BellRing Brands, Inc. (NYSE:BRBR) Q4 2023 Earnings Call Transcript

BellRing Brands, Inc. (NYSE:BRBR) Q4 2023 Earnings Call Transcript November 21, 2023

Operator: Good day and thank you for standing by. Welcome to the BellRing Brands Fourth Quarter 2023 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.

Jennifer Meyer: Good morning, and thank you for joining us today for BellRing Brands’ fourth quarter fiscal 2023 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 fourth quarter and fiscal ’23 results and posted a supplemental presentation to our website. Fiscal ’23 was a fantastic year for BellRing Brands. Our net sales grew 22%, with adjusted EBITDA up 25%. As I reflect on the year, there are three things that stood out to me. The first is the expanding growth opportunity of this category, specifically the segments that we compete in, ready-to-drink shakes and ready-to-mix powders. Both segments have experienced double-digit growth in each of the last three years. Low household penetration, combined with strong macro trends, highlights a long path of growth. Second, the power and the future potential of our brands, this year, we saw tremendous growth on Premier Protein and Dymatize, both reaching new highs across many key metrics.

Premier Protein demonstrates strong resilience, as it quickly regained the TDPs and households lost in prior years during our capacity constraints. This shows the unbelievable consumer and retailer excitement around this brand, which will help fuel future growth. Third, I’ve been blown away by our organization. It is hard to manage a high-growth business with limited supply. It is a heavy load on all functions to optimize supply and demand, especially operations and sales. Despite this added pressure, our organization is stronger than ever, a reflection of the amazing people and our unique culture. We still have work to do, but are well positioned for a strong ’24 and beyond. Now to Q4. I’m pleased to share our results came in at the high end of our expectations.

Net sales grew 25% over prior year and adjusted EBITDA was up 23%. Significant production growth allowed us to restart light shake promotions this quarter. We gained meaningful new shelf space on both Premier Protein and Dymatize, and our relaunched shake flavors and seasonal offerings continue to drive incremental sales. Moving to shake production. In fiscal ’23, we made notable progress to grow and diversify our shake supply. Our production grew 17% over fiscal ’22, modestly above our expectations. We added two co-mans this year, which continue to scale up. And our second greenfield facility, Michael Foods, will start up in December. There will be a much larger contributor to our second half of fiscal ’24 and beyond. Over the past two years, we have transformed our shake co-man network.

We have partnered with the biggest and most reputable players in the aseptic, low-acid industry. We now have a scalable, regionally diverse supply chain, which will enable many years of robust growth. Now to the category and brand updates. The convenient nutrition category grew 9% in Q4 as tailwinds around health and wellness and fitness continued to drive growth. Consumer interest in functional beverages and sports nutrition products continues to be high. Ready-to-drink led the category, up 21%, and ready-to-mix grew 11%. Increased supply and distribution gains are lifting ready-to-drink growth, while increased marketing is boosting both segments. Premier Protein shake consumption accelerated this quarter, up 36%. Growth was tremendous across all channels, driven by improved supply, which allowed us to restart light promotion and expand distribution.

The highest growth was in mass and e-commerce, benefiting from our expanded range of flavors and higher in-stock levels. Additionally, e-commerce and club both saw strong growth behind promotional activity. Our fall seasonal flavor, Pumpkin Spice, demonstrated an impressive 90% incrementality to the brand. Q4 trends continued in October, with shake consumption up 27%, with volume driving 2/3 of this growth. Our brand metrics reflect our building momentum as Premier Protein reached all-time highs in TDPs and market share. Shake TDPs grew 11% versus Q3 behind distribution gains and relaunched shake flavors. Premier Protein RTD market share reached 21%, maintaining 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 household penetration added 1 percentage point versus Q3, reaching over 16% of households. Our household penetration continues to be the highest in the category, with this quarter’s growth driven by promotions and distribution gains. Our repeat and buy rates are holding steady, demonstrating our consumer loyalty. According to our most recent brand equity study, Premier Protein remains the number one brand I love and Net Promoter Score in the RTD category. We are very encouraged by all of these achievements, even though we still haven’t restarted meaningful marketing and promotion. Premier Protein saw great success this year in other forms, showing the power of the brand. In Q4, Premier Protein powders remain strong, growing over 50% behind new distribution and strong velocities.

