Bellring Brands, Inc. (BRBR) Q1 2023 Earnings Call Transcript

Welcome to the BellRing Brands First Quarter 2023 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 12:00 P.M. Eastern Time. The dial-in number is 800-695-0671 and no pass code 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. Ma’am, please begin.

Good morning and thank you for joining us today for BellRing Brands first quarter fiscal 2023 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 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 first quarter results and posted a supplemental presentation to our website. I am pleased to share that fiscal 2023 is off to a good start with our first quarter results coming in ahead of our expectations. Net sales grew 18% over prior year and adjusted EBITDA was up 42%. Overall, net sales came in better than expected with slightly higher production of premier protein shakes that translated into stronger shipments. In addition, adjusted EBITDA benefited from COGS favorability. I am particularly encouraged that premier protein volumes returned to growth in Q1 and we are starting to see its momentum grow. As you saw in yesterday’s press release, we affirmed our fiscal 2023 outlook of net sales and raised the low end of our adjusted EBITDA range. We don’t expect major changes to the cadence we communicated last quarter. Paul will provide more details. Let’s start with shake production. We saw significant growth this quarter in production as we overcame the worst of our capacity constraints. This growth allowed us to modestly increase inventory at our retailers as well as increase our own inventory. Both have improved, but are still not at optimal levels. Over the next few months, we expect most of our customers will be at normal levels, while we don't expect our internal inventory to fully recover until early 2024. Our capacity expansion plans are on track with annual production expected to grow low double digits in fiscal 2023. Our new bottle co-manufacturer continues to scale up with production improving each month throughout Q1. Our three new co-manufacturers for 2023 are tracking to plan. Recall, we have a small co-manufacturer that comes online late in Q2 with a step-up in production in Q4 with our two dedicated greenfield facilities coming online. Consequently, their benefit will not be fully realized until fiscal 2024. Our incremental capacity in 2024 is expected to be north of 20%, setting us up for many years of robust shake growth. Before reviewing category and brand updates, I want to share that we have changed our sources for tracked consumption as well as household penetration. These changes are outlined in greater detail in our supplemental presentation, but in general, these new sources provide us with better coverage of our business and in turn, deeper, better insights. The RTD category remained strong, up 14% in Q1, accelerating compared to the prior quarter. Ready-to-drink was up 18% and ready-to-mix was up 28%. Both segments are growing despite price increases and continued capacity constraints across the RTD competitive set. The Sports Nutrition segment is driving the category as more consumers pursue their fitness goals. The club channel is especially strong, with growth rates of greater than 20% among top accounts. Protein, as a macro trend, continues to show a huge runway for growth. Premier Protein consumption returned to growth this quarter, showing remarkable strength. The brand grew 15% with solid growth across mass, food, and club. This momentum continued through January with consumption up 17%. E-commerce consumption growth was the only exception—it was hindered by the slower-than-anticipated scale-up at our new bottle co-manufacturer that we highlighted last quarter. Our key brand metrics reaffirm a long runway for sustained growth. Market share has stabilized at 18% for the past year despite our reduced SKUs and limited demand-driving activities. Premier Protein shakes lead in velocities, with all SKUs performing in the top third in tracked channels. TDPs experienced small sequential gains this quarter, reflecting more inventory on shelf. As we discussed last quarter, household penetration has softened as a result of our intentional pullback in flavors, promotion, and marketing. Despite this slowdown, Premier Protein still has the highest household penetration in the category, and our buy rate and repeat rates are holding steady, demonstrating the loyalty of our high-value buyers. We expect household penetration to rebound later this year as we reintroduce our full portfolio and restart light promotions and marketing for the shakes. Premier Protein powders are a small but growing part of our portfolio. Powders currently have three flavors and are rapidly gaining distribution. The top two flavors, chocolate and vanilla, currently rank in the top 15% in tracked channels. Consumption in the quarter was up 64% versus the prior year, and we launched our first-ever national marketing campaign in January. It's exciting to see the Premier Protein brand successfully expand formats. Turning to Dymatize, the brand had another great quarter with consumption dollars up 30% across tracked and untracked channels. We saw strong double-digit growth in all key channels driven by distribution gains, pricing, and promotion. Impressively, the momentum accelerated into January with consumption up 50%. As you may remember, we temporarily lost distribution at a key club customer last year. I'm happy to report we regained that distribution late in Q1 and consumption rates are already performing well. Dymatize's expansion in the mainstream accounts is propelling the brand, with market share, TDPs, and ACV reaching all-time highs this quarter. We ended the quarter with 4.6% market share in tracked channels, up significantly versus a year ago. Dymatize continues to add new households with repeat and buy rates holding steady. In closing, we are making significant progress in our shake capacity expansion to grow and diversify our supply and deepen our competitive moats. Our high-growth category continues to accelerate above historic mid-single-digit growth rates with strong macro tailwinds. We are close to reintroducing our full range of Premier Protein shake flavors and restarting marketing and promotions. Lastly, we have a robust innovation pipeline that will help fuel our growth in 2024 and beyond. We remain confident in the long-term outlook of BellRing and look forward to sharing our progress next quarter. Thank you for your continued support. I will now turn the call over to Paul.

