Bellring Brands, Inc. (BRBR) Q1 2024 Earnings Call Transcript

Good day and thank you for standing by. Welcome to BellRing Brands First Quarter Fiscal Year 2024 Earnings Conference Call. At this time, all participants are in a listen-only mode. After the speakers’ presentation, there will be a question-and-answer session. Please be advised that today's conference is being recorded. I would now like to hand the conference over to your speaker today, Jennifer Meyer, Investor Relations for BellRing Brands. Please go ahead.

Good morning, and thank you for joining us today for BellRing Brands' first quarter fiscal 2024 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 section at bellring.com. In addition, the release and slides are available on the SEC's website. Before we continue, I would like to remind you that this call will contain forward-looking statements, which are subject to risks and uncertainties that should be carefully considered by investors, as actual results could differ materially from these statements. These forward-looking statements are current as of the date of this call, and management undertakes no obligation to update these statements. As a reminder, this call is being recorded, and an audio replay will be available on our website. And finally, this call will discuss certain non-GAAP measures. For a reconciliation of these non-GAAP measures to the nearest GAAP measure, see our press release issued yesterday and posted on our website. With that, I will turn the call over to Darcy.

Thanks, Jennifer, and thank you all for joining us. Last evening, we reported our first quarter results and posted a supplemental presentation to our website. This presentation is designed to provide more insight into our business, consumption, and key metrics and now includes more information on our powders' business. I'm pleased to share the fiscal 2024 is off to an excellent start. The business continues to accelerate as we bring on new share capacity and begin to drive demand. Our first quarter results came in ahead of our expectations. Net sales grew 19% over prior year and adjusted EBITDA was up 18%. Premier Protein drove the outperformance, as some key customers chose to right-size their trade inventory heading into the New Year, New You season started in January. As you saw in yesterday's press release, we raised our outlook for the year. We now expect net sales to grow between 12% and 17% over fiscal 2023 and adjusted EBITDA to grow between 11% and 18%. Our better-than-expected first quarter performance, along with strong consumption trends and confidence in our capacity expansion, drove our decision to raise the top and bottom line. Moving to shake production. In fiscal 2023, we made notable progress to grow and diversify our shake supply, and our efforts continue into 2024. I'm happy to share that we brought our second greenfield co-man facility at Michael Foods online during Q1. They will continue to scale up over the next 12 months, producing more shakes every quarter. We remain on track to grow production north of 20% this year, enabling strong net sales growth in 2024 and increased weeks of supply. The demand and supply dynamics on shake will remain tight for most of the year, and we'll continue to be nimble so we can navigate effectively. Now to the category and brand updates. The convenient nutrition category grew 10% in Q1 as tailwinds around health and wellness and fitness continue to drive growth. Consumer interest in functional beverages and sports nutrition products continues to be high. Ready-to-drink led the category up 16%, and ready-to-mix grew 6%. Increased supply and distribution gains are lifting ready-to-drink growth, while the growth in ready-to-mix remained healthy despite lapping significant price increases. Premier Protein shake consumption remained strong this quarter at 29%. Growth was robust across all channels driven by improved supply, distribution expansion, and continued excitement around our seasonal flavors. The highest growth was in Mass and eCommerce. Mass benefited from higher in-stock levels and distribution gains, while eCommerce saw strong growth behind promotional activity. Our latest seasonal flavor, Winter Mint Chocolate, demonstrated remarkable incrementality to the brand. January consumption growth continues at 34%, lifted by incremental promotional activity in tracked channels. Our brand metrics reflect our continued momentum, as Premier Protein reached all-time highs in TDPs and household penetration. Premier Protein with RTD market share of 21% maintained its position as the number-one brand in the RTD segment as well as the number-one brand in the broader Convenient Nutrition category. Premier Protein continues to gain new users, reaching over 17% of households this quarter, adding nearly one percentage point versus Q4. In calendar year 2023, the brand grew household penetration 24%, a significant contributor to the overall RTD category growth. Premier Protein's household penetration continues to be the highest in the category. We expect marketing and promotional activities in the remainder of fiscal 2024 to further grow our reach. With the RTD segment household penetration still below categories such as nutrition bars and energy drinks, we see tremendous opportunity to grow in our existing channels. Premier Protein powder continued its strong trajectory, growing 66% in Q1 behind distribution gains, strong velocities, and promotional support. The momentum continued in January up 50%, as we begin a powder-focused marketing campaign. We remain encouraged by the growth potential of the Premier Protein brand in this format. In fact, during calendar year 2023, Premier Powder's household penetration grew 82%, the highest of any key competitor in the Powder category. We believe the brand will continue to bring mainstream consumers into the Powder category in the same way Premier did to the ready-to-drink category. Turning to Dymatize, the brand had a solid quarter with household penetration maintaining record highs and consumption of 16%, significantly outpacing the category. We saw double-digit growth in nearly all channels driven by distribution gains, promotion, and continued top-tier velocities. Specialty consumption growth was the only exception; it remains challenged as consumers shift purchases to mainstream channels. Looking forward, Dymatize launched a new national marketing campaign in Q2, which focuses on what makes the brand unique: its super premium ingredients and amazing taste. The formulated for more campaign has three pillars. The first focuses on the brand and superior ingredients and how they support superior results for athletes. The second pillar showcases our amazing tasting flavors like Fruity Pebbles to highlight the fun they bring to even the most serious athlete. The third is possibly the most exciting if you're a football fan. I'm thrilled to share we have expanded our core team of Dymatize athletes and influencers, and we are partnering with San Francisco All-Pro running back, Christian McCaffrey. We are eager to see the impact this type of enhanced digital marketing and top-tier influencer will have on our brand awareness and household penetration. In closing, our Q1 results position us well for an above-algorithm fiscal year. Our confidence in our long-term outlook for BellRing remains strong. Our business is focused on the strongest segments of a growing category with a ton of upside. Premier Protein and Dymatize are leading mainstream brands with low household penetration and strong loyalty. Our momentum continues to grow as we began to drive shake demand and ramp up our powder marketing efforts. We continue to increase our shake supply, and our scalable supply chain will enable many years of robust shake growth. We are bringing flavor excitement to consumers and retail partners, and more innovation in our pipeline to fuel future growth. Before passing over to Paul, I'm sure that most of you have heard that Rob Vitale, our Executive Chairman, has returned from his medical leave. We are incredibly excited to have him back at full strength. We look forward to sharing our progress next quarter. And I will now turn the call over to Paul.

