Bellring Brands, Inc. Q2 FY2022 Earnings Call

Welcome to BellRing Brands Second Quarter 2022 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 800-934-7879. No passcode is required. 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 2022 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 and supplemental slide presentation that support these remarks are posted on our website in both the Investor Relations and the SEC filings section at 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 second-quarter results and posted a supplemental presentation to our website. On March 10, Post completed its distribution of 80% of its interest in BellRing to Post shareholders. The spin-off positions us with more strategic flexibility to manage our capital structure and provides additional liquidity in our shares. I want to thank all the people at both BellRing and Post who worked incredibly hard to make this transaction successful. Given the large number of investors participating on this call who are new to BellRing, I want to step back and give a quick overview of our business. BellRing is a unique company. It's rare to have our size, but still only be in the early stages of the category and brand growth. We compete in the large and growing convenient nutrition category, specifically in the ready-to-drink and ready-to-mix segments. Both segments are highly underpenetrated with only 26% and 14% household penetration, respectively. The growth in both segments is driven by mainstream health and wellness trends, which have only accelerated throughout the COVID-19 pandemic. We fully expect both segments to continue to mainstream and dramatically increase household penetration. We have two leading brands, Premier Protein and Dymatize, that target differentiated consumer segments. Premier Protein was the original mainstream ready-to-drink brand, with the vision to improve people's health by putting great-tasting nutrition within everyone's reach. It is now over a $1 billion brand, with incredible loyalty, but still has less than 8% household penetration, leaving us with a tremendous long-term opportunity. Dymatize, our second largest business, is a world-class sports nutrition brand known for high-quality and trusted products. The brand has proven strong appeal with mainstream athletes and will be a major future growth driver. Our business has scale double-digit organic growth, strong margins, and high free cash flow generation. Since 2017, we have organically grown sales at a compound annual growth rate of 15%. We operate an asset-light model, which drives significant free cash flow generation, allowing us to invest in the growth of our business and quickly delever. From our IPO in October 2019 to the first quarter of 2022, we reduced our funded debt by nearly $250 million, and net leverage decreased from 3.8 to 2.1 times. When we went public, we laid out our vision and growth strategies. They included: increasing household penetration, expanding distribution, launching innovation, expanding internationally and, when appropriate, M&A. Since our IPO, we have made such great progress against each one of these organic strategies that we have outpaced our shake capacity, as well as the capacity in the North American aseptic shake co-manufacturing network. As a result, we are dramatically accelerating our multi-year capacity expansion plan that will support our company's long-term strategy. You saw last night, we raised our outlook for the year. Our first half results, combined with increased confidence in our shake supply chain, drove this increase. We feel confident in our ability to deliver our second half results. And as our capacity constraints begin to ease over the next several quarters, we expect to resume our historical shake volume growth rates. Our co-manufacturing partners are producing at the levels we need to deliver the year, and our planned production is expected to increase every quarter through the next several years. This planned expansion will return unit volume growth to double digits in fiscal 2023. However, as anticipated, for the balance of fiscal '22, we will see a decline in volume compared to a year ago as we rebuild inventory. Remember, in the back half of last year, we drew down inventory to an unsustainable level to satisfy the step change in demand. I'm highlighting this because the underlying growth of the category and the company's unit volume growth will continue to diverge for the next two quarters. We have a great growth story that is currently constrained by our capacity. We feel good about our progress this year. And while certainly not finished with our planning process, we expect that '22 back-half revenue and EBITDA run rate is a reasonable proxy for 2023. Now, turning to Q2 category and brand highlights. The convenient nutrition category continues to see strong growth, with ready-to-drink beverages and ready-to-mix powders, both growing dollars 13% versus a year ago. Even though most major competitors have taken price, volumes continue to be strong, with RTD ounces growing 8%. Premier Protein continues to demonstrate tremendous strength, despite our need to pull back promotion, marketing and reduce our SKUs in order to dampen demand. Premier Protein repeat rates and velocities have held steady, demonstrating our high consumer loyalty. Our trailing 52-week consumption is up 20%, which is on pace with category growth, despite the recent six months of capacity constraints. Impressively, Premier Protein's Q2 shake consumption was only down 2%, even though we lapped significant New Year promotions and strong advertising support in the year ago period. Retailers have largely held our shelf space through this period of lower supply, given our category-leading velocities. We saw a brief sequential decline in shake TDPs this quarter, as retailers work through remaining inventory of the temporarily discontinued Tetra SKUs. Since then, our TDPs have stabilized, and we expect them to remain at these levels for the balance of the year until we begin building TDPs again in fiscal '23. I continue to be impressed by the strength and the resilience of the Premier Protein brand. Dymatize had another terrific quarter, with US consumption up 46% across tracked and untracked channels. All key channels saw double-digit growth and brand velocities remain strong. Our newest Dymatize ISO100 flavors, Dunkin', Cappuccino and Mocha Latte, drove excitement and velocities for the brand. Pebbles and Dunkin' together are driving nearly half of Dymatize's growth. I'm encouraged by our progress so far this year. New capacity is coming along as expected, and we are confident the brand will reaccelerate when we are fully in stock. Dymatize is on fire and appealing to mainstream athletes. We have successfully taken price on both businesses to offset commodity increases and seen no elasticity to date. We have two high-growth, complementary brands that have strong mainstream appeal and significant upside. All in all, we feel confident about our long-term outlook and the building blocks we have in place to get there. Thank you for your time and support. I look forward to updating you on our progress next quarter. I'll now turn the call over to Paul.

