Simply Good Foods Co (SMPL) 2021 Q2 法說會逐字稿

Greetings.

Welcome to The Simply Good Foods Company's Fiscal Second Quarter 2021 Conference Call.

(Operator Instructions) Please note this conference is being recorded.

I will now turn the conference over to Mark Pogharian, Vice President of Investor Relations.

Mark, you may now begin.

Thank you, operator.

Good morning.

I am pleased to welcome you to The Simply Good Foods Company earnings call for the second quarter ended February 27, 2021.

Joe Scalzo, President and Chief Executive Officer; and Todd Cunfer, Chief Financial Officer, will provide you with an overview of results, which will then be followed by a Q&A session.

The company issued its earnings release this morning at approximately 7 a.m.

Eastern Time.

A copy of the release and accompanying presentation are available under the Investors section of the company's website at www.thesimplygoodfoodscompany.com.

This call is being webcast, 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 in the company's SEC filings.

Note that on today's call, we will refer to certain non-GAAP financial measures that we believe will provide useful information for investors.

Due to the company's asset-light strong cash flow business model, we evaluate our performance on an adjusted basis as it relates to EBITDA and diluted EPS.

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 true 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 measures prepared in accordance with GAAP.

With that, I'll now turn the call over to Joe Scalzo, President and Chief Executive Officer.

Thank you, Mark.

Good morning, and thank you for joining us.

Today, I'll recap Simply Good Foods second quarter results and provide you with some details on the performance of our brands.

Then Todd will discuss our financial results in a bit more detail.

And we'll wrap it up with a discussion of our outlook before opening it up to your questions.

Second quarter net sales increased 1.5%.

Core ongoing net sales that exclude the impact of our SimplyProtein divestiture and European business exit increased 2.7% driven by continued e-commerce growth, Quest success in new forms and solid international performance.

As expected, trade promotion expense was greater than last year, supporting higher levels of in-store merchandising and display.

Additionally, as discussed last quarter, Q2 shipments, slightly light consumption to certain retailers adjusted back from a Q1 inventory build.

Importantly, throughout the quarter, retailer support for the category and our brands remain strong.

Adjusted EBITDA for the second quarter increased 2.2% primarily due to strong cost controls and Quest acquisition synergies.

Total Simply Good Foods second quarter retail takeaway, including unmeasured channels, increased mid-single digits with IRI measured channel growth of 1.7%.

Marketplace trends were similar to last quarter.

Specifically, our performance was driven by the snackier portion of our portfolio, primarily confections, chips and cookies, that are consumed mostly at home.

Bars for both brands remain temporarily soft in major channels due to fewer on-the-go usage occasions.

In the second quarter, we executed well against our priorities, driving sales and earnings growth in a challenging marketplace.

We are well positioned over the remainder of the year and have initiatives in place that we believe will result in solid financial results.

Consistent with the first quarter, total Simply Good Foods second quarter retail takeaway in measured channels outpaced the category across all time frames driven primarily by the snackier portion of our portfolio.

Importantly, the company gained market share as did each of our brands in their respective subsegments of weight management and active nutrition.

The active nutrition segment of the category, which includes Quest, increased mid-single digits.

Quest POS outperformed the active nutrition segment nearly 3:1 during the quarter.

I would note that IRI MULO C-store universe represents about 70% of Quest's total consumption.

The weight management segment, which includes Atkins, remained soft in the second quarter and declined high single digits due to fewer on-the-go usage occasion.

In the second quarter, Atkins continued to outpace the weight management category.

While early, our marketplace trends in the third quarter are improving.

Atkins second quarter U.S. retail takeaway in measured and unmeasured channels declined low single digits.

A solid e-commerce growth, about 10% of Atkins U.S. sales, was offset by softness in traditional brick-and-mortar.

Atkins IRI MULO and C-store measured channel retail takeaway was off 5.7%, identical to the first quarter.

Performance in December and January sequentially improved versus the first quarter, but February POS declined mid-single digits, impacted by winter store closures.

Importantly, retailer support in the quarter was solid.

And in-store merchandising and display was greater than last year, supporting consumer seasonal participation.

As expected, channel and form trends were similar to the last few quarters.

Atkins confections momentum continued with POS growth of 14.3% as these products are primarily consumed at home.

Bars and shakes performance was similar to the first quarter, impacted by fewer on-the-go usage occasions.

E-commerce growth continues to be a strength, with consumption up about 50% in the quarter.

Bars, shakes and confections all increased strong double digits, with shakes outperforming and representing about 50% of e-commerce sales in the quarter.

We are pleased to see the buyer growth continued from the first quarter into the second, reflecting consumers' renewed interest in weight management as they begin to emerge from COVID-19 movement restrictions.

We're encouraged that both growth in new buyers and loyalty among retained buyers tracks similarly to pre-COVID-19 benchmarks.

Importantly, consumers are coming back to the brand and recognize the attributes and benefits of our products as a way to help them achieve their goals.

Buy rate is a key metric impacting Atkins' return to pre-COVID-19 growth levels.

Overall, buy rate was below prior year levels due to reduced consumption among bars and, to a lesser degree, shakes.

Importantly, recent research indicates a high correlation, over 0.8, between return to work and Atkins bar and shake consumption, reinforcing our belief that improving consumer mobility will positively impact brand consumption and buy rate.

