Welcome to BellRing Brands Third Quarter 2021 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 PM Eastern Time. The dial-in number is 1 (800) 585-8367. And the passcode is 7479008. 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, BellRing Brands, for introductions. You may begin.

Good morning, and thank you for joining us today for BellRing Brands third quarter fiscal 2021 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 afterwards, we'll have a brief question-and-answer session. The press release and supplemental slide presentation that support these remarks are posted on our website in both the Investor Relations and the SEC Filings sections of bellring.com. In addition, the release and slides are 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. Last evening, we reported our third quarter results and posted a supplemental presentation to our website. I'm happy to report that we turned in a record quarter with net sales of $342 million and adjusted EBITDA of $70.5 million. Performance exceeded our expectations, lifted by success of our growth initiatives and tremendous category momentum. Premier Protein and Dymatize grew net sales 65% and 99%, respectively, driven by distribution gains, strong velocities and favorable category tailwinds. Following our better-than-expected third quarter results, we are once again raising our outlook for the year. We now expect net sales to grow at 27% to 30% for the year. We're also raising our adjusted EBITDA guidance range to between $230 million and $235 million. We continue to experience meaningful cost pressure. However, our price increase on shakes, upcoming powder pricing actions and our cost-out programs are helping to offset these headwinds. As a result of accelerated growth, coupled with network delays in adding Tetra capacity, we have run into short-term supply constraints. Over the next several quarters, we are adding significant capacity into our existing co-manufacturers as well as expanding our co-manufacturing network. Delays in 2021 capacity stem from the same issues I expect that you've heard from other companies, challenges with equipment delays and limitations on labor. While we expect inventory will be low for several quarters, our organization has experience managing in this environment, while focusing on our priorities to deliver for our long-term growth objectives. We expect net sales growth and adjusted EBITDA margin to be well within our long-term algorithm. We will give more context in detail in the November call. Turning to this quarter. We are seeing tremendous growth in the convenient nutrition category. Ready-to-drink beverages grew 29% versus a year ago, but even more impressive is the sequential growth. The audio experienced a technical difficulty and briefly interrupted.

The audio experienced a technical difficulty and briefly interrupted. Adjusted EBITDA was $70.5 million, up 83% and EBITDA margin was 20.6%. Our top line performance is very strong across all brands. Also, results further benefited from category tailwinds as well as lapping the COVID-related impacts in the prior year. Premier Protein net sales increased 65%, primarily driven by RTD shakes. Distribution gains, strong velocities and better performing promotions drove this growth. Additionally, we lapped the negative COVID impacts in the prior year period. Last, shake net sales growth outpaced volume growth, reflecting list price increases taken in the third quarter and favorable product and customer mix when compared to prior year. Dymatize net sales nearly doubled this quarter, growing 99% and benefited from lapping the negative COVID impacts in specialty and international markets in the prior year period. Strong distribution gains and velocities were the primary contributor to the brand’s exceptional growth. Favorable product and customer mix drove an improvement in average net selling prices. Turning back to consolidated results. Gross profit of $111.3 million increased 62% this quarter, with an expected decrease in gross profit margin to 32.5%. As we have previously discussed, this decline resulted from higher freight and input costs. SG&A expenses were $42.6 million, and as a percentage of net sales declined 360 basis points to 12.4%, reflecting leverage of our SG&A base. This leverage was achieved by $3.4 million of incremental marketing and consumer advertising expenses and higher incentive compensation accruals. Operating profit of $51.5 million increased 68% or $21 million compared to prior year and was negatively impacted by $11.8 million of accelerated amortization. This was a noncash expense recorded in connection with our decision to discontinue our Supreme Protein brand and was treated as an adjustment for non-GAAP measures. The Supreme brand was fully amortized in the third quarter. We had a strong third quarter for cash flow, generating $72 million from operations. As of June 30, net debt was $529 million, and net leverage was 2.3x. Turning to our outlook. As Darcy previewed, we are raising our fiscal 2021 net sales guidance range to $1.25 billion to $1.28 billion, with adjusted EBITDA expected to range between $230 million and $236 million. We expect our strong sales and category momentum to continue into the fourth quarter. Organic growth, distribution gains, planned promotional activity and our shake price increase are driving net sales growth. Whey protein and freight inflation have continued to rise ahead of our expectations, and along with milk protein inflation will pressure year-over-year gross margins. Recall our fourth quarter typically carries the lowest gross margins driven by the volume of promotional activity in the fourth quarter. We expect SG&A leverage to offset a portion of the gross margin decline. We are thrilled with our year-to-date performance. Our confidence in the BellRing story remains unchanged. With that, I would like to turn the call back over to the operator for questions.

