Greetings and welcome to The Simply Good Foods Company Fiscal Fourth Quarter 2020 Conference Call. [Operator Instructions] As a reminder, this conference is being recorded.

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, Investor Relations, Treasury and Business Development

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 a.m. Eastern Time. A copy of the release and accompanying presentation are available under the Investors section of the Company's website at www.thesimplygoodfoodscompany.com. This call is being webcast and an archive of today's remarks will also be available.

During the course of today's call, management will make forward-looking statements that are subject to various risks and uncertainties that may cause actual results to differ materially. The Company undertakes no obligation to update these statements based on subsequent events. A detailed listing of such risks and uncertainties can be found in today's press release and 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 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.

Joseph E. Scalzo - Chief Executive Officer, President and Director

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 that 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 and 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 in - 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 amid 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 US 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 SimplyProtein brand that we subsequently sold on September 24, 2020.

Total Simply Good Foods retail takeaway in the fourth quarter increased 3.9% in US 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 tracks 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 provides you a good visual of how our business has performed by week in calendar 2020. Remember that IRI track 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 delivered 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 trip 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 up low-single digits since July and over the first two months of fiscal 2021. Within that, Quest has 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 has experienced meaningful reduced shopper traffic during the pandemic.

We believe our diversified portfolio and channel mix is a strength. As this slide depicts, 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 represents about 25% of our business. Majority of these forms are consumed mostly at home are doing extremely well and have 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 estimated 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 represents nearly 9% of legacy Atkins total US 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 headwind. As a result, Atkins total buyer growth was slightly down this year with buy rate slightly up. Importantly, our analysis shows the brand switching has been minimal, and our existing consumers loyal.

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 mass channel declined low-double digits on a percentage basis versus last year, particularly pleased with our performance in the club and e-commerce channels, which now represented about 21% of total Atkins US sales. Given the 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 US sales in the IRI MULO universe of traditional food, drug, mass and club channels. The other 40% of Quest US 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 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, the specialty channel underperformed the measured MULO universe. 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 by half from last year. We expect specialty to continue to be a headwind over the near-term, albeit a smaller one as the strength [Phonetic] and 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. Fiscal 2021, we anticipate that advertising and marketing will increased 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 better and healthier alternative to other at-home snacks, the importance of losing weight gained 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. Our advertising will also support a robust innovation, some of which you see on the slide that we believe is 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 shelf 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 fiscal 2021 synergies beginning in January. But our performance will be pressured in the near-term until further easing of the movement restrictions. Despite these pressures, we are gaining share in the category and then 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 on our approach to brand investment to drive growth. The Atkins and Quest brands are aligned with consumer mega trend for healthy snacking with the nutritional profile that is protein rich and low in carbs and sugar. This profile has broad 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?

Todd Cunfer - Chief Financial Officer

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 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 a key indicator 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 all primarily due to the 53rd-week and non-measured e-commerce contribution, as well as the 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 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 an 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% or $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 of $7.3 million, G&A expenses increased about 58% or $8.8 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 SimplyProtein 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% to $816.1 [Phonetic] 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 SimplyProtein brand. One-time costs related to the Quest acquisition, including business transaction expenses, integration and restructuring costs were combined $43.4 million.

Moving on to 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, 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 inclusion 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 of the term loan and at year end, the outstanding term loan balance was $606.5 million. In addition, 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 contribution to adjusted EBITDA for the full 52 weeks in fiscal '20 was included. Despite the challenges related to COVID-19, we currently anticipate a trailing 12-month net debt-to-adjusted EBITDA ratio well below 3 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 '21 are expected to be $5 million to $6 million, driven by equipment for our new warehouse. We anticipate interest expense to be approximately $30 million.

Note that the divestiture of SimplyProtein 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.

Joseph E. Scalzo - Chief Executive Officer, President and Director

Thanks, Todd. The improvements in category trends in the fourth quarter was encouraging, but there are still uncertainty related to when consumption behavior and shopping trips, particularly in the mass channel 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 advantage business model enables strong cash flow generation and provides us with the financial flexibility. Health and wellness snacking is important to consumers and lower 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 US 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.

Question & Answers

Operator

Thank you. [Operator Instructions] Our first question is coming from the line of Chris Growe of Stifel. Please proceed with your questions.