It reached over $50 million in net sales this year, and we expect robust growth in ’24 as we invest behind marketing programs to drive awareness. In addition to powder, our licensing strategy continues to perform well. Although not a significant revenue driver, we are encouraged that the brand has seen success in other high-traffic aisles. Turning to Dymatize. The brand had a great quarter, with consumption up 38%. We saw double-digit growth in nearly all channels, driven by distribution gains and incremental promotions. Consumption growth continued into October, with the brand up 23%. Dymatize continues to have success in mainstream channels with both TDPs and household penetration reaching new highs this quarter. Encouragingly, as Dymatize adds new households and distribution points, repeat and buy rates are holding steady.

In fiscal ’24, we are launching a new marketing campaign to continue the momentum and drive awareness and new users to Dymatize. Before reviewing our outlook, I want to give our point of view on GLP-1 weight loss medication. Our proprietary research indicates consumers most likely to adopt GLP-1 are currently light users of protein shakes, but will become heavy users once on the medication. These individuals have reduced total caloric intake, but actually need more protein to mitigate muscle loss and certain other side effects. Products like Premier Protein are perfect because they are delicious, compact-size, high-protein nutrition, giving these individuals what they need without making them feel overly full. Research also indicates that once on the medication, consumers start exercising more and choosing healthier food and beverage options, ultimately increasing the demand for convenient and sports nutrition products.

After our initial phase of research, we believe our current products and growth strategies are already well aligned with this opportunity. They are great complements to GLPs while consumers are on the medication and a perfect nutrition solution when people decide to stop taking the drugs to maintain the weight loss benefit. We have begun our next phase of research to better understand this consumer and how we can serve them on this important health journey. In ’24, we plan to test media platforms and created to determine the strongest, most effective strategies and tactics to reach these consumers. We’re encouraged by the early results of these medications and feel that they strengthen the already strong macro trends behind our category and specifically, our business.

Now to our outlook. As you saw in yesterday’s press release, we expect fiscal ’24 net sales to grow between 10% and 15% and adjusted EBITDA to grow between 6% and 15%. At the midpoint, this guidance is on the high side of our long-term algorithm in both net sales growth and adjusted EBITDA margin. As a reminder, our algorithm in net sales growth is between 10% to 12% with EBITDA margins of between 18% and 20%. Our plan reflects strong volume growth for both Premier Protein and Dymatize and the restart of shake promotions in the second quarter. We plan to step up marketing on shakes in Q4, which is when we expect to hit our target weeks of supply. The demand and supply dynamics remain tight for most of the year, and we will continue to be nimble so we can navigate effectively.

In closing, I’m thrilled with our performance this year. we continue to gain momentum in every part of our business. Strong macro trends are driving sustained long-term growth in our categories. Premier Protein and Dymatize continue to reach new consumers and maintain all-time high market share positions. Our flavor strategy is working, and our innovation pipeline is rich, enabling us to bring excitement to consumers and retail partners. Last, we are moving forward on our shake capacity plan to support our future growth. Before passing over to Paul, I’m sure most of you have heard that Rob Vitale, our Executive Chairman, is currently on medical leave. We have been in close contact with him over the last several weeks. We wish him and his family the best throughout his recovery and we’ll be excited to have him back at full strength soon.

I will now turn the call over to Paul.

Paul Rode: Thanks, Darcy, and good morning, everyone. As Darcy highlighted, our fourth quarter results came in at the high end of our expectations. Net sales for the quarter were $473 million, and adjusted EBITDA was $99 million. Net sales grew 25% over prior year, and adjusted EBITDA increased 23%, with adjusted EBITDA margin up 20.8%. Starting with brand performance. Premier Protein net sales grew 30%, with volume growing 21%. In Q4, our shake production increased meaningfully over prior year, which allowed us to restart modest shake promotions driving growth. Volumes also benefited from the relaunch of temporarily discontinued flavors, performance of our seasonal offerings and strong growth from Premier Powders. Net pricing for Premier Protein grew 9%, reflecting the October 2022 price increase.

Shake consumption dollars grew 36%, outpacing shipment growth of 29%. The latter was modestly impacted by the lapping of a trade inventory build in the prior year. Dymatize net sales were relatively flat this quarter as the brand faced a tough prior year comparable. Recall last year’s Q4 had heavy trade inventory build in the international and domestic specialty channels. This headwind, combined with continued weakness in the specialty channel, was offset by strong growth in domestic mainstream channels, driven by distribution gains and organic growth. Gross profit of $155 million grew 27%, with an increase in gross profit margin of 60 basis points to 32.9%. The margin increase resulted from improved pricing that mitigated input cost inflation.

