Bellring Brands, Inc. (BRBR) Q1 2020 Earnings Call Transcript

Welcome to BellRing Brands First Quarter 2020 Earnings Conference Call and Webcast. Hosting the call today from BellRing Brands are Darcy Davenport, President and Chief Executive Officer; and Paul Rode, Chief Financial Officer. Today's call is being recorded and will be available for replay beginning at 1:30 p.m. Eastern Time. The dial-in number is 800-585-8367 and the pass code is 6897820. At this time, all participants have been placed in a listen-only mode. It is now my pleasure to turn the floor over to Matt Mainer of BellRing Brands for introductions. You may begin.

Thank you. Good morning and thank you for joining us today. With me are Darcy Davenport, our President and CEO; and Paul Rode, our CFO. Darcy and Paul will begin with prepared remarks. And afterwards we’ll have a brief question-and-answer session. The press release that supports these remarks is posted on our website in both the Investor Relations and the SEC filing sections at bellring.com. In addition, the release is available on the SEC’s website. Before we continue, I would like to remind you that this call will contain forward-looking statements which are subject to risks and uncertainties that should be carefully considered by investors, as actual results could differ materially from these statements. These forward-looking statements are current as of the date of this call and management undertakes no obligation to update these statements. As a reminder, this call is being recorded and an audio replay will be available on our website. And finally, this call will discuss certain non-GAAP measures. For a reconciliation of these non-GAAP measures to the nearest GAAP measure, see our press release issued yesterday and posted on our website. With that, I will turn the call over to Darcy.

Thanks, Matt. And thank you all for joining us this morning. Most of you know, the first quarter of fiscal 2020 was our first quarter as a publicly traded company. I'm happy to report that we had an excellent quarter and a strong start to the year. I'll begin today's discussion by giving an overview of our first quarter performance and then provide an update on distribution, marketing and innovation. Finally, I will give some insights into our 2020 guidance. Paul will then discuss our financial results and outlook in more detail before we open it up for your questions. During the first quarter the category remained strong, continuing to be a tailwind for us. As reported by Nielsen, the category was up 5.2% versus the same period a year ago, with the total liquid sub-category up 7.1%. Macro trends like mainstreaming of protein, convenience and snacking continued to fuel the growth. Turning to our performance, we had a strong first quarter, with net sales hitting an all-time high of $244 million, up 34%, driven by Premier Protein shakes. Adjusted EBITDA grew 43% driven primarily by higher sales and gross margin. Although significantly better than a year ago, it is generally in line with our expectations. Premier ready-to-drink shakes, which represent 80% of our portfolio, were up 50% in sales and consumption was up 28% in tracked channels, driven equally by volume and distribution gains. The difference between shipments and consumption is mainly due to customers building inventory in advance of New Year promotions as well as pipeline fill related to new distribution. In addition to these drivers, our growth also benefited from lapping capacity constraints in the prior year. Lastly, we had two exciting launches during the quarter in our 30 gram shake line: Pumpkin Spice, our first limited edition which we tested in e-commerce, and Cafe Latte, which is our first shake launch with caffeine. Pumpkin Spice was a successful test and Cafe Latte has already become our third best-selling flavor in several accounts where it is sold. We continue to be pleased with the results of our flavor strategy. Dymatize, our second largest brand, continues its successful diversification in e-commerce and food, drug and mass (FDM). We had a strong e-commerce sales quarter and secured additional FDM distribution commitments. Dymatize sales are down in the quarter; however, this was mainly due to lapping a significant pipeline fill in the prior year, so we remain encouraged by the brand's momentum. Our international business had a strong quarter as well, up 16% in net sales driven by Premier Protein shakes, mainly in Canada. Dymatize and PowerBar also contributed, both growing single digits. In the EU, all three brands had new distribution gains with PowerBar and Premier Protein making progress against our FDM expansion strategy. I'm happy to report that from an operational standpoint, our supply chain network is performing well. We have inventory and capacity flexibility to aggressively drive demand and execute on our growth plans. As we have discussed, we have multiple strategies for continued growth and our near-term focus is on increasing household penetration, expanding distribution and driving innovation. We are making significant progress on all three fronts. We launched our Premier Protein national marketing campaign in January, including for the first time national television and increased promotional displays in most of our major accounts. We are pleased with the early brand indicators and the in-store execution. In fact, we have already seen a two-point increase in market share since the launch of the advertising as well as a leap in Google organic search, clearly indicating that we are breaking through with consumers. From a distribution standpoint, shake TDPs increased 34 points, or 7%, in the quarter with gains in Cafe Latte across multiple accounts as well as expanded space on our base flavors. We also gained additional facings this quarter in one of our club accounts. We expect to further increase our shelf presence during the spring resets. From an innovation standpoint, I'm proud of the capabilities we have built as an organization. We have many new innovations in the pipeline and some currently hitting the market. For example, we're introducing our first shake line extension, Premier Protein with Oats. It targets consumers looking for a more wholesome and balanced offering with 20 grams of protein, seven grams of fiber and the benefit of oats. The line has three flavors that can be served cold or hot and started shipping in January. Our step up in innovation has been a deliberate strategy and we expect it to be a competitive differentiator in years to come. Now I'd like to come back to our outlook. Last evening, we reaffirmed our full-year guidance. Our performance to date gives us a bias to the high side of our range. However, the cadence is a bit more back-loaded than our initial outlook, so I want to provide some additional color. We had a strong Q1 in January. Consumption is off to a great start with Premier Protein shakes growing 48% in tracked channels and non-tracked channels growing even faster. However, we have become aware of changes within our customers' promotional calendars which will shift revenue from Q2 into Q3 and Q4, slightly heavier to Q4. With this change, in addition to our planned step-up in marketing and promotional spend, we expect that sales and EBITDA will be a bit more back-loaded than previously anticipated. Overall, I'm pleased with our performance during our first quarter as a publicly traded company. I'm excited about our new advertising and innovation hitting the market and I look forward to updating you next quarter. Thank you for your continued support and I'm going to now turn the call over to Paul.