As we enter the third quarter, we would point to 4 key factors related to the Atkins brand: First, year ago comparisons are easier as we lapped last year's significant consumption declines from the early stages of COVID-19 lockdowns.

Second, we're starting to see early signs of improvement in shopper traffic in measured channels, especially in the mass class of trade.

Given Atkin's development in this channel, it should help both buyer growth and consumption.

Third, effective marketing and new product innovation should enable us to continue to build on our year-to-date buyer trends, and the potential improvement in consumer mobility should help accelerate buy rate of bars and shakes.

And lastly, we expect in-store merchandising and display will be greater than prior year's reduced levels as retailers anticipate consumer shopping and consumption habits will improve.

Now let me turn to Quest.

Second quarter retail takeaway increased 16% in the measured IRI MULO C-store universe.

Importantly, trends improved across the major food, mass and convenience channels.

Similar to last few quarters, our performance was driven by snacks consumed at home.

As we lapped the year ago launch of ready-to-drink shakes, this headwind has been offset by improving bar performance and the launch of the Quest peanut butter cups that's off to a good start.

Quest bar performance sequentially improved and declined about 4% in the quarter versus 8% in the first quarter.

This was significantly better than the bar segment that was off low double digits in the first half of the year.

As I stated earlier, Quest e-commerce business continues to do well, with retailer takeaway up 60%.

Our business at Amazon is strong.

Chips more than doubled.

Bars and cookies increased more than 50%, and confections momentum is building.

In the second half of fiscal 2021, we anticipate that POS will continue to be strong in measured and e-commerce channels in the third quarter and moderate a bit in the fourth as we lap strong comparisons in the year-ago period.

Chips and confections momentum will continue, and bar performance will improve.

And similar to Atkins, in-store merchandising and display is being reinstated versus the prior year pullback as retailers anticipate consumer shopping and consumption habits will begin to recover.

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

Retail takeaway was slightly better than expected driven by solid e-commerce growth as well as Quest performance in measured channels.

The sequential improvement in nutritious snacking category trends over the last few quarters is encouraging.

And the positive growth in Atkins buyers indicates weight management is becoming increasingly more relevant.

Combined with easier year ago comparisons and improving shopping traffic in measured channels, we expect solid growth in the second half of the fiscal year.

Recall, our analysis indicates that as consumer mobility increases, it correlates to greater levels of consumption of our brands.

Our fiscal third quarter is off to a fast start.

And we're executing well against our plans and initiatives that should drive sales and earnings growth over the remainder of the year.

Now I'll turn the call over to Todd to provide you with some greater financial detail.

Thank you, Joe, and good morning, everyone.

I will begin with a review of our net sales.

Total Simply Good Foods second quarter net sales increased 1.5%.

The core North America and international net sales increase contributed 1% and 1.7%, respectively, to total company growth, while the SimplyProtein brand divestiture and the European business exit were a combined 1.2% headwind.

North America growth was driven by strong Quest volume performance in both measured and nonmeasured channels and modest declines in Atkins.

Specifically, Atkins solid e-commerce performance was offset by declines in measured channels, an increase of trade promotion expense due to higher levels of in-store merchandising versus the year ago period and the previously mentioned timing of shipments in the first quarter related to the seasonal retail inventory build, about a 2% headwind.

Our core international business, whether -- was a 1.7% benefit to sales growth driven by gains in Australia for both Atkins and Quest.

We anticipate that growth in this region will temper in the second half of the year as we lap these initiatives that began about 1 year ago.

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

Now for a review of second quarter results across other major metrics.

Gross profit was $90.3 million, an increase of $4.9 million or 5.7% versus last year.

Gross profit in the prior year was affected by a noncash $5.1 million inventory purchase accounting step-up adjustment related to the Quest acquisition.

Excluding the inventory step-up, gross profit was $90.5 million last year.

This resulted in a Q2 gross margin decline of 70 basis points due to higher levels of in-store merchandising and unfavorable product form and channel mix.

Productivity and Quest acquisition synergies offset modest supply chain inflation, primarily inbound freight to our distribution center.

In the second half of fiscal year 2021, we expect slightly lower gross margin due to a return to typical retail in-store merchandising levels and modest inflationary impacts.

The reduction of in-store activity in the year ago period was due to lower shopper traffic related to COVID-19.

Therefore, full year fiscal '21 gross margin, apart from the inventory purchase accounting step-up in the year-ago period, is expected to be slightly lower compared to fiscal 2020.

While input costs are not expected to be a meaningful headwind in fiscal '21, we are seeing some inflationary pressure as we examine our fiscal 2022 needs.

Our strategy is to maintain and increase gross margin, and we are assessing the levers available to mitigate potential input cost inflation.

Adjusted EBITDA, which excludes Quest integration costs, restructuring expenses and stock-based compensation, increased 2.2% or $0.9 million to $42.6 million primarily due to cost control measures and Quest acquisition synergies.

Overall, SG&A expenses were in line with our estimates.

Specifically, selling and marketing expense declined $0.7 million due to lower selling costs as a result of Quest synergies and the divestiture of the SimplyProtein brand.

