Greetings, and welcome to the Simply Good Foods Company Fiscal First Quarter 2020 Conference Call. At this time, all participants are in a listen only mode. A question and answer session will follow the formal presentation. Please note this conference is being recorded. I will now turn the conference over to your host, Mark Pagarian, Vice President of Investor Relations.
Mr. Pagarian, you may begin.
Thank you, Darryl. Good morning. I'm pleased to welcome you to the Simply Good Foods Company earnings call for the Q1 ended November 30, 2019. 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.
A copy of the release and accompanying presentation are available under the Investors section of the company's website at www.simplygoodfoodcompany.com. This call is being webcast live on the website 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 the financial information presented in accordance with GAAP. Please refer to today's press release for a reconciliation of the non GAAP financial measures to the most comparable measures prepared in accordance with GAAP. Additionally, note that management's reference to legacy Atkins in today's presentation and remarks encompasses the Simply Good Foods business excluding Quest. With that, it's now my pleasure to 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 Foods' Q1 highlights and provide you with some details on the performance of our Atkins and Quest brands. Then Todd will discuss our Q1 financial results in a bit more detail and we'll wrap up with a discussion of our updated full year outlook and then open the call to your questions. With the closing of the Quest acquisition on November 7, we fulfilled a strategic initiative of acquiring a fast growing on trend business.
This provides us with an additional consumer lifestyle brand that trends transforms and positions us to maintain our leadership role within the nutrition snacking category. We believe investments in our legacy Atkins brand with a combination of Quest unlocks further growth potential for our company. We have built and continue to improve upon a consumer centric business model focused on profitable long term growth. Our business model provides us with the financial flexibility to invest in our branded product portfolio. We have a scale, efficient, outsourced supply chain that should enable us to increase gross margins over time, allowing us to invest in our brands while growing EBITDA.
We'll also leverage our core capabilities and product development, manufacturing and marketing to drive growth. Furthermore, this acquisition gives us an enhanced presence in key retail channels with the ability to increase availability over time. The nutritional snacking category continues to grow and outperform both center of store packaged food categories, driven by healthy snacking and meal replacement megatrends. Growth continues to be in the mid to high single digit percentage range, driven by the growth in household penetration. We're excited about the acquisition of Quest as well as our legacy Atkins brand and believe that we are well positioned to deliver on our fiscal 2020 and long term commitment.
We delivered another quarter of solid financial results and double digit increase in retail takeaway. The Crest acquisition closed on November 7, so there are only 24 days of business in our Q1 results. Importantly, Quest is tracking to the acquisition model and the full calendar year 2019 net sales and EBITDA we discussed on prior conference calls. Since the announcement, I have spent time with Dave Ritterbusch, the President of Quest, and we are both excited to work together to unlock the value of our combined business and deliver shareholder value through both revenue growth, margin expansion, and cost synergies. In addition to being part of my senior leadership team, Dave was recently appointed to our Board of Directors upon the closing and will continue to run the Quest business.
I look forward to working with Dave and leveraging his knowledge and extensive experience in managing nutritional snacking brands and businesses. One of our main objectives in 2020 is the integration of Quest. This work is well underway and progressing as planned. I've been pleased with the teamwork and collaboration of the joint leadership teams, which I have found to be an important factor in executing smooth transitions. And the nutritional snacking category continues to outpace most center of store packaged food categories, driven by healthy snacking and meal replacement megatrends.
In our fiscal Q1 and over the last 52 weeks, nutritional snacking category was up in the mid to high single digits on a percentage basis versus the comparable year ago period. And with nutritional snacking household penetration at only around 50%, we believe there is a lot longer runway for Glip. Turning to the Q1, net sales increased 25.8%. Legacy Atkins net sales increased 11.7% and, as expected, slightly outpaced the increase in retail takeaway, driven by our strong e commerce growth. The contribution from Quest was 14.1% benefit to net sales growth.
Legacy Atkins sales growth was driven by velocity of core items, primarily bars and confections, and higher promoted volumes. The increase in adjusted EBITDA is a direct result of higher gross profit driven by higher Atkins net sales and the benefit of Quest. The increase in gross profit was partially offset by the timing of marketing and incentive compensation, as we discussed last quarter. Total Simply Good Foods Company retail takeaway in the fiscal Q1 in the IRI new low measured outlet universe increased 14.5%. Note that this includes traditional food, drug and mass merchant retailers, as well as Walmart, BJ's, Sam's and Dollar Stores.
IRI new load captures about 90% of Atkins U. S. Sales. However, it only represents about 50% of Quest sales, More on this in a bit. Aetna's 1st quarter POS growth was 10.7% and relatively in line with our estimates, and as expected, sequentially moderated versus the Q4 of last fiscal year.
In the year ago period, POS was up 23.5%, indicating a 2 year stack growth rate of nearly 35%. We grew total buyers during the quarter with brand loyalty in line with our expectations. We're focused on continuing to drive velocity and POS growth and believe we have the right combination of advertising, product variety and promotions in place to deliver on our goal. Quest POS nutritional snacking growth was up 24%, with all forms up double digits. Most importantly, the core Quest bar business is driving overall growth.
The building blocks of Atkins' point of sale growth are similar to what we've discussed over the last 2 years, strong base velocity of core items. Distribution was up in fiscal 2019, but slightly down in Q1. Some of this was intentional given our SKU rationalization plans from last year. Promotional volume was up versus year ago and returned to more normal levels. We would expect promotional volume to be higher next quarter as we reinstitute bar promotions that were scaled back in the year ago period due to supply constraints.
