Q2 2021 Simply Good Foods Co Earnings Call

Thank you operator. Good morning. I am pleased to welcome you to the Simply Good Foods company earnings call for the second quarter ended February 27th. 2021. Joe Scalzo President's chief executive officer and Todd Comfort Chief Financial Officer will provide you with an overview of adults, which will then be followed by a Q&A session. The company issued its earnings release this morning at approximately 7 a.m. Eastern time a copy of the release and accompanying presentation are available under the investor section of the company's website at ww.w Simply Good Food Company disco webcasting an archive of today's remarks will also be available.

During the course of today's call management will make forward-looking statements that are subject to various risks and uncertainties that may cause actual results to differ materially the company undertakes. No obligation to update bank statements based on subsequent events. A detailed listing of such risks and uncertainties can be found in today's press release and in the company's SEC filings note that on today's call. We will refer to certain non-gaap Financial measures that we believe will provide useful information for investors due to the company's asset lights drawn cash flow business model. We evaluate our performance on an adjusted basis as it relates to age and diluted EPS. We have included a detailed reconciliation from Gap to adjusted items in today's press release. We believe these adjusted measures are a key indicator of the true underlying performance of the the the presentation of this information is not intended to be considered in isolation, or as a substitute for the financial information presented in accordance with gaap. Please refer to today's press release for reconciliation.

Kitchen on the non-gaap financial measures to the most comparable measures prepared in accordance with gaap with that. I'll now turn the call over to Joe Scalzo president and chief executive officer.

Thank you Mark. Good morning. And thank you for joining us today. I'll recap Simply Good Food second quarter results and provide you with some details on the performance of our brand then title our financial results in a bit more detail and we're wrapping up with the discussion of our outlook before opening it up to your questions.

Second-quarter net sales increased 1.5% or that sells that exclude the impact of our simplyprotein divestiture home and European business exit increased 2.7% driven by continued e-commerce growth Quest success and new forms and solid International performance long as expected trade promotion expenses greater than last year supporting higher levels of in-store merchandising and display additionally as discussed last quarter to two shipments slightly like and function a certain retailers adjusted back from a q1 inventory building.

importantly

Recorder retailer support for the category and Our Brands remain strong.

Just a DVD a for the second quarter increased to 2.2% primarily due to strong cost controls and Quest acquisition synergies.

Total Simply Good Food second quarter retail take away including unmeasured channels increased mid single-digits with iri measure Channel growth of 1.7% off Marketplace transverse similar to last quarter specifically. Our performance is driven by the snackier portion of our portfolio, primarily Confections chips and cookies that are consumed most often at home.

cars for both Brands remain temporarily soft and measured channels do the fuel on the go use education's

And the second quarter we executed well against our priorities driving sales and earnings growth and the challenging Marketplace. We are well-positioned over the remainder of the Year and have initiatives in place that will result in solid Financial results.

Assisting with the first quarter total Simply Good Food second quarter retail takeaway and measured channels outpaced the category across other time frames driven primarily by the snackier portion of our portfolio month importantly the company gain market share as that each of Our Brands and their respective subject of weight management and active nutrition the active nutrition segment of the category which includes Club increase mid single-digits.

Quest POS outperformed the active nutrition segment nearly 3 to 1 during the quarter. I would note that iri Mueller c-store Universe represents about 70% of total consumption weight management segment, which includes Atkins remained soft in the second quarter and decline high single-digits due to fewer on the go using education in the second quarter. I can continue to outpace the weight management category.

Early, our Marketplace Trends in the third quarter are improving.

I can second quarter take away and measure that unless your channels declined single digits a solid e-commerce growth about 10% of sales was offset by Sam Smith and traditional brick-and-mortar. Hello n c store measured China retail takeaway was all 5.7% identical to the first quarter performance in December January sequentially improve versus the first quarter, but February declined mid single-digits impacted by winter storm store closures.

Importantly retailer support in the quarter was solid and in-store merchandising and display was greater than last year supporting consumer seasonal participation as expected challenge friends were similar to the last few quarters Atkins Confections momentum continued with POS growth of 14.3% at least products are primarily consumed at home, shakes performance with similar to the first quarter impacted by fewer on-the-go used education.

Continues to be a strength to consumption up about 50% of the quarter far as the shapes and confession Confections are increased strong double-digits with shakes outperforming and representing about 50% of e-commerce sales in the quarter.

We're pleased to see the power growth continued from the first quarter into the second reflecting consumers renewed interest of weight management as they begin to emerge from COVID-19 movement restrictions or incorrect both growth in new buyers and loyalty among retain buyers tracks similarly to pre COVID-19 benchmarks importantly consumers are coming back to the brand and recognize the attributes of benefits of our program as a way to help them achieve their goals.

High rated a key metric impacting Atkins returned to pre COVID-19 growth levels. Those are all my rate was below prior-year levels do to reduce consumption among bars and to a lesser degree Shack importantly recent Research indicates a high correlation / 0.8 between return to work and I can borrow and shape consumption reinforcing of belief that improving consumer Mobility will positively impact ban consumption and buy rate.