And G&A expenses declined $0.4 million as integration synergies and cost control more than offset higher incentive compensation.

Note that the company Q2 marketing expense was about the same as last year primarily due to the elimination of investments in the SimplyProtein brand.

However, core North America and international marketing expense increased 8% versus last year.

For the full year, the company continues to anticipate that marketing expense related to its core business will increase at least in line with organic sales growth.

Moving to other items in the P&L.

Interest expense declined $2.6 million to $8 million due to the pay-down of term loan debt.

Our effective tax rate in the second quarter was 27.7%, about the same as last year.

Net income in Q2 was $19.1 million versus $10.7 million in the year-ago period.

Year-to-date results were as follows.

Net sales increased $82.5 million or 21.8% to $461.8 million driven primarily by the Quest acquisition.

The SimplyProtein divestiture and the European business exit were a combined 1.4% headwind.

Gross profit was $184.3 million, an increase of $36.7 million or 24.9% driven by the Quest acquisition.

Gross profit in the year -- gross profit in the prior year was affected by a noncash $7.4 million inventory purchase accounting step-up adjustment related to the Quest acquisition.

Recall, the noncash inventory purchase accounting step-up was a 200 basis point headwind in the fiscal first half of 2020.

Excluding this amount, gross profit was $155.1 million last year.

This resulted in year-to-date gross margin decline of 100 basis points driven by higher levels of in-store merchandising and the inclusion of a full 26 weeks of the slightly lower margin Quest business.

Excluding Quest integration costs, restructuring expenses and stock-based compensation, adjusted EBITDA increased 24.2% to $91.3 million primarily due to the inclusion of 26 weeks of Quest results in the current year as well as cost control measures and acquisition synergies.

The increase in SG&A expenses were primarily driven by the inclusion of Quest.

Specifically, selling and marketing expenses increased 13.3% or $6 million to $51.3 million.

The majority of the increase was due to the addition of Quest.

G&A expenses increased about 15% or $5.5 million, again primarily due to the inclusion of Quest.

The net impact of interest income and interest expense was an increase of $2.3 million due to a full 6 months of the acquisition-related debt.

Income tax expense was $15.7 million versus $2.2 million in the prior year.

Year-to-date net income was $41.6 million versus $5.9 million last year.

Turning to EPS.

Second quarter reported EPS was $0.19 per share diluted compared with $0.11 per share diluted for the comparable period of 2020.

In Q2 2021, depreciation and amortization expense and stock-based compensation was $7 million, about the same as the year-ago period.

Costs associated with Quest restructuring were $2.2 million, $7.5 million lower versus last year.

Adjusted diluted EPS, which excludes the items just mentioned, was $0.25, an increase of $0.02 versus the year ago period.

Note that we calculate adjusted diluted EPS as adjusted EBITDA less interest income, interest expense and income taxes.

Year-to-date reported EPS was $0.41 versus $0.06 per share primarily due to the inclusion of Quest as well as lower acquisition and integration-related costs.

Year-to-date adjusted diluted EPS was $0.54, an increase of $0.09 versus the year-ago period.

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 February 2021, the company paid down $25 million of its term loan debt.

And at the end of the second quarter, the outstanding principal balance was $556.5 million.

Building on last quarter's cash flow from operations in the second quarter, the company generated about $25 million of cash, resulting in $39.8 million of cash flow from operations in the first half of fiscal 2021.

Note that the company typically generates higher levels of operating cash flow in the second half of the year versus the first half.

As of February 27, 2021, the company had cash of $91.3 million.

And the trailing 12-month net debt-to-adjusted EBITDA ratio was 2.7x.

Capital expenditures in the first half of the year were $0.4 million.

We still expect $5 million to $6 million of CapEx in fiscal 2021 driven primarily by equipment for our new warehouse.

Our outlook this year for interest expense remains unchanged at approximately $30 million.

I would now like to turn the call back to Joe for closing remarks.

Thanks, Todd.

Our business continues to perform well despite the significant effects over the last year due to reduced consumer mobility related to COVID.

In the second half of the year, we anticipate improving retail takeaway trends in our business driven by easier year-ago comparisons; improving shopper traffic in brick-and-mortar, especially the mass channel; and strong buyer growth on both our brands.

Assuming consumer mobility in the United States remains at current levels and broad lockdowns are not reimposed, we anticipate full year net sales of $930 million to $940 million, and adjusted EBITDA of $180 million to $185 million.

This includes a combined 1.5 point headwind to net sales growth related to the SimplyProtein divestiture and our European business exit.

As Todd mentioned earlier, given year-to-date gross margin performance, full year fiscal 2021 gross margin is expected to be slightly lower than fiscal 2020.

The company continues to anticipate adjusted EBITDA margin expansion as acquisition synergies and SG&A cost controls are expected to more than offset reinstated in-store merchandising, modest supply chain inflation and higher incentive compensation additionally, the company anticipates 2021 adjusted diluted EPS to be in the range of $1.07 to $1.11 versus $0.91 in fiscal year 2020.

The combination of Atkins and Quest provides us with 2 uniquely positioned brands that are aligned around the consumer mega trends of wellness snacking, convenience and meal replacement and consumer feedback in the case that these mega trends will become increasingly more relevant as consumers return to work, school and more normal lives.

