BellRing Brands, Inc. (NYSE:BRBR) Q2 2024 Earnings Call Transcript

BellRing Brands, Inc. (NYSE:BRBR) Q2 2024 Earnings Call Transcript May 7, 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 Second 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’ second 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 the remarks are posted on our website in both the Investor Relations and 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 second quarter results and posted a supplemental presentation to our website. I’m happy to share that we had an excellent first half, with Q2 results above our expectations. The business continues to accelerate as we bring on new shake capacity and begin to drive demand. For the first time since 2021, we executed two successful club promotions in one quarter, which sparked a ton of consumer and retailer excitement. Net sales grew 28% over prior year and adjusted EBITDA was up 53%. Our greater-than-expected shake demand, specifically non-promoted, drove the net sales and adjusted EBITDA margin outperformance. As you saw in yesterday’s press release, we raised our outlook for the year.

We now expect net sales to grow 16% to 19% over fiscal 2023 and adjusted EBITDA to grow 18% to 24%. This raise at the top and the bottom line was based on better-than-expected first half performance, strong consumption trends, confidence in our capacity expansion, and our decision to execute a price increase on shakes late in Q4. Moving to shake production. We have made remarkable progress in our plan to grow and diversify our shake supply. We are making more shakes every quarter, with Q2 production coming in as expected and up significantly versus the year-ago 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 by year-end. Now to the category and brand updates.

The convenient nutrition category grew 5% in Q2 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, with mainstream ready-to-drink brands driving most of the growth and bringing new households into the category. RTD led the category, up 10%, driven by promotions and distribution gains. Ready-to-mix grew 3%, slowing this quarter as consumers traded down to value brands and switched to other high protein products, including RTDs. Despite this change in consumer behavior, our powder brands still outperformed the tracked category. Premier Protein shake consumption growth remained strong this quarter at 29%. Growth was robust across all channels in Q2, driven by promotion, strong velocities, and distribution expansion.

The highest growth was in mass and e-commerce. Mass benefited from display activity and distribution gains, while e-commerce saw strong growth behind promotional events. The club channel, boosted by successful promotions at both of the major club retailers, drove healthy volume lifts and household penetration. April consumption remained strong, up 16%, despite some out-of-stocks in tracked channels. Flavors continue to drive retailer and consumer excitement. Our newest 30-gram flavor cookie dough is performing well, with top 10% velocities in mass. Our seasonal flavor, salted caramel popcorn saw solid success. Our brand metrics remain healthy. Premier Protein, with RTD market share of 21%, maintained its top position as the number one brand in the RTD segment as well as the number one in the broader convenient nutrition category.

TDPs grew 33% over the prior year quarter, but saw a slight sequential decline. With shake supply remaining tight and demand greater than expected this quarter, we experienced some temporary out-of-stocks late in the quarter and into April. Retailer inventory levels are starting to improve, with TDPs stabilizing, and we expect further improvement throughout the second half. I’m pleased to see the brand reach another all-time high in household penetration this quarter, reaching over 18% of households. Premier Protein added 1 percentage point of household penetration versus Q1 and grew 26% over prior year. As of Q1, the brand was 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 modest growth in the remainder of fiscal 2024.

With the RTD segment’s household penetration 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 52% in Q2 behind brand investments, distribution gains, and strong velocities. We remain encouraged by the growth potential of the Premier Protein brand in this format. Premier powders continue to bring mainstream consumers into the category with 80% of its growth coming from outside the category. Its household penetration reached 1.7% this quarter and we continue to believe the brand will be a contributor to mainstreaming the powder category in the same way Premier did for the ready-to-drink category. Our licensing strategy continues to perform well with cereal and frozen pancakes attracting new consumers to the brand.

Although not a significant revenue driver, these two products boost Premier’s overall household penetration to 19% or nearly one in five households. Turning to Dymatize, US consumption remains strong in mainstream FDM channels, but overall consumption declined 8%, weighed down by ongoing softness in specialty channels and increased competitive activity in e-commerce. Despite these headwinds, I’m encouraged to see the brand maintain its record high household penetration with TDPs and share holding steady. Looking forward, we are increasing our investment behind the brand, both in marketing and promotion. We are excited to expand our national marketing campaign with San Francisco All-Pro running back Christian McCaffrey. We are eager to see the impact that enhanced digital marketing and a top tier influencer will have on the brand awareness and household penetration.

