Welcome to the BellRing Brands Third Quarter 2022 Earnings Conference Call and Webcast. Hosting the call today for 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)-839-5241. 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 Matt Manor, Investor Relations of BellRing Brands for introductions. You may go ahead.

Good morning, and thank you for joining us today for BellRing Brands Third Quarter Fiscal '22 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 at bellring.com. In addition, the release and slides are available on the SEC's website. Before we continue, I'd like to remind you that this call will contain certain 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 Paul will discuss certain non-GAAP measures. For a reconciliation of these non-GAAP measures to the nearest GAAP measure, see our press release issued yesterday and posted on our website. With that, I will turn the call over to Darcy.

Thanks, Matt, and thank you all for joining us. Last evening, we reported our third quarter results and posted the supplemental presentation to our website. I'd like to start with the quarter's headlines. Net sales grew 8% over prior year, and our adjusted EBITDA was up 15% with healthy margins. Premier Protein is tracking to our expectations. It grew 7% net sales versus prior year and grew sequentially 23% over Q2. Premier shake supply continues to be tight, and we continue to allocate supply. However, I'm pleased with the progress we are making to satisfy our customers. In fact, this quarter, we prioritized building some inventory to improve customer fill rates rather than maximizing our sales volume in the quarter. This helps both BellRing and our customers more reliably build the brand. Meanwhile, Dymatize continues to show impressive momentum. Elasticity was a bit higher than expected but the brand still had a strong quarter, up 17%. As you saw in yesterday's press release, we tightened our fiscal '22 guidance range for both sales and adjusted EBITDA. We slightly reduced the top end of sales growth and increased the bottom end of our EBITDA range, factoring in our actual Q3 performance. As planned, Q4 expectations are largely unchanged and sales should sequentially grow versus Q3 and deliver our largest year-on-year growth rate in '22. Our guidance delivers an annual sales growth rate of between 11% and 14% coupled with robust EBITDA despite capacity constraints and limited promotion and marketing. Our industry, like many others, is experiencing inflationary pressures. We continue to see our major dairy protein inputs for our shake products escalate. As a result, we announced an additional price increase on Premier Protein RTD shakes effective Q1 of 2023. Our preliminary '23 outlook still suggests our '22 back half adjusted EBITDA dollar run rate to be a reasonable proxy for the full year fiscal '23. We believe our net sales will be above our long-term algorithm of 10% to 12% growth, driven by both strong volume and pricing. We will provide more detail on fiscal '23 next quarter. Now turning to our category, brand highlights and updates on our capacity expansion. We continue to see healthy growth in the convenient nutrition category. Ready-to-drink beverages grew 9% and ready-to-mix powders grew 14% in dollars. Although pricing was a major factor for the dollar growth, consumer tailwinds around wellness and healthier food solutions continue to push the category higher. Premier Protein continues to demonstrate tremendous strength. Market share returned to growth in Q3 and TDPs stabilized, while repeat rates and velocity has held steady continuing to exhibit our high consumer loyalty. While Premier Protein shake consumption and household penetration declined in Q3, this is consistent with our expectations given our intentional pullback in promotion, marketing and SKUs. We expect overall shake consumption to be down in Q4 as well versus prior year as we lap a big promotional period. Encouragingly, July, which had little promotion in the prior year, posted a consumption increase of 11% as a result of improved retailer stock levels. We remain confident we will continue to see this type of improvement as our new supply continues to ramp up, and we return to offense in fiscal '23. These metrics reaffirm that we have a long runway for sustained growth. Turning to Dymatize. The brand had another great quarter with consumption dollars in the U.S. up 21% across tracked and untracked channels, and that momentum continued into July. Although we did see a distribution loss in club as a result of our last price increase, all other key channels saw significant double-digit growth despite reduced promotion and marketing. Overall, the brand's health remains strong. Dymatize is the #1 or #2 sports protein brand in most of our key retailers with a ton of upside. As planned, we will begin to ramp up marketing and promotions in Q4 to further drive demand. Moving to our capacity expansion. We remain on track. We improved our service levels, trade inventories are starting to rebuild and our co-man partners are producing largely as expected. We increased our shake production by 20% versus prior quarter. In closing, I'm pleased with our year-to-date performance in a very challenging environment. We remain on track to deliver not only our full year guidance but equally important, complete our key objectives that will set us up for a strong fiscal '23 and beyond. We have two leading mainstream brands with tremendous consumer loyalty. Premier Protein is gaining momentum and market share despite no demand-driving activities. New capacity is coming along as expected, which paves the way for future years of robust growth. Dymatize continues to win with mainstream athletes and the brand is accelerating into Q4 with a new media campaign, distribution drive and new products. We feel confident about our long-term outlook in the building blocks we have in place to get there. Thank you for your continued support, and I look forward to updating you on our progress next quarter along with more specifics around the upcoming fiscal year. I will now turn the call over to Paul.

