Bellring Brands, Inc. Q4 FY2024 Earnings Call

Good day, and thank you for standing by. Welcome to BellRing Brands Fourth 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. Please go ahead.

Good morning, and thank you for joining us today for BellRing Brands fourth 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 sections 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 this morning. Last evening, we reported our fourth quarter and fiscal '24 results and posted a supplemental presentation to our website. Fiscal '24 was a great year for BellRing Brands. Our net sales grew 20% with adjusted EBITDA of 30%. Our full year results for the second year in a row meaningfully exceeded our long-term algorithm, as we added shape capacity and began to layer in demand drivers. The end of the year is an important time for us to reflect on the past and reassess the future opportunity. There were three things that stood out to me. The first is the expanding growth potential of the convenient nutrition category, specifically, the segments that we compete in, ready-to-drink shakes and ready-to-mix powders. Ready-to-drink is the category standout, delivering double-digit growth in each of the last four years. Despite all of this growth, it still has low household penetration at 48% compared to most mature categories that are close to double that. This, combined with strong macro trends like the mainstreaming of protein, growing popularity of functional foods and beverages, and the continued rise in healthy convenient foods, highlights a long path of future growth. The second thing that stood out to me is the power and incredible future potential of our brands. This year was a pivotal year for our largest brand, Premier Protein, because we steadily increased our supply, and we demonstrated that the demand is there and will continue to grow as we layer in demand drivers. Premier Protein reached new highs across many key metrics, including household penetration, market share, distribution, and buy rate. What is truly unique is that we did this without significant advertising or promotion at many retailers, further illustrating the brand strength and future potential. The third thing that struck me is about our organization. Our team has been working hard to prepare for the moment when shake production would be unconstrained. We have fantastic advertising campaigns prepared, a compelling category story that will unlock shelf space for the category as well as our brands, and we developed delicious new products with a promising pipeline of innovation. At our core, we are a growth company, and we have been preparing for this moment, and we are ready for a strong '25. Now let's get to Q4 category and brand highlights. The convenient nutrition category grew 6% in Q4. It is rapidly transforming into an everyday and sports nutrition category. These segments make up 75% of it and are growing approximately 10% in Q4, which better reflects the category momentum. From a form perspective, ready-to-drink growth accelerated and continued to lead the category, up 13% driven by household penetration and buy rate, a fairly rare combination in CPG. Mainstream everyday and sports nutrition RTB brands continue to drive most event growth and are up 25% versus a year ago. Ready-to-mix grew 4%, slowing from Q3, which was boosted by incremental feature and display activity. We continue to be excited about the tailwinds that protein provides consumers and its high relevance with a broad swath of individuals. Turning to our brands. Premier shake consumption growth accelerated this quarter, up 14%. Growth was strong in mass, food, and e-commerce channels, driven by accelerated velocities, feature and display activity, along with distribution expansion in mass and food. Club grew despite lapping a longer promotional period in the prior year. October's overall consumption accelerated, up 28%, lifted by distribution gains and Pumpkin Spice, our fall seasonal flavor. Pumpkin Spice has demonstrated impressive incrementality to the brand and was the number one pumpkin item at a major mass retailer this fall. As I mentioned earlier, our brand metrics remain strong with Premier Protein reaching