscal 2021, we'll invest in our brands and position our business for long term growth.
For operating our business for the long term and committed to doing the right thing for our employees our customers consumers and investors during these unprecedented times.
Now I'll turn the call over the Todd will provide you with some greater financial details.
Thank you Joe and good morning, everyone. Let me start with two points as they relate to the numbers you see on the slides to follow first for comparative purposes. We will review financial statements for 13 at 39 weeks and it may thirtyth, 2022nd give or given our asset light strong cash flow business my.
While we will evaluate our performance on an adjusted basis as it relates to EBITDA and diluted earnings per share.
We have included a detailed reconciliation from GAAP to adjusted historical items in today's press release.
We believe these adjusted measures are key indicator of the true underlying performance of the business.
I will begin with a review of our net sales third quarter legacy I can volume declined 9.4% the legacy acting E Commerce business business increased 125% in a quarter and contributed about six percentage points of growth.
Brick and mortar volume was off 15.4% and net price realization was a 1.1% benefit.
Note that the return to our normal inventory building Q2.
We discussed last quarter represents the variance between Q3 net sales and their retail takeaway that Joe discussed.
The Q3 quest contribution what the 62.5% benefit resulting in total Q3 net sales increase of 54.2%.
The volume decline I mentioned on the previous lie was primarily driven by bars. As this slide depicts bars is more than 50% ever business I'm very profitable. Despite these pressures we were able to expand gross margin.
Also note that confections chips and cookies are about 20% of our sales and up nicely versus last year. We believe the at home snacking usage occasion is a white space opportunity for us.
Now for a review of third quarter results across other major metrics gross profit was 88.6 million, an increase of 31.9 million or 56.4% driven by the inclusion of quest.
Gross margin improved 60 basis points to 41.2% in the quarter, driven by reduced trade promotions and lower supply chain costs.
Partially offset by next as bar growth lagged the overall business.
Adjusted EBITDA increased 74.2% to $43.4 million driven by the increasing gross profit and legacy Atkins, SGN expenses, which declined versus the year ago period.
Looking at it by line item total company, selling and marketing expenses increased by 40% or $7 million to $24.5 million increase was due to quest as legacy actions declined about 10%.
DNA expenses, excluding quest related integration and restructuring costs as well as stock based compensation increased about 50% in Q3 attributable to the addition of quest as legacy actions cost declined about 21%, primarily due to lower incentive compensation.
Please note that Q3, adjusted EBITDA benefited from lower cost in two areas first the covance impact on retailers pushed in store displays and merchandising from Q3 to Q4.
This lowered our trade rate versus prior year in Q3, and will increase trade versus prior year in Q4.
Second based on our revised outlook for the full year, we trued up our incentive compensation accrual in Q3 with a much less favorable impact EBITDA in Q4.
Additionally, compared to a more modest expense in Q3, the majority of ERP related expenses will hit the personnel in Q4.
Moving to other items in the TNL interest expense increased 4.9 million to $8.3 million due to the higher term loan balance.
Our effective tax rate in third quarter was 26.9% slightly higher than year ago period of 25.4% due to timing of select items for the full year, we anticipate an effective tax rate of around 26%.
As a result reported net income in Q3 was $16.4 million versus 13.5 million in the year ago period.
Year to date results are as follows.
Net sales increased 54.7% to $594.1 million driven primarily by the quest acquisition and a 4.6% increase in the legacy Atkins brand.
Gross profit was 236.2 million, an increase of 78 million or 49.3%.
Driven by legacy African sales growth and quest.
This was partially offset by the previously discussed noncash $7.5 million inventory purchase accounting step up adjustment related to the quest acquisition.
As a result reported gross margin was 39.7% a 150 basis point declined versus last year.
The non cash inventory step up adversely impacted year to date gross margin by 130 basis points.
Adjusted EBITDA increased 56.8% $216.9 million driven by the increase in gross profit, partially offset by selling and marketing expenses, which increased 47% or 22.4 million to $70 million. The majority of the majority of the increase about 85%.
Was due to the addition of quest.
DNA expenses, excluding quest related integration and restructuring cost as well stock based compensation increased about $20 million to $58 million due to the inclusion of quest.
