Greetings, and welcome to Simply Good Foods Company Fiscal Third Quarter 2021 Conference Call. At this time, all participants are in a listen only mode. A question and answer session will follow the formal presentation. As a reminder, this conference is being recorded. I would now like to turn this conference over to your host, Mr.
Mark Pugarian, Vice President of Investor Relations. Thank you, sir. You may begin.
Thank you, operator. Good morning. I am pleased to welcome you to the Simply Good Foods Company earnings call for the Q3 ended May 29, 2021, 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 release this morning at approximately 7 am Eastern. A copy of the release and accompanying presentation are available under the we will be conducting a reconciliation of the company's website at www.simplygoodfoodscompany.com.
This call is being webcast and the 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 we will refer to certain non GAAP financial measures that we believe will provide useful information for investors. Due to the company's asset light strong cash flow business model, we evaluate our performance on an adjusted basis as it relates to EBITDA and diluted EPS.
Additionally, adjusted results exclude the mark to market effect of the treatment of private warrants per the SEC's April 12, 2021 statements related to accounting and reporting considerations for warrants by special purpose acquisition companies. We have included a detailed reconciliation from GAAP to adjusted items in today's press release. We believe these adjusted measures are a key indicator of the underlying performance of the business. 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 measure prepared in accordance with GAAP.
With that out of the way, I'll now turn it 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' 3rd quarter results and provide you with some details on the performance of our brands. Then I'll turn the call over to Todd, who will discuss financial results in a bit more detail and we'll wrap up with a discussion of our revised outlook before opening it up to your questions.
We had
a strong Q3 with net sales up 32% as consumer mobility improved faster than our expectations. In addition to mobility improvements, shopper traffic within brick and mortar retailers improved, especially in the large mass channel, an important class of trade for our business and our category. An increasing On the Go usage occasions resulted in nutrition bar consumption greater than our estimates. Adjusted EBITDA in the 3rd quarter increased 55.6% due to the strong sales growth, G and A cost controls and Quest acquisition synergies. This more than offset higher marketing investments and incentive compensation and improving bar performance as well as favorable consumer mix in brick and mortar channel total in solid gross margin expansion.
Total Simply Good Foods Q3 Retail Takeaway increased 29.1% in the U. S. Measured channels of IRA, MULO and C Stores and outpaced the category. Our Atkins and Quest brand performance was solid across all forms, particularly bars due to increasing consumer mobility. Throughout the pandemic and now into the recovery, we've executed well and remain committed to do the right things over the long term for our business.
In June, we notified customers of a price increase effective in September as we'll begin to experience higher raw material and distribution costs in this Q4. As we look to fiscal 2022, we believe pricing as well as productivity will enable us to maintain gross margins we continue to invest in initiatives to drive growth. In the first half of fiscal twenty twenty one, the the snacking category declined low single digits due to COVID-nineteen driven movement restrictions. In the 3rd quarter, the nutritional snacking category increased about 26% as the category lapped weaker year ago performance. Importantly, Simply Good Foods gains market share across all timeframes as did each of our brands in their respective subsegments of Weight Management and Active Nutrition.
We were also pleased with the performance in the mass channel, which rebounded during the quarter, driven by improved shopper traffic. And e commerce growth continues to be solid and was in line with total measured channel performance. The Active Nutrition segment of the category, which includes Quest, increased over 30% in the quarter. As it has done all year, Quest outperformed the segment. Note that the IRI, Mueller and C Store universe represents about 70% of Quest total retail sales.
Weight Management segment, which includes Atkins increased low teens in the Q3 on a percentage basis versus prior year. Has been the case all year, Atkins continue to outpace the weight management segment. Atkins Q3 U. S. Retail takeaway and measured channels increased 15.6%, Increasing mobility, improving shopper trips, particularly in the important large mass channel and continued buyer growth resulted in solid retail takeaway across all forms.
In Q3, bars and shakes increased about 5% 20%, respectively, and improved sequentially versus the first half of the year. Atkins Confection momentum continued and increased about 27% in the quarter. We're pleased with the performance of the confection products as well as the innovation we've launched over the last year. Improving shopper traffic at the mass channel was strong and combined with increased levels of distribution and display resulted in Q3 POS growth of about 25% in this channel. We continue to be pleased by buyer flows on Atkins and growing consumer interest in weight management as the U.
S. Emerges from COVID-nineteen mobility restrictions. The strong growth in buyers has fueled consumption improvements for the brand during the fiscal year. Atkins buy rate remains the single biggest growth opportunity for the brand as it is currently below historic levels. You may recall Atkins bar consumption is highly correlated to return to work.