all-time highs in TDPs and household penetration. Shake TDPs grew 21% versus Q3 and we improved in-stocks and expanded both forms and pack sizes. Household penetration added just over 3 percentage points reaching 19.4% and surpassing our goal for the year. Impressively, we saw growth in repeat and buy rates with the repeat rate increasing to 52%, demonstrating our category-leading consumer loyalty. Premier Protein with RTD market share of 23%, 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. All of this is especially encouraging because in a high growth category with low household penetration, we see plenty of room to continue to grow our brand and expand the overall category. Premier Protein powder continued its strong trajectory in Q4, with consumption growing 43% beyond strong velocities and distribution gains. In fact, at a major mass customer, it was the fastest growing brand across the entire powder category in the quarter. We remain encouraged by the growth potential of the Premier Protein brand in this format as it reached over $75 million in net sales. We expect another year of robust growth in '25, as we invest more marketing dollars to drive awareness. We continue to believe the brand will be a contributor to mainstreaming the powder category in the same way Premier did to ready-to-drink. Turning to Dymatize. The brand remains one of the strongest in the powder category with velocities in the top third among key customers. Household penetration and overall distribution levels remain stable. U.S. consumption, which covers about two-thirds of the global brand was relatively flat versus last quarter, but down compared to a year ago, as a result of the ongoing softness in the specialty channel and a tougher comparable at food and club. Encouragingly, Dymatize's international business continues to be strong, with net sales up 30% this quarter. As a result, global Dymatize net sales delivered growth for the quarter. Our national marketing campaign with San Francisco All-Pro running back Christian McCaffrey, launched on November 14 during NFL Thursday night football. In addition to new advertising, we have new product platforms launching in the first half of fiscal '25. Overall, we continue to be bullish on the sports nutrition category opportunity. Now to our outlook. As you saw in yesterday's press release, we are anticipating another above algorithm year. We expect fiscal '25 net sales to grow between 12% and 16% and adjusted EBITDA to grow between 5% and 11%. As a reminder, our algorithm in net sales growth is between 10% to 12% with EBITDA margins of between 18% and 20%. Our plan reflects strong volume growth for Premier Protein and a pivot from supply-focused to demand-driving. We are eager to have all of our demand drivers in place this year and are stepping up our marketing dollars on Premier Protein. We are excited to see our national marketing campaign on Premier hit screens late in the first quarter, ahead of the New Year, New You season. EBITDA growth in fiscal '25 is expected to lag net sales growth as we experienced input cost inflation across our portfolio, most notably in our powder business and our increased marketing activities. Paul will provide further details on our fiscal '25 outlook. In closing, I'm thrilled with our performance this year. Our confidence in the long-term outlook of BellRing remains high. Strong macro tailwinds around protein are driving robust long-term growth in our categories with ready-to-drink and powder segments in the early stages of growth. Premier Protein and Dymatize are leading mainstream brands with low household penetration and strong loyalty with Premier Protein maintaining the number one share position in the category. Our innovation pipeline is rich, enabling us to bring excitement to consumers and our retail partners for years to come. Last, we have a scalable, regionally diverse supply chain able to support our long-term growth projections. Finally, I would like to thank all of our employees, customers, and operations partners for an incredible year, and I look forward to a fantastic fiscal '25. We will provide updates on our progress next quarter. I will now turn the call over to Paul.

