BellRing Brands, Inc. Common Stock

Good day, and thank you for standing by. Welcome to Bellring Brands' third quarter 2023 earnings conference call. At this time, all participants are on a listen-only mode. After the speaker's presentation, there will be a question and answer session. To ask a question during the session, you will need to press star 11 on your telephone. Please be advised that today's conference is being recorded. It is now my pleasure to introduce Jennifer Meyer of Investor Relations Bellring.

Good morning, and thank you for joining us today for Bellring Brand's third quarter fiscal 2023 earnings call. With me today are Darcy Davenport, our president and CEO, and Paul Rhode, our CFO. Darcy and Paul will begin with paired 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.

Thanks, Jennifer, and thank you all for joining us. Last evening, we reported our third quarter results and posted a supplemental presentation to our website. I'm pleased to share our Q3 results were above our expectations. Net sales grew 20% over prior year and adjusted EBITDA was up 8%. The momentum in the business is palpable as we restart demand drivers on shakes. This quarter we brought new capacity online which allowed us to relaunch our temporarily discontinued shake flavors and expand our successful limited time offer program. Consumer and retailer excitement around these new flavors is incredible. Both Premier Protein and Dymatize powder businesses are also proving to be strong growth engines with both brands expanding distribution and responding well to media. You saw last night we raised our outlook for the year. We now expect net sales to grow between 19% and 22% over fiscal 22, with adjusted EBITDA to grow between 22% and 25%. Our better than expected Q3 performance drove our decision to raise our full year guide. We are proud of the progress that we made this year. While certainly not finished with our planning process, our initial expectations for next year are to deliver at the high side of our long-term algorithm in both net sales growth and adjusted EBITDA margin. As a reminder, our algorithm and net sales growth is net sales growth of between 10% and 12%, with EBITDA margins of between 18% to 20%. We will provide more details on our Fiscal 24 outlook in November. Turning to Q3, let's start with Shake production. Our production growth over Fiscal 22 continues to track in line with our expectations, with year-to-date production at below double digits. I'm happy to share that we brought a new command, Senocta, online during Q3, They represent one of our two greenfield facilities in our shake capacity expansion plan, and they have a smooth startup. They continue to scale up and will be a small contributor to our Q4, but a much larger contributor to fiscal 24 and beyond. Our second greenfield facility, Michael Foods, is expected to start up in Q1. While a slight delay, we remain on track to add north of 20% incremental capacity next year. This allows us to rebuild our internal safety stock and deliver robust growth in 24 and beyond. Now to the category and brand updates. The convenient nutrition category grew 14% in Q3 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 growth led the category up 21%, and ready-to-mix grew 16%. Increased supply is lifting ready-to-drink growth, while increased promotion, marketing, and distribution are boosting both segments. Moving forward, we expect to see continued strong volume growth, but pricing to be a smaller contributor. Premier protein shake consumption accelerated this quarter, up 27%. Growth was terrific across all channels, driven by improved supply and flavor expansion. The highest growth was in mass and e-commerce, as both benefited from our full range of flavors and higher in-stock levels. Our summer limited-time offering, Root Beer Float, was available outside of e-commerce for the first time and demonstrated an impressive 90% incrementality to the brand. In July, shake consumption continued to grow, up 21%, demonstrating continued strength. Our brand metrics this quarter reflect our building momentum. Premier Protein RTD market share reached 20%, our highest ever quarterly share. I'm also happy to report that Shake TDPs have returned to growth, surpassing our previous high in late fiscal 2021. Recall last quarter, Premier Protein became the number one brand in the RTD segment and the number one brand in the broader convenient nutrition category. The brand stayed in the top spot throughout the quarter. All of this is especially encouraging because we still haven't restarted meaningful marketing and promotion. Premier Protein made great progress in household penetration this quarter with the brand adding nearly one percentage point versus Q2 reaching 15% of households. Our household penetration continues to be the highest in the category, and we expect our Q4 marketing and promotional activities to further grow household penetration. Our repeat and buy rates are holding steady, demonstrating our consumer loyalty. The Premier Protein brand is proving it can travel to other forms and categories. Premier Powder's consumption was up 85% behind new distribution and strong velocities. In the same way that Premier mainstreamed the RTV category, we believe the brand can do the same within the powder category. In addition, we are seeing early success with our licensing strategy in both cereal and frozen pancakes. Although not a significant revenue driver, we are encouraged that the brand can be successful in other high-traffic aisles. Turning to Diamantize, the brand had another strong quarter with consumption dollars up 39%. We saw double-digit growth in nearly all channels driven by distribution gains, promotion, and marketing. The brand's strength continued into July. Dymatize's success with mainstream consumers continues. This fiscal year marks the first time the brand has meaningfully invested in broader media and the strategy is working. Base velocities on our flagship line, ISO 100, are up 30% versus the pre-media period. Market share, TDPs, and household penetration reached new highs this quarter with a ton of upside still in our future. Encouragingly, as Dimetize adds new households and distribution points, repeat and buy rates are holding steady. In closing, I'm delighted with our year-to-day progress. We are on track to deliver results ahead of our guide last November. We are accelerating and gaining momentum in almost every part of our business. Our first shake greenfield facility is now up and running, bringing us closer to realizing a step change in our shake production run rate. Premier Protein maintains the number one share position in our growing on-trend convenient nutrition category. We have begun to drive demand by relaunching our full assortment of flavors. Both Premier Protein and Dymatize are delighting mainstream consumers and reaching all-time highs in market share. Much of this momentum has come without major marketing and promotion. Looking forward, we can't wait to bring the premier protein and diametized brands to more consumers and help grow the category with our retail partners. We look forward to providing more specifics around fiscal 24 next quarter. Thank you for your continued support, and I'll now turn the call over to Paul.