Based on that, we believe as consumer mobility continues to improve, buy rate of Atkins bars will follow. We anticipate continued improvement in consumer mobility, although as we enter Q4, the POS growth rate is affected by more difficult year ago comparisons. As such, we expect overall Q4 retail sales to be similar to Q3. We expect continued improvement in the mass channel and I'm pleased with the Atkins e commerce business. Although the growth rate is expected to moderate long year ago comparisons.
Lastly, in Q4, we have solid marketing, improved distribution and new innovation that should enable us to continue to build on our year to date buyer trends. Now let me turn to Quest, where Q3 retail takeaway increased 56.2% in the measured IRI, Muleaux and C Store universe. Growth was driven by improving shopper traffic in the mass channel and increase in consumer mobility and greater on the go consumption we are pleased by the strong rebound of Quest Bars. Quest Q3 bars retail takeaway increased 38%, More than double the segment growth rate. Recall Quest Bars are about 60% of total Quest retail sales.
The Snackgear portion of Quest products continue to do well and increased nearly 150% in Q3 driven by chips and the launch of new confection items earlier in the year. In addition to increased foot traffic of the mass channel, we are pleased with the performance in C Stores. Combined the mass and C store channels represent about 30% of Quest retail sales and in Q3 growth in these two channels we're over 60%. Quest E Commerce Business about 20% of total Quest U. S.
Retail sales continues to do well with retail takeaway up 43%. Our business in Amazon remains robust and growth was strong against all major firms. The specialty channel while small as a total percent of Quest sales we will return to growth in the quarter. In Q4, we anticipate trends by form will continue and will result in total Quest retail dollar sales similar to the Q3. We expect that the demand for Quest chips and convention items will remain strong and that supply will be pressured.
As such, we have taken actions to ensure there are no disruptions at retail and we'll be dialing back trade promotions and programming on these items. And we'll continue to invest in marketing and innovation that drives greater levels of consumption and new consumers to our brand. In summary, we're pleased with our 3rd quarter results that were better than our expectations due to improving mobility and increasing shopper traffic in the mass channel. In Q4, we anticipate retail dollar sales to be similar to Q3. Raw material and distribution inflation is expected to be a headwind in Q4, offset by continued improved product and channel mix.
Price increase we announced a few weeks ago as well as productivity should offset fiscal 2022 supply chain inflation. We believe pricing as well as productivity will enable us to maintain gross margins and continue to invest in initiatives that drive growth. We're executing well against our plan and delivering on our financial objectives with flexibility to invest in the business has a path to increasing shareholder value. Now I'll turn the call over to Todd to provide you with some greater financial details.
Thank you, Joe, and good morning, everyone. I will begin with a review of our net sales. Total Simply Good Foods' 3rd quarter net sales increased we are pleased to be in the range of 32% to $284,000,000 The core North American business contributed 30.7% to total company growth, Driven by strong Actant and Quest volume across major forms and channels. Net price realization in Q3 was negligible. Q3 shipments benefited by about 2% from delays related to the winter storm disruption at the end of last quarter.
Our core international business was a 2.3% benefit to sales growth driven by strong gains in Australia for both Atkins and Quest. And the Simply Protein brand divestiture and the European business exit were combined 0.9% headwind. Gross profit was $121,000,000 an increase of 36.5% versus last year. Gross margin of 42.6 percent increased 140 basis points versus the year ago period, driven by positive product form and favorable customer mix in the brick and mortar channel. In Q4, we anticipate supply chain costs to be higher, specifically raw materials inflation will be a headwind as well as freight and warehouse expenses as we begin transitioning to our new distribution center.
As Joe mentioned, given the inflationary pressure we're seeing in both Q4 and fiscal 2022, we recently announced a price increase. The pricing action is effective in September and we expect it will enable us to maintain gross margins and continue to invest in initiatives that drive growth. Adjusted EBITDA, which excludes Quest integration costs, restructuring expenses and stock based compensation among some other things, increased 55.6 percent to $67,500,000 primarily due to greater than anticipated sales, cost control measures and Quest acquisition synergies. SG and A expenses were greater than our estimates, specifically selling and marketing expense increased increased $1,500,000 as higher incentive compensation was partially offset by cost control measures and Quest acquisition synergies. For the full year, the company continues to anticipate that marketing expense related to its core businesses we will increase at least in line with organic sales growth.
Moving to other items in the P and L, interest expense declined $300,000 to $8,000,000 due to the pay down of the term loan. Although the additional debt pay down in the quarter resulted in greater non cash amortization expense of deferred financing fees. Our statutory tax rate in the 3rd quarter was 27.0% versus 26.9% last year. Net income in Q3 was $5,900,000 versus $48,100,000 in the year ago period. The decline reflects a non cash charge of $35,800,000 related to the remeasurement of our private warrant liability.
