BellRing Brands, Inc. (NYSE:BRBR) Q4 2022 Earnings Call Transcript

BellRing Brands, Inc. (NYSE:BRBR) Q4 2022 Earnings Call Transcript November 18, 2022

Operator: Welcome to BellRing Brands Fourth Quarter 2022 Earnings Conference Call and Webcast. Hosting the call today from BellRing Brands are Darcy Davenport, President and Chief Executive Officer; and Paul Rode, Chief Financial Officer. Today’s call is being recorded and will be available for replay beginning at 1:30 p.m. Eastern Time. The dial-in number is 800-839-2461. No pass code is required. At this time, all participants have been placed in a listen-only mode. It is now my pleasure to turn the floor over to Jennifer Meyer, Investor Relations of BellRing Brands for introductions. You may begin.

Jennifer Meyer: Good morning. And thank you for joining us today for BellRing Brands fourth quarter fiscal 2022 earnings call. With me today are Darcy Davenport, our President and CEO; and Paul Rode, our CFO. Darcy and Paul will begin with prepared remarks, and afterwards, we will 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 sections of 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.

Binh Thanh Bui/Shutterstock.com

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 fourth quarter and fiscal 2022 results and posted a supplemental presentation to our website. Fiscal 2022 was a transitional year for BellRing Brands. As a result of our outsized growth in 2021, we spent fiscal 2022 laying the foundation and gearing up for the future. We made significant progress in our shake capacity expansion plan to grow and diversify our supply and deepen our competitive moats. Lastly, our organization invested in consumer and category insights, prepared plans to restart marketing and promotion and created a robust innovation pipeline. The work done in fiscal 2022 sets us up for a strong 2023 and beyond. Now to the quarter results, Q4 net sales came in at $379 million, 12% over prior year.

However, this was below our expectations as a result of a production shortfall from our new bottle co-manufacturer, a delayed load-in to the e-commerce channel and an expansion of the previously announced shake recall. Overall, the recall was immaterial to our business, but it led to shelf disruption that uniquely impacted Q4. Fiscal 2022 saw our net sales grow to $1.37 billion, up 10%. Our profit trajectory remained extremely healthy with adjusted EBITDA growing 16% to $271 million and adjusted EBITDA margins at the top end of our long-term algorithm. Paul will go into more detail on the quarter, but I am incredibly proud of the team for delivering these results given the challenges we encountered throughout the year. Premier Protein brand continues to demonstrate strength and resilience.

As a reminder, in November 21, we announced a plan to intentionally dampen shake demand while we expanded our co-manufacturing network. We reduced our full-time shake portfolio from 14 to seven flavors, temporarily turned off promotion and marketing, and still sold every shake we could produce. These supply constraints have made our year-over-year volume trends a bit confusing. In the fourth quarter of 2021, we significantly and unsustainably reduced inventory as a result of our high promoted volumes outstripping our capacity. In Q4 2022, we have limited flavors and did not repeat the promotions, because we did not have the inventory. Nonetheless, consumption declined only 5%. During fiscal 2022, a better measure of brand momentum is our sequential dollar consumption, which grew each quarter.

Starting in fiscal 2023, we no longer — we are no longer lapping heavy promotional periods, with October consumption dollars back to growth, up 16% versus prior year. And with all key measures for Premier Protein remains strong and reaffirm our long runway for sustained growth. According to our most recent brand equity study, Premier Protein remains the number one Brand I love, the number one brand I would pay more for and has the number one Net Promoter Score in the category. Our consumption results support these measures with non-promoted volume in 2022 increasing, clearly showing that our consumers are willing to pay more for Premier Protein. The power of the brand comes through in velocity as well. Premier holds fur of the top — of the RTD category’s top highest velocity items in tracked channels.