As we enter the third quarter, we would point to 40 factors related to the options brain first year ago comparisons are easier as we lap last year significant consumption declines from the ages of COVID-19 lockdowns second. We're starting to see early signs of improvement in chocolate traffic and measure channels, especially in the mass class of trade give exact development in this channel. It should help both buyer growth and consumption. Effective marketing a new product Innovation should enable us to continue to build on our year-to-date fire track.

and the potential Improvement and consumer Mobility should help accelerate by rate of bars and Shakes and lastly we expected store merchandising and display would be greater than prior years reduce as retailers anticipate consumer shopping and consumption habits will improve

Now let me turn to class word second quarter retail takeaway increased 16% in the measured iri new low c-store Universe importantly Trends improved across the major food inconvenience channels similar to last few quarters are performance was driven by snacks consumed at home as we laughed a year ago launch of ready-to-drink shakes. This headwind has been offset by asking for our performance and the launch of the quest peanut butter cup that's off to a good start.

Quest Market sequentially improved and declined about 4% in the quarter versus 8% in the first quarter. This was a significantly better than the bar segment that was off low double-digit off first half of the year.

As I stated earlier question Commerce business continues to do well with retail the takeaway up to 60% our business at Amazon is strong chips more than doubled bars increased more than 50%

Cheez momentum is building.

The second half of fiscal 2021 we anticipate that POS we continue to be strong and measured in e-commerce channels and in the third quarter and moderate a bit in the fourth as we Lobster of comparisons in a year ago. Chefs in Confections momentum will continue and bar performance will improve and similar to acting in store merchandising and display as being reinstated life versus the prior-year pull back as retailers anticipate consumer shopping and consumption habits will begin to recover.

In summary, we're pleased with our second quarter results that were largely in line with our expectations.

We don't take away with slightly better than

sequential Improvement and nutritious snacks category Trends over the last few quarters is encouraging and the positive growth and inspires indicates weight management is becoming increasingly more relevant.

Combined with easier you're about comparisons and improving shop and traffic and measure channels. We expect solid growth in the second half of the fiscal year.

Recall our analysis indicates that his consumer Mobility increases that correlates to Greater levels of consumption of Our Brands are physical third-quarter is off to a fast start and we're executing well against our plans and initiatives that should drive sales and earnings growth over the remainder of the year.

Dolly return the call over the top to provide you with some greater Financial details.

Thank you, Joe and good morning everyone. I will begin with a review of our net sales total simply good food. Second-quarter net sales increased 1.5% The core North America wage International net sales increase contributed 1% and 1.7% respectively to Total company growth while the simplyprotein brand divestiture and the European business exit were a combined 1.2% heading North America growth was driven by strong Quest volume performance in both measured and not measured channels and modest declines and Atkins Pacifico Atkins solid peacock eCommerce performance was offset by declines and measured channels an increase of trade promotion expense due to higher levels of in-store merchandising versus a year ago. And the previously mentioned timing of shipments in the first quarter related to the seasonal retail inventory build-up Outta 2% headwind.

Core international business where the was a 1.7% benefit to sales growth driven by gains in Australia Australia for both accent and Quest. We anticipate that gross this region will temper in the second half of the year has to be lap these initiatives that began about one year ago.

The best picture of simplyprotein and the European business exit will be about a combined 1.5% headwind to full year fiscal 21 net sales growth versus our previous estimate of 2%

Of second-quarter results across other major metrics gross profit was ninety point three million an increase of four point nine million or 5.7% versus last year in a profit in the prior-year was affected by a non-cash 5.1 million inventory purchase accounting staff of adjustment related to the quest acquisition, excluding the inventory step-up. Gross profit was 9.5 Million last year this resulted in a cute too gross margin decline of 70 basis points due to higher levels of in-store merchandising and unfavorable product form and channel mix.

Productivity and Quest acquisition synergies offset modest supply chain inflation primarily in Bound Freight to our distribution center.

In the second half of fiscal year 2021 we expect slightly lower gross margin do to return to typical retail in-store merchandising levels and modest inflationary impacts the reduction of indoor activity in the year ago period was due to lower shop or traffic related COVID-19 there for full-year fiscal 21, gross margin apart from a purchase accounting step up in the year ago. Is expected to be slightly lower compared to fiscal 2020.

While input costs are not expected to be a meaningful headwind in fiscal 21. We are seeing some inflationary pressure as we examine our fiscal 2022 needs our strategy is to maintain and increase gross margin and we are assessing the levers available to mitigate potential input cost inflation.

Adjusted ebitda, which excludes Quest integration costs restructuring expenses and stock-based compensation increased 2.2% or 0.9 million to 42.56 million primarily due to cost control measures and Quest acquisition synergies overall sgx. STNA expenses were in line with our estimates.

Specifically selling and marketing expense decline 0.7 million do to lower selling costs as a result of synergies and the divestiture of the simplyprotein brand and G&A expenses declined 0.4 million as integration synergies and cost control more than offset higher incentive compensation.

Note that the company Q2 marketing expense was about the same as last year primarily due to the elimination of investments in the simplyprotein grant. However, coordinate, North America and international marketing expenses increased 8% versus last year for the full year the company continues to anticipate that marketing expense real life to its Core Business will increase at least in line with Organic sales growth.

