Earnings Call Transcript - BRBR Q2 2026

Operator, Operator

Good day, and thank you for standing by. Welcome to the BellRing Brands Second Quarter Fiscal Year 2026 Earnings Conference Call. Please be advised that today's conference is being recorded. I'd now like to hand the conference over to Jennifer Meyer, Investor Relations for BellRing Brands. Please go ahead.

Jennifer Meyer, Investor Relations

Good morning, and thank you for joining us today for BellRing Brands Second Quarter fiscal 2026 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 measures, see our press release issued this morning and posted on our website. With that, I will turn the call over to Darcy.

Darcy Davenport, President and CEO

Thanks, Jennifer, and thank you all for joining us this morning. Our second quarter results came in below our expectations, and we are disappointed with our results. We faced a challenging operating environment as multiple dynamics pressured our financial results. While net sales grew 2%, which was only modestly below expectations, the mix of our revenues differed meaningfully from both our forecast and what we've seen historically. The combination of negative sales mix, higher-than-expected freight costs and an isolated inventory-related charge weighed significantly on our Q2 profitability. The challenging operating environment was driven by increased competitive intensity, a more pressured consumer and macro-driven cost headwinds. Our updated outlook, which I'll discuss in greater detail, assumes these conditions persist through the back half and that our demand drivers will have a more muted impact on growth. We are also seeing protein-driven commodity inflation running above our expectations, which will impact us in the second half. Against this backdrop, we are making a deliberate choice to continue to invest in promotion and advertising to defend share and support our long-term growth. To put this in context, I'll step back and walk through how the environment has evolved over the course of the year. At the beginning of the fiscal year, the category was one of the fastest growing in CPG fueled by consumer health and wellness trends. Strong category growth, combined with increased industry capacity attracted new competition. Retailers also expanded space particularly in the club channel, which represents just over 40% of BellRing sales. As a result, we expected some higher levels of promotional investment. As the year progressed, the most meaningful change has been the rising cost required to maintain our leadership position. In the first quarter, we noted increased promotional frequency across the category, which largely played out as expected. This quarter, however, we saw a more pronounced step-up this year including higher levels of trade down and a greater response to promoted price. These dynamics drove higher-than-expected promotional lifts across the category and pressured our baselines, further elevating the cost required to defend share. To illustrate, in Q2, promotional frequency and breadth increased sharply year-over-year as newer brands, particularly smaller entrants, continue to invest aggressively to gain traction. As a result, 27% of RTD shake category volumes were sold on price promotion, up 8 percentage points versus last year and a meaningful step up from Q1. Household penetration in protein shakes continues to grow, with little evidence of consumers shifting spend out of shakes into other protein enhanced products. However, in recent months, we have seen a contraction in RTD shake spend per household marking the first decline in buy rate in 5 years. This reflects an increasingly value-focused consumer with greater reliance on promotions, low-priced brands and value-priced pack sizes. In short, the category remains strong with RTD shakes up 8%, which is well ahead of the broader food and beverage industry. However, the impacts of increased competition are more pronounced than we anticipated at the start of the year and the added factor of an increasingly price-sensitive consumer has put near-term pressure on our business, especially the bottom line. That said, our category remains highly relevant to both consumers and retailers with meaningful runway for growth. For fiscal '26, we expect RTD shake category to grow at the low end of high single digits, primarily driven by volume. While we expect heightened promotional intensity to continue, we also anticipate base pricing across the category to rise, considering the rapidly inflating input environment. Against this backdrop, I'll now turn to details on our second quarter results, operating plans and an updated outlook. Net sales increased 2% in the second quarter with Premier Protein net sales in line and Dymatize sales down 2%. Premier RTD shake net sales increased 2.3% with double-digit volume growth, mostly offset by price mix declines. Premier Powder and Dymatize net sales were consistent with expected consumer elasticities following our price increase. Premier's shake dollar consumption was up 3%. Consumption outside of club continues to be strong, up 15%, with the mass channel up high teens driven by distribution and incremental promotion. We are pleased with the performance of our key promotions this quarter with a club retailer and a large mass retailer, driving a record quarter for both sales and consumption. Both events exceeded our expectations and delivered significant household gains with a meaningful portion coming from new-to-category consumers. Consistent with category trends, we saw softer velocity than non-promoted