Greetings, and welcome to the Simply Good Foods Company Fiscal 4th Quarter 2020 Conference Call. At this time, all participants are in a listen only mode. A brief question and answer session will follow the formal presentation. As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Mark Bogarian, Vice President of Investor Relations.
Thank you. You may begin.
Thank you, operator. Good morning. I am pleased to welcome you to the Simply Good Foods Company earnings call for the Q4 full year ended August 29, 2020. Joe Scalzo, 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 a Q and A session. The company issued its earnings press release this morning at approximately 7 am Eastern Time.
A copy of the release and accompanying presentation are available under the Investors section of the company's website at www.simplygoodfoodscompany.com. This call is being web cast and an archive of today's remarks will also be available. During the course of today's call, management will make forward looking statements that are subject to various risks and uncertainties that may cause actual results to differ materially. The company undertakes no obligation to update these statements based on subsequent events. A detailed listing of such risks and uncertainties can be found in today's press release and 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. The presentation of this information is not intended to be considered in isolation or as a substitute for 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 management's reference to legacy actions in today's presentation and remarks encompasses the Simply Good Foods business excluding Quest. With that, it is now my pleasure to turn the call over to Joe Scaldo, President and Chief Executive Officer.
Thank you, Mark. Good morning and thank you for joining us. Today, I'll recap Simply Good Foods' 4th quarter and full year results and provide you with some details on the performance of our brands. Then Todd will discuss our financial results in a bit more detail and we'll wrap that up with a discussion of our outlook and then open the call to your questions. Last 8 months have been an extraordinary period and the COVID-nineteen situation continues to impact shopping behavior and consumer consumption habits.
During this time, we've 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 plans 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 and achieving our fiscal 2020 synergy target while remaining on track to realize our 3 year $20,000,000 target prior to the end of fiscal 2022. I'd be remiss if I didn't call out our supply chain team who performed exceptionally well this year with no major issues. Our team worked collaboratively with suppliers, 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, our cash flow steady and sufficient to support future growth. Fiscal 2020, the marketplace changed dramatically at midyear. 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 you in January, which was after we closed on the Quest acquisition and before COVID-nineteen became an issue. In doing so, we executed well against our plans, committed uncertain operating environment and made investments in our organization and our brands to position us to deliver sustainable sales and earnings growth as consumers and the economy recover from the pandemic. Our brands and category marketplace trends improved from the Q3 to the Q4 as the U.
S. Emerged from confinement and moved to a partial reopening. Net sales exceeded our expectations due to better than expected retail takeaway, continued strong e commerce growth and the timing of shipments related to a Q1 promotion. Adjusted EBITDA for the 4th quarter increased 53.5 percent, 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 a $3,000,000 impairment charge related to the Simply Protein brand that we subsequently sold on September 24, 2020.
Total Simply Good Foods retail takeaway in the 4th quarter increased 3.9% in 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 COVID-nineteen and during the COVID-nineteen confinement period and semi reopening. The four periods of this chart provides you a good visual of how our business has performed by week in calendar 2020. Remember that IRI tracked channels account for most of Atkins POS, but only about 60% of Quest given its large business in the convenience store, specialty and e commerce channels. Pre COVID-nineteen, we enjoyed strong growth with our performance in line with plan and tracking to deliver another year of above 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. As home confinement restrictions began to ease in May, shopping trips steadily improved from their lows in April and 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 of the category, which includes Quest, plateaued up low single digits since July and over the 1st 2 months of fiscal 2021.
Within that, Quest has outperformed the Active Nutrition segment over the same timeframe. The Weight Management segment, which includes Atkins, has improved, but is 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 that has experienced meaningful reduced 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%.
In fiscal 2020 bars declined mid single digits due to lower usage occasions in the second half of the year. Shakes increased low double digits as some softness in Atkins was more than offset by the launch of Quest Shakes. All other snacks increased about a combined 30% in 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 COVID and have accelerated during home confinement.
