Q3 2024 BellRing Brands Inc Earnings Call

Hello. Thank you for standing by. Welcome to Bellring Brands' third quarter fiscal year 2024 earnings conference call.

Operator: 24 earnings conference call. At this time, all participants are in a listen-only mode. After the speaker's presentation, there will be a question and answer session. To ask a question during this session, you will need to press star 1-1 on your telephone. You will then hear an automated message and Desiree. To withdraw your question, please press star 11 again. I would now like to turn the call over to Jennifer Meyer of Investor Relations for Bellring Brands. You may begin.

Speaker Change: At this time, all participants are in a listen-only mode. After the speaker's presentation, there will be a question and answer session. To ask the question during this session, you will need to press star 11 on your telephone. You will then hear an automated message.

To withdraw your question, please press star 11 again.

I would now like to turn the call over to Jennifer Meyer of Investor Relations for Bellring Brands. You may begin.

Jennifer Meyer: Good morning, and thank you for joining us today for Bellring Brands' third quarter fiscal 2024 earnings call. With me today are Darcy Davenport, our President and CEO, and Paul Rode, our CFO. Darcy and Paul will begin with prepared remarks, and afterwards, we'll have a brief question and answer session. The press release and supplemental slide presentation that support these remarks are posted on our website and in both the investor relations and the SEC filing sections at bellring.com.

Jennifer Meyer: Good morning, and thank you for joining us today for Bellring Brands' third quarter fiscal 2024 earnings call. With me today are Darcy Davenport, our President and CEO , and Paul Rode, our CFO . Darcy and Paul will begin with prepared remarks, and afterwards we'll have a brief question and answer session.

Jennifer Meyer: 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 that are subject to risks and uncertainties that should be carefully considered by investors as actual results could differ materially from these statements. These forward-looking statements are current as of the date of this call, and management undertakes no obligation to update these statements. As a reminder, this call is being recorded, and an audio replay will be available on our website.

Speaker Change: The press release and supplemental slide presentation that support these remarks are posted on our website and both the investor relations and the SEC filing sections at bellring.com. In addition, the release and slides are available on the SEC's website.

Speaker Change: Before we continue, I would like to remind you that this call will contain forward-looking statements which are subject to risks and uncertainties that should be carefully considered by investors as actual results could differ materially from these statements.

Speaker Change: These forward-looking statements are current as of the date of this call, and management undertakes no obligation to update these statements.

Jennifer Meyer: And finally, this call will discuss certain non-GAAP measures. For reconciliation of these non-GAAP measures to the nearest GAP measure, see our press release issued yesterday and posted on our website. With that, I will turn the call over to Darcy.

Darcy: As a reminder, this call is being recorded and an audio replay will be available on our website. And finally, this call will discuss non- GAAP measures . For reconciliation of these non- GAAP measures to the nearest GAP measure, see our press release issued yesterday and posted on our website. With that, I will turn the call over to Darcy.

Darcy Davenport: Thanks, Jennifer, and thank you all for joining us this morning. I have four key messages today that I want you all to walk away with.

Darcy: Thanks Jennifer and thank you all for joining us this morning. I have four key messages today that I want you all to walk away with.

Darcy Davenport: First, I'm happy to share that we had a strong quarter. The business continues to perform as we bring on new shake capacity and begin to drive demand. Net sales grew 16% over the prior year, and adjusted EBITDA was up 38%. We saw strength in Premier Protein, with net sales at 20%. Our EBITDA margins were above our expectations as we benefited from favorable growth margins. I'm proud of our year-to-date performance, with each quarter delivering above our long-term algorithm.

Darcy: The first, I'm happy to share that we had a strong quarter. The business continues to perform as we bring on new shake capacity and begin to drive demand.

Darcy: Net sales grew 16% over prior year and adjusted EBITDA up 38%. We saw strength in Premier Protein with net sales up 20%.

Darcy: Our EBITDA margins were above our expectations as we benefited from favorable gross margins. I'm proud of our year-to-date performance with each quarter delivering above our long-term algorithm.

Darcy Davenport: The RTD Shake category continues to grow, with Premier Protein bringing in new consumers. We have the number one velocity SKU across the entire RTV category, and 80% of our products rank in the top third. My third message. Its household penetration reached 1.8% this quarter, and we continue to believe the brand will be a contributor in mainstreaming the powder category in the same way Premier did for the ready-to-drink category.

Speaker Change: My second message, premier shake demand remains strong.

Darcy: The RTD Shake category continues to grow with Premier Protein bringing in new consumers.

Darcy: Our consumption grew 10% in Q3 and accelerated to 20% in July . Premier Protein hit an all-time high in household penetration and remains the highest in the RTD category, outpacing its nearest competitor by 6 percentage points.

Darcy: We have the number one velocity skew across the entire RTV category and 80% of our products rank in the top third. We continue to believe that the brand has a ton of untapped potential given we haven't started meaningful marketing or innovation.

Speaker Change: My third message.

Darcy: Our production delivered to plan and our outlook has improved.

Darcy: Our diversified co-man network has consistently delivered to expectations every quarter this year, and I'm happy to share that we have secured incremental capacity in Q4.

Darcy: This additional production enables us to fill remaining customer inventory gaps and allows us to rebuild our internal inventories to our target safety stock levels, setting us up for a strong fiscal 25.

Darcy: I would be remiss if I didn't give a huge shout out, or as we say, ring the bell, for our entire organization, but especially the sales and operations teams.

Darcy: It is challenging to manage a rapidly growing business in a dynamic category, but it is incredibly hard to do it with limited safety stock when there is little room for error. So thank you all for your hard work. What we have learned will benefit us for years to come.

Darcy: My last message really is a culmination of the first three.

Speaker Change: Our better-than-expected Q3 performance, confidence in demand, and increased Q4 production drove our decision to raise our outlook for the year.

Darcy: We now expect net sales to grow 18 to 20 percent over fiscal 23 and adjusted EBITDA to grow 27 to 30 percent.

