BellRing Brands, Inc. Common Stock

Good day and thank you for standing by. Welcome to the Bellring Brands Third Quarter Fiscal Year 2025 earnings conference call. At this time all participants are in listen only mode. After the speaker's presentation there will be a question and answer session. To ask a question during this session you will need to press star 1 1 on your telephone. You will then hear an automated message advising your hand is raised. To withdraw your question please press star 1 1 again. Please be advised that today's conference is being recorded. I would now like to hand the conference over to your first speaker today Jennifer Meyer, Investor Relations for Bellring Brands. Please go ahead.

Good morning and thank you for joining us today for Bellring Brands Third Quarter Fiscal 2025 earnings call. With me today are Darcy Davenport, our president and CEO and Paul Road, 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 supports 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. Before we're 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-GAP measures. For reconciliation of these non-GAP measures through the nearest GAP measure see our press release issues yesterday posted on our website. With that I will turn the call over to Darcy.

Thanks Jennifer and thank you all for joining us this morning. We delivered another impressive quarter continuing to demonstrate our leadership position. Paul will go into more detail about the quarter's performance and how we expect to end the fiscal year. I plan to use my today to remind you of our company's unique value proposition and why we believe in our continued success. I have three key messages. The first the ready to drink shake category is on fire with a long runway of growth. Second premier proteins demand and brand fundamentals continue to show exceptional growth. And last we're building in our brand momentum positioning ourselves for many years of future growth. Let's get started. As you know our company's core focus is ready to drink shakes. It is no secret that this category remains one of the fastest growing categories in the entire store. It has incredible momentum with meaningful long-term potential. Protein is at the center of many macro trends including health and wellness, popularity of functional beverages, increases in GLP-1 usage and the constant consumer desire for convenience. Ready to drink shakes are thriving because they fit so well with the evolving lifestyles and values of today's consumers. RTDs grew 16% this quarter with 70% of that growth coming from volume. One in two households now consume RTD shakes and the category added five penetration points in the last year. This was the second highest household penetration increase of any category only behind prebiotic sodas. It is worth noting that premier protein contributed approximately one quarter of that growth more than any other brand in the category. Retailers have seen this category's potential and are getting behind it. Many leading retailers turn to us for guidance on how to accelerate their growth. As a category leader, we serve as the official category captain in several key retailers and advise many others. We provide thought leadership on aisle location, assortment, merchandising solutions and signage. And retailers are taking action. They're adding more space for RTDs, testing higher traffic aisle locations and expanding displays in and out of the aisle, all in service of accelerating awareness of the category among their shoppers. Concurrently, they are deemphasizing less productive and in many cases declining subsegments and brands which are weighing on their growth. Further adjustments of these underperformers remain a meaningful opportunity for the category. Success attracts competition, so it is not surprising to see new protein RTDs enter the category, especially in its biggest channel club. The increased interest, especially from large established CPG companies, further validates the long-term consumer relevance and staying power of this category. And in a low household penetration category, competition is good. It brings expanded shelf space, increased marketing spend, heightened focus on innovation and a drive to delight consumers, all with the net effect of increased household penetration and category growth. We continue to believe the category is in the early stages of growth. At 52% household penetration, it trails mature CPG categories which are often at 80 to 90%. The convenient nutrition category has a third or less of the space of similar size categories in the food channel, a compelling argument for more space. The combination of expanded distribution, new households and increased buy rate of existing users will propel this category for years to come. The