Q1 2022 Bellring Brands Inc Earnings Call

Okay.

Welcome to Bell Ring brands first quarter 2022 earnings conference call and webcast hosting the call today from Bell ring brands are Darcy Davenport, President and Chief Executive Officer, and Paul rode Chief Financial Officer.

<unk> call is being recorded and will be available for replay beginning at 130 P. M. Eastern time the dial in number is 880 398318, no pass code is required.

At this time all participants have been placed in a listen only mode. It is now my pleasure to turn the floor over to Jennifer Meyer Investor Relations of Bell ring brands for introductions you may begin.

Good morning, and thank you for joining us today for powering brands first quarter fiscal 'twenty earnings call with me today are Darcy Davenport, our president and CEO and Paul Brown CFO .

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 supports these remarks are posted on our website and books in Investor Relations and the SEC filing sections of Bell Rang Dotcom and.

In addition, there really some 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 additional information regarding these risks and uncertainties. As described is discussed under the forward looking statements section.

In the press release, we issued yesterday.

Other press releases, we have issued with respect to post post proposed distribution of its interest in solving brands, which are posted on our website.

We also urge you to read both the registration statements the proxy statement and prospectus says the related and then much of these filings and other documents related to the proposed distribution of posts interest in growing brands that have been and will be filed with the SEC when they become available because they will contain important information.

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.

And finally this call will discuss certain non-GAAP measures.

For a reconciliation of these GAAP measures to the nearest GAAP measure see our press release issued yesterday hosted 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 both premier protein and diamond ties.

Our first quarter came in slightly ahead of expectations with sales of 307 million and adjusted EBITDA of $60 million.

Net sales grew 9% over prior year led by Diamond ties, which was up 41% from.

Premier protein grew 5% with both brands benefiting from pricing actions the single digit growth for Premier protein was expected as we lap prior year promotions that arent repeating.

Our adjusted EBITDA margins were healthy despite significant cost headwinds.

As you saw in yesterday's press release, we reaffirmed our fiscal 'twenty two guidance for both net sales and adjusted EBITDA to grow between nine and 13%.

Other than a slight shift in diamond ties sales from second quarter into first we don't we don't expect major deviations to the cadence we communicated last quarter.

Not surprisingly inflation ramped up across the freight and dairy proteins this quarter.

As a result, we announced further price increases on shakes and powders, which will mainly benefit the second half of the year.

We expect Q2 sales to be similar to Q1 and to sequentially grow reflecting the incremental pricing actions in new capacity.

We will experience margin pressure in Q2 until the price increases are implemented overall.

Overall, we believe the balance of the year leans toward upside. However, we have seen how quickly circumstances can change in this environment, while our confidence in the years ground. At this point, we are reaffirming our guidance the key drivers that would add opportunity or rest of the year or our ability to deliver our expected production you have.

Just yesterday relating to upcoming pricing actions and additional inflation.

Now turning to our category brand highlights and updates on capacity expansion.

We continue to see robust growth in the convenient nutrition category ready to drink beverages and ready to mixed powders, both grew 17% versus year ago.

Strong consumer tailwind around wellness and healthier food solutions are driving this growth.

RTD beverages added two three points to household penetration and saw growth in purchase size and volume ready to mixed powders continue to be fueled by an increase interest and proactive health and fitness.

Our brands are growing despite supply chain challenges premier protein shake consumption grew 10% across tracked and untracked channels with E Commerce and Mac, leading the way.

Brand metrics remains strong demonstrating our high consumer loyalty.

So penetration and repeat rates are holding steady and velocities are up 45% versus year ago.

Our T D piece have started to rebound as we have increased trade inventory levels. This quarters.

Despite these encouraging signs we expect premier protein RTD shakes consumption in Q2 to lag prior year, because we were lapping significant promotional periods.

Moving to Diamond type Dimetapp had a fantastic quarter with consumption in the U S up 48% across tracked and untracked channels. All key channels contributed with double digit growth and brand velocities remain strong.

Diamond type I said 100 lunch two exciting new flavors this quarter, Dunkin' cappuccino and Mocha Latte, both flavors, which were co developed with Duncan are off to a great start.

Our operating environment remains challenging supply chain disruptions largely around labor availability at our existing co manufacturers are impacting our ability to rebuild inventory as fast as we want.

