Earnings Call Transcript - SMPL Q4 2020

Operator, Operator

Greetings and welcome to The Simply Good Foods Company's Fiscal Fourth 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. It is now my pleasure to introduce your host Mark Pogharian, Vice President of Investor Relations. Thank you. You may begin.

Mark Pogharian, Vice President of Investor Relations

Thank you, operator. Good morning. I am pleased to welcome you to The Simply Good Foods Company Earnings Call for the fourth quarter and full year ended August 29, 2020. 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 Time. A copy of the release and the accompanying presentation are available under the Investors section of the company's website. This call is being webcast and an archive of today's remarks will also be available. During the course of today's call, management will make forward-looking statements that are subject to various risks and uncertainties that may cause actual results to differ materially. The company undertakes no obligation to update these statements based on subsequent events. A detailed listing of such risks and uncertainties can be found in today's press release and 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 our 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 non-GAAP financial measures to the most comparable measures prepared in accordance with GAAP. Additionally, note that management's reference for legacy Atkins in today's presentation and remarks encompasses The Simply Good Foods business excluding Quest. With that, it is now my pleasure to turn the call over to Joe Scalzo, President and Chief Executive Officer.

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 fourth quarter and full year results and provide you with some details on the performance of our brands. Then Todd will discuss our financial results in a bit more detail and we'll wrap it up with a discussion of our outlook and then open the call to your questions. The last eight months have been an extraordinary period and the COVID-19 situation continues to impact shopping behavior and consumer consumption habits. During this time, we've all faced challenges on the home and work fronts. However, I couldn't be more proud of how our team has stayed focused and executed against our plans during these challenging times. Despite the volatility we experienced during fiscal 2020, we executed well against our company initiatives for the year. Those include increasing market share within the total nutritional snacking category and the sub-segments of active nutrition and weight management, diversifying our portfolio with the acquisition of Quest, hitting every milestone on the integration of the business, as well as the ERP implementation, and achieving our fiscal 2020 synergy target while remaining on track to realize our three-year $20 million target prior to the end of fiscal 2022. I'd be remiss if I didn't call out our supply chain team who performed exceptionally well this year with no major issues. Our team worked collaboratively with suppliers, contract manufacturers, and distributors to ensure production occurred seamlessly throughout the year. Importantly, our outsourced supply chain has proven to be a competitive advantage in these times and gives us confidence that despite near-term top-line volatility, our margins remain stable, our cash flow steady, and sufficient to support future growth. Fiscal 2020, the marketplace changed dramatically at mid-year. We adjusted to these changes and despite the revenue impacts resulting from stay-at-home restrictions, we delivered adjusted EBITDA at the low end of the outlook that we provided you in January, which was after we closed on the Quest acquisition and before COVID-19 became an issue. In doing so, we executed well against our plans amidst an uncertain operating environment and made investments in our organization and our brands to position us to deliver sustainable sales and earnings growth as consumers and the economy recover from the pandemic. Our brands and category marketplace trends improved from the third quarter to the fourth quarter as the U.S. emerged from confinement and moved to a partial reopening. Net sales exceeded our expectations due to better than expected retail takeaway, continued strong e-commerce growth, and the timing of shipments related to a first quarter promotion. Adjusted EBITDA for the fourth quarter increased 53.5%, exceeding our estimates, reflecting the inclusion of Quest, the greater than anticipated increase in sales, and strong cost controls. These gains were partially offset by a $3 million impairment charge related to the Simply Protein brand that we subsequently sold on September 24, 2020. Total Simply Good Foods retail takeaway in the fourth quarter increased 3.9% in U.S. measured channels, outpacing the category that declined about 3%. Our performance was driven by the more snack-oriented portion of our portfolio, primarily Atkins confections, Quest