Welcome to BellRing Brands Second 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 passcode is 7392288. At this time, all participants have been placed in a listen-only mode. It is now my pleasure to turn the floor over to Jennifer Meyer, Investor Relations of BellRing Brands for introductions. You may begin.

Good morning, and thank you for joining us today for BellRing Brands’ second quarter fiscal 2020 earnings call. With me today are Darcy Davenport, our President and CEO; and Paul Rode, our CFO. Darcy and Paul will begin with prepared remarks, and afterward, 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 filings section 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, Jennifer. And thank you all for joining us this morning. I want to start by acknowledging this unprecedented time and thanking all the BellRing employees. I’ve been blown away by the dedication, flexibility and focus our organization has exhibited during this stressful time. I’m proud to say that protecting our employees has been our number one guiding priority. A special thanks to the frontline employees who work in our German plant and in our network of co-manufacturing and logistics partners. They’re invaluable to our success. Last evening, we were pleased to report record sales of $258 million, up 19%, and adjusted EBITDA of $43 million. Performance exceeded our expectations, and I’m encouraged by the progress against all of our growth strategies. Because of our loyal consumers, strong product offerings and stable supply chain, we are able to reaffirm our full year guidance. This morning, I will share some category observations, brand highlights, progress against our growth strategies, and end with our outlook. I’d like to start with the broader category and the impact of COVID-19 on consumer behavior. During our second quarter, the category remained strong, up 6.5% as measured in Nielsen, while the liquid subcategory grew 11%. As with most categories, all convenient nutrition product forms experienced COVID-related pantry loading in March. You have likely seen the Nielsen data showing declines in April. We attribute the decline to pantry deloading, a reduction in on-the-go consumption and a channel shifting to online. Pantry deloading, which our research says is the majority of the April decline, will soon end. However, we expect the other two dynamics to continue. Since channel shifting is not a reduction in consumption, but rather a change in measurement from tracked to untracked, I will go directly to the on-the-go usage dynamics. To understand this, let me first share the category usage breakdown, focusing on ready-to-drink shakes. Research says approximately 64% of shake consumption occurs at home and 14% is consumed at work or school. Given shelter-in-place orders, we believe these two usage occasions are both now occurring in the home and have grown. The remaining on-the-go occasions occur when traveling, commuting or at fitness centers in gyms. We believe this on-the-go consumption has declined in April and will continue at a lower level, so long as shelter-in-place orders exist. However, we expect the long-term effect of COVID-19 to be positive for the category because of the increased trial gains through the stock-up period. Now to our brands. Representing 80% of our portfolio, Premier Protein shakes consumption was up 33% in tracked channels, and double that in untracked. We experienced strong organic growth, as a result of increased marketing and promotions, including our national advertising campaigns, new products and the lapping of capacity constraints. Premier Protein’s tracked consumption followed a similar path as the category with a spike in mid-March and a decline in April. As a reminder, Premier Protein’s distribution is fairly equally split across tracked and untracked channels. So, equally as important, Premier’s April performance in untracked channels was incredibly strong, growing over 50%, with eCommerce growing close to 200%. In summary, Premier Protein’s April consumption remained strong despite the COVID category headwind. Now to our growth strategy. Our first national television advertising campaign launched in January, and across all media platforms generated over 1 billion impressions this quarter. We experienced significant increases in awareness, dollar share and website traffic. But most importantly, our household penetration surpassed our annual goal, increasing from 5.3% to 6.6%. Based on these results, we see television as a key driver for future new households. Distribution continues to be a major driver. This quarter we added significant distribution across untracked channels including clubs, in both the U.S. and Canada, and eCommerce. Within tracked channels in the latest 13 weeks, we are growing 79% in food and 84% in drugs. We expect further distribution gains in the back half of the year. Our new products are also performing well. Café Latte is exceeding our expectations and is now our number two fastest selling flavor. Protein with Oats is also off to a great start, performing in the top 40% of the category where it is sold. Now, to our smaller brands. Dymatize’s domestic business had a strong quarter, up 13%, led by eCommerce. However, both Dymatize and PowerBar’s international businesses, which represent 7% of BellRing, suffered as a result of COVID toward the end of the quarter. We expect these declines to continue through Q3 until stores reopen. I was particularly pleased with our performance of our supply chain this quarter. Even with the unexpected demand spikes and overloaded logistics networks, our supply chain executed best-in-class service. Our shake capacity expansion plans remain on track, and we continue to have inventory flexibility to execute our growth plans. Now, I’d like to come back to our outlook. We exceeded our expectations for our first two quarters and have strong momentum against our growth strategies. In summary, better-than-expected Premier Protein performance is offsetting softness on our international businesses, which puts us in a good position to reaffirm our full year guidance. I’m incredibly proud of our Company. Through all of this volatility and uncertainty, our Company, our brand promise, and our business proposition has never been stronger. I will now turn the call over to Paul.