Turning to the Q4, net sales increased 59.7 percent driven by the Quest acquisition. Legacy Atkins net sales Atkins net sales declined 8%, which was better than our initial forecast. Excluding the 53rd week in the year ago Q4 period, Atkins net sales were slightly lower than last year. Atkins performance was driven by continued e commerce momentum, improved retail takeaway versus our expectations and the timing of shipments related to promotional activity. Quest net sales for the Q4 exceeded our forecast and increased about mid single digits on a percentage basis versus last year.
Performance was driven by stronger than anticipated retail takeaway in measured channels and 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 $3,000,000 impairment charge. Todd will provide greater details on these metrics in just a bit. Bakken's 4th quarter and full year retail takeaway was all 4.9% and 0.4%, relatively in line with the category. Similar to last year, Atkins Bars and Shakes were pressured.
We estimate about 40% of the consumption of Atkins occurs away from home. Therefore, lower on the go usage occasions impacted these forms. Atkins Bar's retail takeaway declined 11.1% and 2.4% for the 4th quarter and full year respectively. Although in both periods, Atkins bar performance outpaced the bar segment of the category. Atkins ready to drink shakes declined 8.3% and 9.4% in Q4 and for the full year.
Atkins Confections momentum continued with retail takeaway up 17.3% in the 4th quarter and 21.9% for the full year. Our e commerce business remains strong and increased 55% in the 4th quarter driven by a mix of existing and new online shoppers. We estimate that e commerce 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 Atkins total U. S.
Gross sales. Our brand was responsive as shopper trips improved, but lower on the go usage occasions and the temporary lower importance of weight management during this time are headwinds. As a result, Atkins total buyer growth was slightly down this year with buy rates 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 is Atkins performance there. As the chart at the bottom of the slide indicates in fiscal 2020, Atkins sales in mass channel declined low double digits on a percentage basis versus last year. Particularly pleased with our performance in the club and e commerce channels, which now represent about 21% of total Atkins U. S.
Sales. Given the chopper traffic is better in the traditional food channel, it appears that COVID era consumers are less price sensitive, more focused on convenient locations, quick in and quick out and perceived cleanliness. Let me now turn to Quest, where Q4 and full year retail takeaway increased 28.4% and 21.3%, respectively, in the measured IRI and Yulo universe driven by Snacks and the launch of shakes. Quest generates about 60% of its U. S.
Sales in the IRI, Newolo universe of traditional food, drug, mass and club channels. The other 40% of Quest U. S. Sales are generated in the convenience store class of trade and the unmeasured e commerce and specialty channels that are not included in the Mueller universe. West e commerce business continues to do well and we estimate that sales increased 25% in the 4th quarter.
Full year sales were up less than that. Performed extremely well with retail takeaway in the 4th quarter and the full year up 95% and 72% respectively. Retailer and consumer demand for these products, which remain strong, represents about 27% of the Quest business during the quarter. Quest 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 Q4 and for the full year, the specialty channel underperformed the measured new low universe. Fiscal 2020, we estimate 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 it shrinks in importance to the brand. After pulling back on promotions, marketing and retail merchandising in the 3rd quarter, we increased spending in the Q4 on both brands. Fiscal 2021, we anticipate that advertising and marketing will increase at least in line with organic sales growth. During the first half of fiscal twenty twenty one, new Atkins Rob Lowe advertising will be on air communicating the benefits of our products and promoting at home consumption. Some of the relevant messaging includes Atkins bars are better and healthier alternative to other at home snacks, the importance of losing weight, gain during the pandemic, that our shakes include key vitamins and minerals that support the immune system and providing solutions for people to eat better while working from home.
Our advertising will also support a robust innovation, some of which you see on this 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, the Simply Good Foods Company competes in an attractive category with 2 scale lifestyle brands that transcend forms and usage occasions. The Quest initial integration and full ERP implementation are largely complete and we're on track to achieve our 3 year synergy target of $20,000,000 We'll begin to recognize the majority of the $10,000,000 fiscal 2021 synergies beginning in January.
Far 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 in sub segments of active nutrition and weight management. Our brand equities are strong as evidenced by the solid performance of our other snacks that are primarily consumed at home. We continue to engage with consumers and be flexible on our approach to brand investment to drive growth. The Atkins and Quest brands are aligned with consumer mega brands for healthy snacking with a nutritional profile that is protein rich and low in carbs and sugar.