protein chips, and cookies that are consumed mostly at home. Bars for both brands remain pressured due to fewer on-the-go usage occasions. The retail takeaway trends of our total Simply Good Foods business track generally in line with the category pre-COVID-19 and during the COVID-19 confinement period and semi-reopening. The four periods of this chart provide you a good visual of how our business has performed by week in calendar 2020. Remember that IRI tracked channels account for most of Atkins POS, but only about 60% of Quest, given its large business in the convenience store, specialty, and e-commerce channels. Pre-COVID-19, we enjoyed strong growth with our performance in line with plan and tracking to deliver another year of above-category performance. After the brief pantry loading period in mid-March, the category saw a marked decrease in shopping trips and fewer usage occasions. This affected our portable and convenient on-the-go products, especially our large bar business on both brands. These two factors resulted in a decline in retail takeaway for our brands and the category starting in late March. As home confinement restrictions began to ease in May, shopping trips steadily improved from their lows in April, and consumer interest in weight management and active nutrition began to improve sequentially. However, in mid-to-late July, the improvement in category trends plateaued. The active nutrition segment of the category, which includes Quest, plateaued at low single digits since July and over the first two months of fiscal 2021. Within that, Quest outperformed the active nutrition segment over the same timeframe. The weight management segment, which includes Atkins, has improved, but it's still down in the upper single digits due to temporary lower consumer interest in weight control, fewer on-the-go usage occasions, and weakness in the mass channel, which has experienced meaningful reduced shopper traffic during the pandemic. We believe our portfolio and channel mix is a strength. Bars are about 50% of our business and shakes 25%. In fiscal 2020, bars declined mid-single digits due to lower usage occasions in the second half of the year. Shakes increased low double-digits as some softness in Atkins was more than offset by the launch of Quest shakes. All other snacks increased about a combined 30% in 2020 and represent about 25% of our business. Majority of these forms are consumed mostly at home and are doing extremely well with strong velocities. Importantly, they were growing pre-COVID and have accelerated during home confinement. Turning to the fourth quarter, net sales increased 59.7%, driven by the Quest acquisition. Legacy Atkins net sales declined 8%, which was better than our initial forecast. Excluding the 53rd week in the year ago fourth quarter period, Atkins net sales were slightly lower than last year. Atkins performance was driven by continued e-commerce momentum, improved retail takeaway versus our expectations, and the timing of shipments related to promotional activity. Quest net sales for the fourth quarter exceeded our forecast and increased about mid-single digits on a percentage basis versus last year. Performance was driven by stronger than anticipated retail takeaway in measured channels and e-commerce, partially offset by the softness in convenience stores and specialty classes of trade. The increase in adjusted EBITDA is a direct result of higher gross profit, driven by the inclusion of Quest and legacy Atkins cost control, offset by the previously mentioned $3 million impairment charge. Todd will provide greater details on these metrics in just a bit. Atkins fourth quarter and full year retail takeaway was off 4.9% and 0.4%, relatively in line with the category. Similar to last year, Atkins bars and shakes were pressured. We estimate about 40% of the consumption of Atkins occurs away from home; therefore, lower on-the-go usage occasions impacted these forms. Atkins bars retail takeaway declined 11.1% and 2.4% for the fourth quarter and full year, respectively. Although in both periods, Atkins bar performance outpaced the bar segment of the category. Atkins ready-to-drink shakes declined 8.3% and 9.4% in Q4 and for the full year. Atkins confections momentum continued with retail takeaway up 17.3% in the fourth quarter and 21.9% for the full year. Our e-commerce business remained strong and increased 55% in the fourth quarter driven by a mix of existing and new online shoppers. We estimate that e-commerce contributed about 2.6 percentage points to total Atkins brand net sales growth in the quarter. For the full year, e-commerce sales increased 77% and represent nearly 9% of legacy Atkins total U.S. gross sales. Our brand was responsive as shopper trips improved, but lower on-the-go usage occasions and the temporary lower importance of weight management during this time are headwinds. As a result, Atkins total buyer growth was slightly down this year, with buy rates slightly