Thanks, Darcy and good morning everyone. As Darcy highlighted, our first quarter results came in above our expectations. Net sales for the quarter were $430 million and adjusted EBITDA was $101 million. Net sales grew 19% over prior year and adjusted EBITDA increased 18% with adjusted EBITDA margin of 23.4%. Starting with brand performance, Premier Protein net sales grew 19%, behind strong growth for RTD shakes and powders. Distribution gains, organic growth, and light promotional activity drove shake growth. Shake consumption dollars grew 29%, outpacing shipment growth of 19%. The former benefited primarily from higher net pricing as price increases at retail lagged our October 2022 price increase on shakes. Dymatize net sales decreased 21% this quarter as the brand benefited from increased distribution and organic growth of domestic mainstream channels. These gains, combined with lapping last year's Q1 trade inventory de-load, drove volume gains in the quarter. Price/mix was a partial offset to this growth, driven by incremental promotional activity and unfavorable mix. Gross profit of $148 million grew 22%, with an increase of gross profit margin of 80 basis points to 34.4%. The margin increase resulted from input cost deflation, partially offset by incremental promotional activity and lapping production attainment fees received in the prior year. Excluding one-time costs in the prior year period, SG&A expenses as a percentage of net sales decreased 90 basis points, as we lap our lowest SG&A spend quarter in 2023. Operating profit of $73 million decreased $2 million compared to the prior year and was negatively impacted by $17 million of accelerated amortization. This was a non-cash expense recorded in connection with our Q4 decision to discontinue the PowerBar North American business and was treated as an adjustment for the non-GAAP measures. The intangible assets associated with this business were fully amortized in the first quarter. Before reviewing our outlook, I would like to make a few comments on cash flow and liquidity. We generated $74 million in cash flow from operations in the first quarter. While our working capital modestly decreased in the first quarter, we continue to expect net working capital growth in fiscal '24 to exceed our net sales growth rates as we add weeks of shake supply. As a result, our cash flow in fiscal '24 will be modestly lower than fiscal '23. During the quarter, we repaid the remaining $25 million of borrowings under our revolving credit facility. As of December 31, net debt was $755 million and net leverage was 2.1 times. With our adjusted EBITDA growth and strong cash flow generation, we anticipate net leverage will decline below two times in fiscal '24. With respect to our share repurchases this quarter, we bought 200,000 shares at an average price of $44.27 per share, or $9 million in total. Our remaining share repurchase authorization is $14 million. Turning to our outlook. We raised our fiscal '24 guidance for net sales to be $1.87 billion to $1.95 billion and adjusted EBITDA of $375 million to $400 million. Our guidance supplies strong top line growth of 12% to 17% and adjusted EBITDA growth of 11% to 18% with healthy adjusted EBITDA margins of 20.3%. As Darcy mentioned, our better-than-expected first quarter performance drove our decision to raise our outlook and we don't expect any major changes to the cadence we communicated last quarter. Moving to our second-quarter forecast, we expect net sales growth to exceed 20% with the majority of the growth driven by Premier Protein as we restart meaningful shake promotions. Consequently, we expect pricing to be a significant offset to the strong shake volume growth. We expect second quarter adjusted EBITDA margins to improve modestly compared to prior year as higher gross margins are partially offset by higher SG&A as a percentage of net sales. Gross margins are expected to benefit from lower protein costs, offset partially by increased promotional spend and other input cost inflation. In closing, we are pleased with our good start to fiscal '24. 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 comes from the line of Andrew Lazar from Barclays.