Thanks, Darcy, and good morning, everyone. As Darcy highlighted, our third quarter performance was modestly above our expectations. Net sales for the quarter were $446 million, and adjusted EBITDA was $87 million. Net sales grew 20% over prior year, and adjusted EBITDA increased 8%, with adjusted EBITDA margins of 19.5%. Starting with brand performance, Premier Protein net sales grew 20%, with growth split evenly across volume and pricing. Volume grew 10%, benefiting from increased shake production compared to a year ago, the relaunch of temporarily discontinued flavors, and strong growth from Premier powders. As a reminder, we have fully lapped the April 2022 price increase for RTD shakes and will continue to benefit from the October 2022 price increase through the end of fiscal 23. Shake consumption dollars grew 27%, outpacing shipment growth 19%, as last year's April price increase was not fully reflected at retail until later in the third quarter. Additionally, shipment growth was modestly impacted by the lapping of a trade inventory build in the prior year. Diamantized net sales were up 32% this quarter, with volumes growing 46%. Strong volume growth was driven by distribution gains, organic growth, and promotional activity. Additionally, volumes benefited from the lapping of an easier prior-year comparable driven by price elasticities and lower shipments of non-core products resulting from supply constraints. Price mix was a 14% headwind to Diamantizer's growth rate in Q3, driven by higher trade promotional activity and unfavorable product mix. Gross profit of $136 million grew 13%, with a decrease in gross profit margin to 30.5%. The margin decline resulted from higher input cost and trade promotion. This was partially mitigated by pricing actions and favorable freight rates. Gross profit in the quarter also included a $2 million unrealized mark-to-market adjustment on our commodity hedges, which was a 40 basis point headwind to our gross profit margins. Excluding one-time cost in the prior year period, SG&A expenses as a percentage of net sales increased 30 basis points. The increase was driven by a 130 basis point increase in our marketing spend, primarily on our powder business, partially offset by leverage on the remainder of our G&A base. Before reviewing our outlook, I would like to make a few comments on cash flow and liquidity. I'm pleased to share that we generated $110 million in cash flow from operations in the third quarter and $131 million year-to-date. As expected, net working capital decreased significantly from the second quarter, with reductions in both raw material and diametrized finished goods inventory. During the quarter, we repaid $60 million against our revolving credit facility. As of June 30, net debt was $893 million and net leverage was 2.8 times. With our EBITDA growth and continuous drawn cash generation expected in Q4, we anticipate net leverage to be approximately 2.5 times by the end of fiscal 23. With respect to our share repurchases this quarter, we bought 1.3 million shares at an average price of $36.13 per share, or $49 million in total. Our remaining share repurchase authorization is $31 million. Turning to our outlook, we raised our fiscal 2023 guidance range for net sales to be $1.63 to $1.67 billion and adjusted EBITDA of $330 to $338 million. The updated guidance reflects our better-than-expected third quarter results, while our outlook for the fourth quarter remains largely unchanged. In Q4, we expect premier protein net sales to grow double digits, with volume a larger contributor to the net sales growth rate than pricing, as we restart light promotions and shift fall resets. Similar to Q3, the reintroduction of our temporarily discontinued flavors and higher RTP production will also drive year-over-year volume growth. Diamantize faces a tough comparable in Q4 as we lap the impact of high international and specialty shipments in the prior year. We expect fourth quarter just even margins to be down slightly compared to prior years as our higher SG&A as a percentage of net sales is partially 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 inflations. In closing, we are pleased with our year-to-date performance. Our momentum continues to grow, and we are well positioned to close out the year. I will now turn it over to the operator for questions.

