BellRing Brands, Inc. (NYSE:BRBR) Q1 2024 Earnings Call Transcript

BellRing Brands, Inc. (NYSE:BRBR) Q1 2024 Earnings Call Transcript February 6, 2024

BellRing Brands, Inc. isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).

Operator: Good day and thank you for standing by. Welcome to BellRing Brands First Quarter Fiscal Year 2024 Earnings Conference Call. At this time, all participants are in a listen-only mode. After the speakers’ presentation, there will be a question-and-answer session. [Operator Instructions] Please be advised that today’s conference is being recorded. I would now like to hand the conference over to your speaker today, Jennifer Meyer, Investor Relations for BellRing Brands. Please go ahead.

Jennifer Meyer: Good morning, and thank you for joining us today for BellRing Brands’ first 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 in both the Investor Relations in the SEC filings section at bellring.com. In addition, the release and slides are available on the SEC’s website. Before we continue, I would like to remind you that this call will contain forward-looking statements which are subject to risks and uncertainties that should be carefully considered by investors, as actual results could differ materially from these statements.

These forward-looking statements are current as of the date of this call, and management undertakes no obligation to update these statements. As a reminder, this call is being recorded, and an audio replay will be available on our website. And finally, this call will discuss certain non-GAAP measures. For a reconciliation of these non-GAAP measures to the nearest GAAP 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. Last evening, we reported our first quarter results and posted a supplemental presentation to our website. This presentation is designed to provide more insight into our business, consumption and key metrics and now includes more information on our powders’ business. I’m pleased to share the fiscal 2024 is off to an excellent start. The business continues to accelerate as we bring on new share capacity and begin to drive demand. Our first quarter results came in ahead of our expectations. Net sales grew 19% over prior year and adjusted EBITDA was up 18%. Premier Protein drove the outperformance, as some key customers chose to right-size their trade inventory that they were heading into the New Year, New You season started in January.

As you saw in yesterday’s press release, we raised our outlook for the year. We now expect net sales to grow between 12% and 17% over fiscal 2023 and adjusted EBITDA to grow between 11% and 18%. Our better-than-expected first quarter performance along with strong consumption trends and confidence in our capacity expansion drove our decision to raise the top and bottom line. Moving to shake production. In fiscal 2023, we made notable progress to grow and diversify our shake supply and our efforts continue into 2024. I’m happy to share that we brought our second greenfield co-man facility at Michael Foods online during Q1. They will continue to scale up over the next 12 months, producing more shakes every quarter. We remain on track to grow production north of 20% this year enabling strong net sales growth in 2024 and increased weeks of supply.

The demand and supply dynamics on shake will remain tight for most of the year and we’ll continue to be nimble, so we can navigate effectively. Now to the category and brand updates. The convenient nutrition category grew 10% in Q1 as tailwinds around health and wellness and fitness continue to drive growth. Consumer interest in functional beverages and sports nutrition products continues to be high. Ready-to-drink led the category up 16%. And ready-to-mix grew 6%. Increase supply and distribution gains are lifting ready-to-drink growth, while the growth in ready-to-mix remained healthy, despite lapping significant price increases. Premier Protein shake consumption remained strong this quarter at 29%. Growth was robust across all channels driven by improved supply, distribution expansion and continued excitement around our seasonal flavors.

The highest growth was in Mass and eCommerce. Mass benefited from higher in-stock levels and distribution gains, while eCommerce saw strong growth behind promotional activity. Our latest seasonal flavor, Winter Mint Chocolate, demonstrated remarkable incrementality to the brand. January consumption growth continues at 34%, lifted by incremental promotional activity in tracked channels. Our brand metrics reflect our continued momentum, as Premier Protein reached all-time highs in TDPs and household penetration. 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. Premier Protein continues to gain new users, reaching over 17% of households this quarter, adding nearly one percentage point versus Q4.

In calendar year 2023, the brand grew household penetration 24% a significant contributor to the overall RTD category growth. Premier Protein’s household penetration continues to be the highest in the category. And we expect marketing and promotional activities in the remainder of fiscal 2024 to further grow our reach. With the RTD segment household penetration is still below categories such as nutrition bars and energy drinks. We still see tremendous opportunity to grow in our existing channels. Premier Protein powder continued its strong trajectory, growing 66% in Q1 behind distribution gains, strong velocities and promotional support. The momentum continued in January up 50%, as we begin a powder-focused marketing campaign. We remain encouraged by the growth potential of the Premier Protein brand in this format.