Thanks, Darcy. Good morning, everyone. I'm pleased to share our fourth quarter results came at the high end of our expectations. Net sales for the quarter were $556 million, and adjusted EBITDA was $117 million. Net sales and adjusted EBITDA both grew 18% over the prior year, with an adjusted EBITDA margin of 21%. Starting with brand performance. Premier Protein net sales grew 20%, primarily driven by strong volume growth for both RTD shakes and powders. RTD shake sales grew 21%, boosted by organic growth and distribution gains as well as a 1% benefit from our price increase taken in Q4. Shipment dollar growth outpaced consumption dollar growth with shipments benefiting from load ends of new distribution and Q1 promotions, as well as replenishment of food channel shelf gaps. Dymatize net sales increased 4% this quarter on 7% higher volume. Strength in the international business continued in Q4 with double-digit sales growth. This was partially offset by domestic headwinds with softness and distribution losses primarily in specialty and food weighing down overall brand growth. Gross profit of $205 million grew 32%, with an increase in margin of 400 basis points to 36.9%. Gross profit included higher unrealized mark-to-market gains on our commodity hedges versus prior year and production attainment fees received from shake co-manufacturers. Excluding these impacts, gross margins increased 250 basis points compared to a year ago primarily from net input cost deflation as we lap elevated protein costs in the prior year. Excluding one-time costs in the prior year period, SG&A expenses as a percentage of net sales increased 320 basis points, more than half of which was driven by higher marketing spend as expected. Advertising and promotion spend rose to 4.5% of net sales as we increased marketing support across our portfolio. Operating profit of $112 million grew 44% and was positively impacted by lapping $7 million of accelerated amortization recorded in the prior year. Turning to full year fiscal '24 results. Net sales were just shy of $2 billion, up 20% over the prior year. Gross profit of $707 million grew 33% with margins up 360 basis points over 2023. This growth was driven by input cost inflation, partly offset by higher promotional activity. SG&A expenses were $285 million and when excluding one-time items, increased 160 basis points as a percentage of net sales. Marketing spend increased 60 basis points versus prior year and was 3.1% of net sales this year. Adjusted EBITDA grew 30% to $440 million with a margin of 22.1%, an increase of 180 basis points. Before reviewing our outlook, I would like to make a few comments on cash flow and liquidity. We generated $4 million in cash flow from operations in the fourth quarter and $200 million for the year. As expected, shake inventory levels increased in the fourth quarter driven by incremental production volumes, putting us in a strong inventory position at the end of the year. In fiscal 2025, we expect to further build shake weeks of supply at optimal levels, most notably in Q1. As a result, our cash flow in fiscal '25 is expected to be similar to fiscal '24. As of September 30, net debt was $769 million and net leverage was 1.7 times. With our EBITDA growth and strong cash flow generation, we anticipate net leverage will remain below 2 times in fiscal '25. With respect to our share repurchases this quarter, we bought roughly 700,000 shares at an average price of $55.97 per share or $41 million in total. For the fiscal year, we repurchased 2.6 million shares at an average price of $56.12 or $147 million in total. Our remaining share repurchase authorization is $175 million. Turning to our outlook. We expect fiscal '25 net sales of $2.24 billion to $2.32 billion and adjusted EBITDA of $460 million to $490 million. Our guidance implies strong top line growth of 12% to 16% and adjusted EBITDA growth of 5% to 11% with healthy adjusted EBITDA margins of 20.8% at the midpoint. We expect dollar and percentage sales growth to be weighted to the first half of the year, while adjusted EBITDA growth will be weighted to the second half. From a brand perspective, we expect mid-teens sales growth for Premier Protein driven by volume gains, shake list price increase benefit and continued category tailwinds. Key drivers of Premier Protein's volume growth include distribution gains on new and existing products, increased promotional activity and organic growth, expanded formats and pack sizes, along with innovation driving new distribution growth this year. Net sales growth in the first half of fiscal '25 benefits from lapping low shake supply in the prior year, while the second half faced a modest headwind as we lap trade inventory loads in the prior year. We expect low to mid-single digit sales growth for Dymatize in fiscal '25 driven by volume. Fiscal '25 adjusted EBITDA margins are expected to decline 130 basis points at the midpoint, but at 20.8%, still above our long-term algorithm of 18% to 20%. Gross margins are expected to be moderately pressured by higher protein and other input costs. Significant inflation will weigh on our powder margins in fiscal '25 after experiencing very favorable protein rates in '24. On shakes, our price increase taken in the fourth quarter of '24 is expected to largely offset inflation, which gradually increases throughout the year. SG&A as a percentage of net sales is also expected to be a modest headwind to margins as we increase marketing for Premier Protein, particularly in the first half compared to a year ago. Turning to our first quarter forecast, we expect net sales growth north of 20%, with Premier Protein being the main driver. Dymatize and all others are expected to grow low to mid-single digits. Premier protein growth is lifted by distribution gains, promotions, and organic growth as well as our shake price increase. We expect shipment dollar growth for Premier shakes to be relatively in line with consumption growth. First quarter adjusted EBITDA margins are expected to be meaningfully lower than the prior year as higher SG&A expenses are partially offset by a modest increase in gross margins. On SG&A, we're expecting a significant step-up in advertising promotion spend from very low levels a year ago as we kick off our Premier Protein nationwide campaign late in the quarter. Gross margins compared to prior year benefit from our recent pricing action on shakes, offset partially by input cost inflation. In closing, we are encouraged with our strong performance in fiscal '24. Our long-term outlook remains bright, and we look forward to delivering another above algorithm year in fiscal '25. I will now turn it over to the operator for questions.