weeks and retailers, reflecting shifts in consumer purchase behavior to our promotions and value-priced options. This, coupled with increased promotional lifts led to a higher-than-expected mix of promoted versus nonpromoted volume. Note, our promotions in Q2 ran as we communicated in early February with no further events added during the quarter. I'll now turn to an update on our demand drivers, which remain centered on growing our distribution, both in and out of the aisle, increasing advertising investment while elevating its impact and launching innovation that provides consumer excitement, odds, occasions and drive trial. Distribution growth continued during the quarter, and we remain on track for double-digit TDP growth in '26. It's worth noting that single-serve bottles represent a decent portion of these gains. And while not as productive as larger pack sizes, they drive trial and are a critical part of our display strategy. Our promotion with a large mass retailer, which included extensive displays and end caps across both pharmacy and grocery aisles drove strong consumption, increased household penetration and delivered solid trial for our coffee health innovation. Given these successes, we now plan to repeat this promotion in the mass channel in the fourth quarter. Our second priority is advertising, where we've increased investment and elevated our creative. Our new go get 'em campaign launched in late December, is showing early signs of success with lifts in awareness, brand equity and traffic to our website and e-commerce product pages. Our analysis indicates strong ROI and incremental sales from the campaign. We believe continued brand investment is the right strategy to strengthen brand equity and support long-term growth and we expect to maintain our investment this year at approximately 4% of sales with more tempered and near-term returns given the more competitive promotional environment. Turning to innovation. As I've discussed previously, we conducted a comprehensive demand study to identify white space opportunities as the category evolves to meet a wider range of consumer needs and occasions. Two of the most attractive and underserved areas were performance protein and refreshing protein. I'm pleased to announce we will be launching new products in both spaces in the fourth quarter. The first, Premier Protein Ultimate is a new 42-gram shake for consumers looking for high protein levels, available in both multipacks and single-serve bottles. The item targets a fast-growing 40-plus protein gram segment and launches in mass, e-commerce and select food retailers. I'm especially excited about our second new offering, Premier Protein sparkling soda, which targets one of the most underserved segments of the category. Premier will be the first scaled player to enter this rapidly growing segment. Our sparkling soda is bubbly and refreshing with 15 grams of protein in a vibrant can format in 4 different fruit flavors. It has a very clean label with only 5 ingredients. We expect our protein soda to bring in new, younger consumers, increase basket sizes and expand usage, particularly the afternoon and mid-day occasions. The initial launch of this refreshing protein item will be in a significant mass retailer, e-commerce and many other food, drug and mass retailers. It will be supported by strong display merchandising, targeted retail media and an exciting social media campaign to drive awareness. I'll now move on to the details of our outlook. We expect Q3 Premier shake consumption to be relatively flat with continued double-digit growth outside of club. Club remains challenged in Q3, with increased competitive promotional intensity and consumer trade down weighing on our performance in this channel. Our promotional activity in Q3 is expected to be fairly modest, slightly below last year's Q3 levels. We now expect full year '26 net sales growth of flat to up 2%. Our updated adjusted EBITDA margin outlook is 14%, inclusive of 50 basis points of impact from the Q2 inventory-related charge. This assumes that price mix and freight cost headwinds continue in the second half of the year. Additionally, as consumer demand for protein remains strong and protein products continue to proliferate, demand for protein input has materially increased. This is resulting in protein-driven commodity inflation above our initial assumptions, which will begin to impact us in the third quarter with a greater impact in our fourth quarter. In this environment, we are balancing near-term investment to defend market share with actions to strengthen long-term profitability. We believe that our results this year are below the long-term potential of the business and closing that gap through innovation, pricing discipline and cost optimization is a clear priority. In closing, the near-term environment is challenging as we navigate competitive, consumer and macro inflation headwinds. However, consumer demand for protein remains healthy. And while competitive intensity from insurgent brands remain elevated, we would expect it to gradually moderate over time. In the long term, we continue to expect scaled players with deep category expertise, mainstream appeal and high repeats to be the winners as retailers consolidate shelf space behind the best-performing brands. Premier's strength across each of these attributes positions us well to capture our fair share of the long-term growth. Our team is acting with urgency to adapt to the evolving environment and position our business for long-term success. Now I'll turn the call over to Paul.