Year to date legacy Atkins Genie is 8.6% lower versus last year, driven primarily by lower incentive expense.
Business transaction integration restructuring costs and stock based compensation for a combined $43.7 million and primary primarily associated with the quest acquisition.
Moving to other items in the TNL.
The net impact of interest in common interest expense was an increase of $15.1 million due to the higher term loan balance.
Year to date income tax expense was 8.2 million versus $13.2 million in the prior year.
As a result Q3 year to date reported net income was 22.2 million versus $41.4 million last year.
Turning to EPS.
In the third quarter 2020, either the company reported 17 cents per share diluted compared with 16 cents per share diluted for the comparable period of 2019.
Q3 was impacted by integration costs of $4.1 million and restructuring expenses of $1.4 million.
Adjusted diluted EPS was 26 cents, an increase of six cents versus the year ago period.
Note that we calculate adjusted diluted EPS as adjusted EBITDA less interest income interest expense and income taxes.
Year to date reported EPS was 23 cents a share versus 49 cents per share diluted in the prior year impacted by the noncash inventory step up a $7.5 million integration cost of 9.4 million business combination cost of $26.9 million and restructuring expenses of one point.
$4 million.
Year to date adjusted diluted EPS was 71 cents, an increase of 11 cents versus a year ago period.
Please refer to todays press release for an explanation <unk> reconciliation of non-GAAP financial measures.
Moving onto it account balance sheet and cash flows year to date, we pay down $21 million of term loan and at the end of Q3. The outstanding term loan balance was $635.5 million as of May Thirtyth 2020, the company has cash of $111 million.
Subsequent to the ended the third quarter the company paid down the $25 million that a bar under its revolving credit facility in March at the end of June the company estimated cash balance was about $80 million.
Despite the negative volume impact due to covert in third quarter. The company generated free cash flow of nearly $40 million and we are well on track to achieving the targeted trailing 12 month.
Net debt to adjusted EBITDA ratio of less than 3.7 times by fiscal year end 2020.
We anticipate net interest expense to be $31 million to $32 million.
Year to date, depreciation and amortization was $11.6 million and capital expansion and capital expenditures was about $800000.
Capital expenditures for fiscal 2020 are expected to be about $2 million lower versus our previous forecast as the estimate for ERP implementation has been reduced.
I would now like turn call back to Joe for closing remarks.
Thanks Todd.
The marketplace trends of our brands have improved sequentially as home confinement restrictions ease during our fiscal third quarter and into the first month or so the fourth quarter.
We believe the increasing consumption is due to increasing brand relevance more shopping trips more on the go consumption.
Rapid growth in E commerce, and pickup and delivery is contributed to these positive trends.
However in the near term, we expect channel shifting away from away from large format to continue and the trips into convenience store in specialty classes of trade.
We'll remain pressured.
As we've previously stated there are many long term growth opportunities that exist in this category and our business.
Consumers continue to tell us that health and wellness snacking is important to them.
And low household penetration will be a tailwind for our business in category for years to calm.
Given our visibility well into our fiscal fourth quarter, we feel reasonably confident and providing total year guidance.
Assuming no major changes in U.S. movement restrictions in the final weeks, if our fiscal year for the full fiscal 2020, the company anticipates net sales of 790 800 million.
And adjusted EBITDA of $145 million to $150 million.
Legacy Atkins net sales and adjusted EBITDA is expected to be about the same as the year ago period, including the headwind for 50 Threerd week in fiscal 2019.
The company estimates at the extra week included into fiscal year 2019, as a headwind to year over year comparisons have reported legacy net sales growth in fiscal 2020 of about 200 basis points of growth.
Hello outlook for full year 2020, adjusted diluted earnings per share is 86 to 90 cents compared to 77 cents in 2019.
Please refer to today's press release for an explanation of the company's definition of adjusted diluted earnings per share.
We appreciate everyone's interest into simply good food company and we are now available to take your questions.
Thank you.
I'd like to ask a question. Please press star one I know your telephone keypad.
Information until indicate your line is in the question Q you May Prestart tell if he would like to remove your question from the Q.
Participants using speaker equipment, and maybe necessary to pick up your handset before pressing the star teas.
Our first question is from Chris Growe with Stifel. Please proceed.