Thank you. As a reminder, to ask a question, you will need to press star 1-1 on your telephone. And if your question has been answered or you wish to remove yourself from the queue, press star 1-1 again. Please stand by while we compile the Q&A roster. And our first question comes from the line of Andrew Lazar with Barclays.

Good morning, Paul and Darcy.

Good morning.

Good morning. First off, as you've seen, we've all seen some center store food categories start to slow pretty meaningfully as pricing has lapped and sort of volumes have remained pressured. Even private label is showing lower volume at this point. Your categories obviously have remained very resilient in the face of all this. So I was hoping to get a bit of a better sense of sort of what your consumers are telling you and, you know, if you've seen any change in behavior and I guess why you think the ready to drink shake and powder, you know, categories thus far at least have held up as well as they have.

Yeah, I think it's the macro trends. I mean, I think that all of the areas that are boosting, so think of everything coming out of kind of COVID and These macro trends were here before COVID, but they were just accelerated. So think of the obesity epidemic. You think of more people, you know, more people get after COVID who gained weight during that period of time and who are now trying to exercise more. Just in general, the health and wellness trend. So all of those things which were coming in just were accelerated. during the COVID period of time, and that's what I think we're seeing. I mean, in general, volumes are solid in the category. We're starting to see from an RTD standpoint, the category is being boosted by, A, better, you know, the capacity constraints are easing within the RTD, and that's, you know, partially because of us. Pricing is still up, but moderating, And then from a, specifically on powders, sports nutrition is this idea that many of the sports nutrition brands are successfully transitioning into mainstream channels. That strategy is working and it's just bringing more households into the category. So I expect this to absolutely continue. These are big macro societal trends. And so we expect the pricing to come down, but volume to continue to grow steadily.

Got it. Thanks. And then Given the very strong momentum in the business, I'm curious if you've yet optioned for more lines to be built at your two new greenfield facilities beyond the four lines, I think, that each is starting with, such that you're thinking about capacity for 25 and 26, not to get too far ahead of ourselves.

Yeah, I'm going to probably talk a little more in generalities here, but we are absolutely – we're now – planning three to five years out. So we are actively talking to our partners for 25, 26, and 27. We are building out our long-range plan and absolutely we're talking about expansion.

Got it. Thanks so much.

Thank you.

Thank you. One moment please for our next question. Our next question comes from the line of Ken Goldman with JP Morgan.

Hi, good morning. Thank you. Darcy, I was curious, you know, with the understanding that you're not ready to go into full details on 24 yet, just the commentary or the reiteration of sales growth to be sort of at the higher end of your algo next year. You did talk about rebuilding some safety stock within that area. The commentary really is for 20% plus capacity to be added. I just wanted to get a sense of what that plus really is, how much safety stock is going to be built, and really what your actual production growth will be next year. If there's any way to think about all of those, given that it's a little early maybe.

Yeah, I think we're giving ourselves some flexibility with the 28% plus, and the main reason is because, remember, you know, we just started up Senopta. It is going well, but they aren't at their, you know, it takes somewhere between two and three quarters to really fully ramp up and to get to the levels that we are expecting. So there's still a ways to go. And then we haven't produced a single shake at MFI. So I think that we are giving ourselves some kind of latitude in that 20% plus. I feel good about that number, but I also don't feel confident enough to give any more above that number. And then just your question about inventory build. Yeah, I mean, we've talked about the the kind of delta between call it 20% production and the high side of our algo and that difference. We have to rebuild. We only have about four weeks of safety stock right now. We are at the bare minimum to operate our business right now. It's hard on our organization, and we basically have to be – really, really good at forecasting, specifically at the different sizes and at all the different facilities. And it's difficult. And so we need to – our ideal safety stock is at eight weeks. So we have to build – and anywhere between – anything's better than four. So six to eight is really the ideal, eight being perfect. And so we're going to next year plan on building inventory so we can operate effectively.

Got it. Thank you for that. And then just quickly, and I'll risk it again by asking about 24, but one of the questions that we've received lately is, is it reasonable to expect that all-in bell ring will have you know, potentially negative pricing next year. Not that it's necessarily a bad thing, right? It's because whey and nonfat dry milk are down so much. But last I checked, the street was kind of modeling flattish. You talked about dimetized pricing being down. Just curious if that's a reasonable assumption and if there's any early read on, you know, how we kind of think about that from a percentage basis.

Paul, do you want to answer that?