Year to date results are as follows. Net sales increased 25.5 percent to $745,800,000 driven by the acceleration of the business in the Q3 and the full 39 week impact of the Quest acquisition. Gross profit was $305,300,000 an increase of 29.2%. Gross profit in the prior was affected by a non cash $7,500,000 inventory purchase accounting step up adjustment related to the Quest acquisition. Recall the non cash inventory purchase accounting step up impacted year to date 2020 gross margin by 130 basis points.
Excluding this amount, gross profit was $243,600,000 last year and gross margin was 41%. Year to date fiscal 2021 gross margin of 40.9% is essentially in line with the year ago period. As I stated earlier, we expect supply chain inflation beginning in Q4 and anticipate gross margin for the quarter to be about the same as prior year. Adjusted EBITDA increased 35.9 percent to $158,800,000 primarily due to higher Q3 gross profit and the inclusion of 39 weeks of Quest results in the current year. Excluding Quest integration costs, restructuring expenses and stock based compensation, SG and A expenses increased $19,800,000 specifically selling and marketing expenses increased 18.4 percent to $82,100,000 The increase was driven by higher brand building initiatives and the full year impact of Quest.
G and A expenses increased about 12% or $7,000,000 due to higher incentive compensation and the inclusion of Quest. Moving to other items in the P and L. The net impact of interest income and interest expense was an increase of $2,000,000 due to a full 9 months of acquisition related debt. Our year to date statutory income tax rate was about 27%. Net income was $22,600,000 versus $104,900,000 in the year ago period.
The decline of $82,700,000 is primarily due to the non cash charge related to the remeasurement of the private warrant liabilities. Turning to EPS. 3rd quarter reported EPS was $0.06 per share diluted compared with EPS of $0.17 per share diluted for the comparable period of 2020. In fiscal Q3 2021, we recorded a non operating non cash charge of $35,800,000 due to the change in the fair value of the outstanding private warrants, depreciation and amortization expense and stock based compensation was 6.7 we expect to be approximately $1,000,000 about the same as the year ago period. Costs associated with Quest integration and restructuring were $400,000 we had a legal settlement gain of $5,000,000 adjusted diluted EPS, which excludes the items just mentioned was $0.43 an increase of $0.17 versus the year ago period.
Note that we calculated adjusted diluted EPS as adjusted EBITDA less interest income, interest expense and income taxes. Year to date reported EPS was $0.23 while year to date adjusted diluted EPS was $0.97 versus $0.71 in the year ago period. Note that the calculation of adjusted diluted EPS in Q3 we are pleased to report that the full year results are not included in the full year of fiscal Q3 2020 1 conference call. At this time, please refer to today's press release for an explanation and reconciliation of non GAAP financial measures. Moving to the balance sheet and cash flow.
In May 2021, the company paid down $50,000,000 of its term loan. And at the end of the Q3, the outstanding balance was $506,500,000 In the Q3, the company generated about $52,000,000 of cash, resulting in year to date cash flow from operations of $91,800,000 As of the end of Q3, the company had cash of 90 point $2,000,000 and a trailing 12 month net debt to adjusted EBITDA ratio was 2.1 times. Capital expenditures for the year to date period were $3,200,000 We still expect $5,000,000 to $6,000,000 of CapEx in fiscal 2021, driven primarily by equipment for our new warehouse. We anticipate interest expense to be about $31,000,000 higher than our previous forecast of about $30,000,000 The increase is the result of greater non cash amortization expense of deferred financing fees due to incremental pay down of the term loan. I would like to now turn the call back to Joe for closing remarks.
Thanks, Todd. As consumer mobility increased in the Q3, our business accelerated. As we emerge from the challenges of COVID-nineteen, Our business is stronger and our organization is more capable. As such, we remain confident in both our short and long term growth prospects. Over the remainder of the year, assuming there are no significant COVID-nineteen related disruptions in the United States, the company anticipates full year fiscal 2021 net sales of about $995,000,000 to 1.0 $5,000,000,000 and adjusted EBITDA of $200,000,000 to $205,000,000 As previously stated, the divestiture of Simply Protein and the European business exit is about a combined 1.5 points headwind to a full year fiscal 2021 net sales growth.
