Q4 2022 Bellring Brands Inc Earnings Call
Today, Please press star zero.
Yes.
Welcome to Bell ring brands fourth quarter, 2022 earnings conference call and webcast.
During the call today from Bell ring brands are Darcy Davenport, President and Chief Executive Officer, and Paul rode Chief Financial Officer.
Today's call is being recorded and will be available for replay beginning at 130 P. M Eastern time.
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Q4, six one.
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It is now my pleasure to turn the floor over to Jennifer Myers Investor Relations of Bell ring brands for introductions you may begin.
Good morning, and thank you for joining us today for Bell ring brands fourth quarter fiscal 2022 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 filing section of Dol Green Dot 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 uncertainty.
Ts 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.
Okay.
Thanks, Jennifer and thank you all for joining US last evening, we reported our fourth quarter and fiscal 'twenty two results and posted a supplemental presentation to our website.
Fiscal 'twenty two was a transitional year for powering brands.
As a result of our outsized growth in 'twenty. One we spent in fiscal 'twenty to laying the foundation and gearing up for the future.
We made significant progress in our shake capacity expansion plan to grow and diversify our supply and deepen our competitive mode.
Lastly, our organization invested in consumer and category insights prepared plans to restart marketing and promotion and created a robust innovation pipeline.
The work done in fiscal 'twenty, two sets us up for a strong 23 and beyond.
Now did the quarter results Q4, net sales came in at 379 million, 12% over prior year.
However, this was below our expectations as a result of it.
Production shortfall from our new bottle co manufacturer I.
A delayed load in to the E Commerce channel and an expansion of the previously announced shake recall.
Overall, the recall was immaterial to our business, but it led to shelf disruption that uniquely impacted Q4.
Fiscal 'twenty two saw our net sales grow to 1.3 dollars 7 billion at 10%.
Our profit trajectory remained extremely healthy with adjusted EBITDA growing 16% to 271 million and adjusted EBITDA margins at the top end of our long term algorithm.
Paul will go into more detail on the quarter, but I'm incredibly proud of the team for delivering these results given the challenges we encountered throughout the year.
The Premier protein brand continues to demonstrate the strength and resilience.
As a reminder, in November 21, we announced the plan to intentionally damp and shake demand, while we expanded our co manufacturing network.
We reduced our full time Sheikh portfolio from 14 to seven flavors.
Temporarily turned off promotion and marketing and still sold every shake we could produce.
These supply constraints have made our year over year volume trends a bit confusing.
In the fourth quarter of 'twenty, one we significantly an unsustainably reduced inventory as a result of our high promoted volumes outstripping our capacity.
In Q4, 'twenty, two we had limited flavors and did not repeat the promotions.
We did not have the inventory.
Nonetheless consumption declined only 5%.
During fiscal 'twenty, two a better measure of brand momentum is our sequential dollar consumption, which grew each quarter.
Starting in fiscal 'twenty, three we no longer we are no longer lapping heavy promotional periods.
With October consumption dollars back to growth up 16% versus prior year.
Almost all key measures.
For Premier protein remains strong and reaffirm our long runway for sustained growth. According to our most recent brand equity study Premier protein remains the number one brand I love the number one brand I would pay more for and has been number one net promoter score in the category.
Our consumption results support these measures with non promoted volume in 'twenty, two increasing clearly showing that our consumers are willing to pay more for premier protein.
The power of the brand comes through and velocity as well Premier holds four of the top part of the RTD categories top highest velocity items in tracked channels.
In fact that one of.
At a key mass customer premier holds in nine of the top 10 items.
Household.
<unk> is the only exception to a landscape of right performance metrics with Premier Protein's pullback in flavors promotion and marketing we have seen and we have seen the overall shape category as well as our brand decline in household.
However, our buy rate has risen signifying our loyal high value buyers are staying with us while our while we are temporarily losing occasional deals seeking buyers.
We fully expect household penetration to rebound once we reintroduced our full portfolio and restart promotion and marketing.
As we enter 'twenty three our trade inventory levels have improved however, some retail partners are still below target based on our current capacity ramp up plan, we will focus the first half of 'twenty three on rebuilding these remaining retailers inventory levels. So we can get back to full shelves and pallets everywhere.