This profile has broad appeal to consumers interested in better for you as well as weight management and active nutrition shoppers looking to achieve their goals. Now I'll turn the call over to Todd to provide you with some greater financial details. Todd?
Thank you, Joe, and good morning, everyone. Let me start two points as they relate to the numbers you see on the slides that follow. First, for comparative purposes, we will review financial statements for the 13 52 weeks ended August 29, 2020, versus the 14 53 weeks in the year ago period. Our full fiscal year information includes Quest results from the November 7, 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 today's 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. 4th quarter legacy Atkins sales declined 8% primarily due to the extra week in the year ago period. Excluding the extra week, 4th quarter net sales declined 1% versus the Q4 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 higher customer spend as discussed last quarter. Note that the company's Q4 net sales percent change versus IRI MULO retail takeaway is off primarily due to the 53rd week and non measured e commerce 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 a 67.7 percent benefit resulting in total Q4 net sales increase of 59.7%. Now for a review of 4th quarter results across other major metrics.
Gross profit was $88,100,000 an increase of $28,900,000 or 48.9 percent driven by the inclusion of Quest. Gross margin declined 2 90 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 bar growth lagged the overall business. Adjusted EBITDA increased 53.5 percent to $37,000,000 driven by the increase in gross profit and legacy Atkins SG and A expenses, which declined versus the year ago period. Looking at it by line item, total company selling and marketing expenses increased by 23.1 percent or $4,600,000 to 24,500,000 dollars The increase was primarily due to the inclusion of Quest.
Excluding integration and restructuring expenses, non core legal costs and stock based compensation of $7,300,000 G and A expenses increased about 58% or $8,800,000 in Q4. The increase was attributable to the addition of Quest, including costs related to the ERP implementation. Additionally, the company recorded a $3,000,000 impairment charge related to the Simply Protein brand. Moving to other items in the P and L, interest expense increased $5,300,000 to $8,900,000 due primarily to the increase in the term loan balance. Our effective tax rate in the 4th quarter was 29% lower than the year ago period of 36.6% due to timing of select items.
As a result, reported net income in Q4 was $12,400,000 versus $6,100,000 in the year ago period. Full year results are as follows. Net sales increased 56 percent to $816,100,000 driven primarily by the Quest acquisition and a 1.2% increase from legacy Atkins. Gross profit was $324,300,000 an increase of $106,900,000 or 49.2 percent driven by the Quest acquisition. This was partially offset by the previously discussed non cash $7,500,000 inventory purchase accounting step up adjustment related to the Quest acquisition.
As a result, reported gross margin was 39.7 percent, 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 percent to $153,900,000 driven by the increase in gross profit, partially offset by selling and marketing expenses, which increased 40% or $27,000,000 to $94,500,000 The majority of the increase was due to the addition of Quest and slightly higher legacy Atkins expense. Additionally, G and A expenses excluding Quest related integration and restructuring expenses, non core legal costs and stock based compensation increased about 58% or $30,000,000 due primarily to the inclusion of Quest. As mentioned earlier, the company also recorded a $3,000,000 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 $43,400,000 Moving on to other items in the P and L, the net impact of interest income and interest expense was an increase of $21,500,000 due to the higher term loan balance. Income tax expense was $13,300,000 versus $16,800,000 in the prior year. As a result, full year reported net income was $34,700,000 versus $47,500,000 last year. Turning to EPS, Q4 of 2020 reported EPS was $0.12 per share diluted compared with $0.07 per share diluted in the prior year, primarily impacted by depreciation and amortization expense of $4,400,000 higher versus last year due to the conclusion of Quest, integration costs of $1,300,000 and restructuring expenses of $4,100,000 Adjusted diluted EPS was $0.20 a share, an increase of $0.05 versus the year ago period. Note that we calculate adjusted diluted EPS as adjusted EBITDA less interest income, interest expense and income taxes.
