This conference call transcript was computer generated and almost certianly contains errors. This transcript is provided for information purposes only.EarningsCall, LLC makes no representation about the accuracy of the aforementioned transcript, and you are cautioned not to place undue reliance on the information provided by the transcript.
spk03: Welcome to Bellring Brands' 4th 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 800-839-7000. No passcode 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 Myers, Investor Relations of Bellring Brands, for introductions. You may begin.
spk00: 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'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 and the SEC filing sections 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 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.
spk01: Thanks, Jennifer, and thank you all for joining us. Last evening, we reported our fourth quarter and fiscal 22 results and posted a supplemental presentation to our website. Fiscal 22 was a transitional year for Bellring Brands. As a result of our outsized growth in 21, We spent fiscal 22 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 mode. 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 22 sets us up for a strong 23 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 22 saw our net sales grow to $1.37 billion at 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'm incredibly proud of the team for delivering these results given the challenges we encountered throughout the year. The 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 21, we significantly and unsustainably reduced inventory as a result of our high promoted volumes outstripping our capacity. In Q4 22, we had limited flavors and did not repeat the promotions because we did not have the inventory. Nonetheless, consumption declined only 5%. During fiscal 22, a better measure of brand momentum is our sequential dollar consumption, which grew each quarter. Starting in fiscal 23, we are no longer lapping heavy promotional periods with October consumption dollars back to growth up 16% versus prior year. Almost all key measures for Premier Protein remain 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 22 increasing, clearly showing that our consumers are willing to pay more for Premier proteins. The power of the brand comes through in velocity as well. Premier holds four of the RTD category's top highest velocity items in tract channels. In fact, at a key mass customer, Premier holds nine of the top ten items. Household 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 households. 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 reintroduce our full portfolio and restart promotion and marketing. As we enter 23, 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 23 on rebuilding these remaining retailers' 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've made significant progress. In fiscal 22, we added three co-manufacturers and signed agreements with an additional three that will start up in fiscal 23. As you may recall, the big step up in production happens in Q4 23, when our two dedicated greenfield facilities come online. Consequentially, their benefit will not fully be realized until fiscal 24. 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 23. In 24, with the additions of the dedicated facilities, we expect to add north of 20% incremental capacity on top of the 23 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 double-digit growth in all key channels, except for Club, where we temporarily lost distribution. The momentum has continued in October, 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 is 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 23 net sales to grow between 14% and 20%, and adjusted EBITDA to grow between 11% and 20%. This sales guidance is above our long-term algorithm reflecting our pricing actions and lapping capacity constraints in 22 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 mid-year 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 generations. Given our asset-light model, we will have significant cash flow to de-lever 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.
spk06: 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 impacts from the expanded recall. We were able to more than offset the net sales miss 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. Diamantized net sales grew 32% compared to a year ago, benefiting from higher net pricing and favorable product mix, offset partially by lower volumes. ISO 100 had a great quarter with sales up 63% on higher volumes, benefiting from distribution gains and category momentum. These gains were partially offset by volume declines for the remainder of the Diamantized portfolio as a result of lapping discontinued products. We made the strategic choice to simplify the business with a core focus on ISO 100, our flagship product. As a result, we exited certain diametized products, which caused volume headwinds in the quarter. This is expected to remain a volume headwind through the first half of fiscal 23. 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 left a prior year period that included 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 Dymatox. 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 to percent of sales, SG&A approved 80 basis points, driven primarily by reduced marketing spend as we managed demand on Premier Protein shakes. Just Adibda 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 diametrized powder and raw materials, resulting in lower than typical free cash flow compared to historical rates. Fiscal 23, we expect shank 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 23 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 of 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 spinoff closing target of four times. With our expected EBITDA growth and return to strong free cash flow generation in fiscal 23, we anticipate net leverage to be lower than 2.5 times by the end of fiscal 23. Turning now to our outlook. We expect fiscal 2023 net sales of $1.56 to $1.64 billion and adjusted EBITDA of $300 to $325 million. Our guidance implies strong top-line 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 Diametize as both benefit from higher net selling prices and increased volumes. 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 relaunch of temporarily discontinued flavors, and the restart of marketing promotion to drive demand. We expect volume headwinds in the first half for 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 and result in strong gross margins in the first quarter, with lower gross margins on a sequential basis as protein costs step up. We expect just even a dollar growth to be weighted modestly toward the first half of fiscal 23, which has a greater benefit from pricing actions, while the second half of 23 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 top-line 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 prices. 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 23. I will now turn it over to the operator for questions.