In fact, at one of — at a key mass customer, Premier holds nine of the top 10 items. Also penetration is the only exception to a landscape of bright performance metrics. With Premier Protein’s pullback in flavors, promotion and marketing, we have seen the overall shake category, as well as our brand decline in household. However, our buy rate has risen, signifying our loyal, high value buyers are staying with us, while we are temporarily losing occasional deal seeking buyers. We fully expect household penetration to rebound once we have reintroduced our full portfolio and restart promotion and marketing. As we enter 2023, our trade inventory levels have improved. However, some retail partners are still below target. Based on our current capacity ramp-up plan, we will focus the first half of 2023 on rebuilding these remaining retailer’s inventory levels, so we can get back to full shelves and pallets everywhere.

Now to shake capacity, last November we outlined a plan to aggressively add capacity for our shake business and we have made significant progress. In fiscal 2022, we added three co-manufacturers and signed agreements with an additional three that will start up in fiscal 2023. As you may recall, the big step up in production happens in Q4 2023 when our two dedicated greenfield facilities come online. Consequentially, their benefit will not fully be realized until fiscal 2024. As you would expect, adding this much capacity has not been without its challenges. In addition to the July recall at one of our smaller co-manufacturers, Q4 production scale up at our new bottle co manufacturer has been slower than anticipated, which didn’t allow us to drive the expected growth in the e-commerce channel.

The good news is that our production is growing with second half production significantly increasing versus the first half. We expect low double-digit production growth in fiscal 2023. In 2024, with the additions of the dedicated facilities, we expect to add north of 20% incremental capacity on top of the 2023 volumes. This year, we have laid the foundation for many years of robust shake growth. Turning to Dymatize. The brand had a terrific quarter, with consumption dollars in the U.S. up 32% across tracked and untracked channels. We saw strong growth — we saw strong double-digit growth in all key channels except for club where we temporarily lost distribution. The momentum has continued in October, with consumption up 44%. A return of marketing and promotions drove this growth with sales lifts exceeding our expectations.

Equity metrics are incredibly strong with Dymatize, being the number one high quality brand and number two Brand I love among powder brands. Lastly, Dymatize’s expanding distribution in mainstream accounts adding 21% more TDPs this quarter, which are now at an all-time high. Moreover, with only 35% ACV today, Dymatize has a ton of room to grow future distribution, which is a major organizational focus this year. Now to our outlook. As you saw in yesterday’s press release, we expect fiscal 2023 net sales to grow between 14% and 20%, and adjusted EBITDA to grow between 11% and 20%. The sales guidance is above our long-term algorithm, reflecting our pricing actions and lapping capacity constraints in 2022 as shake volumes return to growth. We expect to begin driving demand in our Premier Protein shake business again this year.

Our current plan is to start reintroducing our temporarily discontinued flavors midyear and restart marketing and light promotion in the back half. Obviously, these decisions depend on the demand and supply dynamic and we will remain nimble so we can navigate effectively. In closing, we believe we have many strong growth years ahead of us. Our high growth category continues to accelerate above historic mid single-digit growth rates with strong macro trend tailwinds. We now have two powerful growing mainstream brands transforming the category and gearing up to innovate, market and promote again. Since our 2019 IPO, we have delivered a 17% revenue CAGR and an 11% adjusted EBITDA CAGR, outperforming our long-term algorithm, despite the COVID-19 pandemic and major supply chain disruptions.

We are well along in our shake capacity expansion plan. We are a rare combination of scale, organic growth, strong margins and high free cash flow generation. Given our asset-light model, we will have significant cash flow to delever rapidly. Lastly, BellRing has a nimble, collaborative culture that will continue to fuel its success for years to come. We remain confident in our long-term outlook for BellRing and look forward to demonstrating our success. Thank you for your continued support. I will now turn the call over to Paul.

See also 11 Best Penny Stocks To Buy and 11 Best Recycling Stocks To Buy.

Paul Rode: Thanks, Darcy. Good morning, everyone. Net sales for the quarter were $379 million and adjusted EBITDA was $80 million. Net sales grew 11.5% over prior year and adjusted EBITDA increased 32% with adjusted EBITDA margins of 21.1%. Net sales in the quarter lagged expectations, driven primarily by production shortfall in bottles, a delayed load into the e-commerce channel and shelf impact from the expanded recall. We were able to more than offset the net sales mix on the adjusted EBITDA line through efficiencies in freight and logistics, as well as modest benefits from lower protein costs. Premier Protein net sales grew 9%, driven by higher average net selling prices, which contributed 18% to overall growth, offset partially by a 9% volume decline.

