Q1 2023 Bellring Brands Inc Earnings Call
Welcome to city Bell Ring brands first quarter 2023 earnings conference call and webcast.
The call today from Bell <unk> brands are Darcy Davenport, President and Chief Executive Officer, and Paul wrote Chief Financial Officer.
Today's call is being recorded and will be available for replay beginning at 12 o'clock P M Eastern time.
The dial in number is 800 695, he wrote 671.
No passcode 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 building brands for introductions.
Ma'am please begin.
Good morning, and thank you for joining us today for Bell ring brands first quarter fiscal 2023 earnings call with me today are Darcy Davenport, our president and CEO , 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 at Bell Ring Dot Com. In addition, the release and slides are available on the SEC's website.
Before we continue I would like germane to 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 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 Ya.
Our press release issued yesterday and posted on our website with that I will turn the call over to Darcy.
Thanks, Jennifer and thank you all for joining US last evening, we reported our first quarter results and posted a supplemental presentation to our website I'm.
I'm pleased to share that fiscal 'twenty three is off to a good start with our first quarter results coming in ahead of our expectations net sales grew 18% over prior year and adjusted EBITDA was up 42%.
Overall net sales came in better than expected with slightly higher premier protein shake production it translated into stronger shipments in.
In addition, adjusted EBITDA benefited from Cogs favorability.
I'm, particularly encouraged that premier protein volumes returned to growth in Q1, and we are starting to see momentum grow.
As you saw in yesterday's press release, we reaffirmed our fiscal 'twenty three outlook of net sales and raised the low end of our adjusted EBITDA range. We don't expect major changes to the cadence we communicated last quarter.
Al will provide more detail.
Let's start with shake production.
We saw significant growth the growth this quarter in production as we lap the worst of our capacity constraints.
This growth allowed us to modestly increase inventory at our retailers as well as increase our own inventory.
Both have improved but are still not at optimal levels.
Over the next few months, we expect most of our customers will be at normal levels. While we don't expect our internal inventory to fully recover until early 'twenty four.
Our state capacity expansion plans are on track with annual production expected to grow low double digits in fiscal 'twenty three.
Our new bottle co manufacturer continues to scale up with production improving each month throughout Q1.
Our three new co manufacturers for 'twenty three are tracking to plan recall, we have a small co man that comes online late in Q2 with the step up in production in Q4 with our two dedicated greenfield facilities coming online.
Sequentially, there benefit will not be fully realized until fiscal 'twenty four.
Our incremental capacity in 'twenty four is expected to be north of 20% setting us up for many years of robust Shea Chris.
Before reviewing category and brand updates I want to share that we've changed our sources for tracked consumption as well as household penetration.
These changes are outlined in greater detail in our supplemental presentation, but in general these new sources provide us with better coverage of our business and in turn deeper better insights.
The convenient nutrition category remained strong up 14% in Q1 accelerating compared to prior quarter ready to drink was up 18% and ready to mix at 28%.
Both segments are growing despite price increases and continued capacity constraints across the RTD competitive set.
The sports Nutrition segment is driving the category as more consumers pursue their fitness goals.
The club channel is especially strong with growth rates greater than 20% in top accounts.
Protein as a macro trend continues to show a huge runway for growth.
Premier protein consumption returned to growth this quarter showing remarkable strength.
The brand grew 15% with solid growth across mass food and club.
This momentum continued through January with consumption up 17%.
E Commerce consumption growth was the only exception it was hindered by the slower than anticipated scale up our <unk>, our new bottle co man that we highlighted last quarter.
Our key brand metrics reaffirm a long runway for sustained growth market share has stabilized at 18% for the past year. Despite a reduced skus and limited demand driving activities premier protein shakes lead and velocity as with all skus performing in the top.
Third in tracked channels Tdp's experienced small sequential gains this quarter, reflecting more inventory on shelf.
As we discussed last quarter household penetration has softened as a result of our intentional pullback in flavors promotion and marketing despite.
Despite this slowdown premier protein's still has the highest household penetration in the category and our buy rate and repeat rates are holding steady demonstrating the loyalty of our high value buyers.
We expect household penetration to rebound later this year, we reintroduced our full portfolio and restart light sale light shake promotion and marketing.
Premier protein powders are a small but growing part of our portfolio powders currently have three flavors in a rapidly gaining distribution the top two flavors chocolate and vanilla currently rank in the top 15% in tracked channels consumption in the quarter was at 64 <unk>.
Versus prior year, and we launched our first ever National marketing campaign in January it's exciting to see the premier protein brand successfully expand formats.
Turning to <unk> the brand had another great quarter with consumption dollars up 30% across tracked and untracked channels. We saw strong double digit growth in all key channels, driven by distribution gains pricing and promotion.
Impressively the momentum accelerated into January with consumption up 50%.