Full year reported EPS was $0.35 versus $0.56 per share diluted in the prior year, primarily impacted by depreciation and amortization expense of $16,000,000 higher versus the year ago period due to the inclusion of Quest. The non cash inventory step up of $7,500,000 and business transaction, integration and restructuring costs of $43,400,000 Full year adjusted diluted EPS was $0.91 a share, an increase of $0.14 versus the year ago period. Please refer to today's press release for an explanation and reconciliation of non GAAP financial measures. Moving on to the balance sheet and cash flows. In fiscal 2020, we paid down $50,000,000 of the term loan and at year end the outstanding term loan balance was $606,500,000 In addition, in June we repaid the $25,000,000 that the company borrowed under its revolving credit facility in March.
At year end, there were no amounts outstanding under the revolver. Building on last quarter's momentum, cash flow from operations in the 4th quarter was $35,000,000 resulting in $75,000,000 of cash flow from operations in the second half of fiscal twenty twenty. Therefore, as of August 29, 2020, the company had cash of $95,800,000 As of August 29, 2020, the net debt to fiscal 2020 adjusted EBITDA ratio was 3.3 times. This ratio would be lower if Quest's contribution to adjusted EBITDA for the full 52 weeks in fiscal 2020 was included. Despite the challenges related to COVID-nineteen, we currently anticipate a trailing 12 month net debt to adjusted EBITDA ratio well below 3 times by fiscal year end 2021.
Full year depreciation and amortization was $16,000,000 and capital expenditures were about $1,700,000 Capital expenditures for fiscal 2021 are expected to be $5,000,000 to $6,000,000 driven by equipment for our new warehouse. We anticipate interest expense to be approximately $30,000,000 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 would now like to turn the call back to Joe for closing remarks.
Thanks, Todd. The improvements in category trends in the 4th quarter was encouraging, but there's still uncertainty related to wind consumption behavior and shopping trips, particularly in the mass channel will return 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 twenty twenty one to perform similar to current trends. Therefore, we estimate that in the first half of fiscal twenty twenty one, net sales will be in the $425,000,000 to $435,000,000 range and adjusted EBITDA in the $77,000,000 $82,000,000 range.
Additionally, we expect inflation to be modest, Quest 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 U.
S. 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 and meal replacement usage occasions. 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. First question comes from the line of Chris Growe of Stifel. Please proceed with your questions.
Hi, good morning. Hey, Chris.
Good morning, Chris. Hi. Just had a couple of questions for you. I am curious from a high level, basically the strategy in this environment. Is it to lean more heavily on Quest where the brand is growing more strongly?
Or is there a marketing promotion or promotional program that the Heine Atkins could help sort of revive the sales during this time? I guess more of a kind of first half question. How are you approaching kind of the marketing and promoting of the product in an environment where clearly there's less shopping trips and less consumer interest in the category?
Yes, Chris, as we said in our comments, we lean back in on marketing in the Q4, all the data we had on both brands, all the data we had for both brands is it was effective. And so we're going to continue that investment as we move into the first half of next year. And then also as we mentioned in our comments, we've adjusted, so we've made some adjustments in messaging. So on the Atkins brand, we shot new Rob Lowe commercials and 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 Q4. 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 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 inventory stand and maybe retailer inventory stand currently and how that could affect the first half sales outlook?
Yes, I'll take that. No big shift in promotional timing. It's very similar to the first half of last year. So I don't see 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. The reason why we gave first half versus individual quarters, we always have a lot of noise with resolution period of shipments between November 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 pretty normal.
Okay.
Thanks so much for your time.
Thank you. Our next question has come from the line of Alexia Howard with Bernstein. Please proceed with your questions.
Good morning, everyone.
Good morning, Alexia.
Good morning.
Hi, there. Okay. So two questions. First of all, input cost inflation. We've obviously seen some of the grain input costs start to spike upwards a bit over the last couple of months.
Wondering when that might hit your P and L and how far hedged out you might be ahead of that? And then my second question on a very different topic is now that your net debt to EBITDA is coming down fairly sharply, At what point might you be in the market again for another deal? And are you actively looking right now amidst the pandemic to see if there are any available opportunities? Thanks. And then I'll pass it on.
You want to take the first one, Todd, and I'll take the second.
Absolutely. So as Joe mentioned, we're expecting some modest inflation for fiscal year 2021. We are 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 areas. 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 plans that we gave you. Yes.
