BellRing Brands, Inc. (NYSE:BRBR) Q1 2023 Earnings Call Transcript
BellRing Brands, Inc. (NYSE:BRBR) Q1 2023 Earnings Call Transcript February 7, 2023
Operator: Welcome to the BellRing Brands First Quarter 2023 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 12:00 P.M. Eastern Time. The dial-in number is 800-695-0671 and 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. Ma'am, please begin.
Jennifer Meyer: Good morning and thank you for joining us today for BellRing Brands first 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 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.
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 H. Davenport: Thanks Jennifer and thank you all for joining us. Last evening, we reported our first quarter results and posted supplemental presentation to our website. I am pleased to share that fiscal 2023 is off to a good start with our first quarter results coming in ahead of our expectations. Net sales grew 18% over prior year and adjusted EBITDA was at 42%. Overall net sales came in better than expected with slightly higher premier protein shake productions, that translated into stronger shipments. In addition, adjusted EBITDA benefited from COGS favorability. I am particularly encouraged that premier protein volumes returned to growth in Q1 and we are starting to see its momentum grow. As you saw in yesterday's press release we affirmed our fiscal 2023 outlook of net sales and raised a low-end of our adjusted EBITDA range.
We don't expect major changes to the cadence we communicated last quarter. Paul will provide more details. Let's start with shake production. We saw significant growth this quarter in production as we lost the worst of our capacity constraints. This growth allowed us to modestly increase inventory at our retailers as well as increase our own inventory. Both have improved, but are still not at optimal levels. Over the next few months, we expect most of our customers will be at normal levels, while we don't expect our internal inventory to fully recover until early 2024. Our state capacity expansion plans are on track with annual production expected to grow low double digits in fiscal 2023. Our new bottle co-manufacturer continues to scale up with production improving each month throughout Q1.
Our three new co-manufacturers for 2023 are tracking to plan. Recall, we have a small co-man that comes online late in Q2 with the step up in production in Q4 with our two dedicated greenfield facilities coming online. Consequently, their benefit will not be fully realized until fiscal 2024. Our incremental capacity in 2024 is expected to be north of 20%, setting us up for many years of robust shake growth. Before reviewing category and brand updates, I want to share that we have changed our sources for tracked consumption as well as household penetrations. These changes are outlined in greater detail in our supplemental presentation but in general, these new sources provide us with better coverage of our business and in turn, deeper, better insights.
The communication category remained strong, up 14% in Q1, accelerating compared to prior quarter. Ready-to-drink was up 18% and ready-to-mix up 28%. Both segments are growing despite price increases and continued capacity constraints across the RTD competitive set. The Sports Nutrition segment is driving the category as more consumers pursue their fitness goals. The club channel is especially strong, with growth rates greater than 20% of top accounts. Protein as a macro trend continues to show a huge runway for growth. Premier Protein consumption returned to growth this quarter showing remarkable strength. The brand grew 15% with solid growth across mass, food, and club. This momentum continued through January with consumption up 17%. E-commerce consumption growth was the only exception.
It was hindered by the slower-than-anticipated scale up at our new bottle co-man that we highlighted last quarter. Our key brand metrics reaffirm a long runway for sustained growth. Market share has stabilized at 18% for the past year despite our reduced SKUs and limited demand driving activities. Premier Protein shakes lead in velocities with all SKUs performing in the top third in track channels. TDPs experienced small sequential gains this quarter, reflecting more inventory on shelf. As we discussed last quarter, household penetration has softened as a result of our intentional pullback in flavors, promotion, and marketing. Despite this slowdown, Premier Protein still has the highest household penetration in the category, and our buy rate and repeat rates are holding steady, demonstrating the loyalty of our high-value buyers.
Photo by Mariana Medvedeva on Unsplash
We expect household penetration to rebound later this year as we reintroduce our full portfolio and restart light sales -- light shake promotion and marketing. Premier Protein powders are a small but growing part of our portfolio. Powders currently have three flavors and are rapidly gaining distribution. The top two flavors, chocolate and vanilla currently rank in the top 15% in tracked channels. Consumption in the quarter was up 64% versus prior year, and we launched our first ever national marketing campaign in January. It's exciting to see a Premier Protein brand successfully expand formats. Turning to Dymatize, the brand had another great quarter with consumption dollars up 30% across tracked and untracked channels. We saw strong double-digit growth in all key channels driven by distribution gains, pricing, and promotion.