Now to shake capacity.
Last November we outlined a plan to aggressively add capacity for our shake business and we've made significant progress.
In fiscal 'twenty, two we added three co manufacturers and signed agreements with an additional three that will start up in fiscal 'twenty three.
As you May recall, the big step up in production happens in Q4 23, when our two dedicated greenfield facilities come online.
Consequentially their benefit will not fully be realized until fiscal 'twenty four.
Yeah.
As you would expect adding this much capacity has not been without its challenges and.
In addition to the July recall at one of our smaller co manufacturers Q4 production scale up at our new bottle co manufacturer has been slower than anticipated, which didn't allow us to drive the expected growth in the ecommerce channel.
The good news is that our production is growing with second half production significantly increasing versus the first half.
We expect low double digit production growth in fiscal 'twenty three.
In 24 with the additions of the dedicated facilities, we expect to add north of 20% incremental capacity on top of the 23 volumes.
This year, we have laid the foundation for many years of robust Shea Chris.
Turning to Diamond case.
The brand had a terrific quarter with consumption dollars in the U S at 32% across tracked and untracked channels.
We saw strong threat, we start strong double digit growth and all key channels, except for club, where we temporarily lost distribution.
The momentum has continued in October .
October with consumption up 44%.
Our return of marketing and promotions drove this growth with sales with exceeding our expectations.
Equity metrics are incredibly strong with diamond type being the number one high quality brand and number two brand I love among powder brands.
Lastly, diamond taxes, expanding distribution in mainstream accounts, adding 21% more TDP is this quarter, which are now at an all time high Moreover, with only 35% ACB today <unk> has a ton of room to grow.
Future distribution, which is a major organizational focus this year.
Now to our outlook.
As you saw in yesterday's press release, we expect fiscal 'twenty three net sales to grow between 14, and 20% and adjusted EBITDA to grow between 11 and 20%.
This sales guidance is above our long term algorithm, reflecting our pricing actions and laughing capacity constraints in 'twenty, two I shake volumes returned to growth.
We expect to begin driving demand in our premier protein Shake business again. This year. Our current plan is to start reintroducing our temporarily discontinued flavors in mid year, and restart marketing and like promotion in the back half.
Obviously these decisions depending on the demand and supply dynamic and we will remain nimble. So we can navigate effectively.
In closing we believe we have many strong growth years ahead of US are high growth category continues to accelerate above historic mid single digit growth rate with strong macro trend tailwind.
We now have two powerful growing mainstream brands transforming the category and gearing up to innovate market and promote again.
Since our 2019 IPO, we have delivered a 17% revenue CAGR and an 11% adjusted EBITDA CAGR outperforming our long term algorithm. Despite the COVID-19, pandemic and major supply chain disruptions.
We are well along in our shake capacity expansion plan.
We are a rare combination of scale organic growth strong margins and high free cash flow generation gives.
Given our asset light model, we will have significant cash flow to delever rapidly.
Lastly, salaries has a nimble collaborative culture and will continue to fuel its success for years to come.
We remain confident in our long term outlook for Bell ring and look forward to demonstrating our success. Thank you for your continued support and I'll now turn the call over to Paul.
Thanks, Darcy and good morning, everyone.
Net sales for the quarter were $379 million and adjusted EBITDA was $80 million.
Net sales grew 11, 5% over prior year and adjusted EBITDA increased 32% with adjusted EBITDA margins of 21, 1%.
Net sales in the quarter lagged expectations, driven primarily by production shortfall in bottles, a delayed load into the ecommerce channel and shelf impact from the expanded recall.
We were able to more than offset the net sales Miss on the adjusted EBITDA line through efficiencies in freight and logistics as well as modest benefits from lower protein cost.
Mayor protein net sales grew 9% driven by higher average net selling prices, which contributed 18% to overall growth offset partially by 9% volume decline.
Premier protein RTD shakes volume declined 9% as we lapped prior year promotions and a temporary reduction in available flavors.
These headwinds were partially offset by increased baseline volume.
<unk> net sales grew 32% compared to a year ago benefiting from higher net pricing and favorable product mix offset partially by lower volumes.
