Simply Good Foods Co (SMPL) 2020 Q1 法說會逐字稿

Greetings, and welcome to The Simply Good Foods Company's Fiscal First Quarter 2020 conference call.

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

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

Mr. Pogharian, you may begin.

Thank you, Daryl.

Good morning.

I'm pleased to welcome you to The Simply Good Foods Company Earnings Call for the First Quarter ended November 30, 2019.

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 press release this morning at approximately 07:00 a.m.

Eastern.

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

This call is being webcast live on the website, and an archive of today's remarks will also be available.

During the course of today's call, management will make forward-looking statements that are subject to various risks and uncertainties that may cause actual results to differ materially.

The company undertakes no obligation to update these statements based on subsequent events.

A detailed listing of such risks and uncertainties can be found in today's press release and the company's SEC filings.

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

The presentation of this information is not intended to be considered in isolation or as a substitute for the financial information presented in accordance with GAAP.

Please refer to today's press release for a reconciliation of the non-GAAP financial measures to the most comparable measures prepared in accordance with GAAP.

Additionally, note that management's reference of legacy Atkins in today's presentation and remarks encompasses a Simply Good Foods business, excluding Quest.

With that, it's now my pleasure to turn the call over to Joe Scalzo, President and Chief Executive Officer.

Thank you, Mark.

Good morning, and thank you for joining us.

Today, I'll recap Simply Good Foods first quarter highlights and provide you with some details on the performance of our Atkins and Quest brands.

Then Todd will discuss our first quarter financial results in a bit more detail, and we'll wrap up with a discussion of our updated full year outlook and then open the call to your questions.

With the closing of the Quest acquisition on November 7, we've fulfilled a strategic initiative of acquiring a fast-growing on-trend business.

This provides us with an additional consumer lifestyle brand that transcends forms and positions us to maintain our leadership role within the nutritional snacking category.

We believe investments in our legacy Atkins brand with a combination of Quest unlocks further growth potential for our company.

We have built and continue to improve upon a consumer-centric business model, focused on profitable, long-term growth.

Our business model provides us with the financial flexibility to invest in our branded product portfolio.

We have a scale, efficient outsourced supply chain that should enable us to increase gross margins over time, allowing us to invest in our brands, while growing EBITDA.

We'll also leverage our core capabilities and product development, manufacturing and marketing to drive growth.

Furthermore, this acquisition gives us an enhanced presence in key retail channels with the ability to increase availability over time.

The nutritional snacking category continues to grow and outperform most center-of store packaged food categories driven by healthy snacking and meal replacement megatrends.

Growth continues to be in the mid- to high single-digit percentage range driven by the growth in household penetration.

We're excited about the acquisition of Quest as well as our legacy Atkins brand and believe that we are well positioned to deliver on our fiscal 2020 and long-term commitments.

We delivered another quarter of solid financial results and double-digit increase in retail takeaway.

The Quest acquisition closed on November 7. So there are only 24 days of business in our first quarter results.

Importantly, Quest is tracking to the acquisition model and the full calendar year 2019 net sales and EBITDA we discussed on prior conference calls.

Since the announcement, I've spent time with Dave Ritterbush, the President of Quest, and we're both excited to work together to unlock the value of our combined business and deliver shareholder value through both revenue growth, margin expansion and cost synergies.

In addition to being part of my senior leadership team, Dave was recently appointed to our Board of Directors upon the closing and will continue to run the Quest business.

I look forward to working with Dave and leveraging his knowledge and extensive experience in managing nutritional snacking brands and businesses.

One of our main objectives in 2020 is the integration of Quest.

This work is well underway and progressing as planned.

I've been pleased with the teamwork and collaboration of the joint leadership teams, which I have found to be an important factor in executing smooth transitions.

And the nutritional snacking category continues to outpace most center-of-store packaged food categories driven by healthy snacking and meal replacement megatrends.

In our fiscal first quarter and over the last 52 weeks, nutritional snacking category was up in the mid- to high single digits on a percentage basis versus the comparable year ago period.

And with nutritional snacking, household penetration at only around 50%, we believe there's a lot longer runway for growth.

Turning to the first quarter.

Net sales increased 25.8%.

Legacy Atkins net sales increased 11.7% and, as expected, slightly outpaced the increase in retail takeaway driven by our strong e-commerce growth.

The contribution from Quest was a 14.1% benefit to net sales growth.

Legacy Atkins sales growth was driven by velocity of core items, primarily bars and confections in higher promoted volume.

The increase in adjusted EBITDA is a direct result of higher gross profit driven by higher Atkins net sales and the benefit of Quest.

The increase in gross profit was partially offset by the timing of marketing and incentive compensation, as we discussed last quarter.

Total Simply Good Foods Company retail takeaway in the fiscal first quarter in the IRI/MULO measured outlet universe increased 14.5%.

Note that this includes traditional food, drug and mass merchant retailers as well as Walmart, BJ's, Sam's and dollar stores.

IRI/MULO captures about 90% of Atkins U.S. sales.

However, it only represents about a 50% of Quest sales, more on this in a bit.

Atkins first quarter POS growth was 10.7% and relatively in line with our estimates, and as expected, sequentially moderated versus the fourth quarter of last fiscal year.

In the year ago period, POS was up 23.5%, indicating a 2-year stack growth rate of nearly 35%.

We grew total buyers during the quarter with brand loyalty, in line with our expectation.

We're focused on continuing to drive velocity and POS growth and believe we have the right combination of advertising, product variety and promotions in place to deliver on our goal.

Quest POS nutritional snacking growth was up 24%, with all forms up double digits.