Thanks Darcy and good morning everyone. As Darcy mentioned earlier in her remarks, we had a good first quarter and the results were generally aligned with our expectations. Net sales grew 31% to $244 million and adjusted EBITDA increased 43% to $58.6 million, delivering an adjusted EBITDA margin of 24.0%. Our overall sales growth was driven by Premier Protein with net sales and volume increasing 45% and 38% respectively. This increase was fueled by growth for our ready-to-drink shakes including distribution gains in FDM, club and e-commerce. In addition, our shake growth benefited from lapping capacity constraints in the first quarter of 2019 which negatively impacted our prior year net sales. Dymatize net sales and volume declined 10% and 4% respectively, driven by lapping of significant customer pipeline fill in the prior year. We continue to expect Dymatize performance to be stronger in the second half of the year. PowerBar net sales and volumes declined 12% and 28% respectively, as we continue to see the impacts from our portfolio optimization strategy in North America. We expect to cycle the effect of this reduced PowerBar distribution in the second half of fiscal 2020. Turning back to the consolidated results, gross profit increased 39% this quarter with gross margin up 210 basis points to 37.4%. Gross margins benefited from higher net selling prices, favorable product mix and lower freight, offset partially by higher raw material costs. SG&A expenses as a percentage of net sales increased 40 basis points to 15% driven by higher warehousing costs, marketing spend and incremental public and standalone company costs. Adjusted EBITDA for the quarter was $58.6 million and increased 43% with adjusted EBITDA margin of 24.0%, an improvement of 190 basis points. Our cash balance is approximately $30 million resulting in net debt of $750 million and net leverage of 3.5x. Our net leverage target remains 3.0x and we plan to reach that in fiscal 2021. Turning to fiscal 2020 guidance, we continue to expect fiscal year 2020 net sales of $1.0 to $1.05 billion and adjusted EBITDA of $192 to $202 million, respectively. However, as Darcy mentioned earlier, we are expecting a shift in customers' promotional calendars for Premier Protein shakes which will move anticipated revenue out of Q2 and into the second half of the fiscal year. This revenue timing shift, coupled with incremental Q2 investments behind our national TV advertising campaign, will cause both net sales and adjusted EBITDA to be higher in the second half versus the first half of the fiscal year. With that, I'd like to turn the call back over to the operator for questions.