I just want 100 had a great quarter with sales of 63% on higher volumes benefiting from distribution gains a category momentum.
These gains were partially offset by volume declines for the remainder of the diamond portfolio as a result of lapping discontinued products.
We made the strategic choice to supply the business with a core focus on IC 100, our flagship product.
As a result, we exited certain diameters products, which caused volume headwinds in the quarter. This.
This is expected to remain a volume headwind through the first half of fiscal 'twenty three.
Gross profit of $122 million grew 27% with gross margins of 32, 3% up 410 basis points as our pricing actions offset significant inflation.
In addition, we left the prior year period that included significant promotion supply chain inefficiencies and protein inflation ahead of pricing.
Excluding onetime items SG&A expenses increased $9 million compared to last year.
As a percentage of sales SG&A SG&A increased 120 basis points, largely reflecting returned to marketing for diamond dogs.
Turning to full year 2022 results net sales were approximately $1 4 billion up 10% over the prior year with gross profit of $422 million growing 9%.
Gross profit margins were largely flat.
Year over year, as our pricing actions and promotional pullback offset double digit inflation.
SG&A expenses were $190 million and excluding onetime items increased 5 million compared to last year.
As a percent of sales SG&A improved 80 basis points, driven primarily by reduced marketing spend and we manage demand on premier protein shakes.
Adjusted EBITDA increased 16% to $271 million with a margin of 19, 8% an increase of 100 basis points.
Before reviewing our outlook I would like to make a few comments on cash flow and liquidity.
We generated 10 million of cash flow from operations in the fourth quarter and $21 million for the year.
As a reminder, we started the year with low inventories on both our shake and power businesses, which fueled outsized cash flow in fiscal 2021.
Fiscal 2022, we saw the opposite effect as we built inventory, primarily <unk> powder and raw materials, resulting in lower than typical free cash flow compared to historical rates.
Fiscal 'twenty three we expect shake inventory growth to be largely offset by reductions for our powder enrollment cereal inventories.
As a result, we expect to generate much free cash flow in fiscal 'twenty, three and be more in line with our historical EBITDA to cash flow conversion rate.
During the quarter, we repurchased 1 million shares at an average price of $23 20 per share 800000 of which were purchased in connection with the secondary offering of shares previously held by post.
For the fiscal year, we purchased one 9 million shares at an average price of $23 34.
Our remaining share repurchase repurchase authorization is $25 million.
As of September 30, net debt was $903 million and net leverage was three three times down <unk> seven times from the pro forma spinoff closing target of four times.
With our expected EBITDA growth and return to strong free cash flow generation of fiscal 'twenty. Three we anticipate net leverage will be lower than two five times by the end of fiscal 'twenty three.
Turning now to our outlook, we expect fiscal 2023 net sales of $1 5616, 4 billion and adjusted EBITDA of $300 million to $325 million.
Our guidance implies strong topline growth of 14% to 20% and adjusted EBITDA growth of 11%, 20% with healthy adjusted EBITDA margins of 19, 5% at the midpoint.
We expect double digit sales growth for premier protein, a diamond highs as both benefited from higher net selling prices and increased volumes.
Sales are expected to sequentially grow after the first quarter as RTD shakes production increases.
Volume growth for Premier protein RTD shakes is expected to be driven by continued category tailwind the relaunch of temporarily discontinued flavors and the restart of marketing promotion to drive demand.
We expect volume headwinds in the first half of <unk> as we lap the exit of discontinued products with stronger volume growth in the second half.
We continue to experience significant inflation in dairy proteins and executed an additional price increase on our premier protein RTD shakes in October .
This increase is expected to offset inflation resulted in strong gross margins in the first quarter with lower gross margins on a sequential basis as protein cost step up.
We expect adjusted EBITDA dollar growth to be weighted modestly toward the first half of fiscal 'twenty, three which has a greater benefit from pricing actions, while the second half of 'twenty, three as higher inflation and incremental brand building investments.
Turning to our first quarter forecast, we expect low double digit net sales growth compared to prior year with adjusted EBITDA growth outpacing the topline growth.
Through Q2 pricing continues to be the primary sales growth driver compared to prior year.