Absolutely. Yeah, so from a Shake perspective, you know, we are expecting to get to more of a normalized promotional year. So that would... obviously drive some unfavorable pricing. So we would expect some pricing headwinds on our shake business. So I think it's a fair assumption that short of us taking any further pricing on shakes, that promotion would drive that down slightly. On diamonds, I think it's still a TBD. I do think that there could be some incremental promotional activity. And to your point, the magnitude of those the protein there is coming down faster, but I think it's a little bit of a TBD of how the market reacts to the dimetized and the powders.

Can I just ask a quick follow-up on that? I know we're limited to two questions, but last quarter I thought, Darcy, you were suggesting that dimetized was more of a pass-through, so I'm just curious why it's more of a TBD now. Maybe I misheard last quarter.

I don't believe we've said it's a pass-through. I think what we've said in the past is that Historically, the powder category is how it's acted with protein costs going up or down. Is it a just promotion up or down? I think the question in this particular case is the magnitude is just greater, so does that still play? So I think that's the question, but it's not a pass-through.

Got it. Great. Thank you for that.

Thank you. One moment, please, for our next question. And our next question comes from the line of Brian Spillane with Bank of America.

Thanks, Dr. Brody. Good morning, everyone. Good morning. Good morning. Hi. I have a question about the long-term EBITDA margin algorithm. And I guess, you know, thinking a little bit about just how different maybe the business is today versus what it was when you originally set that. you know, like, how should we think about, I guess, you know, whether that's the right range? And I guess what I was thinking is the channel mix is changing, right? You know, less club, more mass and food. Your supply chain is changed, right? You've got, you know, a wider network of comans, you know, dimetized, I guess, you know, a little bit of a bigger part of the mix than it was when you really sent that. So if you could just kind of talk about the puts and takes there, and I guess as you're looking out over, Darcy, you said you're doing kind of multi-year planning now. Just, you know, is 18 to 20 still the right algorithm? Could it maybe be different than that? Again, just relative to EBITDA margins. Thanks.

Sure. I'll start, and Darcy, feel free to jump in. Yes, you are correct that if you look at our recent history, we have been on the higher side of our algorithm, and the midpoint of our guidance this year would suggest we're at the top end of the long-term algorithm of 18 to 20 percent. We still feel like that's the right range. We do believe that over time we could get some additional scale benefits. You mentioned some of the channel mix shifting. The shift really between Powder and RTDs isn't really dramatically different. The margin structure there is relatively similar. But you also have to look at this year as an example. We're not spending heavy on promotion. We're not spending on marketing. And so those things typically will ramp up and will chip away at our margins a bit. But yeah, I agree. Over the long term, we still feel like 18% to 20%. We've said we want to be in the top half of that. And then if we see that we can continue to be at the top end of that, then perhaps it should be adjusted upward a bit, but we still feel comfortable with our algorithm today.

Yeah, I would just add, all the things, I mean, you described the changes of the business, and they absolutely are true, but just to reiterate what Paul mentioned, From a channel mix standpoint and a product mix standpoint, the margins are pretty close. So that change, it's more about just the scale, and we actually do get some scale benefits, but not as much as some other businesses with our command model. I think where we get scale benefits are, you know, things like GNA, et cetera. We do get some from kind of procurement, et cetera. And we'll get some from the network. So that will move. But also, I think we want to keep our, I mean, this is a branded business. And we are bringing in new households into the category. And that takes marketing. And we want to continue to build these brands to keep the loyalty up. And so that's why I think Again, I think we're being a little conservative by keeping the algorithm where it is. Because remember, we haven't started marketing and promotion again on our biggest business. So we want to get kind of a year under our belt, and then we'll reassess.

Okay, thanks. And then just a quick follow-up. Now that the supply chain is, again, is, you know, expanding the way it is and more diversified, Darcy, does it give you any more, how much flexibility does it provide in terms of either product formulation changes and or packaging, you know, to the extent that you might think about different pack types for shakes? Does this really change at all the type of flexibility you have in terms of you know, product formulations, innovation, and also just more flexibility on maybe different types of packaging if that's, you know, kind of what the market is looking for down the road?

Okay. So the expansion of our network, we have expanded the lines of 330 ml. So that's the size of our main 30-gram shake. But we've also added a bottle command, so that absolutely does expand our ability, and we can have different sizes of bottles. There are a ton of different packaging options within Tetras, and many of our commands do have different capabilities, but our focus has been really around expanding the size. Now, from an innovation standpoint, I see us doing more innovation of the liquid inside the same size Tetra. It's a great size of Tetra. If you look across the competitive set, it's kind of the standard. But I see us doing a fair amount of innovation around the liquid. We will be looking at some packaging, but I think it's more likely that we'll be innovating more around the liquid as opposed to the packaging.

Thanks, Darcy.

Thank you. One moment, please, for our next question. Our next question comes from the line of Jim Solera with Stevens.