up. Importantly, our analysis shows the brand switching has been minimal and our existing consumers are loyal. The change in shopping behavior we discussed last quarter continued in Q4. Trips at large mass merchants, our biggest channel, are slightly improving, but are still well below last year. Traditional grocery channel trips are better as is Atkins performance there. As the chart at the bottom of the slide indicates, in fiscal 2020 Atkins sales in the mass channel declined low double-digits on a percentage basis versus last year. We are particularly pleased with our performance in the club and e-commerce channels, which now represent about 21% of total Atkins U.S. sales. Given that shopper traffic is better in the traditional food channel, it appears that COVID-era consumers are less price sensitive, more focused on convenient locations, quick in and quick out, and perceive cleanliness. Let me now turn to Quest, where Q4 and full year retail takeaway increased 28.4% and 21.3%, respectively in the measured IRI MULO universe, driven by snacks and the launch of shakes. Quest generates about 60% of its U.S. sales in the IRI MULO universe of traditional food, drug, mass, and club channels. The other 40% of Quest U.S. sales are generated in the convenience store class of trade and the unmeasured e-commerce and specialty channels that are not included in the MULO universe. Quest's e-commerce business continues to do well, and we estimate that sales increased 25% in the fourth quarter. Full-year sales were up less than that. Quest snacks, driven by chips and cookies performed extremely well with retail takeaway in the fourth quarter and the full year up 95% and 72%, respectively. Retailer and consumer demand for these products, which remain strong, represents about 27% of the Quest business during the quarter. Quest bars declined 5.8% in Q4, much better than the bar category that was off low double-digits. For the full year, Quest bars were down only 1% versus the bar category that declined mid-single digits. As I mentioned earlier, bars have been impacted by less on-the-go consumption. Quest is outperforming the category due to its large, loyal, and active consumer base. The fourth quarter and for the full year of the specialty channel underperformed the measured MULO universe. In fiscal 2020, we estimate that the specialty channel sales declined about 45%. This channel is about 9% of Quest sales at year-end, down about half from last year. We expect specialty to continue to be a headwind over the near term, albeit at a smaller one as it shrinks in importance to the brand. After pulling back on promotions, marketing, and retail merchandising in the third quarter, we increased spending in the fourth quarter on both brands. For fiscal 2021, we anticipate that advertising and marketing will increase at least in line with organic sales growth. During the first half of fiscal 2021, new Atkins Rob Lowe advertising will be on air communicating the benefits of our products and promoting at-home consumption. Some of the relevant messaging includes Atkins bars are a better and healthier alternative to other at-home snacks, the importance of weight management during the pandemic, that our shakes include key vitamins and minerals that support the immune system, and providing solutions for people to eat better while working from home. While advertising will also support a robust innovation, we have what we believe to be the most robust pipeline in years. We have a good balance of new product forms across both of our brands. Additionally, the fall resets are on track and you should start to see some of our innovation on shelves at select retailers in November. In summary, the Simply Good Foods Company competes in an attractive category with two scale lifestyle brands that transcend forms and usage occasions. The Quest initial integration and full ERP implementation are largely complete, and we're on track to achieve our three-year synergy target of $20 million. We'll begin to recognize the majority of the $10 million in fiscal 2021 synergies beginning in January. Bar performance will be pressured in the near term until further easing of movement restrictions. Despite these pressures, we are gaining share in the category and in the sub-segments of active nutrition and weight management. Our brand equities are strong, as evidenced by the solid performance of our other snacks that are primarily consumed at home. We continue to engage with consumers and be flexible in our approach to brand investment to drive growth. The Atkins and Quest brands are aligned with consumer mega trends for healthy snacking, with a nutritional profile that is protein-rich and low in carbs and sugar. This profile has brought appeal to consumers interested in better-for-you, as well as weight management and active nutrition shoppers looking to achieve their goals. Now, I'll turn the call over to Todd to provide you with some greater financial details.

