The Simply Good Foods Company (SMPL) Q3 2021 Earnings Report, Transcript and Summary

Greetings, and welcome to The Simply Good Foods Company Fiscal Third Quarter 2021 Conference Call. [Operator Instructions] As a reminder, this conference is being recorded. I would now like to turn this conference over to your host, Mr. Mark Pogharian, Vice President of Investor Relations. Thank you, sir. You may begin.

Thank you, operator. Good morning. I am pleased to welcome you to The Simply Good Foods Company Earnings Call for the third quarter ended May 29, 2021. Joe Scalzo, President and Chief Executive Officer; and Todd Cunfer, Chief Financial Officer, will provide you with an overview of results, which will then be followed by a Q&A session. The company issued its earnings release this morning at approximately 7:00 a.m. Eastern. A copy of the release and accompanying presentation are available under the Investors section of the company's website at www.thesimplygoodfoodscompany.com. This call is being webcast, and the archive of today's remarks will also be available. During the course of today's call, management will make forward-looking statements that are subject to various risks and uncertainties that may cause actual results to differ materially. The company undertakes no obligation to update these statements based on subsequent events. A detailed listing of such risks and uncertainties can be found in today's press release and the company's SEC filings. Note that on today's call, we will refer to certain non-GAAP financial measures that we believe will provide useful information for investors. Due to the company's asset-light strong cash flow business model, we evaluate our performance on an adjusted basis as it relates to EBITDA and diluted EPS. Additionally, adjusted results exclude the mark-to-market effect of the treatment of private warrants for the SEC's April 12, 2021, statement related to accounting and reporting considerations for warrants by special purpose acquisition companies. We have included a detailed reconciliation from GAAP to adjusted items in today's press release. We believe these adjusted measures are a key indicator of the underlying performance of the business. The presentation of this information is not intended to be considered in isolation or as a substitute for the financial information presented in accordance with GAAP. Please refer to today's press release for a reconciliation of the non-GAAP financial measures to the most comparable measure prepared in accordance with GAAP. With that out of the way, I'll now turn it over to Joe Scalzo, President and Chief Executive Officer.

