Bellring Brands, Inc. (BRBR) Q4 2022 Earnings Call Transcript

Good morning. And thank you for joining us today for BellRing Brands fourth 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 afterwards, we will 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 fourth quarter and fiscal 2022 results and posted a supplemental presentation to our website. Fiscal 2022 was a transitional year for BellRing Brands. As a result of our outsized growth in 2021, we spent fiscal 2022 laying the foundation and gearing up for the future. We made significant progress in our shake capacity expansion plan to grow and diversify our supply and deepen our competitive moats. Lastly, our organization invested in consumer and category insights, prepared plans to restart marketing and promotion and created a robust innovation pipeline. The work done in fiscal 2022 sets us up for a strong 2023 and beyond. Now to the quarter results, Q4 net sales came in at $379 million, 12% over prior year. However, this was below our expectations as a result of a production shortfall from our new bottle co-manufacturer, a delayed load-in to the e-commerce channel and an expansion of the previously announced shake recall. Overall, the recall was immaterial to our business, but it led to shelf disruption that uniquely impacted Q4. Fiscal 2022 saw our net sales grow to $1.37 billion, up 10%. Our profit trajectory remained extremely healthy with adjusted EBITDA growing 16% to $271 million and adjusted EBITDA margins at the top end of our long-term algorithm. Paul will go into more detail on the quarter, but I am incredibly proud of the team for delivering these results given the challenges we encountered throughout the year. Premier Protein brand continues to demonstrate strength and resilience. As a reminder, in November 21, we announced a plan to intentionally dampen shake demand while we expanded our co-manufacturing network. We reduced our full-time shake portfolio from 14 to seven flavors, temporarily turned off promotion and marketing, and still sold every shake we could produce. These supply constraints have made our year-over-year volume trends a bit confusing. In the fourth quarter of 2021, we significantly and unsustainably reduced inventory as a result of our high promoted volumes outstripping our capacity. In Q4 2022, we have limited flavors and did not repeat the promotions, because we did not have the inventory. Nonetheless, consumption declined only 5%. During fiscal 2022, a better measure of brand momentum is our sequential dollar consumption, which grew each quarter. Starting in fiscal 2023, we no longer are lapping heavy promotional periods, with October consumption dollars back to growth, up 16% versus prior year. And with all key measures for Premier Protein remains strong and reaffirm our long runway for sustained growth. According to our most recent brand equity study, Premier Protein remains the number one Brand I love, the number one brand I would pay more for and has the number one Net Promoter Score in the category. Our consumption results support these measures with non-promoted volume in 2022 increasing, clearly showing that our consumers are willing to pay more for Premier Protein. The power of the brand comes through in velocity as well. Premier holds a number of the RTD category’s top highest velocity items in tracked channels. In fact, at one of the key mass customers, Premier holds nine of the top 10 items. Also penetration is the only exception to a landscape of bright performance metrics. With Premier Protein’s pullback in flavors, promotion and marketing, we have seen the overall shake category, as well as our brand decline in household. However, our buy rate has risen, signifying our loyal, high value buyers are staying with us, while we are temporarily losing occasional deal-seeking buyers. We fully expect household penetration to rebound once we have reintroduced our full portfolio and restart promotion and marketing. As we enter 2023, our trade inventory levels