First quarter production came in slightly below our expectations, mainly due to COVID-19 driven labor shortages. However, we are encouraged with the improvement in January .

Our capacity expansions are progressing well and remain on track as you may remember, we have capacity coming online each quarter. Starting Q2, we are comfortable with our ramp up assumptions. Despite COVID-19 related challenges. We also made significant progress identifying and vetting additional growth partners, who are expected to bring on capacity in fiscal 'twenty three and two.

Four.

Finally, I would like to share a brief update on post distribution of its interest in Bell ring overall the transaction remains on track we have scheduled a special meeting a ballerina stockholders on March eight to vote on the transaction.

Most will announce additional details about the spin off in coming weeks. We believe upon completion of the transaction Valerie will have increased strategic flexibility to manage our capital structure and should benefit from more liquidity in our shares.

In closing.

We all had been tested over the last two years I've been impressed by how our employees manufacturing and logistic logistics partners and customers have navigated this period.

I believe we'll look back on 22 as a pivotal year for our brands and our company one where we solidified the foundation of the business. So we can really see what our brands are capable in the future I continue to believe that we are in the early innings of our category and brands growth Premier protein and diamond ties are perfectly.

Position to attract new households into the category and improve consumer's house along the way thank.

Thank you and I look forward to updating you on our progress throughout the year I will now turn the call over to Paul.

Thanks, George and good morning, everyone.

Net sales for the quarter were $306 5 million up eight 5% adjust.

Adjusted EBITDA was $59 8 million a slight decline to prior year and EBITDA margin was 19, 5%.

Premier protein net sales grew four 5% driven by higher average selling prices, reflecting reduced promotional activity and price increases recall, while we face capacity constraints.

We have temporarily temporarily reduced tetra shake skus and promotional marketing.

This resulted in expected volume declines for premier protein in the quarter.

This decline shipments exceeded the consumption in the quarter and resulted in increased retailer inventory.

<unk> net sales grew 41% with volumes up 8%.

Net sales outpaced volume broke benefiting from higher average selling prices, which reflected price increases Anthony favorable mix.

Strong velocities and distribution gains drove volume growth.

Gross profit of 92 million was flat to last year with the decrease in gross profit margins of 31%.

The gross margin decline resulted from higher dairy protein costs as well as increased freight which was mitigated by higher net selling prices.

SG&A expenses of $37 million included $2 million of separation cost.

Prior year SG&A expenses included $4 6 million of restructuring and facility closure costs.

Adams were treated as adjustments for non-GAAP measures.

Excluding these items SG&A increased $1 million. It was a favorable 50 basis points as a percentage of sales.

Our cash flow in the first quarter was unfavorably impacted by higher working capital a decrease in payables and an increase in power inventories brokers results.

We expect further working capital increases throughout the year as we rebuild our RTD shake inventory levels.

During the quarter, we saw an attractive entry point and repurchased 800000 shares of our class a common stock at an average price of $23 34 per share.

Our remaining share repurchase authorization of $42 million.

As of December 31, net debt was 489 $489 million and net leverage was two one times.

The first quarter, we repaid debt of 90 million using cash on hand.

Turning to our outlook, we are maintaining our guidance for net sales of $1 36 to $1 1 billion and adjusted EBITDA of $255 million to $265 million.

As already highlighted the year is progressing slightly ahead of expectations with net sales and adjusted EBITDA growth weighted to the second half.

Inflation has outpaced our initial estimates we expect additional cost headwinds for both shakes and powders.

However, we are executing a price increase to help offset these impacts which will benefit gross margins in the second half.

During the second quarter, we expect high single digit net sales growth is higher net pricing and volume growth for our power portfolio is partially offset by volume declines in RTD shakes as we lapped promotional activity.

We expect adjusted EBITDA to grow significantly from prior year benefiting from the pullback in promotions and marketing.

Second quarter adjusted EBITDA is expected to decline sequentially, driven by inflation head of pricing as well as modestly higher SG&A.

Finally, as Darcy mentioned post distribution of its interest in Bell ring remains on track, we expect approximately $4 million of cash will be distributed the bell rings stockholders, including post.

As a result, we expect net debt about rate will increase to an amount not to exceed four times adjusted EBITDA.