Todd Cunfer, Chief Financial Officer

Thank you, Joe, and good morning, everyone. Let me start with two points as they relate to the numbers you see on the slides to follow. First, for comparative purposes, we will review financial statements for the 13 and 52 weeks ended August 29, 2020, versus the 14 and 53 weeks in the year ago period. Our full fiscal year information includes Quest results from the November 7, 2019 date of acquisition. Lastly, 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 key indicators of the true underlying performance of the business. I will begin with a review of our net sales. Fourth quarter legacy Atkins sales declined 8% primarily due to the extra week in the year ago period. Excluding the extra week, fourth quarter net sales declined 1% versus the fourth quarter of 2019. Legacy Atkins brick and mortar volume declined 9.2%, while e-commerce increased 55% in the quarter and contributed about 2.6 percentage points of growth. Net price realization was a 1.4% headwind due to higher customer spend as discussed last quarter. Note that the company's Q4 net sales percent change versus IRI MULO retail takeaway is primarily due to the 53rd week and non-measurable e-commerce contribution, as well as a shift related to Q1 promotions that added approximately 2% to Q4 growth. The full 13-week Q4 Quest contribution was a 67.7% benefit, resulting in a total Q4 net sales increase of 59.7%. Now for a review of fourth quarter results across other major metrics. Gross profit was $88.1 million, an increase of $28.9 million or 48.9%, driven by the inclusion of Quest. Gross margin declined 290 basis points to 39.6% in the quarter, primarily due to the inclusion of Quest, which has lower gross margins than legacy Atkins. Additionally, gross margin was impacted by unfavorable net price realization and negative product mix as bar growth lagged the overall business. Adjusted EBITDA increased 53.5% to $37 million, driven by the increase in gross profit and legacy Atkins SG&A expenses, which declined versus the year ago period. Looking at it by line item, total company selling and marketing expenses increased by 23.1% for $4.6 million to $24.5 million. The increase was primarily due to the inclusion of Quest. Excluding integration and restructuring expenses, non-core legal costs, and stock-based compensation at $7.3 million. G&A expenses increased about 58% or $0.8 million in Q4. The increase was attributable to the addition of Quest, including costs related to the ERP implementation. Additionally, the company recorded a $3 million impairment charge related to the Simply Protein brand. Moving to other items in the P&L, interest expense increased $5.3 million to $8.9 million due primarily to the increase in the term loan balance. Our effective tax rate in the fourth quarter was 29%, lower than the year ago period of 36.6% due to timing of select items. As a result, reported net income in Q4 was $12.4 million versus $6.1 million in the year ago period. Full year results are as follows: net sales increased 56% or $816.1 million, driven primarily by the Quest acquisition and a 1.2% increase from legacy Atkins. Gross profit was $324.3 million, an increase of $106.9 million or 49.2% driven by the Quest acquisition. This was partially offset by the previously discussed non-cash $7.5 million inventory purchase accounting step-up adjustment related to the Quest acquisition. As a result, reported gross margin was 39.7%, a 180 basis point decline versus last year. The non-cash inventory step-up adversely impacted full year gross margin by 90 basis points. Adjusted EBITDA increased 55.9% to $153.9 million driven by the increase in gross profit, partially offset by selling and marketing expenses, which increased 40% or $27 million to $94.5 million. The majority of the increase was due to the addition of Quest and slightly higher legacy Atkins expense. Additionally, G&A expenses, excluding Quest related integration and restructuring expenses, non-core legal costs, and stock-based compensation, increased about 58% or $30 million due primarily to the inclusion of Quest. As mentioned earlier, the company also recorded a $3 million impairment charge related to the Simply Protein brand. One-time costs related to the Quest acquisition, including business transaction expenses, integration and restructuring costs, were combined $43.4 million. Moving onto other items in the P&L, the net impact of interest income and interest expense was an increase of $21.5 million due to the higher term loan balance. Income tax expense was $13.3 million versus $16.8 million in the prior year. As a result, full year reported net income was $34.7 million versus $47.5 million last year. Turning to EPS, the fourth quarter of 2020 reported EPS was $0.12 per share diluted compared with $0.07 per share diluted in the prior year, primarily impacted by depreciation and amortization expense of $4.4 million higher versus last year due to the conclusion of Quest, integration costs of $1.3 million, and restructuring expenses of $4.1 million. Adjusted diluted EPS was $0.20 a share, an increase of $0.05 versus the year ago period. Note that we calculate adjusted diluted EPS as adjusted EBITDA less interest income, interest expense, and income taxes. Full year reported EPS was $0.35 versus $0.56 per share diluted in the prior year, primarily impacted by depreciation and amortization expense of $16 million higher versus the year ago period due to the inclusion of Quest. The non-cash inventory step-up of $7.5 million and business transaction, integration, and restructuring costs of $43.4 million. Full year adjusted diluted EPS was $0.91 a share, an increase of $0.14 versus the year ago period. Please refer to today's press release for an explanation and reconciliation of non-GAAP financial measures. Moving onto the balance sheet and cash flows, in fiscal 2020, we paid down $50 million as a term loan, and at year-end, the outstanding term loan balance was $606.5 million. Additionally, in June, we repaid the $25 million that the company borrowed under its revolving credit facility in March. At year-end, there were no amounts outstanding under the revolver. Building on last quarter's momentum, cash flow from operations in the fourth quarter was $35 million, resulting in $75 million of cash flow from operations in the second half of fiscal 2020. Therefore, as of August 29, 2020, the company had cash of $95.8 million. As of August 29, 2020, the net debt to fiscal 2020 adjusted EBITDA ratio was 3.3 times. This ratio would be lower if Quest's contribution to adjusted EBITDA for the full 52 weeks in fiscal 2020 was included. Despite the challenges related to COVID-19, we currently anticipate a trailing 12-month net debt to adjusted EBITDA ratio well below three times by fiscal year-end 2021. Full-year depreciation and amortization was $16 million, and capital expenditures were about $1.7 million. Capital expenditures for fiscal 2021 are expected to be $5 million to $6 million driven by equipment for a new warehouse. We anticipate interest expense to be approximately $30 million. Note that the divestiture of Simply Protein and our decision to exit Europe is about a 2% headwind to net sales in fiscal year 2021. And our solid cash flow provides us with the financial flexibility to support future growth. I would now like to turn the call back to Joe for closing remarks.