By form, 1st quarter bars and confections retail takeaway was solid, up 10.6% and 33.6%, respectively. As expected in Q1, competition in the RTD shape category increased and Agnes RTD shakes POS was slightly lower in the period. We anticipate that our shake performance will improve in the second half of the fiscal year. As I stated earlier, we are focused on continuing to drive velocity of POS growth and believe we have the right combination of advertising, products, and promotions in place to deliver on our goals. Our business model enables us to invest in our brands, specifically as part of our long term algorithm.
We are committed to increasing marketing, at least in line with sales growth on an annual basis. We believe the step up in expanding our consumer base and growing our business is educating consumers on the benefits of the Atkins approach to nutrition and teaching them how to make smarter food choices. We find that the more consumers know about the Atkins approach to nutrition, the more likely are to rebalance their choices away from carbohydrates and towards our snack foods. As such, we've established a variety of marketing and advertising strategies to connect with consumers, including digital marketing and social media platforms, television advertising, celebrity endorsements, and online food tracking and facilitation tools. Accordingly, we have structured our marketing and advertising to not only promote our products, but also to educate consumers.
As you see on this slide, our advertising highlights the nutritional profile of our products and our website provides consumers with detailed information such as Atkins, Keto and the benefits of a low carb lifestyle. In addition to television advertising, social media is an important component of our marketing tools and we have an active and growing presence on key social channels such as Facebook, Instagram and Twitter. For the fiscal year ended 2019, we had approximately 9,000,000 new visitors to our Atkins website. Let me now turn to Quest. For those of you not familiar with the brand, it was a California company founded in 2010 as a high protein, low carb, low sugar bar, primarily distributed in gin, specialty stores, and e commerce.
Over time, it has expanded in traditional channels. Additionally, over the last couple of years, Quest's management team has done a terrific job transitioning its position from a protein bar to a broader healthy lifestyle snack brand, focused on providing craveable foods backed by metabolic science. Today, about 2 thirds of the business is the core protein bar, with the remaining 1 third consisting of products such as protein chips, cookies, powders and frozen pizza. Similar to Atkins, Quest has a small international business. Quest generates about half of its U.
S. Sales in traditional food, drug, mass and club channels. The other half of Quest U. S. Sales are generated in the convenience store class of trade and the unmeasured e commerce specialty channels, which are not tracked by IRI or Nielsen.
Performance in the convenience store and e commerce channel are solid. However, the specialty channel, which represents about 18% of sales, is declining about 20% due to store closures and slower foot traffic. The declines at the specialty channel has been a multiyear headwind for the category as consumers have shifted purchases to other channels such as food, drug, masks and e commerce. This slide depicts Quest point of sale nutritional snacking growth in measured IRI universe. As a reminder, this only represents about half of Quest's US business and excludes pizza.
As such, the IRI Nielsen data is less indicative of total Quest performance. Quest digital and social marketing programs after last few years, combined with new products, has resonated with consumers. As such awareness and velocity, the nutritional snacking products across most forms, as bars, cookies, protein chips and powders, is driving growth of the brand in measured channels. Importantly, Quest's 1st quarter bar retail takeaway and IRI mullo measured channels increased 15.9%. Velocity across all other forms, bars, cookies, chips, and powders, is up double digits on a percentage basis versus last year.
And while distribution is a tailwind, velocity contribution to growth is 2x the benefit from distribution. The initiatives the pest management team has instituted over the last few years are working. Given our collective knowledge of the category, we see a path to increasing distribution and driving more consumers to the brand and its multiple product forms. We will also leverage our combined marketing expertise to determine the right marketing mix over time, while always focused on the highest return on investment. In the near term, we're focused on incremental digital and social advertising campaigns to broaden reach.
We're also investing in our Quest Squad influencer network that has been effective in retaining attractive core consumers. Their presence across various social media platforms such as Instagram, Wilcrest has nearly 900,000 followers has driven solid growth. As a result, we anticipate the Quest marketing expense in fiscal 2020 will be greater than net sales growth. In summary, the Simply Food Good Foods Company competes in a highly attractive category and is a leader in the U. S.
Nutritional snacking space. With a combination of Atkins and Quest, it provides us with 2 uniquely positioned brands that are aligned around the consumer megatrends of wellness snacking, convenience, and meal replacements. Quest also provides us with key capabilities, such as e commerce, small format retail sales and social and digital marketing. Our teams are motivated and engaged and want to continue to win in the marketplace. Nutritional snacking is a business we know very well and I'm confident in our ability to execute as we look to integrate Quest while preserving the best elements of our growth oriented cultures.
As we enter the Q2, we have the financial and marketplace momentum and are well positioned to deliver on our fiscal 2020 commitment. With that, I'll turn the call over to Todd, who will provide you with some greater financial detail. Thank you, Joe, and good morning, everyone. Let me start with 2 points as it relates to the numbers you see on the slides that follow. First, for comparative purposes, we will review financial statements for the 13 weeks ended November 24, 2018 and 13 weeks ended November 30, 2019.
2nd, 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 start with a review of our Q1 and net sales drivers of growth. U.
S. Legacy Atkins volume growth was +13.5 percent. Higher volume was partially offset by greater trade promotion resulting in total U. S. Legacy Atkins net sales growth of 12.7%.