The conference is now open for questions.

Hi. Good morning and thank you for the question. So the moment Darcy that you mentioned the revenue shifting into the second half, the stock took a little bit of a leg lower, can you add a little bit of color into the timing change in terms of the promotion, what happened? Do you think it's sort of just standard fare in terms of, hey, sometimes customers decide to move things into a different quarter? Help us if you can understand a little bit more of what happened there.

Sure. Hi, Ken. Yes. I believe that we highlighted this last quarter that we often see changes in the promotional calendar. And sure enough we did this year. The move is from Q2 into Q3 and Q4, heavier in Q4, but we see most competitors would see this as a similar thing and we view it as standard fare.

So it's nothing atypical. It's just something that you think you've seen in the past. Is that a fair way of describing it?

Correct.

Something similar. Okay. Thank you. And then a quick follow-up on Dymatize. I think, if I go back and look at my notes from before the IPO, I think management was looking for a little bit of a better performance by now for Dymatize. Can you just give us a little more color as to whether it's been a little disappointing or whether that's a timing shift as well? Any help there would be appreciated too.

Yes. So I don't think it's necessarily disappointing. I believe that we still expect the business to rebound. Last year there was an inflection point where it was declining, and we were lapping some of the declines in specialty and then we started seeing an increase in both e-commerce and FDM. The one thing that we are lapping is a large pipeline still in one of our club customers from last year. Because those volumes are very large, it's a tough comp. So we still expect the year to land in the positive direction, and we're already seeing some good distribution wins in FDM. So again, our diversification strategy is absolutely going the way we expect. Mostly this is just a timing thing, with some volume going from Q1 to Q2.

Great. Thanks so much.

Your next question is from Andrew Lazar with Barclays.

Good morning everybody. I guess first off, I wanted to make sure I heard you right. I think you said that in January for Premier — for the ready-to-drink shakes — consumption was up 48% in tracked channels and then faster in non-tracked channels. If I heard that right, I'm just trying to get a sense of — if that was in line with what you had expected consumption would do, or it sounds like a bigger number than I would have expected. And then second, it may be too early, but can you talk a little bit about, from what you've seen so far, the incrementality of some of the new flavors/products that you're putting out there? Thank you.

So for the consumption in January, we're very pleased with the number. It's nice to see the progressive increase: we saw about 17% in Q4, then Q1 we were at 28%, and then to see January hitting at 48% — we're definitely pleased to see that movement. I will say based on expectations, I do think it's a little bit better than our expectations. However, we're doing a lot of things we've never done before. As you know, we've never done national television. We've been pulling back for the last two years on promotion as well as mass marketing. So this is the first time in years that we've actually been able to press the accelerator. But yes, we're very pleased with the consumption results. Yes, regarding incrementality, we are still seeing incrementality with our flavor strategy. We are now up to Cafe Latte, which will be our eighth flavor in the line. The way we evaluate incrementality is by looking at the effect on our base flavors, chocolate and vanilla. It's a little difficult honestly to evaluate that right now because we're lapping the two-flavor strategy. So we are seeing a decline in chocolate and vanilla currently, but that is more a reaction to the fact that they were the only ones being sold a year ago. So it is messy right now, I will just be honest. However, having Cafe Latte be the number three flavor in the line where it's sold in several of our accounts is really encouraging.

Thanks very much.

Your next question is from Chris Growe with Stifel.

Hi, good morning. I had a question first if I could, just to better understand the phasing of EBITDA between the first half and second half and as you probably know, this is a little bit more back-half loaded. Can you add color around the percentages? We already expected it to be more second-half loaded. Should we be even more second-half loaded? Can you give any relative size of first half versus second half? I guess the question is for Paul.

Sure. Yes. So I think the way we're thinking about it is we're seeing some shifts in promotional timing, which would push a little bit more revenue than we had initially anticipated towards the second half. So the short answer to your question is yes, I would think that based on what's out there, there was a little bit more movement into the second half than the first half, but not dramatically so. So I think a little bit more on the revenue side, but yes, we do expect to see some movement.