Hi, good morning.
Hi, Chris Thank you for the thanks for the time today I Hope you all doing well.
I just want to ask a as I look at your guidance for the year in the implied level for the for the fourth quarter. It seems like you're you're as I'm, just kind of back into your legacy Atkins.
Outlook is pretty similar to what happened in Q3, and we have seen an improvement in obviously in a slow improvement and so the reopening of some of these states I wanted to get a sense of that aren't that legacy Atkins outlook for the business and then to also understand around that are there any unique like inventory movements consumer pantry level.
And then you also know there like a trade promotional shift from Q3 Q4, just understand how those play into your outlook for Q4 legacy I can sales.
Yes, So legacy act in Q4 will be slightly better than.
In Q3 on an apples to apples basis.
Third, we which isn't a point headwind for the quarter two points for the years.
With retailers.
Pushing out.
Trade promotions and merchandising activity that was two or three point.
To Q4.
Q3.
Got shifts the Q4.
So we won't do a little bit better apples to apples on a volume basis, but.
These are weak is the biggest impact.
Okay and do you believe consumer pantry levels are now at a level that does not incorporated.
A higher rate inventory overall.
We do work where that we're in a good position from inventory no big shifts on a year day basis. So we think it's very level at this point.
Okay, and then just one other question which is around.
The fall shelf resets as we kind of moved through the quarter get closer to that period is that occurring at retail maybe if you had some of those that are that are not resetting shells and I'm just curious from lots in the high level is that a net benefit to you do you have a lot of new products prepared for for the shelf resets.
Yes, so Chris so far it appears everybody is on track that would normally be resetting in the fall to reset in the fall so.
We're in the midst of those decisions right now it's hard to always to protect we've got I think the best pipeline.
In our business and quite a while so we're cautiously optimistic but again in the middle those decisions. This thing so started will start hearing about them.
In August for resets call at September October November.
Okay. Thanks, so much carries on into Chris Tucker.
Our next question is from Phase Oh, <unk> with Deutsche Bank. Please proceed.
Yes, hi, good morning.
Couple of questions from me Firstly, just wanted to talk about the gross margin because I think the expansion was I was pretty impressive then really proved out or variable cost structure I just wanted to understand a little bit more the quantification of you know how much did nowhere promotion help and it.
You also mentioned favorable supply chain cost. So I'm wondering if those as we look ahead to next year do those continue or were those more a onetime oriented and I think it also mentioned a mix or the positive impact so just more color around gross margin.
And if possible if you could break it out between legacy voice as Clos that would be helpful.
Yes. So couple of couple of thoughts so that trade shift obviously helped us in the quarter.
The tailwind will be will be a headwind in Q4 as retailers promotions Q3 Q4.
As we talked about in the prepared remarks.
Well the over 100 basis points positive price realization in the quarter due to that trade show a supply chain just had absolutely spectacular quarter I couldn't have performed in better. We've had so we're really just favorable cost trends.
No hiccups whatsoever, even given the code situation.
So, let's see what the legacy assets business has done a really nice margin expansion in the quarter as you know the quest business.
Their gross margins are a few points lower than than legacy active so that that puts a little bit of a drag overall business, but it's after performance by actions a good performance my questions. While they were hurt by the bars being down that is that there.
Most profitable.
So with bars being down that was a bit of a drag but they put their supply chain performed.
Yes, I'd make a few points as it pertains to next year.
You know given just downturn in demand in general.
It looks like a relatively benign input cost year coming up.
Which I would have said six months ago that would not be the case, we're seeing a fair amount of inflation. So as we look to input costs next year I think.
We're in the when a favorable position just from an input cost standpoint, and then obviously, we start benefiting from a supply chain standpoint, starting into for 21.
The cost synergies of the integration of the two businesses, which is on track.
Part of that is.
Ability.
To to benefit from.
Our combined volumes with our key with our key suppliers as well as ultimately getting into a single distribution network and benefiting from a freight and distribution warehousing standpoint. It will talk about we'll talk but there's more that Q4, but joe points out.
Benign, but I think would cost structure and we will we will have some gross margin favorably because.