Thanks, Darcy, and good morning, everyone. As Darcy highlighted, fiscal 2023 is off to a good start. Net sales for the quarter were $363 million, and adjusted EBITDA was $85 million. Net sales grew 18% over prior year, and adjusted EBITDA increased 42% with strong adjusted EBITDA margins of 23.4%. Starting with brand performance, Premier Protein net sales grew 23%. Higher average selling prices contributed 18% to overall growth. Volumes grew 5%, reflecting increased shake production compared to a year ago and continued RTD category growth tailwinds. Net sales growth outpaced consumption growth in the quarter due to typical seasonality, as well as continuing to build customer trade inventories back to optimal levels. Dymatize net sales grew 3% compared to a year ago, benefiting from higher net pricing, distribution gains, and favorable product mix, offset partially by lower volumes. Moreover, we are lapping our strategic decision to discontinue certain Dymatize products, which was a headwind to growth in Q1 and continues into Q2. In addition, shipments into the international and domestic specialty channels, both of which have historically inconsistent shipment patterns, deloaded inventory during the quarter. The combination of shipment timing and the lapping of discontinued products was a 25% headwind to the net sales growth rate in the quarter. Excluding these items, net sales growth tracks closer to consumption growth. Gross profit of $122 million grew 34%, with gross margins of 33.6%, up 350 basis points. The increase in gross margin was partially driven by production attainment fees from our shake co-manufacturers as well as lapping of prior year supply chain and efficiency issues. Excluding these impacts, gross margins decreased 120 basis points compared to a year ago as our pricing actions offset significant inflation. Excluding one-time separation costs, SG&A expenses increased $6.6 million compared to last year and were flat as a percentage of net sales. Before reviewing our outlook, I would like to make a few comments on cash flow and liquidity. We generated $36 million in cash flow from operations in the first quarter. We expect to generate much stronger cash flow in fiscal 2023, particularly in the second half, with the full year more in line with our historical EBITDA to cash flow conversion rate. With respect to our share repurchases this quarter, we bought 1.8 million shares at an average price of $23.33 per share. Our remaining share repurchase authorization is $29 million. As of December 31, net debt was $910 million, and net leverage was 3.1 times, down almost a full turn from the spin-off last March. With our expected EBITDA growth and strong cash flow generation, we continue to anticipate net leverage to be lower than 2.5 times by the end of fiscal 2023. Turning to our outlook, we are maintaining our guidance for net sales of $1.56 billion to $1.64 billion and raising our adjusted EBITDA range to $306 million to $325 million. We continue to expect sales to sequentially grow each quarter as RTD shake production increases. Our pricing actions on Premier Protein shakes are offsetting significant inflation on protein and other input costs. However, we expect gross margins to sequentially decline from the first quarter as protein and packaging costs step up. We continue to expect adjusted EBITDA dollar growth to be weighted towards the first half of 2023, which has a greater benefit from pricing actions, while the second half of 2023 will have further inflationary impacts and incremental brand building investments. For the second quarter, we expect high teens net sales percentage growth compared to the prior year, with pricing continuing to be the primary sales growth driver. Similar to Q1, we expect Q2 adjusted EBITDA dollars to grow significantly from the prior year, driven by increased net sales. However, adjusted EBITDA margins are expected to be similar to the prior year as gross margin improvements are largely offset by higher marketing spend to support Premier Protein and Dymatize patterns. Before wrapping up, I want to provide an update on our relationship with Post Holdings. During the first quarter, Post sold us the remaining shares of our common stock and has completely exited its ownership of BellRing. Post has been a great partner over the years, and we are grateful for their guidance and stewardship. Post will continue to provide services through a master services agreement, and Rob Vitale will remain in his role as Executive Chairman of the Board. In closing, our momentum continues to grow. Our strong Q1 results give us greater confidence in our full year outlook and long-term growth prospects. I will now turn it over to the operator for questions.