Thanks, Darcy, and good morning, everyone. As Darcy mentioned in her remarks, the second quarter exceeded our expectations. Net sales grew 19% to $258 million, and gross profit increased 11.6%. Adjusted EBITDA was $43 million, down 12.5%, which reflects our planned incremental marketing and promotional investments behind Premier Protein. Our overall net sales growth was driven by Premier Protein with the net sales and volume increasing 26% and 27%, respectively. Premier Protein saw great growth, driven by distribution gains in club, FDM and eCommerce, and benefited from higher promotional and marketing activity when compared to the prior year. In addition, pantry loading related to COVID contributed to the growth for the brand in the quarter. Dymatize net sales declined 2%. Strong eCommerce growth in excess of 50% as consumers shifted purchases online was outweighed by declines for international and the club channel as we lap prior year promotions. PowerBar net sales and volumes declined 20% and 27%, respectively with lower international volumes and the impacts from our portfolio optimization strategy in North America. Turning back to consolidation results. Gross profit increased 12% this quarter with gross margin declining 220 basis points to 34.3%. As anticipated, the majority of gross margin decline related to higher input costs, primarily milk-based proteins, which we expect to continue through the second half. Higher levels of trade promotions also weighed on gross margins, which was partially offset by lapping the prior-year shake price increases. SG&A expenses as a percentage of net sales increased 330 basis points to 18.4%. This increase was driven by strategic increase in marketing spend of nearly $10 million, incremental public company cost, and approximately $2 million in accounts receivable credit reserves. We expect SG&A to be lower in the second half as we lap the impact of the second quarter marketing campaign. Adjusted EBITDA for the quarter was $43.4 million, a decrease of 12.5%, with adjusted EBITDA margin of 16.9%. Before reviewing our outlook, I would like to make a few comments on cash flow and liquidity. We saw an increase in net working capital in the first half of the year, which was largely caused by COVID and timing-related items on vendor payment and marketing spend. COVID-19 caused a spike in sales in March, which resulted in higher than expected customer receivables. We expect the operating cash flow to improve in the second half of fiscal 2020 when compared to the first half as some of the working capital timing reversed. In fact, in April alone, we generated approximately $25 million in cash. Regarding liquidity, we ended the quarter with approximately $77 million of cash on hand. As a precautionary measure to preserve flexibility in light of the uncertainty resulting from COVID-19, we borrowed $65 million. We believe we have sufficient liquidity to satisfy our business needs. As of March 31, net debt was $735 million and net leverage was 3.5 times. Our net leverage target remains 3 times and we plan to reach that in fiscal 2021. Turning to our outlook. We continue to expect fiscal year 2020 net sales to be $1.0 billion to $1.05 billion, and adjusted EBITDA of $192 million to $202 million. The first half 2020 came in stronger than expected, largely resulting from COVID-related pantry loading for Premier Protein, which we expect to reverse in the third quarter. I want to emphasize that while COVID has not changed our full year expected results, it has changed the quarterly guidance. We expect to favor the second half over the first and the pull-forward from Q3 to Q2 reversed that. Likewise, within the second half, we expect Q3 to favor Q4 and for the same reason, that too has reversed. Despite the lingering impacts of COVID, we expect the second half to deliver strong double-digit top-line growth, driven by growth for Premier Protein, and we remain confident in our full year guidance. With that, I’d like to turn the call back over to the operator.