Thanks, Darcy, and good morning, everyone. Our second quarter financial results were strong, with sales of $315 million and adjusted EBITDA of $51 million. Net sales grew 12% over prior year and for the second quarter in a row, were led by Dymatize, which was up 55%, while Premier Protein grew 7%. Adjusted EBITDA was up 21% over prior year, with a margin of 16.1%. Premier Protein net sales were driven by higher average net selling prices, reflecting reduced promotional activity and prior year price increases. Recall that while we face capacity constraints, we have temporarily reduced tetra shake SKUs on promotion and marketing. This resulted in expected volume declines for Premier Protein in the quarter. Dymatize net sales outpaced volume growth of 25%, benefiting from higher average net selling prices, which reflected October price increases and a favorable mix. Strong velocities and distribution gains drove volume growth. Gross profit of $87 million was flat to last year, with a decrease in gross profit margin to 27.6%. The margin decline resulted from higher dairy protein costs, increased freight, and higher than expected logistics inefficiencies, which were partially mitigated by higher net selling prices. We saw improvements on logistics cost in the latter part of the quarter, which continued into the third quarter as inventories were better balanced across the network. We estimate these inefficiencies were roughly a 200 basis point drag on the second quarter gross margin. SG&A expenses of $49 million included $10 million of separation costs related to the spin-off from Post. Prior year SG&A expenses included $0.8 million of restructuring and facility closure costs. Both items were treated as adjustments for non-GAAP measures. Excluding these items, SG&A decreased $9 million and was favorable by 460 basis points as a percentage of sales, driven primarily by reduced marketing. We generated $27 million in cash flow from operations in the second quarter. We expect working capital increases in the second half as we rebuild our RTD shake inventory levels. Before outlining our updated guidance for 2022, I want to review the changes to our capital structure that went into effect upon closing of the spin-off from Post. On March 10th, Post distributed 78 million shares of BellRing common stock to Post shareholders. Our share count has now increased to 136 million shares outstanding. Post retained 20% of its interest in BellRing, which translates to 19 million shares or 14% of our shares outstanding. At the time of the distribution, BellRing paid $2.97 per share to the legacy BellRing shareholders, which included Post, for a total cash outlay of $405 million. In connection with the close of the spin-off, we issued $840 million of new 7% senior notes due March 2030 and borrowed $109 million under our new revolving credit facility. The combined new debt of $949 million was used to pay off the entire legacy $520 million term loan, fund the $405 million share repayment and pay transaction-related fees. As of March 31, net debt was $879 million. Net leverage was 3.6 times, down from the pro forma spin-off closing target of four times. Turning to our outlook. We raised our fiscal 2022 guidance for net sales of $1.39 billion to $1.43 billion and adjusted EBITDA of $258 million to $268 million. Compared to prior year, our updated guidance implies top-line growth in the second half of 13% to 18% and EBITDA growth of 12% to 20%. As indicated last quarter, we expect sequential sales growth in Q3 and Q4, reflecting the incremental pricing actions and new capacity. For Premier Protein, we expect second half net sales growth to come from pricing actions, offset partially by lower volumes. As Darcy mentioned, in the second half of fiscal 2021, we saw significant inventory reductions of shakes, as shipments outpaced production driven by strong category and brand growth. This is an expected headwind to shake volumes in the second half, with the third quarter being the toughest volume comparable against prior year. We expect increases in second half margins as recent pricing actions flow through and offset inflation. We expect inflation to step up each quarter in the second half, driven primarily by dairy proteins. The second half EBITDA is expected to be roughly split across Q3 and Q4, growing significantly from prior year. In closing, we are encouraged by our first half performance and are well-positioned heading into the second half. I will now turn it over to the operator for questions.

