Q4 2020 Simply Good Foods Co Earnings Call
Greetings and welcome to the <unk> Foods company's fiscal fourth quarter 2020 conference call.
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Great question and answer session will follow the formal presentation.
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Now my pleasure to introduce your host Mark <unk>, Vice President of Investor Relations.
Can you maybe get thank you operator.
Good morning, I'm pleased to welcome you to the 50 that each company earnings call for the fourth quarter and full year ended August 29, 2020 jokes Gals, <unk>, President and Chief Executive Officer, and Todd Comfort Chief Financial Officer will provide you with an overview of results, which will then be followed by <unk> session.
The company issued its earnings press release. This morning at approximately seven am Eastern time, <unk>, a copy of the release and accompanying presentation are available under the Investor section of the company's website at Www <unk> simply a good pizza company Dot Com. This call is being webcast and an archive of today's remarks will also be available.
During the course of todays call management will make forward looking statements that are subject to various risks and uncertainties that may cause actual results to differ materially.
The company undertakes no obligation to update these statements based on subsequent events a detailed listing of such risks and uncertainties can be found in today's press release and the company does he think five.
Note that on today's call, we will refer to certain non-GAAP financial measures that we believe will provide useful information for investors a part of that.
Nature of this information is not intended to be considered in isolation or the substitute for the financial information presented in accordance with GAAP.
Please refer to today's press release for a reconciliation of non-GAAP financial measures to the most comparable measures prepared in accordance with GAAP. Additionally, note that managements replicas legacy acting just to the East Asian, and middle market companies that simply good business excluding quest.
With that it is now my pleasure to turn the call over to Jos Gallagher, Our President and Chief Executive Officer.
Thank you Mark good morning, and thank you for joining us today I'll recap simply good foods fourth quarter and full year results and provide you with some details on the performance of our brands.
And Todd will discuss our financial results in a bit more detail then we'll wrap it up with a discussion of our outlook and then open the call to your questions.
Last eight months have been an extraordinary period.
And the Cobi 19 situation continues to impact shopping behavior and consumer consumption habits.
During this time Weve all faced challenges on the home and work fronts.
However, I couldn't be more proud of how our team has stayed focused and executed against our plan during these challenging times.
Despite the volatility we experienced during fiscal 2020, we executed well against our company initiatives for the year.
And those include increasing market share within the total nutritional snacking category and the sub segments of active nutrition and weight management.
Diversifying our portfolio with the acquisition of quest.
Hitting every milestone on the integration of the business as well as the ERP implementation.
In achieving our fiscal 2020 synergy target while remaining on track to realize our three year 20 million target prior to the end of fiscal 2022.
I'd be remiss, if I didn't call out our supply chain team, who perform exceptionally well this year with no major issues.
Our team worked collaboratively with suppliers and contract manufacturers and distributors to ensure production occurred seamlessly throughout the year.
Importantly, our outsourced supply chain has proven to be a competitive advantage in these times and gives us confidence that despite near term top line volatility our margins remain stable.
Cash flow steady insufficient to support future growth.
Fiscal 2020, the marketplace changed dramatically at mid year.
We adjusted to these changes and despite the revenue impacts resulting from stay at home restrictions.
We delivered adjusted EBITDA at the low end of the outlook that we provided to you in January.
It was after we closed on the quest acquisition and before COVID-19 became an issue.
In doing so we executed well against our plans amidst an uncertain operating environment and made investments in our organization and our brands to position us to deliver sustainable sales and earnings growth as.
As consumers and the economy recover from the pandemic.
Our branding category marketplace trends improved from the third quarter to the fourth quarter at the U.S. emerged from confinement and move to a partial reopening.
That's sales exceeded our expectations due to better than expected retail take away continued strong E commerce growth.
And the timing of shipments related to a first quarter promotion.
Adjusted EBITDA for the fourth quarter increased 53.5% exceeding our estimates, reflecting the inclusion of quest the greater than anticipated increase in sales and strong cost controls.
These gains were partially offset by $3 million impairment charge related to the simply protein brand that we subsequently sold on September 24 2020.
Total simply good food retail take away and in the fourth quarter increased 3.9% and U.S. measured channels.
Outpacing the category that declined about 3%.
Our performance was driven by the more snack oriented portion of our portfolio, primarily Atkins confections quest protein chips and cookies that are consumed mostly at home.
Bars for both brands remain pressured due to fewer on the go usage occasions.
The retail takeaway trends of our total simply good foods business tracks generally in line with the category pre Cove at 19, and during the Cobi 19 confinement period and semi reopening.
For periods of this chart provides you a good visual of how our business has performed by week in calendar 2020.
Remember that I or I track channels account for most of Bakkens, Pos, but only about 60% of quest given its large business in the convenience store, especially in E commerce channels.
Recovered 19, we enjoyed strong growth with our performance in line with plan and tracking to deliver another year of a bulk category performance.
After the brief pantry loading period in mid March.
The category saw a marked decrease in shopping trips and fewer usage occasions.
This affected our portable and convenient on the go products, especially our large bar business on both brands.