Most importantly, the core Quest bar business is driving overall growth.

The building blocks of Atkins point-of-sale growth are similar to what we've discussed over the last 2 years: strong base velocity of core items.

Distribution was up in fiscal 2019, but slightly down in Q1.

Some of this was intentional given our SKU rationalization plans from last year.

Promotional volume was up versus year ago and returned to more normal levels.

We would expect promotional volume to be higher next quarter, as we reinstitute bar promotions that were scaled back in the year ago period due to supply constraints.

By form, first quarter bars and confections retail takeaway was solid, up 10.6% and 33.6%, respectively.

As expected in Q1, competition in the RTD Shakes category increased and Atkins RTD Shakes POS was slightly lower in the period.

We anticipate that our shakes performance will improve in the second half of the fiscal year.

As I stated earlier, we're focused on continuing to drive velocity and POS growth and believe we have the right combination of advertising, products and promotions in place to deliver on our goals.

Our business model enables us to invest in our brands.

Specifically, as part of our long-term algorithm, we are committed to increasing marketing, at least in line with sales growth on an annual basis.

We believe the step-up in expanding our consumer base and growing our business is educating consumers on the benefits of the Atkins approach to nutrition and teaching them how to make smarter food choices.

We find that the more consumers know about the Atkins approach to nutrition, the more likely they are to rebalance their choices away from carbohydrates and towards our snack foods.

As such, we've established a variety of marketing and advertising strategies to connect with consumers, including digital marketing and social media platforms, television advertising, celebrity endorsements and online food tracking and facilitation tools.

Accordingly, we have structured our marketing and advertising to not only promote our products, but also to educate consumers.

As you see on this slide, our advertising highlights the nutritional profile of our products and our website provides consumers with detailed information such as Atkins, keto and the benefits of a low-carb lifestyle.

In addition to television advertising, social media is an important component of our marketing tools, and we have an active and growing presence on key social channels such as Facebook, Instagram and Twitter.

For the fiscal year ended 2019, we had approximately 9 million new visitors to our Atkins website.

Let me now turn to Quest.

For those of you not familiar with the brand, it was a California company, founded in 2010, as a high-protein, low-carb, low-sugar bar, primarily distributed in gyms, specialty stores and e-commerce.

Over time, it has expanded in traditional channels.

Additionally, over the last couple of years, Quest management team has done a terrific job transitioning its position from a protein bar to a broader, healthy lifestyle snack brand, focused on providing craveable foods backed by metabolic science.

Today, about 2/3 of the business is the core protein bar, with the remaining 1/3 consisting of products such as protein chips, cookies, powders and frozen pizza.

Similar to Atkins, Quest has a small international business.

Quest generates about half of its U.S. sales in traditional food, drug, mass and club channels.

The other half of Quest U.S. sales are generated in the convenience store class of trade and the unmeasured e-commerce specialty channels, which are not tracked by IRI or Nielsen.

Performance in the convenience store and e-commerce channel are solid.

However, the specialty channel, which represents about 18% of sales, is declining about 20% due to store closures and slower foot traffic.

The decline in the specialty channel has been a multiyear headwind for the category as consumers have shifted purchases to other channels, such as food, drug, mass and e-commerce.

This slide depicts Quest point-of-sale nutritional snacking growth in measured IRI universe.

As a reminder, this only represents about half of the Quest U.S. business and excludes pizza.

As such, the IRI/Nielsen data is less indicative of total Quest performance.

Quest digital and social marketing programs over the last few years, combined with new products, has resonated with consumers.

As such, awareness and velocity, the nutritional snacking products across most forms as bars, cookies, protein chips and powders, is driving growth of the brand in measured channels.

Importantly, Quest's first quarter bar retail takeaway in IRI/MULO measured channels increased 15.9%.

Velocity across all other forms, bars, cookies, chips and powders, is up double digits on a percentage basis versus last year, and while distribution is a tailwind, velocity contribution to growth is 2x the benefit from distribution.

The initiatives the Quest management team has instituted over the last few years are working.

Given our collective knowledge of the category, we see a path to increasing distribution and driving more consumers to the brand and its multiple product forms.

We'll also leverage our combined marketing expertise to determine the right marketing mix over time, while always focused on the highest return on investment.

In the near term, we're focused on incremental digital and social advertising campaigns to broaden reach.

We're also investing in our Quest squad influencing network that has been effective in retaining attractive core consumers.

Their presence across various social media platforms, such as Instagram, where Quest has nearly 900,000 followers, has driven solid growth.

As a result, we anticipate the Quest marketing expense in fiscal 2020 will be greater than net sales growth.

In summary, The Simply Good Foods Company competes in a highly attractive category and is a leader in the U.S. nutritional snacking space.

With the combination of Atkins and Quest, it provides us with 2 uniquely positioned brands that are aligned around the consumer megatrends of wellness snacking, convenience and meal replacement.

Quest also provides us with key capabilities, such as e-commerce, small format retail sales and social and digital marketing.

Our teams are motivated and engaged and want to continue to win in the marketplace.

Nutritional snacking is a business we know very well, and I'm confident in our ability to execute as we look to integrate Quest, while preserving the best elements of our growth-oriented cultures.

As we entered the second quarter, we have the financial and marketplace momentum and are well positioned to deliver on our fiscal 2020 commitment.

With that, I'll turn the call over to Todd, who'll provide you with some greater financial detail.

Thank you, Joe, and good morning, everyone.