More details will be provided over the coming weeks.

In closing we are encouraged by the solid start to the fiscal year.

We and our industry are facing short term challenges and historical inflation, our optimism and outlook for our business has never been brighter.

I will now turn it over to the operator for questions.

Yeah.

And at this time, if you would like to ask a question. Please press star and one on your Touchtone phone I got about a star and one if you would like to ask a question you could remove yourself from the queue at any time by pressing the pound key.

We will take our first question today from Andrew Lazar with Barclays. Your line is open.

Good morning, everybody.

Good morning, good morning.

Okay. Thanks for the question.

I guess first off.

I know that Darcy, you've referred to 2021, and it's kind of a year, where bell rings sort of had almost two years of growth sort of compressed into one year and a lot of that had a lot to do with of course, having the capacity, but also a lot of incremental shelf space gains.

A key sort of key customers that you benefited from.

I'm curious if you could kind of maybe characterize how how that.

Looks as we as we go through this year are there.

A major shelf reset windows, where you think there can still be <unk>.

Incremental progress made in and obviously, how does the capacity situation play into your ability to sort of take advantage of those windows.

But I am assuming others are having sort of similar issues. As you are and then I've just got a follow up.

Sure So that right now as you know we reduced our skus are tetra skus.

This year because of our capacity constraints, we've been able to hold them for the most part about 90% of our space.

Basically customers are spreading out our facings on our core items, because you know, it's what they're one of the most productive skus on the shelf.

So we're not in this in the place right now that for the next year, we're gonna be expanding our shelf space on our Tetra Skus. What's I think encouraging is we do have some innovation coming on outside of the 30 Gram line.

Toward the end of the year, but for the most part this year as it's a catch up year for the 30 Gram Shake line and so we're not gonna be expanding shelf space considerably.

Got it and then I think when you took some of the initial price increases heading into this year at least for planning purposes, you had assumed that competitors would not necessarily follow so it was that kind of a prudent conservative stance heading in.

Are you, making a similar.

Assumption with some of the incremental pricing that you're taking or.

And how do you think about your elasticity assumptions for this next round of pricing at least from how youre forecasting and modeling it internally. Thanks, so much.

We are we're assuming that we included some modest elasticity in our assumptions so staying on the conservative side in our first round, we tended to be the first to move on pricing in the category and then most of our competitors.

Followed a fairly soon afterwards.

But and but we have we have an approach to when we take pricing we assume elasticity and then when we well then we see what happens in the marketplace, we adjusted those assumptions.

Okay. Thank you.

Thanks.

The next question comes from Pamela Kaufman with Morgan Stanley . Your line is open.

Good morning.

Good morning. Thank you you mentioned that production in the first quarter was slightly below expectations can you talk about how much of your fiscal 'twenty two topline outlook is dependent on additional capacity coming online over the next few quarters and it seems like the balance has shifted more towards price.

Now given the incremental pricing you've taken in the quarter. So is that kind of the right way to think about the composition of your top line outlook for the year.

So I'll.

I'll hit the first the production question first.

The press the production you know below expectations in Q1 was related to it was mostly in our existing co manufacturers. So the new capacity that is coming in line online starts in Q2 and then your question around <unk>.

How much is associated with existing versus new the vast majority of our production. This coming year is from existing co manufacturers I think what's encouraging is that we are seeing an improvement in January with our existing co manufacturers.

Or is it really was related to kind of the omicron variant and having absence is we are still seeing some absences, but what's encouraging in January is despite the fact that we are seeing absences and in kind of labor shortages were still getting the production. So that tells me that.

We're being prioritized over either cut over other customers.

So that was the first one the second piece is just the composition of our growth.

It depends on which brand we're talking about from a premier standpoint, the growth was predominantly coming from pricing them. Originally and that was split that will obviously be the case with our upcoming incremental pricing that we took.

That we announced this quarter and then but from Diamond carriers. It's a mix. So it's a it's a mix between volume and pricing.

Thank you.

Anything else that you wanted to add.

No.

Obviously with the price increase that does obviously you push a bit more towards pricing goes dark. So you talked about in her prepared remarks.

Yeah.

The increase is obviously it gives us confidence in the year, where we're waiting to kind of see how things play out with elasticity in those kinds of things, but it gives us obviously a lot of confidence.