These two factors resulted in a decline in retail takeaway for our brands and the category starting in late March.
It's home confinement restrictions began to ease in may shopping trips steadily improved from their lows in April.
Consumer interest in weight management, and active nutrition began to improve sequentially.
However in mid to late July the improvement in category trends plateaued.
The active nutrition segment.
The category, which includes quest plateaued up low single digits.
July and over the first two months of fiscal 2021.
In that quest has outperformed the active nutrition segment over the same timeframe.
The weight management segment, which includes Jack and has improved but it's still down in the upper single digits due to temporary lower consumer interest in weight control fewer on the go usage occasions and weakness in the mass channel does experience meaningful reduced shop.
Shopper traffic during the pandemic.
We believe our diversified portfolio and channel mix is a strength.
As this slide depicts bars are about 50% of our business and shakes 25%.
Fiscal 2020 bars decline mid single digits due to lower usage occasions in the second half of the year.
Shakes increased low double digits at some softness in actions was more than offset by the launch of quest shakes.
All other snacks increased.
About a combined 30% and 2020 and represents about 25% of our business.
Majority of these farms are consumed mostly at home are doing extremely well and have strong velocities.
Importantly, they were growing pre cobot and have accelerated during home confinement.
Turning to the fourth quarter net sales increased 59.7% driven by the quest acquisition.
Legacy actions net sales declined 8%, which was better than our initial forecast.
Excluding the 50 Threerd week in the year ago fourth quarter period packages that sales were slightly lower than last year.
Actions performance was driven by continued E commerce momentum.
Improved retail takeaway versus our expectations and the timing of shipments related to promotional activity.
Net sales for the fourth quarter exceeded our forecast an increased about mid single digits on a percentage basis versus last year.
Four months was driven by stronger than anticipated retail takeaway in measured channels in E commerce, partially offset by the softness in convenience stores and specialty classes of trade.
The increase in adjusted EBITDA is a direct result of higher gross profit driven by the inclusion of quest and legacy Atkins cost control offset by the previously mentioned 3 million dollar impairment charge.
I will provide greater details on these metrics in just a bit.
Bakkens fourth quarter and full year retail takeaway was off 4.9% and 0.4% relatively in line with the category.
Similar to last year actions bars, and shakes were pressured we.
We estimate about 40% of the consumption of Bakkens occurs away from home therefore, lower on the go usage occasions impacted these farms.
Actions bars, retail takeaway declined, 11.1% and 2.4% for the fourth quarter and full year respectively.
Although in both periods Atkins bar performance out paced the bar segment of the category.
I can is ready to drink shakes declined 8.3% and 9.4% in Q4 and for the full year.
Hi, Conns confections momentum continued with retail takeaway up 17.3% in the fourth quarter and 21.9% for the full year.
Our E Commerce business remains strong and increased 55% in the fourth quarter driven by a mix of existing.
A new online shoppers.
We estimate that ecommerce contributed about 2.6 percentage points to total Atkins brand net sales growth in the quarter.
For the full year E Commerce sales increased 77% and represents nearly 9% of legacy actions total U.S. gross sales.
Our brand was responsive a shopper trips improved but lower on the go usage occasions, and the temporary lower importance of weight management. During this time.
Our headwinds.
As a result actions total buyer growth was slightly down this year with buy rate slightly up.
Importantly, our analysis shows the brand switching has been minimal and our existing consumers loyal.
Change in shopping behavior, we discussed last quarter continued in Q4 trips at large mass merchants, our biggest channel are slightly improving but are still well below last year.
Traditional grocery channel trips are better as his actions performance there.
The chart at the bottom of the slide indicates in fiscal 2020, I can sales in mass channel declined low double digits on a percentage basis versus last year.
Particularly pleased with our performance in the club and ecommerce channels, which now represent about 21% of total Atkins U.S. sales.
Given that shopper traffic is better in the traditional food travel appears the cobot erect consumers are less price sensitive more focused on convenient locations quick in and quick out and perceive cleanliness.
Let me now turn to quest, where Q4 and full year retail takeaway increased 28.4%.
21.3%, respectively in the measured IRI MULO universe, driven by snacks and the launch of shakes.
Wes generates about 60% of its U.S. sales in the <unk> ride MULO universe of traditional food drug mass and club travels.
The other 40% of quest U.S. sales are generated in the convenience store class of trade and the and measured E Commerce and specialty channels that are not included in the MULO energy universe.
Lets ecommerce business continues to do well.
And we estimate that sales increased 25% in the fourth quarter full.
Full year sales were up less than that.
Lets snacks, driven by chips and cookies performed extremely well with retail takeaway in the fourth quarter and the full year up 95% and 72% respectively.
Retailer and consumer demand for these products, which remains strong represents about 27% of the quest business during the quarter.
West bars declined 5.8% in Q4, much better than the bar category that was off low double digits.
For the full year quest bars were down only 1% versus the bar category that declined mid single digits.
As I mentioned earlier bars have been impacted by less on the go consumption.
Quest is outperforming the category due to its large loyal and active consumer base.
The fourth quarter and for the full year, the specialty channel underperformed the measured MULO universe.