Moving to other items in the penal interest expense to climb 2.69 to 8 million dollars due to the pay down of term loan debt. Our effective tax rate in second quarter was 27.7% about the same as last year.

Come in Q2 was 19.1 million dollars versus ten point seven million in the year-ago.

Year-to-date results are as follows. Net sales increased to eighty two point five million or 21.8% to 461.8 million primarily by the quest acquisition simplyprotein the best picture and the European business exit for a combined 1.4% Headway gross profit was 184.3 Million an increase of 36.7 month 24.9% driven by the quest acquisition gross profit in the year gross profit in the prior-year was affected by the non-cash seven point four million inventory purchased account except Pub related to the quest acquisition recall the non-cash inventory purchased accounting step up with a 200 basis-point had went in the fiscal first half of 2020 Chef looking at the mount gross profit was 155.1 Million last year this resulted in year to date gross margin decline of one hundred basis points driven by higher levels of birth.

Core merchandising and the inclusion of a full twenty six weeks of the slightly lower margin Quest business.

Excluding Quest integration costs restructuring expenses and stock-based compensation adjust either. Increased 24.2% to ninety one point three million dollars off primarily due to the inclusion of twenty six weeks of quest results and in current year as well as cost control measures and acquisitions synergies.

The increase in sg&a expenses were primarily driven by the inclusion of quest specifically selling and marketing expenses increased 13.3% or six million dollars to finish one point three million. The majority of the increase was due to the addition of quest G&A expenses increased about 15% or 5.5 million again, primarily due to conclusions.

But now the impact of interested in, and some interest expense wasn't increase of 2.3 million due to a full six months of the acquisition-related debt income tax expense was fifteen point seven million dollars versus two point two million in the prior year.

Year-to-date net income was 41.6 Million Dollars vs. 5.9 Million last year.

Turning two EPS second quarter reported EPS was Nineteen cents per share diluted compared with eleven cents per share diluted for the Comptroller. At twenty $20,000.21 depreciation and amortization expense and stock-based compensation was seven million dollars about the same as the year ago. Costs associated with the restructuring or two point two million dollars, seven point five million lower versus last year.

Just included DPS which excludes the items just mentioned was twenty-five cents an increase of $0.02 versus the year-ago. Note that we calculate adjusted diluted EPS. She has adjusted ebitda pay less interest income interest expense and income taxes. Year-to-date reported EPS was $0.41 versus $0.06 per share of merrily due to the inclusion of quest as well as lower acquisition and integration integration related costs.

Your date adjusted diluted EPS was $0.54 an increase at $0.09 versus the year-ago. Please refer to the to today's press release for an explanation and Reconciliation of non-gaap financial measures.

Moving to the balance sheet and cash flow in February 2021 the company paid down $25 of its term loan debt and at the end of the second quarter, the outstanding principal balance was 556.5 Million building on last quarter's cash flow from operations. And the second quarter The company generated about $25 million dollars of cash resulting in 39.8 million of cash flow from operations in the first half of fiscal 2021 note that the company typically generates higher levels of operating cash flow in the second half of the Year versus the First Act

As of February 27th, 2021 the company had cash of 91.3 million and the trailing-twelve-month net debt to adjusted. Ebitda ratio was 2.7 times Capital expenditures in the first half of the Year. We're zero point four million. We still expect five to six million dollars of capex and fiscal 2021 driven primarily by equipment or a new Warehouse how Outlook this year for interest expense remains unchanged at approximately Thirty million dollars. I would now like to turn the call back to Joe for Club marks.

Sometimes our business continues to perform well, despite the significant effects over the last year due to reduce consumer Mobility related to cobras.

And the second half of the year, we anticipate improving retail takeaway Trends in our business driven by easier year ago comparisons improving Shopper traffic and brick-and-mortar, especially on a channel and strong Briargrove on both our brains.

If you need consumer mobility in the United States Remains, the current levels and brought lockdowns are not re-imposed. We anticipate full year net sales of 932 month and $40 and adjusted either the pay of 180 to 185 million dollars that includes a combined 1.5.6 internet sales growth related to the simplyprotein to data structure and our European business accent.

Todd mentioned earlier given year to date gross margin performance full year fiscal 2021 gross margin is expected to be slightly lower than physical twenty-twenty the money continues to anticipate adjusted ebitda margin expansion his acquisition synergies and sg&a cost controls are expected to more than offset reinstated in-store merchandising supply chain inflation and higher incentive compensation. Additionally the company anticipates 2021 adjusted diluted EPS to be in the range of m47 to a dollar $11 versus $0.91 in fiscal year 2020.

Combination of actions and Quest provides us with to uniquely positioned brands are aligned around the consumer megatrends Wellness snacking convenience and Bill replacement and consumer feedback indicates that these megatrends will become increasingly more relevant as consumers return to work school and more normal lives. You have an advantage asset-light variable business model that enables strong cash flow from operations and provides us with the financial flexibility to invest in organic growth opportunities and participate in m&a.

We are confident in our growth prospects and are executing against our strategy that position us to deliver on our financial objectives with the ability to invest in the business as a path towards increasing shareholder value over time.

We appreciate everyone's interest in our company and we are now available to take your questions.