spk03: At this time, if you would like to ask a question, please press the star and 1 on your touch-tone phone. You may remove yourself from the queue at any time by pressing star 2. Once again, that is star and 1 to ask a question. We will pause for a moment to allow questions to queue. We'll take our first question from Ken Goldman with JP Morgan.
spk09: Hi, thank you very much. I wanted to focus a little bit on Dymatize. I'm just curious. little bit more if we can get a little bit more information about the decision perhaps to you know focus on the iso 100 variety what's driving that decision um and then i also wanted to you know ask as a follow-up i guess typically when a product is no longer sold in a channel at all it seems like diamond ties 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 ISO 100 to that channel versus what you may have been selling there? I'm just trying to get a little better sense of the dynamics there. Thank you.
spk01: Good morning. Okay, Paul, why don't I answer the club, and then I'll let you answer the ISO 100 and the URAT decision focus. Okay. 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, you know, 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 they weren't happy with the price increase. They've reversed that decision, and we're actually getting it back in. So it was a temporary discontinuation, but it was not our decision.
spk06: Just to add on that, 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 ISO 100 has always been the flagship brand for Dymatize. 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 ISO 100, but also to take out some of the smaller sub-brand, and in some cases just flavors, so that we could focus our resources in growing ISO 100. 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'll call them lower value products, and in some cases some flavors, which we will bring back in fiscal 23. But it is a headwind to Q4 as well as into the first half of the year.
spk01: Yeah, think of this as a kind of typical few rat. However, it was a little bigger than normal just because of the long tail on the dimetized business. A lot of small skews that needed to be cleaned up.
spk06: And it has an outside impact on volume because ISO 100 is a high dollar per pound product, and a lot of the other products are lower dollar per pound. So if The volume impact is outsized compared to the sales because ISO is a, you know, two-thirds to 75% of the overall business. So it just has an outsized effect.
spk09: Got it. That's all very helpful. If I can just tie a bow on that. So putting, you know, or adding one plus one, is it fair to say that you're 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.
spk01: It should be in for Q2. Great.
spk09: Thanks so much.
spk01: Yep.
spk03: We'll take our next question from Andrew Lazar with Barclays.
spk05: Great. Thanks. Good morning.
spk03: Good morning.
spk05: I'm sorry if you said this, I was unclear. Some of the one-off items that affected 4Q, the delayed load-in to e-commerce and the bottler co-packer issue, are those now completely resolved or do they bleed into the new year? Is there a way to quantify maybe what the impact to sales in the fourth quarter was from some of those one-off items? I know that can be hard sometimes.
spk01: Yeah, so I'll hit the first, and then I'll let Paul address the quantification. Yeah, you hit the three items. And for the most part, they have been resolved. So obviously the recall expansion, that is unique to Q4. And that was really a shelf disruption. And then on the – and just to be clear on the recall, the recall happened, and this was one of our – it was immaterial. It was a small command, kind of immaterial to our overall business. Our initial recall happened on 7-28, which we knew last – earnings call, but then there was an expansion after our earnings call. And what happens with the expansion is, from a retailer standpoint, it's like a new recall. So they actually, you know, many retailers just swipe the shelf, They can turn off your item, et cetera. So there is a disruption at the shelf. So that was the unique item. And then, yes, on the e-commerce pieces, delayed load-in largely was remedied in Q1. And then bottle production continues to improve, not where we need to be, but improving. So I would say largely it has been kind of corrected, and they were kind of unique items to keep for.
spk05: And, Paul, I think you were going to mention, yeah, if there was a way to quantify the impact on sales.