The operator provided instructions to participants. And our first question is going to come from the line of Andrew Lazar, Barclays.

Darcy, I wanted to start off with, maybe trying to compare a little bit, the severity of capacity constraints that BellRing faced at the end of '18 and early '19, just sort of what you're seeing now. Back then, obviously, it forced the company to cut back on a couple of flavors and then, sort of, SKUs, maybe cut back on some promotional activity with key customers, and it certainly did impact the top line performance pretty significantly. Can you compare a little bit about what you're seeing now to then and if it requires you to pull back on flavors or SKUs or innovation in any way or promotional activities with key customers? That would be the first one.

Sure. It's pretty different from last time. First, we have a healthy, diversified network of co-manufacturers and we've worked hard to add more partners. We are making significantly more shakes every quarter. To give a bit more color than in the prepared remarks, we grew much faster than our best-case forecast. We had planned for a 20% increase, which was already double our long-term model, and we have flexibility to go higher, but we ended up growing 30%. The flex capacity we were counting on was delayed into 2022 due to manufacturing delays and labor issues, so we drew down our inventory. Adding capacity takes time. You’re right that we won’t be forced into the extreme actions we took before, like a two-flavor strategy, but we will need to manage demand relative to supply for several quarters, using the obvious levers of promotion and marketing.

Yes. Got it. And then I think last quarter, you mentioned that your base planning assumptions for elasticity did not include competitors raising pricing. I have to assume, given what we've seen in costs for everybody that, generally, there's been a general raising of prices across the board, but which would make elasticity maybe a little bit more tenable anyway. But I wanted to get a sense from you on how that's been progressing.

Yes. That's exactly right. So that is one of the factors that led to our beat in the quarter. The first was just around the category tailwinds, which were stronger than we expected. But the second is around our assumptions around shake elasticity. We did assume that we would see some elasticity and a couple of things factored in. We just haven't. We haven't seen any hit to volume at all. And it was really a result of a couple of things. One, retailers reflected at shelf later than we expected. And then also, as you said, competitors have followed. We just started seeing that late in the quarter. And then lastly, we've actually seen volume increases instead of volume declines since we raised price.

And our next question will come from the line of Ken Goldman, JPMorgan.

I wanted to first follow up on Andrew's question about the balance between supply and demand. I think, Darcy, you mentioned that you'll have to manage demand relative to supply for several quarters. I assume that your guidance for 2022 has been somewhat informed by that. Is there any rough sense you can give? I know it's early and you're not giving full guidance at this time, but can you give a rough sense of how that 10% to 12% range has been affected by your relative inability to supply demand at this time?

We factored that into our preliminary estimates. And you're exactly right, Ken. We're not ready to go into details into '22, but we did want to give you a sense that we still believe that we can grow 10% to 12% on top of the outsized growth that we saw this year. And that's going to be coming from several different places. We're still going to see growth in shakes. But we now have strong powder businesses, and we expect to see growth in powders as well.