Thank you will not be conducting the question and answer session. If you'd like to ask a question, please press star one on your telephone keypad and a confirmation tone indicate your line questions. You may press start to age would like to remove your question from the Q4 participants that are using speaker equipment may be necessary to pick up your handset before pressing the star Keys. One moment. Please how we pull for questions.

Thank you. First question is coming from the line of Jason English with Goldman Sachs. Please just see with your questions.

Hey, good morning, folks. Thank you for stopping in the questions morning. Can you tell us what the organic sales growth was for both vehicles Grand inquest brands?

For the quarter and the quarter you'll see in the queue. The Atkins was down about 10% largely due to the shift from q1 month. And also we had some through the storms in Texas. We had a a fair amount of shipments particularly on the Atkins brand that kind of got held up in transit that will come back to 3 so purses, you know, a low single-digits total consumption timing of shipments was off a bit on on Atkins Quest on the other hand was up in the mountains.

Okay, and I think I heard I think I heard you mention in prepared remarks. That's at that pull into q1 and Q2 was about two points and what happens off? Okay. So it's implying that this deferral is shipments into Q3 may actually be like an 8.4 or larger type benefit Krakens. Am I doing the math properly on that? Yes, it's probably I probably not that much. We also pull back with our with our new business model in Canada that affected you know, the North America business for Atkins as well. So we lost a month or two there. So we lost a few points due to the storms that will go right into Q3 and then we lost a little bit in Canada as well.

Gott it. It's helpful and Joe quick question for

Good question for clarification on on the Outlook in prepared remarks. You mentioned that your guidance is predicated on the the current consumer Mobility level sort of hold these studies rather than sequentially including but at the same time right before that you mentioned you expect Mobility to continue to improve. So I guess the question is which is is is you said you're from you're planning assumption. Are you assuming stagnation on Mobility or are you are you indeed expecting is in planning for continued progress?

Yeah, we're actually assumptions in our guidance been second half of the Year assumes status quo.

Excellent. Thank you so much for the clarification on past noon.

The next question is from the line of Chris Crowley with stifel. Please just see with your questions.

Hi, good morning.

Chris just had a question for you is I think about the current state of your business the current mobility and the sort of sales that's you know, creating in at least in measure channels that we came back and I realized we're going to get the full picture because of the very strong growth in e-commerce, but it would seem to suggest against the really easy comps of the prior-year, you know, some some very strong sales momentum in the third quarters you go into this page easy, and those kind of April and May in particular from the prior-year. I just want to get a sense of how to think about like the current rate of Revenue and again in a world where you don't expect Mobility to improve, you know, should this general sales whole basing your assumptions and there's any other considerations around that like the inventory movements or we got a little bit of that just now from Jason's question, but also, you know promotional timing things that could be distorted up or down in in in the coming quarters.

You're probably helpful to think of it on a quarter basis. So historically third-quarter is a bigger quarter for us than fourth. So I would think the kind of run that you're seeing right now probably will be more like we'll see in the third quarter kind of weak the weak and then we would expect some softening cuz we do see it historically in the fourth quarter just based upon kind of this Iraq business and then you're rightfully pointed out that we we saw higher levels of inventory in transit at the end of the second quarter which obviously jump right into the right into the third quarter. So I think that that's probably helpful from just how to take about run-rate standpoint and again to Jason's question. We're assuming we learn a little bit about Mobility a little bit more specificity around mobility and specifically are Brands Kar late and particular bars and clubs.

Master degree car late not to just consumption correlate not just two general Mobility but being at work and being in transit to work off so gentle Mobility is a good benefit because it improves shop or traffic and in particular in Mass, but we're really looking for people to get back to their normal lives and get back to work. And if you think about it that makes a fair amount of sense what we've been sitting at home. We are probably eating more meals and using our products less formula replacement. When we start going back to sucking in transit to work fewer meal occasions more products in particular bars and shakes used as a meal replacement and or a snack while I'm at work. So I am bility. You know, we understanding what Mobility really means made us a little bit more cautious as we moved into the second half of the year cuz it seems like Mobility is going to get better, but we really need people to Thursday.

Back to working for us that felt like fourth quarter first quarter next year before at least the u s gets back to that.

States that's the color of thank you. Yeah, one other thing I would say just if you remember from last year when COVID-19 hit in March retailers really just kicked out or pulled off all their promotions. So we are lapping that now we're kind of a normalized promotional. For Q3 and also for two months or so, you're going to see if you remember last Q3 volume was way down which was not helpful for us obviously, but our margins both at the gross margin even larger really benefit from that pull back and trade activity. So the prophet held very very nicely. We're going to see a bit of a reversal that into three. I think we're going to have a very strong volume quarter as we lap to Thursday 3, we're also reinstating some trade so that will have a bit of a of a margin hit for the quarter and then is go into Q4 as we started to especially on the quest Club.

Yeah, Quest had a very strong to 4 they snapped back very very quickly and we had pretty normal trade activity in the quarter. And so the the trade impact should be you know, pretty pretty young and cute forward. There will be a Q3 impact.

Okay, that's good color. Thank you and just a quick follow-up cuz it kind of leads into the point you made they're tied around promotional spending and then I guess so I think what you just said, we should look for like a slight more normalized promotional levels for a second half of the year and I just was curious around that if the degree to which incremental shelf space The Innovation if that's prompting even more therefore, then let's call the normalized level of promotion.