Fiscal 2020, we estimate that the specialty channel sales declined about 45%.
This channel is about 9% of quest sales at year end down about by half from last year.
We expect specialty to continue to be a headwind over the near term, albeit a smaller one as a trinket importance to the brand.
After pulling back on promotions marketing a retail merchandising in the third quarter, we increased spending in the fourth quarter on both brands.
Fiscal 2021, we anticipate that advertising and marketing will increase at least in line with organic sales growth.
Well in the first half of fiscal 2021, new actions, Rob Lowe advertising will be on air communicating the benefits of our products and promoting at home consumption.
Some of the relevant messaging includes actions bars are better and healthier alternative to other at home snacks.
The importance of losing weight gain during the pandemic.
Better shakes include key vitamins and minerals that support the immune system.
And providing solutions for people to eat better working from home.
Oh advertising will also support a robust innovation some of which you see on the slide that we believe is the most robust pipeline in years.
We have a good balance of new product forms across both of our brands.
Additionally, the fall resets are on track and you should start to see some of our innovation on shelf at select retailers in November.
Summary to simply good foods company compete in an attractive category with two scale lifestyle brands that transcend forms and usage occasions.
The quest initial integration and full ERP implementation are largely complete and we are on track to achieve our three year synergy target of $20 million.
We'll begin to recognize the majority of the 10 million fiscal 2021 synergies beginning in January.
Our performance will be pressured in the near term until further easing of movement restrictions.
Despite these pressures we are gaining share in the category and then sub segments of active nutrition and weight management are.
Our brand equities are strong as evidenced by the solid performance of our other snacks that are primarily concerned at home.
We continue to engage with consumers and be flexible in our approach to brand investment to drive growth.
The actions and quest brands are aligned with consumer Mega trends for healthy snacking with the nutritional profile that is protein rich and low end carbs and trigger this.
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.
Now I'll turn the call over to Todd to provide you with some greater financial detail God.
Thank you Joe and good morning, everyone. Let me start with two points as it relates to the numbers you see on the slides that follow.
First for comparative purposes, we will review financial statements for the 13 and 52 weeks ended August 29, 2020 versus 14, and 53 weeks in the year ago period.
Full fiscal year information includes quest results from the November seven 2019 date of acquisition.
Lastly, given our asset light strong cash flow business model, we 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 todays press release.
We believe these adjusted measures are a key indicator of the true underlying performance of the business.
I will begin with a review of our net sales.
Fourth quarter legacy Yadkin sales declined 8%, primarily due to the extra week in the year ago period.
Excluding the extra week fourth quarter net sales declined 1% versus the fourth quarter of 2019.
Legacy Atkins brick and mortar volume declined 9.2%, while E commerce increased 55% in the quarter.
And contributed about 2.6 percentage points of growth.
Net price realization was a 1.4% headwind due to higher customer spend as discussed last quarter.
Note that the company's Q4 net sales per cent change versus higher I MULO retail takeaway is up primarily due to the 50 Threerd week and non measured ecommerce contribution as well as a shift related to Q1 promotions that added approximately 2% to Q4 growth.
The full 13 week Q4 quest contribution was 67.7% benefit resulting in total Q4 net sales increase of 59.7%.
Now for a review of fourth quarter results across other major metrics gross.
Gross profit was $88.1 million, an increase of $28.9 million or 48.9% driven by the inclusion of quest growth.
Gross margin declined 290 basis points to 39.6% in the quarter, primarily due to the inclusion of quest, which has lower gross margins than legacy Atkins.
Additionally, gross margin was impacted by an unfavorable net price realization and negative product mix as far growth lagged the overall business.
Adjusted EBITDA increased 53.5% to $37 million driven by the increase in gross profit and legacy acting as gionee expenses, which declined versus the year ago period.
Looking at it by line item total company, selling and marketing expenses increased by 23.1% for $4.6 million to 24.5 million.
The increase was primarily due to the inclusion of quest.
Excluding integration and restructuring expenses non core legal costs and stock based compensation up $7.3 million. She can expenses increased about 58% or $8.8 million in Q4. The increase was attributable to the addition of quest, including costs related to the ERP and.
Cementation.
Additionally, the company recorded a 3 million dollar impairment charge related to simply protein brand.
Moving to other items in the TNL interest expense increased $5.3 million to 8.9 million due primarily to the increase in the term loan balance our effective tax rate in the fourth quarter was 29% lower than the year ago period, a 36.6% due to timing of select items.
As a result reported net income in Q4 was $12.4 million versus $6.1 million in the year ago period.
Full year results are as follows net sales increased 56% to 816.1 million driven primarily by the quest acquisition and a 1.2% increase from legacy Atkins gross profit was 324.3 million an increase of 106.9 million or 49.
0.2% driven by the Quest acquisition.
This was partially offset by the previously discussed non cash $7.5 million inventory purchase accounting step up adjustment related to the quest acquisition.
As a result reported gross margin was 39.7% a 180 basis point decline versus last year, the non cash inventory step up adversely impacted full year gross margin by 90 basis points.