As you May remember, we temporarily lost distribution at a key club customer last year I'm happy to report, we regained that distribution late in Q1 and consumption rates are already performing well.
Diamond kinds of expansion into mainstream accounts is propelling the brand with market share Tdp's, an ACB, reaching all time highs this quarter we.
We ended the quarter with $4, 6% market share in tracked channels up significantly versus a year ago.
<unk> continues to add new households, with repeat repeat in buy rates holding steady.
In closing, we are making significant progress in our shake capacity expansion to grow and diversify our supply and deepen our competitive moats.
Our high growth category continues to accelerate above historic mid single digit growth rates with strong macro trend tailwind.
We are close to re introducing our full range of premier protein shake flavors, and restarting marketing and promotion.
Lastly, we have a robust innovation pipeline that will help fuel our growth in 'twenty four and beyond.
We remain confident in the long term outlook of Bell ring and look forward to sharing our progress next quarter. Thank you for your continued support I will now turn the call over to Paul.
Thanks, Doris and good morning, everyone.
As <unk> highlighted fiscal 2023 is off to a good start net sales for the quarter were $363 million and adjusted EBITDA was $85 million net.
Net sales grew 18% over prior year and adjusted EBITDA increased 42% with strong adjusted EBITDA margins of 23, 4%.
Starting with brand performance Premier protein net sales grew 23%.
Higher average definitely prices contributed 18% overall growth.
Volumes grew 5%, reflecting increased production compared to a year ago.
Continued RTD category growth tailwind.
Net sales growth outpaced consumption growth in the quarter due to typical seasonality as well as continuing to build customer trade inventories back to optimal levels.
<unk> net sales grew 3% compared to year ago benefiting from higher net pricing distribution gains and favorable product mix offset partially by lower volumes Mauro.
Moreover, we are lapping our strategic decision to discontinue certain diamond touch products.
It was a headwind to growth in Q1 and continues into Q2.
In addition shipments into the international and domestic specialty channels, most of which have historically inconsistent shipment patterns the loaded inventory during the quarter.
The combination of shipment timing and the lapping of discontinued products was a 25% headwind to the net sales growth rate in the quarter.
Excluding these items net sales growth tracks closer to consumption growth.
Gross profit of 122 million grew 34% with gross margins of 33, 6% up 350 basis points.
Increase in gross margin was partially driven by production attainment from our show our shake co manufacturers as well as the lapping of prior year supply chain inefficiencies.
Excluding these impacts gross margins increased 120 basis points compared a year ago as our pricing actions offset significant inflation.
Excluding one time separation cost SG&A expenses increased $6 6 million compared to last year and were flat as a percentage of net sales.
Before reviewing our outlook I would like to make a few comments on cash flow and liquidity.
We generated $36 million cash flow from operations in the first quarter, we expect to generate much stronger cash flow in fiscal 2023, particularly in the second half with the full year more in line with our historical EBITDA to cash flow conversion rate.
With respect to our share repurchases. This quarter, we bought $1 8 million shares at an average price of $23 33 per share.
Our remaining share repurchase authorization is $29 million.
As of December 31, net debt was $910 million and net leverage was three one times down almost a full turn from the spinoff last March.
With our expected EBITDA growth and strong cash flow generation, we continue to anticipate net leverage to be lower than two five times by the end of fiscal 'twenty.
Turning to our outlook, we are maintaining our guidance for net sales of 156 to $1 64 billion and raising our adjusted EBITDA range of $306 million to $325 million.
We continue to expect sales to sequentially grow each quarter as RTD shakes production increases.
Our pricing actions on Premier protein shakes were offsetting significant inflation on protein and other input costs.
However, we expect gross margins to sequentially decline from the first quarter as protein packaging cost step up.
We continue to expect adjusted EBITDA dollar growth to be weighted towards the first half of 'twenty, three which has a greater benefit from pricing actions, while the second half of 'twenty three has further inflationary impacts and incremental brand building investments.
For the second quarter, we expect high teens net sales percentage growth compared to prior year.
Pricing continues to be the primary sales growth driver.
Similar to Q1, we expect Q2 adjusted EBITDA dollars to grow significantly from prior year driven by increased net sales.
However, adjusted EBITDA margins are expected to be similar to prior year as gross margin improvements are largely offset by higher marketing spend to support premier protein powders and dinosaurs.
Before wrapping up I want to provide an update on our relationship with post holdings.
During the first quarter post sold its remaining shares of our common stock and has completely exited its ownership of bell ring.
So it's been a great partner over the years and we are grateful for their guidance and stewardship.
Post will continue to provide services through a master services agreement and Rob Vitale can remain in his role as executive chairman of the board.
In closing our momentum continues to grow our strong Q1 results gives us greater confidence in our full year outlook and long term growth prospects.
I will now turn it over to the operator for questions.
Thank you.
At this time, if you would like to ask a question. Please press the star and <unk> on your Touchtone phone.