This was partially offset by incremental promotional activity. Excluding onetime costs in the prior year period, SG&A expenses as a percentage of net sales increased 40 basis points, half of which was driven by higher marketing spend. Operating profit of $78 million increased $17 million compared to prior year and was negatively impacted by $7 million of accelerated amortization. This was a noncash expense recorded in connection with our decision to discontinue PowerBar in our North American business and was treated as an adjustment for non-GAAP measures. We expect the remaining $17 million of noncash accelerated amortization to be recorded in the first quarter. Our international PowerBar business is unaffected by this decision and continues to grow.

Turning to full year 2023 results. Net sales were approximately $1.7 billion, up 22% over the prior year, with gross profit of $530 million growing 26%. Gross profit margin increased 100 basis points over 2022, driven by pricing actions that mitigated input cost inflation, along with favorable freight rates. SG&A expenses were $216 million, and excluding onetime items, increased 60 basis points as a percentage of net sales. Higher marketing spend drove the increase as our marketing spend in fiscal ’22 was exceptionally low. We saw modest leverage on our remaining G&A base. Adjusted EBITDA increased 25% to $338 million, with a margin of 20.3%, an increase of 50 basis points. Before reviewing our outlook, I would like to make a few comments on cash flow and liquidity.

We generated $85 million in cash flow from operations in the fourth quarter and $216 million for the year. In fiscal ’23, net working capital declined slightly despite our strong top line growth. In fiscal ’24, our net working capital growth will moderately exceed our net sales growth rate 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 $54 million against our revolving credit facility. As of September 30, net debt was $817 million, and net leverage was 2.4x. With our EBITDA growth and strong cash flow generation, we anticipate net leverage to fall under 2x by the end of fiscal ’24. With respect to our share repurchases this quarter, we bought 200,000 shares at an average price of $39.20 per share or $8 million in total.

For the fiscal year, we repurchased 4.2 million shares at an average price of $29.56 per share or $125 million in total. Our remaining share repurchase authorization is $23 million. Turning to our outlook. We expect fiscal ’24 net sales of $1.83 billion to $1.91 billion and adjusted EBITDA of $360 million to $390 million. Our guidance implies strong top line growth of 10% to 15% and adjusted EBITDA growth of 6% to 15%, with healthy adjusted EBITDA margins of 20% at the midpoint. We expect dollar and percentage growth for both measures to be weighted to the first half of the year. From a brand perspective, we expect double-digit sales growth for both Premier Protein and Dymatize, driven primarily by volume gains and continued category tailwinds.

Key drivers of Premier Protein’s volume growth include increased promotional activity, distribution gains and the first half benefit of our relaunched flavors. Organic growth and distribution gains are the primary volume drivers for Dymatize. We expect fiscal ’24 adjusted EBITDA margins to be largely in line with fiscal ’23, with increased gross margins offset by higher SG&A. Gross margins are expected to benefit from favorable input costs, notably in the first half of the year, offset partially by higher promotional activity. Investments behind our brands, including promotional marketing spend, are expected to skew higher in both the second and fourth quarters. Turning to our first quarter forecast, we expect low double-digit net sales growth compared to a year ago.

We expect strong growth from Dymatize, as it has an easier prior year comparable, lapping a trade inventory deload in the international and domestic specialty channels. Premier Protein sales growth is expected to be in the high single digits as we lap a prior year trade inventory build, which we estimate to be a low double-digit headwind to Premier’s growth rate. As a result, we expect consumption growth to outpace net sales growth as we lap this headwind. Consumption growth will also benefit from higher net pricing, as price increases at retail lagged our October 22 price increase on shakes. We expect first quarter adjusted EBITDA margins to be similar to prior year as higher SG&A as a percentage of net sales was offset by higher gross margins.

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 encouraged with our strong performance in fiscal ’23. Our momentum continues to grow, and we are excited about our prospects in fiscal ’24. 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 Andrew Lazar with Barclays. You may proceed.