Last, we are putting the final touches on innovation that will expand Dymatize’s product line. Overall, we continue to be bullish on the mainstream powder opportunity with two complementary brands. In closing, our excellent first half results position us well for an above algorithm fiscal year. Our confidence in the long-term outlook for BellRing remains strong. Our brands are leaders in the highest growth areas of an on-trend category. Ready-to-drink and powder segments are in the early stages of growth, with major tailwinds. Premier Protein and Dymatize are leading mainstream brands with low household penetration and strong loyalty. Our momentum continues to grow on shakes as we start to layer in promotion. Our shake capacity plan is on track to support many years of robust growth.

I’m excited to see the momentum continue into 2025 as we layer in more innovation and national marketing. Thank you for your interest in our company. We look forward to sharing our progress next quarter. I’ll now turn the call over to Paul.

Paul Rode : Thanks, Darcy. Good morning, everyone. Net sales for the quarter were $495 million, up 28% over prior year, above our expectations with strong demand for Premier Protein shakes, the biggest driver of the outperformance. The adjusted EBITDA was $104 million, an increase of 53%. Adjusted EBITDA margins were 21% and also exceeded our expectations, benefiting from favorable gross margins and leverage on higher net sales. Starting with brand performance, Premier Protein net sales grew 34% behind strong volume growth for RTD shakes and powders. Promotional activity, distribution gains, and organic growth drove the increase in net sales. Shake consumption dollars grew 29% compared to shipment growth of 34%, with the difference driven primarily by the lapping of a prior-year trade inventory deload.

Dymatize net sales increased 5% this quarter as the brand benefited from increased distribution and promotional activity in domestic mainstream channels along with international strength. These gains were partially offset by continued weakness in the specialty channel and increased e-commerce competitive activity. Gross profit of $164 million grew 40%, with an increase in gross profit margin of 280 basis points to 33.2%. The margin increase resulted from net input cost deflation, partially offset by incremental promotional activity. Compared to our expectations, gross margins benefited from greater-than-expected non-promoted volume and non-recurring cost favorability. SG&A expenses as a percentage of net sales were 14% and roughly flat to prior year.

Advertising and promotion spending increased $3 million, but was flat as a percentage of net sales at 3.1%. Before reviewing our outlook, I would like to make a few comments on cash flow and liquidity. We generated $16 million in cash flow from operations in the second quarter and $90 million in the first half. We expect net working capital growth in fiscal 2024 to modestly exceed our net sales growth rate as we add weeks of shake supply in the second half. As of March 31, net debt was $761 million and net leverage was 1.9 times. With our EBITDA growth and strong cash flow generation, we anticipate net leverage will remain below 2 times in fiscal 2024. With respect to our share repurchases this quarter, we bought 400,000 shares at an average price of $56.46 per share, or $23 million in total.

Our remaining share repurchase authorization is $289 million. Turning to our outlook, we raised our fiscal 2024 guidance for net sales to be $1.93 billion to $1.99 billion and adjusted EBITDA of $400 million to $420 million. Our guidance implies strong top line growth of 16% to 19% and adjusted EBITDA growth of 18% to 24%, with healthy adjusted EBITDA margins of 20.9% at the midpoint. The updated guidance reflects our better-than-expected first half results and strong consumption trends. In the second half of fiscal 2024, product and logistics costs are expected to increase compared to the first half, with pricing actions on shake planned late in the fourth quarter. At the midpoint, our second half net sales are expected to grow 13%, with adjusted EBITDA margins of approximately 20%.

As we enter the second half, we have largely lapped the relaunched shake flavors and expect sales growth to be driven by continued organic momentum and distribution gains. Compared to the second half of fiscal 2023, we expect EBITDA margins to be similar. Turning to the third quarter, our net sales growth is expected to largely track our second half growth rate. Premier Protein drives this growth as volumes are expected to increase in the mid to high teens. Dymatize partially offsets Premier’s strong growth, with the brand facing a tough prior year comparable in Q3 as it laps a club load-in in FDM display activity. Adjusted EBITDA margins are expected to improve modestly from the year-ago quarter, with significantly higher gross margins as we lap peak protein prices.

This increase is mostly offset by incremental marketing spend and SG&A as a percentage of net sales. In closing, we’re pleased with our first half momentum. Our strong first half 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: [Operator Instructions]. Our first question comes from the line of Ken Goldman from J.P. Morgan.

Ken Goldman: I think you mentioned that non-promoted sales of Premier did quite well this quarter too. And I’m just curious if I heard you right there, what do you attribute the acceleration kind of in those base products to, in light of how well the promoted products did at the same time? Is there a natural correlation between the two just in terms of new generation or am I playing that up too much in my head?