Thank you. Our first question comes from Andrew Lazar from Barclays.

Great. Thanks. Good morning, Darcy and Paul.

Good morning.

Thanks. I guess first off, Darcy, I think you have done some trial runs in isolated geographies around increased marketing spend behind Premier and that you would sort of use those learnings to inform how you want to go about this broader national campaign this year. If I have that right, maybe what are some of the key takeaways or learnings from those trials as it relates to the approach you're taking this coming year around the increase in advertising and consumer spend?

Perfect. Thanks for the question. You're right. We did a couple of things this quarter to prepare for our national campaign. We had three in-market tests and then we also just did some additional creative testing. We're still waiting for the full results, but the early results would say that the in-market tests met or exceeded our lift expectations, so that's great. And then the second piece is on the creative testing. We saw some areas where it performed very well, but we saw some opportunities to improve the creative. In my mind, that's the best-case scenario: the existing creative performed at or above our expectations in market, but we also have some areas to tweak it and improve. So all in, I’m feeling really good. We have the time to tweak the creative a little bit, and then we'll hit the market later in Q1.

Great. Thank you for that. And then I guess what is your sort of current view on what the increase in capacity will look like in fiscal '25? I think as of last quarter, it was kind of a mid-teen increase that was expected. I don't know if that's changed or not. And then are you closer to having to start to add maybe additional lines in either or both of the greenfield production facilities because I know that takes some time to get those up and running. Thank you.

For fiscal '25, we are anticipating production volumes in the mid- to high teens. This includes some incremental production that we mentioned last quarter, which contributed to Q4 and is expected to carry into Q1 and beyond. We believe our current network can sustain our growth into fiscal '26 and '27, although this outlook is a bit further out than previously discussed regarding when we might need to consider adding more lines. We are confident we can achieve additional volumes from our existing network, which is advantageous as it poses lower risks and is simpler for us. Overall, there is a small adjustment from our last update, but it's not significant.

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

Hi. Good morning, everyone. Thank you. I wanted to ask, Darcy, you mentioned before that this year's revenue growth for 2025 might be near the higher end of the long-term projections, around 12%. Now it seems that 12% is at the lower end of the range. Can you explain what has changed in the last few months that has given you more optimism, making you feel comfortable with a higher range now? Or was it just a matter of it being too early to be certain, and now you have more clarity on how the year will progress?

Yeah. I think it's just the latter. Our full plan wasn't finalized in August when we had our last call. We knew that it was rolling up strong and felt comfortable with the top end of our algorithm. But just as this planning process developed, we obviously saw more opportunity.

Makes sense. And then for my follow-up, Paul, you gave some helpful information on the first quarter. I may have missed it, but I don't think we kind of had enough puzzle pieces to kind of get exactly to where you're thinking about for EBITDA dollars, understanding that sales will be up 20% or more, but that the margin will be meaningfully lower. Any more clarity that you can give us on sort of where you'd like to net out on that bottom line in terms of dollars or bottom line growth would be helpful, I think, just because of those kind of major puts and takes there.

Yeah. We expect our first quarter EBITDA margins to be meaningfully lower than a year ago. The biggest driver is on the SG&A line, which we expect a significant step-up for our marketing. Last year, our A&P was relatively on the low side at about 1.4%. This year, we're expecting it to step up very significantly as we are marketing behind brands, starting with Premier national marketing towards the latter part of the quarter. It’s a very significant step-up on the marketing – on the SG&A line, and we expect some additional headwinds on G&A. So it's a very significant step-up for SG&A. Our gross margins are actually expected to be moderately favorable as pricing for shakes does offset some of the inflation. But net-net, a pretty meaningfully lower EBITDA margin in Q1 versus a year ago.

Thanks so much.

Thank you. One moment for our next question. Our next question comes from the line of Matthew Smith from Stifel.

Hi. Good morning. Thanks for taking the question. Marketing stepped up in the fourth quarter and you called out higher marketing spend for the upcoming fiscal '25. Should we think of the 4.5% of sales from the fourth quarter as a goalpost for the full year or maybe even higher than that, with the rollout of the marketing campaign being more targeted in the fourth quarter?

No. If we think about fiscal '25, I would not expect 4.5% to be the full year; I think it should be a little bit less than that. Again, in Q4, we had a number of activities going on, including the test marketing we had for our Premier shakes. I will say that as you look at fiscal '25, marketing will be a bigger headwind to margins and EBITDA in the first half than it is in the second half because we stepped up marketing in the second half of '24. So as you look at '25, we're expecting fairly sizable step-ups in both Q1 and Q2 of '25 versus a year ago, and then it moderates in the second half. But net-net, it should be somewhere in the high-3s to low to mid-4s for the year.

Thank you, Paul. I’ll pass it on.