May remove yourself from the queue at any time by pressing star Q.
Once again that is star one to ask a question.
And our first question will come from David Palmer with Evercore ISI. Your line is open.
I think you just made a comment there about promotions and marketing for the rest that there would be some step ups. There could you could you maybe give some color where some numbers around how much you would expect promotion spending and marketing to be up for the rest of the fiscal 'twenty three and how we should think about the implications for.
The model.
Sure.
I'll start with marketing so from a market perspective, we do expect marketing or advertising promotion to step up in the second quarter.
We would expect it to be in the 3% to 4% of net sales range for the second quarter for the full year, we would expect our advertising and promotion spend to be in the mid two percents and really thats pretty consistent first half and second half with again the highest spend in the second quarter from.
From a growth perspective on shakes its pretty we are doing some light promotion primarily in the second half, but it's not.
A significant drag it does impact the fourth quarter margin a bit, but that's not a significant driver.
And just.
Maybe a comment about the competitive environment you see for Premier protein. These days, we do see some smaller competitors that appear to be.
At least benefiting from the limited capacity across the industry for some of the.
For some players but could you just.
Talk about the competitive environment, and how you see that shaping up through the rest of your fiscal year and thank you.
Yes, the competitive environment hasn't changed a ton since kind of the last quarter and before I would say the same themes have continued so a few more people have taken pricing this last quarter.
<unk>.
Within RTD is.
And then capacity constrained kind of across the competitive set have continued TD.
<unk> for the category are actually down about 6% for RTD.
To your question about smaller we are seeing.
Some smaller brands pick up some TDP is.
So I think that.
What should happen.
As for the if you kind of look forward as the as some of these brands that have had capacity constraints like ourselves start reintroducing.
Our full line and then accelerating with innovation et cetera, I think that you know you'll see a combination of expansion of the category.
RTD category from a shelf space perspective, as well as just picking up from some of the competitors that you know.
Arent arent necessarily performing to the levels that the big brands can.
Thank you.
Thanks.
Thank you.
Our next question will come from Jason English with Goldman Sachs. Your line is open.
Hey, good morning folks thanks for slotting emphasis.
I guess ill go with two here starting with the <unk> bottle supply.
When you first brought online. It was brought in was expect to tell me, Brian a substantial amount of capacity, but I believe it was also going to bring a substantial amount of cost savings, allowing you to effectively get the margin profile on PDP bottles down in line with your Tetra Pak.
Given the challenges so far since you've on boarded that where do we stand in terms of absolute magnitude of capacity at run rate as well as that.
<unk> position.
All right, Thanks, Jason I'll hit the the capacity and.
I'll, let Paul hit the cost savings.
<unk>.
From a capacity standpoint, we have improved so you are exactly right.
Plans were two two.
Expand it quite dramatically.
So last quarter like I said in my prepared remarks that we increased every month from a run rate standpoint, actually Q1 is pretty close to where our run rate needs to be or where we assumed it would be for the whole year. It steps up a little bit we are.
<unk> it to step up a little bit in the back half, but we saw some real improvement this quarter, which was needed and nice to see.
So.
So I would say you know, we're very close to the run rate we need to be for the rest of the year and it absolutely is a big cost savings and you you described it well that it was going to be consistent with you know pretty close to tetra.
Paul do you want to add anything on cost savings I don't wanted to coverage. We certainly do we are we are realizing benefits on costs from from this switch.
It's definitely been sending us in the first half and then obviously, we'll start lapping as we get.
Later in the year, but yes, we're seeing we're seeing the.
The benefits from this relationship.
Yes, Jason the only other I would say the only other thing I would just add is there's also a fair amount of sustainability improvements.
With this change around just that the amount of plastic that is actually used in these P. T's and so there's a real benefit to the change on that front as well.
That's good to hear.
I'm more enthused about the potential to allow you to enter C stores without format, though.
Sticking on the topic of cost whey protein prices have come in quite a bit and they have been falling fast which is really encouraging to see you made comments last quarter about sort of hedge timing. So.
<unk> to you where are your hedges stand and when can we expect to see these lower prices royalty your P&L.
Yes, so our biggest cost is actually milk protein and then whey proteins on the powder milk because on the shakes and whey protein powders.
We're really we're coming through really kind of the peak of the protein costs, especially on the milk proteins here in the second into the third quarter and then we do expect that our protein costs will start to to pullback whey protein.
As to your point falling more dramatically and so we will see perhaps some benefit to that starting as early as Q4, but really I think most of the year over year tailwind will come more in fiscal 'twenty four as we go through the rest of the year the magnitude of the headwinds from from protein declines as we go through into Q3 into Q4, but it's still.
Net headwind as we just get through the <unk>.
The peak of the market there is a lag time from the time, we procure protein to the time it rolls through cost of goods sold somewhere in the six to nine months, depending on how far out we are in so we expect the peak of that to hit us this quarter into next.