spk06: Yeah, as far as magnitude, about two-thirds of the impact is from the e-commerce industry. challenges and about a third from the recall. On the e-commerce side, you know, bottle production was a majority of it, but we did have some challenges with an e-commerce retailer. They were heavy on inventory, and so they weren't allowing us to ship in some of our products, so that's part of it. And then one thing I want to touch on, so Darcy mentioned the production challenges. The one issue we did have as well is that did result in some of our limited time offerings not getting to the shelf because of issues. So that's the one thing that it would have benefited Q4 that won't come back into Q1, but we do get some timing benefits from some of the other products as they fall into Q1.
spk05: And then, Darcy, you mentioned the buy rate was up. Is some of that due to just purely the price increases that you've had? Or, I mean, is there a way to see what maybe buy rate would be on sort of more of a volumetric basis to get a sense of how consumers are thinking about or the loyal consumers are thinking about the brand?
spk01: Yes, most of the buy rate increases are pricing. But I think that what it shows is that our loyal, high-value buyers are sticking with us. Okay. Thank you.
spk03: We'll take our next question from Chris Groh with Stiefel.
spk08: Hi, good morning.
spk03: Good morning.
spk08: Hi. I had a question for you on, you showed a chart in the slides around a TDP recovery. And I just want to get a sense of, you know, clearly about 20% below where you were pre sort of supply issues. Would you expect to build back to that level throughout the year? Is that a way to think about it? Or does it build back there more quickly as you're rebuilding inventory at the trade?
spk01: I'm assuming, Chris, you're talking about Premier Protein, not Dynatize, right?
spk08: Correct. I'm sorry. Yes, yes.
spk01: Yeah, so we expect PDPs to stay kind of stable. They've been very stable since, you know, for most of the calendar year. And we expect them to stay stable until we start reintroducing some of those pause SKUs. and that's going to happen mid-year, then they will pick up. We should see a little bit of an increase over the next kind of several months just as we continue to fill the shelves out and as we increase trade inventory, we still have holes on the shelf, especially in some FDM accounts. So we'll think of it as maybe some small increases as we fill out the shelves better in kind of FDM and then We'll start seeing consecutive improvements as we start reintroducing, kind of mid-year as we start reintroducing those POS SKUs.
spk08: Okay. Our data does show it picking up here a little bit, even in recent weeks. I know your data goes through the quarter, but it looks like it picked up a bit, and perhaps that's filling in some of those holes in the FDM account.
spk01: That's exactly right.
spk08: Okay. And then, just a second question for you, perhaps for Paul, it's around a controversy, well, spiked up a lot in the fourth quarter, and days still outstanding spiked up. I guess I want to just understand, like, obviously, it would indicate you shipped a lot, you know, late in the quarter. Was that getting retailers back to targeted levels? Is that what I'm seeing there? And maybe related to that, is a targeted level for a retailer, is that above where it's been historically, or is it where it's been historically, and you're trying to get back to that level?
spk06: Yeah, so on your last question, we're really just trying to get back to their initial level. We haven't necessarily seen changes in their desired weeks of supply, so it's really trying to get them back. As far as cash or as far as receivables, you're correct. It's really more about timing. So we did have heavier shipments in September, which drove the AR up. And if you compare that to the prior year, we had a lot of promotional shipments in kind of that July-August time period, which meant that accounts receivable in September was really almost at a low point a year ago where it was just a little different in how it shipped out in the fourth quarter of fiscal 22. Okay.
spk08: Okay. Thanks a lot for that.
spk06: Thank you.
spk03: We'll take our next question from Ben Bienvenu with Stevens.
spk10: Hey, guys. Jim Soler on for Ben. Thanks for taking our question. I wanted to ask you, you touched on this a little bit at the beginning with the club retailer, Flip Club. Just kind of your retail partners' receptiveness to you guys pulling the price lever. I know we've heard some larger retailers kind of digging their heels in. Just wanted to get some commentary around the category sets as you guys have taken price. Have you seen maybe some SKUs get trimmed out or maybe new brands come into the category?