And we will take our first question from Andrew Lazar with Barclays.

Great. Thanks very much. Good morning Darcy and Paul.

Good morning.

Good morning.

I guess, Darcy, based on your outlook for the capacity ramp, around when would you expect that we would start to see increases in TDPs and flavor variants as well as in-market commercial activities start to sort of move higher? And have you seen anything in terms of competitive activity on the shelf for consumer behavior in the category that would impede Premier from restoring TDPs back ultimately to the brand's high watermark given the capacity that you ultimately have coming online? Thanks so much.

We anticipate that TDPs have stabilized over the last couple of months, specifically in February and March. We expect this stability to continue for the remainder of the year, through the first half of 2023, when we will begin to drive TDPs again and reintroduce the temporarily discontinued flavors. Regarding when we will start to generate demand through marketing and promotions, that plan is set to roll out in the second half of 2023, beginning with marketing efforts in Q3 and promotions in Q4. Essentially, in 2023, we will start implementing activities to drive demand. As for the third question about competitive activity that could affect us, we are monitoring that closely.

Yes. Any changes you've seen that would impede Premier getting back or restoring TDPs to sort of where the high watermark was given all the capacity you have coming online?

Nothing has dramatically changed from a competitive standpoint that would hinder us. You can visit any retailer right now and notice rising prices across competitors along with capacity constraints. This situation varies by competitor, but it clearly indicates that everyone is impacted by these capacity constraints, whether they are co-manufactured or self-manufactured. Therefore, there is nothing that should obstruct us from implementing our reintroduction plan.

Great. Thanks for your time.

Thank you.

We will take our next question from Ken Goldman with JPMorgan. Your line is open.

Hi. Good morning. I wanted to dig in a little bit on the back-half guidance. The consensus estimate for the third quarter top line, $383 million. It implies a pretty sizable step-up in terms of both the one year and three year growth rates versus 2Q. I realize you don't want to give specific numbers, but the Street's modeling sales dollars growing much higher from 2Q to 3Q than from 3Q to 4Q. Paul, I noticed that you called out a tougher volume comp in 3Q as well. So I guess what I'm trying to get at is, is there any sense you could give us sort of that cadence between 3Q and 4Q? And how comfortable you are with where the Street numbers are right now?

Yes, sure, Ken. I'll take that. So if you look at what's driving growth in sales from Q2 to Q3, the one thing I'll point out is, obviously, there's significant pricing actions that are taking place in really late second quarter, really early into the third quarter. So we've taken double-digit price increases on our Dymatize powder business, and we've taken mid-to-upper single-digit increases on our shake business. So some of the step-up is clearly from Q2 to Q3 was related to pricing actions. But overall, we're relatively comfortable with the growth rates that you outlined.

Okay. Thank you. And then wanted to follow-up by asking about operating expenses which SG&A plus amortization that is, which came in much lighter than what the Street had expected this quarter. So I wanted to ask, to what degree was SG&A in terms of dollars lower than you might have thought going in? Or was it really just the Street kind of mismodeling, which it may seem a little bit from our perspective if it's the latter? But I guess, the real question is, how do we think about SG&A dollar progression from here? It seems to us that consensus is modeling a nice step-up in 3Q and 4Q from the first half. I'm not quite sure if that's in line with how you're thinking about things as well.

I don't focus much on SG&A when it comes to amortization, but if you exclude the amortization component, SG&A in the first half was around 12% of net sales after accounting for the separation costs of approximately $12 million. We expect that the second half will be similar in terms of SG&A as a percentage of sales, potentially slightly higher. This suggests that while SG&A dollars will increase alongside sales, the percentage should remain relatively consistent.

Great. Thank you so much.

We will take our next question from Pamela Kaufman with Morgan Stanley. Your line is open.

