The Simply Good Foods Company (SMPL) Q1 2020 Earnings Report, Transcript and Summary

Greetings and welcome to the Simply Good Foods Company's Fiscal First Quarter 2020 Conference Call. At this time, all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. [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 am pleased to welcome you to 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 7:00 AM 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 to legacy Atkins in today's presentation and remark encompasses the Simply Good Foods business excluding Quest. With that, it’s now my pleasure to turn the call over to Joe Scalzo, President and Chief Executive Officer.

Thank you, Mark. Good morning and thank you for joining us. Today, I'll recap Simply Good Foods first quarter highlight and provide you with some details of 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 7th, we’ve built 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 well within the nutritional snacking category. We believe investments in our legacy Atkins brand, with the 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 outsource supply chain that should enable us to increased 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-store packaged food categories driven by healthy snacking and meal replacements megatrend. Growth continues to be in the mid to high-single-digit percentage range driven by the growth in household penetration. We're excited about the acquisition of Quest, as well as our legacy Atkins brand and believe that we are well positioned to deliver on our fiscal 2020 and long-term commitment. We’ve delivered another quarter of solid financial results and double-digit increase in retail takeaway. The Quest acquisition closed on November 7th, 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 our prior conference call. 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 have been pleased with the teamwork and collaboration of the joint leadership teams, which I found to be an important factor in executing smooth transitions. And the nutritional snacking category continues to outpace most center-store packaged food categories driven by healthy snacking and meal replacement megatrend. 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 stacking 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 and 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 of measured outlet universe increased 14.5%. Now that this includes traditional food, drug and mass merchant retailers, as well as Walmart, BJ, 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 estimate; 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 two 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 was similar to what we've discussed over the last two years, strong base velocity of core item. 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 a year ago and returned to more normal levels. We would expect promotional volume to be higher next quarter as we reinstate two bar promotions that was 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 shake category increased and Atkins RTD shakes POS was slightly lower in the period. We anticipate that our shake performance will improve in the second half of the fiscal year. As I stated earlier, we're focused on continuing to drive velocity of POS growth and believe we have the right combination of advertising, products and promotions in place to deliver on our goals. Our business model enables us to invest in our brands. Specifically as part of our long-term algorithm, we're 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, they more likely are to rebalance their choices away from carbohydrates and towards our snack foods. As such, we've established a variety of marketing and advertising strategies to connect with consumers including digital marketing, and social media platforms, television advertising, celebrity endorsements and online food tracking and facilitation tools. Accordingly, we have structured our marketing and advertising to not only promote our products, but also to educate consumers. As you see on this slide, our advertising highlights the nutritional profile of our products. And our website provides consumers with detailed information such as Atkins, keto and the benefits of a low-carb lifestyle. In addition to television advertising, social media is an important component of our marketing tools and we have an active and growing presence on key social channels such as Facebook, Instagram and Twitter. For the fiscal year ended 2019, we had approximately 9 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 gym, 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 two-thirds of the business is the core protein bar, with the remaining one-third consisting of products such as protein chips, cookies, powders and frozen pizza. Similar to Atkins, Quest has a small international business. Quest generates about half of its U.S. sales in traditional food, drug, mass and club channels. The other half of Quest U.S. sales are generated in the convenience store class of trade and the unmeasured e-commerce specialty channels which are not tracked by IRI or Nielsen. Performance in the convenience store and e-commerce channel are solid. However, the specialty channel which represents about 18% of sales is declining about 20% due to store closures and slower foot traffic. The declines in the specialty channels had 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 sales nutritional snacking growth in measured IRI universe. As a reminder, this only represents about half of Quest U.S. business and excludes pizza. As such, the IRI, Nielsen data is less indicative of total Quest performance. Quest’s digital and social marketing programs over the last few years combined with new products, has resonated with consumers. As such, awareness and velocities in nutritional snacking products across most forms as bars, cookies, protein chips and powders is driving growth of the brand in measured channel. 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 products fronts. We will also leverage our combined marketing expertise to determine the right marketing mix over time, while always focused on the highest return on investment. In the near-term we are 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 two uniquely positioned brands that are lined 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 enter second quarter we have the financial and the marketplace momentum and are well-positioned to deliver on our fiscal 2020 commitment. With that, I will turn the call over to Todd who will provide you with some greater financial detail.