have improved. However, some retail partners are still below target. Based on our current capacity ramp-up plan, we will focus the first half of 2023 on rebuilding these remaining retailer’s inventory levels, so we can get back to full shelves and pallets everywhere. Now to shake capacity, last November we outlined a plan to aggressively add capacity for our shake business and we have made significant progress. In fiscal 2022, we added three co-manufacturers and signed agreements with an additional three that will start up in fiscal 2023. As you may recall, the big step up in production happens in Q4 2023 when our two dedicated greenfield facilities come online. Consequently, their benefit will not fully be realized until fiscal 2024. As you would expect, adding this much capacity has not been without its challenges. In addition to the July recall at one of our smaller co-manufacturers, Q4 production scale up at our new bottle co-manufacturer has been slower than anticipated, which didn’t allow us to drive the expected growth in the e-commerce channel. The good news is that our production is growing with second half production significantly increasing versus the first half. We expect low double-digit production growth in fiscal 2023. In 2024, with the additions of the dedicated facilities, we expect to add north of 20% incremental capacity on top of the 2023 volumes. This year, we have laid the foundation for many years of robust shake growth. Turning to Dymatize. The brand had a terrific quarter, with consumption dollars in the U.S. up 32% across tracked and untracked channels. We saw strong growth in all key channels except for club where we temporarily lost distribution. The momentum has continued in October, with consumption up 44%. A return of marketing and promotions drove this growth with sales lifts exceeding our expectations. Equity metrics are incredibly strong with Dymatize being the number one high quality brand and number two Brand I love among powder brands. Lastly, Dymatize’s expanding distribution in mainstream accounts adding 21% more TDPs this quarter, which are now at an all-time high. Moreover, with only 35% ACV today, Dymatize has a ton of room to grow future distribution, which is a major organizational focus this year. Now to our outlook. As you saw in yesterday’s press release, we expect fiscal 2023 net sales to grow between 14% and 20%, and adjusted EBITDA to grow between 11% and 20%. The sales guidance is above our long-term algorithm, reflecting our pricing actions and lapping capacity constraints in 2022 as shake volumes return to growth. We expect to begin driving demand in our Premier Protein shake business again this year. Our current plan is to start reintroducing our temporarily discontinued flavors midyear and restart marketing and light promotion in the back half. Obviously, these decisions depend on the demand and supply dynamic and we will remain nimble so we can navigate effectively. In closing, we believe we have many strong growth years ahead of us. Our high growth category continues to accelerate above historic mid single-digit growth rates with strong macro trend tailwinds. We now have two powerful growing mainstream brands transforming the category and gearing up to innovate, market and promote again. Since our 2019 IPO, we have delivered a 17% revenue CAGR and an 11% adjusted EBITDA CAGR, outperforming our long-term algorithm, despite the COVID-19 pandemic and major supply chain disruptions. We are well along in our shake capacity expansion plan. We are a rare combination of scale, organic growth, strong margins and high free cash flow generation. Given our asset-light model, we will have significant cash flow to delever rapidly. Lastly, BellRing has a nimble, collaborative culture that will continue to fuel its success for years to come. We remain confident in our long-term outlook for BellRing and look forward to demonstrating our success. Thank you for your continued support. I will now turn the call over to Paul.