We expect first quarter adjusted EBITDA to grow significantly from prior year, driven by increased net sales and margin expansion.
Gross margins are expected to benefit from higher net selling prices offsetting inflation as well as lapping prior year supply chain inefficiencies and protein inflation ahead of pricing.
In closing we are pleased with our performance this year, despite a tough environment.
We are emerging stronger and our momentum is growing heading into 'twenty three.
I will now turn it over to the operator for questions.
At this time, if you'd like to ask a question. Please press star one on your Touchtone phone.
You may remove yourself from the queue at any time by pressing star two.
Once again that is star and one to ask a question.
We'll pause for a moment to allow questions to queue.
We'll take our first question from Ken Goldman with JP Morgan.
Alright, Thank you very much.
I wanted to focus a little bit on diamond ties.
Just curious a little bit more if we could get a little bit more information about the decision perhaps to focus on the ISO 100 variety, what's driving that decision.
And then I also wanted to.
As a follow up I guess.
Typically when a product is no longer sold in a channel at all it seems like Dematteis had zero sales to club this quarter, it's usually the customer's decision not to producers so.
It was your decision to exit club why why not just sell ISO 100 to that channel versus what you may have been selling there I'm just trying to get a little better sense of the dynamics there. Thank you.
Hey, Paul why don't I answer the club, but and then.
Well I'll, let you answer the IC 100 in that era.
That decision and focus.
So on the club on <unk> It was not our decision to discontinue it.
<unk>.
Retailer when we took significant pricing on diamond prices as a result of the rapid inflation.
The club retailer decided to was not happy about the increases in price and decided to discontinue it was not because of performance actually diamond ties was the number one item in his set for powder.
But they.
They werent happy with the price increase and they have reversed that decision and we're actually getting it back in so it was a temporary discontinuation, but it.
It was not our decision.
Yeah, and just to add on that so from a volume headwind that discontinuation is certainly a part of it but the discontinuation of flavors and products is a bigger piece. So let me touch on the why so I just have one hundreds of always been the flagship brand for diamond ties.
As we as I mentioned in my prepared remarks, we came into the year on the lower side of inventory and so we made some decisions to focus on ISO 100, but also to take out some of the smaller sub brand and in some cases, just flavors. So that we could focus our resources and our and growing <unk>.
The 100, it allowed us to.
If you go back protein was also a little tight last year and so it's allowed us again to focus on specific skus and products, we discontinued a number of.
I'll call them lower value.
Products.
And in some cases, some flavors, which we will bring back in fiscal 'twenty three but it is a headwind to Q4 as well as into the first half of the year.
Yes, I think of this as a kind of typical SKU rat. However, it was a little bigger than normal just because of the long tail.
Yes.
On the on the <unk> business.
Is it all skus that needed to be cleaned up.
It has an outsized impact on volume because they are just 100 as a high dollar per pound product and a lot of the other products are lower dollar per pound.
The volume impact is outsized compared to the sales because the peso was a two thirds to 75% of the overall business. So it just has an outsize effect.
The volume.
That's all very helpful. If I can just tie a bow on that so.
Putting.
We're adding one plus one is it fair to say that.
Youre getting the product back into club in the second half of the year I just want to get a sense of the timing on that recovery there.
It should be in.
For Q2.
Great. Thanks, so much.
Yes.
We will take our next question from Andrew Lazar with Barclays.
Great. Thanks, good morning.
Good morning, good morning.
And I'm sorry, if you said this I was I was unclear some of the one off items that affected <unk>.
The delayed load into ecommerce and some of the bottler co Packer issue are those now sort of completely resolved or or do they sort of bleed into into the new year.
They're a way to sort of quantify maybe what the impact to sales in the fourth quarter was from some of those one off items.
I know that can be hard sometimes.
Yeah. So I'll hit the first and then I'll, let Paul address the quantification front, yes. The three you hit the three items, so and for the most part they have been resolved. So obviously the recall expansion that.
That is unique to Q4.
And then and that was really a shelf.
A shelf disruption.
And then on.
And just to be clear on the recall, we the recall happened and this was one of our it was immaterial and.
Because it was a small co man kind of immaterial to our overall business.
Our initial recall happened on 728.
Which we knew last.