In fact during calendar year 2023, Premier Powder’s household penetration grew 82%, the highest of any key competitor in the Powder category. We believe the brand will continue to bring mainstream consumers into the Powder category in the same way Premier did to the ready-to-drink category. Turning to Dymatize, the brand had a solid quarter with household penetration maintaining record highs and consumption of 16%, significantly outpacing the category. We saw double-digit growth in nearly all channels driven by distribution gains, promotion and continued top-tier velocities. Specialty consumption growth was the only exception it remains challenged as consumers shift purchases to mainstream channels. Looking forward Dymatize launched a new national marketing campaign in Q2, which focuses on what makes the brand unique.

It’s superior Premier — its super premium ingredients and amazing taste. The formulated for more campaign has three pillars. The first focuses on the brand and superior ingredients and how they support superior results for athletes. The second pillar showcases our amazing tasting flavors like Fruity Pebbles to highlight the fun they bring to even the most serious athlete. The third is possibly the most exciting if you’re a football fan. I’m thrilled to share we have expanded our core team of Dymatize athletes and influencers and we are partnering with San Francisco All-Pro running back, Christian McCaffrey. We are eager to see the impact this type of enhanced digital marketing and top tier influencer will have on our brand awareness and household penetration.

In closing, our Q1 results position us well for an above-algorithm fiscal year. Our confidence in our long-term outlook for BellRing remains strong. Our business is focused on the strongest segments of a growing category with a ton of upside. Premier Protein and Dymatize are leading mainstream brands with low household penetration and strong loyalty. Our momentum continues to grow as we began to drive shake demand and ramp up our powder marketing efforts. We continue to increase our shake supply and our scalable supply chain will enable many years of robust shake growth. We are bringing flavor excitement to consumers and retail partners and more innovation in our pipeline to fuel future growth. Before passing over to Paul, I’m sure that most of you have heard that Rob Vitale, our Executive Chairman has returned from his medical leave.

We are incredibly excited to have him back at full strength. We look forward to sharing our progress next quarter. And I will now turn the call over to Paul.

Paul Rode: Thanks Darcy and good morning everyone. As Darcy highlighted, our first quarter results came in above our expectations. Net sales for the quarter were $430 million and adjusted EBITDA was $101 million. Net sales grew 19% over prior year and adjusted EBITDA increased 18% with adjusted EBITDA margin of 23.4%. Starting with brand performance, Premier Protein net sales grew 19%, behind strong growth for RTD shakes and powders. Distribution gains, organic growth and light promotional activity drove shake growth. Shake consumption dollars grew 29%, outpacing shipment growth of 19%. The former benefited primarily from higher net pricing as price increases at retail lagged our October 2022 price increase on shakes. Dymatize net sales decreased 21% this quarter as the brand benefited from increased distribution and organic growth of domestic mainstream channels.

These gains, combined with lapping last year’s Q1 trade inventory de-load, drove volume gains in the quarter. Price/mix was a partial offset to this growth, driven by incremental promotional activity and unfavorable mix. Gross profit of $148 million grew 22% with an increase of gross profit margin of 80 basis points to 34.4%. The margin increase resulted from the input cost deflation, partially offset by incremental promotional activity and lapping production attainment fees received in the prior year. Excluding one-time costs in the prior year period, SG&A expenses as a percentage of net sales decreased 90 basis points as we lap our lowest SG&A spend quarter in 2023. Operating profit of $73 million, decreased $2 million compared to prior year and was negatively impacted by $17 million of accelerated amortization.

This was a non-cash expense recorded in connection with our Q4 decision to discontinue the PowerBar North American business and was treated as an adjustment for the non-GAAP measures. The intangible assets associated with this business were fully amortized in the first quarter. Before reviewing our outlook, I would like to make a few comments on cash flow and liquidity. We generated $74 million in cash flow from operations of the first quarter. While our working capital modestly decreased in the first quarter, we continue to expect net working capital growth in fiscal ’24 to exceed our net sales growth rates as we add weeks of shake supply. As a result, our cash flow in fiscal ’24 will be modestly lower than fiscal ’23. During the quarter, we repaid the remaining $25 million of borrowings under our revolving credit facility.