Understood. Thanks, a lot I'll pass it on.
Thank you.
Yes.
Thank you.
Our next question will come from Ken Goldman with Jpmorgan. Your line is open hi.
Thanks, just to build on your answer to Jason's question there.
Historically, your gross margin has gone up or down.
A little more I think than most companies that we cover and part of that I think is because of the the underlying movements in non fat dry and in a way and I guess my question is as you look ahead.
Is there any reason to think that.
As those prices remained lower if they remain lower that youll have to discount your products more heavily.
Such.
Still.
We're still capacity constrained in the industry still capacity constraint I guess my question is.
Should we assume for modeling purposes that as these costs come down your gross margin should increase and you won't have to give back a significant amount of that pricing thats I guess the way to ask it.
Yes, well I'll start and then Darcy if you want to touch on just discounting but.
Couple of play Theres, a couple of pieces of this and play that you have to consider so yes as we go into 'twenty four we would expect to see some headwinds on protein we are seeing inflation in other places, especially starting in the second half which was around packaging.
And some of our other manufacturing cost, but keep in mind that we're also in a year, where we're doing very little promotional spend so as we go into 2040 of the dynamic of <unk>.
Protein costs going down, but the thinking is that we are going to invest in brand building and more into the promotional side of it and so net net I think.
<unk> gross margins ought to bounce up a bit next year, but those are the two primary things that are in play on whey protein because of the magnitude of the change is so dramatic we should see gross margins for powders come.
Come up quite nicely from where they are right now but from shakes its really a tradeoff between.
Protein costs coming down.
Obviously restarting the promotional activity, but net net I would expect that to be a favorable the other thing I want to mention I think Jason asked so maybe I didn't get to which is we're covered on our on our proteins about 75% or 80% at this point for fiscal 'twenty three.
Thank you for that and then.
E Commerce I'm, just curious for an update there it doesn't seem like it's quite as strong as for other channels and Premier just curious for your strategy there.
The outlook for the year, if thats changed at all.
Yes, we are.
It was the only channel that was down a little bit.
For the quarter, just a reminder, that for our E. Comm business about 50% is premier and about 50% of diamond ties in diameter size was actually up quite nicely, but on the premier side, yes.
Yes.
Issues are still stemming from our the bottle co man constraints that we talked about last quarter. We've had kind of continued challenges getting our flavors.
All flavors back in stock at one of the key retailers.
We're tight on warehouse space.
And prioritizing promoted items, especially during the holiday time, and we see this firsthand because <unk> is promoting and they are fully in stock.
On line and at this key retailer.
We are actively working on premier getting it back I do believe we have we have the inventory they need the inventory so.
We I believe that this will be solved it kind.
Kind of in the next several months and hopefully sooner than later, but one thing I will just remind you that e-commerce in total for our business is only about 10%.
So it's an important channel we want to get it on track because it is one of the areas. It's one of the channels that we build households, we get trial.
But it is still a fairly small part of our business.
Thank you so much.
Yes.
Thank you.
Our next question will come from Pamela Kaufman with Morgan Stanley . Your line is open.
Hi, good morning.
Good morning.
So given that the production capacity is improving better than you expected can you talk about any changes in your advertising or promotion plans.
Is that driving any.
And your plans for the year, there and I guess, how are you thinking about the further recovery in tdp's over the course of the year can be approached 2021 levels.
Given improving supply.
So promotion and marketing.
Pretty good.
We are fairly consistent with what we communicated before so our plan is just to remind you. We will we are we are doing some market, we're coming back with marketing as Paul said in Q2 around non.
Mostly non shake items, so or so were actually marketing more of our of diamond ties as well as premier protein powder.
Basically any product that we have ample supply on will come back towards the end of <unk>.
Back half more.
Marketing our shakes. So we will start getting back into marketing there and that was that was really always the plan.
From a promotion standpoint again, consistent with what we talked about before we're looking at light promotion.
But not until Q4, so that's that.
Is that kind of answers the promotion and marketing piece on PDP.
We are seeing and I assume you're talking about Tdp's unshaped, we are seeing some.
<unk> improvement this quarter, and that's really having to do with just better in stocks.
We'll continue to see that through next quarter with.
With the reintroduction of our power Skus.
Which will hit in Q3.
We'll start seeing again, some bump up.
Of of TDP is but it's not going to be dramatic you know, we're waiting on resets to happen and that will happen in the kind of late spring, which really is Q3 for us and then into Q4.
As far as 2021 levels.
Honestly I think that it's going to take.
I would say Q4, Q1, probably Q1 of 24 to really get back to 2021 levels, but.
We'll be consecutively, improving every single quarter I think.
Great. Thank you and then just on <unk> can you elaborate on what impacted the performance this quarter and how youre thinking about diamond highest growth over the rest of the year.