Thanks, Darcy. Good morning, everyone. Net sales for the quarter were $379 million and adjusted EBITDA was $80 million. Net sales grew 11.5% over prior year and adjusted EBITDA increased 32% with adjusted EBITDA margins of 21.1%. Net sales in the quarter lagged expectations, driven primarily by production shortfall in bottles, a delayed load into the e-commerce channel and shelf impact from the expanded recall. We were able to more than offset the net sales mix on the adjusted EBITDA line through efficiencies in freight and logistics, as well as modest benefits from lower protein costs. Premier Protein net sales grew 9%, driven by higher average net selling prices, which contributed 18% to overall growth, offset partially by a 9% volume decline. Premier Protein RTD shake volumes declined 9% as we lapped prior year promotions and a temporary reduction in available flavors. These headwinds were partially offset by increased baseline volumes. Dymatize net sales grew 32% compared to a year ago, benefiting from higher net pricing and favorable product mix, offset partially by lower volumes. ISO100 had a great quarter with sales of 63% on higher volumes, benefiting from distribution gains and the category momentum. These gains were partially offset by volume declines for the remainder of the Dymatize portfolio as a result of lapping discontinued products. We made the strategic choice to simplify the business with a core focus on ISO100, our flagship product. As a result, we exited certain Dymatize products, which caused volume headwinds in the quarter. This is expected to remain a volume headwind to the first half of fiscal 2023. Gross profit of $122 million grew 27% with gross margins of 32.3%, up 410 basis points as our pricing actions offset significant inflation. In addition, we lapped a prior year period that included significant promotion, supply chain inefficiencies and protein inflation ahead of pricing. Excluding one-time items, SG&A expenses increased $9 million compared to last year. As a percent of sales, SG&A increased 120 basis points, largely reflecting the return to marketing for Dymatize. Turning to full year 2022 results. Net sales were approximately $1.4 billion, up 10% over the prior year, with gross profit of $422 million growing 9%. Gross profit margins were largely flat year-over-year as our pricing actions and promotional pullback offset double-digit inflation. SG&A expenses were $190 million and excluding one-time items, increased $5 million compared to last year. As a percent of sales, SG&A improved 80 basis points, driven primarily by reduced marketing spend as we manage demand on Premier Protein shakes. Adjusted EBITDA increased 16% to $271 million with a margin of 19.8%, an increase of 100 basis points. Before reviewing our outlook, I would like to make a few comments on cash flow and liquidity. We generated $10 million in cash flow from operations in the fourth quarter and $21 million for the year. As a reminder, we started the year with low inventories on both our shake and powder businesses, which fueled outsized cash flow in fiscal 2021. In fiscal 2022, we saw the opposite effect as we built inventory, primarily Dymatize powder and raw materials, resulting in lower than typical free cash flow compared to historical rates. Fiscal 2023, we expect shake inventory growth to be largely offset by reductions for our powder and raw material inventories. As a result, we expect to generate much stronger cash flow in fiscal 2023 and be more in line with our historical EBITDA to cash flow conversion rate. During the quarter, we repurchased 1 million shares at an average price of $23.20 per share, 800,000 of which were purchased in connection with a secondary offering of shares previously held by post. For the fiscal year, we purchased 1.9 million shares at an average price of $23.34. Our remaining share repurchase authorization is 25 million. As of September 30, net debt was $903 million and net leverage was 3.3 times, down 0.7 times from the pro forma spin-off closing target of 4 times. With our expected EBITDA growth and return to strong free cash flow generation in fiscal 2023, we anticipate net leverage to be lower than 2.5 times by the end of fiscal 2023. Turning now to our outlook. We expect fiscal 2023 net sales of $1.56 billion to $1.64 billion and adjusted EBITDA of $300 million to $325 million. Our guidance implies strong topline growth of 14% to 20% and adjusted EBITDA growth of 11% to 20% with healthy adjusted EBITDA margins of 19.5% at the midpoint. We expect double-digit sales growth for Premier Protein and Dymatize as both benefit from higher net selling prices and increased volume. Sales are expected to sequentially grow after the first quarter as RTD shake production increases. Volume growth for Premier Protein RTD shakes is expected to be driven by continued category tailwinds, the re-launch of temporarily discontinued flavors and the restart of marketing promotions to drive demand. We expect volume headwinds in the first half at Dymatize as we lap the exit of discontinued products with stronger volume growth in the second half. We continue to experience significant inflation on dairy proteins and executed an additional price increase on our Premier Protein RTD shakes in October. This increase is expected to offset inflation resulted in strong gross margins in the first quarter, with lower gross margins on a sequential basis as protein costs step up. We expect adjusted EBITDA dollar growth to be weighted modestly toward the first half of fiscal 2023, which has a greater benefit from pricing actions, while the second half of 2023 has higher inflation and incremental brand-building investments. Turning to our first quarter forecast. We expect low double-digit net sales growth compared to prior year, with adjusted EBITDA growth outpacing the topline growth. Through Q2, pricing continues to be the primary sales growth driver compared to prior year. We expect first quarter adjusted EBITDA to grow significantly from prior year, driven by increased net sales and margin expansion. Gross margins are expected to benefit from higher net selling prices offsetting inflation, as well as lapping prior year supply chain inefficiencies and protein inflation ahead of pricing. In closing, we are pleased with our performance this year despite a tough environment. We are emerging stronger and our momentum is growing heading into 2023.