Premier Protein RTD shake volumes declined 9% as we lapped prior year promotions and a temporary reduction in available flavors. These headwinds were partially offset by increased baseline volumes. Dymatize net sales grew 32% compared to a year ago, benefiting from higher net pricing and favorable product mix, offset partially by lower volumes. ISO100 had a great quarter with sales of 63% on higher volumes, benefiting from distribution gains and the category momentum. These gains were partially offset by volume declines for the remainder of the Dymatize portfolio as a result of lapping discontinued products. We made the strategic choice to simplify the business with a core focus on ISO100, our flagship product. As a result, we exited certain Dymatize products, which caused volume headwinds in the quarter.

This is expected to remain a volume headwind to the first half of fiscal 2023. Gross profit of $122 million grew 27% with gross margins of 32.3%, up 410 basis points as our pricing actions offset significant inflation. In addition, we lapped a prior year period that included a significant promotion, supply chain inefficiencies and protein inflation ahead of pricing. Excluding one-time items, SG&A expenses increased $9 million compared to last year. As a percent of sales, SG&A increased 120 basis points, largely reflecting the return to marketing for Dymatize. Turning to full year 2022 results. Net sales were approximately $1.4 billion, up 10% over the prior year, with gross profit of $422 million growing 9%. Gross profit margins were largely flat year-over-year as our pricing actions and promotional pullback offset double-digit inflation.

SG&A expenses were $190 million and excluding one-time items, increased $5 million compared to last year. As a percent of sales, SG&A improved 80 basis points, driven primarily by reduced marketing spend as we manage demand on Premier Protein shakes. Adjusted EBITDA increased 16% to $271 million with a margin of 19.8%, an increase of 100 basis points. Before reviewing our outlook, I would like to make a few comments on cash flow and liquidity. We generated $10 million in cash flow from operations in the fourth quarter and $21 million for the year. As a reminder, we started the year with low inventories on both our shake and powder businesses, which fueled outsized cash flow in fiscal 2021. In fiscal 2022, we saw the opposite effect as we built inventory, primarily Dymatize powder and raw materials, resulting in lower than typical free cash flow compared to historical rates.

Fiscal 2023, we expect shake inventory growth to be largely offset by reductions for our powder and raw material inventories. As a result, we expect to generate much stronger cash flow in fiscal 2023 and be more in line with our historical EBITDA to cash flow conversion rate. During the quarter, we repurchased 1 million shares at an average price of $23.20 per share, 800,000 of which were purchased in connection with a secondary offering of shares previously held by post. For the fiscal year, we purchased 1.9 million shares at an average price of $23.34. Our remaining share repurchase authorization is 25 million. As of September 30, net debt was $903 million and net leverage was 3.3 times, down 0.7 times from the pro forma spin-off closing target of 4 times.

With our expected EBITDA growth and return to strong free cash flow generation in fiscal 2023, we anticipate net leverage to be lower than 2.5 times by the end of fiscal 2023. Turning now to our outlook. We expect fiscal 2023 net sales of $1.56 billion to $1.64 billion and adjusted EBITDA of $300 million to $325 million. Our guidance implies strong topline growth of 14% to 20% and adjusted EBITDA growth of 11% to 20% with healthy adjusted EBITDA margins of 19.5% at the midpoint. We expect double-digit sales growth for Premier Protein and Dymatize as both benefit from higher net selling prices and increased volume. Sales are expected to sequentially grow after the first quarter as RTD shake production increases. Volume growth for Premier Protein RTD shakes is expected to be driven by continued category tailwinds, the re-launch of temporarily discontinued flavors and the restart of marketing promotions to drive demand.