Let me start with 2 points, as it relates to the numbers you'd see on the slides that follow: first, for comparative purposes, we will review financial statements for the 13 weeks ended November 24, 2018, and 13 weeks ended November 30, 2019; second, given our asset-light, strong cash flow business model, we evaluate our performance on an adjusted basis as it relates to EBITDA and diluted earnings per share.

We have included a detailed reconciliation from GAAP to adjusted historical items in today's press release.

We believe these adjusted measures are a key indicator of the true underlying performance of the business.

I will start with a review of our first quarter and net sales drivers of growth.

U.S. legacy Atkins volume growth was plus 13.5%.

Higher volume was partially offset by greater trade promotion, resulting in total U.S. legacy Atkins net sales growth of 12.7%.

As expected, this was slightly greater than the retail takeaway growth of 10.7%, given the continued strength in our nonmeasured e-commerce business.

As a reminder, we expect trade promotion to be a headwind to gross margin in fiscal Q2 as we reinstate bar promotions that were curtailed in the year ago period due to supply constraints.

Atkins non-U.

S. net sales, including Canada in our international business, was only up about 1.5% in the quarter, and therefore, a drag on the total company growth rate.

As a result, total organic net sales growth in the quarter was 11.7%.

The 24 days of Quest contribution was a 14.1% benefit, resulting in a total Q1 net sales increase of 25.8%.

Now we'll review our first quarter results across other major metrics.

Gross profit was $62.2 million in the first quarter of 2020, an increase of $10.3 million or 19.8%.

The increase in gross profit was driven by both the legacy Atkins sales growth and Quest partially offset by a noncash $2.4 million inventory purchase accounting step-up adjustment related to the Quest acquisition.

As a result, gross margin was 40.9%, a 200 basis point decline versus last year.

The noncash inventory step-up adversely impacted gross margin by 160 basis points.

Quest lower gross margin and the previously mentioned increase in trade promotions were a 40 basis point headwind.

In Q2, we anticipate the inventory step-up adjustment to be $5.1 million for a total of $7.5 million.

Similar to first quarter reporting, the $5.1 million will also be a reconciling item in our debt-to-adjusted EBITDA for reconciliation.

Adjusted EBITDA increased 19.1% to $31.8 million driven by the increase in gross profit partially offset by a 20.3% increase in selling and marketing expenses.

The majority of the increase was due to the timing of higher Atkins marketing expense as we discussed last quarter.

Proportion of the increase was also due to the acquisition.

Additionally, general and administrative expenses increased 45% in Q1, 72% of the increase was attributable to the Quest acquisition and 28% to Atkins.

Moving to other items in the P&L, the net impact of interest income and the interest expense was an increase of [$1.9] million in Q1 due to the increase in the term loan in early November.

And the effective income tax rate in Q1 was 26.5% versus 23.3% last year.

In fiscal 2020, we anticipate an effective tax rate of around 26%.

In the first quarter of 2020, the company reported a net loss of $4.8 million or $0.05 per share diluted compared with net income of $15.3 million or $0.18 per share diluted for the comparable period of 2019.

The net loss was driven primarily by $26.2 million of transaction costs and $1.4 million of integration costs due to the acquisition of Quest.

Adjusted diluted EPS was $0.22, in line with the year ago period.

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

Please refer to today's press release for an explanation and reconciliation of non-GAAP financial measures.

Moving on to the balance sheet and cash flow.

At the end of the first quarter, the company had cash of $72.7 million.

There is $655.5 million remaining on the term loan.

Recall, on October 7, we issued 13.4 million shares and a few weeks later, increased the term loan by $460 million to fund the Quest acquisition.

Depreciation and amortization in the first quarter was $2.5 million.

Capital expenditures for fiscal 2020 is expected to be in the $5 million to $6 million range due primarily to the implementation of our new ERP system.

Note that G&A costs related to this project will begin in Q2.

The company's solid cash flow provides us with continued financial flexibility to support future organic growth and the ability to quickly pay down debt related to the Quest acquisition.

Let me now summarize all of the moving parts related to the Quest acquisition.

On October 7, as part of generating the necessary capital to complete the acquisition, we sold approximately 13.4 million shares of common stock and estimate that total diluted shares outstanding for the remainder of the year will be about $100 million.

The incremental $460 million term loan was completed in early November, and we closed the acquisition on November 7. Our total debt of $655 million is at a favorable rate, LIBOR plus 375 basis points, and we'll begin making payments later this month.

We anticipate the net impact of interest income and interest expense to be in the $32 million to $34 million range, including amortization of debt financing costs of about $4 million.

And LIBOR to be about the same as it is today.

As such, we're targeting a net debt to adjusted EBITDA ratio of less than 3.7x by fiscal year-end of August 2020.

Noncash amortization of intangibles related to Quest is about $8 million per year.

Note that our fiscal 2019 depreciation and amortization of $7.5 million consisted of about $1 million of operating depreciation and $6.5 million of amortization related to the passing Conyers combination.

Transaction costs in fiscal 2020 are anticipated to be about $27 million, with a vast majority occurring in the first quarter.

Integration expenses in the first quarter were $1.4 million.

We anticipate total integration expenses to be similar to other deals of the same size, about 2% to 3% of the total deal value.

One of our key goals in 2020 is the integration of Quest.

Our planning began in September and October, and we hit the ground running when the transaction closed.

I'm pleased to report that work is well underway and progressing as planned.

We're focusing on ensuring that business remains wired for growth.

As such, we will maintain Quest headquarters in El Segundo, California.

Our initial integration efforts are concentrated on retail customer-facing initiatives, a single integrated supply chain and migrating the Atkins business to Quest's ERP platform.