Hi. Thank you very much. I wanted to focus on Dymatize. I'm curious to learn more about the decision to emphasize the ISO100 variety. What is driving that choice? Additionally, I'd like to follow up on the fact that Dymatize had no sales in the club channel this quarter. Typically, when a product isn't sold in a channel anymore, it's usually due to the customer's decision rather than the producer's. If it was your decision to exit the club channel, why did you choose that? Why not continue selling ISO100 in that channel instead of what you were previously selling? I'm trying to understand the dynamics better. Thank you.

Hey, Paul, I’ll address the club situation first and then you can talk about ISO100 and the decision focus. Regarding Dymatize, it was not our choice to stop selling it. We raised prices on Dymatize due to high inflation, and the club retailer was unhappy with the price increases, leading them to discontinue it. This decision was not based on product performance, as Dymatize was actually the top-selling item in that category. They have since reversed their decision, and we are bringing it back. So, it was only a temporary discontinuation and not a decision made by us.

To add to that, the discontinuation of some flavors and products is a significant factor contributing to the volume challenges. ISO100 has always been Dymatize's flagship brand. As I mentioned earlier, we started the year with lower inventory levels, leading us to prioritize ISO100 while also eliminating some smaller sub-brands and certain flavors. This strategy was aimed at concentrating our resources on growing ISO100. Additionally, considering that protein supplies were somewhat tight last year, this focus allowed us to target specific SKUs and products more effectively. We discontinued several lower-value products and some flavors, which we plan to reintroduce in fiscal 2023. However, this approach has created headwinds for the fourth quarter as well as the first half of the upcoming year.

Think of this as a somewhat challenging SKU rate. However, it was slightly larger than usual due to the long tail on the Dymatize business, along with the small SKUs that needed to be streamlined.

And it has an outsized impact to volume, because the ISO100 is a high dollar per pound product, and a lot of the other products are lower dollar per pound. So the volume impact is outsized compared to the sales because ISO is a two-thirds to 75% of the overall business. So it just has an outsized effect the volume.

Got it. That’s all very helpful. If I can just tie a bow on that, so putting or adding one plus one, is it fair to say that you are getting the product back into club in the second half of the year? I just want to get a sense of the timing on that recovery there.

It should be in for Q2.

Great. Thanks. Good morning.

Good morning.

Good morning.

I am sorry if you said this, I was unclear, some of the one-off items that affected 4Q, the delayed load-in to e-commerce and sort of the bottler co-packer issue. Are those now sort of completely resolved or do they sort of bleed into the New Year? And is there a way to sort of quantify maybe what the impact to sales in the fourth quarter was from some of those one-off items, I know that can be hard sometimes?

I will address the first part and then allow Paul to cover the quantification. Regarding the three items you mentioned, for the most part, they have been resolved. The recall expansion we experienced was specific to Q4 and primarily caused shelf disruptions. It's important to clarify that this recall was relatively minor and did not significantly impact our overall business. The initial recall occurred on July 28, which we discussed in the last earnings call, but it was followed by an expansion after that call. This expansion is perceived by retailers much like a new recall, leading many of them to remove our product from shelves, resulting in a disruption. So, that was a notable issue. Additionally, the delays in our e-commerce operations, particularly the delayed load-in, were mostly addressed in Q2, and while bottle production is still not at our desired level, it is improving. Overall, I would say that these issues have largely been corrected and were unique to Q4.

Then, Paul, I think, you were going to mention, yeah, if there was a way to quantify the impact on sales.

Yeah. As far as magnitude, about two-thirds of the impact is from the e-commerce challenges and about a third from the recall. On the e-commerce side, bottle production was a majority of it but we did have some challenges with an e-commerce retailer. They were heavy on inventory and so they weren’t allowing us to ship in some of our products. So that’s part of it. And the one thing I want to touch on, so Darcy mentioned, the production is challenge, the one issue we did have as well that did result in some of our limited-time offerings, not getting to the shelf because of issues. So that’s the one thing that would have benefited Q4 that won’t come in back into Q1, but we do get some timing benefits from some of the products as they fall into Q1.

Got it. And then, Darcy, you mentioned the buy rate was up. Is some of that due to just purely the price increases that you have had or, I mean, is there a way to see what maybe buy rate would be on sort of more of a volumetric basis to get a sense of how consumers are thinking about or the loyal consumers are thinking about the brand?

Yeah. Most of the buy rate increases are pricing. But I think that what it shows is that our loyal, high value buyers are sticking with us.