Great. Good morning, everybody.

Good morning.

Maybe to start off. I'm trying to get a better sense of what you think is driving customers to sort of raise their and their trade inventories. It sounds like that happened at a greater level than maybe you had anticipated heading into the sort of the New Year, New Year season. Is that normal course of business or indicative of the increased shelf space and distribution? Just trying to get a sense of what drove that if it was sort of beyond your expectations?

Yeah, it was. It was beyond. And mainly, it was due to a few customers carrying low inventory in Q1 during the holidays. And so, what happened is they were low. We weren't sure if they were going to right-size their inventory, but they did, and we were able to meet the demand. So it was more about right-sizing their own inventory because they were low.

Got it. And then, I think when you initially provided your fiscal '24 guidance last quarter, sales growth at the midpoint of about 12.5% was well below your expected capacity increase for the year, I think around 20%. And much of that I think was attributed to your expectation that some of the added capacity would be built up as your own internal safety stock. If capacity is still expected to grow around 20%, I guess I'm trying to get a sense of why now you're expecting a narrower gap between added capacity and sales growth. Is it simply just that the demand is stronger than you thought and so basically you don't have to add as much safety stock as you anticipated? Just trying to get a sense of what drives that and what that means for the business. Thanks so much.

Yeah, that's right. And yeah, simply put, given the current consumption trends, we estimate that we will need to use more of our capacity for sales instead of inventory. As we explained last time, we need to build our inventory up to a level. Our target is six to eight weeks, but we do have the flexibility. We can operate around four to five weeks. So if the demand is there, we're going to make a call and we can lean a little bit more into sales.

Thanks so much.

Thanks.

Thank you. One moment for our next question. Our next question comes from the line of Pamela Kaufman from Morgan Stanley.

Good morning. I have a follow-up to Andrew's second question. Maybe just to ask it slightly differently, I guess just given how strong demand has been in recent months, do you have enough supply to meet the demand if it stays at these levels? And I guess, is there any flexibility to add more capacity or to kind of exceed the current guidance as demand stays where it is?

We are confident that we can meet our current guidance and it is feasible to increase our capacity if needed. We have developed a much stronger network than ever before. We are in discussions with all our co-manufacturers to explore additional supply options. We have been focused on this for quite a while, particularly intensifying efforts over the last year to two years. It's encouraging to see our two new facilities ramping up production, and Sycamore Partners is also increasing their output. I believe we can reliably deliver on our current guidance, and we are actively encouraging our co-manufacturers to provide more supply to address the demand.

Thank you. And just my other question is about your plans for promotion. Have you adjusted your plans at all just considering how strong demand has been? Maybe is there a need to promote less just given the demand environment?

Our promotion strategy for this year remains unchanged. We plan our promotions well in advance, and our retailers rely on this commitment. Our 2024 strategy has already been established. Currently, what you're observing in tracked consumption is influenced by distribution, improved in-stocks, and promotional efforts, particularly with some of our major customers in track channels. We strongly believe in the importance of promotion. It's not just about the discount percentage, but more about visibility. We need to showcase our brand effectively, as it still has low household penetration. The second quarter is our peak promotional period, after which we shift our focus more toward marketing rather than promotions.

Thank you. I'll pass it on.

Thank you. One moment for our next question. Our next question comes from the line of Ken Goldman from JPMorgan.

Hi, thank you. One of the questions I received from investors overnight was whether we should be modeling a reversal of that 1Q inventory load. I assume, listening to you today and given that low was really to refill, what was low and customer stocks that we shouldn't model necessarily any kind of reversal in terms of BBU under shipping in any quarter ahead. Just to make sure that's correct, just so I can start with that.

Correct.

Yeah. Correct, Ken. We do not believe we shipped ahead. There will be a modest deload in Q2 because we did ship some promotional volume in the first quarter, which we expected. But we expect a modest deload and a smaller deload than we saw last year.