Thank you. Our first question will come from David Palmer with Evercore ISI. Your line is open.

Thank you. I think you just made a comment there about promotions and marketing for the rest that there would be some step-ups there. Could you maybe give some color or some numbers around how much you would expect promotion spending and marketing to be up for the rest of fiscal 2023 and how we should think about the implications for the model?

Sure. And I'll start with marketing. So from a marketing perspective, we do expect marketing or advertising and promotion to step up in the second quarter. We'd expect it to be in the 3% to 4% of net sales range for the second quarter. For the full year, we'd expect our advertising and promotion spend to be in the mid-2% range, and really, that's pretty consistent between the first half and second half, with again the highest spend in the second quarter. From an approach perspective on shakes, we are doing some light promotion primarily in the second half, but it's not a significant drag. It does impact the fourth quarter margin a bit, but that's not a significant driver.

Thanks. Could you provide your thoughts on the competitive environment for Premier Protein? Are there smaller competitors that seem to be gaining an advantage due to limited capacity in the industry? How do you view the competitive landscape as we move through the rest of your fiscal year? Thank you.

Yes. The competitive environment hasn't changed a ton since kind of the last quarter and before. I would say the same themes have continued. So a few more people have taken pricing this last quarter, including us, within RTDs, and then capacity constraints across the competitive set have continued. TDPs for the category are actually down about 6% for RTDs. To your question about smaller brands, we are seeing some smaller brands pick up some TDPs. So I think what should happen is if you look forward as some of these brands that have had capacity constraints like ourselves start reintroducing our full line and then accelerating with innovation, etc., I think that you'll see a combination of expansion of the RTD category from a shelf space perspective as well as picking up from some of the competitors that aren't necessarily performing to the levels that the big brands can.

Thank you.

Thanks.

Thank you. Our next question will come from Jason English with Goldman Sachs. Your line is open.

Hey, good morning folks. Thanks for slotting me in. I guess I'll go with two here. Starting with the PET bottle supply. When you first kind of brought online, it was expected to only bring a substantial amount of capacity, but I believe it was also going to bring a substantial amount of cost savings, allowing you to effectively get the margin profile on PET bottles down in line with your Tetra Pak. Given the challenges so far since you've onboarded that, where do we stand in terms of the absolute magnitude of capacity at run rate as well as that margin position?

Thanks, Jason. I'll hit the capacity, and I'll let Paul hit the cost savings. From a capacity standpoint, we have improved. So you are exactly right. The plans were to expand it quite dramatically. Last quarter, like I said in my prepared remarks, we increased every month from a run rate standpoint. Actually, Q1 is pretty close to where our run rate needs to be or where we assumed it would be for the whole year. It steps up a little bit. We are expecting it to step up a little in the back half but we saw some real improvement this quarter, which was needed and nice to see. So I would say we're very close to the run rate we need to be for the rest of the year. It is a big cost savings and you described it well that it was going to be consistent with pretty close to Tetra Pak. Paul, do you want to add anything on cost savings?

No, I think you covered it. We certainly are realizing benefits on cost from this switch. It's definitely been paying us in the first half, and then obviously, we'll start lapping as we get later in the year. But yes, we're seeing the benefits from this relationship.

Yes, Jason, I would also like to mention that this change brings significant sustainability improvements, particularly regarding the amount of plastic used in these PETs. There are real benefits to this change in that area as well.

That's good to hear. I'm more enthused about the potential to allow you to enter C-stores for that format, though. Sticking on the topic of cost, the way protein prices have come in quite a bit, like they've been falling fast, which is really encouraging to see. You made comments last quarter about sort of hedge timing. So a question to you, where your hedges stand and when can we expect to see these lower prices roll to your P&L?

Yes. So our biggest cost is actually milk protein and then whey proteins on the powder, so milk is on the shakes and whey protein on powders. We're really coming through really kind of the peak of the protein costs, especially on the milk proteins here in the second into the third quarter, and then we do expect our protein costs to start to pull back. Whey protein is, to your point, falling more dramatically, so we will see perhaps some benefit to that starting as early as Q4. But really, I think most of the year-over-year tailwinds will come more in fiscal 2024. As we go through the rest of the year, the magnitude of the headwinds from protein declines as we go into Q3 and into Q4, but it's still a net headwind as we just get through the peak of the market. There's a lag time from the time we procure protein to the time it rolls through cost of goods sold, and that's somewhere in the six to nine months depending on how far out we are. And so we expect the peak of that to hit us this quarter and into next.