Sure. There were there were two items that were headwinds to the quarter. The first is we did see some shipments.
We had some shipments into especially international that was stronger in Q4 that day loaded in the first quarter. So that was about.
15 of the 25% headwind and then we are <unk>.
Lapping discontinued products, which we've called out over the last couple of quarters as a headwind.
That we will see continue into the second quarter. So those are the two primary items. If you pull out that those two combined are about 25% headwind.
That gets you closer to the consumption growth, which was up 30%. So we really feel like it's the brand is doing well and from a consumption perspective, so we really want to.
E Commerce, we're just we're just.
We just have some shipment timing items and the decision we made last year and just go to items that are that are weighing it down.
Yeah, I would just encourage everybody to focus on the consumption for diamond ties.
The business the business is super healthy and.
Shipments can be a little lumpy in that business, because international and specialty represent about 50% of the business and those ordering patterns.
Can <unk>.
Really you know you can get three big orders in one quarter and then won the next.
So really focusing on consumption is.
The best Barometer of the health of the business and we've been consistent saying consistently saying double digit growth.
Thank you.
Thanks.
Thank you.
Our next question will come from co mill Gora Wala from Credit Suisse. Your line is open.
Hi, Phil.
Thank you.
Revenues came in quite nicely ahead of expectations, but you only brought up to your guidance on the on the EBITDA side. So is there anything maybe timing related.
Be aware of as it relates to revenues.
Yes.
From an EBITDA perspective, we did bring up the bottom end of our range.
That's largely reflecting some of the margin favorability that we saw in the first quarter and really specifically we saw the production attainment fees of about $3 8 million in the first quarter that we did not include in our original guidance and so that is certainly a big part of the reason for raising on EBITDA.
And it can be all I would just say on.
Just the guidance piece.
Strong start to the year, but it's early and we just want to see where we're being a little more conservative and I think we want to see another quarter before making any any changes to our guidance.
Okay got it and any of them.
Anything you'd.
I'd like to add on spring shelf resets.
Just maybe what the outlook I think by now maybe you'd have a good sense on where you stand and how that lines up with your ability to supply.
Yeah sure so.
I'll hit fall first I think I talked about in a little last quarter, but.
I would say overall.
Both dimer time, so, let's just talk about.
Product that we have supply that amplify so powders really good so <unk> premier powders doing very well in actually both fall and spring resets.
We've gotten store expansions, we've got new items and I talked about in the prepared remarks around getting back club distribution on Diamond times, which was exciting.
Looking forward and then on and that actually applies to spring resets as well.
When we're talking about shakes and our focus is for spring is.
Reintroducing, our Pos skus so the three <unk>.
Flavors.
That will be coming back in.
Really March April so.
Those are actually it's more April may.
For the spring resets and it's looking good so most places they're excited to get our full line back and were expecting.
Everywhere, where we've heard for spring they've taken all the three items, so feeling pretty good about our reset.
Alright, thank you.
Our next question will come from Chris <unk> with Stifel. Your line is open.
Thank you good morning.
Good morning, I had a quick quick.
Quick question for you if I could on just to understand you mentioned, having stronger production this quarter.
Was that just a one quarter a factor or are you seeing that kind of continue through the year I guess ultimately I'm just curious of your volume growth expectations for the year of change if youre seeing a stronger rate of production from your kind of putting pressures.
So yes, we had stronger production this quarter and I will say that.
We are lapping.
Kind of the worst of our capacity constraints last year. So we're lapping a low number but we did have strong strong.
About 20% production growth.
We were very pleased with that as far as our full year.
We're still expecting it to be we talked about low double digit growth.
As having for production and.
Although I think we're feeling better about that after getting the first quarter under our belt and and hopeful we'll over deliver that but right now I think that it's still.
It's still a good number to go on.
And then it plays out would you expect to ship ahead of consumption in the second quarter again, we're still in inventory rebuilding mode is that right.
I would expect to I would expect shipments of consumption to be closer tracking in the second quarter, we may see a little bit of build as we get into the second half as we start to relaunch some of the flavors. We may we would expect to see that shipments maybe slightly ahead of consumption, but I think it will be a little bit more balanced as we go forward as well.
As we closed out the remaining gaps on shelf.
We will ship a little bit ahead, but it should be in better balance as we go forward I think.
Okay.
And just one final question on the production of peanut fees is that a one time factor to those continue just want to understand how that could affect the business in the future and I'll finish there. Thank you sure, yes, but those specifically related to a contract period that has now passed so into the space.
It's basically a minimum volume commitment that is over a contract period and so we would not but we're not expecting to have further production attainment fees as we go forward.
Thank you.
Yeah.
Thank you.
Our next question will come from John Baumgartner with Mizuho Securities. Your line is open.
Good morning, Thanks for the question.
Okay.