Therefore, we expect the majority of the $20 million in identified cost synergies to be achieved in years 2 and 3.

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

Thanks, Todd.

We're pleased with the start of the year and the progress we're making against our strategic initiatives to build on the existing capability and strength in our brands.

We have excellent marketplace momentum across the business, and we're confident in capturing the growth opportunities ahead of us as well as delivering on our 2020 financial commitments.

For the full year fiscal 2020, we have updated our outlook to include the acquisition of Quest.

We anticipate that total Simply Good Foods Company, all-inclusive full year 2020 net sales will be in the $850 million to $870 million range and adjusted EBITDA in the $154 million to $158 million range.

The outlook for Atkins net sales and adjusted EBITDA growth remains unchanged from guidance that we provided you on our fourth quarter conference call.

Recall that we stated that the net sales growth would be at the high end of the company's long-term target of 4% to 6%, while adjusted EBITDA is expected to increase somewhat higher than net sales growth.

Our outlook for the full year 2020 adjusted diluted earnings per share is $0.90 to $0.95 compared to $0.77 in the prior year.

Please refer to today's press release for an explanation of the company's definition of adjusted diluted earnings per share.

As we've shared with you over the last 2.5 years, we're confident in our business, as we execute against our strategy.

We're delivering on our financial objectives, while investing in our business, a path that we believe will continue to create value for our shareholders.

We appreciate everyone's interest on the business and our company, and we'll now -- are available to take your call and questions.

Operator?

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

So I wanted to come back to the new business, the one that we're all still trying to wrap our heads around and that being Quest, of course.

I know you only owned it for, I think, 24 days.

But nonetheless, the contribution that we saw this quarter was a little bit lighter than we expected.

Obviously, there could be a lot of timing noise there.

But maybe you can resolve that question just by giving us some -- what the like-for-like growth is for the business for the last quarter -- or I guess -- for really the first full quarter?

Yes, I would say, Jay, probably the easiest way to answer that, Jason, is just take a look at how the business is performing relative to what we told you was going to do for calendar year 2019.

It is absolutely on pace.

We're very happy about the performance of the business.

If you look at it overall, kind of, November to November, it's performing, growth -- top line growth has been kind of in the mid-teens, [on the bit].

So very happy with the performance, very much in line with our expectations.

You're seeing solid growth across the brand, the total business, all the product perform -- all the product forms.

And we're very happy about that.

A little bit stronger growth in the most recent quarter as they've got a little bit pipeline from their ready-to-drink launch.

But overall, it's been good growth, kind of, mid-teen growth top line overall for the business on a sustainable basis over the last 12 months.

One of those 3 weeks that we owned it was the week of Thanksgiving.

And obviously, there's a lot less shipments just because of the holiday and distribution centers closed.

So to Joe's point, the business is completely on track, no change.

Totally makes sense.

I got a little bit spooked when you start telling me that 20% of its sales are declining 20%, though.

So I'm glad we got to come back and get some clarification on that.

Jason, just step back from that.

That's a multiyear trend.

Business has been growing strongly through that.

So there's -- and it's not a trend that's different from the category.

So the thing that you need to understand is its consumer purchasing channel habits are changing away from specialty channel towards more traditional channels through drug mass as well as e-commerce.

So it's been a trend that this business has been offsetting on an ongoing basis for a number of years.

Totally.

And we've seen it with some other similar businesses as well.

In the vitamin supplement type channel, it's been tough [sledding].

One more question for me.

I think you've mentioned some cautionary comments on 2Q multiple times.

You mentioned the ERP-related G&A expense stepping up in the second quarter, you mentioned the heavy-up on more trade spend, which I think is going potentially subdue sales and gross margin.

Can you just walk us through the headwinds, just like a packaged them all and wrap my head around the headwinds you were calling out for 2Q?

Yes.

Well, you mentioned them, and I would say, there's probably 3 or 4 headwinds.

There is incremental promotional activity.

Again, that should be generating additional volume.

But it will be the -- probably will be a slight margin impact to it.

From a marketing perspective, same issue as Q1, just the timing over year-over-year because we had a big increase in our marketing in our second half, that's now in our base that hit us in Q1, will again hit us in Q2.

And there are the ERP-related G&A expenses will start to hit in Q2 and go on for the rest of the year.

So that -- those are the other impacts.

But other than that, we feel really good about the rest of the year.

Yes, I'd also add, we're a little surprised.

So if you remember what happened last year, we saw less trade inventory build in Quest for the season.

So we were under shipping POS in the first quarter, a little bit in the second quarter.

And then we saw that inventory come back, obviously, is less of a drawdown in the second half of the year.

Going into the first quarter and the second quarter, we anticipated to return to more normal levels of inventory build.

So we expected a little bit better performance in shipments relative to POS in the first quarter that frankly didn't happen to the magnitude that we were expecting.

And we expect that will play out a little bit in the second quarter and that we're not seeing the inventory build.

Now we're not concerned about either because of the inventory that you don't put in, in the first quarter -- in the second quarter, you don't take out in the third and fourth.

So no impact on the total year, but we're a little bit surprised of that.

And that will be a bit of a drag, I think, in the second quarter too.

No net impact on the year ago.

Our next question comes from the line of Alexia Howard of Sanford C. Bernstein.

One question and one follow-up.

Firstly, in the measured channels, this is the legacy Atkins, and I know you've talked about this quite a bit.

It looks as though the shakes, as expected, have come under pressure as the company's hit tough comparables and perhaps also that competitors have emerged from a period of capacity constraints.

Can you just remind us of the strategy here?