Thanks, and given that some.

Some of the supply challenges are in Tetra Pak.

Have you explored other options for packaging I know you also sell bottled rtd's can you more meaningfully shift your mix to that format.

So we do have bottles.

And but bottles are constrained too so it's really it's you know.

Across the and because of the dramatic demand increase that happened last year.

Bowls bottles and tetra are constrained so it's not as easy and our Tetris business is so large that the idea of just shifting to another package size is just it's just not feasible.

I think we are we are moving our we're making sometimes what some co man shifts on our bottle business, which will dramatically increase our ability to satisfy the increasing demand for our bottles. So.

So it's again, it's not as easy as just shifting them, but I am confident in our increase that we have planned from a tetra standpoint. It's later in the year and then into 'twenty three and like I said bottles are also increasing.

Thank you.

Okay.

Our next question comes from Jason English with Goldman Sachs. Your line is open.

Yeah.

Hey, folks good morning, Thanks for Slotting me Ann.

Hi, guys. Good morning, a couple of questions first you all confused me on some of the comments on guidance, it's probably my fault I am distracted over here and trying to juggle too many balls, but.

Can you go back I think you said sales similar Q1 to Q2, but sequentially growing.

Which seem like they can coexist and then there was also some comments on EBITDA.

Sounded upbeat, but then you commented sequentially lower on.

Price cost lag et cetera, do you just kind of come back reasonably can clarify those for me. Please.

Sure are you at now I'll hit the net sales and I'm going to let.

Paul had EBITDA, our net sales you nailed it.

That Q2, similar to Q1, and then sequentially growing and then Paul do you want to talk about EBITDA.

Yes, so our comments on EBITDA is that the second quarter, we expect to be sequentially down from the first quarter, which is which is consistent with our initial expectation going into the year and that is because there is incremental.

Patients are proteins, primarily so the step up from Q1 into Q2 and our pricing.

We do expect a modest increase in SG&A. So the comment was that EBITDA will be sequentially down from.

Q1.

Yes, and it always kind of it is seasonality, but was there a year on year comment in there, though that I missed you.

There was not a year over year, obviously, there is a different dynamic because last year in the second quarter, because all of the second quarter. We promote heavily in the second quarter typically that is not the case. This year. So there's a benefit on pricing both from a.

Reducing the promotion spend as well as with price increases that we took on powders in October and background checks back in April . So we have the benefit of pricing, but we also have significantly higher inflation in the second quarter versus last year particular whey protein was at its low point, which is our powder product.

Good work last year, and it's significantly higher this year, so thats the dynamics going on with EBITDA.

Yeah, Ryan carefully Sanjay with more people were because of marketing spend and that's the piece. That's the one piece I did Miss dimension is that we're also we typically spend pretty heavily in marketing in the second quarter, because we do TV advertising and we're not planning to do that this year. So that's another element of what the EBITDA increased from last year, but again sequentially down from Q1.

Understood.

And bigger picture question for you Darcy I remember around the time of separation you talked about your aspirations to have premier reach I think and correct me, if I'm honest premier reach a 10% sort of penetration level.

The penetration growth I'm looking after the brand has been phenomenal I think it's actually accelerated during Covid you are now north of 8%.

So are we approaching sort of an upward governing limit.

Or do you think this can go or or is there now more scope for penetration growth as being perhaps youre envisioning just a few years ago.

Yeah I think this brand continues what continually surprises you know I think that not only do I think that there's more upside from a category standpoint, and but we are we're increasing household penetration faster than I would have predicted so yes, I think that.

We're gonna.

I believe that it that we can get up to I mean, so one of the.

Some of the comparisons I have used are some of the mainstream brands.

Like clif and kind of in the nutrition bar space and they are right above 10, 11, 12, and so I use that as a barometer and I I still use that as a barometer of where we can get to and you know the kind of medium term.

Got it okay. Thank you I'll pass it on.

Thanks.

We will go now to Ben <unk> with Stephens. Your line is open.

Hey, guys. Good morning, Jim Slater on for Ben I.

I wanted to ask a little bit on the production side and inflation, how long of a lead time will be to get fill rates and service levels back to normal assuming the mcglaun production.