Paul Rode, CFO

Thanks, Darcy, and good morning, everyone. Total BellRing net sales for the second quarter were $599 million, up 2% year-over-year with adjusted EBITDA of $54 million. As Darcy noted, sales were modestly below our expectations, while adjusted EBITDA margin of 9% was 400 basis points below our guide of 13%. An inventory-related charge of $11 million represented 190 basis points of the variance. The remainder was primarily driven by the composition of our Premier Protein RTD sales along with higher-than-expected freight costs. Premier Protein net sales grew 1.7% with RTD shake net sales up 2.3%. The Premier shake volumes increased 12% with unfavorable price/mix of 9% with the latter above expectations given higher promoted volumes, coupled with lower baseline volume. Dymatize sales declined 2%, impacted by elasticities due to inflation-driven price increases. Adjusted gross profit was $136 million with adjusted gross margin of 22.7% compared to 34.5% a year ago. The year-over-year decline was driven by significant input cost inflation, including tariffs, the unfavorable price mix I just described, higher freight and the inventory-related charge. Compared to expectations, freight costs were modestly above plan and protein inflation was in line. SG&A expenses were $92 million at 15.3% of sales, in line with prior year on a percentage of sales basis. This is inclusive of an increase in advertising investment, which was up 140 basis points as a percentage of sales. Turning to our 2026 outlook. We now expect net sales of $2.325 billion to $2.365 billion, which represents flat to 2% growth. Adjusted EBITDA is expected to be $315 million to $335 million with a margin of approximately 14% or 14.5% excluding the inventory-related charge in Q2. Our revised guidance incorporates our second quarter results and our updated outlook for the second half, which I will now discuss. We now anticipate net sales growth of 1% in the second half, in line with the first half versus 8% implied in our prior guide. The sales revision is primarily on Premier Protein, where we have reflected the consumer dynamics we saw in Q2 and a more muted contribution from demand drivers. Specifically, we have reduced our second half baseline velocities for Premier Protein RTD shakes, which has an outsized impact in Q3. As a reminder, Q3 typically is a lower promotional quarter than Q2 and Q4. In Q4, we've added promotional activity, which increases trade spend and also unfavorably impacts mix as we saw more volume on promotion than previously expected. As a result, we now expect volume growth and price mix headwinds in the second half to be relatively similar to the first half for Premier Protein with high single-digit volume growth, partially offset by mid-single-digit pricing headwinds. Regarding adjusted EBITDA, we expect second half margins of 15% versus 20% implied in our prior guidance. Four items drive this change in EBITDA margin. First, higher freight and protein costs represent approximately 200 basis points. Second, unfavorable mix and increased trade investment are approximately 160 basis points. Third, lower cost savings and other manufacturing costs are approximately 60 basis points. And last, lower SG&A leverage represents the remainder of the decline. Importantly, we are maintaining our advertising investment at approximately 4% of sales for the full year as we continue to support the Premier brand. For the third quarter, we expect net sales growth to be down approximately 1%, with Premier declining slightly, somewhat offset by Dymatize growth. Third quarter adjusted EBITDA margin is expected to be approximately 16% and reflects significant year-over-year commodity and freight inflation, tariffs and higher planned advertising investment. Compared to the second quarter, Q3 margins benefit from better mix as less volume is sold on promotion. Additionally, we expect improved pricing and margins on our powder business as Q3 fully reflects the price increase implemented late in Q2 to address historically inflation on the key input in powders. Now I'll make a few comments on cash flow and liquidity. The first half was a modest use of cash in line with our expectations, and we ended the quarter at net leverage of 3x. We returned cash to shareholders through share repurchases with $26 million repurchased in the second quarter. We continue to expect strong cash flow generation in the second half of '26, in line with historical conversion. Recall, we anticipate payment of a legal settlement in our Q4. As a result, we expect leverage to remain in the low 3s during the remainder of our fiscal '26. In closing, we believe in the long-term potential of our category and the Premier brand and are not satisfied with our current performance. The near-term environment is challenging, and we are investing in promotions and advertising this year to defend market share while managing through significant commodity cost headwinds. We are evaluating our pricing plans and cost structure to strengthen our economic model and continue to believe in the long-term attractiveness of our business. We hold a leadership position in the category supported by a brand that remains highly relevant to consumers and retailers, and an attractive scaled asset-light model. We are acting with urgency to position the company for improved performance. I will now turn it over to the operator for questions.