Joe Scalzo, President and Chief Executive Officer

Thanks, Todd. The improvements in category trends in the fourth quarter were encouraging, but there's still uncertainty related to when consumption behavior will return to more normal levels. The unknown duration of the pandemic and its impact on consumer shopping and consumption behaviors make it difficult to provide full-year fiscal 2021 outlook at this time. However, we expect that total Simply Good Foods retail takeaway and revenue trends in the first half of fiscal 2021 to perform similar to current trends. Therefore, we estimate that in the first half of fiscal 2021, net sales will be in the $425 million to $435 million range and adjusted EBITDA in the $77 million to $82 million range. Additionally, we expect inflation to be modest. Quest synergies will be more meaningful from Q2 to Q4, and advertising and marketing to increase in line with organic sales growth. Combined with our variable business model, we expect full-year gross margin to be about the same as last year, and adjusted EBITDA margin to increase. As Todd mentioned, our advantageous business model enables strong cash flow generation and provides us with the financial flexibility. Health and wellness snacking is important to consumers, and low household penetration is a long-term opportunity. We remain very confident in our business model and our long-term growth prospects, and believe that when the reopening of the U.S. economy resumes and sustains, consumer shopping behavior will return to more normal patterns, and our brand benefits of active nutrition and weight management will drive greater better-for-you snacking and meal replacement usage occasions. We are executing against our strategies and are well-positioned for long-term sustainable sales and earnings growth that we expect will create value for our shareholders. We appreciate everyone's interest in our company, and we are now available to take your questions.

Operator, Operator

Thank you. We will now be conducting a question-and-answer session. Our first question is coming from the line of Chris Growe of Stifel. Please proceed with your questions.

Chris Growe, Analyst

Hi, good morning.

Joe Scalzo, President and Chief Executive Officer

Hey, Chris.

Todd Cunfer, Chief Financial Officer

Good morning, Chris.

Chris Growe, Analyst

Hi. Just had a couple of questions for you. I am curious from a high level, basically the strategy in this environment, is it to lean more heavily on Quest where the brands growing more strongly, or is there a marketing promotion or promotional program that the Heinekens can help sort of revive the sales during this time? I guess more of a first-half question. How are you approaching kind of the marketing and promoting of the product in an environment where clearly there's less shopping trips and less consumer interest in the category?

Joe Scalzo, President and Chief Executive Officer

Yeah. Chris, as we said in our comments, we leaned back in on marketing in the fourth quarter. All the data that we had on both brands showed that it was effective. Therefore, we're going to continue that investment as we move into the first half of next year. Additionally, we've made some adjustments in messaging. On the Atkins brand, we shot new Rob Lowe commercials to adjust to consumer attitudes and behaviors during the pandemic. As you see those in the marketplace, you'll see that they address those needs nicely. We've made shifts on both brands in media investment based on how they were consuming media in the fourth quarter. The biggest change as we move into the first half of this year is about 60% of shelf resets take place right now. We will shift messaging and marketing to start highlighting some of the new products on both brands. Overall, we're leaning in on both brands based upon the data we have on the effectiveness of the marketing at this time.

Chris Growe, Analyst

Okay. Thank you for that. And then just one more question, which is on the first-half guidance. Is there anything around the timing of promotion this year versus last year? And then I'm also curious related to that how your inventory stands and maybe retailer inventory stands currently and how that could affect the first half sales.