We have an advantaged, asset-light variable business model that enables strong cash flow from operations and provides us with the financial flexibility to invest in organic growth opportunities and participate in M&A.

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

We appreciate everyone's interest in our company.

And we are now available to take your questions.

(Operator Instructions) Our first question is coming from the line of Jason English with Goldman Sachs.

A couple of questions, and I apologize if I missed this in prepared remarks, but can you tell us what the organic sales growth was for both the Atkins brand and Quest brands?

So for the quarter, you'll see in the Q, the -- Atkins was down about 10% largely due to the shift from Q1.

And also, we had some -- due to the storms in Texas, we had a fair amount of shipments, particularly on the Atkins brand, that kind of got held up in transit that will come back in Q3.

So versus a low single-digit total consumption, timing of shipments was off a bit on Atkins.

Quest, on the other hand, was up in the high-teens.

Okay.

And I think I heard -- Todd, I think I heard you mention in the prepared remarks that, that pull into Q1 out of Q2 was about 2 points at Atkins.

You're right.

Okay.

So implying that this deferral of shipments into Q3 may actually be like an 8-point or larger type benefit for Atkins.

Am I doing the math properly on that?

Yes.

It's probably not that much.

We also pulled back with our new business model in Canada that affected the North America business for Atkins as well.

So we lost a point or 2 there.

So we lost a few points due to the storms that will go right into Q3.

And then we lost a little bit in Canada as well.

Got it.

That's helpful.

And Joe, a quick question -- or Todd, a quick question or clarification on the outlook.

In prepared remarks, you mentioned that your guidance is predicated on the current consumer mobility level sort of holding steady rather than sequentially improving.

But at the same time, right before that, you mentioned you expect mobility to continue to improve.

So I guess the question is which is it.

Is -- from your planning assumption, are you assuming stagnation on mobility?

Or are you indeed expecting and planning for continued progress?

Yes.

We're actually -- the assumptions in our guidance for the second half of the year assumes status quo.

The next question is from the line of Chris Growe with Stifel.

Just had a question for you.

As I think about the current state of your business, the current mobility and the sort of sales that's creating an -- at least in measured channels that we can track.

And I realize we're not going to get the full picture because of the very strong growth in e-commerce, but it would seem to suggest, against the really comps of the prior year, some very strong sales momentum in the third quarter as you go against those really easy comps in those kind of April and May in particular from the prior year.

I just want to get a sense of how to think about like the current rate of revenue.

And again, in a world where you don't expect mobility to improve, should this general rate of sales hold based on your assumptions?

And any other considerations around that, like inventory movements or we got a little bit of that just now from Jason's question, but also promotional timing, things that could distort it up or down in the coming quarters?

Yes, probably helpful to think of it on a quarter basis.

So historically, third quarter is a bigger quarter for us than fourth.

So I would think, Chris, that the kind of run rate you're seeing right now probably will be more like we'll see in the third quarter kind of week-to-week.

And then we would expect some softening because we do see it historically in the fourth quarter just based upon kind of the seasonality of the business.

And then you rightfully pointed out that we saw higher levels of inventory in transit at the end of the second quarter, which obviously just flow right into the third quarter.

So I think that's probably helpful from just how to think about a run rate standpoint.

And again, to Jason's question, we're assuming -- we learned a little bit about mobility, a little bit more specificity around mobility.

And specifically, our brands correlate in particular, bars and, to a lesser degree, correlate not to just -- consumption correlate not just to general mobility but being at work and being in transit to work.

So general mobility is a good benefit because it improves shopper traffic and, in particular, in mass.

But we're really looking for people to get back to their normal lives and get back to work.

And if you think about it, that makes a fair amount of sense.

While we've been sitting at home, we are probably eating more meals and using our products less for meal replacement.

When we start going back to work and in transit to work, fewer meal occasions, more products, in particular, bars and shakes used as a meal replacement and/or snack while at work.

So for us, mobility -- understanding what mobility really means made us a little bit more cautious as we move into the second half of the year because it seems like mobility is going to get better.

But we really need people to get back to work.

And for us, that felt like fourth quarter, first quarter next year before at least the U.S. gets back to that state.

Yes.

One other thing I would say just -- if you remember from last year, when COVID hit in March, retailers really just kicked out or pulled off all their promotions.

So we are lapping that now.

We're kind of at a normalized promotional period for Q3 and also for Q4.

So you're going to see -- and if you remember, last Q3, volume was way down, which was not helpful for us, obviously.

But our margins, both at the gross margin and EBITDA margin, really benefited from that pullback in trade activity.

So the profit held very, very nicely.

We're going to see a bit of a reversal of that in Q3.

I think we're going to have a very strong volume quarter as we lap Q3.

We're also reinstating some trade so that we'll have a bit of a margin hit for the quarter.

And then as you go into Q4, as we start to -- especially on the Quest side, Quest had a very strong Q4.

They snapped back very, very quickly.

And we had a pretty normal trade activity in the quarter.

And so the trade impact should be pretty nominal in Q4, but there will be a Q3 impact.

Okay.

That's good color.

And just a quick follow-up because it kind of leads into the point you made there, Todd, around promotional spending.

And then I guess -- so I think what you just said is we should look for, I guess, like more normalized promotional levels for the second half of the year.