Darcy: We are proud of our performance to date and encouraged by our momentum going into 2025. While certainly not finished with our planning process, our initial estimates

Darcy: for next year are to deliver at the high side of our long-term net sales growth algorithm of 10 to 12 percent. We will provide more details on fiscal 25 outlook in November .

Speaker Change: Now to get a bit deeper into the category and brand highlights. The convenient nutrition category grew 7% in Q3 and all forms saw stronger growth versus Q2. Ready to drink led the category up 11% driven by strong velocities and distribution gains.

Darcy: Mainstream RTD brands continue to drive most of the growth and are bringing in new consumers into the category. Ready to Mix grew 8% boosted by feature and display activity.

Darcy: Protein continues to have incredible tailwinds and high relevance with a broad swath of consumers. It is beneficial for almost every age depending on their nutrition and health goals.

Speaker Change: It is rare to have a nutrient that is equally as critical for a child, a teenager, a pregnant woman, an athlete, and an aging adult, while providing a wide variety of benefits ranging from muscle building to weight management.

Speaker Change: The more we learn, the more our teams get excited about our future, our future potential given our brand's mainstream appeal.

Speaker Change: Turning to our brands, Premier Shake Consumption Growth remained strong this quarter up 10% with volumes up 14%.

Speaker Change: Growth was robust in math, food, and e-commerce driven by strong velocities and distribution expansion in math and food.

Speaker Change: Club was the outlier, with flat dollar consumption growth versus a year ago because of temporary changes in our assortment and flavor-specific out-of-stocks. Encouragingly, Club's consumption returned to growth in July , and overall consumption grew 20%.

Speaker Change: Our brand metrics remained healthy. Premier Protein with RTD market share of 21% maintained its position as the number one brand in the RTD segment as well as the number one brand in the broader convenient nutrition category.

Darcy: Both market share and TDPs grew throughout the quarter, with TDPs up 13% versus Q2.

Darcy: Expansion in form, including bottles and pack size, along with improved in stocks, drove the distribution gains and we expect further TDP growth in Q4.

Speaker Change: As I referenced at the beginning, I'm pleased to see the brand reach another all-time high in household penetration, with 19% of households drinking Premier Protein.

Darcy: We surpassed our goal for the year, adding roughly three percentage points of household penetration in fiscal 24, with repeat and buy rates continuing to hold steady.

Speaker Change: Premier Protein continues to bring in new category consumers with almost all of our growth coming from outside the category.

Speaker Change: All of this is especially encouraging because in a high growth category with low household penetration, we see plenty of room to continue to grow our brand and expand the category.

Darcy: Premier Protein powder continued its strong trajectory, growing 44% in Q3 behind distribution gains and strong velocities. In fact, at a major mass customer, we have the number one velocity item in the retailer's powder category.

Darcy: We remain encouraged by the growth potential of the Premier Protein brand in this format and are investing more marketing dollars behind it in Q4.

Darcy: Its household penetration reached 1.8% this quarter, and we continue to believe the brand will be a contributor in mainstreaming the powder category in the same way Premier did for the ready-to-drink category.

Darcy: Turning to Dymatize, the brand remains one of the strongest in the category with velocities in the top third at key customers. However, U.S. consumption, which covers about 60% of the global brand, was challenged this quarter as a result of tough comparables, continued competitive pressures, and ongoing softness in the specialty channel.

Darcy: Despite these headwinds, July had a record e-commerce promotion showing there's still a ton of excitement for the brand.

Speaker Change: It is also worth noting that Diametized International Business, which represents about 30% of the brand, continues to be strong with net sales of 18% this quarter.

Speaker Change: Looking forward, we are increasing investment behind Dymatize in the U.S., both in marketing and promotion. Our national marketing campaign with San Francisco all-pro running back Christian McCaffrey launches this month. We are excited to see what this type of top-tier spokesperson and amazing creative can do for the brand.

Darcy: Overall, we continue to be bullish on the mainstream powder potential with two complementary brands.

Darcy: In closing, I am proud of our year-to-date progress. We were on track to deliver results ahead of our guide last November . Our confidence in the long-term outlook for Bellring Brands remains high. Ready-to-drink and powder segments are in the early stages of growth with major tailwinds.

Darcy: Premier Protein and Dymatize are leading mainstream brands with low household penetration and strong loyalty, with Premier Protein maintaining the number one share position in the category.

Darcy: Our momentum continues to grow on shakes as we start to drive demand. Our capacity plan is on track to support many years of robust growth.

Darcy: I'm excited to see our organization pivot from supply focused to demand driving. At our core, we are a growth company.

Darcy: So our entire organization is eager to have all of our demand drivers in place for 2025, including our national marketing campaign on our biggest brand.

Darcy: Thank you for your interest in the company. We look forward to providing more specifics around Fiscal 25 next quarter. I will now turn the call over to Paul.

Paul: Thanks, Darcy, and good morning, everyone. Net sales for the quarter were $515 million, up 16 percent over prior year, modestly above our expectations. Just the Diva Dub was $120 million, an increase of 38 percent.

Speaker Change: Adjusted EBITDA margins are 23.2%, meaningfully exceeding our expectations and lifted primarily by favorable gross margins.

Darcy Davenport: Starting with brand performance, Premier Protein Net Sales grew 20% behind strong volume growth for RTD shakes and powders. RTD shake growth of 19% was driven by organic growth, distribution gains, and to a lesser extent, higher trade inventory levels. Compared to our expectations, gross margins benefited from more favorable whey protein costs than expected, and to a lesser extent, non-recurring cost favorability. With respect to our share repurchases this quarter, we bought 1.3 million shares at an average price of $58.08 per share, or $74 million in total.

Speaker Change: Starting with brand performance, Premier Protein Net Sales grew 20% behind strong volume growth for RTD shakes and powders.

Speaker Change: RTD shake growth of 19% was driven by organic growth, distribution gains, and to a lesser extent higher trade inventory levels.

Speaker Change: Shipment growth outpaced consumption dollar growth as a result of late Q3 trade inventory builds and lower net retail pricing.