Christopher Growe - Stifel Financial Corp. - Analyst

Hi. Good morning.

Joseph E. Scalzo - Chief Executive Officer, President and Director

Hey, Chris.

Todd Cunfer - Chief Financial Officer

Good morning, Chris.

Christopher Growe - Stifel Financial Corp. - 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 brand is growing more strongly or is there a marketing promotion or promotional program that the high [Phonetic] Atkins could help sort of revive the sale during this time? I guess, more of a kind of first half question, how are you approaching kind of the marketing and then promoting of the product in an environment where clearly there is less shopping trips and less consumer interest in the category?

Joseph E. Scalzo - Chief Executive Officer, President and Director

Yeah. Chris, as we said in our comments, we lean back in on marketing in the fourth quarter all the data we had - on both brands, all the data we had for both brands is that, it was effective. And so, we're going to continue that investment as we move into the first half of next year. And then also as we've - we mentioned in our comments, we've adjusted, so we've made some adjusted - adjustments in messaging. So, on the Atkins brand, we shot new Rob Lowe commercials in the - the attempt obviously is the commercials is to adjust to consumers' attitudes and behaviors during the pandemic, and I think as you see those at the marketplace you will see that those do that nicely.

We've made some shifts on both brands in media investment based on how they were consuming media in the fourth quarter. And then obviously, probably the biggest change as we move into the first half of this year is about 60% of shelf resets take place right now. And so, we will shift messaging and marketing to start highlighting some of the new products on both brands. But I think overall we're leaning in on both brands just based upon the data we have on the effectiveness of the marketing at the time.

Christopher Growe - Stifel Financial Corp. - Analyst

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

Todd Cunfer - Chief Financial 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 will be a slight headwind. There is always a lot of noise. The reason why we gave first half versus individual quarters, we always have a lot of noise with resolution period, shipments between November and December, so they can have a significant impact in Q1 versus Q2. So, we're much more comfortable with giving first half guidance. But other than that it should be pretty normal.

Christopher Growe - Stifel Financial Corp. - Analyst

Okay. Thanks so much for your time.

Operator

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

Alexia Howard - Sanford C. Bernstein & Co., LLC - Analyst

Good morning, everyone.

Joseph E. Scalzo - Chief Executive Officer, President and Director

Hi, Alexia.

Todd Cunfer - Chief Financial Officer

Good morning.

Alexia Howard - Sanford C. Bernstein & Co., LLC - Analyst

Hi, there. Okay. So two questions. First of all, input cost inflation, we've obviously seen some of the grain input costs start to spike upwards a bit over the last couple of months. Wondering when that might hit your P&L. And how far hedged out you might be ahead of that?

And then my second question on a very different topic is, 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? And are you actively looking right now amidst the pandemic to see if there are any available opportunities? Thank you, and I'll pass it on.

Joseph E. Scalzo - Chief Executive Officer, President and Director

Do you want to take the first one, Todd and I'll take the second?

Todd Cunfer - Chief Financial Officer

Absolutely. So, as Joe mentioned, we're expecting some modest inflation for fiscal year '21. We are pretty well covered for at least the first half of our fiscal year where we're seeing some input cost pressure is in dairy and soy proteins. We're seeing some benefits in some other areas. So, clearly, we are seeing some inflation out there in the marketplace, but nothing - we believe we cannot handle through a lot of synergies and other cost savings initiatives that we have out there. So, again, modest inflation. First half of the year, we have great visibility. We believe it's impacted into the plans that we gave you.

Joseph E. Scalzo - Chief Executive Officer, President and Director

Yeah. Alexia, the second question, I'd like to - since it's a M&A question, I'd like to first take the time to say thank you to the SMPL team and actually the Quest team. So, I think probably the first virtual business integration ever executed. So, as you can imagine, as we got into the mainstream of the integration of Quest, both of the companies went to remote operation. So, we were integrating the organization, doing our ERP integration, doing our business process integration all virtually since March, and the team has performed extremely well. We hit every key milestone in the plan. We went live with the organization and then - and the ERP on Sept - 1st of September. And by all accounts, has done an outstanding job.