Thank you, Mark. Good morning, and thank you for joining us. Today, I'll recap Simply Good Foods' third quarter results and provide you with some details on the performance of our brands. Then I'll turn the call over to Todd, who will discuss financial results in a bit more detail, and we'll wrap up with a discussion of our revised outlook before opening it up to your questions. We had a strong third quarter with net sales up 32% as consumer mobility improved faster than our expectations. In addition to mobility improvements, shopper traffic within brick-and-mortar retailers improved, especially in the large mass channel, an important class of trade for our business and our category. An increasing on-the-go usage occasions resulted in nutrition bar consumption greater than our estimates. Adjusted EBITDA in the third quarter increased 55.6% due to the strong sales growth, G&A cost controls and Quest acquisition synergies. This more than offset higher marketing investments and incentive compensation. An improving bar performance as well as favorable consumer mix in brick-and-mortar channel resulted in solid gross margin expansion. Total Simply Good Foods Q3 retail takeaway increased 29.1% in the U.S. measured channels of IRI MULO and C-stores and outpaced the category. Our Atkins and Quest brand performance was solid across all forms, particularly bars, due to increasing consumer mobility. Throughout the pandemic and now into the recovery, we've executed well and remain committed to do the right things over the long term for our business. In June, we notified customers of a price increase effective in September as we'll begin to experience higher raw material and distribution costs in this fourth quarter. As we look to fiscal 2022, we believe pricing as well as productivity will enable us to maintain gross margins and continue to invest in initiatives to drive growth. In the first half of fiscal 2021, the nutritional snacking category declined low single digits due to COVID-19-driven movement restrictions. In the third quarter, the nutritional snacking category increased about 26% as the category lapped weaker year-ago performance. Importantly, Simply Good Foods gains market share across all time frames, as did each of our brands in their respective subsegments of weight management and active nutrition. We were also pleased with the performance in the mass channel, which rebounded during the quarter, driven by improved shopper traffic. And e-commerce growth continues to be solid and was in line with total measured channel performance. The active nutrition segment of the category, which includes Quest, increased over 30% in the quarter. As it has done all year, Quest outperformed the segment. Note that the IRI MULO and C-store universe represents about 70% of Quest's total retail sales. Weight management segment, which includes Atkins, increased low teens in the third quarter on a percentage basis versus prior year. As been the case all year, Atkins continued to outpace the weight management segment. Atkins Q3 U.S. retail takeaway in measured channels increased 15.6%, increasing mobility, improving shopper trips, particularly in the important large mass channel and continued buyer growth resulted in solid retail takeaway across all forms. In Q3, bars and shakes increased about 5% and 20%, respectively, and improved sequentially versus the first half of the year. Atkins' confection momentum continued and increased about 27% in the quarter. We're pleased with the performance of the confection products as well as the innovation we've launched over the last year. Improving shopper traffic at the mass channel was strong and, combined with increased levels of distribution and display, resulted in Q3 POS growth of about 25% in this channel. We continue to be pleased by buyer flows on Atkins and growing consumer interest in weight management as the U.S. emerges from COVID-19 mobility restrictions. The strong growth in buyers has fueled consumption improvements for the brand during the fiscal year. Atkins' buy rate remains the single biggest growth opportunity for the brand as it is currently below historic levels. You may recall Atkins bar consumption is highly correlated to return-to-work. Based on that, we believe as consumer mobility continues to improve, buy rate of Atkins Bars will follow. We anticipate continued improvement in consumer mobility, although as we enter Q4, the POS growth rate is affected by more difficult year-ago comparisons. As such, we expect overall Q4 retail sales to be similar to Q3. We expect continued improvement in the mass channel, and I'm pleased with the Atkins e-commerce business, although the growth rate is expected to moderate given strong year-ago comparisons. Lastly, in Q4, we have solid marketing, improved distribution and new innovation that should enable us to continue to build on our year-to-date buyer trends. Now let me turn to Quest, where Q3 retail takeaway increased 56.2% in the measured IRI MULO and C-store universe. Growth was driven by improving shopper traffic in the mass channel, an increase in consumer mobility and greater on-the-go consumption as evidenced by the strong rebound of Quest bars. Quest Q3 bars retail takeaway increased 38%, more than double the segment growth rate. Recall, Quest bars are about 60% of total Quest retail sales. The snackier portion of Quest products continue to do well and increased nearly 150% in Q3, driven by chips and the launch of new confection items earlier in the year. In addition to increased foot traffic in the mass channel, we were pleased with the performance in C-stores. Combined, the mass and C-store channels represent about 30% of Quest retail sales. And in Q3, growth in these 2 channels were over 60%. Quest e-commerce business, about 20% of total Quest U.S. retail sales, continues to do well, with retail takeaway up 43%. Our business in Amazon remains robust, and growth was strong against all major forms. The specialty channel, while small as a total percent of Quest sales, returned to growth in the quarter. In Q4, we anticipate trends by form will continue and will result in total Quest retail dollar sales similar to the third quarter. We expect that the demand for Quest chips and confection items will remain strong and that supply will be pressured. As such, we have taken actions to ensure there are no disruptions at retail, and we'll be dialing back trade promotions and programming on these items. And we'll continue to invest in marketing and innovation that drives greater levels of consumption and new consumers to our brand. In summary, we're pleased with our third quarter results that were better than our expectations due to improving mobility and increasing shopper traffic in the mass channel. In Q4, we anticipate retail dollar sales to be similar to Q3. Raw material and distribution inflation is expected to be a headwind in Q4, offset by continued improved product and channel mix. Price increase we announced a few weeks ago as well as productivity should offset fiscal 2022 supply chain inflation. We believe pricing as well as productivity will enable us to maintain gross margins and continue to invest in initiatives that drive growth. We're executing well against our plan and delivering on our financial objectives with flexibility to invest in the business as a path to increasing shareholder value. Now I'll turn the call over to Todd to provide you with some greater financial details.