Thank you, Joe, and good morning, everyone. Let me start with two points as it relates to the numbers you see on the slides that follow. First, for comparative purposes, we will review financial statements for the 13 weeks ended November 24, 2018 and 13 weeks ended November 30, 2019. 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 volumes 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 non-measured e-commerce business. As a reminder, we expect trade promotion to be a headwind to gross margin in fiscal Q2 as we reinstate bar promotions that were curtailed in the year ago period due to supply constraints. Atkins non-U.S. net sales including Canada and our international business was only up about 1.5% in the quarter, and therefore, a drag on the total company growth rate. As a result, total organic net sales growth in the quarter was 11.7%. The 24 days of Quest contribution was a 14.1% benefit, resulting in total Q1 net sales increase of 25.8%. Now for a review of first quarter results across other major metrics. Gross profit was $62.2 million in the first quarter 2020, an increase of $10.3 million or 19.8%. The increase in gross profit was driven by both legacy Atkins sales growth and Quest, partially offset by a non-cash $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 non-cash inventory step-up adversely impacted gross margins 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 or a total of $7.5 million. Similar to first quarter reporting the $5.1 million will also be reconciling items in our GAAP to adjusted EBITDA for reconciliation. Adjusted EBITDA increased 19.1% to $31.8 million driven by the increase in gross profit, partially offset by 20.3% increase in selling and marketing expenses. The majority of the increase was due to the timing of higher Atkins marketing spend, as we discussed last quarter. A portion of the increase was also due to the acquisition. Additionally, general and administrative expenses increased 45% in Q1, 72% of the increase was attributable to the Quest acquisition, and 28% to Atkins. Moving to other items in the P&L, the net impact of interest income and interest expense was an increase of [$1.1 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 flows, 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 7th, 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 the moving parts related to the Quest acquisition. On October 7 as part of generating the necessary cash flow to complete the acquisition, we sold approximately 13.4 million shares of common stock and estimated 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 favorable rates, 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 cost 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 3.7 times by fiscal year end August 2020. Non-cash amortization of intangibles related to Quest is about $8 million per year. Note that our fiscal 2019 depreciation and amortization of $7.5 million consists of about $1 million of operating depreciation and $6.5 million of amortization related to the Atkins-Conyers combination. Transaction costs in fiscal 2020 are anticipated to be $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 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 the 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 a majority of the $20 million and identified cost synergies to be achieved in years two and three. 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 existing capability and strength in our brand. 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 next 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 two and a half 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 will now are available to take your call and questions. Operator?

[Operator Instructions]. Our first question comes from the line of Jason English with Goldman Sachs. Please proceed with your question.

So, I wanted to come out 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 [decrease] all the question just by giving us some -- what the like-for-like growth is for the business for the last quarter or I guess for the -- yes, for really the first full quarter?

Yes, I would say -- hey Jason, by way the easiest way to answer that Jason is just take a look at how the business is performing relative to what we told you it was going to do for calendar year 2019. It is absolutely on pace. We're very happy about the performance for the business. If you look at it overall kind of November-to-November, it’s performing, growth -- top-line growth has been kind of in the mid teens on the business. So, very happy with the performance, very much in line with our expectations. You're seeing solid growth across the brand, the total business, all the products 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 of pipeline from their ready-to-drink launch. But overall, it's been good growth, kind of mid teen growth top-line overall for the business on a sustainable basis over the last 12 months.

One of those three 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 center close. So, to Joe's point the business is completely on track, no change.

Totally makes sense. I got a little bit spoofed when you started telling me that 20% of the sales are declining, 20% sales. So, I'm glad we can come back and get some clarification on that.

Hey, Jason just step back from that, that's a multiyear trend. Business has been growing strongly through that. So there's -- and it's not something that’s different from the category. So the thing you need to understand is, it’s consumer purchasing channel habits are changing, away from specialty channel towards more traditional channels to 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 with some other similar businesses as well, in the vitamin supplements type channel it’s been tough slightly. One more question from me. I think you’ve mentioned some cautionary comments on 2Q a 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 to potentially subdue sales and gross margin. Can you just walk us through the headwind just like a package them all and wrap my head around of the headwinds you’re calling out for 2Q?

Yes. Well, you mentioned and I would say just there’s probably three or four headwinds. There is incremental promotional activity, again that’s to be generating additional volume. There probably will be a slight margin impact through it. From a marketing perspective, same issue as Q1 where just the timing over year-over-year, we had a big increase in our marketing, our second half, that’s now in our face that hit us in Q1, will again hit us in Q2. And there are -- our key related G&A expenses will start to hit in Q2 and go on for the rest of the year. So those are the other impacts. But other than that we feel really good about the rest of the year.