Hi. Good morning.

Good morning.

Good morning.

I had a question regarding the chart you showed about TDP recovery. It appears that you are about 20% below your pre-supply issues level. Do you anticipate returning to that level throughout the year, or is there a more accelerated timeline as you work on rebuilding inventory at the trade?

I am assuming, Chris, you are talking about Premier Protein, not Dymatize, right?

Correct. I am sorry. Yes. Yes.

We expect TDPs to remain stable, as they have been for most of the calendar year. We anticipate they will hold steady until we begin reintroducing some of the paused SKUs, which is set to occur around midyear. Following that, we should see a slight increase in the coming months as we work to fill the shelves and boost trade inventory. There are still gaps on the shelves, particularly in some FDM accounts. We foresee small increases as we improve shelf availability in FDM, and then we will observe continuous improvements as we start reintroducing the paused SKUs around midyear.

Okay. Our data has shown picking up here a little bit even in recent weeks. I know your data goes through the quarter. But it looks like it picked up a bit and perhaps that’s filling in some of those holes in the FDM accounts, so…

That’s exactly right.

We are really just trying to get back to the initial level in response to your last question. We haven't seen changes in the desired weeks of supply, so it's mainly about getting them back. Regarding cash and receivables, you are correct that it's more about timing. We had heavier shipments in September, which increased accounts receivable. If you compare that to the previous year, we had many promotional shipments in July and August, which resulted in accounts receivable in September being at a low point a year ago, as the shipping pattern was different in the fourth quarter of fiscal 2022.

Hi. Good morning, everyone.

Good morning, Ken.

Good morning.

Do you ever think that you need to rethink your business model in terms of potentially getting a closer relationship or something with the, obviously, that you wouldn’t want to actually do the manufacturing. But is there something that you can do, because this obviously isn’t the first time you have had supply issues going back to the IPO, we have gone through this a couple of times. Is there a thought of just taking a step back and saying, all right, there’s a better way to look this model?

In many ways, I believe we have shifted our strategy. Looking back several years, we operated just as a co-manufacturer, and each of our co-manufacturers faced multiple competitors. Now, two of the three co-manufacturers joining us next year will be exclusive to us and dedicated to our needs. This development is quite elegant because it allows us to maintain our asset-light approach while also providing us with dedicated facilities. In fact, we will have three dedicated facilities since we already have one in place. This change will enhance our influence and transparency. Additionally, I've mentioned before that we will have the right of first refusal on new assets. Overall, our manufacturing strategy has adapted as we learned from the capacity constraints we experienced in the past.

Okay. My second question is, have you segmented your customers to determine what percentage are looking for value? Is there an opportunity to minimize that segment and not worry about it since they may not significantly impact profits, but are less beneficial than others? It doesn’t seem that demand is your challenge, right? If you direct all your capacity towards consumers willing to pay more, is there an opportunity to do that?

We are able to categorize our customers into loyal, high-value groups and occasional deal-seeking buyers. This segmentation helped us identify that our household penetration has declined this past year due to the loss of these occasional buyers. Half of them have completely left the category, while the other half have shifted to various competitors offering deals. These deal-seeking consumers tend to move to the next promotion. However, we’ve observed that consumers who remain with our brand tend to increase their spending over time. For instance, those who started shopping with us at the beginning of the pandemic have doubled their expenditures. Our strategy focuses on attracting new households and encouraging them to spend more as they stay with us. While we believe deal-seeking buyers will return when we run promotions, they aren't our primary focus. Instead, we aim to attract loyal, high-value customers and nurture them to increase their spending.

Hey. Good morning, folks. Thanks for slot me in.

Good morning, Jason.

I suppose I kind of want to pick up on that last question, but really about timing. You characterized this year as the year of coming back into the main demand. When do you expect to be in a position to start stimulating that demand?

Our current plan right now, Jason, is to bring back some of this paused SKUs midyear and then to start marketing and some light promotion in the back half.

We will take our first question from Ken Goldman with JPMorgan.