Hi. Good morning. I know it's still early and you're in the middle of fiscal 2022. But in the prepared remarks, you suggested that growth for 2023 can look closer to the back half outlook for this year, which, at the midpoint, implies about 15% growth. So, is it fair to think about next year being an above-algorithm year? And can you kind of break down the drivers that give you confidence around the stronger outlook?

Yes, I want to emphasize that we mentioned this in our prepared remarks, but I want to note that we are still in the early stages of planning for 2023. You're correct in pointing out that we view the second half of this year as a good indicator. We have previously stated that we are facing constraints this year. Building capacity takes longer than we would like, but once we achieve that capacity, we fully expect to return to historical growth rates, which align with your comments. Additionally, we have pricing factors that will positively influence the first half of the year. So, what you've outlined is precisely where we see potential for growth exceeding algorithmic projections, as we will face fewer constraints than we did in 2022.

Great. Thank you. And then just on Dymatize, obviously, you're seeing very strong growth. Can you talk about what channels you're focused on building distribution in? Where you see further growth opportunity? And what are you observing across repeat rates and velocity, particularly in untracked channels, which we have less visibility around?

Certainly. What's interesting about Dymatize is that we are experiencing growth in all channels, including those that have traditionally been weaker, such as specialty. If we look at the long-term trend, specialty had previously seen a decline in volume due to e-commerce growth. However, it's encouraging to see that we're now experiencing growth across all areas. This success can be attributed to our new flavors, particularly the Dunkin' and Pebbles offerings, which have performed exceptionally well across all channels. In terms of distribution, the greatest opportunity lies in mass channels, which include food, drug, mass, and club. The latter two present the most potential since that's where powders tend to perform best. We also see opportunities for growth in specialty and e-commerce. Currently, Dymatize has under 1% household penetration, indicating a significant distribution opportunity. From a repeat rate and velocity perspective, we are performing very well. In e-commerce, we rank as the number two brand, and we're among the leaders in specialty with strong velocity. Overall, there is significant potential for growth for this brand.

Thank you.

We will take our next question from Chris Growe with Stifel. Your line is open.

Hi. Good morning.

Good morning.

I have a question to clarify my understanding of the second half. Regarding building inventory, are you focusing on your own inventory as you increase capacity, or is this concerning retailer inventory? What I'm trying to figure out is, to reach mid-teens growth, you will need pricing for Premier and growth from Dymatize. It seems like you would require some Premier volumes to achieve that, but it sounds like you indicated they will be down in the second half. Is that correct?

Yes. We anticipate that volumes for Premier will decrease in the second half. This is primarily due to our pricing strategy. We implemented a single-digit price increase for Premier in late March to early April, which is higher than our prior increases. Additionally, we will not be promoting Premier in the second half, which also contributes to the pricing advantage. Thus, we expect a significant pricing benefit for Premier during this period. For Dymatize, we have executed our second double-digit price increase, with benefits from both increases implemented in October and March-April. Therefore, Dymatize should see pricing benefits as well as some volume growth expectations in the second half.

Thank you. I have a quick question regarding the gross margin. There are clearly many factors influencing it, such as reduced promotions, and this quarter had some unique aspects concerning the gross margin. Additionally, you mentioned that input costs are expected to rise during the second half of the year. We've noticed a slight decline in whey and nonfat dry milk prices. Should we expect this trend to be advantageous for you in fiscal 2023, or do you have hedging strategies that might prevent you from benefiting from this in the second half of the year?

We do not anticipate significant benefits from any major decreases in protein prices for the second half of the year, as we are mostly covered at this time. We're approximately 90% covered, with some minor variable pricing that might provide some benefit, but it's quite small. Therefore, it is primarily a fiscal 2023 matter. Regarding your question, we have observed some early signs that milk proteins and dairy proteins are beginning to stabilize and decline. However, these prices have been fluctuating over the past few weeks. To clarify, we expect any benefits to be mostly realized in 2023.

Okay. And then just to round it out, Paul, regarding the gross margin, considering the reduction in promotional spending, even though volumes are likely down, when thinking about the gross margin, is it more aligned with the average of the first half or more similar to the first quarter? This would help in understanding where that might land for the year.

You mean from a gross margin percent?

From gross percentage, yeah, okay.

Does that make sense?

Okay. Thanks a lot.

Yeah.

I appreciate your time.

We will take our next question from Ben Bienvenu with Stephens. Your line is open.