Great. And then my follow-up, for Premier over the 52 weeks, last 52 weeks, you showed a slide, you're growing almost as fast in supermarkets as you're going in eCom. I'm sure grocers are seeing these numbers, thinking about ways of expanding their visibility. Darcy, you previously said we're not seeing any signs of a given space in a much more heavily traveled aisle soon. So I guess I'm not going to ask about that, but what other steps can you take with your supermarket customers to improve your visibility and, sort of, take advantage of those velocity trends? And maybe it's just as simple as continuing to build more and better displays, but just wanted to, I guess, get your thoughts there.

Yes, that's exactly right. We know what drives our business; displays are a really effective way — within the tool set that we have right now — effective ways to bring in new consumers. As I said in my prepared remarks, we're bringing in 80% of the new people into the category. So we are doing that even within the set, but displays are really effective. Our advertising is really effective and just the product. So I think that what we're doing is working. Those grocery and mass customers are seeing the tremendous growth. So we're both incented to continue to drive the category.

And our next question will come from the line of Pamela Kaufman, Morgan Stanley.

What factors do you see as contributing to the elevated demand that you've seen recently? And I guess, what's, kind of, driven it to be ahead of what you were planning for relative to your expectations?

There were basically three areas that over-performed. The first was the category. We haven't seen these types of increases in the category really ever. The liquids subcategory was up 29% in the quarter, and even some of that is due to lapping COVID. But when you look at June and July, you are no longer lapping the COVID period. So that is pretty clean. The category is still growing mid-double digits. If you think of what it was like pre-COVID, we were seeing pretty steady 5% to 6%. Now we're seeing mid-double digits, which is a dramatic change. We conducted a study to understand what is driving this outsized category growth. Consumers are looking to eat healthier. During this COVID period, people are constantly thinking about how to improve overall health. Consumers are looking to lose weight after a sedentary period, they're looking to exercise more, and they're looking for sports products. They're also seeking health advice and doctors are recommending this category, and they're recommending Premier Protein. Then there's also just some economic conditions as stimulus and America reopens; traffic generally is very high. So those are all leading to outsized category tailwinds that we did not expect the gravity of. The second piece is around shake pricing elasticity. We had some conservatism in our numbers, but we are not seeing the expected elasticity. The third is really around Dymatize. We saw better-than-expected results out of specialty and international than we forecasted.

Great. That's very helpful. And to what degree is the capacity that's coming online incremental to the original plan? And how much flexibility will you have to scale back on production if demand moderates?

The new capacity is all incremental. We always incorporate some flexibility into our forecast, so we will always be able to dial it up and dial it down.

And our next question will come from the line of Chris Growe with Stifel.

I just had a question, if I could, first on — to Paul — the pricing came through this quarter. You also talked about inflation, kind of, coming in ahead of your expectations. I just was curious, as you stand today, does pricing offset inflation? And is there a chance to go for more pricing, given some of the continued inflation you're seeing in your business?

Yes, you're correct. We have seen continued inflation, particularly on our powder business, and so we have a price increase going into effect in Q1 on that. We're continuing to evaluate the level of price increase there because the increases on whey protein have really gotten much higher. On our shake business, our price increase is largely offsetting commodities. But as they continue to rise, we'll continue to evaluate some additional levers to pull there to offset that, especially as we look to 2022.

Okay. And then I had a question, Darcy, on supply and just thinking about when you run into these issues where you have a shortage of supply in some cases, just like the cost basis of your supply chain. So I'm just — are there specific geographies, for example, now you've got a pretty good diverse supply of product where you have less of an inventory buffer, and therefore, you can have some more margin effect. And therefore, as you get back to kind of full production, you can actually get a better, kind of, lower cost opportunity for your business. Does that make sense?

It makes perfect sense. During this period when we're low on inventory, we're shipping product wherever it needs to go, which is not always efficient. We will continue doing that for several quarters until we build back up our inventory. Once we do, we're going to see the benefit of that. If I were betting, I think we'd see that towards the end of 2022.

Yes, Chris, you're correct. We do have some what we call rate inefficiencies in our numbers, especially in Q4. As Darcy mentioned, we are working hard to ship product wherever it needs to go, and that's not always the most optimal cost. As we expand our network, it gives us more flexibility to optimize freight.