Thank you, Joe, and good morning, everyone. I will begin with a review of our net sales. Total Simply Good Foods third quarter net sales increased 32% to $284 million. The core North American business contributed 30.7% to total company growth, driven by strong Atkins and Quest volume across major forms and channels. Net price realization in Q3 was negligible. Q3 shipments benefited by about 2% from delays related to the winter storm disruption at the end of last quarter. Our core international business was a 2.3% benefit to sales growth, driven by strong gains in Australia for both Atkins and Quest. And the SimplyProtein brand divestiture and the European business exit were a combined 0.9% headwind. Gross profit was $121 million, an increase of 36.5% versus last year. Gross margin of 42.6% increased 140 basis points versus the year-ago period, driven by positive product form and favorable customer mix in the brick-and-mortar channel. In Q4, we anticipate supply chain costs to be higher, specifically, raw materials inflation will be a headwind as well as freight and warehouse expenses as we begin transitioning to our new distribution center. As Joe mentioned, given the inflationary pressure we're seeing in both Q4 and fiscal 2022, we recently announced a price increase. The pricing action is effective in September, and we expect it will enable us to maintain gross margins and continue to invest in initiatives that drive growth. Adjusted EBITDA, which excludes Quest integration costs, restructuring expenses and stock-based compensation, among some other things, increased 55.6% to $67.5 million, primarily due to greater-than-anticipated sales, cost control measures and Quest acquisition synergies. SG&A expenses were greater than our estimates. Specifically, selling and working expense increased $6.3 million, driven by incremental brand-building investments on both Atkins and Quest. And G&A expenses increased $1.5 million as higher incentive compensation was partially offset by cost control measures and Quest acquisition synergies. For the full year, the company continues to anticipate that marketing expense related to its core businesses will increase at least in line with organic sales growth. Moving to other items in the P&L. Interest expense declined $0.3 million to $8 million due to the pay down of the term loan, although the additional debt pay down in the quarter resulted in greater noncash amortization expense of deferred financing fees. Our statutory tax rate in the third quarter was 27.0% versus 26.9% last year. Net income in Q3 was $5.9 million versus $48.1 million in the year-ago period. The decline reflects a noncash charge of $35.8 million related to the remeasurement of our private warrant liabilities. Year-to-date results are as follows: net sales increased 25.5% to $745.8 million, driven by the acceleration of the business in the third quarter and the full 39-week impact of the Quest acquisition. Gross profit was $305.3 million, an increase of 29.2%. Gross profit in the prior year was affected by a noncash $7.5 million inventory purchase accounting step-up adjustment related to the Quest acquisition. Recall, the noncash inventory purchase accounting step-up impacted year-to-date 2020 gross margin by 130 basis points. Excluding this amount, gross profit was $243.6 million last year and gross margin was 41%. Year-to-date, fiscal '21 -- 2021 gross margin of 40.9% is essentially in line with the year-ago period. As I stated earlier, we expect supply chain inflation beginning in Q4 and anticipate gross margin for the quarter to be about the same as prior year. Adjusted EBITDA increased 35.9% to $158.8 million, primarily due to higher Q3 gross profit and the inclusion of 39 weeks of Quest results in the current year. Excluding Quest integration costs, restructuring expenses and stock-based compensation, SG&A expenses increased $19.8 million. Specifically, selling and marketing expenses increased 18.4% to $82.1 million. The increase was driven by higher brand-building initiatives and the full year impact of Quest. G&A expenses increased about 12% or $7 million due to higher incentive compensation and the inclusion of Quest. Moving to other items in the P&L. The net impact of interest income and interest expense was an increase of $2 million due to the full 9 months of acquisition-related debt. Our year-to-date statutory income tax rate was about 27%. Net income was $22.6 million versus $104.9 million in the year-ago period. The decline of $82.7 million is primarily due to the noncash charge related to the remeasurement of the private warrant liabilities. Turning to EPS. Third quarter reported EPS was $0.06 per share diluted compared with EPS of $0.17 per share diluted for the comparable period of 2020. In fiscal Q3 2021, we recorded a nonoperating noncash charge of $35.8 million due to the change in the fair value of the outstanding private warrants. Depreciation and amortization expense and stock-based compensation was $6.7 million, about the same as the year-ago period. Costs associated with Quest integration and restructuring were $0.4 million, $5 million lower versus last year. And we had a legal settlement gain of $5 million. Adjusted diluted EPS, which excludes the items just mentioned, was $0.43, an increase of $0.17 versus the year-ago period. Note that we calculated adjusted diluted EPS as adjusted EBITDA less interest income, interest expense and income taxes. Year-to-date reported EPS was $0.23, while year-to-date adjusted diluted EPS was $0.97 versus $0.71 in the year-ago period. Note that the calculation of adjusted diluted EPS in Q3 and year-to-date period assumes fully diluted shares outstanding of 101.9 million and 101.1 million shares, respectively, versus 97.6 million and 97.2 million under GAAP. The difference versus GAAP is due to the exclusion of the private warrants and fully diluted shares outstanding under GAAP due to the private warrants being classified as a liability on our balance sheet. Please refer to today's press release for an explanation and reconciliation of non-GAAP financial measures. Moving to the balance sheet and cash flow. In May 2021, the company paid down $50 million of its term loan. And at the end of the third quarter, the outstanding balance was $506.5 million. In the third quarter, the company generated about $52 million of cash, resulting in year-to-date cash flow from operations of $91.8 million. As of the end of Q3, the company had cash of $90.2 million and a trailing 12-month net debt-to-adjusted EBITDA ratio was 2.1x. Capital expenditures for the year-to-date period were $3.2 million. We still expect $5 million to $6 million of CapEx in fiscal 2021, driven primarily by equipment for our new warehouse. We anticipate interest expense to be about $31 million, higher than our previous forecast of about $30 million. The increase is the result of greater noncash amortization expense of deferred financing fees due to incremental paydown of the term loan. I would like to now turn the call back to Joe for closing remarks.