I don't you know, I don't think so. It's again, it was just really artificially low last year. So we're going to go back to normal levels off and then just some you know, unfortunately your every year. It looks like there's there's there's You Know instrumental traits band, but it's really just getting back to kind of 2019 levels. Okay. Thank you.

My next question is in the line of fire with your bank. Please see what your question.

Yes. Hi. Good morning. So high. My first question is, you know around Atkins. I think we all know that there are two drivers that have impacted actions one is maybe you know, the weight management side of thing and the side of things and the other is just you know, reduced consumer Mobility as you talked about and I'm wondering how you think about those two drivers cuz you mentioned, you know renewed consumer interest in weight management, and then you mentioned sort of you know return to work as as as mm components of you know, bringing Atkins back to more normal levels. So we just have more perspective around how you think about those two drivers going forward.

Yep. Well great question, you know first.

If if you just track what what's happened since COVID-19 third and fourth quarter on Atkins, we saw dramatic fall-off in people coming to the brand so our new buyer growth post COVID-19 through the end of our fiscal year was down dramatically down double digits and that impacted obviously total volume off second half of the fiscal year on Atkins, encouragingly starting in September and going through the second quarter. We've seen fire flow new buyers coming in off and loyalty among retained buyers at historic levels. So people started coming back to the brand and coming back to Weight Management pretty much timed with beginning of our fiscal year. That's encouraging that means interest in weight management interested in the interest in the brand has been strong since the start of our fiscal year. So we feel pretty good job.

Marketing our marketing is working or product Innovations working. And so the Gap in volume on Atkins. If you think of it from a prior standpoint, it's just straight-out buy rate. How much people are consuming and then that let us do a path of trying to understand what the driver of that is. And what we learned is there's a high correlation and bars and shakes on a chrome and bars on Quest around being at work and being in transit.

Fascinating, right? So what's driving Atkins performance is not people's interest in weight management. It's flat-out the number of occasions kind of well, I am and and how much I smacked right how much I'm using it as a meal replacement. And as I as I mentioned earlier, you know when I'm home, I'm eating more meals and not using snack foods less as a mule replacement, right and I might even snack less because I'm eating more regular meals because I'm home as I start getting back and going back to work and pick up the kids the school and going to sports convenience becomes more important. My snacking Behavior goes up and I'm probably using our products more as a meal replacement and you can see that by faith warm bars and shakes which tend to be more meal replacement oriented than snacking oriented during doing less. Well, that's people have not been at work in an office.

Transit and then the what we call the snackier portion of our portfolio so chips and cookies and Confections. They had no correlation whatsoever to location off. So, you know, there are getting concerned that normal rates and we would not expect any change as in those forms as people return to work and and not returned to their jobs and and kids go back to school. So, you know for us very encouraging consumers are coming back to the brand and as they get back to work. We're going to see by race go back there pretty confident that okay that that's super helpful. I was wondering if you could just like as we think about, you know, the bar transfer request vs. I know we talked about this earlier on in the pandemic how Quest was outperforming. So I'm wondering if if you have any evolved thoughts on you know, why sort of the quest Club

Brent specifically Within

The bar product form is doing better than Atkins.

Yep, less correlated. So it's interesting. We now have the data less correlated to at work and at Transit than Atkins has so pretty interesting them then to some of the drivers of quest. So some of the distribution drivers improving distribution in general some Innovation on bars. That's really doing well. So Quest is done a slightly better job that's related to to uh mobility and being at work and some nice innovation in particular hero bars have done pretty well. So we've seen in a question do a little bit better from a bar standpoint obviously not where we wanted to be but certainly doing a little bit better than I can fast during that period of time.

Great day at the last Factor. The last factor is it's always been over indexed in e-commerce. And obviously that's the channel you wanted to be in and out last year and they continue to perform exceptionally well, and so they have not been as reliant on brick-and-mortar. So that's helped that part of their business as well.

Great, thank you for the other interesting thing is if you just look at the development of the brands by channel, the largest retailer of quest is Amazon doing exceptionally. Well, the largest wage of packages Walmart very challenge during Covent. So those that that fact alone given the importance of those two retailers to each of the businesses has a lot to do with the trajectory of the brands overall.

It's really appreciate it. Super helpful. Yep. Yep, that'd be great.

The next question is from the line of Wendy Nicholson with City Place you with your questions. Hi. My first question is actually just a follow-up to his line of questioning cuz you know, obviously there's a lot of being talked about in terms of maybe consumer Behavior will have shifted permanently from COVID-19. Maybe not every I mean, I think every kids going to go back to play soccer but maybe not everybody's going back to the office and Mobility wage quite what it is or was a pandemic do you think about it that in the context of Atkins in terms of changing the messaging? I mean, we also be adds a ton off but does it make sense to re-think the product assortment or the messaging from the ads in terms of you know, trying to appeal to people if they are in fact going to end up staying home and be less Mobile going forward.