Got it shakes out in the second quarter so.

Actually as normal at the end of the second quarter and still rates get back to normal levels in the third quarter fourth quarter or is that still looking into next year.

Yeah, our fill rates and service levels will continue to increase them. We are already seeing kind of month on month small increases.

And we will continue to see that throughout the year I think we'll be we'll be in a much I mean, there's this quarter our trade inventory levels improved and again, we'll continue to see that by I would say.

Q3, theyre going to look a lot better beginning of Q3 theyre going to be looking a lot better.

Okay.

And if I could ask one more you guys have any visibility into freight costs in the back half of the year, whether you anticipated.

It's been a compares that that's going to go up maybe a little bit of relief there.

Yes, we do expect that freight will go into the third quarter and then.

Based on the essence, we've seen it kind of flattens out at that point and so from a year over year perspective, we have more of a headwind in the first half.

We have in the second half.

So that's our current thinking.

Alright, Thanks, guys I'll pass it on.

Thank you.

Yeah.

The next question comes from Bill Chapell with <unk> Securities. Your line is open.

Thanks, Good morning.

Good morning.

Hey, guys.

I guess first question on Premier protein.

What do you envision a elasticity looks like in that category as you raise prices because it's when you have a highly loyal base in a pretty high market share within the drink side I mean are people just buying less general.

If they are there's elasticity are they switching to lower priced brands.

Switching to some other form just trying to understand I mean, it doesn't seem like there'd be a whole lot of elasticity, especially with your base, but I assume you're factoring some in one way or the other with higher prices.

To date, we have seen no elasticity and we have been watching it basically we increased price and.

Volume went up.

However.

We are we are not assuming that's going to continue so we are assuming some modest elasticity I E.

Until we see it in marketplace and kind of you know the facts and circumstances that we see in the marketplace based on what competitors do et cetera, and how.

How much the retailer reflects that shelf, then we will make any adjustments to our assumptions.

Okay. Thanks, and then.

And then just kind of on that on the cost front.

Just trying to understand.

For lack of better terms either how much of this is excuse is short term in nature, but certainly everything from from labor to free.

Two but when you when it's coming from the co man.

How much do you think rolls off as commodities get better in six months or.

We're Conversely, leavers kind of here to stay at a higher rate.

Any thoughts there in terms of how youre thinking about kind of profitability going forward.

Yes.

Into two pieces, so from a commodity front, yes, we will.

Seeing as whey protein.

Even milk proteins are at historical highs.

Hmm.

Protein has been pretty tight supply and demand dynamic and so that's got to get better but it doesn't look like it's likely until fiscal 'twenty three or at least that's the kind of the current thinking.

So I do think theres some opportunity obviously as we get on the other side because we're talking about protein rates on our powder business under two X plus what they were just a year ago. So that's got to come back down and so obviously, that's one element milk proteins to kind of steadily going up besides our shakes and so I think that once that one we'll have to keep an eye on because it seems like both of them.

Market should come back down.

So it seems like there should be a transitory piece of that on our comments our.

Chips. They are typically long term contracts and I don't want to get into specifics because it varies by customer, but we're a little bit little bit insulated from that.

Flavor talk obviously seen high it will obviously good.

It absorbed at some point.

As it's passed along to us but thats.

Tony.

Such a cost of somewhere 15% of our overall cost. So it's really the commodities that are driving that.

The profitability.

Got it thanks, so much for the color.

Yeah.

We'll go now to Chris Growe with Stifel. Your line is open.

Thank you good morning good.

Morning.

Hi, I just had a quick question for you and sorry, if I missed this but have you said just to get an order of magnitude on the size of the price increases you have in place the new ones for shakes and for powders.

Yes, the price increase.

Go ahead sorry.

You can tell we're not together.

Yeah. So the second round of pricing is slightly higher than the ones. We took before we didnt specifics yet.

Order of magnitude. The first one was single digits on premier protein double digits on a diamond ties and this round is slightly higher than that.

Okay, and Thats, mostly going kicking it sounds like in the third quarter kind of going in place during the second quarter is that right.

Correct right.

Okay.

And then I just I was curious you had a chart in your slide deck around showing tdp's.

They started to increase.