spk01: So from a price standpoint, I mean, it's always difficult. And, yeah, we've definitely seen the same articles out there. So we obviously just took a round of pricing on the Premier Protein Shake Business Effective Q1, so in October. It was accepted by all retailers. And it is, you know, currently in the market. But I think that they – I mean, it was – there were a lot of negotiations, you know. I think that – and there's definitely pushback. But I think ultimately they understand that – that our costs are dramatically increasing. So it just kind of comes down to that. It was a pretty logical conversation. And then what was your second question?
spk10: Oh, I was just saying that with the club flip-flop, when they pull the SKUs off, did they replace that with a different brand, or did they just pull them out entirely and just put a different set in there?
spk01: Yeah, so, and the club flip-flop was on Dymatize, happened earlier this year. I don't know the exact, they put in a different, they put in a different competitor. I don't remember which one it was, but they, you know, Club is a little different, especially on the powder side of the business, where they do bring in some ins and outs. So I can't remember if it was a permanent SKU that replaced it or just an in and out. I seem to remember it was an in and out, which is why we're getting back in.
spk10: Okay. If I can ask then, when you guys put together the guidance, did that – assume that you guys would be out on Club for Dynamitize, or is that assuming that you guys would be back in? So basically, is it incremental that you're back in?
spk01: No, it's not incremental. We knew that it was coming back.
spk10: Okay, got it. Thank you. I'll pass it along.
spk01: Thank you. Thank you.
spk03: And once again, if you'd like to ask a question, please press star 1. That is star 1. if you would like to ask a question. We'll take our next question from John Baumgartner with Mizuho Securities. John Baumgartner For the question.
spk07: First off, Darcy, I wanted to ask about Premier's household penetration and promo and rebuilding penetration from here given the stable buy rate set against the consumers you lost who are more deal-driven. As you build that supply, is there a way of promoting differently or positioning the brand differently In light of the promoter score and the willingness to pay data that you mentioned, where you don't need to go as deep on future promo and you can maximize that mix of loyal consumers in your base, or is having that price-driven consumer, is that just necessary to build penetration? And we could still see kind of that similar promotional depth as we've seen historically before the supply constraints.
spk01: It's a great question, and we've been debating this internally a lot, just about rethinking kind of our promotional strategy. First of all, we know that promotion is key. There's going to be some natural churn within all brands. We need promotion, especially, and for us, it's less the temporary price reduction, but it's more about the display that often – comes with the temporary price reduction. And just to remind you, this business has been really built on getting kind of out of the aisle. And what that does, it's a mainstream product. As long as we get out of the aisle and get eyeballs, then we can, you know, bring in new people. And then because of our strong repeat, we keep them for the most part in the franchise. So regarding the – it's a balance. We're talking to retailers right now about our promotional strategy. They're dying to promote again. as you can imagine, because we bring in a lot of people from outside the category. So now it's a balance of, okay, you know, can we maybe not go as deep as you were talking about? Or can we do maybe one last promotion? I think the big thing for us is as long as we get outside of the aisle, it will be very effective.
spk07: Okay. Thanks for that. And a follow-up for Paul on the commodity outlook for this year. I think you mentioned higher inflation for H2. Is that pressure driven by expectations for spot pricing, maybe in protein, where there could be potential flexibility? Or is that outlook sort of locked through forward buying or hedging, where there's really not much wiggle room? Just trying to figure out how much flexibility is inherent in the back half of the year on commodities. Thank you.
spk06: Sure. Yeah, our typical strategy is to be covered on commodities out about six months or so. And so for us, our are hit on COGS, the protein rates that flow through RPNL typically go more about a six to nine month lag to the market. So the market did tick up obviously in the second half of last year. So we're really expecting the height of that to hit us in the second and third quarter. So I mentioned my prior remarks that we would expect sequential increase in protein from Q1 into Q2 and Q3. We have recently seen commodities start to come down a bit, but they have been bouncing around a little bit, and so I think it's a little bit to be determined where they land, but it could provide some potential opportunity for us in the second half, depending on where the rates go.
spk03: Okay. Thanks, Paul. We'll take our next question from David Palmer with Evercore ISI.
spk02: Thanks. A question on the production growth. You said low double digits in fiscal 23. Is that below where you had previously believed it would be? And if so, you know, what's driving that?