He also made one of the point, which I think is really important as we were a vertically integrated business right now the volume loss will be we're dead, we'd be absorbing some significant fixed cost leverage right. One of the strengths of our business model is it's pretty variable models as our volume as decline.
Variable cost is.
We're not we're not sitting on a bunch of fixed costs that that flow through to the.
A real benefit to our business I also want to highlight that our contract manufacturers that a phenomenal job they've got with so in the quarter at the beginning of the quarter, we had been making as much cut as they could make as it was hard to see.
In the early stages of pantry loading how long that would sustain itself and then the business.
Significantly step down that we had actually go back to them.
Change our forecast going forward they did a phenomenal job there they've been terrific partners that we really appreciate their flexibility responsiveness.
Great. That's really helpful. If I could just.
One more it seems like you know on slide 10, you highlighted.
That's a board immune house and that seems like a very sort of relevant message currency and it seems new to me, but I couldn't be wrong, but I'm. Just wondering how are you thinking about that as the marketing messages. The marketing message going forward. You know are they changes that you're making on the shelf.
You know have you improve the product to meet any changes to I guess product ingredient anything out. It's just it's more color around that message Oh, yeah. So we've been tracking consumer attitudes all long in the process. We saw from an attitude standpoint, the increase concern.
Earns around immunity, we saw a pickup and sublimit consumption.
And we know from a though the we have played impacts in our shakes. So theyre vitamin fortified with those vitamin fortifications you can make you can make certain claims around boosting immunity, which.
You know given the changing consumer attitudes around as we thought we thought that was a good tactical decision so and we're executing it 360, so television spots talking about it.
Actually still occurring shakes right now in the marketplace shells tags around it promotion support around it. So I think I think it's a it's a short term tactic I think people will evolve over time, but as long as we see the.
Our trackers talking about that's a high consumer interest claim or benefit we can make those clients will do that tactically.
Great. Thank you so much you walk.
Our next question is from Brian Holland with D.A. Davidson. Please proceed.
Thanks, Good morning.
But our first about just a follow up on the guidance.
I couldn't you know the scanner data out yes, they would imply that absence was down about 5% year on June so can I infer from.
The guidance flat E commerce, it will give an offset your but but given the increased merchandising and marketing investment that's being made.
And I don't know Theres any interest accrued severance benefit on Iraq distribution or anything but does the expectation I guess, most specifically that Atkins consumption should turn positive by by the end of August is that kind of embedded in the expectations that you.
That does not embedded in expectations I mean were yeah. As we said, we're assuming very hard to hard to figure out how to Cook, how cobiz can play out over the next several weeks and several months we've assumed its status quo. So we're assuming we're going to be similar slightly better kind of where we are tracking.
Right now.
Just a seasonally is not as big and Q4, because just because of the summer month or products get shut off it was it'll be a nice positive impact will give me wrong there won't be had positive.
As it was Q3, so we anticipate will continue to track a little bit higher but we do not anticipate right now we will act and business that we will go pod.
Yeah, it's really important they you know as your weighing all the factors you talked about a few of an increase merchandising supported retail increased advertising support the big factor.
Is what's the what's the trend in stay at home confinement that has been a significant factor high correlation to our business that will be the driver we've assumed in the balance of in the last weeks it stays about where it is and with that our performance will.
We'll be about where it.
And again Theres three drivers of this we mentioned in our prepared comments. The first one is when you're staying at home the relevance of our brand benefits just isn't as high weight management active nutrition, when you're hanging around the house most of the time not as important second we have a significant portion of our consumption.
Is on the go.
There's just not as many of those occasions going on when I'm fine.
And then lastly, there is a high correlation in shopping behavior and confined both in the quantity of shopping as well as where I'd shop. So those three factors.
Really have a significant impact it had been highly correlated to our business and is the key driver as we look at our business in the fourth quarter, and we think about our business in 2021.
Okay perfect really appreciate the color that and then I guess.
As you talk about consumer mobility, obviously.
You can you can get pretty granular with the data.
You know track based on some of the earlier Riocan States and now maybe more recently as as you know there.
But it's been a resurgence and Kogan 19 cases.
What do you see a divergence in trends in markets that have reopened or maybe in some markets, where we're seeing now more recently increases there.
Is it moving inline with our <unk> are the trends broadly kind of consistent across the U.S.