As expected, this was slightly greater than the retail takeaway growth of 10.7%, given the continued strength in our non measured e commerce business. As a reminder, we expect trade promotion to be a headwind to gross margin in fiscal Q2 as we reinstate bar promotions that were curtailed in the year ago period due to supply constraints. Patience non U. S. Net sales, including Canada and our international business, was only up about 1.5% in the quarter and therefore a drag on the total company growth rate.
As a result, total organic net sales growth in the quarter was 11.7%. The 24 days of Quest contribution was a 14.1% benefit, resulting in a total Q1 net sales increase of 25.8%. Now for a review of Q1 results across other major metrics. Gross profit was $62,200,000 in the Q1 of 2020, an increase of $10,300,000 or 19.8 percent. The increase in gross profit was driven by both legacy Atkins sales growth and Quest, partially offset by a non cash $2,400,000 inventory purchase accounting step up adjustment related to the Quest acquisition.
As a result, gross margin was 40.9%, a 200 basis point decline versus last year. The non cash inventory step up adversely impacted gross margin by 160 basis points. Quest's lower gross margin and the previously mentioned increase in trade promotions were a 40 basis point headwind. In Q2, we anticipate the inventory step up adjustments to be $5,100,000 for a total of $7,500,000 Similar to 1st quarter reporting, the $5,100,000 will also be a reconciling item in our GAAP to adjusted EBITDA for reconciliation. Adjusted EBITDA increased 19.1 percent to 31.8 $1,000,000 driven by the increase in gross profit, partially offset by a 20.3% increase in selling and marketing expenses.
The majority of the increase was due to the timing of higher Atkins marketing expense as we discussed last quarter. A portion of the increase was also due to the acquisition. Additionally, general and administrative expenses increased 45% in Q1, 72% of the increase was attributable to the Quest acquisition and 28% to Active. Moving to other items in the P and L, the net impact of interest income and interest expense was an increase of $1,800,000 in Q1 due to the increase in the term loan in early November and the effective income tax rate in Q1 was 26.5% versus 23.3% last year. In fiscal 2020, we anticipate an effective tax rate of around 26%.
In the Q1 of 2020, the company reported a net loss of $4,800,000 or $0.05 per share diluted compared with net income of $15,300,000 or $0.18 per share diluted for the comparable period of 2019. The net loss was driven primarily by $26,200,000 of transaction costs and $1,400,000 of integration costs due to the acquisition of Quest. Adjusted diluted EPS was $0.22 in line with the year ago period. Note that we calculated adjusted diluted EPS as adjusted EBITDA less interest income and interest expense and income taxes. 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, at the end of the Q1, the company had cash of $72,700,000 There is 655 point $5,000,000 remaining on the term loan. Recall, on October 7, we issued 13,400,000 shares and a few weeks later increased the term loan by $460,000,000 to fund the Quest acquisition. Depreciation and amortization in the Q1 was $2,500,000 Capital expenditures for fiscal 2020 is expected to be in the $5,000,000 to $6,000,000 range due primarily to the implementation of our new ERP system. Note that G and A costs related to this project will begin in Q2. The company's solid cash flow provides us with continued financial flexibility to support future organic growth and the ability to quickly pay down debt related to the Quest acquisition.
Let me now summarize all the moving parts related to the Quest acquisition. On October 7, as part of generating the necessary capital to complete the acquisition, we sold approximately 13,400,000 shares of common stock and estimate the total completed in early November and we closed the acquisition on November 7. Our total debt of $655,000,000 is at favorable rate, LIBOR plus 3.75 basis points and we will begin making payments later this month. We anticipate the net impact of interest income and interest expense to be in the $32,000,000 to $34,000,000 range, including amortization of debt financing costs of about $4,000,000 and LIBOR to be about the same as it is today. As such, we are targeting a net debt to adjusted EBITDA ratio of less than 3.7 times by fiscal year end August 2020.
Non cash amortization of intangibles related to Quest is about $8,000,000 per year. Note that our fiscal 2019 depreciation and amortization of 7,500,000 dollars consisted of about $1,000,000 of operating depreciation and $6,500,000 of amortization related to the Atkins Conyers combination. Transaction costs in fiscal 2020 are anticipated to be about $27,000,000 with the vast majority occurring in the Q1. Integration expenses in the Q1 were $1,400,000 We anticipate total integration expenses to be similar to other deals of the same size, about 2% to 3% of the total deal value. 1 of our key goals in 2020 is the integration of Quest.
Our planning began in September October and we hit the ground running when the transaction closed. I am pleased to report that work is well underway and progressing as planned. We are focused on ensuring the business remains wired for growth. As such, we will maintain Quest headquarters in El California. Our initial integration efforts are concentrated on retail customer facing initiatives, a single integrated supply chain and migrating the Atkins business to Quest ERP platform.
Therefore, we expect the majority of the $20,000,000 in identified cost synergies to be achieved in years 23. I would now like to turn the call back to Joe for a brief closing remark. Thanks, Todd. We are pleased with the start of the year and the progress we are making against our strategic initiatives that build on the existing capability and strengthen our brand. We have excellent marketplace momentum across the business and we are confident in capturing the growth opportunities ahead of us, as well as delivering on our 2020 financial commitments.