As of December 31, net debt was $755 million and net leverage was 2.1 times. With our adjusted EBITDA growth and strong cash flow generation, we anticipate net leverage will declined below two times in fiscal ’24. With respect to our share repurchases this quarter, we bought 200,000 shares at an average price of $44.27 per share or $9 million in total. Our remaining share repurchase authorization is $14 million. Turning to our outlook. We raised our fiscal ’24 guidance for net sales to be $1.87 billion to $1.95 billion and adjusted EBITDA of $375 million to $400 million. Our guidance supply of strong top line growth of 12% to 17% and adjusted EBITDA growth of 11% to 18% with healthy adjusted EBITDA margins of 20.3% organic [ph]. As Darcy mentioned, our better-than-expected first quarter performance drove our decision to raise our outlook and we don’t expect any major changes to the cadence we communicated last quarter.

Moving to our second-quarter forecast, we expect net sales growth to exceed 20% with majority of the growth driven by Premier Protein as we restart meaningful shake promotions. Consequently, we expect pricing to be a significant offset the strong shake volume growth. We expect second quarter adjusted EBITDA margins to improve modestly compared to prior year as higher gross margins are partially offset by higher SG&A as the percentage of net sales. Gross margins are expected to benefit from lower protein costs offset partially by increased promotional spend and other input cost inflation. In closing, we are pleased with our good start to fiscal ’24. Our strong Q1 results give us greater confidence in our full-year outlook and long-term growth prospects.

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

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Q&A Session

Operator: Thank you. [Operator Instructions] Our first question comes from the line of Andrew Lazar from Barclays.

Andrew Lazar: Great. Good morning, everybody.

Darcy Davenport: Good morning.

Andrew Lazar: Maybe to start off. I’m trying to get a better sense of what you think is driving customers to sort of raise their and their trade inventories. It sounds like that happened at a greater level than maybe you had anticipated heading into the sort of the new year, new year season. Is that normal course of business or indicative of the increased shelf space and distribution? Just trying to get a sense of what drove that if it was sort of beyond your expectations?

Darcy Davenport: Yeah, it was. It was beyond. And mainly, it was due to a few customers carrying low inventory in Q1 during the holidays. And so, what happened is they were low. We weren’t sure if they are going to right-size their inventory, but they did and we are able to meet the demand. So, it was more about right sizing their own inventory because they’re low.

Andrew Lazar: Got it. And then, I think when you initially provided your fiscal ’24 guidance last quarter, sales growth at the midpoint of about 12.5% was well below of your expected capacity increase for the year, I think around 20%. And much of that I think was attributed to your expectation that some of the added capacity would be build up your own internal safety stock. If capacity is still expected to grow around 20%, I guess I’m trying to get a sense of, I guess why now you’re expecting a narrower gap between added capacity and sales growth. Is it simply just the demand is stronger than you thought and so basically you don’t add as much safety stock as you anticipated? Just trying to get sense of what drives that and what that means for the business. Thanks so much.

Darcy Davenport: Yeah, that’s right. And yeah simply put given the current consumption trends, we estimate that we will need to use more of our capacity for sales instead of inventory. As we explained last, we need to build our inventory up to a level. Our target is six to eight weeks. But we do have the flexibility. We can operate around four to five weeks. So if the demand is there we’re going to make a call and we can lean a little bit more into sales.

Andrew Lazar: Thanks so much.

Darcy Davenport: Thanks.

Operator: Thank you. One moment for our next question. Our next question comes from the line of Pamela Kaufman from Morgan Stanley.

Pamela Kaufman: Good morning. I have a follow-up to Andrew’s second question. Maybe just to ask a slightly differently, I guess just given how strong demand has been in recent months, do you have enough supply to meet the demand if it stays at these levels? And I guess, is there any flexibility to add more capacity or to kind of to exceed the current guidance as demand stayed where it is?

Darcy Davenport: We do have the capacity to meet the current guidance and asked for additional capacity to flex. We are — it’s possible. I mean, I think that we are — we have a — we now have a network that is much more robust than we’ve ever had before. So suffice it to say we are talking to every single one of our co-man to see if we can get incremental supply. We have been for the last 20 — honestly as long as I’ve been here, but specifically really working hard the last 12 to 24 months. What I think is encouraging is we now have our two greenfields. They’re scaling. But in addition to those, we have Sycamore Partners that are increasing their production as well. So I think that I don’t expect we have — our current guidance is we have full confidence that we can deliver that and as for on top of that I would just say that like we’re pushing our co-man to get more to supply demand.