Operator, Operator

Our first question comes from Andrew Lazar with Barclays.

Andrew Lazar, Analyst

Great. I guess Darcy, over the last couple of quarters, you've mentioned that it will be gradual, but over time, the category will likely go through somewhat of a shakeout, right? As some of these insurgent brands ultimately don't prove to have the kind of velocity on the shelf to sort of maintain the shelf space that they're currently paying up for? And I know that takes some time. But we've seen that happen in other sort of growth categories as well. I think maybe one of the concerns that I've heard a lot about is what gives you the confidence that, I guess, the Premier Protein brand can be, and sustain its leadership or be among one of the leaders in this category if we're thinking 2 years out from now. What are you seeing in the category that's making some of these insurgent brands so attractive to consumers? Is the innovation right, Premier is keeping up with it? I'm trying to get a sense of if one thinks that Premier Protein is going to be a leadership brand 2 years from now in a category that clearly has a lot of runway. One would think, therefore, the stock wouldn't be at sort of levels where it is. That's kind of the question I've got.

Darcy Davenport, President and CEO

Yes, it's a great question. So first of all, the category itself, I mean, we have seen it is a healthy category with a ton of tailwind. And so when you have that type of macro tailwind and then you get added capacity into the market, there is going to be a ton of competition. As the number — I think our latest estimates were internally somewhere around 40 new competitors over the last 18 months. So it's tremendous. And as the #1 player, we are going to get affected by that. I think what gives me confidence is, first of all, we're largely holding our share. We've had a modest share loss, which is expected. But we're actually gaining share outside of club, but there's no doubt it's costing us more than we expected, and that was evident in our results. I think that when I step back and I think of the long-term potential of the category and Premier as a leader, we truly believe that there is going to be a shakeout. Retailers are going to consolidate the shelf around the most successful brands, and we will be one of them. We will be in that consideration set because we right now have the highest awareness, repeat and household penetration. We are the most well-known brand, both with aided awareness and unaided awareness. From a GLP-1 standpoint, we are the brand that gets the most benefits from GLP-1 because of those things. We have great brand metrics, and that has not changed. So we are the most trusted brand. We are the brand that people are willing to pay more for. We are the high quality. All of these things take years to create that trust with consumers. Given the amount of competition and because we have been the #1, we expected to experience pressure, but we actually are not losing more than our fair share to anyone which I think is encouraging. We've built a national supply chain. We have tremendous knowledge about the category and overall, the brand is ultimately what consumers choose. I think right now, we are going through a shakeout and it's going to be the ones with these strong repeats that ultimately win, and we're going to be one of those. I think it's also just important to remember, Andrew, this is a growing category. And you can have multiple winners. So this is not just a zero-sum game. I know we talked about this when we first IPO-ed. But I think that's a big factor.

Operator, Operator

Our next question comes from Megan Clapp with Morgan Stanley.

Megan Clapp, Analyst

Maybe you could just build on that and talk a little bit about the category and the promotional environment, which Darcy, I appreciate all the color you gave in the prepared remarks just around what has changed. And it does sound like promotions ran as planned. You didn't add any events, but that you're just seeing the cost of volume is higher as consumers are a little bit more price sensitive. So the category does feel like it's trending a little bit more towards the kind of traditional CPG promotional cadence seeing that a big move in terms of the volume sold on promo was pretty significant in the quarter. So I guess, like the question is, do you view this as more macro-driven and kind of likely to normalize? And what gives you that confidence? Or is this maybe a bit more of the new normal for the category as it starts to scale and maybe attracts kind of a more mainstream price-sensitive consumer and related? And sorry for the multipart question. How do you expect kind of base pricing across the category to rise given what you're seeing right now?