Yes. I’d also add. We are a little surprised, so if you remember what happened last year, we saw less trade inventory build in prep with the season. So we were under shipping POS in the first quarter, a little bit at the second quarter and then we saw that inventory come back obviously a less of the drill down in the second half of the year. Going into the first quarter and the second quarter, we anticipated the return to more normal levels of inventory builds. 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 that we’re not seeing the inventory builds. 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 impacts on the total year but we were a little bit surprised of that and that will be a bit of a drag I think in the second quarter too, no net impact on the year though.

Our next question comes from the line of Alexia Howard of Sanford C. Bernstein & Co. Please proceed with your question.

One question and one follow up. Firstly, in the measured channel business, in legacy Atkins, and I know you talked about this quite a bit. It looks as though the shake as expected come under pressure as the company has got tough comparables and perhaps also the competitors have emerged from a period of capacity constraints. Can you just remind us a bit just being here and what it’s going to take? It sounds the pressure in the second quarter that you expect an improvement in the second half, what gives you the confident that that’s actually going to come around? And as a follow up, can I ask about promotional activity, you talked about stepped up commercial activity. I think you were trying to answer, it was actually reducing. Should we be worried about the need for that incremental promotional activity and does that mean the competition has intensified in some part of that legacy Atkins business? Thank you very much. I will 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 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 and our total business were brand, so we've seen impact in forms before that’s kind of come and go ebbs and flow. We have -- the reason we're confident in the second half of year is our promotional plan significantly stronger in the second half of the year than it is it in the first, 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 customers just based upon the return. So we're not surprised with where we are and we're pretty confident given the strength of promotions and the second half of the year will be fine.

Our next question comes from the line of John Baumgartner of Wells Fargo. Please proceed with your question.

I guess first off, Joe. Just wanted to circle back and clarifying 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 BellRing, SlimFast kind of picking more that distribution? Or is it -- are you seeing more of a working capital inventory management at retail? Because the category is not really slowing. I'm just curious what you really attribute that to?

Again, ask the question got 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, they're two different points, right? We expected shipments to be a little bit stronger in the first quarter just returning to normalized inventory builds in prep store kind of January, February, March season. So if you remember 2018, the pattern of our business inventory build in the first half. And then inventory depletion in the second half. The net is you end up at 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 that 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 have 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 year into second half of the year, that'll be the net effect. We're not concerned with this from an overall total year standpoint, it’s just a little bit more timing of when the buying comes first half to half. And that's about 1 point or 2 so I think we'll experience in the first half of the year relative to second half of the year, I think it'll 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 normalize build. Joe just said it, I think the end result is the way -- versus the way we originally planned it, it will be a 1 to 2 point shift out of the first half into the second half.

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 allocate more snacking space Quest going forward. 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 snack launch as we are with our shake 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 the average items, stock for Atkins, we’re in the 30s. And Quest is not half that, right? So they are earlier in their development in Atkins from a shelving standpoint, you would expect we're going to be able to build items and distribution as the business builds over time. I think that shifts because there's no competitive entry, and it's a very different daypart, very differently need today. 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 the healthy company. This is not brand, this is not a business that has to have white space to grow. It's benefiting from white space to grow but it has core velocity gains, because it has more buyers coming to the brand over time.

Our next question comes from the line of Brian Holland of D.A. Davidson. Please proceed with your question.

Just want to confirm on the Quest component. And 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, 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. So that business in 2020, am I right in the ballpark there? And then is there -- why would we decelerate from the mid-teen just how help walk through that? I guess I'm thinking about some of the shakes roll out 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 where you're 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's a lot of opportunity for growth. Product innovation driven by this leadership team is singularly outstanding. Penetration growth opportunity for this brand is boundless. So we're very excited. Last thing I am the most excited about is, it’s a brand, not a product. So as a brand promise to transforms, 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 have been in on average mid-teens. There's a fair amount of pipeline in that. We got a back-to-back the pipeline from some product launches that won't be repeated. So, you kind of get into that neighborhood, probably the upper end of the neighborhood that you were talking about from a growth rate standpoint, as you look at our this year 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 that they have -- the product launches obviously don't have a lot of history on it. So there's some fairly wide ranges on outcomes that we tend to be conservative on our forecasts on top-line. But as Joe pointed out, business came in from both of 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.

So I guess, 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, but maybe most specifically frozen, I'm interpreting from all the commentary here that, that you would anticipate largely keeping that portfolio intact 2020 and that's what 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 notice pure protein bars watching the NFL playoffs this weekend, I saw some advertising there. Where do 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 shake, you’ve seen CLIF and KIND promos. So you do see as this category builds household penetration, you got a handful of people making investments to try to grow awareness consideration trial, because they understand it's a growing category and you got to spend money to do it. We feel very comfortable with where we are from an investment standpoint. We have a high share of voice. We have high ROIs from an investment standpoint. So, I think it's good for the category, good for the category, it’s good for us. And so we love having the competition, we have -- we love bringing people to the aisle, and we think it's good overall.