For the full year fiscal 2020, we have updated our outlook to include the acquisition of Quest. We anticipate that total Simply Good Foods Company all inclusive full year 2020 net sales will be in the $850,000,000 to $870,000,000 range and adjusted EBITDA in the $154,000,000 to $158,000,000 range. The outlook for RAC and net sales and adjusted EBITDA growth remains unchanged from guidance that we provided you on our Q4 conference call. Recall that we stated that the net sales growth would be at the high end of the company's long term target of 4% to 6%, while adjusted EBITDA is expected to increase somewhat higher than net sales growth. Our outlook for the full year 2020 adjusted diluted earnings per share is $0.90 to $0.95 compared to $0.07 in the prior year.
Please refer to today's press release for an explanation of the company's definition of adjusted diluted earnings per share. As we have shared with you over the last two and a half years, we are confident in our business as we execute against our strategy. We are delivering on our financial objectives, while investing in our business, a path that we believe will continue to create value for our shareholders. We appreciate everyone's interest on the business and our company and we now are available to take the call. And questions.
Operator?
Our first question comes from the line of Jason English of Goldman Sachs. Please proceed with your question.
Hey, good morning folks and happy New Year.
Happy New Year, Jason. Good morning, Jason.
Thank you. So I wanted to come back to the new business, the one that we're all still trying to wrap our heads around and that being Quest of course. I know you only owned it for I think 24 days, but nonetheless the contribution that we saw this quarter was a little bit lighter than we expected. Expected. Obviously, there could be a lot of timing noise there, but maybe you can resolve that question just by giving us what the like for like growth is for
the business for the last quarter or I guess for the yes, for really the 1st full quarter? Yes, I would say, hey, Jeff, probably the easiest way to answer that, Jason, is just take a look at how the business is performing relative to what we told you it was going to do for calendar year 2019. It is absolutely on pace. We are very happy about the performance of the business. If you look at it overall kind of November to November, it's performing growth.
Top line growth has been kind of in the mid teens on the business. So very happy with the performance, very much in line with our expectations. You are seeing solid growth across the brand, the total business, all the product forms, all the product forms and we are very happy about that. A little bit stronger growth in the most recent quarter as they've got a little bit of pipeline from their ready to drink launch. But overall, it's been good growth, kind of mid teen growth top line overall for the business on a sustainable basis over the last 12 months.
And don't
forget. One of those 3 weeks that we owned it was the week of Thanksgiving and obviously there is a lot less shipments just because of the holiday and distribution centers closed. So to Joe's point, the business is completely on track, no change.
Totally. It makes sense. I got a little bit spooked when you started telling me that 20% of its sales are declining 20%, though. So I am glad we can come back and get some clarification on that.
Hey, Jason, just step back from that. That's a multiyear trend. Business has been growing strongly through that. So there's and it's not a trend that's different from the category. So the thing that you need to understand is it's consumer purchasing channel habits are changing away from specialty channel towards more traditional channels, food, drug, mass as well as e commerce.
So it's been a trend that this business has been offsetting on an ongoing basis for a number of years.
Totally. And we have seen it with some other similar businesses as well in the vitamin supplement type channel. It's been tough, tough sledding. One more question for me. I think you've mentioned some cautionary comments on 2Q multiple times.
You mentioned the ERP related G and A expense stepping up in the second quarter. You mentioned the heavy up on more trade spend, which I think is going to potentially subdue sales and gross margin. Can you just walk us through the headwinds just so I could package them all and wrap my head around them, the headwinds you were calling out for 2Q?
Yes. Well, you mentioned them and I would say, there is probably 3 or 4 headwinds. There is incremental promotional activity. Again, that should be generating additional volumes. There will be probably will be a slight margin impact to it.
From a marketing perspective, same issue as Q1 where just the timing year over year, because we had a big increase in our marketing in our second half, that's now in our base. That hit us in Q1, will again hit us in Q2. And there are the ERP related G and A expenses will start to hit in Q2 and go on for the rest of the year. So those are the other impacts. But other than that, we feel really good about the rest of the year.
Yes. I would also add, we were a little surprised. So if you remember what happened last year, we saw less trade inventory build in prep for the season. So we were under shipping POS in the Q1, a little bit of the second quarter, and then we saw that inventory come back, obviously, as inventory come back obviously as less of a drawdown in the second half of the year. Going into the Q1 and the second quarter, we anticipated to return to more normal levels of inventory build.
So we expected a little bit better performance in shipments relative to POS in the Q1 that frankly didn't happen to the magnitude that we were expecting. And we expect that will play out a little bit in the second quarter and that we are not seeing the inventory build. Now we are not concerned about either because of the inventory that you don't put in the Q2, you don't take out in the 3rd 4th. So no impact on the total year, but we were a little bit surprised of that and that will be a bit of a drag, I think, in the Q2 too. No net impact on the Unico.
Great, great context. Thanks a lot guys. I will pass it on.
Our next question comes from the line of Alexia Howard of Sanford Bernstein and Co. Please proceed with your question.
Good morning, everyone.
Good morning. Happy New Year, Alexis.
Hi, there. So one question and one follow-up. Firstly, in the measured channels, this is the legacy Atkins, and I know you've talked about this quite a bit. It looks as though the shakes, as expected, have come under pressure as the company has hit tough comparables and perhaps also as competitors have emerged from a period of capacity constraints. Can you just remind us of the strategy here and what's it going to take?