Thanks, Todd. As consumer mobility increased in the third quarter, our business accelerated. As we emerge from the challenges of COVID-19, our business is stronger and our organization is more capable. As such, we remain confident in both our short- and long-term growth prospects. Over the remainder of the year, assuming there are no significant COVID-19-related disruptions in the United States, the company anticipates full year fiscal 2021 net sales of about $995 million to $1.05 billion and adjusted EBITDA of $200 million to $205 million. As previously stated, the divestiture of SimplyProtein and the European business exit is about a combined 1.5 points headwind to a full year fiscal 2021 net sales growth. The company's previous outlook for full year fiscal 2021 net sales and adjusted EBITDA was $930 million to $940 million and $180 million to $185 million, respectively. Apart from the inventory purchase accounting step-up in the year-ago period, we expect full year fiscal 2021 gross margins to be about the same as fiscal 2020. You may recall the company's previous outlook indicated full year gross margins would be slightly lower compared to the previous fiscal year. As previously discussed, favorable product and channel mix in Q3 exceeded our expectations and resulted in solid gross margin expansion in the quarter. In Q4, we'll begin to see higher raw material and distribution costs and anticipate gross margins will be down versus Q3 and about the same as year-ago period as inflation is offset by continued improved product mix. And due to solid cost control and acquisition synergies, the company continues to anticipate adjusted EBITDA margin expansion. Additionally, the company anticipates 2021 adjusted diluted EPS to be in the range of $1.20 to $1.25 versus $0.91 in the prior year. We have an advantaged asset-light, variable business model that enables strong cash flow from operations that provides us with the financial flexibility to invest in organic growth opportunities and participate in M&A. We continue to execute against our strategies to position us to deliver on our financial objectives with the ability to invest in the business as a path to increasing shareholder value over the long term. We appreciate everyone's interest in our company, and we are now available to take your questions.

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

Congrats on a strong quarter.

Thanks, Jason.

Welcome. I want to make sure that I understood your comments on the sort of retail sales expectations properly. I think you said quarter-on-quarter, flat as we go into the fourth quarter, which on my quick back-of-the-envelope math suggests that you may be expecting year-on-year growth to slow to something into the mid- to high teens. Do I have it roughly right?

Yes, you do.

Okay. That's still pretty darn robust relative to the comps because I think it actually implies that off of a 2019 level, you're actually going to expect a degree of acceleration from what we saw last quarter. But as I look at the model and the implied guidance for 4Q, you're suggesting a bit of a decel on 2-year stack. I was hoping you could help me understand that, maybe unpack that. Was there a pull forward into this quarter? Clearly, there was a bit of a delta between retail sales or anything else in the comparison from last year that we should make a note of.

Yes. So obviously, Q3, as we stated, Jason, was held by the pull-in from Q2, the winter storms that inflated the Q3 numbers a little bit. The European shutdown is now fully in place. So that's going to affect Q4 more, along with the SimplyProtein divestiture, and that's been tracking about a 1 point headwind. That's now going to be a 3-point headwind in the quarter. And then from a shipment perspective, we just typically pull inventory out of the system late in the year. So we're anticipating that's going to happen again.

Got it. I didn't appreciate the elevated SimplyProtein comp in the fourth quarter, that's helpful. Switching gears real quick. Joe, you kind of alluded to this. I think, with the consumer and the reengagement with weight management, we hear from Weight Watchers an expectation in anticipation of an off-cycle resolution season, if you will, that they're anticipating to happen throughout the summer and particularly, late fall. Are you beginning to see that take shape? And do you expect to see -- do you also expect to see something like that as we enter the fall and maybe back-to-school, back-to-work period?

First, I would say we’re really pleased with the growth of the Atkins business. The thing that’s, frankly, surprised us throughout the fiscal year is that despite movement restrictions and people not being out about, our buyer performance has been outstanding. So we’ve seen strong buyer growth throughout the fiscal year, even in the midst of the COVID. So as we move through the summer and into the fall, I would tend to agree with Weight Watchers. There’s going to be a catalyst as people get out and about more fully that I think will drive renewed interest in weight management. We’re kind of gearing up. Todd mentioned that we’ve made in great marketing investments. We’ll continue to do that through the fourth quarter. And we’re kind of gearing up for kids back to school, folks back to work as kind of that catalytic event. So you should expect us to be ready as we kind of move through August, September, October, expecting that and investing appropriately for it.

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

I'll add my congratulations for a nice quarter there and outlook. Just -- I had 2 questions. The first one, as you see this consumer coming back to the Atkins brand, in particular, in the mass channel, is it just the number -- the raw number of incremental users that are using the product that are coming back? Or are you seeing more heavy users engaging with the product, if you can say it that way? I'm just curious what you're seeing, in particular, on Atkins with the -- as sort of the consumer comes back to the mass channel.