Your first question comes from Andrew Lazar with Barclays.

Darcy, I wanted to start with your comments on household penetration. BellRing still has among the lowest household penetration rates of nearly all the brands we cover, yet it has the highest repeat rate, even in the nutritional shake category. I’m trying to get a sense of this. It’s very early and it’s probably hard to draw much from the data at this point, but do you have any anecdotal thoughts or evidence about what you are seeing in shopper behavior among people who are new to the brand and the likelihood that they will stay with the brand going forward given the repeat rates? And is there anything you can do differently to make sure you convert those customers? I also have a follow-up.

Sure. Yes, you’re exactly right. Our repeat and loyalty is among the highest in the category. And what we have seen historically, and we expect to continue to see is when we get people to try because of the 50% repeat, they will repeat. What we often see is, if they try in smaller pack sizes, for instance, in food, drug, Walmart, et cetera, then what happens, they start consuming the product every day, and then they want to start buying bigger packs. And so, we’ve often seen this sort of cycle with our channels, as our consumers become kind of adaptive into the franchise. So, we expect to see that same phenomenon with these new buyers that are entering in recently.

Yes. Thanks for that. And then, there’s been some discussion that in addition to some of the recent shopper behavior shifts that you mentioned, like the on-the-go piece and all of that, which I certainly understand that maybe shopper behavior, even in the store during the sort of panic buying phase has been a little different where consumers have been going in, shopping the center of the store, and then getting out as quickly as they can and maybe bypassing some other areas that they might otherwise have gone to, like the pharmacy section and what not, where a lot of your shakes are sold. I don’t know if you’re seeing much evidence of that. And if so, does any of that help you ultimately when all this passes in terms of debate and argument with retailers about getting your product more into the mainstream arm?

Yes. It’s a great question. And obviously, with everyone else, this is a dynamic situation. We are seeing shopping trips down as everyone is, and we’re seeing rings up. However, what’s interesting, we see that as a factor. We just don’t see the traffic being the most important, most critical factor. One of the key things that we looked at was different retailers shelve convenient nutrition products in different places. So, in the past couple of years, several retailers have shelved some nutrition bars in the granola aisle and whether it’s placed in a granola aisle or in the pharmacy, we’re still seeing the same declines in April. So that to me tells me it’s really less about traffic in certain parts of the stores and more about the on-the-go usage.

Thanks so much.

Yes. Thank you.

Your next question is from Chris Growe with Stifel.

Hi, good morning.

Good morning, Chris.

Good morning. I hope you’re well. Thank you. I just wanted to ask a quick question if I could, just to better understand the quarter flow there. I guess, as I’m thinking about the differences between consumption and shipments in the quarter, do you foresee them in the third quarter, like a larger inventory kind of restocking occurring there? How does it interact with the fact that the consumers pantry deloading as well. So, I’m just trying to get a better sense of how Q3 plays, I guess, relative to Q4 and how that retail destocking Q3.

Yes. We definitely think that the second quarter pantry loading for primarily for Premier will largely deload from our retailers in the third quarter. That’s our expectation.

Say that again, Paul. Is there inventory reloading in the third quarter?

Do you mean at retail? Yes. So, we look at two pieces. Retailers will deload from some of the inventory that they bought late in March, because obviously the consumption pull-through hasn’t been quite as strong in April, as Darcy alluded to, until we see the other side of that deload. I think, from a consumer perspective, I think there’s been some deloading at the pantry level. But, we’re starting to see that stabilize. Darcy, if you want to add on that at all?

Yes. I think that we saw the spike in the middle of March. And then, many of our retailers then replenished. So, they took in big orders toward the end of March. And so, many of our retailers had higher-than-normal inventories at the end of March. And that’s why we said that there’s going to be kind of a reversal between Q3 and Q2.