I just want to get a sense of it sounds like your the supply of product was a little below what you thought doesn't mean it didnt grow obviously it did grows the more available does that line keeps going up is do you keep could you just see an increase in <unk> as you get more and more.

Supply availability I guess, if that is what's going to determine that rebuild there.

Yes, I mean generally I think there there will be.

So you'll see a slight increase.

Our fill rates and service levels increase however, we do expect TDP is to be.

Down versus year ago because of the.

That a temporary reduction in skus.

Yes, Okay, and I guess just to be clear on that then is I'm thinking like for the for the second quarter.

If you are promoting less that presumably would negatively affect tdp's again, not that it can't grow but it would certainly have a year over year effect on a PDP is that right.

I mean, the promotion won't have anything to do with the TD PS.

If I'm understanding your question, but just the number of Skus on the shelf. So we will see so I mean that that that is really what's affecting the TDP.

Okay.

Thank you.

Thanks.

Yeah.

We'll go now to Rob Dickerson with Jefferies. Your line is open.

Great. Thanks.

Thanks, and a quick question on the inventory side.

Got it.

You're saying it sounds like.

Basically maybe all production this year from existing suppliers sounds like maybe some of them are taking a little bit better.

Are you kind of get through Q2.

Consumption still.

We recently.

Items are down.

The gap so I'm, just curious like kind of in terms of the inventory situation you have with retailers.

Yeah, when we compare that.

The reduction in Skus.

You feel like you're in a pretty good place as you look forward through the year right like you've reduced the skus, maybe the retired a burden for a little bit of inventory.

You're right size excuse relative to your capacities.

B kind of further decline right Kevin.

Lower capacity relative to demand.

Catches up if you know what it is.

Yeah.

So Robert are you asking about <unk>.

I mean, I would say our strategy is sound, meaning that we do not expect any change to the number of skus that we're going to have and we believe that the fill rate and.

And service levels will continuously increase throughout the year. We will also gradually increase our safety stock throughout the year.

Is that what you're asking.

Yeah, I just want to make sure that you reduce the skus right. If you've looked at your forecast good yourself.

The amount of capacity you have to be able to continue to fill those skus that you pointed out by itself. This year, yeah, yeah, absolutely. That's correct. The one thing I will just note is that when youre looking at consumption.

Yeah, we have we have pretty high you know we have some high highs and then.

Increases when we have promotions and so when youre looking at consumption you just have to factor in that.

Youre going to see some negatives on premier when we're lapping promotions.

And that is expected and so I think that it's just it's good to have that in the back of your mind when you're looking at.

The kind of tracked channel consumption on a week to week basis.

Okay Fair enough and then.

I guess back to Jason's question quickly there was a lot of narrow kind of EBITDA sequentially even.

What have you I mean it is thank you.

We're thinking about Q2, just an absolute EBITDA dollars.

Would you say that maybe you are kind of similar to sales sequentially from Q1, and Q2 that maybe EBITDA would see like a similar path.

Absolute dollar number I mean, I know you're not you're not.

Typically guiding to that number, but obviously with <unk>.

Just kind of where the full year EBITDA guidance right. It does imply.

Cereal back half improvement.

So no I would not I would not quite characterize it that way so.

Just to be clear, we expect EBITDA to decline sequentially from Q1 to Q2.

It would be higher than last year, because we're lapping a lot of marketing that we do expect it to decline.

That is again because of higher inflation.

<unk>.

And so that's the primary piece, but we expect it to be down.

Keep in mind that we've said that we expect that sales and EBITDA growth will be weighted to the second half of the fiscal year.

But we do expect it to be sequentially down.

Right.

Note that here, where you came in in Q1, despite all the moving pieces of volatility.

It seems like the business is still tracking kind of as you expected coming out of Q4.

Yeah, I mean first of all.

It's tracking yes first half is tracking like we expected with slight shift of <unk> sales into Q1 for Q2, but yes. The first half is tracking as we speak.

I mean, Rob I would just say big picture. This year is going much like we expected slight movement of sales from Q2 to Q1.

That and that is just you know it's really nothing it's just a little sales phasing.

And then we saw inflation kick up higher than we expected. Although we saw the we saw that coming on the last call and therefore, we took price and that affects the back half I mean, but all other than the inflation and the pricing action.

The cadence is largely what we expected.