Hey, Brian, I just 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 it has as always been a very competitive category and will continue to be a very competitive category. What we're seeing specifically in RTD shake is a 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 seven years, we've seen this ebb and flow over time, different brands, different forms. And if they are 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. It’s growing household penetration across. So we're not as concern, you kind of deal with the short-term wobbles by forms that you experience that it’s overall good for us.

Yes, no the data support that your brands held up to a various competitive forms and factors over the past few years. So I will leave it there.

Our next question comes from the line of Faiza Alwy of Deutsche Bank. Please proceed with your question.

So a couple of questions from me. 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?

So I think Joe pointed in his remarks and we had some supply constraints last year. We actually took out some items just to make it easier to -- some of our comments that are producing more of our A items. So that was self inflicted, we took some SKUs out. Despite the fact that we have had tremendous velocities in the last couple of years as we just talked about, there is a lot of new entrants, a lot of competitors out there. And we really do knocking any SKU or space across the different customers out there. So distribution is going to be kind of flattish for this year. And again we took -- we just on our own took out some items that will have very, very little impact on our business but that’s what you’re seeing in the data right now.

Yes, Faiza, also the thing to understand about our business is our business organizes as people make choices, organizes as the 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 five items in distribution or 10 items in distribution instead of 35, that might be a different game, I think Quest is in that game. Distribution matters because they are building out a broader portfolio of products. For Atkins we have a pretty significant portfolio of products, so slight gains and slight losses really don’t impact our business evidenced in the last two years. We've grown our business two years back 35% and have been relatively flat at distribution chain. So for us it’s less of a concern, obviously we would like to be building distribution to provide consumers more variety. And when they are buying as much as they buy in a year, variety matters. Occasionally you can hit a product, they purchase the need space. The consumers are new to us and can bring people to our brand. But in general we’ve been relatively insulated from 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 we’re 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 that amount of entry into the category and the pressure that’s put on the shelf, we’ve been kind of the trading water for the last call it 24 months.

Okay. And then I guess relatively I was wondering given Quest the digital capabilities, sort of 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, there -- just so folks know Quest is the number one bar purchased on the leading online retailer. So they grew up with Amazon and they are well developed, it is their largest customer. So Atkins is in the advanced reading class, we're doing really well. We're growing really fast, but our developer is roughly a third of theirs today. So we are absolutely going to tap into their capability and learn. Our business has been growing significantly. I think last year growth was…

Last year growth was about 50% plus 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 strengths of -- strength in the Quest team complements strength on the Atkins 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.

And if it's 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's some work being done on the supply chain synergies et cetera. So just related thoughts on how quickly you think their gross margins could increase closer to…?

Yes. I think so my best guess right now is their gross margins will get very close to ours. You made the right point, because of their product mix, they may be slightly below ours. We're sitting here two years from now. But there's clearly some upside if we do the synergy work on getting gross margins closer to ours. I think from an EBITDA margin perspective, the Atkins business and the Quest business will be about the same, but probably a little bit less on gross margins just because of that product mix, but very close.

Our next question comes from the line of Chris Growe with Stifel. Please proceed with your question.

I just have a couple of sort of follow on questions. Misunderstood in relation to Quest and sort of the sales volatility you have for shipping the product you got. I just understand how the quarterly phasing works, so that’s sort of build through the year, there is Quest sales growth, as we think about the totality of growth for fiscal '20?

Yes. So they are definitely -- we look at their quarters. I am not going to give the specific numbers by quarter, but I'll say that 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 of new product launch coming later in the year. But they're not a terribly seasonable -- seasonal business. But 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 with their -- largely driven by activity, new product launches. But the way we're playing out for the rest of the year is definitely second half will be a little stronger.

And then just a follow on question and not to go back to all these questions on inventory. But just a quick question on does like the Thanksgiving effect had any effect on inventories this quarter, how you shipped in the quarter? I know you said the quarter ended November 24th. And then just to understand as well, are you entering 2Q with -- would it be lower retail inventory than you expected? But are they at a level that's below which you would like to be? I guess is my question given some of this shift year-over-year?