convenient nutrition category will look vastly different in five to ten years from now and Premier Protein is positioned well to lead that evolution. My second message, Premier Protein's and brand fundamentals continue to show exceptional growth and strength. Premier Protein with RTD market share of 25% is the number one brand in the RTD segment as well as the number one brand in the broader convenient nutrition category. Our consumption grew 19% in Q3. Volume gains drove approximately 60% of this growth. The brand hit an all-time high in household penetration and remains the leader in the RTD category reaching .6% of consumers. Most encouragingly is that our loyalty and buy rate have remained strong, among the highest in the category. Retails look to us for thought leadership and as a proven brand. We are the number one Velocity brand with the overwhelming majority of our products in the top third of the category. Our brand continues to win incremental shelf space with Premier Protein Shake TDPs of 34%. Premier Protein continues to be the go-to brand within the RTD category because of its mainstream appeal, unbelievable taste, and category-leading loyalty. The third and final message, we've built strong momentum and we are now taken to the next level, positioning ourselves for many years of growth. Key enablers will be increased brand support, distribution expansion both in and out of the aisle, and innovation. Starting with brand support, as a reminder, in late December, we launched our first media campaign since 2021 and results show a strong ROI. In July, we introduced our second wave of media which features our updated packaging. The new packaging which started to roll in July brings a modern look that improves discoverability at the shelf and raises our appeal to younger consumers. Consumer and retailer feedback has been overwhelmingly positive. In addition to increasing brand support, we are boosting in-store investments via promotion, display, and demos. We know from experience, promotions, and more importantly, the displays come along with them are key to reaching new households and growing our business. We are aggressively pursuing merchandising in aisle and throughout the store. We have established a dedicated team in addition to a new broker partner to expand our merchandising and consumer touch points across the store. These include palette displays, end caps, and more recently, single-serve bottles and coolers. Distribution continues to be a major opportunity. We generate 11% of the convenient nutrition category sales but only a 4% share of shelf. In Q4, we will continue to gain TDPs on our core products, single-serve bottles, new innovation, as well as a short-term incremental palette position at a key club retailer. We spent the last four years developing a scalable, regionally diverse co-manufacturing network and now have the capacity to aggressively pursue distribution and take advantage of these valuable retail opportunities. Lastly, we are accelerating our efforts around innovation. Recall we launched two new shake lines this year. The first, our indulgence line, targets an incremental consumption occasion while still delivering on the nutritionals that our consumers expect from the premier brand. We are pleased with this line's performance today. Momentum continues to build and it recently gained distribution and club. The second line, almond milkshakes, our first non-dairy protein offering, launched in late June. These shakes made with real almond milk deliver great tasting nutrition without artificial colors, flavors, or sweeteners. Early results are promising and mark our first step of many toward more wholesome offerings. Our innovation pipeline is rich and is packed with both close-in innovation that has made us successful, like flavor leadership, pack size, and format expansion, as well as big eye innovation, which will be more disruptive and focuses on incremental consumers and occasions. We are committed to bringing continued excitement to our consumers and retail partners for years to come. In closing, the RTD category has strong momentum. Retailers are starting to really lean into this category. The premier protein brand is leading the charge as the number one brand with scale and a ton of upside. Premier protein sells 36 shakes per second, but the brand still has only 20% household penetration, clearly highlighting our consumer loyalty and a long runway for growth. I'm proud of our performance to date with another above algorithm year. Our teams are energized by the momentum we've built and excited about the opportunity that is ahead of us. Our confidence in the long-term outlet for Bellring remains high. Thank you for your interest in the company. I will now turn the call over to Paul.