Adjusted EBITDA increased 55.9% to $153.9 million driven by the increase in gross profit, partially offset by selling and marketing expenses, which increased 40% or $27 million to $94.5 million. The majority of the increase was due.
With the addition of quest and slightly higher legacy actions expense.
Additionally, gionee expenses, excluding quest related integration and restructuring expenses non core legal costs and stock based compensation increased about 58% or $30 million due primarily to the inclusion of quest as mentioned earlier. The company also recorded $3 million impairment charge.
Related to the simply protein brand.
Onetime costs related to the quest acquisition, including business transaction expenses integration and restructuring costs were combined $43.4 million.
Moving onto other items and the personnel that the net impact of interest income and interest expense was an increase of $21.5 million due to the higher term loan balance income tax expense was $13.3 million versus $16.8 million in the prior year as a result full year.
Reported net income was $34.7 million versus $47.5 million last year.
Turning to EPS.
Fourth quarter 2020 reported EPS was 12 cents per share diluted compared with seven cents per share diluted in the prior year, primarily impacted by depreciation and amortization expense of $4.4 million higher versus last year due to the inclusion of quest integration costs of 1.3 million.
And the restructuring expenses of 4.1 million.
Adjusted diluted EPS was 20 cents a share an increase of five cents versus the year ago period note.
Note that we calculate adjusted diluted EPS as adjusted EBITDA less interest income interest expense and income taxes.
Full year reported EPS was 35 cents versus 56 per share diluted share in the prior year, primarily impacted by depreciation and amortization expense of $16 million higher versus the year ago period due to the inclusion of quest and non cash inventory step up of 7.5 million and.
Business transaction integration and restructuring costs of $43.4 million.
Full year adjusted diluted EPS was 91 cents a share an increase of 14 cents versus the year ago period.
Please refer to today's press release for an explanation and reconciliation of non-GAAP financial measures.
Moving onto the balance sheet and cash flows and fiscal 2020, we paid down $50 million of the term loan and at year end. The outstanding term loan balance was $606.5 million. In addition in June we repaid the $25 million that the company borrowed under its revolving credit facility in March.
Year end, there were no amounts outstanding under the revolver.
Building on last quarter's momentum cash flow from operations in the fourth quarter was $35 million, resulting in $75 million the cash flow from operations in the second half of fiscal 2020.
Therefore as of August 29, 2020, the company had cash of $95.8 million.
As of August 29, 2020, the net debt that fiscal 2020, adjusted EBITDA ratio was 3.3 times. This ratio would be lower if quests contribution to adjusted EBITDA for the full 52 weeks in fiscal 2008 was included.
Despite the challenges related to cope in 19, we currently anticipate a trailing 12 month net debt to adjusted EBITDA ratio well below three times by fiscal year end 2021.
Full year, depreciation and amortization was $16 million and capital expenditures were about $1.7 million capital expenditures for fiscal 21 are expected to be $5 million to $6 million driven by equipment for our new warehouse.
We anticipate interest expense to be approximately $30 million.
Note that the divestiture of simply protein and our decision to exit Europe is about a 2% headwind to net sales in fiscal year 2021.
And our solid cash flow provides us with the financial flexibility to support future growth.
I'd now like to turn the call back to Joe for closing remarks.
Thanks Todd.
The improvements in category trends in the fourth quarter was encouraging but there is still uncertainty related to when consumption behavior and shopping trips, particularly in the mass channel were returned to more normal levels.
The unknown duration of the pandemic and its impact on consumer shopping and consumption behaviors make it difficult to provide full year fiscal 2021 outlook at this time.
However, we expect that total simply good foods retail takeaway and revenue trends in the first half of fiscal 2021 to perform similar to current trends there.
Therefore, we estimate that in the first half of fiscal 2021 net sales will be in the 425 to 435 million range.
And adjusted EBITDA in the $77 million to $82 million range.
Additionally, we expect.
Inflation to be modest qwest synergies will be more meaningful from Q2 to Q4 and advertising and marketing to increase in line with organic sales growth.
Combined with our variable business model, we expect full year gross margin to be about the same as last year and adjusted EBITDA margin to increase.
As Todd mentioned, our advantage business model enables strong cash flow generation and provides us with the financial flexibility.
Health and wellness snacking is important to consumers and low household penetration is a long term opportunity.
We remain very confident in our business model and our long term growth prospects and believe that when the reopening of the us economy resumes and sustains consumer shopping behavior will return to more normal patterns and our brand benefits of active nutrition and weight management will drive greater better for you snacking a meal replacement usage.
Indications.
We are executing against our strategies and are well positioned for long term sustainable sales and earnings growth that we expect will create value for our shareholders.
We appreciate everyone's interest in our company.
And we are now available to take your questions.
Thank you we will now be conducting a question and answer session.
If you would like to ask a question. Please press star one on your telephone keypad.
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For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star keys, one moment. Please while we poll for your questions.
Our first question is coming from the line of Chris Growe with Stifel. Please proceed with your questions.
Hi, good morning.
Okay, great. Thanks, Chris Hi, I, just had a couple questions for you.
I am curious from a high level.