EBITDA should follow the revenue.

Thank you guys. Okay. And then I just want to understand the shipment timing for the new products. So Cafe Latte I believe, did that ship last quarter and then Oats is shipping this quarter, is that the way to think about it? I'm just trying to understand the incremental shipment factor from those new products and the timing of how they'll benefit revenue growth.

Correct. Yes, Cafe Latte did start shipping in the first quarter and then Premier Protein with Oats is shipping in the second quarter.

Yes. So just for specifics, Cafe Latte started shipping in October, and then Premier Protein with Oats began shipping in e-commerce at the beginning of January and it's shipping in-line on 2/1, so just earlier or late last week.

And would that line up with your expectations previously and therefore, as we think about the revenue growth and the incremental nature of those incremental shipments, that's pretty well as expected?

As expected. The one thing that I would say is, as we gain distribution and watch it on the shelf, that will obviously raise or lower expectations. I do not, I don't think that we expect Cafe Latte to shoot to number one, but it's encouraging that it's the number three flavor where it's sold.

Okay. Got you. That's great. Thanks for your time.

Your next question is from John Baumgartner with Wells Fargo.

Good morning. Thanks for the question. I guess first off, Darcy, just coming back to that revenue shift you noted for Q2 favoring Q4 because retailers will calendar-wise at that point be getting away from peak consumption seasons for the category. Are you getting the sense that retailers are maybe looking to build interest in consumption counter-seasonally? It seems like you're not the only company to mention changes in shipment timing and it seems to run almost counter to normalized patterns this year.

So I think that retailers are experimenting with different timing to maximize their promotions. We've seen different retailers evaluate different timing, different bundles, etc. So absolutely I believe that's happening. With regards to seasonality of the category, the only seasonality is November and December and then that shoots up in January and February. But actually back-to-school timing is also a good time for the category. I think it mainly just follows foot traffic within the store.

Okay. That's helpful. And then, just to follow up on the volume strength for the shakes, both in measured and non-measured channels — that's included some fairly hard comps the last couple of months. And it's also prior to the uptake in advertising and impressions in the market, which you would think would have even more of a benefit going forward. So I guess the question is, is there an increasing chance that you can run pretty tight on capacity again, even with the advanced notice that you've had coming into the year? I mean, it wasn't contemplated, given the pre-advance notice you'd given your suppliers and all, but how do you think about capacity now versus what your expectations were back in October?

It's a great question. I would say that we have two flexibility levers that give me confidence that we have plenty of inventory and capacity. The first is safety stock or shake inventory. We deliberately increased our inventory as we went into Q2 so we could absorb demand increases. And the second is our co-man network. We do have the ability to surge higher if needed. So with those two levers we feel confident that we can surge inventory and manage that increase in demand. Now, I mean, if suddenly the business is tenfold higher, I think that's probably a good issue to have.

Great. So anything short of tenfold. Okay. Sounds good. Thank you very much.

Your next question is from Ken Zaslow with Bank of Montreal.

Good morning everyone. Just two quick questions. One is, you kind of said you have a bias to the higher end of your guidance, both on sales and EBITDA. Can you talk about what is actually driving that increased confidence, particularly given that there's a shift to the fourth quarter?

Yes. I think it's a combination of a very strong Q1 and the early reads of both the new products as well as the advertising. Very early, but we're feeling good about where we are. Also, as we talked about earlier in the call, consumption is strong; we're pleased with where consumption is in January.

And then, the second question, in terms of capacity, just to double check, you're not seeing any other co-packing capacity expansion across any of the Premier-type products out there. Is that a valid comment?

I would answer this two-fold. The first is there has been a ton of expansion throughout the last two years and so there is a startup curve. The existing network is now, I would say, over the hump of the startup curve and now is performing very efficiently. The second piece is I'm not comfortable in this setting to talk about new lines, etc., but there is some growth in the network that is happening.

Your next question is from SunTrust Robinson. Please state your question.