And our next question is going to come from the line of Kaumil Gajrawala, Credit Suisse.

The first one is on investment spend in marketing. Now that wellness has really taken off, obviously, this wouldn't have been part of the plan a couple of years ago, in particular, powders. Has this changed your investment plan or your capital deployment strategies?

Yes. On powders, absolutely. We've seen great tailwinds for our powder businesses, both Dymatize and Premier Protein. We have two brands that go after two distinct consumers, and we have figured out what drives those businesses. There is tremendous opportunity, especially for mainstream powders. If you look back at what Premier did to RTDs — the mainstreaming of that category — I think that's coming in powders. We're starting to see it. I mentioned that everyday powders in track channels is now the same size as sports, which is a significant change. We're planning on supporting powders. Because we've seen some outsized demand on powder, we need to build up inventories again. Our demand was higher than our capacity for powder, so we dipped into our inventory. Once we build that up, we'll be supporting it strongly next year.

If I could ask a question that's in some ways maybe linked to the first question, which is, in your prepared remarks as it relates to the Post transaction, you mentioned liquidity as well as something strategic. Is M&A maybe now higher on your priority list, given that transaction and how you're looking at the categories?

Nothing has changed in our general view on M&A. We're focused on organic growth of our brands; we still believe that's the biggest opportunity. However, we are constantly looking at what's out there from an M&A perspective. This definitely readies us even more to take advantage of those opportunities, but that's not the driving factor.

And our next question will come from the line of Bill Chappell with Truist Securities.

Darcy, I fully get the pickup in health and wellness at the end of the pandemic and what your studies — losing weight and feeling healthy — but did something in your findings see that shakes versus bars kind of tipped? Because it seems like you're certainly outperforming the various forms and factors. I didn't know if there was some reason why you were seeing and if it was sustainable, that shakes are now really stepping up even further.

Bars have mainstreamed earlier; their household penetration is about 45% to 50% and they have become more of a snack food. Shakes and powders haven't mainstreamed to that degree — household penetration of shakes is about 25%, so it could double just to get to where bars are. I believe there is more of a health halo around both shakes and powders, whereas bars are more of a snacking halo. From a nutritional standpoint, when we ask consumers why they purchase our shakes, it's #1 protein and #2 the vitamin and mineral blend. That health halo and the proactive health seeking is driving interest in shakes and powders.

Got it. But nothing has really changed over the past 4 to 5 months, it's just those trends have manifested?

Yes, I don't think anything has changed from the product delivery standpoint. What I think has changed is the intensity and focus around health and wellness and people's focus. Also, the big reason why people enter the category is they want to lose weight. We get success stories all the time around people using Premier Protein and losing weight.

Our next question will come from the line of Bryan Spillane with Bank of America.

So I wanted to ask a question just about the capacity expansion and just get a little bit more color on a couple of items. One is just, it sounded like, Darcy, from your prepared remarks, was this a project that's already been delayed? I think you mentioned something about other companies having issues getting equipment. So I guess that's my first question is just, when did this start? Has it already been delayed is the first question.

Yes. It's a twofold problem. The first was outsized demand. The second was our flex capacity: to get that flex capacity, we were relying on new lines to come into our existing co-manufacturers. We were expecting approximately nine lines; only four came in and five were delayed to next year. If those lines came in, we'd be in a different situation. I want to be clear our co-man partners have been amazing and delivered on commitments; they've done extraordinary work to support our business throughout this pandemic.

I appreciate that. I'm trying to get a sense for what's the risk of further delay. Is the equipment already in transit being delivered? Is there a labor issue in terms of getting the lines up and running? What percentage of what needs to be done to get those lines up and running next year has been completed? Is there a possibility for further delays?