And I was just -- also just curious around that to the degree to which incremental shelf space, the innovation, if that's prompting even more, therefore, than what's call the normalized level of promotion?

I don't think so.

It's -- again, it was just really artificially low last year.

So we're going to go back to normal levels.

And then just -- unfortunately, year-over-year, it looks like there's incremental trade spend, but it's really just getting back to kind of 2019 levels.

Our next question is from the line of Faiza Alwy with Deutsche Bank.

Yes.

So my first question is around Atkins.

I think we all know that there are 2 drivers that have impacted Atkins.

One is maybe the weight management side of thing and -- the side of things.

And the other is just reduced consumer mobility as you talked about.

And I'm wondering how you think about those 2 drivers because you mentioned renewed consumer interest in weight management.

And then you mentioned sort of return to work as 2 main components of bringing Atkins back to more normal levels.

So I would just love more perspective around how you think about those 2 drivers going forward.

Yes.

Well, great question.

First, if you just track what's happened since COVID, third and fourth quarter on Atkins, we saw a dramatic falloff in people coming to the brand.

So our new buyer growth post-COVID through the end of our fiscal year was down dramatically, down double digits.

And that impacted, obviously, total volume in the second half of the fiscal year on Atkins.

Encouragingly, starting in September and going through the second quarter, we've seen buyer flow, new buyers coming in and loyalty among retained buyers at historic levels.

So people started coming back to the brand and coming back to weight management, pretty much timed with the beginning of our fiscal year.

That's encouraging.

That means interest in weight management, interested in the -- interest in the brand has been strong since the start of our fiscal year.

So we feel pretty good that marketing -- our marketing is working.

Our product innovation is working.

And so the gap in volume on Atkins, if you think of it from a buyer standpoint, is just straight out buy rate.

So how much people are consuming, and then that led us to a path of trying to understand what the driver of that is.

And what we learned is there is a high correlation in bars and shakes on Atkins and bars on Quest around being at work and being in transit.

Fascinating, right?

So what's driving Atkins' performance is not people's interest in weight management.

It's flat out the number of occasions kind of where I am and how much I snack, right, how much I'm using it as a meal replacement.

And as I mentioned earlier, when I'm home, I'm eating more meals.

And I'm using snack foods less as a meal replacement, right?

And I might even snack less because I'm eating more regular meals because I'm home.

As I start getting back and going back to work and taking the kids to school and going to sports, convenience becomes more important.

My snacking behavior goes up, and I'm probably using our products more as a meal replacement.

And you can see that by form.

Bars and shakes, which tend to be more meal replacement-oriented than snacking-oriented, doing less well as people have not been at work and in transit.

And then what we call the snackier portion of our portfolio, so chips and cookies and confections, they had no correlation whatsoever to location.

So they are getting consumed at normal rates.

And we would not expect any change in those forms as people return to work and return to their jobs and kids go back to school.

So for us, very encouraging.

Consumers are coming back to the brand.

And as they get back to work, we're going to see buy rates go back.

We're pretty confident of that.

Okay.

That's super helpful.

Joe, I was wondering if you could just -- like as we think about the bar trends for Quest versus Atkins, I know we talked about this earlier on in the pandemic, how Quest was outperforming.

So I'm wondering if you have any evolved thoughts on why sort of the Quest brands, specifically within the bar product form, is doing better than Atkins.

Yes.

Less correlated -- so it's interesting, we now have the data.

Less correlated to at work and at transit than Atkins is.

So pretty interesting there.

And then two, some of the drivers of Quest, so some of the distribution drivers, improving distribution in general, some innovation on bars that's really doing well.

So Quest has done a slightly better job, less correlated to mobility and being at work and some nice innovation in particular, Hero bars have done pretty well.

So we've seen Quest do a little bit better from a bar standpoint.

Obviously, not where we want it to be, but certainly doing a little bit better than Atkins has during that period of time.

I would say the last factor, Faiza, is Quest has always been over-indexed in e-commerce.

And obviously, that's the channel you wanted to be in, in the last year.

And they continue to perform exceptionally well.

And so they have not been as reliant on brick-and-mortar.

So that's helped that part of their business as well.

Faiza, the other interesting thing is if you just look at the development of the brands by channel, the largest retailer of Quest is Amazon doing exceptionally well.

The largest retail of Atkins is Walmart, very challenged during COVID.

So those -- that fact alone, given the importance of those 2 retailers to each of the businesses, has a lot to do with the trajectory of the brands overall.

Our next question is from the line of Wendy Nicholson with Citi.

My first question is actually just a follow-up to Faiza's line of questioning because, obviously, there's a lot being talked about in terms of maybe consumer behavior will have shifted permanently from COVID.

Maybe not every -- I mean I think every kid is going to go back to play soccer, but maybe not everybody is going back to the office and mobility won't be quite what it is -- or was prepandemic.

So do you think about that in the context of Atkins in terms of changing the messaging?

I mean we all see the ads a ton.

But does it make sense to rethink the product assortment or the messaging from the ads in terms of trying to appeal to people if they are, in fact, going to end up staying home and be less mobile going forward?

Yes.

First, I would say a lot of that -- we've obviously participated in some of that conversation just as a CEO running a business.