Hey thanks. Good morning everybody.

Good morning.

So I've got two questions. The first is just on the debt reduction. You seem to be ahead of schedule. Obviously, the business is performing well. Is it your intention that if the business performs well, you intend to just take that incremental cash and pay down debt at a more rapid rate than promised when we sold the prospectus prior, or how are you thinking about where you'd like debt level to be?

Our main focus is to reduce our debt. At the end of March, we utilized $109 million from our revolving credit line, and we plan to continue paying that down. We aim to lower our leverage ratio, which was at 3.6 times at the end of March, and we expect to reach the low threes by the end of this fiscal year. We are making good progress.

Okay. Great. You highlighted the strength of the ready-to-drink liquids category overall. However, you also mentioned that the entire industry is facing capacity challenges. Do you believe that the growth potential in this category is underestimated, similar to your own situation? How would you compare your circumstances with those of your competitors?

I believe the ready-to-drink category experienced significant growth about a year ago, around April. Before the pandemic, growth was around 5% to 6%. We then consistently reached double-digit growth, even moving into the high teens. Recently, we saw a dip to 13% this quarter. However, we anticipate that growth will continue at high single-digits or possibly low double-digits. This expectation is influenced by several competitors reducing promotions and some intermittent out-of-stocks from various brands. In summary, while I believe the growth is somewhat lower than it could be, we are also comparing against substantial increases in household penetration from new consumers entering the category around this time last year.

Best of luck.

And we'll take our next question from Bill Chappell with Truist Securities. Your line is open.

Thanks, good morning.

Good morning.

Good morning.

I have a question about Dymatize. You mentioned that half of the growth is coming from the Pebbles and Dunkin' flavors. Do you anticipate any competitive reactions to this? Is there a trend towards flavor innovation in the category, or are these specific flavors just particularly resonating with consumers?

Combination. Flavor excitement and the concept of licensing have been prevalent in the specialty market, including Vitamin Shoppe and GNC. The team has effectively identified the right licenses for mainstream, particularly with Pebbles and Dunkin'. Moving forward, the focus will be on matching the right licenses with brand equity and distribution channels, and these choices have proven to be highly successful.

Got it. And then there have been some, I guess, some noise inter-quarter over the past few months about potentially moving from your protein to the convenience store channel or in a different form or fashion. Any update on that, that you can share with us?

We still believe there is a significant opportunity, though it may not materialize in the near term. We have discussed the distribution opportunities, but currently, our priority is on increasing capacity. This is our main focus. We also see potential for growth within existing channels, particularly through TDPs and other avenues. Additionally, we recognize the potential in new distribution opportunities, but those will take time to develop.

Great. Thanks so much.

Thanks.

We will take our next question from John Baumgartner with Mizuho Securities.

Good morning. Thanks for the question. First off, Darcy, I guess coming back to Dymatize and the growth there. You mentioned the strength across channels. Obviously, a lot of it is brand specific and execution-related. But if we just step back, to what extent do you see structural changes in that athlete segment that sort of underpin the long-term opportunity? I mean there seems to be a generational shift with EAS going away, metrics not being what it used to be. And it seems as though the segment is looking for new leadership, whether it's innovation, brand investment. I mean to what extent would you agree with that? And how do you think about building Dymatize and going after the opportunity differently than you've done with Premier over the past decade? Is it really just more of a licensing thing?

No, I believe it's much more significant than just licensing, and I agree. If you take a step back and look at the category, we are witnessing growth in the overall convenient nutrition segment coming from two main areas: everyday nutrition, where Premier operates, and sports nutrition, which is Dymatize's focus. These are the two sectors that have been thriving, especially during the pandemic when adult nutrition also saw an increase due to obvious reasons. However, now the growth is primarily emerging from everyday nutrition and sports. One factor is that more people are becoming active again; the pandemic had kept us rather sedentary. There is a renewed interest and enthusiasm for returning to exercise routines, which I see as a fundamental shift, and I don't think this trend is temporary. It appears to be a long-term change. Additionally, considering the brands, sports nutrition has evolved. Previously, if you visited places like GNC or Vitamin Shoppe, the products appeared quite intimidating and were heavily marketed towards men, often packaged in large black tubs. Today, it's evolved significantly. There has been a noticeable increase in female participation within sports nutrition. For instance, just a few years ago, we rebranded Dymatize from the traditional black tub to a white, much more inviting design. We still target athletes, but now our focus includes mainstream athletes rather than just bodybuilders, for example. I believe this trend is evident across the entire category, making it an ideal environment for Dymatize to thrive.