Okay. Thank you for that. Makes sense. And then, just a quick question for you on your supply chain. It sounds like that supply chain operated very well. It’s not your manufacturing, it sounds like third parties. Are there incremental costs during this kind of environment that you have to bear during this time? Just trying to get a sense of how that may affect Q2 and in fact how that could affect the business going forward?

They are not incremental costs. We did experience some slightly higher transportation costs during that height toward the end of March, but it was nominal, and we don’t expect any further increase in cost.

And you had no capacity issues in the quarter, you don’t foresee them, is that fair to say?

Happy to say, we did not have capacity issues.

Okay, great. Thanks so much for your time.

Thank you.

Your next question is from Ken Goldman with JPMorgan.

Hi. Good morning. Thank you, everybody. Two for me. First, I wanted to ask, Darcy, are you able to take advantage at all of lower dairy costs? I know there’s some lag obviously between when you can buy and when the costs are. But, I’m just curious if there’s possible for you to sort of help us out understand in terms of the timing and the degree to which this might be able to help you in the back half of the year, if at all?

I am actually going to let Paul answer that.

Yes, thanks. So, you’re right. We’ve seen dairy prices drop. We were expecting them to increase throughout the rest of the year and into next year. With milk prices coming down because of COVID, that does put some pressure on protein prices. I will say that while the protein prices are indexed somewhat to dry milk, it’s not always completely in sync. There are times where supply and demand within the milk protein markets cause divergence. So, it’s not always going to fully track milk, and we’re largely seeing that. But, as far as our business and what we’ve baked into our guidance, we baked in second half that still has an increased protein cost as we cover out. I think the opportunity really is more as we look into next year, where if protein prices do come down or don’t go up at the level that we expected, that will help our results as we get into next year.

Okay. That’s clear. And then, my follow-up is, I know it’s hard to know these numbers and I know we’re in a very uncertain time, but it does seem like pantry loading was a big effect. And obviously you talked about the fact that there’s some inventory at retail that maybe has to unwind. Is there any help you can give us in terms of quantifying how much you expect shipments to lag consumption in the third quarter? Even just sort of rough justice would be very helpful, as we think about modeling.

Yes. As we look at our second quarter, we were largely heading on track with our expectations of high-single-digit to low-double-digit top-line growth. We ended up around 19%. From our perspective, that’s the benefit that we got from COVID this quarter. We’re thinking that will largely unwind as we get into the third quarter. So, our retailers will deload. For our international businesses, Dymatize and PowerBar, which are less than 10% of our total revenue, they’re experiencing headwinds in the third quarter which will also impact our net sales as we think about Q3. As we get into Q4, we feel that the North America business will largely be tracking normally again and the international business will hopefully be recovering by then, but it’s probably a slower recovery for them.

Your next question is from Pamela Kaufman with Morgan Stanley.

Hi. Good morning. I had a question on eCommerce growth. It was obviously very strong during the quarter. I think, you mentioned it was up over 200%. Have you seen similar growth rates continue into April and May, and how does this compare to the pre-COVID trend?

Great question. During the quarter, we saw about a 150% increase in eCommerce, and then, actually in April, we saw it go up to 200%. So, we’re actually seeing eCommerce growth increase over time. Historically, our eCommerce business represented mid-single-digits within our portfolio. It’s now about 10%. It is becoming a bigger part of our portfolio. My personal view is that this trend has been happening and COVID is accelerating it. I think it will be here to stay. This is one of the lasting impacts of COVID after we are well past a vaccine. I think people will become used to a new way of shopping, and it will continue being a bigger part of our business.

And then, within the tracked channel data, it seems that there’s been some uptick in private label share gains in the recent period. Are you seeing any change in private label competition? And is there any concern about potential down-trading in the category?