Thanks, Darcy, and good morning, everyone. Net sales for the quarter were $371 million and adjusted EBITDA was $81 million. Net sales grew 8% over prior year and adjusted EBITDA increased 15% with adjusted EBITDA margins of 21.8%. Premier Protein net sales grew 7%, driven by higher average net selling prices reflecting price increases and reduced promotional activity, offset partially by a 9% volume decline. Remember, last year's third quarter was exceptionally strong, and we depleted inventory in addition to selling what we produced. These prior year inventory reductions in contrast to a planned inventory build in the current quarter resulted in volume declines despite production increases. Dymatize net sales grew 17% compared to a year ago, driven by higher net pricing and favorable product mix, offset partially by lower volumes. Volumes were impacted by several factors, including elasticities from recent pricing actions, reductions in trade inventory levels during the third quarter and lapping prior year promotional activities. Gross profit of $120 million grew 8%, with gross margins of 32.4%. Gross margins were flat to prior years; our pricing actions offset significant inflation. Excluding one-time items, SG&A expenses increased $2 million compared to last year, and as a percent of sales improved 40 basis points. Our cash flow in the third quarter was unfavorably impacted by higher working capital, primarily increased finished good inventory and raw materials. Take inventory levels increased as planned as we continue to rebuild safety stock to better service customers. We expect working capital to moderate in the fourth quarter and result in stronger free cash flow. During the quarter, we repaid $25 million against our revolving credit facility. As of June 30, net debt was $889 million and net leverage was 3.5x. Turning to our outlook. We timed our fiscal 2022 guidance range for net sales of $1.39 billion to $1.42 billion and adjusted EBITDA of $262 million to $268 million. Our sales outlook for the quarter remains largely unchanged with double-digit net sales growth expected for Premier Protein and Dymatize, which both benefit from higher net pricing. Similar to the third quarter, we are lapping significant shake inventory reductions as shipments outpaced production and is an expected headwind from our protein shake volumes in the fourth quarter. We expect sequential net sales growth from the third quarter driven by new products on both brands as well as increased distribution, promotional activity and media support for Dymatize. We expect fourth quarter adjusted EBITDA to grow significantly from prior year, benefiting from higher net sales and modestly higher margins. We anticipate fourth quarter gross margins to improve compared to prior year but declined sequentially from the third quarter as a result of expected dairy protein inflation. In closing, we are encouraged by our third quarter performance and are well positioned to close out another strong year.

Thank you. Our first question will come from Ken Goldman with JPMorgan. Your line is now open.

Hi, good morning, everyone. I wanted to follow up, Darcy, on the guidance or outlook for fiscal '23, and I appreciate you providing that update. Was there a slight change in your sales projections? I remember that the midpoint you were aiming for was about 12%. It seems like you're indicating a slightly higher figure now, if I understood correctly. I just want to confirm that I'm interpreting this right. Are you actually adjusting that number upwards a bit, or am I overthinking it?

You're not overthinking it. That was our intention. And the main reason is last quarter, we didn't factor in the price increase.

Got it. Okay. So it's all pricing. I assume there's some elasticity built in there, too. Can you talk a little bit about the elasticity level you're baking in for next year?

At this point, I don't want to go into details about 2023. Last quarter, we provided guidance, which has now shifted slightly in a positive direction. We intended to update you, and we will offer a detailed range for both top and bottom line next quarter.

Yes, no complaints, you've been generous with that rate. I just wanted to ask one quick follow-up. Do you have an update on the timing of the SKU assortment rejuvenation for Premier? Specifically, when will those SKUs that aren’t currently on the shelf return?

Yes. Last quarter, we mentioned that we would be focused on increasing inventory, fill rate, and trade inventories in the latter part of this year and into next year. We expect to introduce the new flavors around mid-2023, with marketing and promotion planned for the end of 2023. That plan is still in place.