Darcy Davenport, President and CEO

Yes, I think this is macro driven. So as you mentioned, that's the reason why I think it's macro driven is just — well, first of all, you highlighted that promotion materially increased in the quarter, up 8 points. So it's a big number. That's 40% higher than last year. So it is a big number. So not only did the overall category, but then we saw higher lifts. And no, we did not add any more events to compete. It was simply the events that we had drove higher lifts and connected, pressured our nonpromoted baselines, hence the impact to the bottom line. We think this is a direct impact of broader consumer affordability issues. I mean, ultimately, when you look at our products they are a pretty inexpensive breakfast, but the absolute pricing in club is about $30. So when you have a coupon that is 25% off that, that's $8. So it matters to consumers. So I think that's what you're seeing. We do believe that this is kind of transitory. I think that it will change. But right now, we're kind of in a bit of the perfect storm, specifically with increased consumer price sensitivity, sustained competitive intensity when you have these insurgent brands not acting very rationally and then the increased inflation. So that's the first piece. The second piece was just what do we expect pricing because of the increased inflation and Paul and I both talked about how not only are these also macro, so you're seeing freight increases and also protein increases that pricing has to follow. And so I don't know exactly the timing. But over the next 12-plus months, there have to be some price increases because the input cost increases are too big.

Operator, Operator

Our next question comes from David Palmer with Evercore ISI.

David Palmer, Analyst

Sort of a follow-up on that, just what you would encourage us to be monitoring along the way. With inflation increasing and maybe you can give us some color about when you see some of these things flowing through. It sounds like your last comment about the 12-plus months. I'd love to get a sense of maybe the cadence of inflation increases that you're seeing. But really, I want to ask you about pricing power. What's going to convince you that you have that? And when I look at base volume in the all-channel numbers, it looks like it was up 4%, 4% or 5%, it looks not bad. I mean, compared to a lot of companies that we see in terms of base volume trends that would more or less convince you that you have pricing power versus the down what, high single digits versus the low single digits that you had. So what should we be following and thinking about to give us a sense of how you're thinking about pricing power going forward in the data?

Darcy Davenport, President and CEO

Yes. I'll hit pricing power, and then Paul, you can address the inflation question. Yes. I think we've shown that we have pricing power. We have a fantastic brand with high repeat, high loyalty, the highest loyalty in the category. And we've taken pricing over time when we've had to. And so — and we see expected elasticities — and if you think of the last 5 years, I think we've taken 3 or 4 price increases. So we've continued to grow. We try not to, but given how reasonable our product is as a breakfast alternative — roughly a $2 equivalent — and the macro tailwinds around protein, a $2 healthy, convenient breakfast is still pretty reasonable. Given our loyalty and our history, we believe we have pricing power.

Paul Rode, CFO

Yes, on inflation data. So a couple of things on inflation. So first, we expected a healthy dose of inflation this year anyway especially on our whey proteins, which are the inputs on our powders. And so we had called kind of mid-single-digit inflation for the year. What has changed is, first, as Darcy highlighted a minute ago, freight has increased. A lot of that has to do with the Middle East conflict. We saw that kind of happen after the February time frame and beyond. So that we expect to continue. That is not a huge driver, but because it's about 10% of our overall cost, it's definitely a headwind. The bigger piece is we've continued to see whey protein increase, so that's affecting our powders in the second half. And then over the last couple of months, the nonfat dry milk market on the CME has gone up significantly. So that's really the biggest new news on the inflation side as we've just seen a significant increase there. We were largely covered for the year. We weren't fully covered. So there is some impact in the latter part of our year. And then as we look into next year, obviously, we need to see where this plays out. It doesn't seem like it should stay at these levels and it should pull back, but obviously, we can't make that prediction at this point. If they stay at these levels, then obviously, we would have some headwinds in '27 that we would need to address. I think on the whey protein side, the headwinds in '27 should be less. They may not be zero, but they will at least not be as significant as we saw in '26. So really, the big new news is just a ramp up on the cost side of non-fat dry milk, which is a key input cost into our milk proteins, which is on our shakes.

Operator, Operator

Our next question comes from Alexia Howard with Bernstein.

Alexia Howard, Analyst

Following up on the previous question on input cost inflation, do you have visibility into what competitors that are using ultrafiltered milk would be seeing because my understanding is that the milk inflation has not been as sharp. So I'm just trying to think about how this might play out across the space in terms of competitiveness.