Hi. Thank you very much. I wanted to focus a little bit on Dymatize. I'm curious about the decision to focus on the ISO100 variety. What is driving that decision? Additionally, I've noticed that Dymatize had no sales to clubs this quarter, which typically indicates a customer decision rather than a producer's. If it was your choice to exit the club channel, why did you make that decision? Why not continue selling ISO100 in that channel instead of what was previously offered? I'm trying to understand the dynamics better. Thank you.

Hey, Paul, let me address the club situation first, and then I will let you discuss the ISO100 and incorporate decision focus. Regarding Dymatize at the club, we did not choose to discontinue it. When we raised prices on Dymatize due to significant inflation, the club retailer was dissatisfied with the price increases and decided to stop carrying it. This decision was not related to the product's performance. In fact, Dymatize was the top seller in its category for powder products, but they were unhappy with the price hike. They have since reversed that decision, and we are in the process of bringing it back. The discontinuation was temporary and was not initiated by us.

To add to that, the volume decline is partly due to the discontinuation of some products, but the cessation of certain flavors and items is a larger factor. ISO100 has always been the flagship brand for Dymatize. As I noted earlier, we started the year with lower inventory levels, prompting us to concentrate on ISO100 while also phasing out some of the smaller sub-brands and certain flavors. This strategic decision allowed us to allocate our resources more effectively to boost ISO100’s growth. Last year, we faced some tightness in protein availability, so this focus enabled us to concentrate on specific SKUs and products. We discontinued several lower-value products and some flavors, which we plan to reintroduce in fiscal 2023. However, this has created a headwind for the fourth quarter and the first half of the upcoming year.

This situation can be viewed as a challenging SKU rate. However, it was somewhat larger than usual due to the long tail associated with the Dymatize business, alongside the need to streamline some smaller SKUs.

And it has an outsized impact to volume, because the ISO100 is a high dollar per pound product, and a lot of the other products are lower dollar per pound. So the volume impact is outsized compared to the sales because ISO is a two-thirds to 75% of the overall business. So it just has an outsized effect the volume.

Got it. That’s all very helpful. If I can just tie a bow on that, so putting or adding one plus one, is it fair to say that you are getting the product back into club in the second half of the year? I just want to get a sense of the timing on that recovery there.

It should be in for Q2.

Great. Thanks. Good morning.

Good morning.

Good morning.

I am sorry if you said this, I was unclear, some of the one-off items that affected 4Q, the delayed load-in to e-commerce and sort of the bottler co-packer issue. Are those now sort of completely resolved or do they sort of bleed into the New Year? And is there a way to sort of quantify maybe what the impact to sales in the fourth quarter was from some of those one-off items, I know that can be hard sometimes?

I will address the first part and then let Paul provide details on the quantification. Regarding the three items you mentioned, they have mostly been resolved. The recall expansion unique to Q4 caused some shelf disruption. To clarify about the recall, it was immaterial to our overall business; it was a minor co-man issue. The initial recall occurred on July 28, which we discussed in the last earnings call, but it expanded after that call. The expansion acts like a new recall from the retailer's perspective, leading many retailers to remove our item from the shelf, causing disruption. On the e-commerce side, the delayed load-in was mostly resolved in Q2, and while bottle production still needs improvement, it is getting better. Overall, these were unique issues to Q4 that have largely been addressed.

Then, Paul, I think, you were going to mention, yeah, if there was a way to quantify the impact on sales.

Yeah. As far as magnitude, about two-thirds of the impact is from the e-commerce challenges and about a third from the recall. On the e-commerce side, bottle production was a majority of it but we did have some challenges with an e-commerce retailer. They were heavy on inventory and so they weren’t allowing us to ship in some of our products. So that’s part of it. And the one thing I want to touch on, so Darcy mentioned, the production is challenge, the one issue we did have as well that did result in some of our limited-time offerings, not getting to the shelf because of issues. So that’s the one thing that would have benefited Q4 that won’t come in back into Q1, but we do get some timing benefits from some of the products as they fall into Q1.

Got it. And then, Darcy, you mentioned the buy rate was up. Is some of that due to just purely the price increases that you have had or, I mean, is there a way to see what maybe buy rate would be on sort of more of a volumetric basis to get a sense of how consumers are thinking about or the loyal consumers are thinking about the brand?