Let's see. The second question, I'd like since it's an M and A question, I'd like to first take the time to say thank you to the SMPL team and actually the Quest team. So I think probably the 1st virtual business integration ever executed. So as you can imagine, as we got into the mainstream of the integration of Quest, both of the companies went to remote operations. So we were integrating the organization, doing our ERP integration, do our 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 and then in the ERP on 1st 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 complete some of the organizational work. And then I think as we emerge in the new calendar year, we'll have our heads up and 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 to I do want to say thanks to Dave Ritterbusch and his team at Quest, his leadership team and my leadership team and all the people at SMPL. They did a phenomenal job in difficult situations in integrating the two businesses and keeping the business on track overall. Thanks for that question.
Great. Thank you very much. I'll pass it on.
Thank you. Our next questions come from the line of John Baumgartner with Wells Fargo.
Your line
is open.
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 on the Quest side, given that those are now really becoming material contributors to growth. Can you walk through your expectations for those categories in F21, be it from new distribution or new brand investment? And then of 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 F21. Thank you.
Yes, really great question. So the all other portion of our portfolio, which we're talking about, confections, I'll call them other forms, right? Confections on Atkins, soon to be confections on Quest. We just launched a peanut butter couple in the Quest business in September, and then the chip business and the cookie business. We have high expectations for all those products.
And the reason for it is they are a different consumer use 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, pretty compelling from a consumer interest standpoint. So you should expect our portfolio to continue to fill out in those areas. We'll continue to drive those use occasions and innovate in that category. And as we have shifted our marketing moving into the first half of the year, you should see increased emphasis against those forms.
So I do think I have high expectations from an innovation standpoint, new product development, marketing and white space on those forms 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. So new forms and new use occasions are really important to these brands.
Thanks, Joe. Just to stick with that theme, it looks like the Atkins brand is getting a bit more and more indulgent. I think you've got some lemon tarts in 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 Atkins consumer as you kind of think about cross pollination of the 2 portfolios?
Yes, none that I can think of. So probably the most important thing is the overlap from a while the product profile of these brands is not dramatically different from a nutritional profile standpoint, the user base are completely separate and completely incremental to each other. So we would view how to innovate on each one of these brands as specific to their target audience and worry less about is there a product overlap between the 2. So I think in the cookie and salty chip case as is for Atkins, I think you should expect to see some innovation there from us. And then as is the case on Quest, so they're going to enter the confection business, they just have 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.
Our next question comes from the line of Jason English with Goldman Sachs. Please proceed with your questions.
Hey, good morning folks.
Thanks for stopping me in. Much appreciated.
Hey, Jason.
And congratulations to your teams for executing, particularly on the integration through these tumultuous times. A couple of questions from you. First, real quick tactical housekeeping. As you look to the sales outlook for the first half, how much do you expect the incremental M and A contribution for Quest to be?
Yes. So it's I won't give you an exact number, but in total, we're going to on a core basis, we're going to be flattish, okay? So the Quest piece is going to add kind of a 10% to 15% incremental to the full first half of the year.
That's as precise as I could ask for. So thank you for that. My next question is on retailers, shelf resets, promotions. So there's been, as you mentioned, a lot of volatility here in terms of performance. I think we've agreed with you that most of this is transitory, although there are some skeptics that maybe this is a sea change.
I guess my question is how are retailers doing everything? And maybe there's some interesting tells here in terms of what the shelf resets have shaken out. So how have they recalibrated the shelves? Have they expanded or shrunk space overall? Are you gaining a proportionate amount of space or losing?
And then also, I know it's early, but I imagine a lot of resolution promotional planning is already executed. How are they looking at that season, right, Given the less resident period of or less resident 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 as business as usual? And sorry, I know there's a lot in there.
Yes. So let me see if I can parse those apart, Jason, for you. First, I think for most retailers as it pertains to their store operations, so shelf resets, seasonal merchandising, it's business as usual. So we don't see I mean, there's been a little bit of timing change on shelf resets, but weeks, so not really material. So we expect the resets to be finished by, call it, November 1.