Basically the strategy in this environment is it is it to lean more heavily on quest for the brands growing more strongly or is there a marketing promotion or promotional program that the high napkins could help to revive the sales. During this time I guess more of a kind of a first half question.
How are you approaching kind of the marketing and promoting the product in an environment, where clearly there's less shopping trips unless consumer interest in the category.
Yeah, Chris as we said in our.
Comments, we we lean back in on marketing in the fourth quarter. All the data we had on both brands all the data we had for both brands as it was effective and so we're going to continue that investment as we move into the first half of next year and.
And then also as Weve we.
As mentioned in our comments, we've adjusted so we've made some adjusted adjustments in messaging so on the Atkins brand.
We shot new Rob Lowe commercials in the <unk>. The attempt obviously is the commercials is to adjust to consumers attitudes and behaviors during the pandemic and I think as you see those in the marketplace, you'll see that those do that nicely. We've made some shifts on both brands in media investment based on how they were consuming media in the fourth.
Quarter, and then obviously, probably the biggest change as we move into the first half of this year is about 60% of shelf resets take place right now and so.
We will shift messaging and marketing to start highlighting some of the new products on both brands, but I think overall, we're leaning in on both branches based upon the data we have on the effectiveness of the marketing at the time.
Okay. Thank you for that and then just one more question, which is on the phone.
First half guidance and is there anything around the timing of promotions sort of this year versus last year and then just I'm also curious related to that how your inventories stand and maybe retailer inventories stand currently.
And how that could affect the first half sales outlook.
Yes, I'll take that no no big shift in promotional timing it's got.
It's very similar to the first half of last year. So obviously, a big impact there. We did mention there was a shift in timing that brought some revenue from Q1. This year into Q4 of the prior year. So that will be a slight headwind. There's always a lot of noise. There's no reason why we gave.
First half versus you know individual quarters, we always have a lot of noise with.
With resolution period shipments between November and December so they can have a significant impact in Q1 versus Q2, so we're much more comfortable with giving.
First half guidance.
But other than that it should be it should be pretty normal.
Okay. Thanks, so much for your time.
Thank you. Our next question is come from the line of Alexia Howard with Bernstein. Please proceed with your questions.
Good morning, everyone.
Although akcea warning.
Hi that I'd like to.
Two questions first of all our input cost inflation, we've obviously seen some of the grain input costs.
Talk to you.
Over the last couple of months wondering when that might hit.
Now.
And how far hedged out you might be.
Black.
And then my second question on a very different topic is now that youre, a net debt to EBITDA coming down fairly sharply.
At what point might you be in the market again for another deal and actively looking right now.
Pandemic to see if at all any available opportunities.
I'll.
Take the first one Todd and I'll take the second.
Absolutely so as Joe mentioned, we're expecting some modest inflation.
Fiscal year 21.
We are we're pretty well covered for at least the first half of our fiscal year, where we're seeing some input cost pressure is in dairy and soy proteins.
We're seeing some benefits in some other area. So clearly are seeing some inflation out there in the marketplace, but nothing.
We believe we cannot handle through a lot of synergies and other.
Cost savings initiatives that we have out there. So again modest inflation first half of the year, we have great visibility.
We believe it's impacted into the plants that we gave you.
Yes, Alexia the second question I'd like to answer the M&A question I'd like to first.
Take the time to say thank you to the.
Snpl team and actually the quest team so.
I think probably the first virtual business integration ever executed. So as you can imagine as we got into the mainstream of the integration of quest.
Both of the both of the companies went to remote operations. So we were integrating the organization doing our ERP integration do art business process integration all virtually since March and the team has performed extremely well we hit every key milestone in the plan. We went live with the organization.
Then in the ERP on Sept first of September and by all accounts have done an outstanding job.
We have a little bit more work to do as we move through the end of the calendar year to to complete some of the organizational work and then I think as we emerge in the new calendar year, we'll have our heads up in the balance sheet. As you pointed out that is in a decent enough shape that we can start looking at other assets.
But I didn't want I do want to say thanks to.
David Bush and his team at Quest leadership team and my leadership team and all the people at Snpl. They did a phenomenal job in difficult situations in integrating the two businesses and keeping the business on track overall thank.
Thanks for that question.
Great. Thank you very much I'll pass it on.
Thank you. Our next question is coming from the line of John Baumgartner with Wells Fargo proceed with your questions.
Good morning, Thanks for the question.
Joe.
I wanted to touch on your secondary categories be it chocolate on the Atkins side and salty snacks in the quest side given that those are not really becoming material contributors to growth can you walk through your expectations for those categories.
Anyone be it from new distribution, New brand investment and then over the growth. We're seeing now how much of it do you think is just tied to the broader at home food shift and how much is tied to underlying velocities and new distribution any thoughts on that would be appreciated for forever 21. Thank you get really really good great question. So are all the all other portion.
Of our portfolio, what you're talking about confections column other forms right confections Anak ends soon to be confections Onquest, we might just launched a peanut butter club pickup on the call.
West business in September and then the chip business and the Cookie business there.