Speaker Change: Entering the fourth quarter, trade inventory levels are improved and nearly to target levels, with the remaining gaps to be filled in Q4.

Speaker Change: Diametized net sales decreased 3% this quarter on 4% higher volumes, with double-digit growth for international more than offset by declines domestically.

Speaker Change: For domestic, recall we are lapping a challenging comparable period that included heavy display activity and changes in club distribution.

Speaker Change: Promotional activity and unfavorable mix were also a headwind to growth this quarter.

Darcy: Gross profit of $190 million grew 40%, with an increase in margin of 630 basis points to 36.8%.

Darcy: The margin increase resulted primarily from net input cost deflation as we lapped elevated protein cost in the prior year.

Darcy: Gross profit in the quarter also included an unrealized mark-to-market gain on our commodity hedges, which drove 80 basis points of the year-over-year increase.

Darcy: Compared to our expectations, gross margins benefited from more favorable whey protein costs than expected and, to a lesser extent, non-recurring cost favorability.

Darcy: SG&A expenses as a percentage of net sales were 14.4%, relatively in line with the second quarter, with advertising promotion spend 2.9% of net sales.

Speaker Change: Before reviewing our outlook, I would like to make a few comments on cash flow and liquidity.

Darcy: We generated $69 million in cash flow from operations in the third quarter and $160 million year-to-date. As expected, shake inventory levels increased in the third quarter with further increases expected in the fourth quarter driven by incremental production.

Speaker Change: As of June 30, net debt was $776 million and net leverage was 1.8 times.

Darcy: With our EBITDA growth and strong cash flow generation, we anticipate net leverage will remain below two times in fiscal 2024.

Darcy: With respect to our share repurchases this quarter, we bought 1.3 million shares at an average price of $58.08 per share, or $74 million in total. Our remaining share repurchase authorization is $216 million.

Darcy: Our guidance applies strong top-line growth of 18 to 20 percent and adjusted EBITDA growth of 27 to 30 percent with healthy adjusted EBITDA margins of 22.0 percent at the midpoint.

Darcy: The updated guidance reflects our better-than-expected Q3 results, confidence in demand, and increased shake production in the fourth quarter.

Speaker Change: Our updated guidance implies fourth quarter net sales growth of 14% at the midpoint, with premier protein the main driver. Diamond ties and others are expected to be relatively flat year over year.

Speaker Change: Premier protein growth is largely volume-based on distribution gains, higher LTO volumes, and continued robust organic growth, partially offset by reduced club promotional activity.

Darcy Davenport: We expect shipment dollar growth for Premier RTD shakes to modestly outpace consumption growth as we fill the remaining retailer inventory gaps and load new distributors. In closing, we are pleased with our year-to-date performance. Our momentum is high, and we are well-positioned to close out the year. I will now turn it over to the operator for questions.

Darcy: We expect shipment dollar growth for Premier RTD shakes to modestly outpace consumption growth as we fill the remaining retailer inventory gaps and load new distribution.

Darcy: Fourth quarter gross margins are expected to improve meaningfully over the year-ago quarter, benefiting from lower net input costs, while higher marketing outweighs the gross profit margin improvement. Lastly, we expect fourth quarter adjusted margins to be down slightly compared to prior year.

Speaker Change: In closing, we are pleased with our year-to-date performance. Our momentum is high, and we are well positioned to close out the year. I will now turn it over to the operator for questions.

Operator: Thank you. Ladies and gentlemen, as a reminder to ask the question, please press star 1-1 on your telephone and then wait to hear your name announced.

Speaker Change: Thank you. Ladies and gentlemen, as a reminder to ask the question, please press star 1-1 on your telephone and then wait to hear your name announced.

Speaker Change: To withdraw your question, please press star 1 1 again. Please stand by while we compile the Q&A roster.

Speaker Change: Our first question comes from the line of Andrew Lazar with Barclays. Your line is open.

Andrew Lazar: Great. Good morning, everybody.

Andrew Lazar: Good morning.

Andrew Lazar: Darcy and Paul, I think last quarter you mentioned you were planning for a price increase to start hitting in the fourth quarter on Premier ready-to-drink shakes. Is that still the plan, given that you had much more favorability in input costs this quarter than you thought?

Speaker Change: Yes, we are still moving forward with the price increase. Keep in mind that a lot of the favorability in this particular quarter was related to whey protein powders, which is the input cost for our powder business, not our shake. So a lot of the favorability was on whey protein powders.

Andrew Lazar: Weigh protein and that is You may recall from last quarter. We talked about there was a very sharp rise expected in the third quarter on whey protein cost for us

Andrew Lazar: We were just a bit conservative on how quickly that flowed into our P&L, and so we saw some favorability primarily because of whey protein, so it's not as much related to shakes. Shakes were pretty much largely on track on cost.

Darcy: Great, thanks for that. And then, Darcy, you mentioned securing some incremental capacity that'll help you in the fourth quarter to get back to your, all the way to your target sort of, you know, inventory or safety stock levels.

Speaker Change: Was that incremental capacity that was already in the pipeline that's just now sort of coming online? Or was it incremental to sort of what you had planned for this year?

Speaker Change: And as part of that, have you formally committed to increasing the number of lines beyond the initial four at each of your two greenfield facilities yet? I know you've been considering it for some time, but I'm just wondering how that looks as you think through potential supply needs for 26 and 27. Thanks a lot.

Speaker Change: Yes, the incremental capacity was incremental to what we originally thought at the beginning of the year, so very good news.

Speaker Change: Pushing our existing commands for more capacity for the last couple years, and this is really the first time that we've been able to secure some. So, I think it's good news. I think it's good news that our commands, you know, have fully stabilized.

Andrew Lazar: and are now actually having some efficiencies that they're able to pass on. So all around very good news.

Andrew Lazar: As for the expansion of...

Andrew Lazar: are, you know, co-mans with new lines. We have not formed, we're in the process of evaluating who we're going to expand with, but generally the timeline is the same. We expect to need new capacity in 26.

Andrew Lazar: Thanks so much.

Andrew Lazar: Thank you.