And what's it going to take?

It sounds as though the pressure in the second quarter, but you expect an improvement in the second half.

What gives you the confidence that, that's actually going to come around?

And as a follow-up, can I ask about promotional activity?

You talked about stepped-up promotional activity I think this time last year, it was actually reducing.

Should we be worried about the need for that incremental promotional activity?

And does that mean that competition has intensified in some part of that legacy Atkins business?

I'll pass it on.

Yes, great question.

On RTDs, we expected with -- we expected more competitive activity on ready-to-drink.

We're seeing with the reemergence of BellRing's Premier, we're seeing activity from SlimFast on their advanced line and keto line as well as our own Quest launch.

So there's a lot of promotional activity in the marketplace in the first quarter.

Frankly, we've seen this, experienced this in the past in our total business that we're a brand, so we've seen impact in forms before that kind of come and go, ebb and flow.

We have -- the reason we're confident in the second half of the year is our promotion plan is significantly stronger in the second half of the year than it is in the first, and it's kind of starting right now.

We'll see a fair amount of promotional activity on RTDs.

We also didn't repeat a promotion in the first quarter on shakes at one of our large customer's just based upon the return.

So we're not surprised with where we are, and we're pretty confident.

Given the strength of our promotions in the second half of the year, we'll be fine.

Our next question comes from the line of John Baumgartner of Wells Fargo.

So I guess first off, Joe, just wanted to circle back and just clarify on that.

You mentioned the surprise on the shipments in Q1 relative to takeaway.

Is it fair to say it's really just the impact of the BellRing, SlimFast kind of picking up more of that distribution?

Or is it -- are you seeing more of a working capital inventory management at retail because the category is not really slow.

So I'm just curious what you really attribute that to?

I guess, ask the question again to make sure I got it exactly right.

Yes.

Just the fact that you didn't really see shipments tracking stronger versus takeaway in Q1 on ready-to-drink.

Was it more of a competitive movement?

You mentioned the BellRing and the SlimFast.

Or was it more on the retail side just working capital?

Yes.

Again, there are 2 different points, right?

We expected shipments to be a little bit stronger in the first quarter, just returning to normalized inventory builds in prep for kind of January, February, March season.

So if you remember, 2018, the pattern of our business is inventory build in the first half and then inventory depletion in the second half.

The net is you end up in the same place at the end of the year that you were in the beginning of the year.

Last year because of supply constraints and we dialed back a significant number of promotions in the second quarter, we didn't see the inventory build that we normally would see in the first half of the year, nor did we see the depletion of inventory in the second half of the year that we normally would see.

So traditionally, in our business, you over-ship consumption in the first half and you under-ship consumption in the second half of the year.

We expected in this current year to return to that more normalized pattern and frankly, didn't see it to the magnitude that we would have expected.

And we can tie it to a few customers who are managing their working capital a little tighter.

So the net effect is not as strong sales in the first quarter as we would normally have anticipated and the net effects -- and we're not seeing that in the second quarter to the degree we would have expected.

So the net effect is you end up shifting net sales from the first half of the year to the second half of the year.

That will be the net effect.

We're not concerned with it from an overall total year standpoint.

It's just a little bit more timing of when the volume comes first half to second half.

And that's about 1 point or 2, I think, we'll experience in the first half of the year relative to the second half year.

I think it will be 1 point or 2 of growth that will shift to the second half, probably a lot of it in the second quarter.

Exactly, John.

I mean that -- again, we anticipated more normalized build.

Joe just said it.

I think the end result is the way -- versus the way we originally planned it will be a 1- to 2-point shift out of the first half into the second half.

Great, very helpful.

And just if I could add one on Quest quickly.

I know a lot of the focus right now is on the RTD launch.

But I'm curious, looking at the salty snacks part of the portfolio, the velocity is growing very nicely year-on-year.

We're seeing some nice gains in ACV as well.

Following the closing of the deal, I'm curious what you're hearing from retailers in terms of their desire to be allocated more snacking space to Quest going forward.

And maybe how you're thinking about the longer-term ceiling for ACV in that snacks business?

Yes, first, great question.

I would say we're equally excited with the salty snacks launch as we are with the shakes launch.

So I don't have a favorite child there.

I'm really excited about the prospects of this business' ability to fill white space in traditional food drug mass.

So if you look at kind of average items stocked for Atkins, we're in the 30s and Quest is not half that, right?

So there is -- they are earlier in their development in Atkins from a shelving standpoint.

You would expect we're going to be able to build items in distribution as the business builds over time.

I think the chips because there's no competitive entry and it's a very different day part, very different need state, I think, you're going to see that business continue to do extremely well, build distribution.

And as I said, the one nice thing about this business is all these new forms are growing, but the single biggest driver of growth in the business is the protein bar business, right?

And most of the growth on all these items is from base velocity.

So that's more buyers coming to the brand, buying more over time.

And that's a good profile, and that's a profile of a healthy company.

This is not brand, this is not a business that has to have white space to grow, it's benefiting from white space to grow.

But it has core velocity gains because it has more buyers coming through the brand over time.

Our next question comes from the line of Brian Holland of D.A. Davidson.

Just want to confirm on the Quest component.

Obviously, in August, you provided sort of assumptions for calendar year '19, I think, about $345 million.

So it sounds like, Joe, from your commentary that, that the year played out just as you expected.

So I guess first point, is that fair?

And then do we infer from that?

I'm sort of looking at it and sort of thinking high single, low double-digit growth is kind of what's embedded in the apples-to-apples guide for that business in 2020.

Am I right in the ballpark there?