Darcy Davenport: What has been true and what continues to be true is about 80% of our growth comes from outside of the category. So we continue to get a ton of new households into the category, showed on our all-time high of household penetration this quarter, and the 1 point jump up. In general, the more we ship, the more we sell. And we really haven’t had healthy fill rates in FDM yet. And so, honestly, this quarter was – we thought strong promotions in our two club customers. Pretty much what we expected to see, but what was higher was actually the non-promoted in pretty much all channels outside of those promotional periods.

Ken Goldman: As we think about the guidance raise and we look ahead toward the upper end of that range, is there potential? And I’m not trying to fish for even higher guidance than what you’ve already looked at, but I’m just trying to get a sense of it. If there is demand there, how much above sort of the high end of your sales guide could you potentially get to, just given some of the capacity constraints that have been mentioned so far?

Darcy Davenport: We have production that can absolutely satisfy the full range of our guidance, obviously. As I’ve said on past calls, we do not have enough internal inventory. We need to build safety stock. However, toward the end of the year, we plan to get up to our target of six to eight weeks. If demand continues to be robust, then we have the flexibility to toggle between building more inventory versus going and satisfying sales. So, I think we’ve always said that we’re going to be nimble this year just because of the that we are building safety stocks, internal inventory. But rest assured that we have the production to satisfy the high end, our full guidance. And then we’re going to have to just assess the situation in Q4 to see if we’re going to build inventory or satisfied if there’s more demand than expected.

Operator: Our next question comes from the line of David Palmer from Evercore ISI.

David Palmer: It was obviously a pretty dynamic quarter with some of the ramp up and promotion mix with the two club promotions. But at the same time, you had the strong gross margins, so I wanted to kind of double click on those two things. What were some of the learnings, both in and out of expectation, from the increase in merchandising from the quarter? And I know you mentioned the two, I was wondering if that meant that was unusual or if this is pretty close to the norm that you would expect in terms of the impact of price mix from promotional activity in the upcoming quarters.

Darcy Davenport: I’ll start with learnings and then you can hit on any price mix. So the learnings from the promotion, so, remember, we haven’t done really any significant club promotions or promotions at all since 2021. So it’s been a while. So we weren’t exactly sure what to expect. Honestly, there was a ton of excitement. I’ve talked about this before. The key for our success on promotion is display. Get out of the aisle, get new people to see our product. And that is where we increase household penetration. We get the bump and stick for the brand. It has been true for the entire time this brand has been around. So, sure enough, that is exactly what happened. We got great displays and a ton of retailer support for the events and that flowed straight into strong results. So I would say, I don’t think it’s a lot of new learnings but more confidence that the fundamentals of the brand are very much intact and there’s a ton of excitement from consumers and retailers.

Paul Rode: And on pricing, we always expected the second quarter to be the most significant headwind on pricing because of the significant promotional activity that we were doing on shakes. As we entered in the second half, we still expect some light promotion in Q4 on shakes. But really from a pricing perspective, it’s pretty balanced in the rest of the year. We aren’t expecting major headwinds or tailwinds in any given quarter on pricing. As we get late in Q4, we are modeling a light benefit in the fourth quarter on pricing, but again, it’s late in the quarter, so it’s a pretty modest benefit. It’s more about 2025, but net-net, not a lot of – at least on the shakes, not a lot of pricing really impact there.

David Palmer: On the gross margin, the 300 or so basis points expansion there, how would you describe that, maybe build up to the 300 basis points in the quarter, and how should we think about that going forward?

Paul Rode: And your question is compared to a year ago.

David Palmer: Around gross margins. I think if you had to – I know it’s hard to break out specifically how many basis points are due to each thing, but if you had to talk about commodity price mix and then volume leverage, net of promotions, how would you think about the gross margin expansion this quarter and then how does that apply to the second half?

Paul Rode: From a gross margin perspective, significant expansion was from lower protein costs. So, as you may recall, last year, we had very high protein costs, especially on our powder business in Q2 and then into Q3. So, if you think of last year by quarter, the second and third quarter were by far the highest protein cost. And then in the fourth quarter, they started to pull back, which is why you see stronger gross margins in our fourth quarter a year ago. So as you look at Q2 specifically, significant expansion at the gross margin line that’s partially offset by significant promotion offsetting that. We also saw about 50 basis points of favorability from what I would call just some non-recurring items. So co-man true-ups, payments for missing on minimum volumes, that’s about 50 basis points, but most expansion is just protein costs offset by promotion.

Operator: Our next question comes from the line of Thomas Palmer from Citi.