Speaker Change: Thank you. Please stand by for our next question.

Speaker Change: Our next question comes from the line of Ken Goldman with J.P. Morgan. Your line is open.

Ken Goldman: Hi, thanks so much.

Ken Goldman: I appreciate the early look into the top line next year, with the understanding that...

Ken Goldman: You know, the year hasn't even started yet. I was just curious.

Ken Goldman: Are there any early reads, just as we think about the flow through of the top line to the bottom line, any particular tailwinds or headwinds we should think about in terms of costs that might lead EBITDA growth to veer more than usually or positively or negatively from where sales growth is?

Kent: Yeah, good morning, Kent.

Speaker Change: So a couple of things I would say for thoughts for Fiscal 25. First, you know, we're talking, we've obviously highlighted that we expect to, that Fiscal 25 for our shake business will be

Ken Goldman: You know, we'll be driving demand, which would suggest obviously incremental marketing spend, potentially promotional spend. So as we look from 24 to 25, I would expect to see some step up on the marketing line and then promotion.

Ken Goldman: Perhaps, and obviously we may toggle between those two as we make decisions on driving demand on promotion versus marketing.

Andrew Lazar: The other one is we are expecting inflation to continue to increase in 2025 versus 2024. It's more impactful on our powder business.

Ken Goldman: We're expecting a pretty sizable step up, starting in Q4 and then into the first half of next year. But on powder, on our shake business, we still expect some inflation throughout the year, but obviously we've taken a price increase there, so I think we can largely offset.

Andrew Lazar: With our price increase on shakes, but going forward, I expect some headwinds on inflation, perhaps some headwinds on marketing and promotion.

Speaker Change: Thank you. And then for a follow-up, we've started to...

Speaker Change: I see your biggest shakes competitor, or at least what we would see as your biggest one, gaining shelf space in the mainstream beverage aisle in a couple of sort of traditional supermarkets. I'm just curious, is this something that's...

Darcy Davenport: So yes, we've absolutely been tracking it, and it's true. There's been some expansion, and it's really through DSD.

Darcy Davenport: Not surprising that that competitor has expanded into the beverage aisle. As you remember, getting out of the aisle. I think I would separate our strategies into two pieces. One is more the near term of getting out of the aisle. So getting out of the aisle has always been a key part of our strategy.

Speaker Change: of getting out of the aisle, right? So getting out of the aisle has always been a key part of our strategy. That can...

Speaker Change: of eyeballs, of awareness, and therefore trial by the first two strategies, which is just end aisle display and multiple...

Speaker Change: Thanks.

Operator: Our next question comes from the line of Thomas Palmer with Citi. Your line is open.

Speaker Change: Please stand by for our next question.

Speaker Change: Our next question comes from the line of Thomas Palmer with Citi. Your line is open.

Speaker Change: So I would put innovation into two buckets. The first bucket is what I call little i innovation, which is

Speaker Change: of new lines in 2025. Obviously, I'm not gonna get into what that innovation is on a public call, but you'll see a couple of new lines come out on Premier Protein next year.

Thomas Palmer: Thank you. And then on dimethysed...

Speaker Change: What's the messaging, I guess, in this new marketing campaign, and what's the target? Is it more customer awareness for the brand? Is it...

Speaker Change: trying to differentiate the brand in what seems to be maybe a little bit more of a competitive segment right now. Just any help on that as we move into the back half of this campaign launches.

Speaker Change: Yeah, so the focus is, and it actually hits the air this week, so you should hopefully see it.

Speaker Change: The focus is really around awareness. I mean, you know, our household pen is 1%, so it's around awareness of the brand. Dymatize is a premium product, and so which

Speaker Change: [inaudible]

Speaker Change: Him is it is a super authentic connection because he already uses Dymatize in his kind of nutrition and workout regimen

Speaker Change: and it is a key part of his success.

Speaker Change: So, it is, you know, not by coincidence that we're launching the campaign right as football season is starting, and so that is, and obviously, he is a big name, so that is, that's the focus. It is an awareness campaign.

Speaker Change: and it's focused around the diametized equity. In addition to that equity campaign, we also have a couple other spots.

Speaker Change: that will focus on flavor.

Speaker Change: So, if you think of kind of upper funnel, lower funnel of a marketing campaign, upper funnel is what we have both going on within the campaign starting in Q4, and then it will continue into Q25.

Speaker Change: Thanks for all the detail.

Speaker Change: Thank you. Please stand by for our next question.

Speaker Change: Our next question comes from Milana Bryant-Holland with D.A. Davidson. Your line is open.

Milana Bryant-Holland: Yeah, thanks. Good morning. Maybe just referring back to Paul's earlier response and question about pricing, you know, mindful of

Milana Bryant-Holland: When Commodities Are Flowing Through the P&L, and also more broadly, just kind of the volume, the challenging volume backdrop across CPG. Just any sense you can provide or, you know, share with respect to customer response to the pricing that you announced last quarter?

Darcy Davenport: I mean, pricing is never easy. What I will say is it is helpful that other competitors have taken pricing into consideration recently. And again, it is because of the rising cost of specifically manufacturing, labor, freight, et cetera. So we're seeing some increases, and other people are passing them on to us, and they did it before us, which always helps. And then, but, you know, no major, major pushback, I would say, and it's all of them are over the line.

Speaker Change: Paul, you want me to answer that? Yeah, please.

Paul: I mean, pricing is never easy.

Paul: It is because of the rising cost of specifically, you know, manufacturing, labor, freight, etc. So, we're seeing some increases and other people are passing it on, too, and they did it before us, which always helps.

Paul: Perfect, thanks. And then I wanted to ask about, you know, we're getting asked about

Paul: Darcy, I was hoping maybe you could just provide a little bit of perspective on what private label looks like in this

Darcy: Yeah, yeah, so private label in...

Darcy: It's definitely less, um...

Darcy: I guess, mature in this category than in others. In RTD, it's about 9%. Powders is about 4.5%. Just realize that...

Speaker Change: More and Nothin' Track Channels.