We have high expectations for all those products and the reason for it is there a different consumer usage occasion and need state than those satisfied by our bars and shake business, so opportunity to bring incremental consumption and incremental consumers into the franchise and just based upon the momentum.
In a pretty compelling from a consumer interest standpoint, so you should expect our portfolio to continue to fill out in those areas. We continue to drive those use occasions and innovate in that category and as we as we have shifted our marketing moving into the first half of the year you should see.
Increased emphasis emphasis against those against those form so.
I do think I have high expectations from an innovation standpoint, new product development marketing and white space on those farms going forward given that they're fairly incremental to our existing product base and both of these businesses are in a consumer household penetration gain game. So.
New forms and new usage occasions are really important to these brands.
Thanks, Joe and you're just just to stick with that that scene. It looks like the Atkins brand is getting a bit more and more indulgent you've got some some London tarts and the presentation. Today is there any reason why when you look at the consumer exposures and the overlap. There is there any reason why that salty snacks or cookies would not make sense for the consumer.
You kind of think about cross pollination between portfolios.
None that I can take us.
So that probably the most important thing is the overlap from a you know why that product the product profile of these brands is not dramatically different from a nutritional profile standpoint, the user bases are completely separate and completely incremental to each other so we would view how to.
Innovate on each one of these bad brands as specific to their target audience and worry less about is there a product overlap between the two so I think in the cookie and salty chip case as is for actions I think you should expect to see some innovation there from us.
And then as is the case on quest. So they are going to enter the confection business.
Just have with.
With a peanut butter cup and more to come. So I think you should expect to see that kind of overlap given the uniqueness of the consumer basis.
Thanks, Joe Thanks for your time, yes everyday.
Thank you. Our next question is coming from the line of Jason English with Goldman Sachs. Please proceed with your questions.
Hey, good morning folks thanks for sneaking me in much appreciate it.
And congratulations to your teams for executing particularly on the integration is tumultuous times.
A couple of questions from me first real quick tactical housekeeping as you look to the sales outlook for the first half how much do you expect the incremental M&A contribution from quest to me.
Yes, so its.
I won't give you an exact number but in total in total.
In total we're going on a core basis, we're going to be flattish okay. So.
The quest piece is going to add.
The 10% to 15% incremental to two.
The full.
Cool.
First half of the year.
That's that's as precise as I can ask for so thank you for that.
My next question.
Is on.
Retailers' shelf resets promotion. So there's been as you mentioned the a lot of volatility here in terms of.
Formats.
We agree with you that most this is transitory although there are some skeptics say maybe this is a sea change I guess my question is how are retailers using everything and maybe there is some interesting telx here in terms of what the shelf resets have shaken out so I'll have the recalibrated the shells have they expand her shrunk space overall are you gaining.
Portion amount of space or are losing and then also I know, it's early but I imagine a lot of resolution promotional plan is already executed how are they looking at that Steve.
Given given the less resident.
Period of of our elected president benefit of weight loss right now should we expect them to curtail that activity as we roll into the new year or are they looking at this is business as usual and sorry, I know, there's a lot in there.
So let me see if I can parse it as a bar Jason wafers.
I think for most retailers as it pertains to their store their store operations of shelf resets seasonal merchandising it's business as usual. So we don't see I mean, there's been a little bit a timing change on shelf resets, but weeks so not really material. So we expect the rate the resets to be finished by call. It November one.
And there are roughly about 60% you know that those resetting or about 60% of the volume in the category. So.
Starting around November one, we'll get a real sense of how that has changed and how that impacts consumer shopping behavior or start to see shopping behavior I.
I think as it pertains to it's as it pertains to shopping behavior shoppers in stores as we said in our comments it looks like consumers. Our priorities are obviously shopping less choosing fewer stores shopping more online and when they do.
Two stores more convenient quicker in and out and I think there is a cleanliness thing or how well they sanitize perception that is driving that behavior I don't expect back to change.
In the near term quite frankly, so I.
I think we've made comments around mass merchant foot traffic has not come back I think that might be more driven just by.
How well they've performed on the store access cleanliness receptivity as well as less shopping behavior, a closer to me behavior. So I think it will modestly improve as we move through the first half of the year.
In fact, we're hoping it is given our dependence on mass merchant as it pertains to the season, we can see into kind of January right now I expect merchandising in line category merchandising by retailer inline with year ago, I think we're going to do a little bit better.
Than we did last year, but I think the real fundamental question is how will consumers respond.
Right. So how will they respond to the merchandising events in the store, but it feels like retailers are from an execution standpoint, returning the business as usual and so we're selling in promotions and expect a strong January promotion season, So we'll see how consumers respond to that.
Thank you that's really helpful. You you didn't really give a lot on the shelf resets and you mentioned that you're going to see the effect on November one.
Have you already seen some of the Planograms isn't there some incremental color you could share in terms of whether you're gaining share space are losing right now.
Yes, I'd like to hold that conversation until the resets in the business performance, we really like our pipeline is really robust against.
Across both brands and in multiple forms.
We expect to do well in the resets, but until it's in the marketplace and performing I just prefer to wait until then have a conversation with you about how it's doing in the marketplace.