Understood, thanks a lot. I will pass it on.

Thank you. Our next question will come from Ken Goldman with J.P. Morgan. Your line is open.

Hi, thanks. Just to build on your answer to Jason's question there. Historically, your gross margin has gone up or down a little more, I think, than most companies that we cover. And part of that, I think, is because of the underlying movements in non-fat dry and in whey. And I guess my question is, as you look ahead, is there any reason to think that as those prices remain lower, if they remain lower, that you'll have to discount your products more heavily? Given that you're still capacity constrained, the industry is still capacity constrained. I guess my question is, should we assume for modeling purposes that as these costs come down, your gross margin should increase and you won't have to give back a significant amount of that pricing? That's, I guess, the way to ask it.

Yes. So I'll start, and then Darcy, if you want to touch on just discounting. But there's a couple of pieces of this in play that you have to consider. So yes, as we go into 2024, we'd expect some headwinds on protein. We are seeing inflation in other places, especially starting in the second half, which is around packaging and some of our other manufacturing costs. But keep in mind that we're also in a year where we're doing very little promotional spend. So as we go into 2024, you have the dynamic of protein costs going down, but the thinking is that we are going to invest in brand building and more into the promotional side of it. And so net-net, I think gross margins ought to bounce up a bit next year, but those are the two primary things that are in play. On whey protein, because of the magnitude of the change is so dramatic, we should see gross margins for powders come up quite nicely from where they are right now. But on shakes, it's really a trade-off between protein costs coming down and obviously, restarting the promotional activity. But net-net, I would expect that to be unfavorable. The other thing I want to mention, I think Jason asked this, and maybe I didn't get to, which is we're covered on our proteins about 75% to 80% at this point for fiscal 2023.

Thank you for that. And then in e-commerce, I'm just curious for an update there. It doesn't seem like it's quite as strong as for other channels in Premier. Just curious for your strategy there and for the outlook for the year, if that's changed at all?

Yes, you're right. It was the only channel that was down a little bit for the quarter. Just a reminder that for our e-commerce business, about 50% is Premier and about 50% is Dymatize, and Dymatize is actually up quite nicely. But on the Premier side, yes, our issues are still stemming from the bottle co-man constraints that we talked about last quarter. We've had continued challenges getting all flavors back in stock at one of the key retailers. They are tight on warehouse space and are prioritizing promoted items, especially during the holiday time, and we see this firsthand because Dymatize is promoting, and they are fully in stock online at this key retailer. So we are actively working on Premier to get it back. I do believe we have the inventory. They need the inventory. So I believe that this will be solved in the next several months, hopefully sooner than later. But one thing I would just remind you that e-commerce in total for our business is only about 10%. So it's an important channel. We want to get it on track because it is one of the areas where we build households and get trial, but it is still a fairly small part of our business.

Thank you so much.

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

Hi, good morning. So given that the production capacity is improving better than you expected, can you talk about any changes in your advertising or promotion plans? Is that driving any change in your plans for the year? And I guess, how are you thinking about the further recovery in TDPs over the course of the year? Can they approach 2021 levels given the improving supply?

We are maintaining a consistent approach with our promotion and marketing plans. As previously mentioned, we will be ramping up our marketing efforts in Q2, focusing on non-Shake items. This includes marketing our Dymatize and Premier Protein powder, as well as any products we have in good supply. Towards the latter half of the year, we plan to shift our marketing efforts back to our shakes, which has always been part of our strategy. Regarding promotions, we intend to keep them light and won't start that until Q4. In terms of TDPs for shakes, we are noticing slight improvements this quarter due to better stock levels. We expect this trend to continue into the next quarter, particularly with the reintroduction of our SKUs in Q3, which should lead to some increases in TDPs, although not significantly. We are anticipating resets in late spring, aligning with Q3 and continuing into Q4. As for returning to 2021 levels, I believe we will likely need until Q4 or possibly Q1 of 2024 to achieve that fully, but we expect steady improvement each quarter leading up to that point.