Darcy: So just remember that most of the powder category, there's just less in track channels for powder. So, I mean, our estimates are actually for powders, it's probably closer to where RTDs is. So call it nine to 10%, if you kind of look at the whole marketplace.

Speaker Change: And same thing for bars. So what is interesting is...

Paul: You know, for the most part, it's maintaining share, so it's not growing faster in our category than the branded players, so it's just maintaining share, and that has been the case for the last year.

Speaker Change: Few years.

Speaker Change: Bye bye.

Speaker Change: You know, this just happens to be, now there are, as you know, there are stronger private labels and less strong private labels, so I think the success depends on the retailer.

Speaker Change: However, I would generally say that in this category, people look for trusted brands.

Speaker Change: And that has been the case. I think where we saw it first go was, I think it has to do with bars. I would say it had a bigger, I would say it went private label first.

Speaker Change: Then powder, and I think RTDs will be last, and part of that has to do with the just dynamic in the category, meaning that there just isn't a lot of capacity in RTDs. It's very complicated to produce.

Speaker Change: The private label within RTBs, at least, are concentrated in a couple of retailers, and others have tried and have not been successful, and so I think are a little scared of it. So does that give you some reference and context?

Speaker Change: Yeah, no, that's extremely helpful, Darcy. I can leave it there, thank you.

Speaker Change: Great.

Speaker Change: Please stand by for our next question.

Speaker Change: Our next question comes from the line of Yasmin Deswanhai with Bank of America. Your line is open.

Yasmin Deswanhai: Hey guys, good morning, and thanks for the question.

Yasmin Deswanhai: So I just had a quick one on Premier. So you said you had strong consumption growth in all key channels, with Club being the exception.

Yasmin Deswanhai: Are you able to quantify the impact of the temporary changes in assortment and also you mentioned that club consumption began to accelerate in June and into July , so is there any way to quantify that and do you expect that acceleration to hold in 4Q or even accelerate further from there?

Speaker Change: Okay, sorry, there were a lot of questions in there Yasmin. Can you just Sorry, sorry. Yeah, yeah, can you just say the question one more time?

Speaker Change: Yep, so just the first question of all of that is just are you able to quantify the impact of the temporary changes in assortment in 4Q, just as it relates to Club kind of being weaker than the rest of the channels in Premier?

Darcy Davenport: And you said Q4. Yeah. Paul, do you want to get that?

Paul Rode: I just want to clarify. Are you saying the temporary change is in Q3? Yeah. So you said Q4. I just want to make sure. Okay. Yeah, so we did have some changes in club assortment in the third quarter, primarily with one of our largest club customers, which did start to ship late in the quarter and early into the fourth quarter. So we should see, you know, the...

Speaker Change: And you said Q4? Yeah. Paul, do you want to get that? I just want to clarify. Are you saying the temporary change is in Q3? Yeah. So you said Q4. Just want to make sure.

Paul: Yeah, so we did have some changes in club assortment in the third quarter, primarily with one of our largest club customers, which did start to ship in late in the quarter and early into the fourth quarter, so we should see, you know, the...

Speaker Change: The year-over-year headwind of that change in Q4 as we move forward.

Speaker Change: I don't know if I have a precise number of what we think that impact was, but certainly it had an impact to the club growth in the quarter.

Speaker Change: as well as just some of the out-of-stocks in some of our other club customers, which vastly improved as we got later into Q3, and you're seeing that in the growth as we hit late Q3 into Q4.

Speaker Change: If you're thinking about headwinds to consumption, I think that, I mean, our Q3 consumption was lower than what we expected, and we would say that

Speaker Change: We would have expected about four percentage points higher than what we saw. So the combination of the...

Speaker Change: And basically that was due to some delayed shipments that went out and so part of about three points of that was replenishment for out-of-stocks and about one point of that was due to new products being shipped in. So hopefully that helps with around four points of consumption.

Speaker Change: Okay, great. That's really helpful. And just a quick follow-up, and it's a more higher-level question. I just had a quick one on your target consumer base as it relates to growing household penetration. I know you said previously that this is a more adult brand, but I saw recently that there was an activation in New York, and these pop-ups tend to skew towards younger audiences.

Speaker Change: So, could you just talk a little bit about, you know, the consumers that you plan to address from here and how you expect that to drive, you know, continued household penetration growth?

Speaker Change: Yeah, so you saw the ice cream pop up. Yep, I saw that.

Speaker Change: That's very successful. So yeah, so low household penetration category, low household penetration brand. So currently, you know, our average age is right

Speaker Change: You know, call it early 40s, but ranges. And so we, our marketing campaign will really focus on

Speaker Change: that we're trying to get to kind of younger, the younger,

Speaker Change: population where we can bring them into the category early and then keep them throughout. So as you can tell that was one kind of that was one test activation but you'll start seeing it as we build out our marketing campaign for next year for Premier. You're going to see that come through in the creative of who we show as well as if you know you can see it through just the targeting efforts.

Speaker Change: Okay great, thanks so much guys.

Speaker Change: Our next question comes from the line of Robert Moskow with TVCogren, your line is open.

Robert Moskow: Hi, thanks for the question. Just to clarify, I think you said consumption was about 400 basis points lower than what you thought for various factors. Was that for all channels or was that just for club? I didn't catch it.

Speaker Change: All channels, but it was majority, most of the effect was club as well as some food.

Speaker Change: Okay, and the reason I ask is, if you just look, you know, eyeballing slide 8, if you look at the consumption trends for Premier Protein RTD, you know, it's your biggest segment, the comps get really difficult in October .

Speaker Change: in 4Q and do you think that would be, how would that relate to shipments because I know you're still filling inventory gaps, you know, do you think shipments could be even higher than that?

Paul Rode: Yeah, I'll take, I can take the latter. Yeah, you can do the latter, yep. So, as I mentioned in my prepared remarks, we do expect shipments to modestly outpace consumption growth. So, shipment growth slightly outpaces consumption growth in the fourth quarter, and that's because we're continuing to replenish the remaining out of stocks and getting our retailers' inventories full. But also...