Hi, good morning, guys. Thanks for taking our question. Darcy, I think, first of all, you talked about the powder buyer for Premier and the opportunity to take that brand outside of Ready to Drink Shake and kind of expand that. When you see the powder buyer, is that an existing RTD shake buyer, and they're just expanding their overall buy with the brand, or are they largely incremental to the brand?

Mostly incremental. It's a different occasion. Think of the RTD consumer. The occasion is primarily a breakfast placement, and powder is primarily used as a true protein supplement. So think of it as a lot of times after working out, but also as a supplement to other things, so smoothies or, you know, putting protein powder in pancakes, et cetera. So it's a pretty different So there's some overlap with consumers, so it would either be an incremental occasion, but more likely it actually is an incremental consumer.

Okay, great. And then on the marketing side, as you guys ramp your marketing spend, is the primary message communicating use occasions and really introducing the consumer that isn't aware that this is a breakfast replacement, that it's not something you take after working out? Is that the primary messaging? Or is it more Premier-specific versus other peers that are already in the ready-to-drink shake category?

So our whole marketing strategy is around, and we've been using this strategy since the beginning of the brand as it started with word of mouth, is using our own loyal consumers to tell other people why they love the product so much. how they use it, why it's different, how it's worked for them. And it has been very successful. It's very authentic. And so they're talking about the fantastic flavors. They're talking about the incredible taste. They're talking about how it changed their lives. And yes, how they use it as well. But it's really, it is about premier protein. And it is not necessarily about just ready to drink shakes. This is about how Premier Protein is different and how it changed their lives.

Okay, thanks. I'll hop back in the queue.

Thank you.

Thank you. One moment, please, for our next question. Our next question comes from the line of Matt McGinley with Needham & Company.

Thank you. Your updated guidance for the year implies some healthy growth in EBITDA in the fourth quarter, but even at the high and low end, it only points to about 40 basis points of margin compression compared to the 230 basis points that you had this quarter. Is that improvement driven more by favorable input prices, or was the promo and marketing in the third quarter just unusually high with the flavors you relaunched and some of that doesn't repeat in the fourth quarter?

It's primarily on the protein cost stepping down from the high. So Q3 was really the peak of protein cost, in particular on the milk proteins. And then we expect them to step down in the fourth quarter versus the third quarter. And so that is the primary driver. We have a little bit less promotion in the powder business, but we also ramp up promotion a little bit on the shake business. So net-net, it's mostly protein.

Got it. And on the supply chain expansion, that's probably more of a tactical question, but will you be relaunching or launching additional flavors with that supply chain expansion as it comes online, or are you good with where you need to be with flavors right now? This next expansion is really more about having the capacity to grow for the next few years.

Yes and yes. Flavors continue to bring in excitement and excitement new people into the brand. I mean, you saw it. Really, the big thing we added this quarter was the three discontinued, the temporarily discontinued flavors, as well as our LTO expansion of root beer float. But with that, you saw, you know, a bump up of almost one point of household pen. So they work. They provide excitement. People get really sick of chocolate and vanilla. So we see a long runway for flavors. But then I say, and yes, because we're also looking at different formulas. So think of everything from anything to bring in either a new occasion or a new consumer. So think of you know, different levels of protein, different types of protein, different, you know, formulations. So all of that, we have a very active R&D team that is thinking of ideas to bring in new, to introduce Premier Protein to a broader set of consumers.

Great. Thank you very much.

Thank you. One moment, please, for our next question. Our next question comes from the line of Jason English with Goldman Sachs.

Hey, folks. Thanks for responding. Hey, Jason. Darcy, it's great to hear the comments about the brand affinity, not just the product affinity earlier. As we look into next year and we look at what I think we'll all agree is a pretty sharp deflationary trend in the info cost, I imagine you'll be throwing off a lot of excess gross profit. What are the plans in terms of marketing? Because you think about building a big beverage brand. Obviously, you think about a lot of marketing spend, which you don't have. Your marketing spend is actually quite low as a percentage of sales over an absolute dollar terms. Do you see an opportunity to meet with Lantab as we go into next year? And if so, how would you look to bring the brand to life? And when or if ever can we expect to see maybe some campaigns coming to life to illustrate how you're evolving a brand story, not just a product story. Thank you.