Thank you. One moment for our next question. Our next question comes from the line of David Palmer from Evercore ISI.

Thanks. I’ll maybe make this a super general question about the convenience channel. I know there’s a lot of curiosity about strategies to improve your penetration in that channel and growth rate in that. And I would suspect there’s some synergies with expanding plastic bottle capacity as well there. Could you maybe talk about that?

The convenience channel accounts for only about 10% of the category, making it a relatively small segment, so it isn't our primary focus right now. We see greater potential in expanding distribution where we are already established. We believe there is an opportunity to double our business in food and see significant prospects in mass as well. I want to distinguish between the convenience channel and the single-serve opportunity, which we view as substantial. This opportunity does not necessarily have to be linked to the convenience channel. We are actively increasing our bottle production and are committed to expanding our single bottles within the channels where we are already distributed.

No. That’s great color. I just wanted to ask one more on advertising. If you get to the 4s, as Paul was just talking about in terms of advertising mix, where does that place you in terms of your share of voice in the category? It feels like this category might be under-advertised right now versus your 20% market share? How much of the heavy lifting will you be doing in terms of advertising voice? And I’ll pass it on.

Yes, when it comes to share of voice, we're quite close with Premier Proteins. We're also promoting Dymatize, but your question seems to focus more on Premier Protein. This category has some seasonality aspects. As Paul pointed out, we'll begin our advertising around the end of the first quarter to prepare for the peak season, which falls in the second quarter, covering January, February, and March — that's when many new consumers enter the market during diet season. For the periods when brands are actively advertising, mainly during the second, third, and fourth quarters, we will maintain a strong competitive share of voice.

Thank you. One moment for our next question. Our next question comes from the line of Jim Salera from Stephens Inc.

Hey, Paul. Hey, Darcy. Good morning.

Good morning.

I wanted to ask a question just about maybe the composition of growth, and I appreciate you probably gave a lot of good detail in the prepared remarks. But what are you guys expecting for kind of RTD shake category growth? And then when you talk about some of the distribution gains, is that distribution for the whole category? And obviously, you have a prominent place there, or is it that you’re finding Premier is gaining distribution where other competitive brands are being left out in that incremental shelf closing?

Okay. So first, there are a couple of questions in there. The first one was what do we expect for the RTD category. We expect the RTD category to grow at low double digits. We will continue to see expansion of RTDs, with mainstream brands and Premier leading the category growth. Regarding our distribution gains and our growth for the year, we expect about 75% of our Premier growth to come from new distribution and new products. We will be driving the growth, so we should secure most of the shelf space. We are having productive discussions with our retailers. They understand that convenient nutrition is under-represented. Compared to other categories in the store with much lower growth rates, we should have two to three times the category space it currently occupies. The retailers recognize that opportunity. Unfortunately, there have been many capacity constraints up to now. Now that we are active, I mentioned our impressive category selling deck, which illustrates the opportunity to retailers. The opportunity is two-fold. One aspect is just gaining incremental space and justifying why the category deserves it. The other aspect is that in any food setting, you'll notice the need for better organization and merchandising of the category. The category is generally misunderstood and confusing for many consumers, and it needs to be organized better. We have many recommendations for that, supported by research. Those were some of the points I was referring to when I said the organization is prepared for this moment when we are no longer constrained and can proactively pursue growth.

Great. Appreciate all the thought. That’s it.

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.

Darcy, there were some high-level comments around innovation for 2025. At this point, are you at liberty to speak more in detail about those? And maybe just conceptually, when you speak about new platforms, what's your expectation for these platforms in terms of offering new ingredients or benefits that can attract new users, new age groups, and so on.

I'm probably not at liberty to talk as much as you'd like me to. It's still early. But here, I'll talk in maybe a little more specifics. Okay. So on Premier, we'll continue to have close innovation. I've in the past, called it little-eye innovation; those are flavors, pack sizes, and formats. We will continue to expand those offerings. We think there’s a ton of opportunity; it's low risk. Not only do you increase household penetration through these offerings, but you also increase buy rate. So that will happen probably a little less sexy than the big-eye innovation, but I think what's exciting around next year is that we will have two new launches under Premier. That's what we would call more big-eye innovation, one launching in Q2, the other in Q4. Once they're on the shelf, I'll tell you more about them. For Dymatize, we have two lines launching in the first half, and these are platform ideas. They're both outside of the typical protein powder. The idea around the big-eye innovation for both businesses is it has to check the box for incremental households, incremental consumers, or incremental occasions. Does that give you a little more clarity?