Earnings call, but then there was an expansion.
After our earnings call and what happens with the expansion is from a retailer standpoint, it's like a new recall so they actually you know many retailers just.
At swipe the shelf.
They can turn off your item et cetera. So there is a disruption at the shelf. So that was the that was a unique item and then yes on the delayed on the E. Commerce piece is delayed load in.
Largely is with.
With remedied in Q1.
And then model production continues to improve not where we need to be.
But but improving so I would say largely.
It has been kind.
Correct and they were kind of a unique items to Q4.
And then does it Paul I think you were going to mentioned, yes, if there was a way to quantify the impact.
Magnitude its about two thirds of the impact just from the E Commerce.
Challenges in about a third from the recall on the E. Commerce side brought bottle production was a majority of it but we did have some challenges with.
And e-commerce retailer.
They were heavy on inventory and so they weren't allowing us a shift in some of our products. So that's part of it.
And then one thing I want to touch on so Darcy mentioned the production. It challenges. The one issue. We did have as wells that did result in some of our limited time limited time offerings not getting on shelf because of issues. So that's the one thing that would have benefited Q4 level.
Won't come in back into Q1, but.
We do get some timing benefits from from some of the products of the physical market.
And then Darcy you mentioned the buy rate was up.
Some of that due to just purely the price increases that you've had or.
Is there a way to see what maybe buy rate would be on sort of more of a volumetric basis.
To get a sense of how consumers are thinking about where the loyal consumers are thinking about the brand.
Most of the buy rate increases our pricing, but I think what it shows is that our loyal high value buyers are sticking with us.
Thank you.
Thanks.
We'll take our next question from Chris Growe with Stifel.
Hi, good morning.
Good morning.
Hi, I had a question for you on <unk>.
You showed a chart in the slides around a pvp recovery.
And I just want to get a sense of.
Clearly is about 20% below where you were pre sort of supply issues. When would you expect to build back to that level throughout the year is that the way to think about it or does it build back there more quickly as you rebuild inventory at Detroit.
I'm, assuming credit Youre talking about premier protein not downsize right correct I'm, sorry, yes, yes, yes.
So we expect.
We expect PDP is too.
Stay kind of stable they've been very stable.
For most of the calendar year.
And we expect them to stay stay at stable until we start reenter do things some of those pods skus.
And that's going to happen mid year, then they will they will pick up we should see a little bit of an increase.
Over the next kind of seven.
Several months just as we continue to fill the shelves out and increase as we increased trade inventory, we still have hold on the shelf, especially in some SDM accounts. So think of it as maybe some small increases as we fill up the shelves are better.
And kind of SPM and then we will start seeing consecutive improvements as we start reintroducing kind of mid year as we start reintroducing desktop skus.
Okay.
This show is picking up here a little bit even in recent weeks I know youre doing it goes through the <unk> through the quarter, but it looks like it picked up a bit perhaps at filling in some of those holes in the FTM accounts. So.
That's exactly right.
Okay.
Then just a second question for you perhaps for Paul surround our COO.
Receivables spiked up a lot in the fourth quarter and days sales outstanding spiked up.
I guess I wanted to just understand like obviously would indicate you shipped a lot late in the quarter. It was that getting retailers back to targeted levels of debt.
What I'm seeing there and maybe related to that is a targeted level for a retailer is that above where it's been historically or is it where it's been historically and youre trying to get back to that level.
Yes. So on your last question, we're really just trying get back to the.
Initial level that we haven't necessarily seen changes in their desired weeks of supply. So it's really trying to get them back.
As far as casual as far as receivables Youre correct, its really more about timing.
We did have.
Heavier shipments in September , which drove the AUR up and if you compare that to the prior year.
A lot of promotion promotional shipments and kind of that July August time period, which meant that the accounts receivable in September was really almost at a low point a year ago, where it was just a little different than how it shipped out in.
In the fourth quarter of fiscal 'twenty two.
Okay.
Okay. Thanks, a lot for that.
Thank you.
We'll take our next question from Ben <unk> with Stephens.
Hey, guys, Jim Taylor on for Ben Thanks for taking my question.