Andrew Lazar: Darcy, on your third quarter earnings call, you provided initial ’24 guidance to be at the high end of your long-term algorithm on sales and EBITDA margins. And today, you provided a range for guidance, which as you said, at the midpoint, correlates to that. There is a wider range, particularly on EBITDA that you provided. And I guess my question is just — does that indicate something has maybe changed in your confidence in the outlook? It doesn’t seem that way from all the metrics you provided. But if so, maybe you could get into some of the key factors? Or maybe I’m just reading too much into the range that you provided.

Darcy Davenport: Yes. There’s been no change in our confidence. I think that — yes, I wouldn’t read too much into the slightly expanded range in EBITDA.

Andrew Lazar: Okay. And then Paul, I think pricing, I think, was expected to be somewhat lower year-over-year in shakes in ’24, just in light of the move in dairy protein costs. I guess what sort of magnitude should we expect around pricing in Premier Protein? And have you seen any shifts in sort of competitive behavior along these lines that may have impacted your initial thinking on the shape pricing will likely take in ’24?

Paul Rode: Yes. We planned in ’24 to get back to a more normal cadence of promotion. And so that would obviously drive a pricing headwind for the year. So, we’re calling for a low- to mid-single-digit headwind on pricing to net sales growth. As far as competitive dynamic, I wouldn’t say anything has dramatically changed. We’ve actually seen some competitors take pricing higher recently. Because keep in mind, it’s not just protein costs. We have — we’re seeing those. Obviously, we’re expecting those to come down in fiscal ’24, but we’re also seeing inflation across a lot of the other input cost, including packaging and manufacturing costs, while net, we expect to be somewhat favorable from an overall cost perspective. There are other things going the other direction.

Operator: [Operator Instructions] Our next question comes from David Palmer with Evercore. You may proceed.

David Palmer: Just a question on some of the data that you’re showing us here on Premier Protein ready — ready-to-drink shakes. On Slide 9, you talk about the shipments being in line with consumption or roughly in line with consumption in the last couple of quarters, but the all-channel consumption outpaced your shipped dollars by 8 points and 6 points, respectively, the last two quarters. I’m wondering, maybe give us a sense of what’s going on there? And do you expect that negative price/mix gap to all channel consumption to continue in the next couple of quarters?

Paul Rode: Yes, there’s a couple of things going on there. So for one, as you go into fiscal ’24, particularly in Q1 and even into Q2, we did see — and I mentioned this in my prepared remarks, that we’re seeing a lag in retailers taking price on shelf. So, we took a price increase on our shakes in October of ’22. So, as we get to Q1, we’ve now fully lapped pricing from a shipments perspective, but for the — for the consumption growth, that’s still benefiting from a high-single-digit growth in kind of into the first quarter, and we expect that to continue a bit into the second quarter as some retailers just didn’t fully reflect price until later. In the fourth quarter in particular, we are lapping trade inventory builds in the Q4 last year. So that is part of the — that is really the main reason between the difference between consumption outpacing shipment growth in Q4. But as we go into Q1 and Q2, it’s more about the pricing element there.

David Palmer: And then just on the capacity increase that Michael’s just bringing on in December, heading into calendar ’24. Is that about 10%? And do — is all signs there that consumption should go up with that capacity that basically that retailers are buying everything they can get from you guys?

Darcy Davenport: Yes. Ultimately, from Michael, yes, I mean, it will be about 10%, but that’s going to take some time to scale up. So I mentioned that December, we should start up, but it won’t be until the back half that really, it will be more of a contributor to our sales. But — but you’re absolutely right, yes. We need that volume to be able to feel comfortable to build our inventory and start marketing. We should be good, as I mentioned, we’ll be starting promotion in Q2, and then looking at — from a Premier Tetra standpoint, looking at starting marketing in Q4.

Operator: [Operator Instructions] Our next question comes from Ken Goldman with JPMorgan. You may proceed.

Ken Goldman: I just wanted to build on Andrew’s question, if I could. And Darcy, you were quite clear that nothing has changed in your outlook or your confidence in the business. But the EBITDA dollar spread sort of from high to low in guidance is higher than what you’ve typically done in the past. And I didn’t know if there was a specific reason for that. And I guess, kind of more importantly, maybe we could get a little bit of sense from you about what the key drivers would be that would lead that number to come in toward the upside or toward the downside? I mean, obviously, no one has a crystal ball. But just as you kind of think of what you’re most excited about and what you’re most concerned about or what some of the risks might be that you think are more important to call out? I’m just curious what those might be for this year.