Joe Scalzo, President and Chief Executive Officer

Yeah, I'll take that. No big shift in promotional timing. It's very similar to the first half of last year. So, I don't see a big impact there. We did mention there was a shift in timing that brought some revenue from Q1 this year into Q4 of the prior year, so that'll be a slight headwind. There's always a lot of noise there. The reason why we gave the first half versus individual quarters is that we always have a lot of noise with a resolution period shipments between November and December, so they can have a significant impact in Q1 versus Q2. We're much more comfortable with getting first-half guidance. Everything should be pretty normal.

Operator, Operator

Thank you. Our next question comes from the line of Alexia Howard with Bernstein. Please proceed with your questions.

Alexia Howard, Analyst

Good morning, everyone.

Joe Scalzo, President and Chief Executive Officer

Good morning, Alexia.

Todd Cunfer, Chief Financial Officer

Good morning.

Alexia Howard, Analyst

Hi there. Okay. So, two questions. First of all, input cost inflation. We've observed some grain input costs starting to spike, wondering when that might hit your P&L and how far hedged out you might be? Regarding your second question, now that your net debt to EBITDA is coming down fairly sharply, at what point might you be in the market again for another deal? Are you actively looking right now? Thank you.

Todd Cunfer, Chief Financial Officer

Absolutely. So, as Joe mentioned, we're expecting some modest inflation for fiscal year 2021. We're pretty well covered for at least the first half of our fiscal year where we're seeing some input cost pressure mainly in dairy and soy proteins. We are seeing some benefits in some other areas, so clearly are seeing some inflation out there in the marketplace, but nothing we believe we cannot handle through synergies and other cost-saving initiatives. Again, we're expecting modest inflation. We have strong visibility in the first half of the year that it will be manageable.

Joe Scalzo, President and Chief Executive Officer

Alexia, for your second question, I want to first take the time to say thank you to the Simply Good Foods team and the Quest team. I think probably the first virtual business integration was ever executed. As both companies went into remote operations, we were integrating the organization, doing our ERP integration and business process integration all virtually since March. The teams performed well, hitting every key milestone in the plan. We went live with the organization and in the ERP on the 1st of September and have done an outstanding job. We have a little more work to do to complete some organizational work through the end of the calendar year, but we anticipate emerging in the new calendar year with a balance sheet that is in decent shape, allowing us to start looking at other assets. I do want to thank Dave Ritterbush and his team at Quest for their leadership during this integration process.

Alexia Howard, Analyst

Great. Thank you very much. I'll pass it on.

Operator, Operator

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

John Baumgartner, Analyst

Good morning. Thanks for the question.

Joe Scalzo, President and Chief Executive Officer

Hi, John.

John Baumgartner, Analyst

Joe, I wanted to touch on your secondary category via chocolate on the Atkins side and salty snacks on the Quest side, given that those are now really becoming material contributors to growth. Can you walk through your expectations for those categories in fiscal 2021, be it from new distribution or new brand investment? Over the growth we're seeing now, how much of it do you think is tied to the broader at-home food shift and how much is tied to underlying velocities and new distribution? Any thoughts on that would be appreciated for fiscal 2021. Thank you.

Joe Scalzo, President and Chief Executive Officer

Yeah. That's a great question. The alternative portions of our portfolio, which include confections on Atkins and the chip and cookie businesses, are expected to see high growth. Our portfolio is filling out in those areas as they cater to different consumer occasions than our bars and shakes. Based on momentum and consumer interest, we have high expectations for these products moving forward. Our marketing emphasizes these new forms to drive innovation and increase penetration in our existing customer base.

John Baumgartner, Analyst

Thanks, Joe. Just to stick with that scene, it looks like the Atkins brand is getting a bit more and more indulgent. You've got some lemon tarts in the presentation today. Is there any reason why -- when you look at the consumer exposures and the overlap there, is there any reason why that salty snacks or cookies would not make sense for the Atkins consumer as you kind of think about cross-pollination the two portfolios?

Joe Scalzo, President and Chief Executive Officer

No, there's no reason to think they wouldn't make sense. While the product profiles of these brands are not dramatically different, the user bases are separate and incremental. We will innovate each brand targeting their specific audiences and not worry about product overlap. Expect to see innovation in cookies and salty chips for Atkins moving forward, and Quest is also entering the confection business with more products to come.