Great. And I guess just to build on that as a follow-up. You touched on it a little bit. But in the Nielsen data, there seems to be a bifurcation in that the sales of the deprivation segments, whether it's meal replacement, weight loss. Those sales are down, but specialty and sports are continuing to grow. Is that sort of what you're seeing on an all-outlet basis right now? And if it is, might next year be sort of the year with the category, you see a bit of a shakeout certainly underperformers as we get into a post sort of COVID trend environment?

Absolutely seeing that trend, and absolutely think it's going to continue.

We will take our next question from Bryan Spillane with Bank of America.

Thanks, Operator. Good morning, everyone. To follow up on John's question, Darcy, now that you have the flexibility with capital allocation, how do you envision BellRing being acquisitive? Can you elaborate on the platform and what BellRing could offer a target asset? Additionally, regarding John's question, do you see more opportunity in active nutrition, such as pre-workout and post-workout powders, compared to meal replacements?

From an M&A perspective, our stance remains unchanged. We are currently focused on our existing capacity. We have two brands that we don't want to risk interrupting our efforts on, as we believe this focus represents the biggest opportunity in the category. So, I think we'll pause on M&A for now. In my prepared remarks, I mentioned that the right time for M&A isn't now. We will continue prioritizing organic growth. I am confident that these two brands are well-positioned to capitalize on trends, particularly in mainstreaming both ready-to-mix and ready-to-drink products. Typically, an M&A strategy is pursued when there are brands lacking the ability to leverage trends, but that is not our case. Our approach will be more focused on building rather than buying.

Okay. Great. And then maybe just to follow-up on that. So if M&A is kind of back seat and you're going to start to generate cash, I mean, I understand there's still some debt reduction. But just what are the other options to cash? Would you consider repurchasing shares, dividends? Is there any consideration given the capacity lumpiness over the last couple of years of actually maybe putting more CapEx in and owning some plants? So just kind of curious what the other priorities are for the cash?

Yes, I'll take the capital allocation and Darcy, if you want to touch on the owning facilities. But yes, our priorities, as you said, it's to delever. Share repurchases is certainly part of our capital allocation strategy. And so those will be the two priorities, and as Darcy touched on, M&A behind that.

From the perspective of owning facilities, we continuously evaluate our strategy. Currently, we are satisfied with our approach, which involves a spectrum of influence or control. We are progressing towards self-manufacturing, which is on the right side of that spectrum, while still adhering to our asset-light model that has proven effective for us. Initially, we engaged dedicated co-manufacturers to increase our influence, and now we have a partnership with Post Holdings, which is also dedicated. Our strong relationship with Post enhances this strategy, and with each step, we are effectively increasing our influence while maintaining our asset-light model.

All right. Thanks, Darcy. Thanks, Paul.

Thanks.

And we will take our final question from Ken Zaslow with Bank of Montreal. Your line is open.

Hi, good morning everyone.

Good morning.

Do you think your pricing will catch up with your current inflation rate?

Yes. We believe our second half pricing is going to more than offset the inflation, yes.

So if, for example, whey or milk or other things happen, you wouldn't give back your pricing, right?

As we move into next year, if the underlying protein costs decrease, we will need to determine the best strategy, which may involve reinvesting in promotional and marketing activities. Our strategy is not to reduce prices, but we will evaluate various options as we reach that point.

And then my last question is, what have you seen with elasticity?

There hasn't been any elasticity observed so far. We just started in April, so we are closely monitoring the situation, but nothing has changed until now. One interesting aspect regarding elasticity is that we are seeing consumers shifting channels. This isn't a dramatic change, but we are noticing some increased growth rates in value channels such as clubs and mass retail. While this observation isn't about elasticity, it does indicate a shift in consumer behavior, which is understandable. However, from a strict elasticity perspective, we haven't identified any changes.

But how does that actually affect your business? Is that negative, neutral, positive? If somebody changes, where they go to buy your product, does it matter? Just how do you frame it? And then I'll leave it there.

Yes, very positive for us because of our channel mix.

Interesting. Thank you, very much.

Thanks.

This does conclude today's program. Thank you for your participation. You may disconnect at any time, and have a wonderful day.