Got it. Thanks so much.

Thank you. Our next question will come from Pamela Kaufman with Morgan Stanley. Your line is now open.

Hi, good morning.

Good morning.

Can you give your perspective on how the active nutrition category performs in an environment where consumers are under increasing pressure and looking for savings? I know the category was pretty nascent in '08, '09, but maybe just some historical context on how it performed then? And how you think about its resilience in a tougher macro backdrop?

Sure. It's a great question, and you're correct. The active nutrition category is relatively young at about 30 years old, and it was small during the last downturn. I'll share my thoughts on the category first, then touch on our brands. Regarding ready-to-drink products, most of them, especially our brand Premier Protein, are often used as breakfast substitutes. For example, our shake costs around $2, which is quite affordable for breakfast. Additionally, there's low substitutability for high-protein, low-sugar options. Based on our research, Premier is well-positioned for a recessionary environment, and the overall ready-to-drink category is in a strong position. The same applies to powders, which primarily serve as supplements. These consumers are highly loyal and looking for ways to boost their protein intake. From the perspective of Dymatize, we have strong consumer loyalty, and our most dedicated customers will likely remain loyal. However, as our largest Dymatize size approaches $100, we've noticed a shift towards smaller sizes this quarter and a move towards cheaper, lower-quality protein products. I anticipate continued shifts in this direction within the category. Overall, the macro trends still support the category's growth, and while our brands are well-positioned, I expect to see some consumers trading down in powder options.

And I just wanted to follow-up on your comments on Dymatize. You've taken a lot of pricing on the brand and noted that elasticities have come in a bit higher than you expected. So how do you think about balancing pricing growth on Dymatize versus driving further household penetration gains? And how have the consumer reaction to pricing influence your strategy going forward?

Yes, you're correct about Powders. We have implemented significant pricing on Dymatize and across the category, with prices reaching historic highs. Honestly, there were times this year when the price increases did not fully cover rising costs. In Q3, we experienced more price elasticity than we anticipated. We expected moderate elasticity, but we observed that when prices increased, consumers experienced some sticker shock. They took a moment to evaluate before returning to purchase, mostly opting for smaller sizes of Dymatize. This pause and reassessment caught us off guard, which is why the elasticity in Q3 was higher than we had expected. However, we are optimistic about our elasticity forecast for Dymatize in Q4 and beyond. Regarding your question about balancing price increases with driving demand, I want to clarify that any further price increase we discuss is related to Premier and not Dymatize. We do not plan to raise prices on Dymatize again. As we enter Q4, we will launch a new media campaign, drive distribution, and introduce several new products, focusing on accelerating demand for the brand. Until now, we have held back on demand-driving activities for Dymatize, but we are now prepared to ramp up efforts. Consequently, we do not foresee any additional price increases and will concentrate on fostering demand.

Got it, thank you.

Thank you.

Ben, your line is open, please make sure your phone is not on mute. Hearing no response, we'll go to our next question from Andrew Lazar with Barclays. Your line is open.

Hi, Darcy and Paul.

Good morning.

Darcy, first off, I'm just curious, what do you think caused the difference, I guess, between sort of consensus sales estimates for the third quarter and what you guys reported. Was the entirety of the difference, do you think the decision that you talked about to sort of rebuild inventory rather than sort of maximizing product sales in the quarter? Or maybe we saw mismodeled it to start with. I'm trying to get a sense of what that difference was.

Yes, there are really two factors. The first is related to Dymatize. I mentioned that elasticities were slightly higher than expected in Q3, and we also saw a reduction in trade inventory levels during that quarter. The second factor is the decision to build inventory and prioritize fill rate over maximizing sales for the quarter.

And you feel like you'll still do that, but maybe not to an extent in the fourth quarter that changes your outlook on the fourth quarter sales, it seems like.

Correct.

Okay. And then maybe you can remind me I don't know if there are any learnings from the last time you went through the capacity constraint issue. This was pre-IPO. Sort of what happened to household penetration trends then. And I don't know if household penetration took a dip in response to those capacity constraints then. And then reaccelerated once capacity came online? Or if the brand was in a different place back then such that it didn't behave the same way.