Great, thank you. And then just on Dymatize, can you elaborate on what's impacted the performance this quarter and how you're thinking about Dymatize growth over the rest of the year?

Sure. There were two items that were headwinds to the quarter. The first is we did see some shipments pull—we had some shipments into especially international that were stronger in Q4 that deloaded in the first quarter. So that was about 15% of the 25% headwind, and then we were lapping discontinued products, which we've called out over the last couple of quarters as a headwind that we will see continue into the second quarter. So those are the two primary items, if you pull out that, those two combined were about a 25% headwind that gets you closer to the consumption growth, which was up 30%. So we really feel like the brand is doing well from a consumption perspective. So we really want FDM and e-commerce. We just have some shipment timing issues and the decision we made last year that just got items that are weighing it down.

Yes, I would just encourage everybody to focus on the consumption for Dymatize. The business is super healthy and shipments can be a little lumpy in that business because international and specialty represent about 50% of the business, and those ordering patterns can really—you can get three big orders one quarter and then one the next. So really, focusing on consumption is the best barometer of the health of the business, and we've been consistently seeing double-digit growth.

Thank you.

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

Hi, first, just let me ask you if your revenues came in quite nicely ahead of expectations. But you only brought up your guidance on the EBITDA side. So is there anything maybe timing-related we should be aware of as it relates to revenues?

Yes, from an EBITDA perspective, we did bring up the bottom end of our range, that's largely reflecting some of the margin favorability that we saw in the first quarter. And really specifically, we saw the production attainment fees of about $3.8 million in the first quarter that we did not include in our original guidance. And so that is certainly a big part of the reason for raising on EBITDA.

And Kaumil, I would just say on just the guidance piece, we have had a strong start to the year, but it's early. And we just want to be a little more conservative. And I think we want to see another quarter before making any changes to our guidance.

Okay, got it. And anything you'd like to add on spring shelf resets, just maybe with the outlook? I think by now, maybe you would have a good sense of where you stand and how that lines up with your ability to supply?

Yes, sure. So I'll hit fall first. I think I talked about it a little last quarter, but I would say, overall, both Dymatize—let's just talk about product that we have supply—that ample supply. So Dymatize and Premier powders are doing very well in actually both fall and spring resets. We've gotten store expansion. We've got new items in. I talked about in the prepared remarks around getting back club distribution on Dymatize, which was exciting, looking forward. And then on—and that actually applies to spring resets as well. When we're talking about shakes and our focus is for spring is reintroducing our SKUs, the three flavors that will be coming back in really March, April. So those—and actually, it's more April, May for the spring reset. And it's looking good. So most places, they're excited to get our full line back, and we're expecting to—everywhere we've heard for spring, they've taken all three items. So feeling pretty good about resets.

Alright, thank you. Our next question will come from Chris Growe with Stifel. Your line is open.

Thank you, good morning. I had a quick question for you, if I could. And just to understand, you mentioned having stronger production this quarter. Was that just a one-quarter factor, or have you seen that kind of continue through the year? I guess, ultimately, I'm just curious with your volume growth expectations for the year have changed if you're seeing a stronger rate of production from your co-manufacturers?

So yes, we had stronger production this quarter, and I will say that we are lapping the worst of our capacity constraints last year. So we're lapping a low number, but we did have strong—about 20% production growth. So we were very pleased with that. As far as our full year, we're still expecting to be—we talked about low double-digit growth for production. And although I think we're feeling better about that after getting the first quarter under our belt and hopeful we'll over-deliver that. But right now, I think that it's still a good number to go on.

And then related, would you expect to ship ahead of consumption in the second quarter, again, if this were still an inventory rebuilding mode, is that right?

I would expect shipment and consumption to be closer tracking in the second quarter. We may see a little bit of build as we get into the second half, as we start to relaunch some of the flavors. We may expect to see shipments may be slightly ahead of consumption. But I think we'll be a little bit more balanced as we go forward, as we close the remaining gaps on shelf. We'll ship a little bit ahead, but it should be a better balance as we go forward, I think.

And then just one final question, the production of TDPs. Is that a one-time factor? Do those continue? Just want to understand how that could affect the business in the future? And I am finished here, thank you.

Sure. Yes, those specifically related to a contract period that has now passed. So it's basically a minimum volume commitment that is over a contract period. So we would not—but we are not expecting to have further production attainment fees as we go forward.

Thank you.