It sounds as though there's pressure in the second quarter, but you expect an improvement in the second half. What gives you the confidence that that's actually going to come around? And as a follow-up, can I ask about promotional activity? You talked about stepped up promotional activity. I think this time last year, it was actually reducing.
Should we be worried about the need for that incremental promotional activity? And does that mean that competition has intensified in some parts of that legacy Atkins business? Thank you very much. I'll pass it on.
Yes, great question. On RTDs, we expected more competitive activity on ready to drink. We are seeing with the reemergence of Bellwins Premier. We are seeing activity from SlimFast on their advanced line and keto line as well as our own Quest launch. So there is a lot of promotional activity in the marketplace in the Q1.
Frankly, we have seen this, experienced this in the past in our total business that we are a brand. So we have seen impacts in forms before that kind of come and go, ebb and flow. The reason we are confident in the second half of the year is our promotion plan is significantly stronger in the second half of the year than it is in the first and it's kind of starting right now. We'll see a fair amount of promotional activity on RTDs. We also didn't repeat a promotion in the Q1 on shakes at one of our large customers just based upon the return.
So we are not surprised with where we are and we are pretty confident given the strength of the promotions in the second half of the year, we will be fine.
Great. Thank you very much. I will pass it on.
You are welcome. Have a good day.
Our next question comes from the line of John Baumgartner of Wells Fargo. Please proceed with your question.
Good morning. Thanks for the question.
Hi, Josh.
I guess first off, Joe, just wanted to circle back and just clarify that you mentioned the surprise on the shipments in Q1 relative to takeaway. Is it fair to say it's really just the impact of the Bellring SlimFast kind of picking up more of that distribution? Or is it are you seeing more of a working capital inventory management at retail? Because the category is not really slowing. So I
am just curious what you really attribute that to? Again, to ask the question again, make sure I got it exactly right.
Yes. No, it's just the fact that you didn't really see shipments tracking stronger versus takeaway in Q1 on ready to drink. Was it more of a competitive movement? You mentioned the bell ring in
the SlimFast or was it more on the retail side, just working capital? Yes. Again, there are 2 different points, right? We expected shipments to be a little bit stronger in the Q1, just returning to normalized inventory build in prep for kind of January, February, March season. So if you remember, 2018, the pattern of our business is inventory build in the first half and then inventory depletion in the second half, the net is you end up in the same place at the end of the year that you were in the beginning of the year.
Last year, because of supply constraints and we dialed back significant number of promotions in the Q2, we didn't see the inventory build that we normally would see in the first half of the year, nor did we see the depletion of inventory in the second half of the year that we normally would see. So traditionally in our business, you over ship consumption in the first half and you under ship consumption in the second half of the year. We expected in this current year to return to that more normalized pattern and frankly didn't see it to the magnitude that we would have expected. And we can tie it to a few customers who are managing their working capital a little tighter. So the net effect is not as strong sales in the Q1 as we would have normally have anticipated and the net effects and we are not seeing that in the second quarter to the degree we would have expected.
So the net effect is you end up shifting net sales from the first half of the year to the second half of the year. That will be the net effect. We are not concerned with it from an overall total year standpoint. It's just a little bit more timing of when the buying comes first half to second half. And that's about a point or 2, I think, we will experience in the first half of the year relative to second half year.
I think it will be a point or 2 of growth that will shift to second half, probably a lot of it in the second quarter. Exactly, John. Again, we anticipated more normalized build. Joe just said it. I think the end result is, versus the way we originally planned it, there will be a 1 to 2 point shift out of the first half into the second half.
Great. Very helpful. And just if I could add one on Quest quickly.
I know a lot of
the focus right now is on the RTD launch, but I'm curious looking at the salty snacks part of the portfolio, the velocity is growing very nicely year on year. We're seeing some nice gains in ACV as well. Following the closing of the deal, I'm curious what you're hearing from retailers in terms of their desire to be allocate more snacking space to Quest going forward. Maybe how you are thinking about the longer term ceiling for ACV in that snacks business?
Yes, first, great question. I would say we are equally excited with the salty snack launch as we are with the shake launch. So I don't have a favorite child there. I am really excited about the prospects of this business' ability to fill white space in traditional food drug mass. So if you look at kind of average items stocked for Atkins, we are in the 30s and Quest is not half that, right.
So there are earlier in their development than Atkins from a shelving standpoint. You would expect we are going to be able to build items in distribution as the business builds over time. I think the ships, because there is no competitive entry and it's a very different daypart, very different needs date, I think you are going to see that business continue to do extremely well, build distribution. And as I said, the one nice thing about this business is all these new forms are growing, but the single biggest driver of growth in the business is the protein farm business, right. And most of the growth on all these items is from base velocity.
So that's more buyers coming to the brand, buying more over time and that's a good profile and that's a profile of a healthy company. This is not brand. This is not a business that has to have white space to grow. It's benefiting from white space to grow, but it has core velocity gains because it has more buyers coming to the brand over time.
Excellent. Thanks for your time.
Yeah. You too. Bye.
Our next question comes from the line of Brian Holland of D. A. Davidson. Please proceed with your question.
Thanks. Good morning, gentlemen. Just want to confirm on the Quest component. Obviously, in August, you provided sort of assumptions for calendar year 2019, I think about $345,000,000 So it sounds like, Joe, from your commentary that the year played out just as you expected. So I guess first point is that fair?