Perfect. Thank you.

Thanks.

We'll go now to Ken Zaslow with Bank of Montreal. Your line is open.

Hey, good morning, guys.

Good morning.

Two questions. One is can you walk us through the capacity Bill.

Over the next.

18 to 24 months of how it works exactly how.

How much incremental capacity is coming online through the next on a quarter by quarter basis.

Yes.

Basically we have increased capacity every quarter four through 'twenty, three I mean, and so we see increased.

And that mostly comes from the existing co Mans are pretty stable.

So the increases come from Newco man they start slotting in in Q2 of this year. There is not a huge benefit this year in 'twenty two so small still call it 90% of our <unk>.

<unk> is coming from existing for 'twenty, two but then.

Those new co mans start increasing and become <unk>.

Contributors real contributors in 'twenty three.

And then we also bring on additional co Mans in 'twenty three so we basically add three new ones in 'twenty two.

And we add two more in 'twenty three.

And the big ones, which are you know new facilities like MSI, we talked to I'm, sorry, Michael Foods would come on in later 'twenty three.

They start up later in the year.

So become kind of smaller contributors in 'twenty, three but bigger contributors in 'twenty four.

Would you say that 2023 additional capacity is 5%, 10%, 15% and then when you get to 'twenty four.

How would you kind of just do that.

Hold on.

I'm calculating.

<unk>.

Take your time.

So call it less in 'twenty two new capacity is you know less than 10% it becomes yeah, 20% to 25% of the of 'twenty three and then can sit and then it ramps up from there.

And remember we can still effect, so because some of the new capacity in 'twenty three.

There actually new greenfield facilities that timeline.

Basically 24 months, we are still talking to.

Partners mm for kind of late 'twenty, three and 'twenty four.

Okay Mike.

Second question is if you believe this capacity coming online you answered an earlier question that you think household penetration kind of you.

You look to brands in the 10% to 100 basis points from where you are right now 25% more capacity coming online.

You, obviously don't really believe that 10% is your.

High watermark.

That does it.

I mean, you obviously believe that your building capacity because there is demand and that demand is going to take you above that 10% household penetration I'm assuming.

Again.

Why would you even know that there is a limit to the demand of what is it.

Why limit yourself to a household penetration it seems like you've hit a tipping point and I'm not trying to be good.

Well it just seems odd to come up with a.

With some arbitrary 10% just I don't know if it's just a thought totally agree with theirs.

So I completely agree and I don't and by the way I don't see it as a limit.

I think it is it is a step along the way.

And I and I truly believe that.

This brand has a I think the category in general is just I mean, I said early innings.

But it has so much more upside and I've used this analogy before but.

Even within our category.

Nutrition bars have mainstreamed much faster than at and then you know any other forms within the category and Theyre at you know close to 50%. So 45% household penetration were RTD shakes are only at 25 powders or even lower so theres no real.

Then why shapes can't get close to nutrition bars, and so I think that that the the upside isn't meant and I think premier protein is perfectly positioned to take advantage of that because it's a mainstream approachable brand.

That shows that it can that it appeals to kind of every need state and I'm kind of every consumer within the category. So youre. So I do not believe that 10% is the limit at all I think it's a step along the way.

Great I appreciate it thank.

Thank you.

We'll go now to co mail Godhra Waller with credit Suisse. Your line is open.

Oh, Hey, everybody. Good morning, first one a very quick one when you talk about these capacity additions for 'twenty three 'twenty four is that fiscal or calendar.

That's cool.

Got it.

And then one of the things that we didn't talk about it as it relates to capacity is.

There are any key ingredients for inputs or materials packaging.

That have created bottlenecks I know in the past they have I think you mentioned this little foil wrappers things like that is that all resolved now or is it still some areas of.

Things to watch out for.

Yes, there's nothing.

That's problematic at the moment.

Extended lead times early on.

Try to prevent those things from happening, yes, we haven't seen any impacts.

Yeah.

Okay, Great. That's all thank you.

Thank you.

Our next question comes from John Baumgartner with Mizuho. Your line is open.

Good morning, Thanks for the question.

Hi, John .

Maybe first off Darcy yeah, congrats on all the time.