Yeah. Most of the buy rate increases are pricing. But I think that what it shows is that our loyal, high value buyers are sticking with us.

Hi. Good morning.

Good morning.

Good morning.

I had a question regarding the chart you presented about TDP recovery. It seems you're currently around 20% below pre-supply issue levels. Do you anticipate returning to that level throughout the year, or is there a way to approach that more quickly as you replenish inventory at the trade?

I am assuming, Chris, you are talking about Premier Protein, not Dymatize, right?

Correct. I am sorry. Yes. Yes.

We anticipate TDPs to remain stable, as they have been for most of the year. We expect this stability to continue until we start reintroducing some of the paused SKUs around midyear, at which point we anticipate a pickup. We should see some increase over the next few months as we work on filling the shelves and boosting trade inventory. There are still gaps on the shelves, particularly in some FDM accounts. Therefore, we expect small increases as we improve shelf availability in the FDM sector, followed by more consistent improvements as we begin reintroducing those paused SKUs around midyear.

Okay. Our data has shown picking up here a little bit even in recent weeks. I know your data goes through the quarter. But it looks like it picked up a bit and perhaps that’s filling in some of those holes in the FDM accounts, so…

That’s exactly right.

We are really just trying to return to the initial level. We haven't seen any changes in their desired weeks of supply, so it's about getting them back. Regarding cash and receivables, you're right that it's primarily about timing. We had heavier shipments in September, which increased the accounts receivable. Comparing that to the previous year, we had significant promotional shipments around July and August, which meant that accounts receivable in September was actually quite low last year due to a different shipping pattern in the fourth quarter of fiscal 2022.

Hi. Good morning, everyone.

Good morning, Ken.

Good morning.

Do you ever think that you need to rethink your business model in terms of potentially getting a closer relationship or something with the, obviously, that you wouldn’t want to actually do the manufacturing. But is there something that you can do, because this obviously isn’t the first time you have had supply issues going back to the IPO, we have gone through this a couple of times. Is there a thought of just taking a step back and saying, all right, there’s a better way to look this model?

Yes, I believe we've adjusted our strategy significantly. Several years ago, we operated solely as a co-manufacturer, where each of our partners faced multiple competitors. Currently, two of the three new partnerships we’re establishing for next year will be exclusive to us, dedicated to our needs. This approach is quite sophisticated as it helps us maintain our asset-light model while also securing one or two dedicated facilities—three in total, since we already have one. This setup will give us greater influence and transparency, and as I mentioned previously, we also have the right of first refusal on new assets. Overall, I think our manufacturing strategy has progressed as we've learned from past capacity challenges.

Okay. My second question is, have you segmented your customers in a way that you know what percentage are seeking value? Is there an opportunity to continue minimizing that segment without worrying about it, as they may not be profit dilutive but are less accretive than others? It doesn’t seem like demand is your challenge, right? If you direct all your capacity towards consumers who are willing to pay more, is there an opportunity to do something like that?

We can categorize our customers into loyal, high-value, and occasional deal-seekers. This segmentation helped us identify the decline in our household penetration over the past year, primarily due to losing those occasional deal-seekers. Half of these buyers completely exited the category, while the other half shifted to various competitors offering deals, as they tend to move from one promotion to another. However, we’ve observed that consumers who remain within our brand tend to increase their spending. For example, those who started purchasing from us at the onset of the pandemic have doubled their expenditure. Our strategy revolves around attracting new households and encouraging them to increase their spending over time. I believe that the deal-seeking buyers will fluctuate when we run promotions, but our main focus is on acquiring and nurturing loyal, high-value customers and helping them to increase their spending.

Hey. Good morning, folks. Thanks for slot me in.

Good morning, Jason.

I suppose I kind of want to pick up on that last question, but really about timing. You characterized this year as the year of coming back into the main demand. When do you expect to be in a position to start stimulating that demand?

Our current plan right now, Jason, is to bring back some of this paused SKUs midyear and then to start marketing and some light promotion in the back half.

We will take our first question from Ken Goldman with JPMorgan.