Sure. I'll hold off for now. To follow up on the household penetration in shakes, the growth rate in the category has accelerated this year compared to the strong post-COVID period. Can we identify how much of the recent growth in shakes is due to users switching from other formats like bars or powders, versus new users entering the nutrition category? Has this balance shifted at all? Do you anticipate any changes in 2025 and onwards? How should we approach this from a penetration standpoint?

Most of the growth is coming from incremental to the category. Only 10% of our growth is coming from brand switching, so start there. So the 90% is coming from new users or our own users buying more. There is actually not that much interaction. We're not sourcing a lot of volume from bars and powders, a little from powders, but not that much. Most of it is coming from out like new consumers or our own consumers buying more; those are usually – if you think of the consumer progression, those are ones that have recently come into the category and now are becoming regular users. With us, we have 50% repeat, so those consumers just continue to – maybe they came in a year ago, two years ago, and now they're becoming everyday users.

Thanks, Darcy.

Thank you. One moment for our next question. Our next question comes from the line of Bill Chappell from Truist Securities.

Thanks. Good morning. Darcy, talk a little bit more about just the decision on stepping up marketing in 2025 and kind of why now and what level? It seems like it's a step change. I mean you've kind of grown exceptionally well over the past few years despite not doing any national marketing or flooding the waves. Now it seems like at least this quarter and probably for the next few quarters, you are deciding to step up. So maybe give us some insight into the thought process from the company or from the management team, of like why now, where do we go with this? How far is too far and how little is too little? Any kind of color around that would be great.

Sure. We’ve always seen advertising as an important demand driver. The last time we were on air was 2021. It really is the only demand driver that can lift your entire business. It’s advertising, especially national advertising. That is the reason we needed to wait until we were confident in our supply. We're confident in our supply now. What I will say around levels, I mean, Paul talked about just percentage of sales. We're being cautious, meaning that we're starting to press the accelerator on advertising, but we're not going pedal to the metal at the very beginning. We did the test markets last quarter, so we have a sense of what the lift should be when rolled out nationally, and we feel great about that. We also will be ready; we have some upside on production if the results end up higher than we expected. Overall, the big opportunity for Premier and the category is household penetration. There is nothing better to expand household penetration of the entire business than advertising.

Okay. And then maybe tying into that, when you talk about believing you can double the food channel sales over a certain amount of time, what are those consumers consuming right now? I mean, that's always the point. You have good household penetration. I think you've said that 80% of your consumption is for breakfast. Are these different meals, occasions for similar users, or are these new consumers that are coming in and going from meal replacement or active nutrition where they haven't over the past few years? What's driving that?

Yeah, you're right. About 60% of our consumption is a meal replacement. So think of those people; they're not in the category now. They may be having an unhealthy breakfast, maybe they’re stopping for an egg with a muffin or a Dunkin' Donuts; or they’re having no breakfast at all. They're looking for a healthier change in their lifestyle, and they start with breakfast or they’ve been told by their doctor or trainer to either lose weight or improve their health. Our research shows that the biggest reason is to improve their health and lose weight around breakfast. That's where most of the new people enter the category. The next one is mid-morning and mid-afternoon snacks, followed by a replacement for lunch. The growth of new occasions is an important factor in expanding the consumer base.

Got it. So your idea is that there are simply more occasions, which are likely driving an increase in new users overall.

Yeah, new users is number one. New users is number one, occasion number two.

Thank you. One moment for our next question. Our next question comes from the line of Thomas Palmer from Citi.

Hi. Good morning and thanks for the question. I just hope to get a quick refresher on your pricing plans. It sounds like you instituted the price increase in the fourth quarter for Premier. And then it did not sound like there were plans last time around on Dymatize. Is that still the case? And then just any magnitude of kind of thinking through the price increase this year and confirming that it's just that one round on Premier. Thank you.