As soon as I can get people back to work, I'm getting them back to work because of a loss of efficiency in the organization.

So I think to some degree, there's various points of view on that.

I think it's -- the conversation is pretty overblown.

So my first observation is it's going to be more the same pre-COVID, post-COVID than it is different.

Just an observation.

Second, yes, obviously, we would adjust marketing.

You're already starting to see on Quest development of what I would call everywhere, every time snacks.

So the confection, the peanut butter cup confections, the chips and the cookies tend to behave differently than bars and shakes do.

So the development of that portion of the franchise becomes very important in that it becomes less site-specific, less time-specific.

Clearly, Atkins has that development with confections.

But you'll see us starting to innovate in snacks that have less dependence upon kind of being at work and being in transit over time.

That's obviously a second strategy, and we're pushing that strategy pretty well.

But I got to tell you, I don't think you're going to see dramatic changes in work performance.

I just -- I expect most companies will be back at work when they have the opportunity to get back to work.

Exactly when that's going to happen is anyone's guess, but it's feeling like somewhere between the 4th of July and Labor Day, people will start moving back to the office.

Fair enough.

Fair enough.

And then just on the commodity side, I know you called out a little bit of inflation, which is less than what a lot of the other food companies are talking about.

And I know that's a function of the products you sell and the product mix and all of that.

But can you talk about your sense of sort of the elasticity of demand to the extent inflation continues to creep up, your willingness to raise prices, whether you think that will affect demand for the product, both on the Atkins and the Quest side?

Yes.

So we're -- we have not taken -- on Atkins, we have not taken a price increase in about 4 or 5 years.

And we are more than prepared if necessary to do it.

We're constantly looking at opportunities and running the elasticity models to see kind of if we did take price, what would that impact be.

We're very, very confident that we can execute a price increase and not only maintain strong volumes but also, obviously, to deliver the price realization that we need.

Where we're seeing -- we've been fortunate where we've been locked in.

Our team has made some really nice bets on locking in commodities earlier in the year, and we've benefited from that.

We're seeing a little bit more impact than we thought a couple of months ago on some of the proteins, both dairy and soy.

And we talked about inbound freight with higher diesel.

So luckily, it's not much of an impact for this year, just a little bit more in the second half than we anticipated but pretty nominal.

If prices stay where they are right now, we'll probably have to do something, look at pulling some levers as we go into our next fiscal year.

But we're doing the work right now on the elasticity models.

We're very, very confident that we would -- if we chose to do that, we could execute it very, very well.

Our next question is from the line of Rob Dickerson with Jefferies.

Great.

Maybe just a couple of easy ones for me.

I guess going back to the question just asked around cost inflation and some of the levers.

Just kind of more generally speaking, if I look at the company, namely Atkins, I guess, historically, I don't feel like you've really pulled the pricing lever much, right?

It's been about attracting new buyers, and you've obviously historically attracted a lot of buyers, right?

So growth has been impressively driven by volumes.

So like as you think about kind of just the cost equation vis-à-vis recovery, is that something you kind of sit there in a few months as you think forward next year and start to consider some pricing changes as long as the category seems to be pricing as well?

Or do you kind of have to tiptoe through this to make sure that you're obviously capturing the full recovery as it comes?

That's the first quick question.

Yes, Rob, I think first, our strategy is pretty simple: maintain our gross margins as it -- in the marketplace.

So we make significant marketing investments.

Maintaining our gross margins and slightly improving it with cost savings opportunities is our long-term strategy.

We have priced on Atkins when we've needed to from an inflation standpoint.

So Todd's comment was, one, more of we've been managing inflation to neutral over the last few years and haven't had the need to do that.

But if we see significant inflation looks -- feels inflationary as we move into fiscal '21, we wouldn't hesitate to price.

Exactly externally what's going on?

Obviously, it's easier when other people are pricing around you to sell on a price increase to customers.

So those are always easier environments than leading.

And clearly, some of that's going on right now, but we're justifying it.

We would justify it based upon the fact that we're seeing inflation.

We have a strategy of holding margins.

We would be encouraging retailers to take price at retail, not to squeeze their own margins and make the movements we need to make in order to hold our gross margins flat.

And then any cost savings we have kind of fall to the bottom line.

Okay.

Got it.

Makes sense.

And then secondly, just on the trade promotional as well as we get to this year and then maybe into next year, again, it sounds like you're kind of getting back to more normalized rate.

Is there kind of anything strategically you kind of think about that you can do to either increase display or run LTOs or what have you kind of as the mobility increases just to make sure you're essentially front and center in that consumer space as they start to walk through Walmart a little bit more?

Yes.

Look, I feel pretty confident.

We benefit from one of the more experienced sales teams in the industry.

So I feel real confident in our ability as a team to sell in display activity, especially as people are reemerging from reduced mobility.

So the second quarter was a good example.

We did an excellent job of executing display across the board pretty much across food, drug and mass, did a terrific job.

I feel pretty confident.

We can see third quarter plans right now.

They're pretty well locked.

I feel really confident of where we'll be in the third quarter from a display activity standpoint.

And we're still doing the planning and executing for the fourth quarter, but we've got a top-notch sales team.

We're really good at selling in display.

And then I think one of the things retailers learned as part of COVID is that big brands matter in categories.