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

Good morning, thanks for the question. I guess I just wanted to touch, first off, on your change in the data providers, especially the move to Numerator. What have you sort of learned, if anything, from seeing those expanded data, the insights there? Are you thinking any differently about penetration now? Are you reassessing how or how much you can mark up on the brand going forward? Is there any impact on how you think about channel expansion? Just anything there would be helpful.

John, I would love to get this question next quarter. We just changed—we are—it's a ton of new information. Our focus for the last quarter has really been reconciling the old data with the new data, making sure that we feel good about it. So that has really been our focus. The team is digging in to really mine the data because I think you know this, is that there is a ton of wonderful insights in there, but we've only gotten a really—the top level at this point. The main reason for the switch is it's at—both Numerator and IRI actually better—we have better coverage over our business, especially when it comes to e-commerce and specialty. So it was a good move for us just from a coverage standpoint. And then just the depth of insights that I think we're going to get from on the Numerator side will be great. But we haven't even scratched the surface so far right now. So ask me that next quarter.

Okay. So I'll save that for next quarter. And my follow-up on the innovation and the Good Night product. I think it's a big step for Premier moving into functional as opposed to just flavor introductions. I imagine there's likely more on the way from that pipeline. But based on the research you've done, how are you thinking about the role that Premier and Dymatize can play in functional going forward? Are there certain segments of functional that you're seeing lend better to one or the other? And then is it fair to think these products will be at least gross margin neutral, if not accretive, when they get to a normalized basis?

Yes. So we don't look at it necessarily as functional or not functional. Our innovation strategy is all about incrementality. So if you think of looking at our pipeline, it's either incremental users or incremental occasions. This one is perfectly aligned to the occasions side of things. I think we will also get some incremental users, but this is all about occasions. Our 30-gram shakes are mostly consumed in the morning. Obviously, Good Night is a nighttime beverage. So this is a limited launch. We are—it's three flavors on RTDs, one on powder. And it is just a test launch this year. So we're kind of dipping our toe in it. Early results—very early are encouraging. I think it's exciting to see some of the online reviews and consumers really getting it, really understanding that this is designed to be a new occasion. It has a great name for it. But in general, if you think of our innovation strategy on both brands, it's all about incremental. And if that overlaps with more function and leading into function, I think that's great. But again, our focus is being incremental to the current line.

Okay, thank you very much.

Thanks.

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

Hi, guys. This is Jim for Ben. Congrats on a good quarter. I'd like to ask on feed mass, you guys posted really strong results there. Is that just because the in-stock rate is improving as the capacity constraints start to alleviate? Can you just give us some detail on what's going on there?

I assume, Jim, you're talking about Premier?

Yes, go ahead.

Although both brands had a great quarter in FDM, but yes, in Premier that channel, like so FDM, those channels were most affected by our capacity constraints last year. So yes, so better in-stock rates are really driving those improvements. We've gotten some minor distribution gains, just really more stores that are factoring in as well, but the primary reason is just better in-stocks. I think you know this, but our biggest opportunity really is FDM. So I think that just—I think we'll continue to see strong growth within those channels from here on out.

Is there a certain point that you guys said, whether it's consistency, same stock or maybe shelf velocity that you guys can move from kind of in-aisle for the NCAP? Because I know sometimes in the mass channel, the shopper might not go into the aisle where the shakes are. They're not specifically looking for it; people have more visibility on the end cap. Is there anything—a metric that you need to hit to maybe start to see some of those shifts in the store?

Just improved in-stocks. We need to have enough product that not only are we filling out the shelves, but we have extra product that we can also fill up the end cap. So directly related to production capacity, it will flow in. We've been asked by many customers if we can do end caps. We have held off. We actually did get some display in January, but in a couple of stores. But in general, this is a capacity issue—we just need more products, and then we can shell it to shelf.

Okay, great, thank you. I will pass it on.

Thank you. Our next question will come from Bryan Spillane with Bank of America. Your line is open.

Hey, thank you operator. Good morning, everyone. I just wanted to start with just a clarification first and then I had one question. I think Darcy in the prepared remarks, you mentioned that in 2024, you'd have a 20% incremental capacity or extra capacity available for Premier shakes. And I just want to make sure the 20% you're talking about is volume, right, not revenue?

Correct.