Too early to call on a quarterly basis. We continue to see strong buyer participation. So both new buyers and retained buyers are strong on the brand. So the -- and in the case of mass, foot traffic really improved. Now they're up against softer comps, but you're starting to see mass pick market share back up in the category -- both categories, in fact. And given our development, in particular on Atkins and mass, that's helped our business. So, so far, it's been a buyer -- a number of buyer dynamics. Buy rate continues to be kind of below historic levels just because of the number of occasions aren't what they normally are. It will be interesting, frankly, to see how the mass dynamic plays out in the fourth quarter and first quarter and how that might affect buy rate going forward.

Okay. And then I just had a question also on bars. And if I heard right, I think you said maybe the bar category was up 15%. I think you said Atkins was up 5% and sounds like Quest gained share in bars. Just want to make sure I was correct on those numbers, number one. And number two, kind of what's behind those? Like what's driving Quest growth to gain share? And Atkins is a strong new product innovation. What's causing it to lag that category, if that number is correct?

Yes. Atkins is more dependent upon being back at work and being in transit than even we expected. And if you look at Quest, Quest got a few dynamics that are helping it. One, it was down more this time last year, so it’s comparable a little bit easier. C-stores rebounded, which is an important component to its business, and we’re even seeing specialty start to come back. Lastly, our sales team has done a really nice job of building distribution in to drug, mass and bars. So that kind of – that triple threats really helped accelerate Quest as we’ve kind of moved through the third quarter.

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

Congratulations from me also. First, sorry if I missed this in the prepared remarks, but I was hoping you could give us a breakdown of Atkins versus Quest sales in the quarter?

Yes. So you'll see it in the K -- I mean, I'm sorry, in the Q. From a pure takeaway perspective, Atkins was up about 15%, Quest up about 56%. You have actually the shipment mark candy on us. I'll get it to you. I don't have in front of me right now. Let me get a [indiscernible]. I don't have it right in front of me. I'll get it for you.

Okay. That's fine. I guess my second question was just as we look ahead to 2022, acknowledging that there's significant uncertainty, I'm curious sort of how you're thinking about the fall resets. You did mention that there is this anticipation that consumers will get back into the weight management category. So I guess I'm wondering, are retailers thinking about it similarly? Do you expect the category to gain incremental shop space? And maybe how are retailers thinking about big brands versus smaller new brands sort of in this new normal?

Yes. Let me try to unpack that. There are a lot of questions in there. First, I would say that we like our product pipeline. We have a very talented R&D organization, terrific marketers. The pipeline that we had the spring and in the fall, we think is pretty compelling. So I suspect we don't like to talk forward too much. I suspect we'll do really well on the resets. In general, COVID has taught retailers that big brands are important, that if you just think about the dynamic that was going on in COVID, you were fighting for shopper traffic. Big brands matter. So we're seeing that in strategy with retailers. They are reengaging with bigger brands. They understand they're important to the aisle and to the foot traffic. And obviously, we've got two of the bigger brands in the category. So we have -- we're in a nice position with retailers right now just from an important standpoint. I would also add, we really focus on consumers and we really focus on consumer -- at building penetration of our brands. That's a language that's really interesting to retailers because they then think about that as shopper conversion from the rest of the store. So I think we're in a very good spot as we move through fiscal '22 just from a brand category aisle standpoint. Your question around, do I expect weight management to pick up space? Those things are more stable than you would think. So the allocation between adult nutrition, active nutrition and weight management, there is not a lot of variability kind of reset to reset. So you tend to be in a fixed set for more times than not, then they're thinking about the entire aisle and moving between the 3 subsegments. That's more rare. But I think, overall, I think we're in a really good position as we move through the summer and into the fall for the resets.

And Faiza, Atkins was up low 20s percent in the quarter, Quest in the 40s. So strong performance from both brands.

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

First question in terms of pricing. Just order of magnitude, is there anything you can tell us in terms of how much pricing you'll take? Is it going to be on both Atkins and Quest? And is there any risk given just how fragmented, particularly the bars category is, do you think there's any risk of sort of elasticity when those prices go into the marketplace?

Well, first, I would say, we calculate -- as we think about pricing and inflation, we calculate elasticity into our model. So be confident that we understand that dynamic pretty well. Pricing, we're executing a mid- to upper single-digit price increase. It is on both brands. It's different as a percentage because the inflation hits the brands a little bit differently. And so from a -- from an execution standpoint, we're in the early stages with conversations with customers. Obviously, this is not a conversation that's in isolation, right? There are manufacturers across the board taking pricing as we speak. So -- and with staring at inflation, significant changes in inflation as we move into fiscal '22. We're pretty confident that we'll work through this with customers and execute against the price increase as we move into September.