Yeah, first I would say a lot of that. You know, we've obviously participated in some of that conversation just as the CEO running a business as soon as I can get people back to work on getting it back to getting them back to wage loss of efficiency in the organization. So I think to some degree there's various points of view on that. I think it's the conversation is pretty overblown. So my first observation is that going to be more the same pre COVID-19 post COVID-19 than it is different just an observation 2nd. Obviously, we would adjust marketing you're already starting to see on quests off of what I would call everywhere every time snacks. So the confection the peanut butter cup Confections the chips and the cookies tend to behave differently than bars and shakes off the development of that portion of the franchise becomes very important in that it becomes less site-specific less time specific clearly Atkins has that development but Confections, but you'll see a dog

starting to innovate in

Snacks that have less dependent upon going to be in at work and being in transit overtime. That's obviously a second a second strategy and we're pushing that strategy pretty well, but I guess I don't think you're going to see dramatic changes in work performance. I just I expect most companies will be back at work when they had the opportunity to get back to work exactly what's going to happen. Is anyone's guess but it's feeling like, you know somewhere between the 4th of July and Labor Day at people start moving back to the office fair enough fair enough and it's just on the commodity side. I know you called out a little bit of inflation Which is less than what a lot of the other food companies are talking about and I know that's a function of the products you sell and the product mix and all of that but can you talk about your sense of sort of elasticity of demand to the extent inflation continues to creep up your willingness to raise prices. What do you think that will affect demand for the product both on the phone number?

and the west side

Yeah, so we're we have not taken on Atkins. We have not taken a price increase in about four or five years and we are more than prepared if necessary to do it now. We're constantly looking at opportunities and and and running, you know, the elasticity models to see kind of what if we take price. What what would that impact be? We're very very confident that we can execute a price increase and and not only maintain, you know strong volumes, but also obviously that deliver the price realization that we need. We're we're we're seeing we we've been fortunate where we've been locked in. Our our team has made some really nice ugh bets on locking and commodities earlier in the year and we've benefitted from that page and you know a little bit more uh impact than we thought a couple of months ago on some of the proteins both Dairy and soy and we talked about inbound free with higher diesel.

So luckily it's not much of an impact for this year just a little bit more in the second second half than we anticipated but pretty nominal, you know, if prices stay where they are right now. We'll probably have to do something and look look at porn some letters as we go into our next fiscal year, but we're doing the work right now and elasticity models. We're very very confident that we would if we chose to do that. We could execute a very very well fair enough. Thank you very much.

Our next question is from the line for Robert Dickerson with Jefferies laser question.

Great. Thanks so much. Give me just a couple of easy ones for me. I just going back to the question just ask around cost inflation. Some of the levers home. It's kind of more generally speaking. You know, if I look at you know, the company in the actions, I guess historically I don't feel like you really pulled the pricing will ever much right? It's been a about attracting new buyers and you've obviously certainly attract a lot of buyers, right? So go ahead and impressively driven by volumes. So like as you think about, you know, I'm kind of just the cost equation Visa Vie recovery is that you know something you you kind of sit there, you know in a few months as you think forward next year and start to consider some pricing changes as long as the category seems to be pricing as well or you know, you kind of have to tiptoe through this to make sure that you're obviously

Capturing the full recovery as it comes. It's a quick question.

Yeah, Rob, I think I think first or strategies pretty simple maintain are maintained our gross margins as it in the marketplace. So we make significant marketing Investments maintaining our gross margins and slightly improving it with cost savings opportunities is our long-term strategy. We have priced on Atkins when we've needed to from that standpoint. So Todd's comment was one more of we've been managing inflation too new to neutral over the last few years and haven't had the need to do that. But if we see significant inflation looks filled inflationary as we move into physical 21, we wouldn't hesitate to press exactly externally what's going on. Obviously, it's easier when other people pricing around you the selling price increase the customer. So those are always easier environments than leading and and it clearly some of that's going on right now, but we're justifying it we would just suck.

Based upon the fact that we're seeing inflation. We have a strategy of holding margins. We would we would be encouraging retailers to take price at retail not the squeeze their own mortgage and um and um, you know, and and make the movements we need to to make in order to hold our gross margins flat and then any cost savings we have kind of fall two thousand and one.

Okay got it makes sense. And then secondly just on the trade promotional flowers we get through this year and maybe in the next year again, you know, it seems like you're kind of getting back to more normalized rate. Is there kind of anything, you know strategically you kind of think about that you can do to either, you know, increase displayed or you know run ltos or what-have-you kind of adds the mobility increases just to make sure you're essentially front and center that consumers face off. They talked to walk through Walmart a little bit more.

Yeah, look, I feel pretty confident. We're we benefit from one of the more experienced sales teams in the industry. So I feel real confident in our ability as a team to sell in display off especially as people are re-emerging from reduced Mobility. So, you know, the second quarter was a good example. We did a excellent job of executing display across the board pretty much across food truck did a terrific job. I feel pretty confident. We can see third-quarter plans right now. They're pretty well locked. I feel really confident of where we'll be in the third quarter from a display activity standpoint. And you know, we're still we're still doing the planning and executing for the fourth quarter, but we've got a we got a we got a top-notch sales team. We're really good at selling in display off. I think one of the things we tell where is learned is part of this part of COVID-19 is that big Brands matter in categories? Make sure you get those right make sure you get those brands on display to drive.