Okay, thank you. And then I guess, this question is for both you, Darcy and Paul. And as we're kind of thinking about modeling out beyond even next year, so kind of thinking about fiscal 2025 and kind of normalization of margins. I guess at the peak, gross margins were 36% and EBITDA margins were in the mid-20s. Obviously, there were some anomalies, right, that affected gross margins that I think promotions weren't—you weren't promoting as much. But just I guess, if we're trying to model the business going forward, right, and trying to balance margins, but also funding growth, and given just you've got more co-man capacity, I think there's some structural costs here that are higher, but you've priced, is a mid-30s gross margin still achievable, should it be maybe more low 30s? And again, how that translates to EBITDA margins, just really trying to understand how much leverage might be in this business as we kind of move into the out years or whether we should be thinking about more kind of the funding the revenues and revenues being the bigger driver of EBITDA growth in the out years?

Sure. I can start, and then Darcy, feel free to jump in. So you mentioned some of the margins in the past. And so I think some of those peak margins were during the time when we had capacity constraints a few years ago, and at that time protein costs were relatively low and we pulled all of our promotion of marketing. And so we always call those kind of outsized margins, the mid to upper 30 margins and the EBITDA margins in the 23% to 25% range. As we go forward, really, the way we think about the business is that our gross margins historically strip out some of those unusual periods, were more in that 32% to 33% to 34% range. So I do believe our gross margins could be in that range over the long term. And then with our spend behind promotion and our investments into marketing, we still think EBITDA margins—we obviously, our algorithm is 18% to 20% EBITDA margins. We've typically been on the upper side of that. I still think that is certainly achievable, perhaps above that, as we do gain leverage. And I think most of the leverage will be primarily at the G&A line. We would likely get some within gross margin as well, but I do think the G&A leverage that we would get. So as we think about it, I think the long-term algorithm is a good proxy for EBITDA margins on the upper half of that. And like I said, gross margins in the 32% to 34% range is how we think about it long term.

Okay, thank you.

And Bryan, just to note on the cadence. Obviously, the margins, specifically EBITDA margins can range from a quarterly basis. Q1 is always the highest because we don't do a lot of marketing, and then Q2 is usually the lowest because that's a big time when new consumers come into the category. So new year, new you, and usually we market on the heavier side. So that's—and then kind of flat Q3, Q4. So that's usually the cadence of EBITDA margins.

Thank you. That’s helpful. If I could ask one more question regarding the long term, what is your understanding of household penetration compared to brand awareness? Is brand awareness higher or lower than household penetration? If it’s higher, that could mean household penetration would increase more quickly. However, if brand awareness is lagging behind, then additional marketing efforts may be necessary. I’m trying to grasp how aware people are of the brand relative to the household penetration.

Yes. I think it's the funnel, right? You have to be aware before you can try. And so yes, I think that our opportunity is definitely kind of the top part of the funnel, which is getting people aware of the brand. We have decent, kind of aided awareness. So have you heard of Premier Protein. We have some big opportunities. The unaided is name a convenient nutrition RTD brand, and then to come back with Premier Protein. So I think there is definitely—we've been dark. I think this is where I think we all kind of forget because we're close to the story, but we've really been dark on marketing and promotion for over a year or plus. So, we've got some work to do to get back on and get in consumer’s kind of vocabulary. I think what's so encouraging for me is even during this period of time when we haven't been marketing and promoting, we're holding on to—we lost a little bit of household penetration, but we're really holding on to those high-value loyal consumers, and our loyalty metrics are showing that. So I think that we've got some work to do definitely unaided, and that would be our unaided awareness, and that will be the start.

Great. Thanks, Darcy, thanks, Paul.

Thanks.

Thank you. Our last question will come from Bill Chappell with Truist. Your line is open.

Thanks, good morning. You just—trying to understand kind of how this—the demand or the volumes grow over the next as we move especially into 2024. Specifically, I mean if you look at the scanner data, in 2022, volumes for kind of your business and the whole category were flat to down. And I'm trying to understand is that the thought is—the pricing is there, the capacity constraints, and how does it really change as you get more capacity? I mean, to get consumers back into the—just to grow those volumes again, is it coming through the track channels or is it coming back from the club? Can you grow even faster on the club channel?