Terrific. And just sort of more broadly, on the Atkins sort of momentum, do you have a sense sort of for the demographics of the new customers that you're bringing into the brand younger? I know you've said it's an issue of mobility. But just in terms of demographics, specifically on Atkins, I'm wondering where you're taking those customers from.

Yes. Over the last year, it's been our target. So it's -- I'll talk less demographic, more psychographic, right? So the change that we made in Atkins, it's been 4 years now, was moving from fast weight loss on a program consumers, which we -- if I remember right, about 8 million of those in the United States, to low-carb lifestyle weight management concerned consumers. There were about 33 million of those. If you just look at the 8 million and the 33 million, they tended to get younger, tended to get a little bit more active because you're moving away from fast weight loss. You're moving directionally towards more lifestyle-oriented, directionally more healthier people directionally with people that -- it's less about, "I got to lose weight right now," more about, "I want to live right, and I'm looking for solutions to do that." Those tend to be a little bit younger, a little bit more active than the original target. I haven't seen a breakout this last year on kind of how our improvements in consumers look demographically, but we can take a look at that and get back to you separately.

Terrific. That’s great.

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

So Joe, just kind of a follow-up, I guess, on the last comment just in terms of the demographic makeup of that consumer, right, as you kind of chip away the original strategy, right, Simply. Atkins obviously very large brand, working well with retailers. Mass traffic is coming up. Atkins is very well, very large in mass. But as you think about the shelf resets, maybe it's not this fall, maybe it's next fall, are there opportunities you think such that you might be even able to replace some of the shelf you have with Atkins with some of the products from Quest, if Quest potentially seems to maybe be a broader base brand accepted by different types of demographics. Does that make sense?

Yes, Rob. The question does make sense. They tend to be -- They tend not to be in the same section of the aisle, in some cases, not even in the same aisle. So no, we won't be swapping. For us, it's not a decision of what space do we allocate to Atkins versus Quest. It's how do we gain more space in each of the segments and how do we allocate it. As I think about Atkins and growth, I think about how do we develop our product portfolio beyond bars and shakes. What we've learned during COVID is those consumption occasions, especially on bars, are highly dependent on on-the-go and at-work. And we've also learned from our Quest business that the snackier portions of that portfolio and confections on Atkins are all the time consumption products, not dependent upon that. So you should expect us, and it's the way we're thinking to develop our other forms to even a bigger portion of our portfolio. It insulates us to some degree on the kind of back-to-work dynamic. And not surprising, confections on Atkins growing double digits. Our confection business in the earliest stages of -- on Quest growing strong. Our chip business, just crazy strong. So expect us to continue to do that. It also leverages what we think is our competitive advantage, which is the best R&D organization in the category.

All right. Super. That makes sense. And then I guess just coming back to Jason's original question just on the top line as you go into Q4, and then while I respect you probably don't want to give guide for fiscal '22, there's some commentary on pricing and gross margin. So kind of take a shot on the sales side. If I look at the data set over the past 4 months, just even week by week, right, total dollar sales have been pretty consistent. It's been very strong, very impressive. If, just like you said on the Atkins piece, more correlated to work mobility, we're still in the summer, some people are going back to work more, but not everybody, not yet. There's not as much critical mass and probably that improves into the fall, while at the same time, as Jason pointed to, like there could be kind of an off-cycle resolution period. So kind of if I'm just thinking about the retail data sets, it seems as if there is still potential upside, obviously, to the guide because it would seem like retail data sets wouldn't necessarily be decelerating that much in the U.S. for ignoring the Europe piece, and then the storm was a couple of percent, but not that much. So I'm just trying to kind of gauge like off the commentary, just to be clear, Q3 very strong, maybe Q4 decelerates a little bit. But if we're all thinking about the first half of next year already, it would seem as if there could be increased momentum on an absolute dollar basis as we're coming out of Q4. Does that make sense?

Yes, it does. And look, I mean, obviously, there's a couple of variables here. Q4, as we stated sequentially, the volume of retail should be pretty much the same. We're obviously lapping stronger numbers a year ago, particularly on Quest. So the comps are getting a little bit harder. From a shipping perspective, as I mentioned, we do tend to pull inventory out, especially in Q4. So that's going to be impacting sales. But we'll see how it plays out and how mobility -- if it continues to accelerate or not, that's still a little bit of an open question. We're not anticipating that it does. As we get into next year, obviously, we're still working through the price increase, so that's a big variable. We'll obviously get back to you at the next earnings call with much more detail on next year's plan. But as you said, first half -- just big picture, first half should obviously be stronger than the second half because we are comping still a weak first half COVID impact in this fiscal year. So the first half should be relatively strong. Gross margins, as we said, our goal is to maintain the gross margin despite the inflation out there. And look, at the end of the day, we love the momentum of this business. We feel great about it. But we'll get back to you in the next quarter with more specifics on next year.