Epic into the aisle and so

We're taking advantage of those changes and I think of evolution of customer thinking and we're using that the drive display on both of our Brands. So I think I feel pretty good about where we are and we're well as we move through the third quarter, sorry pray and then I guess just lastly kind of the question. We somebody asked a recorder. It's just in terms of of acquisition appetite. I know you said historical e, you know continue to have a decent pipeline looking for something, you know, maybe not as large as Quest but probably still unhealthy snacking thumb. Is there any kind of New Perspective on that just in terms of uh, obviously can't speak to timing but my assumption is nothing's changed pipelines good and Thursday. We're always looking for opportunistic buys.

That's that's it. I think that's true. And then we would highlight that, you know, very encouraged by our debt or click that buy down from the that we took long for the quest acquisition. So we've shown this business model deleveraging pretty quick and then we're looking for assets in the space that we're in and probably what's most important to us is the brand. So what is brand promise do they have a defined consumer Target have they made progress against that Target we look for strong consumer brands with good Innovation pipelines and a strong understanding of who their targets are and so off we found one of those requests and we're constantly on the lookout for the next one.

All right. Thanks so much. I really appreciate it.

All right. Have a good day.

Next question is from the line of Alexia Howard Bernstein. This is easier questions.

Good morning, everyone morning Alexia. So I remember that one of your hopes for the the quest deal was off the potential to expand the product range in some of the markets are Outlets. Particularly Walmart. I imagine that the the pandemic kind of limiting the ability to do that last year. I'm just wondering where you are on that path and your ability to get the SKU count on Quest up in those channels and then I have a

Yeah, that's a good question. We've made progress in certainly in food on a quest and in Target on quests, you know Walmart continues to be a little bit of a challenge resetting once a year. So you're kind of locked and loaded what you get in in the fall and it has been impacted by some loss and distribution of our Shake business that we've seen some shape declines just based upon the performance of Shake Shack. Mart stores through the previous twelve months, you know, we're optimistic that we're going to make progress across the board, you know, the numbers of items and distributional class is the size of the business. It's a drug Mass. There is white space. And as I said before we have a pretty talented sales organization terrific leadership will close those gaps over time. I'm confident of that and obviously we're we've been innovating on Quest we've had incredible success probably the the, you know, our our chip business is probably dead.

best example 6-month business

This is you know fifty million in revenue or ready. So pretty pretty significant success The Innovation pipeline is pretty good. I would expect us to continue to build items on Quest own time and distribution great. Thank you. And then as a follow up the guide down and gross margins for the full year you before you were saying flat now, I think your faith like a down would you attribute that mainly to the higher-than-expected input cost and Freight inflation, or is it more that the promotional activity is having a step up more than you'd anticipated? I'm just curious about the retailer environment and whether whether the retailers are are asking for more at this point. Thank you and I'll pass it on Thursday sure. It's it's really it's there's three pieces of it and they're all pretty small, but they they add up to, you know, our language changing from Flatbush to slightly lower. So we're not we're not anticipate wage.

Significant change my gross margin Outlook, but we want to call out that it was going to be a bit lower than we originally planned. It's really not trade-related. We offer our trade expectations are the same. We we we knew we wanted to have very strong merchandising activity. We've had it we knew we wanted to get back to normal levels and the second half we're doing that to really nothing on the on the trade which has changed our our view. It's really three three components one slightly higher input costs nothing significant, but a little bit of pressure there a second one is brand mix quite frankly Quest is growing much faster than Atkins right now. And as you know quested slightly lower gross margins, so there's a bit of a brand or Chrome but mixed impact there and the third component again last huge but a little bit of an impact is channel mix as brick-and-mortar has been slower to rebound than we had originally anticipated.

He, has not slowed down in fact as accelerated and Q2 and we anticipate will be strong in the second half bath will get a little bit of a margin hit as well. But again all through those things individually are very very small but together, you know a little bit of an impact for the year.

Great. Thank you very much. I'll pass it on.

Thank you. Next question is from the line of Eric Larson with Seaport Global. Please just see with your question. Okay. Thanks guys. Thanks for the question. When you're prepared, to talk a little bit about acceleration of of foot traffic at at the mass Channel level. Can you give us you know a little bit of cadence? You know, how long what is the rate of change net? How quick is that? And then if you can put that into some kind of historical perspective, you know is traffic at the mass Channel 80% eighty-five ninety percent of what it was pre COVID-19 cuz I'd suspect that that would be a big positive for actors for the active Graham.

Yeah, big, you know.

Pretty much consistently through COVID-19 foot traffic Mass down double-digits.

And they obviously were making it up in basket so bigger basket, but when people came to let me step back, it's probably helpful to understand the total context COVID-19 strange people shopping Behavior by limiting the number of stores they visited and for the most part moved people down to smaller formats. So grocery tended to benefit more than Mass did right so smaller stores vs. Bigger stores and I think it was just, you know, safety concerns. So Mass saw declines in foot traffic that pretty much didn't change throughout, you know, from the beginning of COVID-19 through the second quarter of this year foot traffic down, but because people were not eating out obviously more meals the basket when people were shopping were bigger so retailers like Target Walmart benefited from bigger baskets, but fewer shopping trips and

Fewer Shoppers. So as we move into the third and fourth quarter, obviously those retailers. Start anniversary going those pretty significant declines and foot traffic and we're starting to see them moving Trends year-on-year. I would expect those Trends to continue even without improvements in Mobility. I would expect those Trends just over easy easier of comparables off to improve and that's obviously benefits both of our Brands, but it certainly benefits Atkins given the importance of the mass channel to Atkins business.