And then do we infer from that? I'm sort of looking at it and sort of thinking high single, low double digit growth is what's embedded in the apples to apples guide for that business in 2020. Am I right in the ballpark there? And then is there why would we decelerate from the mid teen? Just help walk through that.
I guess I'm thinking about some of the shakes rollout that we just had and that's kind of limited distribution. Velocity obviously seems strong. So if you could just I don't know if that's just thinking about drag from the other stuff or you're not being able to implement everything you want right away, if
you could just help us understand that?
Yes. So first to answer your question, we are really excited about the business. It has great momentum. There is a lot of opportunity for growth. Product innovation driven by this leadership team is singularly outstanding.
Penetration growth opportunity for this brand is boundless. So we are very excited. Last thing I am the most excited about is, it's a brand, not a product. So it has a brand promise that transcends forms, transcends products. Those are really important components that we are really excited about.
It performed as we expected it to perform for 2019, is on track for fiscal year 2020 as we anticipated and as we build into our is a fair amount of mid teens. There is a fair amount of pipeline in that. They got to back to back the pipeline from some product launches that won't be repeated. So you kind of get into that neighborhood, probably the upper end of the neighborhood that you were talking about from a growth rate standpoint as you look at our stub year fiscal 2020? It's going to be double it still had double digit, low double digit growth this year.
The one thing we are just normally cautious, the product launches obviously don't have a lot of history on it. So there is some fairly wide ranges on outcomes. So we tend to be a bit conservative on our forecast on top line. But as Joe pointed out, business came in from both the top and bottom line right where we anticipated for the calendar year. It's performing very, very well and it's got an excellent plan for FY20.
That's perfect. So I guess then and one of the questions at the time of the acquisition and probably since has been looking at Atkins portfolio, looking at Quest portfolio, obviously, maybe most specifically Frozen. I'm interpreting from all the commentary here that you would anticipate largely keeping that portfolio intact in 2020 and that's what's embedded in the guidance. Is that a fair assumption?
Yes.
Got it. And then just last question for me. A lot of questions about the competitive landscape heating up and obviously the more promotional activity. I'm seeing more national media as well. I noticed pure protein bars watching the NFL playoffs this weekend.
I saw some advertising there. What are you guys seeing on that end? Are you seeing
an increase in that
activity as well? Yes. I You
are
You are seeing CLIF and KIND promote. So, yes, you do see as this category builds household penetration, you got a handful of people making investments to try to grow awareness, consideration, trial, because they understand it's a growing category and you got to spend money to do it. We feel very comfortable with where we are from an investment standpoint. We have a high share of voice. We have high ROIs from an investment standpoint.
So I think it's good for the category, good for the category is good for us. And so we love having the competition. We love bringing people to the aisle and we think it's good overall.
Hey Brian, I just want
to make it clear, we are not really seeing from a promotional activity, we are not seeing a significant increase in promotional activity. And this has always been a very competitive category. It will continue to be a very competitive category. What we are seeing specifically in RTD shape is the reemergence of premier back on shelf fully and then just a lot of new product entries that are getting a fair amount of activity in the beginning of our fiscal year. We are not really seeing any impact on pricing.
Pricing has been relatively stable. So I just want to make sure that that's not the communication. And I have been feeding the business for 7 years. We have seen this ebb and flow over time, different brands, different forms and they are going to continue to do that. We are not overly concerned by it.
I think that again overall, bringing people to the category is a good thing. Growing out the penetration is a good thing for us. So we are not as concerned. You kind of deal with the short term wobbles by form that you experience, but it's overall good for us.
Yes. No, the data supports that your brands held up to various competitive forms and factors over the past few years. So I will leave it there. Best of luck, gentlemen. Thanks.
Thank you.
Have a good day.
Our next question comes from the line of Faiza Alwy of Deutsche Bank. Please proceed with your question.
Yes. Hi, good morning. Good morning. So a couple of questions from me. One is, I wanted more color on the decline in distribution that you mentioned for the legacy Atkins business, and I guess the decline internationally and how should we think about that going forward?
Yes.
So, I think Joe pointed out in his remarks and we had some supply constraints last year. We actually took out some items just to make it easier on some of our co man to produce more of our cut hay items. So that was self inflicted. We took some SKUs out. Despite the fact that we have had tremendous velocities in the last couple of years, as we have just talked about, there is just a lot of new entrants, a lot of competitors out there and we really did not gain any SKU or space across the different customers out there.
So distribution is going to be kind of flattish for this year. And again, we took we just on our own took out some items that will have very, very little impact on our business. But that's what you are seeing in the data right now. Faz, also the thing to understand about our business is our business organizes as people make choices, organizes as a brand. So the simplest way I think about it is they come to the shelf looking to buy Atkins.
They then choose the product. So for us, slight losses or gains in distribution do not materially impact their overall business. They just make another choice. If we had 5 items in distribution or 10 items in distribution instead of 35, that might be a different game. I think Quest is in that game.
Distribution matters because they are building out a broader portfolio of products. For Atkins, we have a pretty significant portfolio of products. So slight gains and slight losses really don't impact our business, evidenced the last 2 years. We have grown our business 2 years back 35% and have been relatively flat in distribution chain. So for us, it's less of a concern.