I guess I just wanted to touch first off on your change in the data providers, especially the move to greater.
You sort of learned is anything from seeing those expanded the data. The insights. There are you thinking any differently about your penetration now are you reassessing, how or how much <unk> to market behind the brand going forward is there any impact on how you think about channel expansion just any anything there would be helpful. Thank you.
John I would love to get this question next quarter.
We just changed and we are it is.
It is.
A ton of new information our focus for the last quarter has really been reconciling.
The all data with the new data, making sure that we feel good about it.
So that has really been our focus.
We are the team is digging in to really mine the data because I think you know this is that there is a ton of wonderful kind of insight in there, but we've only gotten to really.
The top level at this point.
The reason the main reason for the switch is it debt.
So both numerator and IRI actually.
Better we have better coverage over our business, especially when it comes to e-commerce and specialty and so it was a it was a good move for US just from a coverage standpoint, and then just the depth of insights that I think we're going to get from on the numerator side will be great, but we haven't even.
Scratch the surface surface right now so asked me that next quarter.
Okay. So I'll save that for next quarter and then my follow up on on the innovation.
Good night product.
I think it's a big step for premier moving into functional as opposed to just flavor introductions I imagine there is likely more on the way from that pipeline, but based on the research you've done how are you thinking about the roles that premier Dogmatize can play in functional going forward are there certain segments of functionality, you think lend better to one or the other.
Is it fair to think these products will be at least gross margin neutral if not accretive.
When they get to a normalized basis. Thank you.
Yes, so we don't look at it necessarily on functional or not functional way our innovation strategy is all about incrementally.
So if you think of looking at our pipeline, it's either incremental users so incremental consumers or incremental occasions. This one is perfectly aligned to the occasions side of things I think we will also get some incremental.
All users, but this is all about occasions, our 30 Gram shakes are mostly consumed in the morning. Obviously good night is at night time beverage so.
This is a limited launch.
We are it's a three flavors on RTD is one on powder and it is just a test launch this year. So we're kind of dipping our toe in it.
Early results are very early are encouraging I think it is exciting to see some of the online reviews and consumers really getting at really understanding that this is designed.
Designed to be a new occasion, it as a great name for it so.
But in general if you think of our innovation strategy on both brands, it's all about incremental and if that overlap if that overlaps with.
More function and leading into function.
I think thats, great, but again, our focus as being incremental to the current line.
Okay. Thank you very much.
Okay.
Thank you.
Our next question will come from Ben <unk> with Stephens. Your line is open.
Hey, guys simpler answer Ben Congrats on the good quarter.
Yes.
Miss you guys posted really strong results there.
Is that just because the in stock rate is improving as the capacity constraints.
Start to alleviate or can you just give us some detail on what's going on there.
I assume that Jim you were talking about premier.
Yes.
Although both brands had a great quarter.
Quarter end at the end, but yes I'm premier.
That channel so SDM those channels were most affected by our capacity constraints last year. So yeah. So better in stock rates are really driving those those improvements.
We've gotten some minor distribution gains.
Just really more stores that are factoring in as well, but the primary reason is just better in stocks.
I think you know this but.
Our biggest opportunity really is F. D. M. So I think that just I think we'll continue to see.
Strong growth within those channels from Huron Hill.
Is there a certain point.
Thank you guys said, whether its consistency and install can maybe shelf velocity that you guys can move from kind of in the aisle and cap because I know sometimes.
In the mass channel.
Shopper might not go into the Io, where the snakes ours are not specifically looking for <unk>.
Lot more visibility on the end caps is there anything metric that you need to hit to maybe start to see some of those ships in the store.
Just improved.
Yeah improved in stocks, we need we need to have enough product that not only are we filling out the shelves, but we have extra product that we can also fill up the encap and cap so directly related to.
Production capacity it will flow and we've been asked by many customers if we can do and caps.
We've held off we actually.
Did get some display them in January .
But in a couple of stores, but in general. This is this is the capacity.
<unk>.
It is a capacity thing, we just need more products and then we can sell at the shelf.
Okay, great. Thanks, I'll pass along.
Thanks.
Thank you.
Our next question will come from Bryan Spillane with Bank of America. Your line is open hey, Thank you operator, good morning, everyone.
Just wanted to start with just a clarification first and then I had one question I think Darcy in the prepared remarks.
You mentioned.
In 2024, you would have 20%.
Incremental capacity or extra capacity available for preorder shakes and I just want to make sure. The 20% you are talking about is it.
Volume right not revenue.
Correct, Okay. Thank you.
And then I guess this question is for both you Darcy and Paul and as we're kind of thinking about.
Modeling out beyond even next year, so kind of thinking about it.
Fiscal 'twenty five.
And kind of normalization of margins.
I guess at the peak gross margins were 36% and EBITDA margins were.
In the mid twenties.