The company's previous outlook for full year fiscal 2021 net sales and adjusted EBITDA was $930,000,000 to $940,000,000 $180,000,000 to $185,000,000 respectively. Apart from the inventory purchase accounting step up in the year ago period, we expect full year fiscal 2021 gross margins to be about the same as fiscal 2020. You may recall the company's previous outlook indicated full year gross margins will be slightly lower compared to the previous fiscal year. As previously discussed, favorable product and channel mix in Q3 exceeded our expectations and resulted in solid gross margin expansion in the quarter. In Q4, we'll begin to see higher raw material and distribution costs and anticipate gross margins will be down versus Q3 and about the same as year ago period as inflation is offset by continued improved product mix.
And due to solid cost control and acquisition synergies, the company continues to anticipate adjusted EBITDA margin expansion. Additionally, the company anticipates 2021 adjusted diluted EPS to be in the range of $1.20 to 1 0.25 versus $0.91 in the prior year. We have an advantage asset light variable business model enables strong cash flow from operations that provides us with the financial flexibility to invest in organic growth opportunities and participate in M and A. We continue to execute against our strategies that position us to deliver on our financial objectives with the ability to invest in the business as a path to increasing shareholder value over the long term. We appreciate everyone's interest in our company and we were now available to take your questions.
At this time, we will be conducting a question and answer session. One moment while we poll for questions. Our first question comes from the line of Jason English with Goldman Sachs. You may proceed with your question.
Hey, good morning folks. Thanks for slotting me in and congrats on a strong quarter.
Thanks, Jason.
Welcome. I want to make sure that I understood your comments on the sort of retail sales expectations properly. I think you said quarter on quarter flat as we go into the Q4, which on my quick back of the envelope math suggests that you may be expecting year on year growth The slow to something into the mid to high teens. Do I have it roughly right?
Yes, you do.
Okay. That's still pretty darn robust relative to the comps because I think it actually implies that off of a 2019 level, you're actually going to expect a degree of acceleration for what we saw last quarter. But as I look at the model and the implied guidance for 4Q, you're suggesting a bit of a decel on 2 year stack. I was hoping you could help me understand that, maybe unpack that. Was there pull forward into this quarter, clearly there was a bit of a delta between retail sales or anything else in the comparison from last year that we should make note of?
Yes. So, obviously, Q3, as we stated, Jason, was helped by the pull in from Q2, the winter storms that inflated the Q3 numbers a little bit. The European shutdown is now fully in place, so that's going to affect Q4 more Along with the Simply Protein divestiture, that's been tracking about a 1 point headwind. That's now going to be a 3 point headwind in the quarter. And From a shipment perspective, we just typically pull inventory out of the system late in the year.
So we're anticipating
Got it. I didn't appreciate the elevated Simply Protein comp in the Q4. That's helpful. Switching gears real quick. Joey, you kind of alluded to this, I think, with the consumer and the reengagement with weight management.
We hear from weight watchers an expectation in anticipation of an off cycle resolution season, if you will, that they're anticipating to happen throughout the summer and particularly late fall, are you beginning to see that take shape? And do you expect to see do you also expect to see something like that as we enter the fall and maybe back school back to work period.
First, I would say we're really pleased with the growth of the Atkins business. The thing that's frankly surprised us throughout the fiscal year is that despite movement restrictions People not being out and about, our buyer performance has been outstanding. So we've seen strong buyer growth throughout the fiscal year even in the midst of the COVID. So as we move through the summer and into the fall, I would tend to agree with Weight Watchers. There's going to be a catalyst As people get out and about more fully, that I think will drive renewed interest in weight management.
We're kind of gearing up. Todd mentioned that we've made incremental marketing investments. We'll continue to do that through the Q4 And we're kind of gearing up for kids back to school, folks back to work as kind of that catalytic event. So you should expect us to be ready as we kind of move through August, September, October expecting that and investing appropriately for
Yes, makes sense. Thanks a lot guys. I'll pass it on.
Our next question comes from the line of Chris Growe with Stifel. You may proceed with your question.
Hi, good morning. I'll add my congratulations for a nice quarter there and outlook. I just had two questions. The first one, as you see this consumer coming back to the Atkins brand in particular in the mass channel, Is it just the number the raw number of incremental users that are using the product that are coming back? Or are you seeing more heavy users Engaging with the product, I can say it that way.
I'm just curious what you're seeing in particular in Atkins with the as sort of the consumer comes back to the mass channel? It's too early to call
on a quarterly basis. We continue to see strong buyer participation. So both new buyers and retained buyers are strong on the brand. So the and in the case of mass, foot traffic really improved. Now they're up against softer comps, but you're starting to see mass pick market share back up in the category, both categories in fact.