I'd like to ask about powders against the broader evolution of the category, maybe moving beyond COVID-19 volatility into the new normal with work from home and such but how you think about the role for powder within the category have you seen the core consumer for powder change it all pre versus post Covid, how do you see powders and RTD coexisting as powder.

Growth from here and then for Bell Rang, how can you best I guess make powder products complementary to the RTD business.

Yeah. That's a great question, so I'm going to pick up where I was talking about.

The potential of our T V is versus nutrition bars powders have even lower household penetration than our T. DS. So I think that is and where our where premier helped mainstream or has started to help main.

Stream our Tvs I also believe that powders are are at kind of earlier stage of that mainstream.

Bob.

Trajectory, so they're different than all of the different forms are have kind of unique occasions. So if you think of borrowers are more snacking.

T D's are more meal replacement, although can be used kind of in between meals, but more meal replacement well powders are mostly used with food with food with smoothies and after work out.

Where theyre consumed our Tvs and nutrition bars, mostly on the go powders at home so they're very complementary and so I you know we have been very successful on premier protein with powders, obviously diamond type is our number one powder brand both of them.

Go after unique and complementary consumers and then of course as I was saying before they have kind of unique and complementary occasions as well.

Okay.

Okay, Great and I guess from a supply chain perspective.

There's a lot of focus now understandably on the month to month and quarter to quarter, but aside from just I guess simply increasing volume availability are there opportunities underway here with the changes in supplier base now I guess through F. 'twenty three 'twenty four that sort of place you in a better position either format wise or profit wise to come out of this.

With new channels for growth, whether it's out of home C stores instant consumption.

Is there opportunity to sort of a step change in the composition of your capabilities and channels for the longer term sort of coming out of this this year.

Absolutely. So I think that you know.

I said this in my prepared remarks, just about how I think we're going to look back at 'twenty, one as really pivotal year, because I think that.

What we're going to look back on is really kind of <unk>.

<unk> the foundation laying the table for.

Outsize growth in the future building up where you know we currently from a production standpoint for instance.

You know we have five locations now.

And in four ish years, we'll be doubling that we're expanding our bottle or.

Our bottle capacity dramatically, which will allow us to go we can really sell bottles or or petros within kind of convenience and up and down the street et cetera, but we start being able to match products to different places.

<unk> and then expanding our distribution from there. So yes I believe this year is more about capability building. So then we could take advantage of that in the future.

Great. Thanks for your time appreciate it.

Yeah.

Okay.

We'll go now to Bryan Spillane with Bank of America. Your line is open hi.

Alright, thanks, operator, good morning.

I just had one question.

If we look at the school if we look at the current fiscal year.

And just.

Just the amount of consumer facing spend that you're anticipating this year.

So both promotions and advertising and marketing.

What is that relative to normal and I guess, what I'm trying to get at as we move past the supply constraints how much more in marketing would we have to add back as we go forward.

Yeah, so on the marketing side.

Article in 'twenty, one we spent around 3% of net sales.

Advertising and promotion.

This year, we're pulling back on that.

Around 2%.

Going forward, obviously, we want to invest in that but we also think that will drive topline growth as well as we've seen.

Our recent past it's very.

Our products are very receptive to marketing until we think it would drive obviously topline, but yes, we would expect over the longer term.

Or at least spend back in the 3% level and perhaps look to increase that over time.

When it comes on board.

Is the order of magnitude I remember this correctly.

At the time of the separation right you had been through a supply chain or supply constraints prior to the separation and then and that next fiscal year.

The margin step back because there was more.

Marketing spend that went in so just like order of magnitude will it look like that.

No.

So essentially it was a little bit different back then.

So we did see fiscal year I think it was physical one.

You bet.

Stepped up margin.

But part of that what's too was because protein cost to come down. So we benefited from a price increase as well as from from favorable protein costs, but no I don't I don't think our margin structure should should be impacted obviously some of this depends on what commodities do and we'll have to make sure. We're right sizing that at these historical high prices it gets harder to tell.

Get back to the gross margins that we've experienced in the past, but I do think of long term thankfully even out and we should see gross margins back where they've been historically come in at 33, 34 range, which allows us to spend marketing at a higher level and promotion.

Thank you.

Yeah.

We have no further questions in queue. At this time. This will conclude today's program. Thank you for your participation and you may disconnect at any time.

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