And then is there -- why would we decelerate from the mid-teens?

Just help walk through that.

I guess I'm thinking about some of the shakes rollout that we just had, and that's kind of limited distribution, velocity, obviously, seems strong.

So if you could just -- I don't know if that's just thinking about drag from the other stuff?

Are you not being able to implement everything you want right away.

If you could just help us understand that?

Yes.

So first, to answer your question, we're really excited about the business.

It has great momentum.

There is a lot of opportunity for growth.

Product innovation is driven by this leadership team is singularly outstanding.

Penetration growth opportunity for this brand is boundless.

So we're very excited.

Last thing I'm most excited about is it's a brand, not a product.

So it has a brand promise that transcends forms, transcends products.

Those are really important components that we're really excited about.

It performed as we expected it to perform for 2019, is on track for fiscal year 2020 as we anticipated and as we build into our acquisition model.

The -- I can speak to the last 12 months.

So the last 12 months, growth has kind of been in, on average, mid-teens.

There is a fair amount of pipeline in that.

They got to factor back the pipeline from some product launches that won't be repeated.

So you kind of get into that neighborhood, probably the upper end of the neighborhood that you were talking about from a growth rate standpoint, as you look at our stuff here in fiscal 2020.

Yes.

It's going to be double -- it still has double digit -- low double-digit growth this year.

The one thing, we're just normally cautious.

But they have -- the product launches, obviously, don't have a lot of history on it.

So there's some fairly wide ranges on outcomes.

So we tend to be a bit conservative on our forecast on top line.

But as Joe pointed out, business came in from both the top and bottom line right where we anticipated for the calendar year.

It's performing very, very well, and it's got an excellent plan for FY '20.

That's perfect.

So I guess then -- and one of the questions at the time of the acquisition and probably since has been looking at Atkins portfolio, looking at Quest portfolio, obviously -- maybe more specifically, frozen.

I'm interpreting from all the commentary here that you would anticipate largely keeping that portfolio intact in 2020, and that's what's embedded in the guidance.

Is that a fair assumption?

Yes.

Got it.

And then just last question for me.

A lot of questions about the competitive landscape heating up and obviously, the more promotional activity.

I'm seeing more national media as well, I noticed pure protein bars, watching the NFL playoffs this weekend, I saw some advertising there.

What are you guys seeing on that?

And are you seeing an increase in that activity as well?

Yes.

So you see -- I mean I was watching TV this morning.

I saw the SlimFast keto shakes.

You've seen Clif and Kind promotes.

So you do see as this category build household penetration.

You got a handful of people making investments to try to grow awareness consideration trial because they understand it's a growing category, and you got to spend money to do it.

We feel very comfortable with where we are from an investment standpoint.

We have a high share of voice.

We have high ROIs from an investment standpoint.

So I think it's good for the category, and good for the category is good for us.

So we love having the competition.

We have -- we love bringing people to the aisles, and we think it's good overall.

And Brian, I just want -- I want to make it clear.

We're not really seeing -- from a promotional activity, we're not seeing a significant increase in promotional activity.

And this is and has always been a very competitive category.

And it will continue to be a very competitive category.

What we're seeing specifically in RTD shakes is the reemergence of Premier back on shelf fully and then just a lot of new product entries that are getting a fair amount of activity in the beginning of our fiscal year.

We're not really seeing any impact on pricing.

Pricing has been relatively stable.

So I just want to make sure that, that's not the communication.

And I've been leading the business for 7 years.

We've seen this ebb and flow over time, different brands, different forms, and they're going to continue to do that.

We're not overly concerned by it.

I think that, again, overall, bringing people to the category is a good thing, growing [out is kind of] good for us.

But we're not as concerned.

You kind of deal with the short-term levels by form that you experienced, but it's overall good for us.

Yes.

No, the data supports that your brands held up to various competitive forms and factors over the past few years.

So I'll leave it there.

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

Yes.

So a couple of questions from me.

One is, I wanted more color on the decline in distribution that you mentioned for the legacy Atkins business and I guess the decline internationally?

And how should we think about that going forward?

Yes.

So I think Joe pointed out in his remarks, and we had some supply constraints last year.

We actually took out some items, just to make it easier on some of our [co-mans] to produce more of our -- a item.

So that was self-inflicted.

We took some SKUs out.

Despite the fact that we've had tremendous velocities in the last couple of years, as we've just talked about, there's just a lot of new entrants, a lot of competitors out there.

And we really did not gain any SKU or space across the different customers out there.

So distribution is going to be kind of flattish for this year.

And again, we took -- just, on our own, took out some items that will have very, very little impact on our business.

But that's what you're seeing in the data right now.

And Faiza, also, the thing to understand about our business is our business organizes as people make choices, organizes as a brand.

So the simplest way I think about it is they come to the shelf, looking to buy Atkins.

They then choose the product.

So for us, slight losses or gains in distribution do not materially impact our overall business.

They just make another choice.

If we had 5 items in distribution or 10 items in distribution instead of 35 that might be a different game.

I think Quest is in that game.

Distribution matters because they're building out a broader portfolio of products.

For Atkins, we have a pretty significant portfolio of products.

So slight gains and slight losses really don't impact our business, evidenced the last 2 years.

We have grown our business 2 years back, 35%, and they've been relatively flat in distribution chain.

So for us, it's less of a concern.

Obviously, we would like to be building distribution to provide consumers more variety, [a key], and when they're buying as much as they buy in a year, variety matters.

Occasionally, you can hit a product that differentiates a need state, the consumers are new to us and can bring people to our brand.