I wanted to ask you touched on this a little bit at the beginning with the club retailer flip flop, but just kind of your retail partners Receptiveness to you guys pulling the price level.
We've heard some larger retailers kind of dig in those yields.
Just wanted to get some commentary around the categories such as you guys have taken price have you seen maybe some skus you trimmed out or maybe new brands coming into the category.
So from a price standpoint.
I mean, it's always difficult you know me and yeah, we've definitely seen the same articles out there. So we obviously just took.
A round of pricing on the premier protein.
Jake business effective.
Q1, so in October it was accepted by all retailers and it is.
Currently in the market.
But I think that.
They I mean it was there were a lot of negotiations you know I think that and there is there's definitely pushed back but I think ultimately they understand that.
That our costs are dramatically increasing so it just kind of comes down to that it was a pretty logical conversation and then what was your second question.
I'm, just saying that with me.
Flip flop.
When they pulled the shoes off did they replace that with a different brand or do they just pull them out entirely and showed a different set in there.
Yeah. So.
And the club flip flop was on Diamond pause happened earlier this year.
Don't know the exact they put in a different way.
Putting in a different competitor I don't remember, which one it was.
But they you know.
Club is a little different especially on the powder side of the business, where they do bring in some ins and outs.
So I can't remember if it was a.
If it was a permanent SKU that replace it or just an in and out.
I seem to remember it was an in and out which is why we're getting back in.
Okay.
If I can ask them.
When you guys put together the guidance does that assume that you guys would be out on plug for Dynamo ties or is that assuming that you guys would be back end.
Thanks.
No it's not incremental we knew that it was coming back.
Okay got it.
I'll pass it along thank you. Thank you.
And once again, if you'd like to ask a question. Please press star one.
That is star one if you would like to ask a question.
We'll take our next question from John Baumgartner with Mizuho Securities.
For the question.
First off Darcy I wanted to ask about premiers household penetration and promo and rebuilding penetration from here given the stable binary set against the consumers you lost two or more deal driven as you build that supply is there a way of promoting differently are positioning the brand differently in light of the promoter score and the willingness to pay data that <unk>.
You mentioned, where you don't need to go as deep on future promo and you can maximize that mix of loyal consumers and your base or is having that price driven consumer is that just necessary to build penetration and we could still see kind of that similar promotional depth, though as we've seen historically before the supply constraints.
It's a great question and we've been debating this internally a lot just.
Rethinking kind of our promotion promotional strategy.
First of all we know that we know that promotion is key there can be some natural churn within all brands, we need promotion.
Especially for us it's less the temporary price reduction, but it's more about the display that often comes with the temporary price reduction so and just to remind you. This.
This business has been really built on getting kind of out of the aisle and what that does it's a mainstream product as long as we get out of the aisle and get eyeballs.
Then we can bring in new people and then because of our strong repeat we keep them for the most part in that in the franchise. So regarding that and it's a balance where we're talking to retailers right now about our promotional strategy, they're dying to promote again.
As you can imagine because we bring in a lot of people from outside the category and.
So now it's a balance of okay.
Can we can we may be not go as deep as you were talking about.
Or can we.
Can we do maybe one less promotion I think the big thing for US is as long as we get outside of the aisle it will be very effective.
Okay. Thanks for that and a follow up for Paul on the commodity outlook for this year I think you mentioned higher inflation for each two does that does that pressure driven by expectations for spot pricing, maybe approaching where there could be potential flexibility or is that outlook sort of locked through forward buying our hedging where there is really not much.
I'm just trying to figure out how much flexibility is apparent in the back half of the year on commodities. Thank you sure. Yes, our typical strategy is to be covered on.
On commodities out about six months or so.
And so for us our R. R.
<unk> hit on Cogs, the protein rates of flow through our P&L typically go more about six to nine month lag to the market. So the market did tick up obviously in the second half of last year.
So we're really expecting the height of that to hit us in the second and third quarter. So I mentioned in my prepared remarks, we would expect sequential.
Increased protein from Q1 into Q2 and Q3.
We have recently seen commodity start to come down a bit but they have been bouncing around a little bit until I think it's a little bit to be determined where they land, but it could provide some potential opportunity for us in the second half depending on where the rates go.
Okay. Thanks, Paul.