Paul Rode, CFO

Yes. We believe over time that the dairy complex should be similar for ultrafiltered milk as it is for milk protein concentrates. So over time, we don't believe that there is a structural difference. Now to be fair, I don't have full visibility into some of our competitors and what they can achieve on the cost side. But we feel like we have strong advantages on scale with milk protein. We obviously source it not only domestically but internationally, so the U.S. markets right now are elevated compared to the international markets on some of the non-fat dry skim milk powder, so that could give us some advantage. For '26, we're largely now covered on our protein side. But to answer your specific question, we do not believe there's a big structural advantage or disadvantage of ultrafiltered milk versus milk protein concentrate; they may not move exactly in lockstep, but we think over time, they should.

Operator, Operator

Our next question comes from Peter Grom with UBS.

Peter Grom, Analyst

Great. I did want to come back to the long-term targets. Several months ago, you outlined expectations for 7% to 9% on the top line and adjusted EBITDA margin to 20%. Obviously, this year, it's far more challenged. But I guess based on what you've seen over the last several months, do you still view those as realistic targets? And if so, what is a reasonable timeline that we should be expecting to get back to those levels of growth or profitability?

Darcy Davenport, President and CEO

Yes. So as a reminder, we reassess our long-term algorithm and outlook in November, and we'll plan to do the same thing this year. But definitely acknowledging that, I mean, the near term is challenging from competitive, consumer and commodity pressures all hitting at the same time. But when I step back, the category remains healthy. We have the #1 brand with a very strong equity. We expect to get our fair share of that category growth over time. And we believe that the category will be growing at those kind of levels. So I think I talked about this to Andrew's question: in the long term, we expect the scaled players with mainstream appeal and high repeats to be the winners and retailers to consolidate the shelf space behind the best-performing brands and Premier will definitely be one of those brands. It will take time to get through these macro forces, and we will continue to grow out of it and get back to that long-term estimate.

Operator, Operator

Our next question comes from Matt Smith with Stifel.

Matthew Smith, Analyst

Paul, you called out flat consumption for Premier in the third quarter. Can you talk about shipment expectations in relation to the level of consumption? It looks like prior year consumption was roughly in line with shipments. But does the upcoming launch of two new products or the resumption of the mass program in the fourth quarter benefit shipments in the third quarter? Or is that kind of contained as we get into the fourth quarter?

Paul Rode, CFO

Yes. So most of the new product innovation shipments will occur in the fourth quarter. So we should get a little bit of a bump from that in the fourth quarter. So I would expect that shipments would be slightly ahead of consumption in the fourth quarter. And then in the third quarter, we'd expect consumption growth on a dollar basis to be slightly above our shipment dollar growth. Nothing of major consequence there, just some minor rebalancing from some of the shipments we had in the first half. So net-net, slightly below; it's slightly below consumption in Q3, and I would expect to be slightly above in Q4.

Operator, Operator

Our next question comes from Steve Powers with Deutsche Bank.

Stephen Powers, Analyst

I just want to clarify a little bit more on the current environment. I think what's going on is pretty clear from your remarks. But I'm a little uncertain as to when it started. So are these dynamics you saw earlier in the quarter and they were evident when you reported the first quarter and it just didn't dissipate the way you expected? Or are these dynamics that evolved more late in the quarter and that you expect to continue? And if there's any clarity around where the incremental challenge is concentrated — still in club? Or has it now spread to non-club channels? That would be helpful. If I could, and Paul, just as we net out the pricing power and inflation commentary, when you net it all together and you think about the next 12 months, what percentage of inflation that's building do you think you're realistically able to price for? If there's $100 of incremental inflation, is it realistic that net of promotional environment, you can price for a majority of that? Or should we recalibrate our expectations in the near term that pricing power will be constrained by the competitive dynamics?

Darcy Davenport, President and CEO

Yes. So I'll start. The new information that we had since our February guidance is important to hit. First of all, we only had a few weeks of consumption data heading into our February call. Our largest club promotion hadn't occurred; that occurred in March. And then many weeks of the mass promotion were still ahead of us. So that is really around the consumption and the mix that we ended up seeing. From a cost perspective, obviously, none of us predicted the Middle East conflict, which affected oil and our freight costs. Protein costs have accelerated late in the quarter, specifically late in March and really in April. And then the last thing is an unanticipated inventory charge that was discovered in late March. So we recognize this is super dynamic, and we recognize that this is a significant change, but a lot of things have changed. As far as your question around where the increased consumer price sensitivity is happening, it's across channels. However, it is the most acute in club. That is where we're seeing the highest promo lift and the pressure on baselines. That's also where we're seeing the most competitive intensity.