Thanks, Darcy, and good morning, everyone. As Darcy mentioned, we had another good quarter. Net sales were $548 million, up 6% over prior year, and adjusted EBITDA was $120 million. Adjusted EBITDA margins were in line with our expectations at 22%. Both net sales and adjusted EBITDA were slightly ahead of our expectations, with the primary driver a heavier than expected e-commerce promotion load-in for premier protein and dimetize, which will deload and queue for. Starting with brand performance, premier protein net sales grew 6% with volume and pricing both up 3%. Distribution gains and promotions were the main drivers of volume growth. Recall we expected trade inventory changes to be a headwind to Q3 growth as we lapped prior year inventory replenishment and certain key retailers lowered their weeks of supply. These trade inventory changes went as expected, with the e-commerce load-in a partial offset and together were a high single-digit headwind to growth. As a result, shake consumption dollar growth of 19% meaningfully outpaced shipment dollar growth in the quarter. Dimetize net sales increased 5% this quarter lifted by strong growth for international and domestic RTD shake sales. Adjusted gross profit, which excludes -to-market adjustments on commodity hedges, was $192 million and grew 3% from prior year. Adjusted gross profit margin of .1% decreased 130 basis points. Third quarter margins faced moderate -over-year pressure from input cost inflation and incremental trade and to a lesser extent, packaging redesign cost and overlapping nonrecurring cost favorability in the prior year period. SGA expenses were $145 million and included a $68 million provision for legal matters related to our joint juice brand, which was discontinued in 2023. Excluding this provision, which was treated as an adjustment for non-GAAP measures, SGA expenses were $76 million, a decrease of 40 basis points as a percentage of net sales driven by leverage on GNA. AMP spend was 3% of net sales relatively flat compared to prior year. Regarding the joint juice litigation, a settlement in principles reached during the quarter and remained subject to court approval. See our press release and 10-q for further details on this litigation, which dates back to 2013. We expect payment on the matter sometime in fiscal 2026. Before reviewing our outlook, I would like to make a few comments on cash flow and liquidity. We generated $40 million in cash flow from operations in the third quarter in $92 million year to date. We continue to expect our cash flow in fiscal 25 to be in line with fiscal 24 with strong operating cash flow generation in the fourth quarter. As of June 30, net debt was $971 million and net leverage was two times. We anticipate net leverage will end the year with a leverage will end the year below two times. With respect to our share repurchases this quarter, we bought 1.3 million shares at an average price of $65.07 per share or $83 million in total. Year to date, we have acquired 3.8 million shares or approximately 3% of our outstanding shares. As of June 30, our remaining share repurchase authorization was $197 million. Turning to our outlook, we tightened our fiscal 25 guidance with our midpoint for both net sales and adjusted EBITDA unchanged. Our outlook for net sales is now 2.28 to 2.32 billion with adjusted EBITDA of 480 to 490 million. Our guidance implies strong top line growth of 14 to 16% and adjusted EBITDA growth of 9 to 11% with healthy adjusted EBITDA Inclusive of the previous e-commerce timing shift, we expect net sales to grow 14% at the midpoint in the fourth quarter. Premier protein is the main driver of overall growth with all other expected to grow mid single digits. Premier protein is lifted by distribution gains and incremental promotional activity as we return to historical promotional levels. This is partly offset by lower net pricing. Consumption dollar growth for Premier RTD-Shakes is expected to remain strong in the high teens to low 20s for the quarter. Regarding fourth quarter adjusted EBITDA, we expect margins of approximately 19% at the midpoint. Compared to last year, we expect significantly lower gross margins, partially offset by meaningful SG&A leverage. For gross margins, higher promotional spend and lower GNAs. Our 14 cost headwinds will step up in the quarter for both of our powders and shakes with headwinds from elevated way, the primary input on our powder products, continuing into fiscal 26. In addition, fourth quarter gross margins are negatively impacted by packaging redesign costs and the lapping of one-time favorability, which combined are 100 basis point headwind. SG&A dollars are expected to increase significantly compared to a year ago with lower ANP spend and reduced G&A expense. Wrapping up with an update on tariffs, we are monitoring the latest developments and potential implications to our fiscal 26 input cost. As you may recall, we previously discussed potential headwinds for our fiscal 26 cost of goods sold with the higher tariffs impacting our dairy protein source from New Zealand and the EU. Based on the policy communicated last week, the overall tariff impact for bell ring has increased slightly with 15% tariff rates enacted for those countries. While we are evaluating ways to mitigate these costs, we continue to expect a low single-digit impact for our fiscal 26 total cost of goods sold with no tariff impact on our fiscal 25 results. In closing, we are pleased with our -to-day performance. Our long-term prospects remain bright and we are well positioned to close out the year. I will now turn it over to the operator for questions.