Hi. This is Grant on for Bill. Thanks for taking the question. Had one on the consumer base. Now that you guys had a lot of capacity constraints in the year-ago period, are you seeing the consumers that left the category come back? Are you seeing new consumers come into the category? Can you give a little more detail on the breakout of the volume growth this quarter?

So we haven't completely lapped the two-flavor strategy yet. If you're looking at consumption, we reintroduced the new flavors basically last year between February and April, so all of the new flavors were back on the shelf for the most part in April. We are still lapping that. But back to your question around new consumers, we do believe that we have regained most consumers. During that period we lost fewer consumers than we would have thought. Consumers actually shifted to chocolate and vanilla, which is a testament to brand loyalty as opposed to necessarily loyalty to a flavor. We also saw household penetration go from about 5% for the brand to 5.8%. That percentage-wise is a pretty good jump, although still a small number and highlights how much room for growth there is.

Got it. Thank you. And then just had a quick one on Dymatize. Is there a way you could quantify the timing of the promotion impact on growth in the quarter? Maybe a consumption number there would help too. Thank you.

So you're talking about us lapping the promotion in the prior year — what would the impact of that be? Yes, it is most of the decline.

Our next question is from Bryan Spillane with Bank of America.

Hey, good morning everyone. I had two questions related to the impact of the advertising you've run here early in the year. One, given that it seems like it's having an effect in terms of market share, any thoughts about how you might approach back-to-school differently, in terms of spending more advertising around that timeframe?

I still, even though I'm pleased with the results so far, would say it's early, but we are evaluating it. We're going to continue to watch it over the next few weeks and there's been a nice bump to the business as well as digital indicators like Google search. We'll continue to evaluate the results as the advertising runs through Q2 and that will affect our strategy going forward.

And then maybe second, somewhat related, as you're seeing the increase in consumption here early in the year, how have you fared in terms of in-stock levels and being in stock with the most popular SKUs? Has there been any static around that as you've gone through January and early February?

Honesty, for the existing flavors we've been fairly normal. In FDM we always have some stock issues, and those are things we go back to retailers to explain why we need more facings of the existing flavors. For new flavors such as Cafe Latte, we've seen a fair amount of out-of-stocks where we have Cafe Latte. But over time retailers see the demand and they adjust.

Our next question is from David Palmer with Evercore ISI.

Hi, good morning. I know it's early to talk about out years, but if the new products this year have good repeat, and you've typically had pretty good repeat for your products, how should we think about 2021? Will 2020 be a more typical year to compare against, and you'll have similar amounts of innovation, marketing and spending? Or is there something unusual about this year? Also a follow-up after that.

I think 2020 is more typical than 2019. From an innovation standpoint, we have a strategy of ramping up innovation. There is only so much that retailers and an organization can handle, so yes, in general I would say 2020 is a typical year that you can use as a baseline. Now having said that, if our marketing efforts surprise us in a positive way, I could see putting more spend on advertising.

Thank you. And related to that, if you are going to be doing more on the marketing side and pursuing new areas of product extensions, that costs money. On the leverage side of that, given the co-packing model, how should we think about leverage in the model as you get to greater scale? Is there leverage such that you can have a flywheel back into marketing?

From an overall leverage perspective, we've talked previously about our targeted leverage of 3.0x and we think we can get into that range in the next fiscal year or so. Within our current model we can continue to invest behind our marketing and R&D within reason without having to increase leverage substantially. We feel like we can do that within the confines of our business model as it is.

Yes. I think our long-term algorithm assumes that we will reinvest in the business and the brands.

Your next question is from Jason English with Goldman Sachs.

Hey, good morning everyone. A couple quick questions. The promotional shift with a retailer you're talking about — are they shifting out the program for the entire category or have they just swapped your brand out for another competitive brand?

I'm not sure if we have that information. We know that they have moved timing and are still maintaining different bundles as well as timing. I don't have that specific information about whether it's the entire category or just specific brand swaps.

Okay. Can you discuss what you see in the competitive landscape? There's been a lot of activity with Simply Concludes recently in the shake space, Quest pushing in, Pure Protein and private label. What are you seeing in terms of impact to your business? The category seemed to be reconcentrating and now with more activity it could be fragmenting again. Is that fair?