Private label in convenient nutrition is still relatively small, single digits. It is increasing slightly to the mid-single-digits; in liquids it’s about 8% or 9%. It’s increasing, but still a relatively small portion of the category. Certain retailers are heavier in private label, but most don’t have private label within convenient nutrition. We’re watching it, especially given recession discussions. What we’ve found is that even when there is a private label entrance, it doesn’t affect our business very much. It goes back to our strong consumer loyalty and repeat, as well as our flavor strategy. Private label often offers basic flavors like chocolate and vanilla, and in bars, chocolate peanut butter, but they don’t offer the variety that our consumers expect from us.

Your next question is from Bill Chappell with SunTrust.

Just one question. I understand that from a quarterly basis, the stock-up and then the destock kind of washes out in Q2 and Q3. But, where are we kind of offsetting that 14% of people who consume on-the-go, which is obviously going to be tamped down? Is that being offset by just new users that have come into the market in the first six months or is there something else to keep you maintaining guidance for the full year?

So, the category numbers I gave are one thing, but Premier is slightly different. For Premier, approximately 75% of consumption occurs at home, so it’s already more skewed toward at-home consumption. We’re also seeing from surveys that consumers at home are consuming more. So, existing users may consume more at home and new consumers are entering the category, which helps offset the reduction in on-the-go occasions. Also, pantry deloading is largely over, and the shift to eCommerce and increased at-home consumption helps mitigate the on-the-go decline. Overall, Premier is less affected than the overall category.

And one question on Dymatize: Germany and some other countries started to open up, probably even faster than the U.S. So, how does that play out over the next few months?

Our assumptions are fairly conservative. From a Germany and EU standpoint, we assumed a slower reopening than what we’re seeing. From a Dymatize standpoint, we had been looking at single-digit growth by the end of the year, but due to the international business, we now expect a single-digit decline for the year. We do think this is temporary and expect it to recover by Q4, if not sooner.

Your next question is from Rob Dickerson with Jefferies.

The main question is on the deload for the past month or so, and when you look at the data trend in tracked channels, the declines have been substantial. Is it fair to say that if you think that deload is kind of coming to an end or it’s getting better that over the next couple months, when you’re in Q3 that we should just see that decline year-over-year get less bad as consumers deload and then the consumers that are consuming more at home, in theory, would help offset the decline in away-from-home or on-the-go?

That is exactly how we’re thinking about it.

And then, on the promotional side, last quarter’s call the conversation was around promotional timing and innovation. Are you seeing changes in the promotional calendar now from a couple of months ago? And maybe how you think about overall A&P spend as consumers are deloading and are at home watching more media?

There are two pieces. First, our promotional calendar is essentially the same as what we previously communicated. On A&P spend, we see this as an opportunity. We’ve had success with TV and there are more people at home watching TV, so we’re on television again right now and will continue to use TV for the remainder of the year. That was largely planned, though we moved some timing up slightly. We’re also shifting more toward social and eCommerce, and adjusting our communications to focus more on at-home occasions and content like recipes that resonate on social.

All right, great. Thanks, Darcy.

Thank you.

Your next question is from David Palmer with Evercore ISI.

Thanks. Actually, just to follow up first on that point about advertising and promotion, and even your innovation coming into this year, you had planned to spend up a decent amount. If you had a crystal ball, maybe you wouldn’t have done that spending to that degree because you get essentially free trial from COVID itself. So, how are you thinking about the return on investment, and how much of that money is already spent? And also, given COVID, perhaps you want to lean into digital channels more or something else. How are you adjusting how you go to market, promotion, marketing, and what your retailers are allowing you to do through this year?

The ROI from advertising has been positive. We launched around New Year 'new you' which remains a sound decision. Our metrics are very positive and the campaign increased household penetration. Our plan already had a balanced mix of linear TV and digital. We are pivoting to spend more on social and pushing eCommerce. We’re also adjusting communications to focus on at-home occasions; for example, recipes resonate on social and we’re leaning into that. Regarding retailers, we’ve seen some slight delays in promotions and resets, but not cancellations. In some cases we’ve executed incremental promotions with retailers. It’s dynamic, but largely movements rather than cancellations.

And then, we’ve heard there’s tetra pack shortages out there. Is that something you’re seeing in the marketplace? Given that you’re a scale player, might that be an opportunity where others don’t have enough supply?