Unfortunately, we don't given the presence of national retailers, it's really difficult to look at your business on a local basis right and be able to currently locally I suspect that were states have opened our business is better.
Because that the national correlation.
Is pretty high so I suspect where places have opened up and people are more mobile our business is better.
And the reverse is true where there is more confinement shopping's down Brown brand relevance would be down and on the go use occasions would be down so I I don't have visibility into kind of county by county state by state, but I suspect that's going to be true.
Okay.
Due to tie restrains <unk> comedy everybody in the queue. They said, we're going to ask that you. Please limit yourself to one question.
Our next question is from Jason English with Goldman Sachs. Please proceed.
[laughter].
Hey, good morning, folks and bomber because I have like seven questions, but I'll I'll keep it.
I'm not going to seven.
I guess to stay focused.
Advertising and marketing pressure on the consumer I think last quarter, Joe you talked about in anticipation of perhaps lower ROI in the current environment.
And plans to perhaps pulled back to that.
And we saw in trade spend this quarter.
Can you give us where.
You go over you kind of where the cadence of your advertising investment is as well as your trade spend throughout the course of the year and as we look into Fourq you.
We're hearing more trade come back as the advertising going back to effectively what I'm asking what is that pressure on the consumer look like throughout the year and should we assume or are you expecting any sort of response from that investment.
First of all Jason It's complete coincidence that the comment was made on limiting questions right in front of yes, I was a complete those are complete.
[laughter] I'm sure I'm sure. So first first thing is the merchandising cadence was really driven by customers right. So in the third quarter as they really struggled to keep up with their supply chain store operations folks really we're focused on cleaning the stores overnight getting products on the shelf fruit so for.
For for US we were just responding to the fact that they just stopped promoting and really refocused operational resources and stores. So as their operations have returned to more to to more normal states that state they put promotion back in place I suspect in.
In the all the things being equal or the level of activity. They were going to have in the fourth quarter, probably a little bit stronger than what we had last year.
Hard to know until it actually gets executed we can see the impact of right. So but based on just planning we have a strong fourth quarter relative to prior year as it pertains to advertising. We were we started tracking immediately consumer.
Attitudes and we saw a significant fall off in the relevance of our brands benefits. So we dialed back we just did a value judgment and say people can find at how are they really going to be concerned about active nutrition and weight management. We felt like there were other things based on the data were saying that they were.
Focused on and we just we pull back to advertise we didn't shut it off but we pulled it back and we did that pretty significantly as we continue to track and I think we did trackers every three or four weeks the longer do more people the longer people weren't confinement. The more confinement started to ease the more their attitude started returning.
To more pre Kobe level I back to where they were originally but hey, I'm a little bit more concerned about my weight because concerned about kind of shape.
And then we had some data.
That suggested <unk>, where we spent the money for people. So all our messages in marketing we had a lift in sales relative to folks did so we start layering back in.
The marketing investment towards the ended the third quarter, and we're going to invest in the fourth quarter.
Pretty much steady state and now you may remember on our actions business, we had pretty significant investment year ago, we're going to get pretty close to matching bad.
I can send quest is getting a continues to invest at levels.
And fourth quarter will be very much in line with where they were in the first and second quarter.
Got it that's really helpful or expect the one question and pass off thank you.
[laughter].
Our next question is from Alexia Howard with Bernstein. Please proceed.
Good morning, everyone.
Well exit hi that and so.
About how this.
You've just been thrown in the form.
It's going to affect your innovation funds from here.
During the prepared remarks, you mentioned, the absolute snacking, Oh, Gee being some sort of white space for you or does it materially changed where you're going to be investing resources and the types of thought behavior, so you're going to be going off Jeff. Thank you and I'll pass it on.
Yes, I think at the highest level as a result, the pipeline is what we expected our pipeline to be pre Kobe.
So that is a testament to our R&D organization, our operations organization they've done a phenomenal job of you can imagine mostly working remotely with finishing their.
Able top work and working with our contract manufacturers to get products tested in their manufacturing facilities and so they've got a phenomenal job to keep on track. It is not that easy its been pretty challenging but the teams done a phenomenal job of executing in very difficult circumstance.