Obviously, there were some anomalies right that affected gross margins that I think promotions weren't as you weren't promoting as much but just I guess, if we're trying to model the business going forward rate and trying to balance.
Margins, but also funding growth and given just.
<unk> got more coal man capacity I think there is some structural costs here that are higher but you've priced.
As a as a.
Mid 30% gross margin still achievable.
Should it be maybe more a low 30, percents and again, how that translates to EBITDA margins, just really trying to understand how much leverage might.
Might be in this business as we kind of move into the out years or whether we should be thinking about more.
Kind of the revenue funding the revenues and revenues being the bigger driver of EBITDA growth in the out years.
Sure I can start and then diversity feel free to jump in please.
You mentioned some of the margins in the past and so I think some of those peak margins were during the time, when we have capacity constraints or a few years ago.
And at that time protein costs were relatively low and we pulled all of our promotional marketing until we always called those kind of outsized margins amid the mid to upper 30 margins and EBITDA margins in the 20.
$23, 25% range.
As we go forward really the way, we think about the business is that our gross margins historically to kind of strip out some of those.
Unusual periods were more in that 30 to $33, 34% range. So I do believe our gross margins can be.
In that range over the long term.
Then with.
Our spend behind promotion and our investments in the marketing.
We still think EBITDA margins, we obviously our algorithm is 18% to 20% EBITDA margins. We've typically been in the mid to upper side of that I still think that is certainly achievable, perhaps above that as we do gain leverage and I think most of the leverage will be primarily.
The G&A line, we would likely get some within gross margin as well, but I do think that G&A leverage that we would get so as we think about it I think the long term algorithm is good good proxy for EBITDA margins.
Maybe on the upper half of that and the like I said gross margins in the 32% to 34% range is how we think about it.
Long term.
Okay. Thank you Andrew.
Got it Brian just to note on just the cadence obviously the margins specifically EBITDA margins can can range from a quarterly basis Q1's always the highest because we don't do a lot of marketing.
And then Q2 is usually the lowest because that's a big it's a big time, when new consumers come into the category, So and new year, New you and usually we market on the heavier side. So that's and then kind of kind of flat Q3, Q4, So that's usually the.
The cadence of of EBITDA margins.
Okay. Thanks, that's helpful and maybe if I could just squeeze one more in just thinking about again beyond next year just longer term.
<unk>.
And maybe this is maybe youll be better equipped to answer this one John Baumgartner asks we ask this question about household penetration in the data put.
Do you have a measure or a sense of just.
You have a sense of household penetration, but brand awareness, so and I guess, what I'm thinking of is just is brand awareness.
Greater or less than household penetration and.
I guess, if it's greater than that means there's more availability that household penetration would ramp faster if brand awareness is still lagging penetration in some way than perhaps.
Perhaps it needs there needs to be a step up in marketing, but just trying to understand.
Kind of.
People's awareness to the brand versus versus helpful penetration.
Yeah, I think it's the final rate you have to be aware before you can try and then so yeah I think that our opportunity is definitely kind of the top part of the funnel, which is getting people aware of the brand.
We have decent.
We have decent kind of aided awareness. So have you heard of premier protein.
Where we have some big opportunities. The unaided is you know.
Name, a convenient nutrition RTD brand in them to come back with Premier protein. So I think theres definitely we've been we've been dark yeah. I think this is where I think we all kind of forget because we're close to the story, but you've really been dark on marketing and promotion for over a year plus so we got.
We've got some work to do to get back on and get in and consumers.
Camilleri I think what's so encouraging for me is even during this period of time, when we haven't been marketing and promoting.
We're holding on to and you know we lost a little bit of household pen, but we're really holding onto those high value loyal consumers.
And our our loyalty metrics are showing that so I think that.
We've got some work to do definitely on aided in that would be that our on unaided awareness and that would be the start.
Great. Thanks, Thanks, Darcy Thanks, Paul.
Thank you.
Thank you.
Our next question will come from Bill Chappell with Truest. Your line is open.
Thanks, Good morning.
Good morning, Beth good morning.
You're just trying to understand kind of how this the demand or the volumes grow over the next as we move especially into <unk> to 'twenty four.
Specifically, if you look at the scanner data.
In 22 volumes for your business and the whole category were flat to down.
And I'm trying to understand is that the thought is the <unk>.
Rising is there the capacity constraints.
And how does it really change as you get more capacity.
To get consumers back into the yeah, just to grow those volumes again is it coming through the track channels, where is it coming back from the club can you grow even faster on the club channel.
We have both so.
Youre right volumes have been pretty.
So.
Depending on the quarter or slightly down in the category.
Or you know kind of flattish in 'twenty, two and that was a REIT that was a response to both you know a fair amount of pricing.
But also capacity constraints I mean, I said and I think in an earlier question that PDP for the category was down 6%.
So just a lot of capacity constrained and issues across across the competitive set.
So as we look forward.