Understood. Thank you very much I'll pass it up.
Yeah.
Thank you. Our next question comes from the line of Bauza Ali with Deutsche Bank. Please proceed with your question.
Yes, hi, good morning, and good morning, I guess, just going back to those four sales Lisa I guess I wanted to get a sense in terms of your.
Your first half guidance.
Are you embedding like any potential sort of distribution a few items within that guidance because I know you said that you expect sort of retail take away to trend in line with where its trending currently so just wanted to see if you could share more in terms of.
How the fall short resets or distribution is playing into how you're thinking about your outlook for the first half.
Yeah, we would just stand by our guidance that we feel comfortable in the range that we're in right now it's roughly in line to what we saw in the fourth quarter. So the we think performance on the shelf will be in line with what it was in the fourth quarter.
Okay. Okay and then just my second question is just taking a step back on on class you noted both in the release and earlier on the call that you sort of completed the majority of the integration and I was wondering sort of what last specifically and if you could talk.
About some of the organizational changes that you referenced.
You know now that you now that you've had a year under your belt with quest sort of how should we expect the two businesses to be running together all right. That's a great question. So we have some.
We obviously the the biggest chunk of the work now is capturing.
The synergy.
As it pertains to our supply chain so.
We have a we both at both businesses operate a warehouse in Indiana that will get consolidated with the construction of a single warehouse for both businesses, which will enable us to.
Get our products on one trucks, one order one shipment and one invoice so that will take us through the.
The end of this fiscal year has improved and there is some organizational things getting people on common payroll and a few other things we have to wrap up between common benefits that.
We will wrap up by.
The end of this calendar year.
As it pertains to what's the organization look like going forward.
Interesting from a people standpoint, organizationally more like a merger than a bolt on acquisition. So.
We will have equal numbers of folks in.
The la area as we do in the Denver area. We organizationally, we have a kind of a common value chain. So one supply chain one selling organization that is comprised of folks from both organizations. We've.
We then obviously have shared services finance I T H, our legal all one organization.
And then we maintained separate brand.
Business units, which comprise a chief marketing officer and marketing team for both businesses in the case of African Denver base in the case of Quest L.A. based and then separate R&D team led by one and it actually led by the head of R&D from Quest. So we have a R&D team Thats base.
Based in L.A. sits alongside the marketing team in that way. So think of that brand unit for quest in La and then a similar team in the Denver area for R&D.
So that's kind of the structure going forward, we have kind of marketing driven business units in R&D and marketing located in each of the cities with a comment under lying foundational infrastructure organized by each by one functional head with people in both cities.
Great. Thank you so much you up.
Thank you. Our next question is come from the line of Pamela Kaufman with Morgan Stanley. Please proceed with your questions.
Hi, good morning.
Good morning, how are you Hello.
How are you thinking about the long term health of the category I do.
Do you think that there are any permanent changes to consumer behavior, resulting from the pandemic that could impact your product.
I guess, what doctors give you confidence in the recovery of the category as we move past the pandemic and then are there any strategic changes that you need to make to address.
Yeah, Great question so.
I think overall, we've seen evidence that suggest as people.
If you remember the one chart from our from our presentation that showed the four periods. So we saw at the height of confinement.
Category declined pretty precipitously and our brands. The two in fact across the board every brand its performance was about to say that.
Then as people started as restricted confinement restriction started to ease the business started to category in our business started to perform better.
So almost in a direct line.
And then during the summer as we saw a little bit of a resurgence in the pandemic and infections you saw confinement kind of plateaus, so improvements on people being out and about kind of plateaued at our business.
So it appears there's there appears to be a pretty strong correlation between people out in about on the go behavior I think the benefit the brand benefits of weight management in active nutrition I think are variable based upon.
People returning to more normal lives and so as those have plateaued, so as our business.
I have been in this business seven years I've seen these mega trends for for that period of time I totally expect that as we emerge out of the pandemic I think we'll all have the same acted hectic time crunched not enough time for family meals Ito.
Eating on the go always concerned about our wellness I think all that's going to return and I think our business will return those those things that are headwinds right now will become tailwinds in our business and we're going to continue to see growth.
And then the one factor I keep pointing to its I think its really compelling metric the categories only about half penetrated about 50% of households have.
If you look at most more mature center store.
Categories there in the Ninetys Theres no reason this category given the trends that are.
And that's in our back for so many years. There is no reason that were not in the nineties.
So I do think this category will return to the brands that will when will be the brands that are best position and growing household penetration ahead of the category and I like I like the hand that we have it with this company I like both of the brands their lifestyle based brands, we've defined who the targets are for the brands.
I think we're pretty effective at growing penetration our innovation pipeline is strong I feel optimistic about our ability to return to the kind of growth that we saw pre cove at 19.
Thank you that's helpful. And then I was also hoping that you can comment on the current competitive environment within the ready to drink sales category on and just how you're addressing some of the elevated promotional activity over the quarter from some of your one of your competitors and then.
Seems like private label has been taking share within the category. So just any comments on what you're seeing on your plans for innovation and promotions within ready to drink shakes would be helpful. It feels about that so promotion activity feels about the same for us right the privately.