Speaker Change: Yeah, I'll take the latter. You can do that. Yep.

Speaker Change: So as I mentioned in my prepared remarks that we do expect shipments to modestly outpace consumption growth, so shipment growth slightly outpace consumption growth in the fourth quarter and that's because we're continuing to

Speaker Change: Replenish the remaining out of stocks and getting our retailers inventories full but also

Speaker Change: shipping new distributions. Darcy touched on some of this before so you know we've got some bottles going in and some other distributions so yes we expect a modest

Speaker Change: increase or shipments ahead of consumption in the fourth quarter. As far as the chart you're referencing, I think you're looking at the October time frame. So last year we did in August have

Speaker Change: a club event, we called it a small club event in August .

Speaker Change: And so that's what you're seeing kind of in the 13-week rolling as it gets to October . It's mainly the impact of that August promotion. We are lapping that this year. We're doing less days on promotion, so it is a bit of a headwind for us in the fourth quarter, but that is all contemplated.

Speaker Change: and our guidance and our thinking around shipments versus consumption.

Speaker Change: Okay, so if we can... Yeah, and Rob, just to... Go ahead. Sorry.

Rob: Well, I know that there is...

Speaker Change: We both are focused.

Speaker Change: Darcy, you go first, you're CEO , so please.

Darcy: Well, I know that everybody focuses a lot on consumption, which I understand why, so I thought it might help a little bit.

Speaker Change: to give you some of the monthly dynamics that we expect in Q4. You know, obviously, July was really strong at 20%.

Speaker Change: We expect overall Q4 consumption to be low teens, and that was some of the dynamics that Paul was just talking about.

Paul: You should expect, especially late August , you should expect a consumption dip, and it's mainly because we're lapping that club promotion that is in Untracked Channels but is captured in MULA+.

Paul: and then you'll see an acceleration into September . So you see strong July come down a bit in August because of the lapping of this club promotion and then increase again in September .

Speaker Change: Our next question comes from the line of David Palmer with Evercore ISI. Your line is open.

David Palmer: Thanks and thanks also for that last point. Just a follow-up on that.

David Palmer: but also a key competitor's capacity constraints. Maybe being different than yours, maybe they had it at different points in the past, making for easy comparisons.

Speaker Change: competitively, and then you perhaps had some constraints in addition to the assortment reset that you talked about in this last quarter. Just any comments on that and even how that governs the comparisons that we'll be seeing in the coming quarters?

Speaker Change: You are...

Speaker Change: The changes within our consumption patterns.

Speaker Change: are absolutely...

Speaker Change: a reflection or exacerbated by.

Speaker Change: But you don't see it, or consumption doesn't reflect it, because...

Speaker Change: And because we do not...

Speaker Change: Some of these show up in the consumption. So when we get back to, which we're close.

Speaker Change: When we get back to, you know, adequate safety stock, as well as adequate trade inventory, we just will not see these types of kind of, I guess, volatility, as you put it. The second piece is, this is...

Speaker Change: completely having to do with our safety stocks and our trade and the retailers' trade inventory, less about competition.

Speaker Change: Interestingly enough, I talked about the category being that is

Speaker Change: Really, the growth is driven by the mainstream brands.

Speaker Change: Well, the mainstream brands, us, as well as our biggest competitor, all of our growth, almost all of our growth is coming from outside of the category, so there really is not very much brand shifting between the, you know, two brands.

Thomas Palmer: It looks like you'll finish above the 18 to 20 percent long-term guidance. How are you thinking about your long-term margin now? Is that something that could be in the low 20s longer term?

Speaker Change: Thank you for that. And just by judging on your EBITDA margins for this year, it looks like you'll finish above the 18 to 20 percent long-term guidance. How are you thinking about your long-term margin now? Is that something that could be in the low 20s longer term?

Darcy Davenport: Obviously, as you mentioned, we're having a strong margin year, but keep in mind that it's still not a full demand-driving year, especially for our biggest business, Premier Protein. So I don't think that 22% is our new normal.

Speaker Change: Yeah, we...

Speaker Change: Obviously, yeah, as you mentioned, we're having a strong margin year, keeping in mind that it's still not a full demand-driving year, especially on our biggest business, Premier Protein, so I wouldn't think.

Darcy Davenport: But yeah, it's something we're certainly evaluating. We like our long-term algorithm, which gives us flexibility on spend, but we've always said that our target was to be on the upper part of that, and we've been consistently on the upper part of that. But we'll continue to reevaluate it, and obviously when we come to November, we'll give our thoughts on how it plays out in fiscal 25.

Speaker Change: I don't think that 22% is our new normal.

Speaker Change: But yeah, it's something we're certainly evaluating it, you know, we like our long-term algorithm, gives us flexibility on spend, but we've always said that our target was to be on the upper part of that, and we've been consistently on the upper part of that, but we'll continue to re-evaluate it, and obviously when we come to November , we'll...

Speaker Change: We'll give our thoughts on how it plays out in Fiscal 25.

Operator: Thank you. Please stand by for our next question.

Speaker Change: Hi guys, thanks for taking our question. Firstly, I wanted to drill down a little bit in club. In my area, in the Midwest, I've seen a pretty significant increase in...

Speaker Change: promotion from I'll be at smaller competitors but but other

Speaker Change: competitors that have RTD shake offerings.

Speaker Change: I guess the first question is, is that something that you see more broadly, or maybe that's more concentrated in my area? And two, as you think about maybe the promotional cadence,

Speaker Change: to take price. Should we think about kind of alternating promotions between brands as putting a ceiling on pricing power for the category?

Speaker Change: intensity has increased a little bit and I and it's really it's actually the not the top

Speaker Change: but all the rest of them, as you said.

Speaker Change: There seems to always be somebody, a brand, on promotion in MBM. So that is, I would say, more of a long-term trend. The second, and oh, and is that indicative of the rest of the marketplace?