And.
Improve capacity improve in stocks.
And start getting back to demand drivers I don't see a lot more pricing coming into play this coming year.
So, yes, I think youll start seeing volume improvement, we started seeing for premier.
Increases this quarter, which again was nice to see.
And from where is it coming from from tracked and Untracked I think we expect both will have bigger increases.
In <unk>.
Likely kind of that food drug mass.
Area, because they were the hardest hit by the capacity constrained.
But we still see upside.
On on club than what we've seen in the past, which I expect will be the same for the future.
Is we often get new households, and new trial within both e-commerce as well as F. T M.
Panels and then.
As you know we have this 50% repeat rate so as consumers repeat and become every day users. They often repeat within the club channel because they want bigger packs at a cheaper price.
I will that the whole model that has gotten us here.
We will continue in the future and you'll see growth volume growth within.
Both tracked and untracked channels.
Got it and then I guess I'm trying to understand like.
It seems like.
You're modeling <unk>.
We're looking for kind of a soft landing as you over the next three quarters lap.
Double digit pricing and at the same time capacity comes up and volumes need to accelerate.
Do you see that taking a few quarters to to adjust or or is it is it that simple. If you can get kind of the full set at the tracked channels like you have right now with the club channels that the volumes pick up pretty quickly.
Not sure I'm totally tracking your question.
I mean, just I'm just trying to understand how do you look over the next three four quarters as you lap the price increase but volume doesn't.
Are you expecting volume to pick up that quickly to offset it.
Yes, Paul you want to talk about cadence of volume.
Sure so.
We do expect volume to grow for Premier.
As production comes online and the key drivers for that are we will relaunch some of the flavors that.
We arent currently selling.
We talked about having some wide promotion in the latter part, but as we get into next fiscal year obviously.
Our current thinking is that it'll be more of a normal promotional cadence of promotions and club, which drive a lot of volume also wanted to just highlight that we still have a pricing benefit for shakes in the second half we took the price increase.
<unk> of this year.
So while in the first half we get the benefit of kind of two price increases. The one we took last April and October one of this year in the second half we still good price pricing benefit in the second half related to the current year prices increase so.
We still see a mix of volume and pricing benefits in the second half, but volume does become a more significant contributor in the second half than it was then we expect to be in the first and Thats because of the production coming online.
Got it thanks, so much.
Thanks, Tom.
Thank you.
Our last question will come from Rob Dickerson with Jefferies. Your line is open.
Thanks, guys.
Question longer term and a quick follow up.
Firstly I was just curious if we think longer term just around brand positioning right. It seems like.
Categories still strong or are you still holding share despite.
Despite the reduction in GDP recently.
It sounds like there is still some new innovation kind of being generated in the pipeline.
If you step back and you think about the entire category and kind of the.
The comparative backdrop right usually win.
Volumes are growing so much there's usually increased competition new innovation repackaging, just kind a very general question do you kind of foresee any repackaging design coloring what have you needs as we think forward.
The next two or three years pretty.
Had a quick follow up.
Assuming you are talking about premier.
Yes.
We're always looking at those kind of things and I think that we have.
We've updated kind of the look and feel of.
Of Premier over time, I think from a brand positioning standpoint, we're feeling really good we continue.
All of our consumer research just continues to tell us kind of we have a tiger by the tail end.
This is this kind of <unk>.
Main stream approachable protein is right on trend.
And so I think that you know.
I think that the brand is is positioned right.
I think our challenge is just it is production its capacity. So then we can drive the message to more people.
And that is absolutely the focus.
Okay Fair enough and then just quickly on cash flow.
Well.
Obviously with more production.
Coming down yes, everything you talked about Theres margin moving up in the sales moving up EBITDA is moving up leverage is in a good spot.
We generated more free cash flow.
And your co band so not a lot of capex needs at least for now so just kind of generally speaking again cash flow starts to tick up.
Later this year.
Definitely in the next fiscal year.
Where would you kind of view priorities for cash allocation.
That's it thanks.
Sure yes so.
You are completely correct, our business generates a really strong cash flow.
Which obviously gives us a lot of optionality on the capital allocation side, where we are today with our focuses on organic growth we have a high bar for M&A.
Really the capital allocation decisions are really between share buybacks and deleveraging and the deleveraging is really primarily around paying down our revolver is there.
The remainder of our debt is fixed so we still look at share buybacks as well.
As a prudent capital.
Capital allocation option for us in.
To assess that versus Delevering as we go through the year and keep in mind, we delever.
Just through EBITDA growth. So we will get below three times, just with growing EBITDA. So it just gives us the optionality to look at share buybacks versus bringing bringing down our revolver.
Great to hear thank you so much.
Thanks.
Thank you.
Ladies and gentlemen, we have reached our allotted time for questions and this does conclude today's program. We appreciate your participation and you may disconnect at any time.
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