Obviously, we would like to be building distribution that provides consumers more variety and when they're buying as much as they buy in here, variety matters. Occasionally, you can hit a product that puts it to meet stake. The consumers are new to us and can bring people to our brand. But in general, we've been relatively insulated from the ups and downs of distribution because we communicate about a brand and then people come and choose the product. So, our comment on slight distribution loss for us, we focus on are we bringing households, people to the brand and if we're doing that, we know we can grow our business.
Over time, we would like to see that build and we've seen the amount of entry into the category and the pressure that's put on the shelf. We've been kind of treading water for the last, call it, 24 months.
Okay. And then I guess relatedly, I was wondering, given Quest's digital capabilities, do you see an opportunity in the e commerce channel for Atkins? And how should we think about that over the next year or
so? Yes. Just so folks know, Quest is the number one bar purchased on the leading online retailer. So they grew up with Amazon and they are well developed. It is their largest customer.
So Atkins is in the advanced reading class. We are doing really well. We are growing really fast, but our development is roughly a third of theirs today. So we are absolutely going to tap into their capability and learn. Our business has been growing significantly.
I think last year growth was Last year growth was about 50% -plus. The Q1, we had an exceptional quarter in e commerce, up 70 percent. So, as Joe mentioned, we are no slouches in this area either, but we are We are going to learn a lot. We are going to learn a lot. It's about 6% of Quest, I mean of the Atkins business today, much larger piece of the Quest business.
Both teams are doing really, really well. The one thing that we really liked about this deal is lots of complementary capabilities. So strength strength in the Quest team, complement strength on the Atkins team well. So I think the combination, if we do this well and Dave Ritterbusch and I are committed to do the integration well, we will add capability as a total company when we are all done.
Okay. Understood. And if just one last question and that's on Quest's gross margins. I think historically you talked about over time Quest should be able to get to your legacy gross margin levels. Do you still think that that's the case?
Because I know that some of it is related to just their product mix. But I know there's some work being done on the supply chain synergies, etcetera. So just your latest thoughts on how quickly you think their gross margins could increase closer to that level?
Yes. I think so. My best guess right now is their gross margins will get very close to ours. You made the right point. Because of their product mix, they may be slightly below ours.
We are sitting here 2 years from now, but there is clearly some upside as we do the synergy work on getting their gross margin closer to ours. I think from an EBITDA margin perspective, the Atkins business and the Quest business will ultimately be about the same, but probably a little bit less on gross margin just because of that product mix, but very close.
Okay. Thank you so
much. Our next question comes from the line of Chris Growe of Stifel. Please proceed
I just have a couple of sort of follow on questions. I want to make sure I understood in relation to Quest and sort of the sales volatility, you've got some shipping of product, you've got I just understand how the quarterly phasing works. Does that sort of build through the year
in terms of Quest sales growth
as we think about the totality of growth for fiscal 'twenty?
Yes. So, they are definitely when you look at their quarters, not going to give SIP numbers by quarter, but I will say they will have larger dollar sales in the second half of the year than they do in Q2. It's based on some of the activity, some new product launch coming later in the year. But they are not a terribly seasonal business, but they do they have definitely more innovation as a percentage of their sales than we do. And because of that, sales are kind of driven by quarterly splits are largely driven by activity, new product launches.
But the way we are planning out for the rest the year is definitely the second half will be a little stronger.
Okay. Thank you for that. And then just a follow on question and not to go back to all these questions on inventory, but just a quick question on just like the Thanksgiving effect have any effect on inventories this quarter or how you shift in the quarter? I know you said the quarter ended November 24. And then just to understand as well, are you entering 2Q with would it be lower retail inventories than you expected?
But are they at a level that's below what you would like to be, I guess is my question, given some of this shift year over year?
Yes. I think great question, Chris. So below our we again, we expect it to return to more like 2018 inventory build level, right. So we were surprised in the Q1. We are seeing continued trends in that regard in the Q2.
So less inventory build than expected. I am not concerned about in stock position from a shelf standpoint. I am not concerned about our ability to get displays out into the stores. That has not been the case. So I think it's just a matter of a handful of retailers managing working capital a little tighter than they have in the past.
Now we did have a change with one customer and how we ship to that customer and it's big volume and that that impact the amount of weeks of inventory on a particular item. But again, we are not concerned at all from a total year standpoint, surprised us a little bit, results in a kind of a shifting from the first half to second half from a shipment standpoint. But no, I am not concerned about any impact on POS or impact on performance of our business because of it. Yes. And just look, to be clear, no impact on the year.
It feels like this is just going to be the new normal for the way we build our inventory. Again, we thought we would go a little bit more to what we have historically done. It really hasn't gotten back to that curve. That's perfectly fine. As Joe pointed out, it's really having no impact on our point of sales results and we will probably plan our business a little smoother next year, but no impact to the year.
Yes. And then just a quick question on Thanksgiving effect on the end of the quarter timing, does that matter at all do you think to your shipments?
I don't. We heard some noise around just because of the concentrated late Thanksgiving, a shorter holiday period, some retailers were so focused on the holiday specific goods that they were just less willing to take their non seasonal types of inventory. How big of an impact that was, I am not sure. But I don't think it was a major impact.
Okay. Okay. Thanks so much.
Thanks, Chris.
Our next question comes from the line of Eric Larson of Buckingham Research Group. Please proceed with your question.