And given our development in particular on Atkins and Mass that's helped our business. So far it's been a buyer number of buyer dynamics, buy rate continues to be kind of below historic levels just because of the number of occasions aren't what they normally are. It'll be interesting frankly to see how the mass dynamic plays out in the Q4 and Q1 and how that might affect buy rate going forward.
Okay. And then I just had a question also on bars. And if I heard right, I think you said maybe the bar category was up 15%. I I think you said Atkins is up 5% and it sounds like Quest gainshare in bars. Just want to make sure I was correct on those numbers, number 1.
And number 2, kind of what's behind those? Like What's driving Quest growth to gain share and Atkins was a strong new product innovation, what's causing it to lag that category if that number is correct?
Yes, Atkins is more dependent upon being back at work and being in transit than even we expected. And if you look at Quest, Quest got a few dynamics that are helping it. 1, it was down more this time last year, so its comparables are a little bit easier. C stores rebounded, which is an important component to its business And we're even seeing specialty start to come back. Lastly, our sales team has done a really nice job of building distribution into drug mass on bars.
So that kind of that triple threats really helped accelerate Quest as we've kind of moved through the Q3.
Okay. That's great. Thanks so much for your time.
Our next question comes from the line of Faiza Alwy with Deutsche Bank. You may proceed with your question. Yes. Hi, good morning. Thank you and congratulations from me also.
First, Sorry if I missed this in the prepared remarks, but I was hoping you could give us a breakdown of Atkins versus Quest sales in the quarter?
Yes. So, you'll see it in the K I mean, I'm sorry, in the Q. From a pure takeaway perspective, Atkins was up about 15%, Quest up about 56 You have actually the shipment Smart Candy on us. I'll get
it to you. I'll have it in front of me right now.
Let me get
it to you, I don't have the right part of me.
Okay. That's fine. I guess my second just as we look ahead to 2022 acknowledging that there is significant uncertainty, I'm curious sort of how you're thinking about the fall resets. You did mention that there is this anticipation that consumers will get back into the weight management category. So I guess I'm wondering, are retailers thinking about it similarly?
Do you expect the category to gain incremental shelf space and maybe how are retailers thinking about big brands versus smaller new brands sort of in this new normal?
Yes, let me try to There are a lot of questions in there. First, I would say that we like our product pipeline. We have a very talented R and D organization, Terrific marketers, the pipeline that we had this spring and in the fall, we think is pretty compelling. So I We don't like to talk forward too much. I suspect we'll do really well on the resets.
In general, COVID has taught retailers that big brands are important, that if you just think about the dynamic that was going on in COVID, you were fighting for shopper traffic, Big brands matter. So we're seeing that in strategy with retailers. They are reengaging with bigger brands. They And they're important to the aisle and to the foot traffic. And obviously, we've got 2 of the bigger brands in the category.
So we have we're in retailers right now just from an important standpoint. I would also add, we really focus on consumers And we really focus on consumer building penetration of our brands. That's a language that's really interesting to retailers because They then think about that as shopper conversion from the rest of the store. So I think we're in a very good spot as we move through fiscal 2022 just from a brand, a category aisle standpoint. Your question around do I expect weight management to pick up space?
Those things are more stable than you would think. So the allocation between adult nutrition, active nutrition and weight management, there is not a lot of variability kind of Reset to reset. So you tend to be in a fixed set for more times than not, Then they're thinking about the entire ILN moving between the 3 sub segments. That's more rare. But I think overall, I think we're in a really good position as we move through the summer and into the fall for the resets.
Yes. And Fonda Atkins was up low 20s percent in the quarter, Quest in the 40s, so strong performance from both brands.
Great. Thank you so much.
Welcome.
Our next question comes from the line of Wendy Nicholson with Citi. You may proceed with your question.
Thanks. Good morning. First question in terms of pricing, just order of magnitude, is there anything you can tell us in terms of how much pricing you'll take? Is it going to be on both Atkins and Quest? And is there any risk given just how fragmented particularly the bars category is?
Do you think there's any risk of sort of elasticity when those prices go into the marketplace?
Well, first, I would say we calculate as we think about pricing and inflation, we calculate elasticity into our also be confident that we understand that dynamic pretty well pricing. We're executing a mid to upper single digit price increase. It is on both brands. It's different as a percentage because the inflation hits the brands a little bit differently. And so from an execution standpoint, we're in the early stages with conversations with customers.
Obviously, this is not a Conversation that's in isolation, right? There are manufacturers across the board taking pricing as we speak. So and with staring at inflation, significant changes inflation as we move into fiscal 2022. We're pretty confident that we'll work through this with customers and execute against the price increase as we move into September.