Impressively, the momentum accelerated into January with consumption up 50%. As you may remember, we temporarily lost distribution at a key club customer last year. I'm happy to report we regained that distribution late in Q1 and consumption rates are already performing well. Dymatize's expansion in the mainstream accounts is propelling the brand with market share, TDPs and ACV reaching all-time highs this quarter. We ended the quarter with 4.6% market share in tracked channels, up significantly versus a year ago. Dymatize continues to add new households with repeat and buy rates holding steady. In closing, we are making significant progress in our shake capacity expansion to grow and diversify our supply and deepen our competitive moats. Our high-growth category continues to accelerate above historic mid-single-digit growth rates with strong macro trend tailwinds.
We are close to re-introducing our full range of Premier Protein shake flavors and restarting marketing and promotions. Lastly, we have a robust innovation pipeline that will help fuel our growth in 2024 and beyond. We remain confident in the long-term outlook of BellRing and look forward to sharing our progress next quarter. Thank you for your continued support. I will now turn the call over to Paul.
Paul Rode: Thanks, Darcy and good morning, everyone. As Darcy highlighted, fiscal 2023 is off to a good start. Net sales for the quarter were $363 million and adjusted EBITDA was $85 million. Net sales grew 18% over prior year and adjusted EBITDA increased 42% with strong adjusted EBITDA margins of 23.4%. Starting with brand performance, Premier Protein net sales grew 23%. Higher average debt selling prices contributed 18% to overall growth. Volumes grew 5%, reflecting increased shake production compared to a year ago and continued RTD category growth tailwinds. Net sales growth outpaced consumption growth in the quarter due to typical seasonality as well as continuing to build customer trade inventories back to optimal levels.
Dymatize net sales grew 3% compared to a year ago, benefiting from higher net pricing, distribution gains, and favorable product mix, offset partially by lower volumes. Moreover, we are lapping our strategic decision to discontinue certain Dymatize products, which was a headwind to growth in Q1 and continues into Q2. In addition, shipments into the international and domestic specialty channels both of which have historically inconsistent shipment patterns deloaded inventory during the quarter. The combination of shipment timing and the lapping of discontinued products was a 25% headwind to the net sales growth rate in the quarter. Excluding these items, net sales growth tracks closer to consumption growth. Gross profit of $122 million grew 34%, with gross margins of 33.6%, up 350 basis points.
The increase in gross margin was partially driven by production attainment fees from our shake co-manufacturers as well as the lapping of prior year supply chain and efficiency. Excluding these impacts, gross margins decreased 120 basis points compared to a year ago as our pricing actions offset significant inflation. Excluding onetime separation cost, SG&A expenses increased $6.6 million compared to last year and were flat as a percentage of net sales. Before reviewing our outlook, I would like to make a few comments on cash flow and liquidity. We generated $36 million in cash flow from operations in the first quarter. We expect to generate much stronger cash flow in fiscal 2023, particularly in the second half, with the full year more in line with our historical EBITDA to cash flow conversion rate.
With respect to our share repurchases this quarter, we bought 1.8 million shares at an average price of $23.33 per share. Our remaining share repurchase authorization is $29 million. As of December 31, net debt was $910 million and net leverage was 3.1 times, down almost a full turn from the spin-off last March. With our expected EBITDA growth and strong cash flow generation, we continue to anticipate net leverage to be lower than 2.5 times by the end of fiscal 2023. Turning to our outlook. We are maintaining our guidance for net sales of $1.56 billion to $1.64 billion and raising our adjusted EBITDA range of $306 million to $325 million. We continue to expect sales to sequentially grow each quarter as RTD shake production increased. Our pricing actions on Premier Protein shakes are offsetting significant inflation on protein and other input costs.
However, we expect gross margins to sequentially decline from the first quarter as protein and packaging costs step up. We continue to expect adjusted EBITDA dollar growth to be weighted towards the first half of 2023, which has a greater benefit from pricing actions, while the second half of 2023 has further inflationary impacts and incremental brand building investments. For the second quarter, we expect high teens net sales percentage growth compared to prior year. Pricing continues to be the primary sales growth driver. Similar to Q1, we expect Q2 adjusted EBITDA dollars to grow significantly from prior year, driven by increased net sales. However, adjusted EBITDA margins are expected to be similar to prior year as gross margin improvements are largely offset by higher marketing spend to support Premier Protein patterns and Dymatize.
Before wrapping up, I want to provide an update on our relationship with Post Holdings. During the first quarter, Post sold us remaining shares of our common stock and has completely exited its ownership of BellRing. Post has been a great partner over the years, and we are grateful for their guidance and stewardship. Post will continue to provide services through a master services agreement and Rob Vitale will remain in his role as Executive Chairman of the Board. In closing, our momentum continues to grow. Our strong Q1 results gives us greater confidence in our full year outlook and long-term growth prospects. I will now turn it over to the operator for questions.
See also 20 Best For-Profit Colleges in the US and 15 Most Undervalued Small-cap Stocks To Buy.
To continue reading the Q&A session, please click here.