Yeah, for sure. So I'll answer the marketing question. Paul, if you want to add anything else about the margins. So this brand, you're right, we definitely have a lower percentage of marketing spend than I think, you know, other beverage brands. It's unique. It's a brand that because of our loyalty, our consumer loyalty, we are able to spend less. And I'll give you – and I'll explain why. Once we put – so in 21, when we actually did TV, we had a campaign. We also had digital, et cetera. We still were – we were able to put it out on the air, but then our – follow our social and influencer following, basically take that message and really organically get it out to all of their followers. And it just has to do with how passionate our consumers are. So I do not think we will ever need to spend at the levels of some of the big beverage brands. Now, having said that, we will increase our marketing. You know, we haven't for the last, we've never really spent for, we'll never spend really during Q1, but think of, you know, nine months. We've never spent at the level I think that we should for nine months because when we have, you know, the increase was too steep and we ran into capacity constraints. That will not happen. I think that we will And if it does, I guess that's a good problem. But I think that toward the end of 24, we're going to ease into support in 24. We'll start with promotion in Q2, and then we'll ease in marketing toward the back half of 24. And think of kind of the very back half into 25 is when you're going to start seeing, you know, Q4 of 24 is when you're going to start seeing support. some major TV campaigns, digital support, where you're going to see us really bring the brand to life.

Okay, and I think you guys are going to weigh in on the margins as well.

Yeah, sorry, I can jump in, Jason. So a couple things to think about. So you talked about 24 margins, and there's a couple things. You're right, protein costs, commodities are coming down. But we also have other things going the other way. So we have some headwinds. We do have inflation on some of our other raw materials and manufacturing cost that's partially offsetting that protein savings. And also we expect to spend more on promotion in 24. So depending on how we play the marketing versus promotion, that will, you know, depend depending on how gross margins play versus 23, but those are the big drivers. And as Darcy talked about, then obviously we expect to spend more on marketing. So now we're calling for even the margins to be at the high side of our algorithm for 24, which would suggest a slight decline from where we are in 23.

Okay. Okay. Thank you. I'll pass it on.

Thanks, Jason.

Thank you. One moment, please, for our next question. Our next question comes from the line of David Palmer with Evercore ISI.

Thanks. Good morning. I just wanted to get a sense from you. How would you characterize the competitive environment today versus maybe pre-COVID and post some of the changes we've seen in your competitive set recently, even since the spring, seen some shifts in in some of the other player market shares below what you're doing in your leading share, which is not giving up share, but we're seeing some share shifts below you. Are any of those challenger brands kind of making it more competitive, more discount-oriented? Any ways that you see this competitive environment being reshaped?

So I think some of the competitive dynamics... are that, so I talked about, you know, obviously pricing went up. It's starting to moderate. And I'm assuming you're talking about specifically RTD?

In red, yeah, exactly.

Okay, yeah. So I'll just hit on some of the high-level dynamics. So first, you know, pricing is still up but moderating down. Capacity constraints are easing. So in that way, they're – I think that we're starting to see, so if you look at TDPs, for instance, for the last several quarters, we saw TDPs actually falling because of out-of-stocks, because of capacity constraints, and it wasn't, you know, it was really across the board. You started to see in this quarter TDPs up, so that's a good sign that kind of in-stock levels are coming up. And what's nice about it, it's not because demand is falling. It's actually because there's more supply, which is nice to see. I think that sports nutrition, what's really growing the category are two areas, which is, so if you think of the kind of four needs states that we've talked about before. Adult nutrition, sports nutrition, weight management, and everyday nutrition. Sports nutrition and everyday nutrition are really boosting the category. And it is led by sports nutrition. That is very different from what we had seen before. During COVID, adult nutrition was really driving What was interesting about it is, and that's kind of the insurers and the booths of the world, what's interesting is they weren't growing households, they were just growing buy rate. But what we're seeing now is that's going back to kind of historical levels, kind of low single-digit growth. But what's really growing and exploding is sports nutrition and everyday nutrition. And I think that goes back to some of the trends we were talking about at the very beginning of the call, which is just around, you know, more coming out of COVID, more people are trying to be more active, you know, get back to the gym, start their workout regimen, and it's boosting some of the brands within those categories. So I think in general, some of the challenger brands that you referenced, are growing for sure and we're watching, but I would say that it has more to do with kind of the tailwinds of both the sports nutrition needs state and the everyday nutrition needs state.

That's very helpful. Thanks.

I'll pass it on. Thank you. One moment, please, for our next question. And our next question comes from the line of John Anderson with William Blair.

Hey, good morning. Thank you for the questions. Two quick ones. I wanted to come back to your comments around innovation. One of the things we've observed is obviously in the powder category, plant-based protein is a significant portion of that market, not so much in ready-to-drink shakes. And so I'd love to hear your perspective on, you know, why is this? Is it an issue achieving kind of the right flavor composition with the protein content? And is this changing when you're referring to kind of innovation of the liquid? Would you kind of consider kind of that area and do some of your co-man relationships perhaps help support this over time?