Terrific. And just sort of more broadly on the Atkins sort of momentum, did you have a sense sort of for the demographics of the new customers that you're bringing into the brand, younger, I know you've said it's an issue of mobility, but just in terms of demographics specifically on Atkinson, I wonder where you're taking those customers from?
Yes, over the last year, it's been our target. So it's up top less demographic, more psychographic, Right. So the change that we made in Atkins, it's been 4 years now, was moving from Fast weight loss on a program consumers, which we're there, if I remember right, about 8,000,000 of those in the United States To low carb lifestyle weight management concerned consumers, there were about 30 3,000,000 of those. If you just look at the 8,000,000 and the 33,000,000, they tended to get younger, tended to get a little bit more active because you're moving away from fast weight loss, but we're moving directionally Towards more lifestyle oriented, directionally more healthier people, directionally with people that It's less about I got to lose weight right now, more about I want to live right and I'm looking for solutions to do that. Those tend to be a little bit younger, A little bit more active than the original target.
I haven't seen a breakout this last year on kind of how our improvements And consumers look demographically, but we can take a look at that and get back to you separately.
Terrific. That's great. Thank you so much. Very helpful.
Welcome. Have a good day.
Our next question comes from the line of Rob Dickerson with Jefferies. You may proceed with your question.
Great. Thanks so much.
So Joe, just kind of
a follow-up, I guess, in the last comment here just in in terms of the demographic makeup of that consumer, right, as you kind of chip away at the original strategy, right, simply. Atkins is obviously very large brand, working well with retailers, mass traffic is coming up. Atkins is very well, But as you think about the shelf resets, maybe it's not this fall, maybe it's next fall, Are there opportunities you think such that you might be able to replace some of the shelf you have with Atkins some of the products from Quest, if Quest potentially seems to maybe be a broader base Brand accepted by different types of demographics. Does that make sense?
Yes, Rod. The question does make sense. They tend to be they tend not to be in the same section of the aisle, in some cases not even in the same aisle. So now we won't be swapping. For us, it's not a decision of what space do we allocate to Atkins versus Quest.
It's how do we gain more space in each of the segments and how do we allocate it. As I think about Atkins and Growth, I think about how do we develop our product portfolio beyond bars and shakes. What we've learned during COVID is Those consumption occasions, especially on bars are highly dependent on on the go and at work. And we've also learned from our Quest business that the snackier portions of that portfolio and confections on All the time consumption products, not dependent upon that. So you should expect us And it's the way we're thinking to develop our other forms to even a bigger portion of our portfolio.
It insulates us to some degree on the kind of back to work dynamic and not surprising confections on Atkins growing double digits. Our confection business in the earliest stages it also leverages what we think is our competitive advantage, which is the best R and D organization in the category.
All right, super. That makes sense. And then I guess just coming back to Jason's original question just On the top line as you go into Q4 and then while I respect you probably don't want to give guide for fiscal 2022. There's some commentary on pricing and gross margin. So kind of take a shot on the sales side.
If I look at the data set over the past 4 months, Just even week by week, right? Total dollar sales have been pretty consistent. It's been very strong, very impressive. If
just like
you said on the Atkins piece, more correlated to work mobility, we're still in the summer, some people are going back to work more, but not Everybody, not yet. It's not as much critical mass and probably that improves into the fall. While at the same time, As Jason pointed to, like there could be a kind of an off cycle resolution period. So kind of if I'm just thinking about the retail data sets, It seems as if there is still potential upside obviously to the guide because it would seem like the retail data sets wouldn't necessarily be decelerating that much in the U. S, right, if we're ignoring the Europe piece.
And then the storm was a couple percent, but Not that much. So I'm just trying to kind of gauge like off the commentary just to be clear, Q3 very strong, maybe Q4 decelerates a little bit, but if we're all thinking about the first half of next year already, it would seem as if there could be increased momentum on an absolute dollar basis as
we're coming out of Q4.
Does that make sense? Yes. So, dollar basis as we're coming out of Q4. Does that make sense?
Yes, it does. And look, I mean, obviously, there's a couple of variables here. Q4, as we stated, sequentially, the volume of retail should be pretty much the same. We're obviously lapping Stronger numbers a year ago, particularly on Quest. So the comps are getting a little bit harder from a shipment perspective.
As I mentioned, we do tend to pull inventory out, Especially in Q4, so that's going to be impact for sales. But we'll see how it plays out and how mobility If it continues to accelerate or not, it's still a little bit of an open question. We're not anticipating that it does. As we get into next year, Obviously, we're still working through the price increase. So that's a big variable.