Paul Rode, CFO

And just adding on to that, really, it was a lot of the competitive intensity which affects our baseline that really started occurring in the February and March time frame. So kind of back to your question on timing, a lot of that occurred after our guidance. As far as your question around pricing power and our ability to pass cost increases through: historically, we have been able to do that. I don't expect that the current environment — you're right — is more competitive. So it will be something we'll have to think through and assess if that affects how we want to pass through cost, but our current thinking is that we should be able to pass it through. We've seen competitors in our space that have taken fairly sizable increases recently as well. And so that gives us another data point that we can look at to see. But overall, we would expect to continue to be able to pass through commodity costs.

Operator, Operator

Our next question comes from Yasmine Deswandhy with Bank of America.

Yasmine Deswandhy, Analyst

I just wanted to dig into the competitive landscape a little bit. I was just wondering if you could talk a little bit about the challenges that you're facing competing against the insurgent brands versus the legacy brands? And if those challenges are the same or do they require different strategies? I guess I'm wondering when things moderate with the insurgents, how are you planning to competitively or effectively compete against the legacy brands once the insurgents moderate?

Darcy Davenport, President and CEO

So let me just lay out the competitive set. About 50% of the category are the leading brands, which includes Premier. About 25% to 30% of the category are legacy brands, and about 10% are these newer insurgent brands; the remainder are private label and other brands. For years, the legacy brands have been donor brands, and you've seen them decrease in market share. The larger brands have mostly grown with the category. The insurgent brands are making a lot of noise; there's a lot of churn in that group. A couple are doing well and may persist, but many will not. I think that is often overlooked because insurgents get a lot of attention, but the legacy brands still matter and will continue to be donors. Some insurgent brands are more beverage-focused and bring in new consumers and new occasions, which is good for the category. We monitor that to see if we should launch innovation in those spaces. We will continue to protect and feed our highly loyal customer base but also bring in new consumers through innovation targeted at incremental demand moments.

Operator, Operator

Our next question comes from Jim Salera with Stephens.

James Salera, Analyst

I wanted to get a little more detail on the innovation and how we should think about that contributing going forward. First of all, are those innovation launches going to have similar unit economics to the core shake lineup? And as we think about their presence on shelf, is there going to be some swapping of lower-performing core SKUs? Or do you expect the innovation to be largely incremental to what you have on shelf right now?

Darcy Davenport, President and CEO

I'll hit the incremental on shelf and then Paul will cover unit economics. From what we're seeing so far, the innovations are incremental to our business; they are not simply swapping out core SKUs. We're communicating that to our retailers and are getting incremental shelf space. The 42-gram item and the sparkling product are different propositions: the 42-gram targets the 40-plus gram segment and is important for single-serve and convenience channels; sparkling addresses a refreshing occasion, which is an incremental demand moment outside breakfast. Both are intended to bring in new households and occasions.

Paul Rode, CFO

Yes. From a unit economics perspective, it varies by innovation. Some are at parity or higher with core unit economics and some are smaller or lower margin at launch. Keep in mind our 30-gram shake business has large scale; many new items start smaller. We would expect margins to improve as they grow over time.

Operator, Operator

Our next question comes from Jon Andersen with William Blair.

Jon Andersen, Analyst

Darcy, you mentioned how things have evolved in the category where we've gone from an industry capacity shortage to more industry capacity. My question is centered around capacity because it seems to be driving the ability of these insurgents to play in club and also to the category overall to engage in more promotion. You give us your perspective on where the industry or the category sits in terms of capacity? And could what you're seeing in club in terms of heightened promotion begin to migrate to food, drug and mass? Do insurgents have enough capacity to scale beyond club?