Rob, I'd also say that we don't see big -- I don't think we're going to see big shifts in consumer mobility Q4 to Q3. I think it feels more -- just if you look at the U.S., it feels more the same. The big shift was in Q3, I think, where we just -- it changed very, very quickly, almost like a switch flipped. I think it's going to stay more of the same. I think when kids go back to school, I think that will be the -- if there's a catalytic event and movement, it's going to be one. They put kids on a bus and they go back to school and just looking at how businesses are thinking about this, it feels more like post Labor Day back to office. Some of it's happening now, but I think you're going to see a big shift after Labor Day. In fact, I'm pretty confident that that's when we're going to see kind of an inflection point in people being out and about.

Okay. Fair enough. And then just quickly, Joe, on the M&A side. I think Todd saw it in the numbers. You mentioned you paid down the term loan, leverage staying a little bit better, good for cash flow, great Q3. So just in terms of kind of how you're thinking about the M&A pipeline, I'm not sure what you're seeing out there with kind of any kind of answer side, just trying to check the box as they do usually on the acquisition front.

Yes. We’re active that there is a pipe. There’s pretty good pipeline. We’re looking at things as we speak. As I said before, we love this category. We’d love to continue to get more scale in the category, and we’ll look at the assets that are in the space. Our screening process is pretty simple. We’re looking for strong consumer brands with unique positionings and some pretty good understanding of who the user base is, so we know how to recruit. I think our competitive advantages are we can build distribution in food, drug, mass, small format pretty quickly. We understand how to build household penetration, so understanding the consumer dynamic, who that consumer is, what the brand positioning is, we feel like we’re pretty good at that, and we’re pretty good at innovation. So we’re looking where we can use those capabilities to accelerate growth of assets that are out there. And if there’s an asset out there in our space of a decent size, you can bank on that we’re looking at it.

Our next question comes from the line of Eric Larson with Seaport Research Partners.

Congratulations on the quarter, everyone. So my first question, we've all drawn a little bit more clarity on your gross profit margins. I'm assuming you're talking percentage gross margins. But I would assume that you're pricing more to protect your dollar gross profit margins and maybe a little bit more than that. But then with that -- then in order to maintain percentage gross margins year-over-year next year, that would then require probably continued favorable product and channel mix. Am I -- is that the right way to look at how you're talking about your gross margins?

Yes. So first of all, to clarify, it's on a percentage, not dollars. We're trying to -- the goal is to maintain -- we have some pretty significant inflation next year. Our objective is to price effectively enough to maintain that gross margin percentage to offset the inflation. We'll see -- as you mentioned, we've had a nice benefit here in the second half as bars have rebounded, as brick-and-mortar has rebounded. We'll see -- I think we'll see some more of that in the first half of next year, then it will kind of level out. But we are -- our objective here is to price to offset the input cost inflation that we're seeing and, to be clear, on a percentage basis.

Okay. And then my follow-up question is really on your indulgent brands, i.e., things like peanut butter cup who were very strong, I think, for both Atkins and Quest in the quarter. Are you seeing different buyers for those products? Are they same buyers? And are your buy rates actually better in your indulgent products? Curious as to more of the consumer demographic dynamics on the indulgent line.

Yes, I apologize. I don’t know the data by – I don’t know that data by product form. So we tend to think brand first. But what I would tell you is why it’s doing so well is it’s a different use occasion. So if you think of a bar and shake, tends to be kind of afternoon to early morning. It tends to be a [indiscernible] over between meals or a meal replacement. The snackier portions of our portfolio are not that. They’re indeed just a snack. They’re kind of indulgent. Sometimes use can be after dinner. So in the confections area, the peanut butter cups that you mentioned, the entire lineup in Atkins, can be after dinner kind of consumption occasions. So I think it’s – if we went in and looked at the data, I wouldn’t guess we would see different dynamics, consumer dynamics based upon that. I think you’re just going to see different use occasions and different need states that consumers are purchasing those at.

Our next question comes from the line of Jon Andersen with William Blair.

Congratulations on the strong quarter. I wanted to ask, you talked a little bit about the success you've had acquiring new buyers, specifically, I think, relative to Atkins, but also the fact that the buy rate continues to kind of lag historical levels given the fact that you haven't fully returned on-the-go, pre-COVID on-the-go use cases. Could you talk a little bit more about the rate of new buyer acquisition and/or how far off the buy rate is today versus historical levels to give us a bit of a sense of the progress and opportunity that those 2 metrics represent?