And they're roughly about 60%. Those resetting are about 60% of the volume in the category. So starting around the Bremba 1, we'll get a real sense of how that has changed and how that impacts consumer shopping behavior, start to see shopping behavior. I think as it pertains to shopping behavior, shoppers in stores, as we said in our comments, it looks like consumers are obviously shopping less, choosing fewer stores, shopping more online, and when they do choose stores, more convenient, quicker in and out. And I think there's a cleanliness thing or how well they sanitize perception that is driving that behavior.
I don't expect that to change in the near term, quite frankly. So 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 just less shopping behavior, 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 in line with year ago. I think we're going to do a little bit better than we did last year. But 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 didn't really give a lot on the shelf resets, and you mentioned like you're going to see the effect on November 1. But have you already seen some other planograms? Isn't there some incremental color you can share in terms of whether you're gaining share of space or losing right now?
Yes. I'd like to hold that conversation until the resets in the business performance. We really like our pipeline. It's 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'd just prefer to wait until then to have a conversation with you about how it's doing in the marketplace.
Understood. Thank you very much. I'll pass it on. Thank
you. Our next question comes from the line of Faiza Alwy with Deutsche Bank. Please proceed with your question.
Yes. Hi, good morning. Good morning. So I guess just going back to the fall shelf resets, I guess I wanted to get a sense in terms of your first half guidance. Are you embedding like any potential sort of distribution of new items within that guidance?
Because I know you said that you expect sort of retail takeaway to trend in line with where it's trending currently. So just wanted to see if you could share more in terms of how the fall shelf resets or distribution is playing into how you're thinking about your outlook for the first half?
Yes. 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 4th quarter. So the we think performance on the shelf will be in line with what it was in the 4th quarter.
Okay. Okay. And then just my second question is just taking a step back on Quest. You noted both in the release and earlier on the call that you've sort of completed the majority of the integration. And I was wondering sort of what's left specifically and if you could talk about some of the organizational changes that you've referenced.
And now that you've had a year under your belt with Quest, sort of how should we expect the 2 businesses to be run together?
All right. That's a great question. So we have some we obviously the biggest chunk of the work now is capturing the synergy as it pertains to our supply chain. So we have a we 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 truck.
So one order, one shipment, one invoice. So that will take us through the end of this fiscal year. As it and there's 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, it's 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 kind of a common value chain. So one supply chain, one selling organization that is comprised of folks from both organizations. We then obviously have shared services, finance, IT, HR, legal, all one organization. And then we've maintained separate brand business units, which comprise a Chief Marketing Officer and marketing team for both businesses in the case of Atkins Denver based, in the case of Quest LA based, And then separate R and D teams led by 1 actually led by the Head of R and D from Quest. So we have a R and D team that's based in LA, sits alongside the marketing team in LA.
So think of the brand unit for Quest in LA and then a similar team in the Denver area for R and D. So that's kind of the structure going forward. We have kind of marketing driven business units and R and D and marketing located in each of the cities with a common underlying foundational infrastructure organized by each by one functional head with people in both cities.
Great. Thank you so much.
You're welcome.
Thank you. Our next question comes from the line of Pamela Kaufman with Morgan Stanley. Please proceed with your questions.
Hi, good morning.
Good morning, Pamela.
How are you thinking about the long term health of the category? Do you think that there are any permanent changes to consumer behavior resulting from the pandemic that could impact your product? And I guess what factors 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 these?
Yes, great question. So I think overall, we've seen evidence that suggests as people if you remember the one chart from our presentation that showed the 4 periods. So we saw at the height of confinement category decline pretty precipitously and our brands did too. In fact, across the board, every brand's performance was about the same. Then as people started as confinement restrictions started to ease, the business started to category and our business started to perform better, so almost in the 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 plateau. So improvements on people being out and about kind of plateaued as did our business. So it appears there appears to be a pretty strong correlation between people out and about on the go behavior. I think the benefit the brand benefits of weight management and active nutrition, I think are variable based upon people returning to more normal lives. And so as those have plateaued, so is our business.
Look, I have been in this business 7 years. I've seen these megatrends for that period of time. I totally expect that as we emerge out of the pandemic, I think we'll all have the same hectic time crunched, not enough time for family meals, 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 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, it's a I think it's really compelling metric. The category is only about half penetrated, so about 50% of households. If you look at most more mature center of store categories, they're in the 90s. There's no reason this category, given the trends that are had been in this in our back for so many years. There's no reason that we're not in the 90s.