We'll take our next question from David Palmer with Evercore ISI.
Thanks.
A question on the production growth that you said low double digits in fiscal 'twenty threes is that below where you had previously believed would be in and if so what's driving that.
It is a little bit below what we previously said and the reason is because we are factor. There are two pieces. When you add capacity one is the startup timing, meaning you know when they actually start producing and then there's the scale up and that is getting to the level.
Kind of throughput.
We have.
The timing of start up was.
Absolutely you know on time, and what we expected, but the scale up has been a little bit less than it's taking longer.
We previously expected and the bottle our bottle come in as a perfect example of that affecting this quarter and so what we've done is we've applied those learnings that we saw in 'twenty two to 'twenty three and the result is bringing down the production expectations a little bit.
Okay got it thank you and I'm wondering how you're viewing the interplay between capacity increases for you and your competitors do you see your capacity increasing at the same rate.
As competitors.
And and if they if everybody is getting the same sort of co packer.
Capacity relief, what dynamics do you see playing out in the market in terms of pricing power in.
So how do you see this all playing out.
So I can talk to the.
Kind of Tetra co man portion of the business base.
Based on our estimates we are kind of gobbling up about 70% of the new capacity. So we're definitely getting more than our fair share of the new capacity and that's really.
A reflection of.
Where are the ones initiate it we needed it the most where the bigger player.
And so we were able to enter into these long term agreements and get even right of first refusal for expansion from here as well so I think that so I definitely.
Know that we're getting more than our fair share of new tetra capacity.
And then your second question was around can you clarify yourself.
I think it is.
The bulk of the question is really bad, but I wonder how you are even thinking about.
So till this point certainly pricing power has been perhaps reinforced by this dynamic that nobody else can fill in the capacity that you are vacating that youre, not able to supply and and I Wonder if you think that.
How you think promotion and pricing power will break down or not.
As this capacity rolls in.
Yeah, I think the way I look at.
And I talked about.
My prepared remarks, just this last year was a transitional year.
In many ways I mean.
We we were holding we kind of a holding ground for a year and now we're getting back to driving demand there.
Starting in 'twenty, three and beyond because of capacity and we're going to be able to get back to driving demand having a full set of flavors is driving through promotion and marketing building household doing innovating and doing all the things that we were doing before.
And I think what that's going to do.
I think we have proved that you know pricing power, but I think what's important is we want to get back to growth and we want to get back to bringing new we still think that the category and our brand is highly underpenetrated and so I think as we get back to growth, we will start bringing in new households, some.
It will be on promotion and some of it will be on every day and so I think that that will be that will be the focus going forward and.
I see I mean, the whole category really.
Has been.
A little bit on hold even though we're still with the COO.
Category is growing but I'm excited to see it get back to growth because there is so much more potential here.
Thank you.
Thanks.
Okay.
We'll take our next question from Ken Zaslow with bank of Montreal.
Hey, good morning.
Good morning, Ken.
Do you ever think that you need to rethink your business model in terms of potentially getting a closer relationship or something with the obviously that you would want to actually do the manufacturing, but is there something that you can do.
This obviously isn't the first time.
Had supply issues go back the idea we've gone through this a couple of times.
Is there a thought of just taking a step back and think there's a better way to work this model.
Yeah in many ways I think we have pivoted our strategy.
As we I mean, if you look at.
Several years ago, we were simply a co man, we had a simply a co man model in every single one of our co Mans had multiple different competitors in the same co man.
Now.
Let's see too.
Of our three that are coming on next year are exclusive to us. They are dedicated to us. So yes, there still and which I think is that it.
It's really kind of in an elegant solution because it allows us to stay with our asset light model.
But allows us also to have a dedicated facility.
Or two dedicated facilities, which actually will make it three because we have one already.
But and so that and so we will have you know kind of more influence.
More transparency and then I also talked about before.
About writer first refusal on new assets. So in many ways I think our manufacturing strategy has.
<unk>.
Given as we've learned from the past couple you know capacity constraints.
Okay. My second question is.
You.
Segmenting your customers in a way that you would know what percentage are the ones that are seeking value and is there an opportunity to just you.
We will continue to minimize that and not even worried about that.