The pipeline is as rich as I've seen since I've been CEO here. So we've got a fair amount of innovation coming coming in the fall and as we move into the spring I think the comment around.
The comment Todd made around innovation is about 25% of these around the kind of noncore bar and shake portion of our portfolio. So we are now 25% of our business really isn't in bars and shakes that we have a quest as a healthy chip and cookie business and has a vet.
Very healthy confections business and those businesses have a fair amount of innovation coming because we did two things that need states different use occasions are different and complimentary to our barn shake business overall, so not surprising as we look at different forms were saying a lot of incrementality should expect that going forward.
Our next question is from Rob that person with Jefferies. Please proceed.
Great. Thank you so much.
So I just have a question around kind of a go forward flux in the model right, but we see what what we saw in Q3 was quite impressive right on the cost side.
Now you move into Q4 baby, Saudi trade promo because of a bit marketing brand building, it's going up there's going to there's great innovation on the way.
So we're sitting here you know it's six months from now.
And let's just say you know the trajectory, maybe that's been a little bit positive.
Reverses out right just stay at home orders are extended or what have you right. We don't really know.
I'm, assuming that's left is still there right size. If you now have to plan.
You know and commit to these marketing and promotional.
You know plans into back to school in the fall if you're sitting here in your fiscal Q2 next year in something happens. It sounds like you can kind of revert you know so to speak as you did in Q3 and that's all thanks guys.
Yeah, right I think a good great question first just want to reinforce there's a high correlation between sheltering and our growth in our business. So.
We expect a fly 21 to be highly depended upon what happens for from a sheltering in place standpoint, we have the flexibility to flex investment up or down based upon that we are using consumer trackers were talking to customers every day right if customers get concerned about in store operations.
Dial back promotions, we will do that with that if.
We're seeing interest in our brands benefits Wayne, we will pull back marketing investment we have.
The ability also in.
We have the ability to read.
The effectiveness of our marketing investment if we see those lift starting to fall, we will dial back and adjust accordingly. So yes. It's a it's a good business model right were relatively sophisticated in the front end from a marketing standpoint, and we got a variable cost model. So we don't get punished when volume gets softer so its a.
Good model from an investment standpoint, I think you can expect us to continue to behave similarly, as we watch.
Sheltering change as we move into fiscal 21.
Super Thank you.
Our next question.
Jon Andersen with William Blair. Please proceed.
Good morning, Thanks, Joe talked to the question.
Hi, John.
So my question is on Quest I guess, it's a two parter apologize for that could you could you just talk a little bit about.
The current.
Gross margin profile of quest, why it's lower than the napkins I think it's only a few points lower but it's at a scale issue is it kind of a product mix issue or cost of ingredient issue in and what you expect there.
Can you kind of get that up to kind of a legacy actions level overtime and then also on quest. If you could just talk about what you see as the biggest kind of white space opportunities whether it be HCV.
In measured channels were.
The product line expansions.
Going forward. Thanks.
So I'll take the open gross margin question first so yeah. There through gross margins are about three points lower a part of it is a seasonal it's all product mix there bars have a very similar remarks.
To the Atkins Barb.
Oh, some are there other products pizza cookies.
Our lower margin I'm, good margins will get a bit better.
They scale up over time with that product mix, it will probably not get all the way the legacy I can.
So the second question is where the white spaces.
Well.
Well take a joke I'll take it at first I just want to acknowledge the quest team has done a phenomenal job over the last 24 months and radically overhauling their supply chain to get their cost in line. So.
I think 24 months ago. They were in house manufactured on bars that had some egregious ingredient contracts they done Dave and his team have done a phenomenal job of improving gross margins on the business, giving them room to improve their margins, but also to invest in marketing they've done a great job, we're going to continue that work going for.
I would we feel very comfortable and our ability to continue to get their margins up.
As it pertains to the white space continuing the work that that team started so.
White space. So if you just think about the origins of quest. It was a sports performance active performance business. They grew up in E Commerce grew up.
Ed at specialty sports stores in in your Jim and then if <unk> and was a protein bar business. That's the history of the brand. It is evolve from that to be more than just protein bars more than just specialty and online so growing their white space into into C.