We have a little bit more work to do as we move through the end of the calendar year to complete some of the organizational work. And then I think as we emerge in the new calendar year, we'll have our heads up and a balance sheet, as you pointed out, that is in a decent enough shape that we can start looking at other assets. But I didn't want to - I do want to say thanks to Dave Ritterbush and his team at Quest. His leadership team and my leadership team and all the people at SMPL, they did a phenomenal job in difficult situations in integrating the two businesses and keeping the business on track overall.

Thanks for that question.

Alexia Howard - Sanford C. Bernstein & Co., LLC - Analyst

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

Operator

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

John Baumgartner - Wells Fargo Securities - Analyst

Good morning. Thanks for the question.

Joseph E. Scalzo - Chief Executive Officer, President and Director

Hey, John.

John Baumgartner - Wells Fargo Securities - Analyst

Joe, I wanted to touch on your secondary categories, be it 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 F'21, be it from new distribution or new brand investment? And then over the growth we're seeing now, how much of it do you think is just 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 F'21. Thank you.

Joseph E. Scalzo - Chief Executive Officer, President and Director

Yeah. Really good - great question. So, our - the all other portion of our portfolio, which you're talking about, confections - I'll call them other forms, right, confections on Atkins, soon-to-be confections on Quest, we launched - just launched a peanut butter cup on the Quest business in September and then the chip business and the cookie business. There - we have high expectations for all those products. And the reason for it is, they are a different consumer use occasion and need state than those satisfied by our bars and shake business. So, opportunity to bring incremental consumption and incremental consumers into the franchise. And just based upon the momentum, pretty compelling from a consumer interest standpoint.

So, you should expect our portfolio to continue to fill out in those areas. We continue to drive those use occasions and innovate in that category. And as we have shifted our marketing, moving into the first half of the year, you should see increased emphasis against those forms. So, I do think I have high expectations from an innovation standpoint, new product development, marketing and white space on those forms going forward, given that they're fairly incremental to our existing product base and both of these businesses are in a consumer household penetration gain, so new forms and new use occasions are really important to these brands.

John Baumgartner - Wells Fargo Securities - Analyst

Thanks, Joe. Just to stick with that theme, 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 of the two portfolios?

Joseph E. Scalzo - Chief Executive Officer, President and Director

Yeah. None that I can think of.

John Baumgartner - Wells Fargo Securities - Analyst

Thanks.

Joseph E. Scalzo - Chief Executive Officer, President and Director

So, probably the most important thing is the overlap from a - while the product profile of these brands is not dramatically different from a nutritional profile standpoint, the user bases are completely separate and completely incremental to each other. So, we would do how they innovate on each one of these brands as specific to their target audience and worry less about, is there a product overlap between the two? So, I think in the cookie and salty chip case, as is for Atkins, I think you should expect to see some innovation there from us. And then as is the case on Quest, so they are going to enter the confection business, they just have with a peanut butter cup and more to come. So I think you should expect to see that kind of overlap given the uniqueness of the consumer basis.

John Baumgartner - Wells Fargo Securities - Analyst

Thanks, Joe. Thanks for your time.

Joseph E. Scalzo - Chief Executive Officer, President and Director

Yeah. Have a good day.

Operator

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

Jason English - Goldman Sachs - Analyst

Hey. Good morning, folks. Thanks for signing [Phonetic] me in. Much appreciated.

Joseph E. Scalzo - Chief Executive Officer, President and Director

Hey, Jason.

Jason English - Goldman Sachs - Analyst

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?

Todd Cunfer - Chief Financial Officer

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

Jason English - Goldman Sachs - Analyst

That's - and that's as precise, I could ask for. So thank you for that. My next question is on retailers shelf resets promotion. So, there has been - as you mentioned, a lot of volatility here in terms of performance. I think we agree with you that most of this is transitory, although there are some skeptics - maybe this is a fee change. I guess, my question is, how are retailers dealing everything? And maybe there are some interesting tells here in terms of what the shelf resets have shaken out. So, how had they recalibrated the shelves? Have they expanded or shrunk space overall? Are you gaining proportionate amount of space or losing?

And then also, I know it's early, but I imagine a lot of resolution promotional planning has already executed. How are they looking at that season, right? Given the less resident period of - or less resident benefit of weight loss right now, should we expect them to curtail that activity as we roll into the new year? Or are they looking at this business as usual? And sorry, I know there's a lot in there.