So I do think this category will return to the brands that will win, will be the brands that are best positioned at growing household penetration ahead of the category. And I like the hand that we have it with this company. I like both of the brands. They're 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 optimistic about our ability to return to the kind of growth that we saw pre COVID-nineteen.
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 shake category? And just how you're addressing some of the elevated promotional activity over the quarter from some of your one of your competitors? And it also seems like private label has been taking share within the category.
So just any comments on what you're seeing and your plans for innovation and promotions within ready to drink shakes would be helpful.
Yes, it feels about that. So promotion activity feels about the same for us, right? The private label entry is a Walmart specific targeting the 30 gram active nutrition protein products and in particular, Bellring's Premier brand. And I haven't looked in detail to see how much it's affecting substitutability or switching with any
other shakes. So,
substitutability 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, the temporary reduced interest in weight management, the shopper behavior in mass merchants and our ability to just market from a consumer standpoint and bring in new buyers into our brand and therefore our shakes. It has some impact on Quest Shakes. So we launched Quest Shakes 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 impact and that is a 30 gram active nutrition product, probably a more direct competitor than certainly a more direct competitor to Premier than we experienced with Atkins. So it's going to 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 in where we have new distribution.
Great. Thank you.
You're welcome.
Thank you. Our last questions of the day will come from the line of John Anderson with William Blair. Please proceed with your questions.
I have one question on e commerce. If you could share with us the portion for each brand of the 2 brands that e commerce now represents and talk a little bit about how you feel you're positioned from a share perspective online versus offline?
Are there any
profit implications to the business and your capability set, the strength of your capability set in product content, marketing, the brands online? There's a lot there. I'll leave it at the moment.
Yes. Hey, Todd, do you want to handle share of brand and then I'll talk about capability and positioning?
Sure. Absolutely. So from, 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, it was around 2%.
So we've had significant growth on the Atkins side and we foresee more growth obviously in the future. From a Quest perspective, they have been well developed in e comm for several years now. They are one of the leaders of any comment in this category clearly. It's about 20% of the business. It is the largest e commerce retailer out there is Quest's largest customer.
And both businesses, Quest and Atkins are growing significantly and gaining share in e commerce right now. So we're really, really pleased with how those businesses are doing. From a margin perspective, yes, they're a little bit lower than our average. We're continuing to not significantly lower, but they are a little bit lower than our averages that we 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 of the businesses.
Yes. I would also say, 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. Atkins, I think, 3.5 years.
I think when we went public, e commerce was 1% of our business. It's now we said we thought it should be around 10% to 15%. It's at 9% right now. So we've done I think the team legacy SMPL team has done a nice job of accelerating that growth. We have combined those teams under the 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 4 or 5 years. And I think we're well positioned to from a content standpoint, from a marketing sophistication standpoint, from who shops there, how they different from brick and mortar, I think we're as good as anybody now in 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 done a nice job of building their business.
Target's done a nice job of building a birds and 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 as one going forward, I think, will be core capability. I think we're well positioned to do that.
That's helpful. Thanks.
You're welcome.
1, I missed this earlier, but one on integration cost synergies. Could you talk about the cadence that you expect as you move towards the $20,000,000 of synergies by the end of fiscal 20 21? And how those will show up, whether they'll be in reductions in COGS or OpEx? Thank you.
Yes, I'll take that one. So about half of that $20,000,000 will show up this fiscal year. As we mentioned in the call, it will really start to kick. We got a little bit in Q1, but it really starts to kick in Q2 and beyond, primarily because the people part of it, most people are still with the organization through the calendar year. So we will not get most of those synergies until Jan 1.
So the cadence is definitely loaded back in the 3 quarters. About 2 thirds of those synergies are going to show up below the gross margin line in G and A and selling where we haven't combined brokers, about a third up in the supply chain. But we have 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.
Yes. Thanks again for your participation on the call today. We hope you'll continue to remain safe and we look forward to updating you on our Q1 results in January. 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 and have a great day.