Household penetration in TDPs and market share experienced a slight decline. This was influenced by the brand's positioning at the time. However, once we began to stimulate demand again by reintroducing new items and restocking shelves, all relevant metrics quickly recovered, typically within three to six months. I anticipate a similar recovery this time. Additionally, it's important to note that previously, we offered only two flavors, but now we have seven available. The brand has expanded, showing greater loyalty and household penetration. Therefore, I believe we are likely to experience a rebound in a similar timeframe or perhaps even faster.

Thank you.

Thanks.

Thank you. Our next question will come from Ben with Stephens. Your line is now open.

Hey guys, sorry about the technical difficulties. Tim on for Ben. If I can ask a two-part question on the sales breakout. The first part, can you guys delineate between the capacity constraints versus demand elasticity for the price increases and how each of those impacted volumes, specifically with Premier.

Make sure I heard your question correctly. So for Premier, as we've taken pricing, we have not seen any elasticities on our shakes to date. So as we took the March, April price increase, our consumption trends have been very stable and steady throughout that time period that would suggest that there's no elasticity on our shakes to date.

And then second part, as you guys start to ramp up on the promotional spend, is that going to be more focused on driving category usage, so bringing people that don't use Premier even to the category as a price replacement vehicle, or is that driving higher purchase rates? Or is it going to be increasing just visibility to the brand overall to help with distribution in the new channels?

Yes, Ben, so when I talked about increasing promotional and marketing spend in Q4, I just want to make sure that it was clear, it's on Dymatize. It is not on Premier.

Right.

Are you talking about for '23?

Correct, yes.

Yes, regarding Premier, when we start driving demand and ramping up marketing, our focus will be on increasing household penetration. We have a very high buy rate, one of the highest in the category, and this rate has remained stable over time. However, this is fundamentally about household penetration. Despite already having the highest penetration in our category, we see significant potential for growth. Currently, we are at about 7% to 8%, and we believe there is a lot of room for improvement. The emphasis will be on reaching new households.

And then if I could maybe sneak in one quick question on capital allocation. Moving forward, I know you mentioned the working capital demand in the quarter. As cash flow normalizes, do you guys have a preference on debt reduction versus share repurchase preference one way or the other?

Yes, our main goal is to reduce our debt. We paid down $25 million on our revolving credit facility during the quarter, and we will keep focusing on that. We will also look for opportunities to buy back shares when they are attractive, but paying down debt remains our top priority, with opportunistic share repurchases also being important to us.

Thanks guys. I'll hop back in the queue.

Thank you.

Thank you.

Thank you. Our next question will come from Kaumil Gajrawala with Credit Suisse. Your line is now open.

Hi, thank you. I have a quick question. As you consider your costs for the rest of this year and next, are there any hedges or other factors we should be aware of in relation to how that might impact the P&L? Also, could you provide some insights on performance by channel, specifically what you're observing in clubs versus e-commerce? I assume, given the capacity constraints, the expansion into groceries has slowed down, but any updates on that would be appreciated. Thanks.

On your first question, there's no hedging that you need to consider. Most of our protein purchases, which represent our largest expenses, are tied to firm fixed contracts. There is some indexing based on the CME and other indexes, but for fiscal '22, we have a clear understanding of our costs, and we also have some coverage for fiscal '23. From a hedging perspective, there’s nothing that needs to be included in your modeling.

And regarding consumption by channel, Kaumil, are you asking about Premier or Dymatize?

Really both, but probably Premier a bit more.

Sure. I'll quickly go through both. For Premier, during the quarter, you can refer to our supplemental for details, but I'll provide some additional context. When comparing to the previous year, the change largely depends on whether we had a promotion last year. The trends for Premier are quite stable. However, the year-ago number can have a significant impact depending on past promotions. Notably, in July, where there wasn't much promotion the previous year, we observed positive results. Specifically, we are up 11% overall; untracked sales increased by 16%; tracked sales rose by 7%; overall club sales are up 10%; mass is up 15%; food remained about flat; and e-commerce is up 25%. These growth rates are encouraging when excluding the effects of last year's promotions. The performance across channels is influenced by fill rates. Where we maintain strong fill rates and supply, our business performs well; inconsistency in product availability can affect consumption. As for Dymatize, we are seeing strong double-digit growth in all channels except for Club, where we lost distribution following our last price increase, which is noted in the supplemental. For July in Dymatize, the trend is similar, showing an overall increase of about 27% in both tracked and untracked sales, with double-digit growth across the board, again with the exception of Club.