Thank you. I want to follow up on that line of thought. What would happen if you are fully committed to your promotions and pushing your team hard? My question is, in a scenario where customers request more shipments due to low stock levels, will you be less equipped to meet those requests in the future? This would obviously be a good issue to have if demand is exceeding expectations. But is it reasonable to assume that the level of overshipment we experienced in the first quarter may not occur again, considering your production capabilities after what we witnessed in that quarter?

Yeah, Ken.

Yeah. Go ahead.

I think it's fair to say that, yeah, obviously, it reduces our flexibility to some degree because we did not expect that. But we feel very good about our capacity that's coming online and where we are with our guidance. So we feel comfortable, but you're right. I mean at some point, if demand is so strong, you'll start to stretch your inventory, but we feel good about where we're at right now.

Thank you.

Thank you. One moment for our next question. Our next question comes from the line of John Baumgartner from Mizuho Securities.

Good morning. Thanks for the question.

Good morning, John.

Wanted to come back to good morning, Darcy. I wanted to revisit Premier Powder and the growth in market share you're experiencing there. Do you have any insights on where that share has been coming from? Are you observing any changes from consumers who previously bought powders aimed at weightlifters or bodybuilders? Are those consumers now shifting towards everyday brands like Premier? Or is this more about Premier launching new products that are adding to the overall powder category?

We believe it's mostly the latter. This is an area we are beginning to discuss more, and internally, we are getting really excited about Premier Protein powder. To share some numbers, Premier Protein powder currently has only 1.6 points of household penetration, which is very small, but it has just overtaken Dymatize. Dymatize has always been a strong brand, but it has a narrow focus, primarily targeting the best and most sophisticated athletes. On the other hand, Premier is now a mainstream brand entering the powder market, which is attracting new consumers. As I mentioned in my scripted remarks, we truly believe that Premier has the potential to mainstream the powder segment, similar to its success with the ready-to-drink segment.

Okay. Great. And then as a follow-up, coming back to the promotional discussion for Premier ready-to-drink, the distribution points that are up like 40% year-on-year, but the volume velocity is going down slightly even absent larger promo and advertising spending. Is there anything notable in terms of where these most recent distribution points have been accumulating or whether it's non-price promotion, that's elevating the volume more so than you would typically see as you build distribution?

Most of the distribution gains on Premier have two main components. One is the wider range of flavors, including the return of some past flavors and the introduction of new ones. We recently launched chocolate chip cookie dough, and our seasonal flavors are generating significant consumer excitement. The second aspect is the increase to 12-count sizes in food and mass, which have shown greater sales growth than anticipated. These larger packs are making our distribution points more effective.

Great. Thanks for your time, Darcy.

Thanks.

Thank you. One moment for our next question. Our next question comes from the line of Kaumil Gajrawala from Jefferies.

Do you hear better now? You guys hear me now?

Yes. We hear you.

Yes.

Okay, I apologize for that last time. I want to discuss your focus on the powder side. It seems that every time we have a conversation, you mention it a bit more. Can you elaborate on the differences in the consumers you're attracting with the powder and how it relates to the core product? Any insights on incrementality would also be appreciated.

Yes. Ready-to-drink products and powders complement each other well. Generally, the ready-to-drink option is more convenient for on-the-go situations, while powders are typically used at home. In terms of usage occasions, ready-to-drink options are mainly utilized as a breakfast substitute, while powders are predominantly consumed post-workout. Most powders are leaning towards the athlete demographic, which presents an opportunity for Premier to appeal to more mainstream consumers. Additionally, powders are frequently mixed with other foods, like in smoothies or high-protein pancakes, while ready-to-drink products are usually consumed directly from the packaging, emphasizing their complementary nature.

Okay. Understood. And then on convenience stores, a small piece of the rollout stores as a distribution story. Have you thought about are there opportunities to find the DSD partner or some other partner that can really sort of step distribution up enough in a much more meaningful way?

Yeah. So convenient just to put it in perspective, when you look at all of the retail sales of our RTDs, the entire category, convenience represents about 10%. And so the channels we compete in are around 90% of the retail sales. We still believe that especially Food, Mass, eCommerce are very underdeveloped. And it's also where our target consumers shop. So as we go through all of the opportunities for this brand and we rank them, convenience is just lower. It's still an opportunity, but it is just lower. And it's lower because, A, the size of the opportunity, and the cost and complexity of it. You talked about a DSD partner, which we would need. So these are areas where it is in the long-term plan. But we see a lot of other opportunities that are currently bigger and can accomplish our goals. And like I said, we're in 90% of the category already.

Got it. Thank you very much.

Thanks.

Thank you. At this time, I'm showing no further questions. This concludes today's conference call. Thank you for participating. You may now disconnect.