Make sure you get those right.

Make sure you get those brands on display to drive foot traffic into the aisle.

And so we're taking advantage of those changes in -- I think, of evolution of customer thinking.

And we're using that to drive display on both of our brands.

So I think I feel pretty good about where we are and where we'll be as we move through the third quarter.

All right.

Great.

And then I guess, just lastly, kind of the question somebody asked every quarter.

It's just in terms of acquisition appetite.

I know you've said historically continue to have a decent pipeline, looking for something maybe not as large as Quest but probably still in healthy snacking.

Is there any kind of new perspective on that?

Just in terms of -- obviously, you can't speak to timing, but my assumption is nothing has changed.

Pipeline is good, and we're always looking for opportunistic buys.

I think that's true.

And then we would highlight that very encouraged by our debt -- our quick debt buy-down from the debt we took on for the Quest acquisition.

So we've shown this business model deleverages pretty quick.

And then we're looking for assets in the space that we're in.

And probably what's most important to us is the brand.

So what is the brand promise?

Do they have a defined consumer target?

Have they made progress against that target?

We look for strong consumer brands with good innovation pipelines and a strong understanding of who their targets are.

And so we found one of those at Quest.

And we're constantly on the lookout for the next one.

The next question is from the line of Alexia Howard with Bernstein.

So I remember that one of your hopes for the Quest deal was the potential to expand the product range in some of the mass market outlook, particularly Walmart.

I imagine that the pandemic kind of limited the ability to do that last year.

Just wondering where you are on that path and your ability to get the SKU count on Quest up in those channels.

And then I have a follow-up.

Yes.

Alexia, good question.

We've made progress in -- certainly in food on Quest and in target on Quest.

Walmart continues to be a little bit of a challenge of resetting once a year.

So you're kind of locked and loaded what you get in the fall.

And it has been impacted by some loss in distribution of our shake business.

So we've seen some shake declines just based upon the performance of shake in Walmart stores through the previous 12 months.

We're optimistic that we're going to make progress across the board.

The numbers of items in distribution of Quest against the size of the business and through drug mass, there is white space.

And as I said before, we have a pretty talented sales organization, terrific leadership.

We'll close those gaps over time.

I'm confident of that.

And obviously, where we've been innovating on Quest, we've had incredible success.

Probably the -- our chip business is probably the best example.

6-month business is at $50 million in revenue already.

So pretty significant success.

The innovation pipeline is pretty good.

I would expect us to continue to build items on Quest over time in distribution.

Great.

And then as a follow-up, the dive down in gross margins for the full year, you -- before, you were saying flat.

Now I think you're saying slightly down.

Would you attribute that mainly to the higher-than-expected input cost and freight inflation?

Or is it more that the promotional activity is having to step up more than you'd anticipated?

I'm just curious about the retailer environment and whether the retailers are asking for more at this point.

I'll pass it on.

Yes.

Sure.

It's really -- there's 3 pieces of it, and they're all pretty small, but they add up to our language changing from flattish to slightly lower.

So we're not anticipating a significant change in our gross margin outlook, but we want to call out that it was going to be a bit lower than we originally planned.

It's really not trade related.

Our trade expectations are the same.

We knew we wanted to have very strong merchandising activity.

We've had it.

We knew we wanted to get back to normal levels in the second half.

We're doing that.

So really nothing on a trade which has changed our view.

It's really 3 components: One, slightly higher input costs, nothing significant but a little bit of pressure there.

Second one is brand mix.

Quite frankly, Quest is growing much faster than Atkins right now.

And as you know, Quest has slightly lower gross margin.

So there's a bit of a brand or product mix impact there.

And the third component, again, not huge but a little bit of an impact is channel mix as brick-and-mortar has been slower to rebound than we had originally anticipated.

E-comm has not slowed down.

In fact, it has accelerated in Q2 and we anticipate will be strong in the second half.

That will be a little bit of a margin hit as well.

Again, all 3 of those things individually are very, very small, but together, a little bit of an impact for the year.

Our next question is from the line of Eric Larson with Seaport Global.

Okay.

Joe, in your prepared comments, you talked a little bit about reacceleration of foot traffic at the mass channel level.

Can you give us a little bit of cadence?

How -- what is the rate of change in that?

How quick is that?

And then if you can put that into some kind of historical perspective, is traffic at the mass channel 80%, 85%, 90% of what it was pre-COVID?

Because I'd suspect that, that would be a big positive for the Atkins brand.

Yes.

Big -- pretty much consistently through COVID, foot traffic mass down double digits.

And they obviously were making it up in basket, so bigger basket.

But when people came to -- let me step back.

It's probably helpful to understand the total context.

COVID constrained people's shopping behavior by limiting the number of stores they visited and, for the most part, moved people down to smaller formats.

So grocery tended to benefit more than mass did, right?

So smaller stores versus bigger stores.

And I think it was just safety concerns.

So mass saw declines in foot traffic.

That pretty much didn't change.

Throughout -- from the beginning of COVID through the second quarter of this year, foot traffic down.

But because people were not eating out, obviously, more meals, the basket when people were shopping were bigger.

So retailers like Target, Walmart benefited from bigger baskets but fewer shopping trips and fewer shoppers.