spk01: It is a little bit below what we previously said. And the reason is because we're factoring. So there are two pieces when you add capacity. One is the startup timing, meaning, you know, when they actually start producing. And then there's the scale up. and that is getting to the levels of throughput. The timing of startup was absolutely on time and what we expected, but the scale up has been a little bit less than it's taking longer than we previously expected and the bottle our bottle command is a perfect example of that affecting this quarter and so what we've done is we've applied those learnings that we saw in 22 to 23 and the result is bringing down the production expectations a little bit okay got it thank you and I'm wondering how you're viewing the interplay between capacity increases for you and your competitors do you see
spk02: your capacity increasing at the same rate as competitors? And if everybody is getting the same sort of co-packer capacity relief, what dynamics do you see playing out in the market in terms of pricing power? And how do you see this all playing out?
spk01: So I can talk to the – kind of tetra-coman portion of the business. Based on our estimates, we are kind of gobbling up about 70% of the new capacity. So we're definitely getting more than our fair share of the new capacity, and that's really a reflection of we were the ones initiating it. We needed it the most. We're the bigger player. And so we were able to enter into these long-term agreements and get even, you know, right of first refusal for expansions from here as well. So I think that, so I definitely, you know, know that we're getting more than our fair share of new tetra capacity. And then your second question was around Can you clarify yourself?
spk02: Yeah, well, I think that is the bulk of the question is really that. But I wonder how you're even thinking about, till this point, certainly pricing power has been perhaps reinforced by this dynamic that nobody else can fill in the capacity that you're vacating, that you're not able to supply. And I wonder if you think that that how you think promotion and pricing power will break down or not as this capacity rolls in?
spk01: Yeah, I think the way I look at it, I mean, you know, I talked about in my prepared remarks just that this last year was a transitional year. I mean, in many ways, I mean, We kind of were holding ground for a year, and now we're getting back to driving demand. Starting in 23 and beyond, because of capacity, we're going to be able to get back to driving demand, having a full set of flavors, driving through promotion and marketing, building households. doing, you know, innovating, doing all the things that we were doing before. And I think what that's going to do, I think we have proved that, you know, pricing power. But I think what's important is we want to get back to growth, and we want to get back to bringing new. We still think that the category and our brand is highly underpenetrated. And so I think as we get back to growth, we'll start bringing in new households, Some of it will be on promotion, and some of it will be on every day. So I think that that will be the focus going forward. And I see, I mean, the whole category really has been, you know, a little bit on hold, even though we're still, the category is growing. But I'm excited to see it get back to growth because there's so much more potential here.
spk02: Thank you.
spk01: Thanks.
spk03: We'll take our next question from Ken Zaslow with Bank of Montreal.
spk04: Hey, good morning, everyone. Good morning, Ken. Do you ever think that you need to rethink your business model in terms of potentially getting a closer relationship or something with the – obviously that you wouldn't want to actually do the manufacturing, but is there something that you can do – Because this obviously isn't the first time you've had supply issues. Going back to the IPO, we've gone through this a couple times. Is there a thought of just taking a step back and saying, all right, there's a better way to work this model?
spk01: In many ways, I think we have pivoted our strategy. As we – I mean, if you look at several years ago, we were simply – A co-man, we had simply a co-man model, and every single one of our co-mans had multiple different competitors in the same co-man. Now, let's see, two of our three that are coming on next year are exclusive to us. They're dedicated to us. So, yes, they're still – and which I think is a – It's really kind of an elegant solution because it allows us to stay with our asset-light model but allows us also to have a dedicated facility or two dedicated facilities, which actually we'll make it three because we have one already. And so we will have kind of more influence, more transparency, And then I also talked about before about, you know, right of first refusal on new assets. So in many ways, I think our manufacturing strategy has evolved, given as we've learned from the past couple, you know, capacity constraints.
spk04: Okay. My second question is, have you – segmenting your customers in a way that you would know what percentage are the ones that are seeking value? And is there an opportunity to just, you know, continue to minimize that and not even worry about that because they're probably profit, you know, maybe not be profit diluted, but they're less accretive than the others. And is there, because it doesn't seem like the main of your challenge, right? So if you push all your capacity towards those consumers willing to pay and and have a hire, is there an opportunity there to do something like that?