Both. So you're right. Volumes have been pretty—depending on the quarter, slightly down in the category or kind of flattish in 2022, and that was a response to both a fair amount of pricing and also capacity constraints. I mean I said, and I think in an earlier question, that TDPs for the category were down 6%. So just lots of capacity constraints and issues across the competitive set. So as we look forward and improve capacity, improve in-stocks, and start getting back to demand drivers, I don't see a lot more pricing coming into play this coming year. So yes, I think you'll start seeing volume improvement. We started seeing Premier volume increases this quarter, which again was nice to see. And from where is it coming from, from tracked and untracked, I think we expect both. We'll have bigger increases in likely kind of the food drug mass area because they were the hardest hit from the capacity constraints. But we still see upside on club, and what we've seen in the past, which I expect will be the same for the future, is we often get new households, new trial within both e-commerce as well as FDM channels. And then as we have this 50% repeat rate. So as consumers repeat and become everyday users, they often repeat within the club channel because they want bigger packs at a cheaper price. So the whole model that has gotten us here, I think will continue in the future, and you'll see growth—volume growth within both tracked and untracked channels.

Got it. And I guess I'm trying to understand like it seems like you're modeling or we're looking for kind of a soft landing as you—over the next three quarters, lap the double-digit pricing and at the same time, capacity comes up and volumes need to accelerate. So I mean do you see that taking a few quarters to adjust or is it that simple of if you can get kind of the full set at the tracked channels like you have right now with the club channels that the volumes pick up pretty quickly?

Yes. Paul, do you want to talk about the cadence of volume?

Sure. So we do expect volume to grow for Premier in the—as production comes online, and the key drivers for that are, we will relaunch some of the flavors that we aren't currently selling. We talked about having some wide promotion in the latter part. But as we get into the next fiscal year, obviously, our current thinking is that it will be more of a normal promotional cadence of forward promotions in club, which drives a lot of volume. I also want to just highlight that we still have a pricing benefit for shakes in the second half. We took a price increase in October of this year, and so while in the first half, we get the benefit of kind of two price increases, the one we took last April and the October 1 of this year. In the second half, we still get a pricing benefit in the second half related to the current year price increase. So we still see a mix of volume and pricing benefits in the second half, but volume does become a more significant contributor to the second half than we expect to be in the first, and that's because of the production coming online.

Got it, thanks so much.

Thank you. Our last question will come from Rob Dickerson with Jefferies. Your line is open.

Thanks. Just have a quick question, longer term, and a quick follow-up. Darcy, I'm just curious, if we think longer term, just around brand positioning where it seems like category is still strong or are you still holding share despite the reduction in TDPs recently? There's still some new innovation kind of being generated in the pipeline, but if you step back, and you think about the entire category and kind of the competitive backdrop, it usually when volumes are growing so much, there's usually increased competition, new innovation, repackaging, just kind of a very general question, do you kind of foresee any repackaging design, coloring what have you need as we think for just, I don't know, the next two to three years?

I am assuming you're talking about Premier?

Yes.

We're always looking at those kind of things. I think that we've updated kind of the look and feel of Premier over time. I think from a brand positioning standpoint, we're feeling really good. We continue all of our consumer research just continues to tell us kind of we have a tiger by the tail. And this is—this kind of mainstream approachable protein is right on trend. And so I think that the brand is positioned right. I think our challenge is just—it is production, it's capacity, so then we can drive the message to more people. And that is absolutely the focus.

Okay, fair enough. And then just quickly on cash flow. Look, obviously with more production, way coming down, everything you talked about, there's margin moving up and the sales moving up, EBITDA is moving up, leverage is in a good spot, should be generating more free cash flow and your command. So not a lot of CAPEX needs, at least for now. So just kind of generally speaking, again, cash flow starts to pick up later this year, definitely in the next fiscal year, where would you kind of view priorities for cash allocation? That's it, thanks.

Sure. Yes. So you're completely correct. We—our business generates really strong cash flow, which obviously gives us a lot of optionality on the capital allocation side. Where we are today with our focus is on organic growth. We have a high bar for M&A and so really, the capital allocation decisions are really between share buybacks and deleveraging, and the deleveraging is really primarily around paying down our revolver as the remainder of our debt is fixed. So we still look at share buybacks as a prudent capital allocation option for us and we'll continue to assess that versus delevering as we go through the year. And keep in mind, we delever just through EBITDA growth. So we'll get below 3 times just with growing EBITDA. So it just gives us the optionality to look at share buybacks versus bringing down our revolver.

Great to hear, thank you so much.

Thanks.

Thank you. Ladies and gentlemen, we have reached our allotted time for questions, and this does conclude today's program. We appreciate your participation, and you may disconnect at any time.