Joseph E. Scalzo - Chief Executive Officer, President and Director

Yeah. So let me see if I can parse those apart, Jason, for you. First, I think for most retailers as it pertains to their store operation, so shelf resets, seasonal merchandising, it's business as usual. So, we don't see - I mean, there has been a little bit of a timing change on shelf resets, but weeks, so not really material. So we expect the resets to be finished by, call it, November 1 and there are roughly about 60% those resetting or 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 that impacts consumer shopping be - start to see shopping behavior.

I think as it pertains to shopping behavior, shoppers in stores, as we said in our comments, it looks like consumers are prioritize - are obviously shopping less, choosing fewer stores, shopping more online and when they do choose stores, more convenient, quicker in and out, and I think there is a cleanliness thing or how well they sanitize perception that is driving that behavior. I don't expect that to change in the near-term quite frankly. So, I think we've made comments around mass merchant foot traffic has not come back. I think that might be more driven just by how well they've performed on the store access, cleanliness, receptivity, as well as just less shopping behavior, closer to me behavior. So, I think it will modestly improve as we move through the first half of the year. In fact, we're hoping it is given our dependence on mass merchant.

As it pertains to the season, we can see in the kind of January right now. I expect merchandising in line - category merchandising by retailer in line with year ago. I think we're going to do a little bit better than we did last year, but it - I think the real fundamental question is, how will consumers respond? Right? So how will they respond to the merchandising events in the store? But it feels like retailers are, from an execution standpoint, returning to business as usual. And so, we're selling in promotions and expect a strong January promotion season. So we will see how consumers respond to that.

Jason English - Goldman Sachs - Analyst

Thank you. That's really helpful. You didn't really give a lot on the shelf resets. And you mentioned like you're going to see the effect on November 1. But having already seen some of the planograms, isn't there some incremental color you can share in terms of whether you're gaining share of space or losing right now?

Joseph E. Scalzo - Chief Executive Officer, President and Director

Yeah. I'd like to hold that conversation until the resets in the business performance. We really like our pipeline. It's really robust against - across both brands and in multiple forms. We expect to do well in the resets. But until it's in the marketplace and performing, I just prefer to wait until then have a conversation with you about how it's doing in the marketplace.

Jason English - Goldman Sachs - Analyst

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

Joseph E. Scalzo - Chief Executive Officer, President and Director

Okay.

Operator

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

Faiza Alwy - Deutsche Bank - Analyst

Yes. Hi. Good morning.

Joseph E. Scalzo - Chief Executive Officer, President and Director

Good morning.

Faiza Alwy - Deutsche Bank - Analyst

And so, I guess, just going back to the fall shelf resets. I guess, I wanted to get a sense in terms of your first half guidance. Are you embedding, like, any potential sort of distribution of new items with that guidance? Because I know you said that you would expect sort of retail takeaway to trend in line with where it's trending currently. So just wanted to see if you could share more in terms of how the fall shelf resets or distribution is playing into how you're thinking about your outlook for the first half.

Joseph E. Scalzo - Chief Executive Officer, President and Director

Yeah. We would just stand by our guidance that we feel comfortable in the range that we're in right now. It's roughly in line with what we saw in the fourth quarter. So, the - we think performance on the shelf will be in line with what it was in the fourth quarter.

Faiza Alwy - Deutsche Bank - Analyst

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

Joseph E. Scalzo - Chief Executive Officer, President and Director

All right. That's a great question. So, we have some - we - obviously, the biggest chunk of the work now is capturing the synergy as it pertains to our supply chain. So, we have a - we both - both businesses operate a warehouse in Indiana, that will get consolidated with the construction of a single warehouse for both businesses, which will enable us to get our products on one truck. So one order, one shipment, one invoice. So, that will take us through the end of this fiscal year. As it - and there is some organizational things, getting people on common payroll and a few other things we have to wrap up between common benefits that we will wrap up by - at the end of this calendar year.

As it pertains to what's the organization look like going forward? It's interesting from a people standpoint, organizationally more like a merger than a bolt-on acquisition. So, we will have equal numbers of folks in the LA area as we do in the Denver area. We - organizationally we have kind of a common value chain. So one supply chain, one selling organization that is comprised of folks from both organizations. We then, obviously, have shared services, finance, IT, HR, legal, all one organization.