Yes. So I can give you a high level kind of what -- how the algorithm works so you get a sense of it. So in any 1 year, the new buyers, so first year buyers on Atkins buy somewhere in the area of 30 to 35 servings. Year 2 and beyond, buy 3x that amount. So if you think about it, we have weekly -- multiple weekly -- multiple times weekly buyers and retain. So retain in any 1 year, the volume in your year is mostly driven by retained buyers. Your new buyers are a pretty good proxy for how you're going to perform in the next year because we retain a certain portion of those people. So as you look at then our buyers, our increase this year in -- let me step back here, I'm sorry. The buy rate becomes very sensitive to total volume, especially when you apply it against retained buyers. So at 100 servings, if my buy rate is off, that's a significant amount of servings against a big number of retained buyers. So this year, our growth is being driven almost exclusively by the number of total buyers that we have, both retained and news. That's been driving our business. And the buy rate has been a buffer against that. So buy rate is down, as a percentage basis, kind of in the mid-single digits. So it's a significant number, right? And we've been more than offsetting that with the number of buyers. That's frankly the good news for Atkins because that means I've got good buyer flow going into fiscal '22. If I get any improvements in buy rate, historic buy rate, which we would expect to do it as people go back to work and bars improve, and as I get the portfolio more developed in other forms, I would expect buy rate to move back towards historic levels. Does it get there next year? Hard to say. But I would think we're going to start -- we're going to continue to see improvement in that. Does that help?

That's super helpful. I appreciate the detail. One quick follow-up. You mentioned supply challenges for Quest, I think, in the fourth quarter. Is this just a kind of a transitory situation? What's the -- and how do we think about that impacting maybe sales in the quarter?

Yes. All right. What I would say is in the chip business as well as the peanut butter cup business, it -- our sales have approached what we would have considered best-case scenario. So supply in this category takes time to kind of build out. So we're in a period of transitory having to manage demand to supply until new supply comes on board. We have a pretty talented sales organization. They really like to sell stuff, but they've got experience in kind of tamping down demand, managing programs and as well as promotions because we've had this situation before, it happened on Atkins. So we know what we need to do. We will do it as we move into fiscal '22. Our supply chain is working hard to bring on more capacity, and we'll manage that well over the next few quarters.

Our last question comes from the line of Pamela Kaufman with Morgan Stanley.

Congrats on the quarter.

Thank you.

So I wanted to understand how we should think about the degree of input cost inflation across the business. And to what extent you hedge your inputs and what that's like, what your hedging position is currently over the next year?

Yes. I'd say we hedge about half of our portfolio. Some of the major commodity inputs, we buy directly. Some of them are just direct pass-through with our co-mans, but I'd say about half of our products where we have an active hedging program, and it's anywhere from 3 to 9 months. Our team did just an incredible job this year buying early, locking in prices before we saw the spike in the last few months. So we've been protected really nicely through the first 3 quarters. As we mentioned, we're going to start to see some of that come through in Q4 and obviously, a bigger amount next year. So we're going to see mid- to high single-digit inflation for next year. We'll continue to be opportunistic and lock in prices where we see value. But this is why we had to take a price increase of a similar magnitude to maintain those gross margins.

That's helpful. And I was wondering if you can give an update on Quest distribution expansion, and that was one of the rationales behind the acquisition. So just curious on where you are and where you see further opportunity for Quest?

Significant opportunities on Quest. If you think about our Atkins business, food, drug, mass, we're probably somewhere around 40 items in distribution, Quest is probably in half that. And so we're pretty experienced as a selling organization at building those out. As our part of our sales team, we've inherited some pretty talented Quest folks, too, who are pretty good at that. So I would expect you're going to continue to see improvements. I think the year-to-date number on Quest is...

Mid-teens.

Mid-teens approaching 20% distribution gains, so -- and we're still in early innings. And the innovation pipeline is pretty good.

Can you comment on some of the innovation that you have planned for Quest and Atkins and visibility into gaining shelf space for these products?

No, I prefer not to do that. I’ll talk to you about it once it’s in the marketplace and performing.

Ladies and gentlemen, we have reached the end of today's question-and-answer session. I would like to turn this call back over to Mr. Joe Scalzo for closing remarks.

Thanks for your questions, and thanks for your participation on today’s call. We hope you’ll continue to remain safe, and look forward to updating you on our fourth quarter results in October. Have a good day.

This concludes today's conference. You may disconnect your lines at this time. Thank you for your participation. Enjoy the rest of your day.