Yes, I think great question, Chris. So below our -- we -- again, we expected 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 stores. That has not been the case. So I think it's just a matter of a handful of retailers managing working capital a little tighter than they had in the past. We did have a change with one customer and how we ship to that customer, big volume and the bad debt impact, the amount of weeks of inventory on the particular item. But, again, we're not concerned at all from a total year standpoint, buy just a little bit, results and kind of shifting from the first half to the 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 to be clear, no impact on the year. It looks like this is just going to be the new normal for us 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, so we’re having no impact on our point of sale results. And probably -- we will probably play our business a little smoother next year. But no impact to the year.

And then just a quick question on Thanksgiving effect at the end of the quarter timing. Does that matter at all do you think to your shipments?

We heard some noise around just because of the concentrated, late Thanksgiving, shorter holiday period. Some retailers were still focused on the holiday specific goods that they were just less willing to take their non-seasonal 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.

Next question comes from the line of Eric Larson with Buckingham Research Group. Please proceed with your question.

Yes. Thanks for taking my question. And Happy New Year to everybody. Joe, you kind of alluded to some of the -- not actually directly, the big surprise in your fiscal '19 year was the strength of the buy rates that you had on your Atkins brands. And now looking at kind of your velocity, base velocities, it looks like buy rates -- again, it look like they're pretty strong again in Q1. Can you talk a little bit about the buy rates? And then what's the comps are maybe on a quarter-over-quarter basis for the year? And then finally, buy rates, are they use easy to measure on the Quest bars -- on the Quest customers as they are on the Atkins because you sell Atkins mainly in multipack? How do you -- I just have never asked that question. So I'm curious on how you measure buy rates potentially for Quest as well?

Yes, let me -- so let me answer the second question, because I think it's an easier question. You measure it the same way as household panel, you buy the panel, you analyze it. So that is not data that -- the IRI panel that we buy is not the data that the Quest team has brought. So we're going to be accessing that. We will be taking a look at that over time. And we'll be forming a point of view from a consumer modeling standpoint that we'll talk to you about 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's nothing in the first quarter that would lead us to believe that the perspective that we provided you last quarter would be any different. We're going to grow total buyers, we expect buy rates to be relatively moderate for the year, in line with last year. So don't get too excited about a quarter’s worth of data, it’s too shorter period of time to do any kind of reading.

Our final question come from the line of Rebecca Scheuneman of Morningstar. Please proceed with your question.

So, I just kind of have a higher level question this morning. As 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 opportunities for your brands in the nutritional snacking category. And if you could speak to the whole category, including the non-tracked channel that would be great? But I feel more comfortable limiting it to the traction of this, thank you. I was just kind of wondering where is your current market share at, hopefully including non-tracked? 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 whether we include brands like CLIF and KIND, include shakes like SlimFast, Premier. So it’s a broad category. We're kind of in the low teen…

10%, 11%.

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 your competitive set based on other data. So, we're right there with the market leaders, and everybody shares kind of low double-digit, is the way to think about it. We have grown share significantly over the last call it five years, and continue to outpace that category growth. And again, this is a category at the highest level, Rebecca that is massively under penetrated. So if you're in center-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 someone. I want more of your occasions than somebody else does. This category is fundamentally different. You're trying to grow the house, you're trying to grow, bring more households into the category. And I think my job is -- with Atkins as well as Quest is to make sure we're doing that better than the rest of the competitors. So when it's all done, our penetration is higher than everyone else's. So it’s a game of, are you bringing new buyers to your brand over time? And do you have a loyalty model such that the cost of bringing those people in gives you a good return. So that's what we're focused on. And one of the reasons I like competitive activity is it brings people to the category and I have the chance to put 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 brands over time. The nice thing about Atkins has been historically when we bring somebody to the brand, they stay, they stay for multiple years and they buy more and the purchase -- their purchase amounts of this business are mind-boggling. So you are year one buyer, you are close to -- you're buying close to the 40 servings a year. When I bring you in, in the second year you buy a 100, in the third year you buy a 100. So my return in bringing somebody new to my brand is pretty high because I get a three year total purchase somewhere in the 250 servings over three year period. I can make a lot of money on this people. So that’s what we are focused on. We try to grow a bigger house, grow penetration faster than the categories growing it. And if I do that well I will grow market share relative to the other competitors. Does that answer your question?

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

You're asking me to call growth in the 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 of this from my white wave days with sale kind of rise, it's really, really difficult to grow category growth and under-penetrated 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 my brand, not specific products over time. And I think Quest looks the same. I think Quest has a great brand promise. I think it transcends forms. I think Dave's team has proven that. And I think we've -- and making sure we stay focused on what that brand promises, 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'll 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.