But in general, we've been relatively insulated from the ups and downs of distribution because we communicate about a brand and then people come and choose the product.

So our comment on slight distribution loss, for us, it's -- we focus on, are we bringing households, people to the brand.

And if we're doing that, we know we can grow our business.

Over time, we would like to see that build.

And we've seen the amount of entry into the category and the pressure that's put on the shelf, we've been kind of treading water for the last, call it, 24 months.

Okay.

And then, I guess, relatedly, I was wondering, given Quest, the digital capabilities, so -- do you see an opportunity in the e-commerce channel for Atkins?

And how should we think about that over the next year or so?

Yes.

They're -- just -- so folks know, Quest is the #1 bar purchased on the leading online retailer.

So they grew up with -- they grew up with Amazon, and they are well developed.

It is their largest customer.

So Atkins is in the advanced reading class.

We're doing really well.

We're growing really fast.

But our development is roughly 1/3 of theirs today.

So we are absolutely going to tap into their capability and learn.

Our business has been growing significantly, I think, last year, growth was...

Yes.

Last year growth was about 50-plus percent in the first quarter.

We had an exceptional quarter in e-commerce, up 70%.

So as Joe mentioned, we're no slouches in this area either, but we're...

We're going to learn a lot.

We're going to learn a lot.

It's about 6% of the Quest -- I mean, of the Atkins business today, much larger piece of the Quest business.

Both teams are doing really, really well.

The one thing that we really liked about this deal is lots of complementary capabilities.

So strength of -- strength in the Quest team complement strength on the Atkins team well.

So I think the combination, if we do this well, and Dave Ritterbush and I are committed to do the integration well, we'll add capability as a total company when we're all done.

Okay.

Understood.

And just one last question.

And that's on Quest gross margins.

I think historically, you talked about, over time, Quest should be able to get to your legacy gross margin levels.

Do you still think that, that's the case?

Because I know that some of it is related to just their product mix.

But I know there is some work being done on the supply chain synergies, et cetera.

So just your latest thoughts on how quickly you think their gross margins could increase to closer to yours?

Yes.

I think -- so my best guess right now is we'll -- their gross margins will get very close to ours.

You made the right point.

Because of their product mix, they may be slightly below ours.

We're sitting here 2 years from now, but there's clearly some upside as we do the synergy work on getting their gross margin closer to ours.

I think from an EBITDA margin perspective, they'll -- the Atkins business and the Quest business will ultimately be about the same but probably a little bit less on gross margin just because of that product mix.

But very close.

Our next question comes from the line of Chris Growe of Stifel.

I just have a couple of sort of follow-on questions.

I want to make sure I understood in relation to Quest and sort of the sales volatility.

You've got some shipping of product, you've got -- I just want to understand how the quarterly phasing works.

Does that sort of build through the year in terms of Quest sales growth as we think about the totality of growth for fiscal '20?

Yes.

So they are definitely -- when you look at their quarters, I'm not going to give specifics on the third quarter, but I'll say they will have larger dollar sales in the second half of the year than they do in Q2, just based on some of the activity, some new product launch coming later in the year.

But -- they're not a terribly seasonable -- seasonal business, but they do -- they have definitely more innovation as a percentage of their sales than we do.

And because of that, sales are kind of driven by quarterly splits or largely driven by activity, new product launches.

But the way we're planning out for the rest of the year, definitely, the second half will be a little stronger.

Okay.

And then just a follow-on question and not to go back to all these questions on inventory.

But just a quick question on just like, does the Thanksgiving effect have any effect on inventories this quarter or how you shipped in the quarter?

I know you said the quarter ended November 24.

And then just to understand as well, are you entering 2Q with -- would it be lower retail inventories than you expected?

But are they at a level that's below what you would like to be, I guess, is my question, given some of the shift year-over-year?

Yes.

I think great question, Chris.

So below our -- we, again, we expect it to return to more like 2018 inventory build level, right?

So we were surprised in the first quarter.

We're seeing continued trends in that regard in the second quarter.

So less inventory build than expected.

I'm not concerned about in-stock position from a shelf standpoint.

I'm not concerned about our ability to get displayed out into the store.

That has not been the case.

So I think it's just a matter of a handful of retailers managing working capital a little tighter than they have in the past.

Now we did have a change with one customer and how we ship to that customer.

It's big volume and that does impact the amount of weeks of inventory on a particular item.

But again, we're not concerned at all from a total year standpoint.

It surprised us a little bit, results in a kind of a shifting from the first half to second half from a shipment standpoint.

But no, I'm not concerned about any impact on POS or impact on the performance of our business because of it.

Yes.

And just -- look, to be clear, no impact on the year.

It feels like this is just going to be the new normal for the way we build our inventory.

Again, we thought we'd go a little bit more to what we've historically done.

It really hasn't gotten back to that curve.

That's perfectly fine.

As Joe pointed out, it's really having no impact on our point of sales results.

And we'll probably plan our business a little smoother next year.

But no impact to the year.

Yes.

And then just a quick question on Thanksgiving effect on the end of the quarter timing.

Does that matter at all do you think your shipments?

I don't -- I -- we heard some noise around just because of the concentrated late Thanksgiving, a shorter holiday period.

Some retailers were so focused on the holiday specific goods that they were just less willing to take their nonseasonal types of inventory.

Whether -- how big of an impact that was, I'm not sure.

But I don't think it was a major impact.

Our next question comes from the line of Eric Larson of Buckingham Research Group.

Joe, you kind of alluded to some of this, but not actually directly.

The big surprise in your fiscal '19 year was the strength of the buy rates that you had on your Atkins brand.