Speaker Change: definitely in powder there and I talked about it on the last call and this trend continued where there has been an increase in

Darcy Davenport: Discounting and promotional intensity on powders, for sure, across the marketplace. RTD, it hasn't been as extreme, but there's definitely been an uptick in promotion on RTDs. And I think it really has to do with

Speaker Change: discounting and promotional intensity on powders for sure across the marketplace.

Speaker Change: R.T.D. it hasn't been as extreme, but there's definitely been an uptick in promotion on R.T.D.s. And I think it really has to do with...

Speaker Change: capacity coming on. I think that, you know, we have a little bit more capacity and so people are able to get back to driving demand.

Darcy Davenport: Yeah, the second part was really just if there's kind of this always-on promotional calendar for the space, does that limit pricing power just given the value gaps if there's always somebody in the category that has a promo on even as your promos kind of roll on and off? Does that limit how much you can take because you need to keep kind of a relative gap to whoever's on promo at that time?

Speaker Change: And sorry, what was the second question?

Speaker Change: Yeah, the second part was really just, if there's kind of this...

Speaker Change: always on promotional calendar for the space.

Speaker Change: Does that limit pricing power just given the value gaps, if there's always somebody in the category that has a promo on, even as your promos kind of roll on and off, does that limit how much price you can take because you need to keep kind of a relative gap to whoever's on promo at that time?

Speaker Change: [inaudible]

Speaker Change: No, I mean, I think that we, I'll just talk for our brand. I feel very good about our pricing power. And we're, you know, we have an incredibly strong brand with, with high loyalty. And I think we've shown that consistently over the course of, you know, you know, kind of the last few years, given

Darcy Davenport: The performance of the business, despite capacity constraints, really consumers have stayed with us. So I think that for us, we are not going too deep on promotion. I have said this before, the key to promotion for us is getting display.

Speaker Change: The performance of the business, despite capacity constraints, really, consumers have stayed with us. So I think that for us, we are not going to

Speaker Change: We do not need to go...

Speaker Change: Deep on promotion. I have said this before, the key for promotion for us is getting display.

Speaker Change: So, we will do as little TPR as we need to, to get the display, because the display is where we get the eyeballs, the eyeballs are where we get the trial, the trial is where we get the repeat, and it goes from there.

Speaker Change: And we see, you know, we have two major drive periods. Everybody enters into the category really in our Q2, Jan-Feb-March, so that's a big drive period. And we started, we got back to promotion this year during Q2. We will expect to do it again next year. And then we will also have kind of a second drive period in the Q4 period. And it will be a little bit lighter because, again, I think we've learned that we don't have to go deep or really as frequent.

Speaker Change: Thank you. Please stand by for our next question.

Speaker Change: And then the second follow-up question is just on capacity. You've had your base plan for capacity and now secured some incremental capacity on top of that. I'm just wondering where that maybe puts you.

Darcy Davenport: in terms of supporting sales growth in 2025. Thanks.

Speaker Change: in terms of supporting sales growth in 2025. Thanks.

Speaker Change: TDPs for Q4. We do expect some increases. It will be a combination of... So if you actually, if you look at the supplemental presentation on page 10 is a great graph.

Speaker Change: Fairly big increase last year and that was around a mass retailer that we expanded shelf space a fair amount. We will see some increase in Q4, not as dramatic as we did last year, but we got some nice space.

Speaker Change: And then we'll also see a little more favorability from just

Speaker Change: really sets us up nicely. It allows us to not only, you know, deliver our guidance and actually raise it, but also fill our, get to our target weeks of safety stock, which is eight weeks.

Speaker Change: Our next question comes from the line of Bill Chappell with Truist Securities. Your line is open. Thanks. Good morning.

Bill Chappelle: Just two questions. One, I didn't fully understand when you talked about the consumption 400 basis points below your expectations and a lot of that coming from the club channel. I'm just trying to understand why it was below your expectations that you just seemed to...

Speaker Change: have a good handle on obviously Club Channel and shipments and products and stuff like that so was there something that that

Darcy Davenport: surprise you interquarter or just help us understand that?

Speaker Change: surprise you in your quarter or just just help us understand that?

Speaker Change: Yeah, so, oh go ahead, why don't you get it.

Speaker Change: Yeah, no, yeah, I think Darcy touched on this a little bit earlier so

Speaker Change: It really comes down to the timing of shipment. So we did have some shipments into Club and to other customers to refill some of the out-of-stocks, as well as to ship some of the new distribution in bottles and some of our other flavors. It just happened later in the quarter than we expected.

Darcy: And so that had a direct impact on our consumption growth in the fourth quarter, which, as Darcy mentioned a minute ago, was about a 400 basis point.

Speaker Change: Headwind to our consumption growth. So we're around 10% if you add that that would put our consumption growth at about 14% If that was shift on time

Speaker Change: We have shipment timing changes from time to time. It's not uncommon. It's just when you're not a full safety stock internally, those things sometimes fall out and that's what we saw in the quarter.

Darcy Davenport: Got it. And I'll have a follow up, and then I have another follow up. But did that then impact your July sales, is that why it got a boost because of the timing of shipments?

Speaker Change: Got it and I'll have a follow-up and then I have another follow-up but did that then impact your July sales is why I got a boost because the timing of shipments?

Darcy Davenport: I would not necessarily say that necessarily... Well, let me back up.

Speaker Change: I would not say it necessarily, well, let me back up.

Speaker Change: You saw consumption start to accelerate in June and more into July , and that is largely because of us getting those out-of-stocks filled as well as getting that distribution into the trade. So that did have a direct impact on consumption, which is why you saw it accelerate in June and further into July .

Darcy Davenport: Got it. Okay. And then my real follow-up, just back on pricing, and especially as we move forward, I mean, I'm just trying to pair the commentary that everyone in your category is, you know, playing well in the sandbox on pricing, but you're sourcing most of your new customers outside the category.

Speaker Change: Got it. Okay. And then my real follow-up, just...

Speaker Change: Back on pricing, and especially as we move forward.