Yeah, you're right. So plant-based is much bigger in the powder set than in the ready-to-drink And it's really because of taste. With powders, you can cover up the taste. You can put it in a smoothie and you can put a lot of fruit in it and it'll taste like the fruit. So that helps. With ready-to-drink, you can't hide behind anything. And so it's difficult to make pea protein taste good. And that is absolutely a lot of A lot of companies are working on that, and yes, there's expertise all over the place, you know, including Comans, including protein suppliers, and obviously within the branded sets, we have a ton of experience here. So I think that that will come, and it's just a matter of time.

Okay, thanks. And then with respect to your your supply network and some of the additions that you mentioned earlier on the call, as you think about your longer range plans, you referred to kind of 25, 26, 27, particularly around those new greenfield facilities. Is there capacity within those greenfield facilities for substantial line additions? In other words, as you think about kind of 25 to 27, do you see yourself growing with those providers who have established greenfield facilities, or will it require new additions to the COPAC network? Thank you.

Yes, the partners that we expanded with, we chose them because of their ability to scale. And so just to give you some numbers, I'll use MFI as an example. They put in four lines. They have the ability to scale to 10. And so – and same, you know, Synopta has the ability to scale – they have many phases that they're able to scale their facility. So absolutely – We have room to scale within those facilities and, you know, in some of other partners as well. They're putting in new lines. The goal when we chose our partners was we do want, you know, kind of fewer, bigger, better partners that are interested in really scaling with us. And so that was one of the requirements.

One moment, please, for our next question. And our next question comes from the line of Robert Dickerson with Jefferies.

Great. Thanks so much. Just a quick question on the shelf resets you spoke to, and then also you said, you know, volumes clearly would be, you know, growing nicely next year given the incremental capacity. and the product reintroductions. I'm just curious, like, you know, are the shelf resets kind of different than the incremental capacity? You know, is it incremental? And then do you just kind of have line of sight with your customers that as the capacity comes online and you can reintroduce the products that have been offline, that those just kind of go in on a rolling basis? you know, relative to having to then like wait for another reset. That's it, thanks.

Yes, as we are temporarily paused flavors, the three that we brought back, they will roll in as we have resets. I think what's interesting is there is a major mass customer that will be resetting in this, in Q4. They didn't want to wait for the reset, and so they decided to put up a display that had those three paused flavors immediately when they were available to kind of bridge the gap before the reset. That is pretty unique. Most don't have that flexibility, and so we need to wait for the resets So far, those are available in, I would say, I don't know, a third of the locations, and the rest of the two-thirds will be rolling out in the fall and the spring resets.

Got it. Okay. And then just to kind of... I guess combine that with the commentary around kind of the timing of expected marketing spend, right? As you get through 24, I mean, it sounds like, you know, as the products are reintroduced and they're coming online on the resets that, you know, kind of maybe as we get through like the first half of next fiscal year, kind of the primary focus is more on a little bit more kind of normal promotional activity with display. you know, trying to drive velocities relative to, you know, kind of pushing the consumer, you know, with respect to marketing spend.

Is that fair? Yeah, our plan, we have a, I think we've talked about this before, in Q4, so next quarter, we have some very light promotions. And then we usually, you know, We don't promote in Q1, but if you think of then Q2 with the big time, we will layer on more normal new year, new you promotion and store promotion and then layer on marketing in kind of Q3, Q4 of next year. We don't feel like we need to do it all at the same time. We always have kind of a baseline of marketing activity on all of our social channels and some small digital, you know, some digital spend. But I think what you're talking about is similar to what Jason was asking about is more of like the bigger campaign. And that would come later in 24. Super.

Thank you.

Great.

Thank you.

Thank you. One moment, please, for our next question. Our next question comes from the line of John Bumgardner with Mizzouho.

Good morning. Thanks for the question. Hi, John. Darcy, first off, on the subject of household penetration for Premier, you mentioned it's the highest penetration in the category, but it's still only a fraction of the total category. And when you think about where Premier is not present right now, how do you prioritize segmenting that opportunity? Do you have to hit on Anything different to chip away at the next 5% to 10% of households, and then different for the 5% to 10% after that? I mean, aside from just more marketing, more flavors, I guess what, if anything, needs to evolve to grow households from here?