And looking at kind of your velocities, base velocities, it looks like buy rates, again, are -- it looks like they're pretty strong again in Q1.

Can you talk a little bit about the buy rates?

And then what the comps are maybe on a quarter-over-quarter basis for the year?

And then finally, buy rates, are they as easy to measure on the Quest bars -- on the Quest customers as they are on the Atkins?

Because you sell Atkins mainly in multipacks.

How do you -- I guess I've never asked that question.

So I'm curious on how you measure buy rates potentially for Quest as well?

Yes.

So let me answer the second question because I think it's an easier question.

You measure it the same way, you have a household panel, you buy the panel the day that you analyze it.

So that is not data that the IRI panel that we buy is not the data that the Quest team has bought.

So we're going to be accessing that.

We'll be taking a look at that over time.

And we'll be forming a point of view from a consumer modeling standpoint and we'll talk to you about it at a later date.

As it pertains to tracking buyers and buy rate, careful at any one quarter, it's not a lot of data, right?

So sample size matters.

The panels themselves are not huge.

And they're not designed really to be read in a quarter.

You need more purchase occasions, more buyers over time.

So there is nothing in the first quarter that would lead us to believe that the perspective that we provided to you last quarter would be any different.

We're going to grow total buyers.

We expect buy rate to be relatively moderate for the year in line with last year.

So don't get too excited about a quarter's worth of data.

It's too short a period of time to do any kind of reading.

Our final question comes from the line of Rebecca Scheuneman of Morningstar.

So I just kind of have a higher-level question this morning.

If you look at the Atkins brand with 85% brand awareness, and 67% of Americans looking to reduce net carbs, it seems like there'd be great market share opportunity for your brands in the nutritional snacking category.

And if you could speak to the whole category, including the nontrack channel, that would be great.

But if you're more comfortable limiting it to the track channel, that's fine too.

I'm just kind of wondering like, where is your current market share at, hopefully including nontrack?

And then, where do you see that this can potentially get to in the next couple of years?

Yes.

High-level depends upon the denominator, right?

So if you want to measure, we measure total nutritional snacking.

So it will include brands like Clif and Kind.

It will include shakes like SlimFast, Premier.

So it's a broad category.

We're kind of in the low teens...

10%, 11%, margin.

Yes.

10%, 11%, 12%, right?

So the unfortunate thing, neither IRI or Nielsen's competitive panel makes any sense at all.

So you have to do a custom panel.

You have to choose who your competitive set is based on other data.

So we're right there with the market leaders and everybody's share is kind of low double digits, is the way to think about it.

We have grown shares significantly over the last, call it, 5 years, and continue to outpace that category growth.

And again, this is a category, at the highest level, Rebecca, that is massively underpenetrated.

So if you're in center-of-store, you're in a category where you've got 95% household penetration.

And all the competitors are trying to steal share of, in food, share of stomach.

I want more of your occasions than somebody else does.

This category is fundamentally different.

You're trying to grow the house.

You're trying to grow, bring more households into the category.

And I think my job is with Atkins as well as Quest, is to make sure we're doing that better than the rest of the competitors.

So when it's all done, our penetration is higher than everyone else's.

So it's a game of, are you bringing new buyers to your brand over time and do you have a loyalty model, such that the cost of bringing those people in gives you a good return.

So that's what we're focused on.

And one of the reasons I like competitive activity is it brings people to the category and I have a chance to flip them and get them over to my side.

So the game is different, and we're talking about trying to grow total buyers, grow household penetration, bring more people to our brand over time.

The nice thing about Atkins has been, historically, when we bring somebody to the brand, they stay.

They stay for multiple years, and they buy more.

And the purchased amount of this brand are mind-boggling.

So if you are a year one buyer, you're buying close to 40 servings a year.

When I bring you in, in the second year, you buy 100.

In the third year, you buy 100.

So my return on bringing somebody new to my brand is pretty high because I get a 3-year total purchase somewhere in the 250 servings over the 3-year period.

I can make a lot of money on those people.

So that's what we focus on.

We're trying to grow a bigger house, grow penetration faster than the categories growing it.

And if I do that well, I'll grow market share relative to the other competitors.

So does that answer your question?

Yes.

If you'd love to quantify where you think your market share could ultimately settle out, given that it's an extremely competitive category, I'd love to hear.

Yes.

So you're asking me to call growth in a category over multiple years in a category that's kind of very volatile and changes speed all the time.

That's really difficult.

And I had a lot of experience at this from my WhiteWave days with Silk and Horizon.

It's really, really difficult to grow category growth in an underpenetrated nascent category.

I fundamentally believe that we can deliver our long-term algorithm.

I fundamentally believe we can grow faster than the category.

And I'm going to do that by staying focused on marketing return, bringing buyers in and paying attention to my loyalty over time.

And I think that's a matter of effective marketing, good innovative product innovation on the shelf that will bring different need states and use occasions to the consumers and stay focused on advertising by brand, not specific products over time.

And I think Quest looks the same.

I think Quest has a great brand promise.

I think it transcends forms.

I think Dave's team has proven that and I think we've -- and making sure we stay focused on what that brand promise is, communicating the brand first, the product second, I think we'll be able to do that.

We have reached the end of the question-and-answer session.

I will now turn the call back over to management for any closing remarks.

Yes.

Thanks, again, for your participation on our call today.

We look forward to updating you on our second quarter results in April.

Everyone, have a good day.

Thanks.

This concludes today's conference.

You may disconnect your lines at this time.

Thank you for your participation, and have a great day.