The category is attractive and competitive and has been for years. I still maintain that the bar category is even more competitive than shakes. We've seen an uptick in competitive activity over the last couple of years. What's encouraging is that for the last two years, we didn't have the ability to press the accelerator, and now we can. We can launch national advertising, accelerate innovation, push for promotions and displays, which we know drive business. We have not seen a tremendous negative impact from competitive activity on our business. We have a unique brand, strong following with high repeat and loyalty, and we still have very low household penetration, so we have room to grow.

Your next question is from Robert Dickerson with Jefferies.

Thank you. A couple of quick questions. First, going back to spring resets and digging into what that is: many categories have been expanding and retailers sometimes take longer to reset the shelf as they look to expand overall space or test bundling. I noticed your stock performance was pressured, and sometimes a shift into the back half can be perceived negatively. Is there a possibility the shift had something to do with retailers supporting the subcategory more broadly and needing more time to re-plan the shelf across channels?

I do not view the shift as negative. We've come off an odd year with capacity constraints, and I think each month the brand gains confidence in the retailers' eyes because they see we're one of the most productive SKUs on the shelf. I believe we will have a more successful spring reset than we did the fall reset. I actually think the back-half timing could be positive because it takes time for advertising to set in. Also, this category doesn't have a single national reset time — it's a rolling reset. I estimated it's about 50% in the fall and 50% in the spring across accounts, so timing nuances don't change the overall opportunity.

Okay, perfect. And then just to touch on cash usage this year: you have an asset-light model and good free cash flow generation. How much should we be thinking about cash usage going forward if you don't need to put it into capacity? Any appetite for near-term tuck-ins or acquisition activity?

Yes. We're an asset-light model. It's a strong cash-generating business and we expect that to continue. We did have negative operating cash in the first quarter — that's not typical for us because we tend to have heavy shipments in the month of December, which drives receivable balances higher and causes a little cash outflow. But we still expect strong cash flow for the year, with cash taxes and interest expense combined in the neighborhood of about $80 million. We expect to generate strong free cash flow and capital expenditures are guided to about $4 million. So we still expect strong cash generation for the year.

I guess I was asking about leverage and appetite for acquisitions. You're around 3.5x leverage now and still under the broader Post parent. How should we think about maximizing leverage levels and appetite for tuck-ins?

Our leverage currently is at 3.5x. We do expect that as we get into next fiscal year we could get down to our target of 3.0x.

What's fundamentally different between BellRing and Post is that we have a massive organic growth opportunity with Premier, and that remains our focus. Having said that, as we look down the road we will always be watching the market. Toward the end of 2020 and the beginning of 2021, we'll be in a good cash position to act on something interesting and synergistic with our businesses.

Your final question comes from Pamela Kauffman with Morgan Stanley.

Hi, good morning. I wanted to ask about your product innovation pipeline. I'm curious if Cafe Latte's early success influences the way you're thinking about new innovation in terms of combining other functional benefits with the core product. And any update on the timing of your plant-based shake launch?

From an innovation standpoint, we are constantly looking at different claims, different types of protein and even different formats. Development cycles are long — it takes anywhere between 18 and 24 months to develop a shake. We already have several different paths that we are evaluating from an innovation standpoint. In this forum I'm not comfortable talking about specific innovation ideas, but know that we have a whole group of people looking at trends and evaluating where we think the next place to innovate is.

Thanks. And can you talk about the international opportunity for Premier? You mentioned growth in Canada. How far along are you in the launch in Canada and where else do you see opportunity for growth internationally?

We see Premier, as well as PowerBar and Dymatize, having a very large opportunity internationally. Our biggest market for Premier is Canada, but we are seeing solid growth in the EU. We just launched in the U.K. for Premier and are getting distribution in the FDM area, and we are also launching in Mexico. Dymatize already has a sizable international business — about 40% of the business is international through distributors — and PowerBar has a very strong foothold in the EU. Overall, international is a growth driver for us. We have an office in Germany which will help, but it does take time to develop.

Ladies and gentlemen, this concludes today's conference call. Thank you for participating. You may now disconnect.