spk01: So, yes, we are able to segment our customers kind of to the like loyal, high value, and occasional, and that's an occasional deal seeking. That's how we knew that we were losing our household penetration as it's gone down this last year. We were losing those occasional deal seeking buyers. So half of those buyers actually left the category completely. And then half went to a variety of different competitors that were on deal. And those will just always move to the next deal. That's how they operate. We also know that consumers, that as consumers stay within the franchise, they continue to buy more and become more valuable. So for instance, the ones that entered at the beginning of the pandemic, they have doubled, those consumers have doubled their spend. So it's all about, the model is all about bringing in new households and then continue to graduate them to spend more. So I think the deal-seeking buyers, when we promote again, I think they will come and go. They're not our focus. Our focus is to bring in these loyal high values and then continue to graduate them up and spend more.
spk04: Right. I guess because you said in your comment that, Anytime we've produced anything, it's been sold. You can't produce anything and not sell it. So therefore, why sell it to somebody who would not pay full price? You don't have a consumer problem. You have a distribution or a production issue. So that's the only thing I'm thinking. Right.
spk01: Yes, it makes sense. I think that, you know, promotion and really, and we're not going to, we don't expect to start promotion until we have the adequate supply. I think what promotion does and what I was saying to John earlier is it is really around the display and getting more eyeballs and therefore more household penetration.
spk04: Okay. Thank you.
spk01: Yeah, thanks.
spk03: We'll take our next question from Jason English with Goldman Sachs.
spk02: Hey, good morning, folks. Thanks for talking to me. I suppose I kind of want to pick off on that last question, but really about timing. You characterized this year as the year of coming back in and stimulating demand. When do you expect to be in a position to start stimulating that demand?
spk01: Our current plan right now, Jason, is to bring back some of this pause skews mid-year and then to start marketing and some light promotion in the back half.
spk02: Okay. So for those of us tracking the data, we should expect a deceleration based on comps as we enter next year, I suspect. Tell me if you see it differently. And on shipments, you mentioned, I think, in the press release that you expect to use the first half to reload inventory. Should we expect the shipment versus consumption disparity, meaning a surplus of shipments over consumption, to persist through the first half of the year?
spk06: Yeah, so I'll take the last one. So we do expect some modest shipments over consumption in the first half as we, as Darcy touched on earlier, rebuild the remaining customers that we have that aren't at optimal levels. But I think it is moderating from where it's been. So I'd expect to be fairly modest until we get to reloading some of the paused flavors as Darcy touched on, which we expect to happen sometime in the late first half into the second half. So that obviously would be a load ahead of of consumption but those are the two primary items and jason sorry go ahead yeah
spk02: Well, yeah, sure. You said something about the comps. I said something about the comps. Your consumption growth has accelerated because we're lapping a dip in consumption from our prior year. Sequentially, we're not really seeing a tremendous uptick. And that dip doesn't really exist in the front half of the year. So at current run rate, it suggests your sales growth is going to moderate quite a bit in the front half of the year if you don't have more TDPs and more marketing going in. And then if you tell me you're only going to modestly overship, it suggests that you have a very back half weighted year.
spk01: Okay, so just remember that Q1 is a seasonally low period. So what you're seeing right now in the POS is so that's where the year ago and sequential, I mean, obviously you know this, but just factor them both in. So we always see a seasonally in kind of November, December, it's low for the category. It's the one seasonal time. There's a natural increase in Q2 because of new year, new you for the overall category. And then we'll start driving demand, you know, throughout Q2 through Q4.
spk02: So is it a back-half-weighted year or not? Well, it's a back-half-weighted year.
spk01: It is, but – and that's, you know, that is – Partially because, first of all, we're a gross business. It will always be back half-weighted, but also because that's when our supply also is coming more online. So that does lend itself to, and then we have the demand drivers, which are related.
spk02: Right, right, right. Okay, thank you.
spk01: Yep.
spk03: We have reached our allotted time for Q&A, and this concludes today's call. You may now.
Disclaimer