Closet.
Deepak dilutive, but theyre less accretive than the others and is there.
Because it doesn't seem like demand is your challenge right. So if you.
All your capacity towards those consumers willing to pay and have a higher is there an opportunity there to do something like that.
Yeah.
So yes, we are able to segment our customers.
To the.
Like loyal high value and occasional and Thats an occasional deal speaking that's how we knew that we were losing.
Household penetration as it's gone down this last year, we were losing those occasional deal seeking buyers so half of those buyers actually left the category completely.
And then half went to <unk>.
A variety of different competitors that were on deal there.
We will just always move to the next deal that's how they're how they operate.
We also know that.
Consumers.
That.
As consumers stay within the franchise they continue to buy more and become more valuable so for instance.
The ones that entered at the beginning of the pandemic they have doubled.
Those consumers have doubled their spend.
It's all about the model is all about.
Bringing in new households, and then continue to graduate them.
To spend to spend more so I think we will I think the deal seeking buyers. When we promote again I think they will they will come and go.
They're not our focus our focus is to bring in these loyal high values and then continue to graduate them up and spend more.
Right I guess.
Because you said in your comments that any.
We've produced anything it's been sold like we can't you.
You can't produce anything you'd sell it so therefore why sell it to somebody who.
Would not pay.
So you.
You don't have a consumer problem.
A distribution or a production issue.
Absolutely right.
Yes, it makes sense I think that.
Promotion and really and we're not going to we don't expect to start promotion until we have.
The adequate supply I think what promotion does and what I was saying to Jon earlier is.
It is really around the display and getting more eyeballs and therefore more household penetration.
Okay.
Thank you.
Thanks.
We will take our next question from Jason English with Goldman Sachs.
Hey, good morning, Thanks, a lot man.
Good morning.
I suppose that I don't want to pick up on that last question, but really about timing you characterized this year as the Europe coming back in stimulating demand, where do you expect to be in a position to start stimulating that demand.
Our current plan right now Jason is to bring back some of this pause skus mid year, and then to start marketing and some light promotion in the back half.
Okay. So for those tracking with that and we should expect a decent reaching based.
Based on comps.
After next year.
Probably if you would see it differently.
And on shipments you mentioned again I think in the press release that you expect to you first have to reload inventory should.
Should we expect the shipment versus consumption disparity surplus of shipments over consumption to persist through the first half of the year.
Yes, so I'll take the last one so we do expect some modest ship.
Shipments over consumption in the first half as we start to.
You touched on earlier rebuild the remaining the remaining customers that we have that arent at optimal levels, but I think it is moderating from where it's been so I'd expect to be fairly modest until we get to.
Reloading some of the.
Pause flavors as Darcy touched on which we expect to happen sometime in the late first half into the second half. So that obviously would be a load ahead of <unk>.
Consumption.
Two primary items.
And Joe This is Greg.
Sorry go ahead.
Yes sure.
Comps, obviously some of the comps.
Youre consumption growth is accelerating because we are lapping a dip and consumption from all parts of Europe sequentially were not really seeing tremendous uptick and that doesn't really exist in the front half of the year. So our current run rate and suggest your sales growth is going to moderate quite a bit in the front half of the year. If you don't have more PDP the more marketing going in and then if you tell me youre only going up.
Honestly over shift it suggests that you're going to you have a very back half weighted year.
Oh, Okay. So different.
So just remember that.
Q1 is a seasonally low period.
So what youre seeing right now in the Pos.
S is.
So that's where the year ago and sequential I mean, obviously, you know that but they did just factor them, both and so we always see a seasonally.
In kind of November December it's slow for the category, it's the winter seasonal time.
There is a natural increase in Q2 because of new year, New you for the overall category.
And then we'll and then we will start.
Bill.
We will start driving demand.
Throughout Q2 through Q4.
So is it a back half weighted year.
George a battery.
It is but and not to.
That is partially because first of all we're a growth business. It will always be back half weighted but also because that's when our supply also is coming more online. So that that does let lend itself to and then we have the demand drivers which are related.
Right right right. Okay. Thank you.
Yes.
We have reached our allotted time for Q&A and this concludes today's call you may now disconnect.
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