Stores into grocery mass merchants club that work has to continue know by the way also from just a bar business into other forms and then and within the bar business pretty much selling single bars to multi packs. So that work is going to continue right continue to penetrate drive points of growth.
As shown in food drug mass roof, I'm, just being a single bar business to a multi pack business and then expand in new for so the success of their cookie business and the growth of the cookie business the ability to expand into chips really strong they've created some strong legs of growth and the business average.
A broad and deep innovation pipeline, we're going to continue to push forward in those areas.
Great. Thanks, so much.
You're welcome.
Next question is from John.
Sorry.
Yes.
Good morning, Thanks for the question.
Hey, John.
Yeah, I guess, Joe we think about the revenue in distribution opportunities. The club channel has been an area, where the business hasn't really maximize its potential thus far so in a cold world. The now with quest seeing what you're seeing does it change how you're thinking about the opportunity there whether it's increased ability to expand the breadth of some of these new products you're talking about.
Or maybe some flexibility to offset lower margins within club with you the product mix or distribution elsewhere. Just how you think about the options on distribution going forward. Thanks.
Our folks that right, our sands and BJ business would take exception comments that our club store business isn't good right. So first of all we have a better we have a strong we have a strong business in club.
A growing business in club broad distribution, we do really we do really fine job. There right. I think would you were alluding to is the opportunity at Costco and for anybody that does business. It cosco. They didn't start in Costco because you have a lot of brands that kind of got their legs that cosco and then expanded more broad broadly the.
Challenges with Costco is always finding the right product price value equation.
It doesn't disrupt your main stream marketplace. We continue to work with Cosco to find those solutions that are acceptable from our standpoint unacceptable from Costco standpoint from a price value standpoint, and we'll continue to work on that.
Do I think ultimately that that would be in a nice drove that growth driver for our business, yeah, what am I not MISO soup and my surprised that neither request nor are we in the United States have a strong cosco business given how the brands grew up I'm not surprised that as the case, so it's a difficult once.
You grown up in other channels, it's a difficult channel, it's a difficult customer to go into an attempted to grow at a much different proposition that if I grew up at Cosco and expanded broadly. So look we continue to work we look for those solutions eventually that will find one.
Thanks, Joe didn't mean to a short the efforts there [laughter].
Well I do that all the time internally and then I'm reminded that we do have a good clubs for business.
I said that.
Yes, you do.
Final question.
<unk>.
Yeah.
Yes.
Hi, everyone, you said that about 40% of the sales are coming from Amit go consumption.
How do you think about the impacts of working out going to a gym versus just a broader mobility trend I know we've heard.
Anecdotally about consumers building out their home gyms is there any impact that you think that that would have on your brands.
Your first of all the data I gave you with actions data I think the away from or on the go consumption quest is a little bit lower but depending on the bar business. So I think you you bring up a question that we talk about a lot. So the first.
Broadly if I'm out and about our business is good it performed better part of the quest equation is actually an active nutrition equation. There are highly linked to people that work out working out happens to be linked to Jim's.
So I think as people start trying to figure out what those solutions are I think our business will do better right, because they're going to be working out and I do think this solving Europe because your Jim's close figuring out how to work out will be part of the equation going forward I think people will I don't know if you noticed.
You know Amazon sold out of.
Dumbbells, and Kettle bells, and you Couldnt get a bench on Amazon for Awhile. So people are clearly looking for at home solutions to working out and I think as.
As a.
Jens get stalled in opening you're going to continue to PTC people start searching for those solutions and I think the reason they are doing that is.
In the back of their mine they've gone from safety immunity concerns staying at home and the early stages to the of this too. Okay. I may have to live a little like this so weight management becomes increasingly more important to me and working out becomes increasingly important me how am I going to solve those things and then I think you'll see there.
We're experiencing they're eating patterns snacking patterns will change it become.
Huh.
But you know friendlier does so I think great question and I do expect people to start sobbing that as they go for.
Great. Thanks for the color that's that's it for me.
Right.
Yeah, I read I never question and answer session I would like to turn it back to management for closing remarks, yeah. Thanks again for your participation on the call today. We hope you continue to remain safe, we look forward to updating your on their fourth quarter results in October I have a good week.
Thank you. This concludes today's conference you may disconnect your lines at this time and thank you for your participation.