It's not one project and not one co-man. We're adding capacity every quarter in partnership with our co-man partners. Some delays are labor related. One partner described having four lines where one sits idle some weekends because they don't have the labor to run it; it's about training and bringing in high-skill labor. Some equipment has been received and is being installed; others are long lead and awaiting delivery. We have various timelines that we've factored in and we've been conservative in our projections.

And our next question is going to come from the line of Rob Dickerson with Jefferies.

Darcy, kind of a general question around the capacity, again: how it differs potentially for you relative to the category? It sounds like category growth is far ahead of where it was just two years ago. My assumption is you are likely not the only company in this situation. So as you get through this capacity build to meet demand, as you look out throughout the category and your competition, do you feel like others are in a similar situation such that your actual market share should not be eroded because others might be able to fill in that demand more quickly than you?

We are not alone. The entire aseptic processing network is constrained. If anyone is trying to get more capacity than they have already contractually committed to, it will be difficult. It will take some time until the network catches up to this significant increase in demand.

Okay. Fair enough. And then just mechanically for you, Paul. I know there was a question earlier around M&A. Darcy saying you're thinking about capital allocation in the same way, continue to look at pipeline. I heard on the other call this morning and, kind of, saw in the release, it sounds like, with the Post transaction, that leverage would be at a rate similar to the IPO. I just had a number of people keep asking this. What was that leverage ratio when you went public? And then secondly, as you think through that special dividend, just to clarify, it sounds like what is implied here is just that cash would be coming out of BellRing, but you're going to put more leverage on the business, pay the special dividend and then you'll reset from there. So kind of indirectly, it sounds like it'd be fair to assume that further acquisitions wouldn't be a near-term event, especially given the capacity constraints and the special dividend.

This morning we touched on leverage similar to the IPO timeline; that range was near 4x, just below 4x. We're a fast-growing business that generates strong cash flow and we de-lever quickly. While a large M&A transaction may be more challenging at that leverage level at a point in time, we can de-lever quickly and we don't see it as an impact related to our near-term strategy to seek M&A.

Okay. Fair enough. And then just quickly, Darcy, can you just talk about how having a co-man supply chain can potentially benefit you on the margin side relative to others that have it in-house? In some cases, co-manufacturers absorb some costs that you would have to absorb internally if you had in-house manufacturing. Could that help you going forward?

I can't speak for what others do. From our perspective, we control the purchases of major commodities; we buy the proteins because with our scale and leverage we believe we can get the best buys. There are smaller things our co-mans buy where they have cost advantages, and we try to leverage where they have advantages and where we have advantages. That's how we see our competitive advantage, optimizing both ends.

And our final question will come from the line of Ken Zaslow with Bank of Montreal.

If you look at the elasticity through your findings, it seems like your elasticity is fairly low and that there is room for price increases. We've seen other companies, like confectionery companies, make more frequent price changes rather than only when there's inflation. Would you consider that as an option, given the low elasticity that you have?

We would consider it. For now, we are a growth brand and we are trying to expand. We still believe we are in the early innings of Premier Protein's growth. We have a lot of upside in household penetration and market share, and we want to continue to grow as fast as we can. That is a reason we would be cautious about frequent price increases. Now, those are always part of our evaluation as costs rise. There is a limit at some point; we aren't seeing it now, but we will watch it closely.

Okay. My second question is on repeat purchases: what was your repeat purchase rate, what do you attribute it to, and what can you learn from those findings to do something better going forward?

Our repeat rate has stayed over 50% for the last five years. From 2017 to now, our business has changed significantly, we've doubled household penetration, yet repeat has stayed above 50%, which is one of the top repeat rates in the category. It's a testament to a product consumers love. We track brand love and aim to keep it high. That includes new flavors, improvements to our shakes around immunity, and other product improvements as well as expansion initiatives. Our goal is to keep repeat rates as high as possible, and based on our track record, we expect to continue doing that.

Thank you. And with that, we will conclude today's BellRing Brands Quarter 3 2021 Earnings Conference Call. We do appreciate your participation and ask that you please disconnect. Thank you.