So as we move into the third and fourth quarter, obviously, those retailers start anniversarying those pretty significant declines in foot traffic.

And we're starting to see improving trends year-on-year.

I would expect those trends to continue.

Even without improvements in mobility, I would expect those trends just over easier comparables to improve.

And that obviously benefits both of our brands.

But it certainly benefits Atkins, given the importance of the mass channel to Atkins business.

And will your buy rates be better with more foot traffic as opposed to larger basket size, if that makes sense?

Yes.

It's a great question.

And to tell you, I don't have enough quantitative data to tell you that.

Intuitively, you would think your buyer behaviors would be more buyers, given the importance.

Walmart is 30-plus percent of Atkins business.

I would think buy rate would be impacted as well as buyer flow.

But I don't have any historic data to be able to tell you that, right?

So we haven't had a buyer flow issue in the brands in September.

So -- and we know that buy rate's going to correlate to being back at work and back in transit.

So I think mass merchant improvement for traffic should help consumption.

We do think that's the case.

So -- but we haven't forecasted for a lot of that at this point.

We just assume mobility is the same and pointed to the fact that we've got easier comparables, better foot traffic.

And we should see improving consumption just based on those factors.

Okay.

That's really helpful in your clarity.

So the final question is -- and this question has already been asked in a different form.

But it sounds like in your studies of buying patterns for Atkins, it sounds like you've learned something new about Atkins, given the consumption patterns.

So it's driving to work or at work behavior.

Again, does that change the way you market the brand a little bit?

Rob Lowe is not necessarily someone that needs weight management control.

So you've positioned it differently, but you've learned something there.

Does that change how you market the brand or position it?

Well, first, I would say the mobility data was very helpful for both brands.

So we understood.

Our belief prior to the data was general mobility will help us.

What we've learned now back to work, back to school, in transit, really important to bars and, to a lesser degree, shakes on both of our brands.

That was an important component to it.

So understanding that, obviously, that's a consumer insight.

And obviously, as we look to market our brands, we'll leverage that as an insight from a consumer standpoint.

Absolutely.

Rob, your question about Rob, we have changed the positioning of Atkins from a fast weight loss diet brand to a weight management brand.

And we think Rob is the perfect embodiment of that.

And the reason we think that was quite simple.

The size of the target audience, about 8 million diet, fast weight loss consumers in the U.S., about 33 million weight management consumers in the U.S. interested in low carb, so much bigger target audience.

And the brand has enjoyed that improving consumer penetration around the bigger -- repositioning around the bigger audience.

So we like Rob.

We're going to continue leveraging.

Our last question comes from the line of Ryan Bell with Consumer Edge Research.

With the increased move to confections and snacking or what you're calling the snackier side of your portfolio, is that expansion due to those who are already consuming Atkins and Quest products?

Or is that largely from those outside the brand family?

Kind of seeing if it's the deepening of existing consumer base or the degree to which there's some incremental consumer expansion going on that might benefit as we come out of some of the on-the-go restrictions.

Yes.

Great.

Great question.

First, I would rebrand it from snackier to everywhere, every time products, right?

So what we learned is that they don't correlate at all to where I am, which is really encouraging.

It says that as we people start becoming more mobile and have no impact at all on consumption of these products.

So that's good news for us.

And as is the case in most things, as it pertains to brand and product, it's a little of both, right?

They're really good at driving new people to the brand, and they're really good at driving buy rate among existing.

So we see them as both.

And the data would suggest that they are both.

Okay.

That's helpful.

And I know you answered one question on acquisitions after you've deleveraged as much as you have.

But is there anything that you'd be looking for thematically to add to your portfolio, maybe some plant-based products, something that's more of the anytime occasion, some channel expertise?

Or is there anything else that you would find useful to add to the article?

Strong consumer brands, well-defined consumer brands, well-defined consumer targets, underpenetrated opportunities to grow.

So Quest is a great example of the type of business that we seek.

Here's a brand that has shown strong, consistent growth over time.

It was well defined from a brand standpoint.

It had a well-understood consumer target.

And the opportunity for Quest was it was relatively unknown, relatively low-aided and unaided consumer awareness.

So the ability to use our marketing expertise to build brand awareness, to drive consideration, improve trial and then conversion, those are the types as opposed to I want to be in this segment or I want this type of product.

It's more about, I think, from our standpoint, consumer and brand than it is anything else.

And they're hard to find.

And when you find them, you got to grab them.

So that's what's on our hunting list.

And Quest was possibly the best brand in the category from that.

And we're showing that right now in its growth rate, its trajectory, its ability to expand beyond protein bars, its ability to expand beyond kind of specialty channels to food, drug and mass to other snacking products, the brand promise, the target -- the ability to target folks and get them and build trial and penetration on the brand.

We're showing that, that was a pretty good profile and we made a good choice.

So that's what we're looking for more than any particular segments or products.

This concludes our question-and-answer session.

And I'll turn it back to Joe Scalzo for closing remarks.

Yes.

Thank you.

Thanks again for participating on today's call.

We hope to continue to remain safe, and we look forward to updating you on our third quarter results in July.

We hope all of you have a good day.

Thank you.

This will conclude today's conference.

You may disconnect your lines at this time.

Thank you for your participation.