Useful, thank you.

Thanks.

Thank you. Our next question will come from John Baumgartner with Mizuho Securities. Your line is now open.

Good morning. Thanks for the questions. Maybe first on the Dymatize business, Darcy, your explanation on the pause and reevaluate makes a lot of sense. But are you able to get a lead from that dynamic to the extent that maybe it implies sort of an absolute ceiling on pricing for the category that maybe indicates more limited future opportunities for mix accretive innovation? Or do you still have a high willingness from the consumer to pay for differentiation, this resistance is just more tied to the rate of pricing over a short-term period?

I really think it's the latter. This category has experienced significant pricing increases, with prices rising by an average of 25% to 30% in a very short timeframe. That's why I referred to it as a temporary sticker shock. Interestingly, this effect was indeed temporary; we observed that consumers initially hesitated, then returned after doing more research, and now we are seeing fairly consistent consumption. However, there is a trend of higher demand for the 20-serving size and lower demand for the 5-pound size. Additionally, we are noticing some less loyal or lower value consumers shifting to less premium options in channels where multiple Dymatize sizes are not available. This trend aligns with what you are observing in other categories with private label products. In the powder category, there has been a slight increase in market share for private label, but more often, consumers are opting for lower-tier branded products.

Okay. That makes sense. Thank you for that. And then a follow-up for Paul. Upon gross margin, can you quantify the impacts from the network inventory inefficiency really imbalances this quarter? I think it was like 200 basis points last quarter as the new supply ramps. How quickly do you think you can get that network headwind to moderate? And I'm just trying to get a sense for the opportunity to recover gross margins from supply chain normalization as opposed to just waiting for commodity deflation to set in? Thank you.

I'm pleased to share that we experienced improvements regarding inefficiencies this quarter. They peaked in the second quarter but showed a significant reduction in the third quarter, resulting in less than a 50 basis point impact. We anticipate some ongoing imbalances in specific flavors or products, but we expect these to decrease over time as we adjust our approach to managing these inefficiencies.

Thanks for your time.

Thank you. Our next question will come from Ken Zaslow with Bank of Montreal. Your line is now open.

Hey, good morning guys.

Hey, Ken.

Good morning.

I have a quick question. I'm not sure if you addressed this. What prompted you to increase the EBITDA? Does this establish a new base? I recall that when you achieved a higher EBITDA, it dropped again with the new capacity. Should we assume that this EBITDA level will be maintained? That's my two-part question.

You want to hit that, Paul?

Well, do you want to hit the increase, I guess, from...

Yes, from a guidance perspective, we are not in the same position. We based our guidance on the actual Q3 results. Typically, we refine our predictions during Q3, and we did so for both net sales and EBITDA, observing some positive trends throughout the year. This represents our current run rate as we move into Q4. Paul, would you like to discuss future expectations?

Yes. We still feel good about delivering EBITDA margins within our algorithm. We're in the neighborhood of 90% this year around that last year. So as we look forward, we continue to believe that we can deliver EBITDA margins in that range. And then we'll see as we move forward of how inflation plays out and where there might be expansion opportunities to expand that as we go forward as well, depending on levels of investment behind the brand marketing activities, but we still feel good about our ability to continue to deliver EBITDA, strong EBITDA margins going forward.

I guess is there a give back of EBITDA in 2023 given the smaller production? Or does this become a new space in which we kind of continue to grow from?

Yes, while our EBITDA margin is over 20% this quarter, we do not expect this to sustain in the future, partly due to upcoming inflation. However, we are still aiming to remain in the upper half of our target range, which is 18% to 20%.

Okay, and then can you just one quick one. Can you just remind us exactly the cadence of capacity coming online in 2023? And then I'll leave it there. Thank you.

Yes, we have three new comments coming on in '23. We have a small one in the first half and two major comments coming in in the second half, actually Q4. We always know it's back-end loaded because the two major ones are Greenfield facilities to able to take two plus years to build. They are on track. We see pictures all the time. And the production, basically, you're looking at the quarters on '23, the production grows every quarter.

Appreciate it, thank you guys.

Yes, thanks.

Operator, we cannot hear you. Yes, we have no further questions. Thank you all.

Thank you.