Pamela Kaufman: Thank you. And just my other question is about your plans for promotion. Have you adjusted your plans at all just considering how strong demand has been? Maybe is there a need to promote less just given the demand environment?

Darcy Davenport: So our plan to promote this year is intact. I mean you have to really — we commit to our promotions well-ahead of plan and our retailers depend on it. So our 2024 plan has been set for a bit. As you know what you’re seeing in the tracked consumption right now is a result of, A, distribution, stronger in-stocks. But also, promotion. And specifically, in a couple of our major customers that are in-track channels. So that is one of the — we believe in promotion in just that. And I think I’ve talked to you about this before, it’s less about the percentage off, but it’s more about the display. So we can get the eyeballs on this brand, which is still a low-household-penetration brand. Q2 is our biggest promotional quarter. And after that, it becomes — we start leaning a little bit more into marketing as opposed to promotions.

Pamela Kaufman: Thank you. I’ll pass it on.

Operator: Thank you. One moment for our next question. Our next question comes from the line of Ken Goldman from JPMorgan.

Ken Goldman: Hi, thank you. One of the questions I received from investors overnight was whether we should be modeling a reversal of that 1Q inventory load. I assume, listening to you today and given that low was really to refill, what was low and customer stocks that we shouldn’t model necessarily any kind of reversal in terms of BBU under shipping in any quarter ahead. Just to make sure that’s correct, just so I can start with that.

Darcy Davenport: Correct.

Paul Rode: Yeah. Correct, Ken. We do not believe we shipped ahead. There will be a modest deload in Q2 because we did ship some promotional volume in the first quarter which we expected. But we expect a modest deload and a smaller deload than we saw last year.

Ken Goldman: Got it. Thank you. And then I’ll just stay on the same line of reasoning. What happens if there’s a — you’re promoting, you’re committed to your promotions, you’re pushing your co-man as hard as you can. I guess my question is, if there is a situation again where your customers say look our stocks are low, can you ship us more, are you less able to do that going forward? This is obviously a great problem to have. If you do have your record demand is too high. But is it reasonable I guess to think that hey maybe the level of overshipment we saw in 1Q wouldn’t necessarily happen again just given your ability to produce some after what we saw in 1Q?

Paul Rode: Yeah. Ken.

Darcy Davenport: Yeah. Go ahead.

Paul Rode: I think it’s fair to say that yeah, obviously, it reduces our flexibility to some degree because we did not expect that. But we feel very good about our capacity that’s coming online and where we are with our guidance. So we feel comfortable, but you’re right. I mean at some point, if demand is so strong, you’ll start to stretch your inventory, but we feel good about where we’re at right now.

Ken Goldman: Thank you.

Operator: Thank you. One moment for our next question. Our next question comes from the line of John Baumgartner from Mizuho Securities.

John Baumgartner: Good morning. Thanks for the question.

Darcy Davenport: Good morning, John.

John Baumgartner: Wanted to come back to — good morning, Darcy. I wanted to come back to Premier Powder and the market share growth you’re seeing there. Do you sense as to from where do that share has being sourced? Are you seeing any sort of shift from consumers having previously bought powders position more towards the weightlifter or body builders segment? Are those folks shifting more towards everyday brands like Premier? Or is this just more of a situation where Premier launches and it’s incremental to the overall powder category?

Darcy Davenport: We think it’s mostly the latter. So it’s really — I mean, I think this is one of the areas that we’re just starting to talk about more. And I think internally, we’re getting really excited about Premier Protein powder. Just to give you some — some numbers actually Premier Protein powder is now — I mean, it’s only 1.6 points of household penetration. So teeny, but it just surpassed Dymatize. So, I mean, Dymatize has always been a really amazing brand, but it’s pretty narrow. It’s for the best and the most sophisticated athletes. And then you’ve got Premier that is a mainstream brand now going into powders. And so it’s bringing in new consumers. And I mean, I said, this in my scripted remarks, but we really think that Premier has the ability to really mainstream the powder segment similar to what it did to the ready-to-drink segment.

John Baumgartner: Okay. Great. And then as a follow-up, coming back to the promotional discussion for Premier ready-to-drink, the distribution points they’re up like 40% year-on-year, but the volume velocity is going down slightly even absent larger promo and advertising spending. Is there anything notable in terms of where these most recent distribution points have been accumulating or whether it’s non-price promotion, that’s elevating the volume more so than you would typically see as you build distribution?