John Baumgartner, Analyst

Thanks, Joe. Thanks for your time.

Joe Scalzo, President and Chief Executive Officer

Yeah. Have a good day.

Operator, Operator

Thank you. Our next question comes from the line of Jason English with Goldman Sachs. Please proceed with your questions.

Jason English, Analyst

Hey, good morning, folks. Thanks for having me in, much appreciated and congratulations to your teams for executing, particularly on the integration in these tumultuous times. A couple of questions from me. First, real quick tactical housekeeping as you look to the sales outlook for the first half, how much do you expect the incremental M&A contribution from Quest to be?

Joe Scalzo, President and Chief Executive Officer

Yeah. So, it's -- I won't give you an exact number, but in total, on a core basis, we're going to be flattish. The Quest piece is going to add about a 10% to 15% incremental to the full first half of the year.

Jason English, Analyst

And that's as precise as I could ask for. So, thank you for that. My next question is on retailers' shelf resets and promotions. There's been, as you mentioned, a lot of volatility here in terms of performance. I think we agree that most of this is transitory, although there are some skeptics -- maybe this is a fee change. My question is how are retailers doing everything? Can you share any insights on what the shelf resets have shaken out?

Joe Scalzo, President and Chief Executive Officer

Let me see if I can parse those apart, Jason. First, for most retailers, shelf resets and seasonal merchandising is business as usual. We don't see any major shifts. There has been a slight timing change on shelf resets, but nothing material. So, we expect the resets to be finished by about November 1. They account for about 60% of the volume in the category, so starting around November 1, we'll get a real sense of how that has changed and how it impacts consumer shopping behavior. As it pertains to shopping behavior, as we've stated, consumers are shopping less frequently, choosing fewer stores, and more online shopping. The outlook could modestly improve as we move through the first half of the year.

Jason English, Analyst

Thank you. That's really helpful. You didn't really give a lot on this shelf resets. And you mentioned like you're going to see the effect on November 1. But have you already seen some other plano-grams? Isn’t there some incremental information you can share in terms of whether you're gaining or losing shelf space right now?

Joe Scalzo, President and Chief Executive Officer

I'd like to hold that conversation until the resets affect business performance. We really like our pipeline; it's really robust across both brands, and we expect to do well in the resets. Until it's in the marketplace and performing, I'd prefer to wait until then to discuss how it's doing.

Jason English, Analyst

Understood. Thank you very much. I will pass it on.

Operator, Operator

Thank you. Our next question comes from the line of Fiza Ali with Deutsche Bank. Please proceed with your questions.

Fiza Ali, Analyst

Yes. Hi, good morning.

Joe Scalzo, President and Chief Executive Officer

Good morning.

Fiza Ali, Analyst

So, I guess, just going back to the fall shelf resets. I wanted to get a sense in terms of your first half guidance. Are you embedding potential distribution of new items with that guidance? Because you mentioned you expect retail takeaway to trend in line with current levels.

Joe Scalzo, President and Chief Executive Officer

Yeah. We stand by our guidance and feel comfortable. It's roughly in line with what we saw in the fourth quarter. We think performance on the shelf will be consistent with that period.

Fiza Ali, Analyst

Okay. And then just my second question regarding Quest, you noted both in the release and earlier on the call that you've completed the majority of the integration. I was wondering what's left specifically? If you could also talk about some of the organizational changes you referenced, and now that you have a year under your belt with Quest, how should we expect the two businesses to be run together?

Joe Scalzo, President and Chief Executive Officer

That's a great question. The majority of the operational work now involves capturing the synergy related to the supply chain. We have two warehouses in Indiana that will consolidate into a single warehouse for both businesses, enabling us to streamline shipments. Some changes involve getting people on common payrolls, and we expect to wrap up by the end of the calendar year. Organizationally, it looks more like a merger than a bolt-on acquisition, so we will maintain equal numbers of folks in both areas. We will have a supply chain and selling organization comprised of folks from both companies while maintaining separate brand business units. Marketing and innovation will focus on specific target audiences for each brand, and we will operate with a common foundational infrastructure across shared services.