Paul Rode, CFO

Overall, capacity is mixed. On Tetra cartons, there is more capacity available than before. Bottles capacity has been added over time. For cans, many competitors would likely need to add capacity to scale meaningfully. So there's definitely more balance than before but not necessarily excess across the board. Additional capacity exists relative to the past, particularly in Tetra and bottles, but scaling a sizable business still takes time and additional investment.

Darcy Davenport, President and CEO

And just to add, capacity will be a challenge for many insurgent brands. Also, the economics of heavy promotion are expensive. Some insurgent brands are promoting at very high rates, which is costly. When inflation becomes more meaningful in the back half of the year, that will have a big impact on those businesses.

Operator, Operator

Our next question comes from Thomas Palmer with JPMorgan.

Thomas Palmer, Analyst

I did want to ask maybe on some of those promotional plans you mentioned for Q4. One, you did have some other promotions running in the club channel and I just want to confirm, are those going to be running again as we think about the fourth quarter? Any changes there? And second, just the promotion you mentioned in the mass channel. How does it compare to what ran earlier this year in terms of the duration of it? And then maybe how broad-based it might be across the category? Because I think last time we did see some other brands participating even if maybe you guys were more prominent.

Darcy Davenport, President and CEO

Yes. The promotional schedule in Q4 will be similar to Q2. We have our two club promotions and we will also have the mass promotion, which will mirror what we did in Q2. Regarding breadth, our expectation is it will be similar, though possibly a little less given seasonality — January through March tends to bring more new households into the category because of New Year resolutions. We don't necessarily have full visibility to all competitors' plans, but our promotion will be similar to Q2.

Operator, Operator

Our next question comes from John Baumgartner with Mizuho Securities.

John Baumgartner, Analyst

Darcy, I wanted to revisit your comments on innovation between nutrition credentials and insurgents bringing more of a beverage experience. Historically, Premier and the category have differentiated through protein content and flavor variety. I'm hearing the strategy is offering more protein during more times of the day. But at what point does the consumer see the proposition as a commodity? As the category becomes more sophisticated, demand may require more than high protein, possibly a full meal replacement with more vitamins and minerals. Is there a risk that to wield pricing power and defend market share you'll need to redefine the category's proposition with more specialized innovation?

Darcy Davenport, President and CEO

Yes. I think you're seeing that. The demand study we conducted mapped out a range of demand moments — from nutrition-focused, complete nutrition occasions to more beverage-focused refreshing occasions. Those products and demand moments require different propositions. A refreshing product doesn't require vitamins and minerals the way a meal replacement would. Our 30-gram product fits many demand moments well, which is why it's such a large line, but as the category evolves you will see more specialized products targeted to specific occasions. We're already starting to see that and will continue to innovate to capture those opportunities.

John Baumgartner, Analyst

And then a follow-up: coming back to your comments on category buy rate. You said RTD is not losing share to other protein formats. But if buy rate is down and protein consumption is up overall, are you seeing consumers shift to other protein like eggs or meat? What's happening across the broader protein dynamic?

Darcy Davenport, President and CEO

We dug into this. We didn't see a huge outflow of consumers leaving RTD shakes into other protein-enhanced products. We also didn't see a decline in new households entering the RTD shake category — household growth remains strong, which shows category strength. What changed this quarter is that, for the first time in five years, buy rate declined. That drove the difference: households are still entering the category but are buying less per household. We do see some interaction with other proteins like eggs depending on pricing, but it's not significant.

Operator, Operator

Our next question comes from Robert Moskow with TD Cowen.

Robert Moskow, Analyst

I want to know, in most CPG categories, the market leaders set the price and everyone follows. Would you say that it's harder to do that today given the influx of so many smaller players that may or may not play along? And you said that I think, Paul, you said that you have seen one of your competitors take significant pricing recently. Is that a big player? Or is it a small player? And does that make a difference?

Darcy Davenport, President and CEO

It's a big player that recently took significant pricing. I think that right now, the changes in the category and the environment are significant and relatively new. We are evaluating how to respond. Many players will need to reevaluate pricing given freight and protein increases. We're seeing price increases in powder where whey protein is at historic highs, and now we're seeing pressures on milk proteins as well. So pricing dynamics are in flux and we'll continue to monitor competitive actions.

Operator, Operator

This concludes today's question-and-answer session. This concludes today's conference call. Thank you for participating. You may now disconnect.