And will your Buy rate be better with more foot traffic as opposed to larger basket size if that makes sense. It's a great club and you know to tell you we I don't have enough quantitative data to tell you that intuitively you would think you're bi or behaviors would be more buyers given the importance in a Walmart is thirty plus percent of Atkins business. I would think by rate would be impacted as well as fire flow. But you know, I don't have any historic data to to be able to tell you that right so we haven't had a buyer flow issue in the brand September. So and we know that buy rates going to correlate to being back at work and back in transit so long. I I think Mass Merchants Improvement foot traffic should help consumption. We do think that's the case. So but we haven't forecasted for a lot of that at this point. We're we just assumed wage

Mobility is the same and pointed to the fact that we got easier comparables better foot traffic and we should see improving consumption just based on those factors may take that that that's really helpful in your Clarity. So the final question is in this question is already been asked in a different form, but it sounds like in your studies of of you know, I'm buying patterns for Atkins. It's it sounds like you've learned something new about it Atkins given the, you know consumption patterns with driving to work or at work with AV Ur again, does that change the way you Market the brand a little bit? You know, Rob Lowe is not necessarily someone that needs weight management control. So you've positioned it differently, but you've you've learned something there. Does that change how you Market the brand or position it?

Well first I would say the the Mobility data was.

Real helpful for both Brands. So we understood, you know, our our belief part of the data was General Mobility will help us. Well, we've learned now back to work back to school in transit really important choice to bars and to a lesser degree shakes on both of our Brands. So that was an important component to it. So understanding that obviously that's a consumer insight and obviously as we look the market Our Brands we'll we'll move towards that as an Insight from a consumer standpoint. Absolutely, you know your question about Rob, you know, uh, you know, we have we have changed the positioning of Atkins off from a fast weight loss diet ran to a weight management brand and we think Rob is the perfect embodiment of that. And the reason we did that was quite simple besides the target audience about eight million diet fast weight loss consumers in the US about thirty $33 million weight management Consumers Energy.

Interested in low carb so much bigger target audience and the brand is enjoyed that improving consumer penetration than the bigger repositioning around the bigger audience. So we like Rob we're going to control. Okay. Perfect. Thanks Joe.

Thank you. Our last question comes from the line of Ryan Bell with consumer research. Please receive your question.

Hey everyone with the increase of your portfolio page that expansion due to those who are ready consuming Atkins and plus products or that largely from those outside the brand family's kind of seeing if it's a deepening of existing consumer base. Uh, I agree to which there's some incremental, uh consumer expansion going on that that might benefit as we come out of ugh, you know, some of the on-the-go restrictions

Yeah, great. Great question, you know first I would reprint it from snackier to everywhere Every Time products. Right? So what we're learned in fact that they don't correlate at all to where I am, which is really encouraging it says that is we people start becoming more mobile. It has no impact at home consumption of these products. So that's that's good news for us. And as is the case in most things as a as it pertains the brand and product it's a little above right the really good at finding new people to the brand and they're really good at driving by rate among existing. So we see them as we see them as both and the data would suggest that they are dead.

Okay, that's that's helpful. And I know you answered one question Acquisitions after you do you leverage as much as you have but is there is there anything that you'd be looking for matically to add your portfolio? So, you know, maybe some plant-based products something that's more of the anytime occasion some Channel expertise or is there anything else that you would find useful to add Thursday?

strong consumer brands

well defined consumer Brands well-defined consumer targets under-penetrated opportunities to grow so questions a great example of the type of business. That way we seek here's a brand that has shown strong consistent growth over time. It was well-defined from a brand standpoint. It had a well-understood consumer Target and the opportunity for Quest was it was relatively unknown relatively low needed an unneeded consumer awareness. So the ability to you with our marketing expertise to build brand awareness the drive consideration and prove trial and and then conversion. Those are the types as opposed to I want to be in this segment where I went this type product. It's more about I think from our standpoint consumer in bran than it is anything else.

They're hard to find and when you find them you got to grab them. So that's that's what's on our hunting list. And you know Quest was possibly the best brand in the category from that. I'm showing that right now and it's growth rates and trajectory its ability to expand Beyond protein bars. Its ability to expand Beyond kind of specialty channels to food drives a mass to other snacking products that you know, the brand promise the target audit ability to target folks and get them and build trial and off penetration on the brand was showing that that was it was a pretty good profile. We made a good choice. So that's what we're looking for more than any particular segments our products great. Thanks contacts that off for me.

Thank you. This concludes our question-and-answer session and I'll turn it back to Joe Scalzo for closing remarks.

Yeah, thank you. Thanks again for participating on today's call. We hope continue to remain safe and we look forward to updating or in a third-quarter results in July. We hope all of you have a good day. Thank you.

This will conclude today's conference May disconnect your lines at this time. Thank you for your participation.