Darcy Davenport: At most of the distribution gains on Premier are two-fold. So, one is the expanded breadth of the flavors. So getting some of the past flavors back on, but just continuing to expand. We have launched — now we launched chocolate chip cookie dough and first mass our seasonal flavors are really doing just incredibly well gathering a lot of the consumer excitement. The second piece is the up-sizes to 12 count in food and mass which have seen a lot more incrementality than we would have seen. So those distribution points are working harder because they’re bigger packs.

John Baumgartner: Great. Thanks for your time, Darcy.

Darcy Davenport: Thanks.

Operator: Thank you. One moment for our next question. Our next question comes from the line of Kaumil Gajrawala from Jefferies. Kaumil, please check your line. Make sure that you are not on mute. If your line is muted, please un-mute it or please rejoin using the commi feature. Our next question comes from the line of Matt Smith from Stifel.

Matt Smith: Hi. Good morning, Darcy and Paul. I wanted to ask a question about when you look at the sales growth outlook in fiscal 2024, how do you balance the rate of household penetration gains against upside to the annual buy rate? When we look at the buy rate, it implies a relatively low frequency of purchasing through the year. So are you looking at your promotional activity to drive frequency with existing users or more to bring new users into the Premier Protein brand?

Darcy Davenport: Both, actually, I think that what you saw in this last — if you look at the household penetration that was gained in this last year call it 25% that is really a result of both getting back to some light – is you saw household penetration pop in Q4 of last year. And then has continued. And that was a factor of bringing back some light promotions. And then — but it also — but then you also look at the buy rates in our supplemental that also increased. For the first time it’s been pretty steady throughout the last several years. But it popped up this last year. And that is a result of that kind of getting back into promotion. And especially, in our club account. So it’s really a combination of both. And that’s why we believe we’ve in promotion and it’s mostly because you get out of the aisle and you’d get new eyeballs, but then also people load up as well.

And we know that once this brand is in the household not only do people consume more, but more people in the household consume it. So it really is a combination.

Matt Smith: And Paul just a follow-up on the guidance outlook. The midpoint now suggests a slightly higher EBITDA margin. What’s supporting the higher margin? Is that additional volume leverage? Or do you have better line of sight into protein costs in the second half? Last quarter you talked about some supply ingredient tightness. Has that alleviated? Are you better covered now through the end of year?

Paul Rode: So we are slightly more covered than we were back in November. So we do have better visibility. We’re not fully covered at this point. So fourth quarter still have some open. But yeah, we’re a little bit more covered. As far as your question around margin you’re right. The midpoint is about 20 basis points higher. And it’s a combination of the two things you mentioned. So total leverage of G&A sort of the higher sales of being leveraged on the G&A line. And then just a little bit better visibility into the protein for the rest of the year. So those are the two main drivers. Nothing really dramatically has changed from our original guidance.

Matt Smith: Okay. Thank you. I can leave there and pass it on.

Paul Rode: Thank you.

Operator: Thank you. One moment for our next question. Our next question come from the line of Brian Holland from D.A. Davidson.

Brian Holland: Good morning. Darcy, you touched on Premier Protein ready-to-drink shake sitting with new two TDPs this quarter. Just curious any sense whether that incremental shelf space is coming from other competitors within ready-to-drink shakes or an adjacent category?

Darcy Davenport: I can’t speak to a mass retailer that reset in Q4. And we’ll call it may be indicative of others and it was a combination a not only higher set of convenient nutrition gain space. And but also the ready-to-drink and powdered segments gained space within effect. So bars actually lost space. And then within, kind of, ready-to-drink space, there’s always a shuffling around. And we’re seeing that performance nutrition and what we call everyday nutrition those are the parts of the ready-to-drink category that are really that are kind of booming where some of the others adult weight those are not doing this one.

Brian Holland: Appreciate the color. And then just curious, you gave some data points on January consumption trends for Premier Proteins within ready-to-drink shakes. Just curious, what you’re seeing from a competitive standpoint around resolution season, if there’s any change in promotional activity or anything of the sort? Is there anything noticeably different or incremental to this time last year?