Speaker Change: the commentary of

Darcy Davenport: These occasions are breakfast replacements. So, in essence, what consumers are trading out an Egg McMuffin, a bagel and cream cheese, et cetera. And so those things are, for the most part, more expensive than a $2 shake. And so I think that is where I think we see we are. And so not only is it less expensive, but it's also a much healthier breakfast. And so I think that's where you're seeing it, and that's why we feel like, you know, all of our data would say that we have pricing power.

Speaker Change: is, you know...

Speaker Change: etc. And so those things are for the most part more expensive than a $2 shake. And so I think that that is where I think we see we have and you were so not only is it you know less expensive but it's also a much more healthy breakfast.

Darcy Davenport: Got it. No, that helps a lot. Thank you.

Operator: Please stand by for our next question.

Speaker Change: Got it. Now that helps a lot. Thank you.

Thomas Palmer: But more broadly, as we see the high protein, low sugar formulations becoming standardized, to what extent do you think this category can evolve? I guess similarly to energy drinks, where you're now including ingredients and functions in combination with caffeine. How do you assess protein's ability to evolve similarly between liquids and powder? And I'm thinking here, three, five, seven years, not a fiscal 25.

Speaker Change: But more broadly, as we see the high-protein, low-sugar formulations becoming standardized,

Darcy Davenport: Well, I think the first piece, and it goes back to what I talked about in my prepared remarks, just about Think about how amazing the wide variety of people it is beneficial to, which obviously has innovation ramifications, as well as the benefit it provides, which also has innovation ramifications. So I think there is such a huge opportunity, which actually, I know you asked about Big Eye Innovation, but actually, that is the reason why we are so encouraged by the little I innovation because there is so much upside just by putting our, you know, then you go to Big Eye Innovation. And if you look at five, seven.

Speaker Change: Well, I think the first piece, and it goes back to what I talked about in my prepared remarks, just about...

Speaker Change: Kind of at how amazing...

Speaker Change: The Nutrient of Protein is and just how the more we learn

Speaker Change: that the wide variety of people it is beneficial to, which obviously has innovation ramifications, as well as the benefit it provides, which also has innovation ramifications.

Speaker Change: So, I think there is such a huge opportunity, which actually, I know you asked about big eye innovation, but actually, that is the reason why we are so...

Speaker Change: encouraged by the little I innovation because there is so much upside just by putting our you know

Speaker Change: existing formula or something close to it in different packages in different kind of pack sizes in different formats. So there's that because there's a ton more kind of household penetration potential.

Darcy Davenport: 10 years out, I think what you'll see is protein as a part in complement with other functional ingredients. I mean, I think that the specialty, you know, if you walk into a, The mainstream gets influenced by kind of two places. One is

Speaker Change: [inaudible]

Speaker Change: 10 years out, I think what you'll see is protein as a part and complement with other functional ingredients. I mean, I think that the specialty, you know, if you walk into a...

Speaker Change: The mainstream gets influenced by kind of two places.

Darcy Davenport: Sports nutrition, in kind of the specialty world, you walk into a vitamin shop at GNC and you see where, you know, that part, that side is going or from, like, nature, right? So those are the two places that influence it the most. And when you go into those places, you see a combination of, you know, real food. So that has an influence, but then you also see it really leaning into function. And so I think that's where the category will go.

Speaker Change: Sports Nutrition.

Speaker Change: In kind of the specialty world, you walk into a vitamin shop at GNC and you see where, you know, that part, that side is going, or from like natural, right? So those are the two places that influence it the most.

Speaker Change: And when you go into those places, you see a combination of, you know, real food, so that has an influence, but then you also see really, you know, leaning into function. And so I think that's where the category will go.

Thomas Palmer: Great, thanks for that. And as a follow-up, in terms of competition in RTD, you know, Tetra supply has been the standard, and tightness has been a major barrier to entry. But we're seeing some of the newer entrants adopting bottles, and I'm curious about industry bottle capacity, the extent it can be a means for newer players to sort of circumvent the Tetra tightness, and the extent to which bottles can play in channels such as, you know, mass and club, as opposed to just more of a single serve opportunity.

Speaker Change: Great, thanks for that. And as a follow-up, in terms of competition in RTD,

Speaker Change: You know, Tetra Supply has been the standard, and Titan has been a major barrier to entry. But we're seeing some of the newer entrants adopting bottles.

Speaker Change: And I'm curious your take on industry bottle capacity, the extent it can be a means for newer players to sort of circumvent the tetra tightness. And the extent to which bottles can play in channels such as mass and club as opposed to just more of a single serve opportunity.

Darcy Davenport: So bottles are also constrained, and it really is, I think that... What is constrained is the... Upstream Aseptic Processing. So whether you put it in a bottle or a tetra, it is the aseptic processing upstream that is constrained. But I think that, in general, at the same time that the tetra capacity is opening up, so is the bottle capacity, and that is what you're seeing. And, and yeah, I think we see the opportunity for bottles, for us, because it's a smaller part of our business. We actually see the potential for the growth potential of bottles actually being bigger for us, not numbers of shakes. But we see that there is a, and when I talk about format, that is one of the formats that we see potential with.

Speaker Change: So bottles is also constrained and it really is, I think that what is constrained is the

Speaker Change: upstream aseptic processing. So whether you put it in a bottle or a tetra, it is the aseptic processing upstream.

Speaker Change: In general, in the same time that the Tetra capacity is opening up, so is the bottle capacity, and that is what you're seeing. And yeah, I think we see the opportunity for bottles, for us, because it's a smaller part of our business, we actually see the potential for the growth potential of bottles actually, you know,

Speaker Change: The growth being bigger for us, not numbers of shakes, but we see that there is a... And that's when I talk about format, that is one of the formats that we see potential with.

Operator: Ladies and gentlemen, I'm showing no further questions in the queue. This concludes today's conference call. Thank you for your participation. You may now disconnect.

Darcy: Thank you, Darcy.

Darcy: Yep.

Speaker Change: Thank you.

Speaker Change: Ladies and gentlemen, I'm showing no further questions in the queue.

Speaker Change: This concludes today's conference call. Thank you for your participation. You may now disconnect.