Mobile entry is a Wal Mart specific targeting the 30 Graham active nutrition protein products and in particular.
Bell rings Premier brand and I, you know I haven't looked in detail to see how how much it's affecting the premier business I know, it's been relatively successful at Walmart.
Our Atkins business has very little.
Substitute ability or switching with any other shakes so our ability to grow our shake business is really driven about on our ability to bend the trends that we're seeing today.
Temporary reduce interest and weight management.
The shopper behavior and mass merchants and.
Our and our ability to.
Just market from a.
From a consumer standpoint, and bring in new buyers into our into our brand and therefore, our shakes it.
It has had some impact on quest shakes that we launch question a year ago, we got distribution, but frankly, the trial levels of our shake business have been lagging in large part due to the fact that from the pandemic difficult to generate trial when people aren't shopping in their normal behavior. So we have seen some men.
And that is a 30 Graham active nutrition product, probably a more direct competitor than certainly a more direct competitor that to premier than we experience with we experienced with Bakken. So it's.
It's going to it'll it'll it has us focused on driving trial as we move into the on quest shakes as we move into the fiscal year and getting our velocities up and where we have new distribution.
Great. Thank you good luck.
Thank you.
Last question is of the day will come from the line of Jon Andersen with William Blair. Please proceed with your questions.
I have one.
One question on E Commerce, if you could.
Share with us the.
Portion for each brand of the two brands that ecommerce now represents.
And talk a little bit about.
How you feel your position from a share perspective.
Online versus offline.
Are there any profit impact.
The implications.
To the business.
And your capability set.
The strength of your capability set.
In.
Product content marketing.
The brands online there is a lot there I'll leave it at that for the moment.
Hey, Todd do you want to handle share of brand and then I'll talk about capability and positioning sure absolutely. So [noise] problem.
From a Atkins perspective, it has grown dramatically in the last couple of years. So it is now about 9% of our total business. A couple of years ago was around it was around 2%, which so we've had significant growth.
On the back inside and we foresee more growth obviously in the future.
From a quest perspective, they had been well developed and E com off for several years now they are one of the one of the leaders in economy and this category clearly it's about 20%.
Of the business.
Is that the largest E commerce retailer out there is quest largest.
Customer.
And both businesses quest and actions are growing.
Significantly and gaining share in ecommerce right now so we're really really pleased with how those businesses that are dealing from a margin perspective, the other a little bit lower than our average we're continuing to not significantly lower but they are a little bit lower than our average as we've talked about before we continue to look for opportunities.
To take cost out.
From a supply chain perspective to bridge that gap, a little bit on the margin, but we're really pleased with both the businesses.
Yeah, I would also say I'm just if you look at the.
History of both brands Quest grew up online. It is the largest bar sold on Amazon today, So well positioned they had a terrific general manager leading their business lots of capability as their largest customer.
Back ends I think three and a half years I think when we went public in E. Commerce was 1% of our business is now we said we thought it should be around 10 to 15 is that nine right now.
So we've done I think the team.
Legacy Snpl teams done a nice job of.
Accelerating that growth.
We have combined those teams under the quest.
Quest leader, we have I think what is best in class capability right now online with Amazon and E Commerce. So.
Our view is the pandemic, probably accelerated adoption of E commerce by four or five years.
And I.
I think we're well positioned to from a content standpoint from a marketing sophistication standpoint from a who shops there how they different from brick and mortar I think we're as good as anybody now and that area and well positioned to leverage the change in consumer shopping behaviors and then trying to link that team obviously with.
The brick and mortar E Commerce organization. So Walmart has done a nice job of building their business targets done a nice job of gold members in size as a number of other retailers and then linking all that with pickup and delivery of brick and mortar trying to get that integrated.
And thinking is one going forward I think will be a core capability I think we're well positioned to do that.
That's helpful. Thanks.
New York, one if I missed this earlier, but one on the integration cost synergies could you talk about the cadence.
You expect as you move towards $20 million of synergies by the end of fiscal 2021 and.
How those will show up whether they'll be.
In reductions in Cogs.
Or opex. Thank you.
Yeah, I'll take that one so.
About half of that $20 million will show up.
This this fiscal year as we mentioned in the call.
Got it are really start to kick it will get a little bit in Q1, but really start to kick in in Q2 in Q2 and beyond primarily because.
The people part of it.
Most people are still within the organization through the calendar years, we hope we will not.
Get most of those synergies until Jan one.
So so the cadence is definitely is definitely loaded back in the three quarters about two thirds of those synergies are going to show up.
Below the gross margin line and Gionee and.
Selling where we haven't we combine brokers about third up and that up in the supply chain, but we had very strong visibility to those savings and feel really good about them.
Thanks, so much.
That is all the time, we have today for questions I will now hand, the call back over to management for any closing remarks.
Thanks again for your participation on the call today, we hope you will continue to remain safe and we look forward to updating you on our first quarter results in January I Hope you all have a good day. Thank you.
This does conclude today's conference you may disconnect. Your lines at this time. Thank you for your participation.
Have a great day.