Darcy Davenport: We are seeing – I mean it’s only a few weeks in. But I think that our business is moving. We are seeing more promotions, actually across the whole category. And actually, we saw it in Q1 as well, which was not normal to have promotions in that kind of October, November, December timeframe. So we are seeing some enhanced promotion, more so on – a little bit more so on the powder side of things but also on the ready-to-drink side. Saw a few people taking pricing within ready-to-drink this last quarter and then just consumption is just incredibly strong on ready-to-drink in January.

Brian Holland: Helpful. Thanks.

Darcy Davenport: Thanks.

Operator: Thank you. One moment for our next question. Our next question comes from the line of Jim Salera Stephens.

Jim Salera: Hi, guys. Good morning. Thanks for taking my question.

Darcy Davenport: Good morning.

Jim Salera: I wanted to ask – I think historically, you’ve mentioned on the ready-to-drink shakes like around 60% of the use occasions is breakfast like a meal – like breakfast replacement. As you’ve increased the number of households, has that use occasion kind of held steady or have we seen a different consumer that is maybe using it as a lunch replacement or as a supplement after workout? Maybe I’ll start there.

Darcy Davenport: The bulk of our concession is still breakfast. So that has stayed constant. One area – this is where innovation can help and even in flavors. So when we launch café latte for instance. That has the equivalent amount of caffeine as a cup of coffee. And so people started using that as a replacement for that kind of afternoon latte. So that’s an example where we purposefully use innovation to expand the occasion. But at the end of the day still the bulk of the consumption is a breakfast replacement.

Jim Salera: Okay. And then if I think about when I go through the store in my area, I’ve seen a lot of your products placed kind of in the middle of the aisle, as you’re walking through some of the main aisles. Obviously, highly visible, good place for an impulse purchase. If the product is kind of part of daily consumption and you’re seeing increase in household uptake. Do we think about that as being part of the display throughout the year and not just around kind of the New Year, New You season?

Darcy Davenport: For sure, for sure. I mean our focus – and our entire sales team is focused on getting display – quality merch is the focus because I mean and I said this earlier, but it’s less about sent off or TPRs that’s going to drive the business. But it’s the display, because it’s a mainstream product that has low household penetration and still fairly low awareness. And just buy — because protein is hot. It’s convenient. And you put it out in front — and you kind of put it out in front of people’s eyes and all of the sudden, they consider it. And so, I think that absolutely the goal is to get more display. Get our products out where they think about it. At the cash register in coolers and aisle and really increase the awareness of it.

Q – Jim Salera: Okay. Great. Thanks. I’ll hop back in the queue.

Operator: Thank you. One moment for our next question. Our next question comes from the line of Thomas Palmer from Citi

Q – Thomas Palmer: Good morning and thanks for the question. Maybe just follow up first on just the cost environment, as we think about the balance of this year. I think a quarter ago you kind of indicated the first half was expected to be more favorable. It sounds like you have visibility at least stretching through 3Q and maybe into 4Q. How does that favorability I guess, progresses when we think about the second half of the year?

Paul Rode: Yes. Again, our thoughts haven’t changed too much from the November guidance. So you’re correct that we expect more protein favorability in the first half, and then that starts to moderate as we go into the second half. What we’ve seen recently is, there’s been — it’s slightly favorable from where it was, but we’ve seen some puts and takes within the protein complex of some were up some were down. But that we still expect our favorability to start to moderate as we get into the second half. So cost will go up in the third and fourth quarter sequentially, as we go forward.

Q – Thomas Palmer: Okay. Thanks for that. And then I know you’d — you kind of answered on the promo flexibility or the commitment to it. What about marketing dollars? Because that is more back half-weighted. There is probably more of the element of discretionary I guess. Is there a thought of kind of flexing that bit, if demand is so high that you don’t really need the incremental demand to build? Or marketing decisions maybe more long-term oriented where that ‘s not as much of a consideration, as you think about this year?

Darcy Davenport: We definitely have more flexibility on marketing because yes, it’s in our control. We are already supporting our powder side of the business, as well as we are doing some support around bottle because and we don’t have constraints there. So — but as for kind of the broader equity support around the Tetra side of the business, which is the lion’s share, we do have our flexibility. We’re currently developing our campaign that we plan to launch in Q4. And as you guys know the impact of marketing isn’t always immediate. It’s more of a long-term play. So we’ll make those decisions later and that we usually — you usually have to make those decisions within kind of couple of months of launch. So, we have a little time to evaluate if we’re going to launch as expected maybe go a little lighter or wait.

Thomas Palmer: Okay. Thank you.