Yes. Thank you for taking my question and Happy New
Year to everybody. Joe, you kind of alluded to some of this, but
not actually directly. The big surprise in your
buy rates that you had on your Atkins brands. And looking at kind of your velocity, base velocities, it looks like buy rates again are it looks like they're pretty strong again in Q1. Can you talk a little bit about the buy rates and then what the comps are maybe on a quarter over quarter basis for the year? And then finally, buy rates, are they as easy to measure on the Quest bars on the Quest customers as they are on the Atkins because you sell Atkins mainly in multi pack. How do you I guess I've never asked that question.
So I'm curious on how you measure buy rates potentially for Quest as well.
Yes. So let me answer the second question because I think it's an easier question. You measure it the same way, you have household panel, you buy the panel data, you analyze it. So that is not data that the IRI panel that we buy is not the data that the Quest team has bought. So we are going to be accessing that.
We will be taking a look at that over time and we will be forming a point of view from a consumer modeling standpoint that we will talk to you about at a later date. As it pertains to tracking buyers and buy rates, careful at any one quarter, it's not a lot of data, right? So sample size matters. The panels themselves are not huge and they are not designed really to be read in a quarter. You need more purchase occasions, more buyers over time.
So there is nothing in the Q1 that would lead us to believe that the that the perspective that we provided to you last quarter would be any different. We're going to grow total buyers. We expect buy rates to be relatively moderate for the year, in line with last year. So don't get too excited about a quarter's worth of data. It's too short a period of time to do any kind of reading.
Okay, great. Thank you, Jill, for that clarity. Thanks, guys.
Thanks, Eric.
Our final question comes from the line of Rebecca Schmidt of Morningstar. Please proceed with your question.
Good morning. So I just kind of have a higher level question this morning. If you look at the Atkins brand with 85% brand awareness and 67% of Americans looking to reduce net carbs, it seems like there'd be great market share opportunity for your brands in the nutritional snacking category. And if you could speak to the whole category, including the non tracked channels, that would be great. But if you're more comfortable limiting it to the track handle that's fine too.
I'm just kind of wondering like where is your current market share at, hopefully including non track? And then where do you see that this can potentially get to in the next couple of years?
Yes. High level depends upon the denominator, right. So if you want to measure, we measure total nutritional snacking. So it will include brands like CLIF and KIND. It will include shakes like SlimFast, Premier.
So it's a broad category. We are kind of in the low teens. 10%, 11 percent margin. Yes, 10%, 11%, 12%, right. So the unfortunate thing, neither IRI or Nielsen's competitive panel makes any sense at all.
So you have to do a custom panel. You have to choose who your competitive set is based on other data. So we are right there with the market leaders and everybody's share is kind of low double digits is the way to think about it. We have grown share significantly over the last, call it, 5 years and continue to outpace that category growth. And again, this is a category at the highest level, Rebecca, that is massively under penetrated.
So if you are in center of store, you are in a category where you have got 95% household penetration and all the competitors are trying to steal share of in food, share of stomach. I want more of your occasions than somebody else does. This category is fundamentally different. You're trying to grow the house. You're trying to grow, bring more households into the category.
And I think my job is with Atkins as well as Quest is to make sure we're doing that better than the rest of the competitors. So when it's all done, our penetration is higher than everyone else's. So it's a game of, are you bringing new buyers to your brand over time and do you have a loyalty model such that the cost of bringing those people in gives you a good return. So that's what we're focused on. And one of the reasons I like competitive activity is it brings people to the category and I have the chance to flip them and get them over to my side.
So the game is different and we're talking about trying to grow total buyers, grow household penetration, bring more people to our brand over time. The nice thing about Atkins has been historically when we bring somebody to the brand, they stay, they stay for multiple years and they buy more and the purchase amounts of this brand are mind boggling. So if you are a year 1 buyer, you are buying close to 40 servings a year. When I bring you in, in the 2nd year, you buy 100. In the 3rd year, you buy 100.
So, my return on bringing somebody new to my brand is pretty high, because I get a 3 year total purchase somewhere in the 2 50 servings of the 3 year period. I can make a lot of money of those people. So that's what we focus on. We are trying to grow a bigger house, grow penetration faster than the category is growing it and if I do that well, I will grow market share relative to the other competitors. Does that answer your question?
Yes. If you would love to quantify where you think your market share could ultimately settle out, given that it's an extremely competitive category, I'd love to hear that.
They're asking me to call growth in a category over multiple years in a category that's kind of very volatile and changes speed all the time, that's really difficult.
And I
had a lot of experience at this from my white wave days with Silk and Horizon. It's really, really difficult to grow category growth in under penetrated nascent categories. I fundamentally believe that we can deliver our long term algorithm. I fundamentally believe we can grow faster than the category. And I am going to do that by staying focused on marketing return, bringing buyers in and paying attention to my loyalty over time.
And I think that's a matter of effective marketing, good innovative product innovation on the shelf that will bring different need states and use occasions to the consumers and stay focused on advertising my brand, not specific products over time. And I think Quest looks the same. I think Quest has a great brand promise. I think it transcends forms. I think Dave's team has proven that and I think we in making sure we stay focused on what that brand promises, communicating the brand first, the product second,
I think we will be able to do that.
Okay. Great. Thank you so much.
Okay. Thank you.
We have reached the end of the question and answer session. I will now turn the call back over to management for any closing remarks.
Yes. Thanks again for your participation on our call today. We look forward to updating you on our Q2 results in April. Everyone have a good day. Thanks.
This concludes today's conference. You may disconnect your lines at this time. Thank you for your participation and have a great day.