We'll also get back to you at the next earnings call with much more detail on next As you said, first half, just big picture, first half should obviously be stronger than the second half because we are comping still we have a weak first half COVID impact in this fiscal year. So the first half should be relatively strong. Gross margins, as we said, our goal is to maintain the gross margins despite the inflation out there. And look, at the end of the day, we love the momentum of this business. We feel great about it, but we'll get back to you in the next quarter with more specifics on next year.
Rob, I'd also say that we don't see big I don't think we're going to see big shifts in consumer Mobility Q4 to Q3. I think it feels more just if you look at the U. S, it feels more the Same. The big shift was in Q3, I think, where we just it changed very, very quickly, almost like a switch flipped. I think it's going to stay more the same.
I think when kids go back to school, I think that'll be the if there's a catalytic event And movement, it's going to be one that put kids on a bus and they go back to school. And just looking at how this is our thinking about this, it feels more likely post Labor Day back to office. Some of it's happening now, but I think you're going to see a big shift after Labor Day. In fact, I'm pretty confident that that's when we're going to see kind of an inflection point in people being out and about.
Okay, fair enough. And then just quickly, Joe, on the M and A side, I think Todd saw it in the numbers. You mentioned you paid down the term loan, leverage getting a little bit better, good free cash flow, great Q3. So just in terms of kind of how you're thinking about the M and A pipeline, I'm not sure what you're seeing out there, kind of any can answer is fine. Just trying to check the box as I do usually on the acquisition front.
Yes, we're active There is a pipe, there's pretty good pipeline. We're looking at things as we speak. As I said before, we love this category. We'd love it's pretty simple. We're looking for strong consumer brands with unique positionings And some pretty good understanding of who the user base is, so we know how to recruit.
I think Our competitive advantages are we can build distribution in food, drug, mass, small format pretty quickly. We understand how to build household penetration. So understanding the consumer dynamic, who that consumer is, what the brand positioning is, we feel like we're pretty good at that And we're pretty good at innovation. So we're looking where we can use those capabilities to accelerate growth of assets that are out there. And if there is an asset out there in our space of a decent size, you can bank on, we're looking at it.
All right. Super. Thank you.
Our next question comes from the line of Eric Larson with Seaport Research Partners. You may proceed with your question.
Yes. Thank you and congratulations on the quarter everyone. So my first question revolves around a little bit more clarity on your gross profit margins. I'm assuming you're talking percentage gross margins, but I would assume that you're pricing more toward to protect your dollar gross profit margins and maybe a little bit more than that. But then would that then in order to maintain percentage gross margins year over year next year, that would then require probably continued favorable product And channel mix, am I is that the right way to look at how you're talking about your gross margins?
Yes. So first of all, to clarify, it's on a percentage, not dollars. We're trying to the goal is to maintain. We have some pretty significant inflation next year. Our objective is to price effectively enough To maintain that gross margin percentage to offset the inflation, we'll see we've as you mentioned, we've had nice benefit here In the second half, as bars have rebounded, as brick and mortar has rebounded, we'll see I think we'll see some more of that In the first half of next year, then it will kind of level out.
But we are our objective here is to price to offset The input cost inflation that we're seeing and to be clear on a percentage basis.
Okay. Thank you for that. And then my follow-up question is really on your indulgent brands, I. E. Things like peanut butter cups, they were very strong, I think, for both Atkins and Quest in the quarter, are you seeing different buyers for those products?
Are they the Same buyers and are your buy rates actually better in your indulgent products? Curious as to more of the consumer Demographic dynamics on the indulgent line.
Yes, I apologize. I don't know the data by I don't know that data by product form. So we tend to think brand first, but what I would tell you is why it's doing so well is it's a different use occasion. So if you think of a bar and shake, tends to be kind of afternoon to early morning, it tends to be a whole be over between meals or a meal replacement. The snackier portions of our portfolio Are not that, they're indeed just a snack.
They're kind of indulgent. Sometimes use can be after dinner. So in the confections area, The peanut butter cups that you mentioned, the entire lineup in Atkins can be after dinner kind of consumption occasions. So I think it's if we went in and looked at the data, I wouldn't guess we would see different dynamics, consumer dynamics based upon that, I think you're just going to see different use occasions and different needs states that consumers are purchasing those at.
All right. Thanks for the insight.
Our next question comes from the line of John Anderson with William Blair. You may proceed with your question.
Good morning. Thanks for the question and congratulations on the strong quarter. I wanted to ask, you talked a little bit about the success you've had acquiring new buyers, specifically, I think, relative to Atkins, but also the fact that the buy rate continues to kind of lag historical levels, given the fact that we haven't fully returned on the go, pre COVID on the go use cases. Could you talk a little bit more about the rate of new buyer acquisition and or how far off the buy rate is today versus historical levels to give us a bit of a sense of the progress and opportunity that those two metrics represent.