Operator: Thank you. Bryan Spillane Bank of America.

Bryan Spillane: Hey thanks operator. Good morning everyone. I think just a couple of quick ones for me. Really for you Paul is one just I guess as we’re thinking about the cadence on pricing. Will it — like just whether Q2 would be down the most I guess of the quarters for the balance of the year? Just if you can give us some sense. Even just at a total company level how we’re thinking about the cadence on pricing over the balance of the year?

Paul Rode: Yes absolutely. The second quarter should be the biggest impact for pricing as we have significant promotions going on in most of our channels. So, that would certainly be the biggest pricing headwinds from — as we go through the quarters. The rest of quarters are fairly balanced. Slight headwinds, but that’s really the second quarter where it’s the most meaningful.

Bryan Spillane: Okay. And is this year — should this be a pretty good year as we’re kind of modeling the out years and thinking about the timing of promotions. There is some seasonality. Is this sort of a normal years we’re beginning to kind of do the out — model the out years in terms of just the flow of promotions and the seasonality in the business?

Paul Rode: Yes. As we go forward, we’d expect the second quarter will always be kind of the heaviest period as that’s just when a lot of consumers come into the category. So, yes, we expect the second quarter is typically the heavier promotional period. The fourth quarter is kind of the next. We don’t typically promote much in the first quarter as a seasonally low consumption period. And then the third quarter is kind of somewhere in between. Not usually a lot of promotion in the third quarter. I’d say the only difference from how this year is playing out is we typically also spent heavier marketing behind our shakes. In the second quarter, we are not doing that as we’ve talked about earlier on this call with just as we’re continuing to manage supply and demand. But we do expect it to ramp up in the fourth quarter. So, that’s the only difference. But from a promotional calendar, yes, it’s primarily due to a bit in Q4 than in Q1 and Q3 are typically fairly light.

Bryan Spillane: All right. Cool. And then just one last one. Just I think you said earlier that 2Q SG&A as a percentage of sales is going to be higher. I’m just wasn’t sure is it higher than the first quarter, higher versus last year? I just wanted to clarify that.

Paul Rode: Yes, the comment was higher than last year.

Bryan Spillane: Okay. Year-over-year percentage as a percentage of sales it will be higher this year than last year?

Paul Rode: Modestly higher, correct.

Bryan Spillane: All right, cool. That’s it for me. Thank you.

Paul Rode: Thank you.

Operator: Thank you. Our next question comes from the line of Bill Chappell from Truist Securities.

Bill Chappell: Thanks. Good morning.

Darcy Davenport: Thank you.

Bill Chappell: Darcy just cannot get arms around where we go from here and in terms of household penetration. And for ready-to-drink shake you said Premier’s now at 17%, which is almost one in five households. And some would say not one in five households actually eat breakfast each morning. So, if you look at the next kind of eat points getting 25%. Does that come from bar users? Does that come from energy drink users? Does that come from lunch or dinner? Or is — do you see a lot of kind of backfill of each households who are in the 17% are having two shakes a week, need to go to three shakes or four shakes or five shakes. So, how do you see that going to play out over the next few years?

Darcy Davenport: I mean historically, about 80% of our growth is coming from outside of the category. So, I’m not sure I can tell — when I say outside of the category, I mean outside of the convenient nutrition category. So these are people who are trying to make a better decision and trying to be healthier. And so, whether they drink energy, drinks or not. It’s just outside of the category. And then and in that — I mean we believe that there is a ton of upside. I mean you look at the household penetration just the category and of liquids are ready-to-drink about 45%, bars is about 54%, energy drinks is 69%. So, I think that — and most mature CPG companies are up in the 80% to 90%, some even higher. So we think that there’s a ton of room to grow within just adding people given all the macro trends that are going on around protein is good for you, healthy eating convenience.

And not even to mention everything going on with GLPs. So we think there’s a ton of tailwinds more people leaning into the category and we’re positioned well.

Bill Chappell: Okay. And then just — again, I know you explained this before, but the importance of the tetra packaging, because I mean I think you just said on the last one, obviously you don’t have capacity constraints on the bottles. And so why would not just go all bottles? Help us understand the importance of that on the packaging and into the brand into the story?