We are having no problems with supply on any of our packaging or ingredients.

Your next question is from Brian Holland with D.A. Davidson.

I wanted to probe on the composition of your consumer, given that it’s such a large percentage consuming the product at home. Maybe there’s a difference between the consumer that’s going into the club store buying your product and the tracked channel. Are the folks consuming at home buying more in club and the on-the-go consumers buying in other channels? Is that the disconnect?

When you look at channels for Premier, the retailers and channels that are having success are those that have expanded distribution or supported Premier with promotions, across both tracked and untracked channels. For instance, in April, food for Premier was up 31%, drug up 18%. It’s more about the retailers that have gotten behind Premier and expanded distribution, enabling them to offset COVID headwinds.

I thought the current dynamic might set up pent-up demand as folks migrate back to convenient nutrition. We’re hearing more indulgent purchases during this period, so folks may need to reduce or get back into normal habits. Is pent-up demand a real opportunity for you?

Yes, there will be pent-up demand. Different need states have behaved differently during COVID: adult nutrition has done very well, diet-related products have declined as people stress eat at home, and sports nutrition has suffered due to gym closures. Those latter two need states will rebound and I expect they may rebound strongly, which will be positive for the category. Our brand spans everyday nutrition and other need states, so we should capture our fair share of that rebound.

I appreciate the insight. Best of luck.

Thank you.

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

Just one question. When I think about the longer term impact of COVID-19 and you get your business back, will your business be better, neutral or worse off, and why or why not?

I believe it will be better. First, during the stock-up period we got new households; surveys and household trends show new trials. The down turns are temporary but the new trial should convert to repeat buyers. Second, there will be pent-up demand when things reopen, and I expect more traffic back into the category. Both factors point to upside.

Would it be fair to say your longer term top-line growth could be up another 100 to 200 basis points beyond 2020 and 2021? And at the same time, your cost structure is not impacted given how you go to market?

I’m not in a position right now to quantify that long-term incremental growth. We do believe there is upside, but we’re in the middle of the situation and haven’t fully quantified the magnitude of the long-term benefit.

I appreciate it. Stay safe.

Thanks, Ken. You too.

Your next question is from John Baumgartner with Wells Fargo.

Good morning. Darcy, I wanted to ask big picture about the innovation pipeline. There’s increasing optionality across this category in terms of specialized products. Given that new products are a part of your longer term growth plan, can you speak a little bit to that pipeline? How much activity you have there at this point, given the dislocations? And then, how you’re anticipating any net positives or net delays in that activity resulting from the COVID environment? Thank you.

Our innovation pipeline is unchanged by COVID. I’m impressed by our R&D team and their creativity; they’ve been executing projects with a skeleton lab crew. On a bigger picture, our successful launches this year include Café Latte, which added caffeine to shakes and has been successful. We’re looking to take innovation in liquids toward incremental consumers, need spaces and occasions. We will continue to launch products that address those directions.

Thank you.

Your next question is from Jason English with Goldman Sachs.

Hey. Good morning, folks. Thank you for taking my question.

Good morning, Jason.

I wanted to congratulate you on the idea of pent-up demand and when we emerge from quarantine we’ll have to kick-start behavior again. Have you approached the retailers with this concept yet? Is there any inertia underway at retail to prepare for any programming activation around that concept?

To be honest, retailers are focused now on labor and getting through the crisis and making sure resets and promotions occur. However, the two biggest times for the category are New Year 'new you' and back-to-school. I see back-to-school as an interesting time to reengage consumers and retailers often execute big programs during that period.

Why does back-to-school resonate so much? I would have thought summer kickoffs would be big too.

Back-to-school coincides with higher traffic in stores and a moment when retailers focus attention. The category has somewhat stable consumption throughout the year outside of November/December and January–March, so the opportunities to capture attention come when there are significant store or media events. Back-to-school is one of those times.

There are no further questions at this time. Ladies and gentlemen, thank you for participating. This concludes today’s conference call and webcast. You may now disconnect.