And then we maintained separate brand business units, which comprise a Chief Marketing Officer and marketing team for both businesses. In the case of Atkins Denver based, in the case of Quest LA based, and then separate R&D teams led by one - actually led by the Head of R&D from Quest. So, we have a R&D team that's based in LA, sits alongside the marketing team in LA. So, think of the brand unit for Quest in LA and then a similar team in the Denver area for R&D. So, that's kind of the structure going forward. We have kind of marketing-driven business units and R&D and marketing located in each of the cities with a common underlying foundational infrastructure organized by each - by one functional head with people in both cities.

Faiza Alwy - Deutsche Bank - Analyst

Okay. Thank you so much.

Joseph E. Scalzo - Chief Executive Officer, President and Director

You're welcome.

Operator

Thank you. Our next question is coming from the line of Pamela Kaufman with Morgan Stanley. Please proceed with your questions.

Pamela Kaufman - Morgan Stanley - Analyst

Hi. Good morning.

Joseph E. Scalzo - Chief Executive Officer, President and Director

Good morning.

Pamela Kaufman - Morgan Stanley - Analyst

How are you thinking about the long-term health of the categories? And do you think that there are any permanent changes to consumer behavior resulting from the pandemic that could impact your products? And, I guess, what factors give you confidence in the recovery of the category as we move past the pandemic? And then, are there any strategic changes that you need to make to address these?

Joseph E. Scalzo - Chief Executive Officer, President and Director

Yeah. Great question. So, I think overall we've seen evidence that suggest, as people - if you remember the one chart from our presentation that showed the four periods. So, we saw at the height of confinement category declined pretty precipitously and our brands did too. In fact, across the board every brand's performance was about the same. Then as people started, as confinement restriction started to ease, the business started to - category in our business started to perform better. So, almost in a direct line.

And then during the summer, as we saw a little bit of a resurgence in the pandemic and infections, you saw confinement kind of plateau, so improvements on people being out in about kind of plateaued as did our business. So, it appears there appears to be a pretty strong correlation between people out in about on-the-go behavior. I think the benefit - the brand benefits of weight management and active nutrition, I think are variable based upon people returning to more normal lives. And so, as those have plateaued shows our business.

Look, I have been in this business seven years, I've seen these mega trends for that period of time. I totally expect that as we emerge out of the pandemic, I think we'll all have the same hectic, time crunched, not enough time for family meals, eating on-the-go, always concerned about our wellness, I think all that's going to return. And I think our business will return. Those things that are headwinds right now will become tailwinds in our business and we're going to continue to see growth.

And then the one factor I keep pointing to, it's a - I think it's really compelling metric. The category is only about half penetrated. It's about 50% of households. If you look at most more mature center of store categories, they are in the 90s. There is no reason this category, given the trends that are - has been in this - in our back for so many years, there is no reason that we're not in the 90s. So, I do think this category will return to the brands that will win will be the brands that are best positioned at growing household penetration ahead of the category. And I like the hand that we have it with this Company. I like both of the brands that are lifestyle-based brands, we've defined who the targets are for the brands, I think we're pretty effective at growing penetration, our innovation pipeline is strong. I feel optimistic about our ability to return to the kind of growth that we saw pre-COVID-19.

Pamela Kaufman - Morgan Stanley - Analyst

Thank you. That's helpful. And then I was also hoping that you can comment on the current competitive environment within the ready-to-drink shake category. And just how you're addressing some of the elevated promotional activity over the quarter from some of your - one of your competitors? And it also seems like private label has been taking share within the category. So just any comments on what you're seeing and your plans for innovation and promotions within ready-to-drink shakes would be helpful.

Joseph E. Scalzo - Chief Executive Officer, President and Director

Yeah. It feels about the - so promotion activity feels about the same for us. Right? The private label entry is a Walmart-specific targeting the 30-gram active nutrition protein products and in particular, BellRing's Premier brand. And you know what, I haven't looked in detail to see how much it's affecting the Premier business. I know it's been relatively successful at Walmart.

Our Atkins business has very little substitutability or switching with any other shakes. So, our ability to grow our shake business is really driven about - on our ability to bend the trends that we're seeing today. The temporary reduce interest in weight management, the shopper behavior in mass merchants, and our ability to just market from a consumer standpoint and bring in new buyers into our brand and therefore, our shakes.