Darcy Davenport: Well, part of this just numbers. So, if you think of — and when I say we don’t have to have capacity constraints on bottles. The overall network of bottles is constrained. But I mean bottles are 10% of our business. So it’s virtually impossible to convert the entire business to bottles. There just isn’t enough. We find that our consumer really likes the tetra pack, another also consumers that like bottles. So I think that it’s less about what’s important is what’s inside the bottle — what’s inside the package. And I think that, so it’s less about we will get to — we have invested in our tetra pack network. And I feel like we are in kind of sitting distance to be unconstrained, which I think we expect that by the time we get into 2025, we will be managing to a demand number and not a supply number. So again, I think that they both have their place but our consumers consistently stated that they do like the tetra.

Bill Chappell: Great. Thanks so much.

Darcy Davenport: Thanks.

Operator: Thank you. One moment for our next question. Our next question comes from the line of Matt McGinley from Needham.

Matt McGinley : Great. Thank you. With your seasonal flavors and Premier, do you expect to see more seasonal ebbs and flows in TDPs and ACV related to those limited time flavors, and overtime would you expect the shipments related to the seasonal flavors to create a little more seasonality in your sales volumes? Or do you think your core SKUs really just pick up a slack whenever those seasonal flavors get depleted at your customers?

Darcy Davenport: What’s great about our seasonal strategy now is we have one for every season. So in essence, it’s just a rotating spot, and consumers get excited. So we basically go from Pumpkin’s Spice or beginning the winter mint chocolate to a summer seasonal. It was [indiscernible]. And it’s now salted Caramel Popcorn. It then goes into Pumpkin Spice and then rotates around again. So the idea is that we in essence always have a seasonal flavor out there, although what that flavor is may change.

Matt McGinley : Got it. And last quarter, you noted that your the biggest factor for you to hit the high end of your guidance would likely be the timing of production. Is the timing of ramp production capacity? Is that still the critical factor to reach the high end of your new guidance? Or is the high end of the guidance now more contingent upon the effectiveness of marketing or promotion that you just might have less visibility into?

Darcy Davenport: Steel production scale-up.

Matt McGinley : Okay. Thank you very much.

Darcy Davenport: Thank you.

Operator: Thank you. One moment for our next question. Our next question comes from the line of Kaumil Gajrawala from Jefferies.

Kaumil Gajrawala : Do you hear better now? You guys hear me now?

Darcy Davenport: Yes. We hear you.

Paul Rode : Yes.

Kaumil Gajrawala : Okay. Sorry about that last time. I want to talk — you maybe not so quietly been talking about being the powder side. It seems like every very time we chat, you’re talking about it a little bit more. Can you maybe just talk about the differences in the consumers that you’re bringing in on powder, how it interacts with the core product? Maybe anything on incrementality. Any more color there would be helpful.

Darcy Davenport: Yes. Ready-to-drink in powders are very complementary. For the most part, one is a little bit more on the go, being ready to drink. The other one powder is used mostly in the house. And then just from an occasion standpoint, I talked about the occasion for the most part of ready-to-drink is a breakfast replacement, whereas powders are more used after a workout. The consumer also can be — most powders are going more toward the athlete. However, that’s the opportunity for Premier is really bringing in those mainstream consumers. The other piece is powders are more often used with other foods, so making smoothies or throwing it in pancakes to make a high protein pancake or as ready-to-drink are used that way, usually just consumed right out of the Tetra of the bottle, because very complementary.

Kaumil Gajrawala : Okay. Understood. And then on convenience stores, a small piece of the rollout stores as a distribution story. Have you thought about are there opportunities to find the DSD partner or some other partner that can really sort of step distribution up enough in a much more meaningful way?

Darcy Davenport: Yeah. So convenient just to put it in perspective, when you look at all of the retail sales of our RTDs, the entire category, convenience represents about 10%. And so the channels we compete in are around 90% of the retail sales. We still believe that you know our especially Food, Mass, eCom are very underdeveloped. And it’s also where our target consumers shop. So as we go through all of the opportunities for this brand and we rank them, convenience is just lower. It’s still an opportunity, but it is just lower. And it’s lower because of a, the size of the opportunity, and the cost and the complexity of it. You talked about a DSD partner, which we would need. So these are areas where it is in the long-term plan. But we see a lot of other opportunities that are currently bigger and can accomplish our goals. And like I said, we’re in 90% of the category already.

Kaumil Gajrawala: Got it. Thank you very much.

Darcy Davenport: Thanks.

Operator: Thank you. At this time, I’m showing no further questions. This concludes today’s conference call. Thank you for participating. You may now disconnect.