Yes. So I can give you high level kind of how the algorithm works. And new buyers, so 1st year buyers on Atkins buy somewhere in the area of 30 to 35 servings Year 2 and beyond by 3 times that amount. So if you think about it, we have Weekly multiple weekly multiple times weekly buyers in retain. So in any one year, the volume in your year is mostly driven by retained buyers.
Your new buyers are pretty good proxy for how you're going to perform in the next year because we retain a certain portion of those people. So as you look at then our buyers, our increase this year in let me step back, I'm sorry. The buy rate becomes very sensitive to total volume, especially when you apply it against retained buyers. So at a 100 servings, if my buy rate is off, that's a significant amount of servings against a big number of retained buyers. So this year, our growth is being driven almost exclusively by the number of total buyers that we have both retained and news.
That's been driving our business and the buy rate has been a buffer against that. So buy rate is down as a percentage basis kind of in the mid single digits. So it's a significant number, right? And we've been more than offsetting that with the number of buyers. That's frankly the good news for Atkins because that means I've got good buyer flow going into fiscal 2022.
If I get any improvements in buy rate, historic buy rate, which we I would expect to do it as people go back to work and bars improve. And as I get the portfolio more developed in other forms, I would expect buy rate to move back towards historic levels. Does it get there next year? Hard to say, but I would think we're going to start we're going to continue to see improvement in that. That help?
That's super helpful. I appreciate the detail. One quick follow-up. You mentioned supply challenges for Quest, I think, in the Q4. Is this just a kind of a transitory situation?
What's the and how do we think about that impacting maybe sales in the quarter?
Yes. All right. What I would say is in the chip business as well as the peanut butter cup business, our sales have approached what we would have considered best case scenario. So supply in this category takes time to kind of to build out. So we're in a period of transitory having to manage demand to supply until new supply comes on board.
We have pretty talented sales organization. They really like to sell stuff, but they've got experience in kind of a tamping down demand, You're managing programs and as well as promotions because we've had this situation before happened on Atkins. So we know what we need to do. We will do it as we move to fiscal 2022, our supply chain is working hard to bring on more capacity and we'll manage that well over the next few quarters. Okay.
Thank you very much. You're welcome.
Our last question comes from the line of Pamela Kaufman with Morgan Stanley. You may proceed with your question.
Hi, good morning.
Good morning.
Congrats on the quarter. Thank you. So I wanted to understand how we should think about the degree of input cost inflation across the business and to what extent you hedge your inputs and what that's like, what your hedging position is currently over the next year?
Yes, I'd say we hedge about a half of our portfolio. Some of the major commodity inputs we buy directly, some of them are just a direct pass through with our co mans. But I'd say about half of our products work, we have an active hedging program and it's anywhere from 3 to 9 months. Our team did just incredible job this We're buying early, locking in prices before we saw the spike in the last few months. So we've been protected really nicely through the 1st three quarters.
As we mentioned, we're going to start to see some of that come through in Q4 and obviously a bigger amount Next year. So we're going to see mid to high single digit inflation for next year. We'll continue to be opportunistic and lock in prices where we see value. But This is why we had to take a price increase of a similar magnitude to maintain those gross margins.
Thanks. That's helpful. And I was wondering if you can give an update on Quest's distribution expansion. That was one of the rationale behind the acquisition. So just curious on where you are and where you see further opportunity for Quest?
Significant opportunities on Quest, if you think about our Atkins business, food, drug, mass, we're probably somewhere around 40 items in distribution. Quest is probably at half that. And so we're pretty experienced. This is selling organization at building those out. Yes, as part of our sales team, we've inherited some pretty talented Quest folks too, who are pretty good at that.
So I would expect you're going to continue to see improvements. I think the year to date number on Quest is mid teens approaching 20% And we're still in early innings and the innovation pipeline is pretty good.
Thanks. Can you comment on some of the innovation that you have planned for Quest and Atkins and visibility into gaining shelf space for this product?
I prefer not to do that. I'll talk to you about it once it's in the marketplace and performing.
Okay. Sounds good. Thank you.
All right.
You're welcome.
Ladies and gentlemen, we have reached the end of today's question and answer session. I would like to turn this call back over to Mr. Joe Scalzo for closing remarks.
Thanks for your questions and thanks for your participation on today's call. We hope you'll continue to remain safe and look forward to updating you on our Q4 results in October. Have a good day.
This concludes today's conference. You may disconnect your lines at this time. Thank you for your participation. Enjoy the rest of your day.