Yeah. The current thinking is really confirming what you said. We took a pricing, a mid-single digit price increase on Premier shakes in late in the fourth quarter. We'll get the benefit of that throughout most of fiscal '25. We're seeing significant inflation on our powder business, which we priced for back; if you go back in time, we took significant pricing on our Dymatize and Premier business powders back in the first half of fiscal '22. We're seeing protein costs really going back to about those same levels that we saw in late '22 and '23. So we price for that. Right now, we're not constantly initiating pricing on our powders, but it is something we're evaluating. What we will look at is perhaps promo rates – promotional rates could come down a bit. But as of now, it's primarily the premier price increase completing our guidance.

Okay. And maybe I'll just follow up quickly on the inflation side. Any help on the magnitude of the inflation that you're facing? And then I just want to make sure I have it right: The Premier shakes pricing is covering the magnitude of inflation that you're seeing on that piece of the business, so the pressure would be on the powder side.

Correct. We expect our price increase on shakes to cover inflation on powders. What I would say is, again, we took significant pricing back in '22 on this business. In '24, as protein costs came down, it did drive strong margins for our powder business in '24. That's part of the reason you see our EBITDA margins are strong for fiscal '24; a lot of that is just the favorable protein rates, and those are flipping on us as we move into '25. Overall, I would say inflation is in the mid-single-digit range. It's more impactful again, as I mentioned, on our powder business. For instance, we’re looking at costs for our protein in our powder; so that's whey protein, which is up about 50%. That’s our expectation for fiscal '25, and it's almost double in Q1. So we're talking about significant inflation on powder. It’s much more significant on our shake business; obviously, it’s less than that, but still inflation on not only the protein, which we expect to continue to increase as we go through the year, but we’re also continuing to see inflation on things like manufacturing costs and a bit on packaging. The pressure will still be there throughout the year for powder.

Thank you. Thanks for the detail.

Thank you. One moment for our next question. Our next question comes from the line of Robert Moskow from TD Cowen.

Hey, good morning. This is Jacob Henry on for Rob Moskow. Thanks for the question. I think just one for me. I know it's still early, but how have the elasticities been versus your expectations on the shakes following the price increase?

It is early, but they’re largely as we expected, I would say, modest elasticity. One interesting piece is we are seeing a trade-up from the four count to the 12 count, and that’s a little higher than we would have expected. Again, we saw that in powders over the last year where consumers would trade up to larger sizes within Dymatize. So not unexpected, but a bit higher. Honestly, I think it’s good news in that they’re moving towards larger packs; there’s some pantry loading once you get a bigger pack. That’s great. But that’s really the only piece. Otherwise, largely as expected.

Great. Thank you. I appreciate that color. I’ll leave it there.

Thank you. One moment for our next question. Our next question comes from the line of Steve Powers from Deutsche Bank.

Great. Thank you. Good morning. First is potentially a rudimentary question. But Paul, production payment fees, could you just give us a little tutorial as to what those are and whether they are expected to recur at all or if it was just isolated to the fourth quarter?

Yeah. So the latter question, we're not expecting those to continue. A production retention fee is basically when we have our co-manufacturers have volume commitments to us. If they do not meet those volume commitments, there is a fee to be paid for the missed volume. That's what that was in the fourth quarter. It’s something we recognized in our fourth quarter related to volume in fiscal '24 that was not delivered.

Yeah. Okay. That's what I thought. Okay. Thank you. And then, Darcy, on incremental innovation, you talked about the thresholds for new innovation to drive incremental households or more occasions. Are there any thresholds that you think about in terms of profitability, the incrementality from a profitability perspective? They have to be margin neutral, margin accretive? And how do you balance the complexity that new innovation and new platforms represent relative to just trying to keep simplicity and efficiency in the business?

Yeah. Our goal is to have all innovation margin accretive over time. Obviously, there are instances when you launch new innovations where you may need to support it at the beginning. But in the long term, we want it to be margin accretive. Just from a complexity standpoint, we have a fairly simple business, so we know that when we do launch innovations, there will be some complexity introduced, but honestly, it’s nothing – it’s still a pretty simple business. Again, margin accretive is our goal. Our innovation plan is to launch a new platform on the Premier side every 18 months. Obviously, we haven’t launched a lot of big-eye innovation over the last few years; we’ve got a lot in the hopper. That’s why we have two this year. Over time, we’ll get back to every 18 months.

Okay. Very good. Thank you so much.

Thank you.

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.