It has had some impact Quest shakes. So, we launched Quest shakes a year ago. We got distribution. But frankly, the trial levels of our shake business have been lagging in large part due to the fact - from the pandemic, difficult to generate trial when people aren't shopping in their normal behavior. So, we have seen some impact and that is the 30-gram active nutrition product, probably a more direct competitor than - certainly a more direct competitor to Premier than we experienced with Atkins. So, it's going to - it will - it has us focused on driving trial as we move into the - on Quest shakes as we move into the fiscal year and getting our velocities up where we have new distribution.

Pamela Kaufman - Morgan Stanley - Analyst

Great. Thank you.

Joseph E. Scalzo - Chief Executive Officer, President and Director

You're welcome.

Operator

Thank you. Our last question of the day will come from the line of Jon Andersen with William Blair. Please proceed with your questions.

Jon Andersen - William Blair & Company - Analyst

I have one question on e-commerce, if you could share with us the portion for each brand of the two brands 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 is a lot there. I'll leave it at that for the moment.

Joseph E. Scalzo - Chief Executive Officer, President and Director

Yeah. Hey, Todd, do you want to handle share of brand and then I'll talk about capability and positioning?

Todd Cunfer - Chief Financial Officer

Sure, absolutely. So, from an Atkins perspective, it has grown dramatically in the last couple of years. So, it is now about 9% of our total business. A couple of years ago, it was around 2%, which is - so we've had significant growth on the Atkins side, and we foresee more growth obviously in the future.

From a Quest perspective, they have been well developed in e-comm for several years now. They are one of the leaders in e-comm in this category clearly. It's about 20% of the business. It is - the largest e-commerce retailer out there is Quest's largest customer and both businesses, Quest and Atkins, are growing significantly and gaining share in e-commerce right now. So we're really, really pleased with how those businesses are doing.

From a margin perspective, yeah, they are a little bit lower than our average. We're continuing to - not significantly lower, but they are a little bit lower than our average, as we've talked about before. We continue to look for opportunities to take cost out from a supply chain perspective to bridge that gap a little bit on the margin, but we're really pleased with both our businesses.

Joseph E. Scalzo - Chief Executive Officer, President and Director

Yeah. I would also say, just if you look at the history of both brands, Quest grew up online. It is the largest bar sold on Amazon today. So well positioned. They had a terrific General Manager leading their business. Lots of capability as their largest customer. Atkins, I think three and a half years, I think when we went public, e-commerce was 1% of our business. It's now - we say we thought it should be around 10% to 15%. It's 9% right now. So, we've done, I think the team - legacy SMPL team has done a nice job of accelerating that growth. We have combined those teams under the Quest leader. We have, I think, what is best-in-class capability right now online with Amazon and e-commerce.

So, yeah, our view is the pandemic probably accelerated adoption of e-commerce by four or five years. And I think we're well positioned to - from a content standpoint, from a marketing sophistication standpoint, from a who shops there, how are they different from brick-and-mortar, I think we're as good as anybody now in that area and well positioned to leverage the change in consumer shopping behaviors.

And then trying to link that team, obviously, with the brick-and-mortar e-commerce organization, so Walmart has done a nice job of building their business. Target has done a nice job of building their business as has a number of other retailers and then linking all that with pickup and delivery of brick-and-mortar, trying to get that integrated and thinking as one going forward, I think will be a core capability, I think we're well positioned to do that.

Jon Andersen - William Blair & Company - Analyst

That's helpful. Thanks.

Joseph E. Scalzo - Chief Executive Officer, President and Director

You're welcome.

Jon Andersen - William Blair & Company - Analyst

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

Todd Cunfer - Chief Financial Officer

Yeah. I'll take that one. So, about half of that $20 million will show up this fiscal year. As we mentioned in the call, it will really start to kick - we'll get a little bit in Q1, but it really start to kick in Q2 and beyond, primarily because the people part of it. Most people are still with the organization through the calendar years. We will not get most of those synergies until Jan 1. So, the cadence is definitely loaded back in the three quarters. About two-thirds of those synergies are going to show up below the gross margin line in G&A and selling, where we haven't - we combine brokers, about third up in the supply chain, but we have very strong visibility to those savings and feel really good about them.

Jon Andersen - William Blair & Company - Analyst

Thanks so much.

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.

Joseph E. Scalzo - Chief Executive Officer, President and Director

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

Operator

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