We expect volume headwinds in the first half at Dymatize as we lap the exit of discontinued products with stronger volume growth in the second half. We continue to experience significant inflation on dairy proteins and executed an additional price increase on our Premier Protein RTD shakes in October. This increase is expected to offset inflation resulted in strong gross margins in the first quarter, with lower gross margins on a sequential basis as protein costs step up. We expect adjusted EBITDA dollar growth to be weighted modestly toward the first half of fiscal 2023, which has a greater benefit from pricing actions, while the second half of 2023 has higher inflation and incremental brand building investments. Turning to our first quarter forecast.

We expect low double-digit net sales growth compared to prior year, with adjusted EBITDA growth outpacing the topline growth. Through Q2, pricing continues to be the primary sales growth driver compared to prior year. We expect first quarter adjusted EBITDA to grow significantly from prior year, driven by increased net sales and margin expansion. Gross margins are expected to benefit from higher net selling prices offsetting inflation, as well as lapping prior year supply chain inefficiencies and protein inflation ahead of pricing. In closing, we are pleased with our performance this year despite a tough environment. We are emerging stronger and our momentum is growing heading into 2023. I will now turn it over to the Operator for questions.

Q&A Session

Operator: We will take our first question from Ken Goldman with JPMorgan.

Ken Goldman: Hi. Thank you very much. I wanted to focus a little bit on Dymatize. I am just curious a little bit more — if we could get a little bit more information about the decision perhaps to focus on the ISO100 variety, what’s driving that decision? And then I also wanted to ask as a follow-up, I guess, typically, when a product is no longer sold in a channel at all, it seems like Dymatize had zero sales to club this quarter. That’s usually the customer’s decision, not the producers. So if it was your decision to exit club, why? Why not just sell ISO100 to that channel versus what you may have been selling there? I am just trying to get a little better sense of the dynamics there? Thank you.

Paul Rode: Good morning.

Darcy Davenport: Hey, Paul, why don’t I answer the club and then we will — I will let you answer the ISO100 and you add decision focus. So on the club on Dymatize, it was not our decision to discontinue it. The club retailer — when we took significant pricing on Dymatize as a result of the rapid inflation, the club retailer decided to — was not happy about the increases in price and decided to discontinue it. It was not because of performance. Actually, Dymatize was the number one item in his set for powder, but he just — they weren’t happy with the price increase. They have reversed that decision and we are actually getting it back in. So it was a temporary discontinuation. But it was not our decision.

Paul Rode: Yeah. Just to add on that. So from a volume headwind, that discontinuation is certainly a part of it, but the discontinuation of flavors and products is a bigger piece. So let me touch on the why. So ISO100 has always been the flagship brand for Dymatize. As we — as I mentioned in my prepared remarks, we came into the year on the lower side of inventory and so we made some decisions to focus on ISO100, but also to take out some of the smaller sub-brand, and in some cases, just flavors, so that we could focus our resources and our — and growing ISO100. It allowed us to — if you go back, protein was also a little tight back last year and so it allowed us again to focus on specific SKUs and products. We discontinued a number of, I will call them, lower value products, and in some cases, some flavors, which we will bring back in fiscal 2023, but it is a headwind to the Q4, as well as into the first half of the year.

Darcy Davenport: Yeah. Think of this as a kind of difficult SKU rate . However, it was a little bigger than normal just because of the long tail on the Dymatize business, but the small SKUs that needed to be cleaned up.

Paul Rode: And it has an outsized impact to volume, because the ISO100 is a high dollar per pound product, and a lot of the other products are lower dollar per pound. So the volume impact is outsized compared to the sales because ISO is a two-thirds to 75% of the overall business. So it just has an outsized effect the volume.

Ken Goldman: Got it. That’s all very helpful. If I can just tie a bow on that, so putting or adding one plus one, is it fair to say that you are getting the product back into club in the second half of the year? I just want to get a sense of the timing on that recovery there.

Darcy Davenport: It should be in — for Q2.

Ken Goldman: Great. Thanks so much.

Darcy Davenport: Yeah.

Operator: We will take our next question from Andrew Lazar with Barclays.

Andrew Lazar: Great. Thanks. Good morning.

Paul Rode: Good morning.

Darcy Davenport: Good morning.