Yeah, great question. So first, just to hit on your first comment, yes. Highest in the category at 15%, but still only 15%. So the overall liquid category is 43% nutrition bars, which are the part of the category that kind of has already mainstreamed, that is at 55%, and then the overall convenient nutrition category is 73%. So just putting some numbers to your comment at the very beginning. So a lot of upside. We believe that we can... double our household penetration. And we'll do it in a few ways. First of all, yes, we're the kind of normal playbook that we really haven't implemented yet. And a normal playbook is flavors. You know, first it was just making sure that we have supplies. So, you know, clearing up our out-of-stocks, making sure we have full shelves. Then it was, you know, getting the flavors out there. It's increasing distribution where we already are distributed. And one of those places, e-commerce, we know that in our category, one of the channels that is really important for discovery, meaning that people go, and this is kind of obvious, but especially for our category, is that people go online and they research this type of product before they buy. And oftentimes, they will buy online first. So big discovery channel, so really expanding our e-commerce presence and communication. We have a lot more room, again, where we already are distributed specifically in food drug masks. We vastly under-index. We think that we should have double the space in FDM. Then you start getting to, and then, you know, getting back to marketing and expand and getting back to a brand campaign. where we really can focus on those new households that look like the ones that already are in our franchise, but haven't tried. So this idea of open to our TVs, but haven't tried. So we think that's a massive opportunity. Then we start getting to the areas that are maybe a little harder, but still very much an opportunity. So think of channel expansion. We've talked about convenience food service, those are great for trial. And then you bring them into our franchise. And then innovation is a big part of ZOL. So we have a, in our investor deck, we have a household penetration bridge that goes through all of those pieces to get to double the size of our household pen.

Okay. Thanks for that. And then as a follow-up, in terms of promotions, The distribution of this category has changed a lot since the last material wave of input cost deflation. E-commerce is much larger. Specialty is much smaller. You've got food in mass with more distribution. Has the shift in retailers, has that impacted at all sort of the net focus from the trade on discounting? I mean, I'd imagine grocers are less inclined to use protein as a traffic driver than GNC would be. So is it fair to think that on the downside of this commodity cycle, there's going to be less pressure to discount emanating from retailers relative to past cycles?

It's an interesting question. We do see less. So I guess I would answer it slightly. OK, so I think that there will be discounting. Based on our experience, you see less depth in kind of more mainstream So specialty, for instance, seems to go deeper on those promotions. So I think the overall promotional frequency will probably be around the same, but I think the depth will be different, will be less seen.

Thanks, Darcy. Thank you. One moment, please, for our next question. And our next question comes from the line of Matt Smith with Stifel.

Hi.

Good morning, Darcy.

Good morning.

I wanted to ask about the incrementality of the flavor extensions in your distribution gains. In the past, as you've reintroduced flavors, they've been very incremental, spurring additional consumption. And I was wondering if you're still seeing that level of incrementality. I know it's very high right now, but relative to when the flavors were reintroduced after the last supply shortage, given the larger size of the FDM channel compared to the prior reintroduction and if there's any difference in consumer behavior there, or perhaps if the competitive set is making a difference today with some stronger competitor's accumulating some share below you and getting on their front foot in terms of capacity additions as well?

So again, in my prepared remarks, I gave the incrementality of root beer float. It was 90%. So that just gives you a sense of the consumer excitement around flavors. I also mentioned the retailer excitement around the one major mass customer that couldn't wait for the reset and they wanted to put it on display for several months. So there is definitely excitement around these new flavors. It is very difficult to assess true incrementality on on the kind of paused flavors. And it's just because, I mean, we're getting growth from just filling out the shelves. So it's hard to distinguish what is coming from, I mean, we're putting the new flavors on the shelf and they're selling and we're growing and it's incremental, but is that, I think it takes more time. So I would love that question in a few quarters. when we have more time under our belt and we have better data, that I can really give you a solid incrementality data point.

Okay, thank you for that, and I think that's fair. If I could ask a follow-up on your comment around innovation within the bottle and the liquid, how do you think about the incrementality hurdle for innovation given how strong the reintroduction of flavors is performing. And as you mentioned, root beer did very well. That would seem like there's a high bar there, even though incremental innovation beyond just flavors may ultimately unlock additional household penetration opportunity.

Yeah, we have two kind of streams of... of innovation. One is just continue to expand flavors on both brands. Continues to be, and this is more, this is both kind of LTOs, so limited time offerings on Premier, but also in-line flavor expansion. And Dimetize also has done, we didn't talk about it as much, but flavors have done very well on Dimetize as well. Then, so that's one kind of line of innovation. The other line is really focusing around incremental consumers and occasions. There are some people that aren't interested in a 30-gram shake. It's too much protein. There are some people that are lactose intolerant. There are some people that, you know, so there is a kind of fence There's much more room to expand with our current lines, but then we can go after completely new consumers, and that is kind of another line of innovation. So we're going after both simultaneously, and really it starts with just consumer insights and focusing on truly incremental to what we currently have.

Great.

I appreciate the call, and I'll pass it on. Thank you. Ladies and gentlemen, that concludes today's conference call. Thank you for participating, and you may now disconnect.