Fiza Ali, Analyst

Great. Thank you so much.

Operator, Operator

Thank you. Our last question of the day will come from the line of Pamela Kaufman with Morgan Stanley. Please proceed with your questions.

Pamela Kaufman, Analyst

Hi. Good morning.

Joe Scalzo, President and Chief Executive Officer

Good morning.

Pamela Kaufman, Analyst

How are you thinking about the long-term health of the category? Do you think that there are any permanent changes to consumer behavior resulting from the pandemic that could impact your product? What factors give you confidence in the recovery of the category as we move past the pandemic? Are there any strategic changes that you need to make to address these?

Joe Scalzo, President and Chief Executive Officer

That's a great question. Overall, we’ve seen evidence that suggests as people emerge from confinement, category growth and our brands tend to improve. There appears to be a strong correlation between consumer mobility and our business performance. There are trends that have been present for years, and I expect they will return post-pandemic. Health and wellness snacking remains important to consumers, and household penetration in our category is still relatively low. This presents a long-term opportunity, and I am confident we will adapt and capitalize on the eventual normalization of consumer behavior.

Pamela Kaufman, Analyst

Thank you. That's helpful. Also, I was hoping you could comment on the current competitive environment within the ready-to-drink shake category. What are you seeing regarding elevated promotional activity from some of your competitors? And it seems private label has been taking share within the category, so your insights on this and your plans for innovation and promotions within ready-to-drink shakes would be helpful.

Joe Scalzo, President and Chief Executive Officer

While promotion activity feels about the same for us, the private label entry is Walmart-specific and has grown in the 30-gram active nutrition protein segment, particularly with BellRing's Premier brand. Our Atkins business doesn't compete as directly due to minimal substitutability with other shakes. The Quest shakes launched last year haven't received the desired trial levels due to the pandemic's impact on foot traffic. We'll continue focusing on driving trial for our shake business as we navigate the upcoming fiscal year and get our velocities up with new distribution.

Pamela Kaufman, Analyst

Great. Thank you.

Joe Scalzo, President and Chief Executive Officer

You're welcome.

Operator, Operator

Thank you. Our last question comes from the line of Jon Anderson with William Blair. Please proceed with your questions.

Jon Anderson, Analyst

I have one question on e-commerce. If you could share with us the portion for each brand that e-commerce now represents and talk a little bit about how you feel your position from a share perspective online versus offline. Are there any profit implications to the business and your capability set -- the strength of your capability set in product content marketing? The brands online. There's a lot there. I'll leave it at that for the moment.

Joe Scalzo, President and Chief Executive Officer

From an Atkins perspective, e-commerce has grown dramatically in the last couple of years, now representing about 9% of our total business, significantly up from around 2% a couple of years ago. Quest is one of the leaders in e-commerce in this category, with e-commerce representing about 20% of its business. Both brands are gaining share online. While their margins are slightly lower than our average, we’re working to balance that through supply chain efficiencies. The pandemic has accelerated e-commerce adoption by years, and I believe we are well-positioned to leverage this shift in consumer shopping behavior.

Jon Anderson, Analyst

That's helpful. Thanks.

Joe Scalzo, President and Chief Executive Officer

You're welcome.

Jon Anderson, Analyst

One -- I missed this earlier, but one on the integration cost synergies. Could you talk about the cadence you expect as you move towards the $20 million of synergies by the end of fiscal 2021? How will those show up, whether they'll be in reductions in COGS or OpEx? Thank you.

Todd Cunfer, Chief Financial Officer

About half of that $20 million will show up this fiscal year. We will get a little bit in Q1, but it will kick in primarily in Q2 and beyond since most personnel remain through the calendar year. The cadence is loaded back in three quarters, with about two-thirds showing up below the gross margin line in G&A and selling. We see very strong visibility on those savings and feel good about them.

Jon Anderson, Analyst

Thanks so much.

Operator, Operator

That is all the time we have today for questions. I will now hand the call back over to management for any closing remarks.

Joe Scalzo, President and Chief Executive Officer

Thanks again for your participation on the call today. We hope you'll continue to remain safe, and we look forward to updating you on our first quarter results in January. Hope you all have a good day. Thank you.

Operator, Operator

This does conclude today's conference. You may disconnect your lines at this time. Thank you for your participation, and have a great day.