Thank you. At this time, we will conduct a question and answer session. As a reminder, to ask a question, you will need to press star 1-1 on your telephone and wait for your name to be announced. To withdraw your question, please press star 1-1 again. Please stand by while I compile the Q&A roster. Our first question comes from Andrew Lazar from Barclays. Please go ahead.

Great. Thanks very much. Good morning, everybody. Good morning. Darcy, you listed a bunch of reasons why you remain confident in the long-term potential of both the convenience nutrition category and premier proteins roll within it. I think I remember last year on the fiscal 3Q call, I think you broadly addressed some expectations for the coming year. And I was wondering if you'd be able to, admittedly, on a preliminary basis, provide some initial color on your thinking for fiscal 26. Thanks so much.

Yeah, sure. So it is really too early to talk about 26. We're deep in our planning process. You know, historically, we have talked a little bit about 26 on this call, but candidly, it is a lot easier to estimate, you know, demand when your capacity is constrained versus, and we're not now, so we are, we kind of have to follow the planning process a little more religiously. So there are a couple uncertain variables. Obviously, we just started one of our biggest promotions with Club, and we have another one later, so we want to see how those go, as well as we've, you know, we're still assessing some, what happens with tariffs. So there are just a few pieces. Overall, we feel great about the long-term opportunity of the business. For all the reasons that I went through in my scripted remarks, I really think that, you know, not only are we unconstrained from a capacity standpoint, you know, our metrics are fantastic, and I really feel like we're at a tipping point with retailers that they're really getting behind the category and we're leading the charge. So feel great about the opportunity. Just, you know, in the middle of our planning process, and we'll have more information in our next call.

I'll pass it off. Thank you.

Thank you. Our next question comes from Kamel Goss-Rolaw. Please go ahead.

Good morning, everybody. A couple of questions. The first is, you know, third quarter came in maybe a little bit better than expected when adjusting for some of the de-stocking issues, but you've narrowed your guide as opposed to maybe coming in at the higher end, given all of the statistics and all of the things you talked about, Darcy, of the momentum that you have. So just curious why, you know, narrowing as opposed to maybe pushing towards the higher end. And then maybe I don't have the scales correct on your slide nine, but consumption being kind of in line with shipments for 3Q, I might have expected consumption to be much higher given there was some de-stock in the third quarter. So just want to understand if I'm just seeing that wrong or if there's something else in there.

Sure. I'll start with your first question and then pass it to Paul for the second. So, you know, with any quarter, there are many puts and takes, but they're all pretty minor. So I'll just walk you through some of the puts and takes just to give you a sense. Yes, Q3 consumption was slightly higher than we expected. Mainly it was actually pricing because of mix, less volume, but, you know, let's call that a couple million dollars benefit. So that's one piece. The second piece was we gained, I said this in my prepared remarks, we gained a short-term club palette. So that added a couple, about two months benefit. One was promoted. So that, we'll call that about $10 million benefit. So what offset that was when we gained that short-term club palette, several other competitors gained short-term space as well. So we're assuming this increases some competitive pressure in club and it reverses the first two gains. So again, this is, these are small numbers. It's only about, you know, 2% of our quarter, but that is the reason. So, you know, we've got some ups and some downs, but that is the reason why we ended up lowering our upper end.

So the second question regarding our supplemental schedule, slide nine. So yes, you're correct. We expected consumption of slightly outpaced shipments more than it did. They came in more in line. And the primary driver is the e-commerce heavier than expected load-in that we saw in the third quarter. So that is masking the deload to some degree that we saw in club and other retailers. On the last call, we called out obviously an expected deload in the quarter. That played out exactly as we expected. We feel good about where our trade inventory levels are for those key customers. But that's, that's the main reason is yes, we expected it to be slightly lower as well, meaning consumption over shipments. And it was a massive bit by this e-commerce load-in that we expect to fully load, deload in Q4. We think it's purely timing.

Okay, got it. Thank you.

We'll move on to our next question. Our next question comes from David Palmer from Evercore ISI. Please go ahead.

Thanks and good morning. I just want to follow up on on Andrew's question because, you know, obviously not commenting on it, given all the mixture of increased competition, but also your distribution innovation, marketing drivers. There's a lot of things for us to consider here, and obviously the category remains vibrant. You know, I wonder, is your long-term targeted 10 to 12 percent a good starting point for us to be thinking about in the high single digit type category growth? And do you think you'll be gaining share this this year, this next year, or do you think that that's maybe not as much in the cards and just any sort of proportions comments that would speak to how we should be thinking about the category and your growth within the category would be helpful?

Yeah, I mean, I think we feel great about the opportunity still. I think we still feel good about our long-term algorithm. I think that in general, you know, that many of the, you know, all the things that we've laid out kind of are in our investor presentation are are are very relevant. You know, I think that it's a hot category. Everything I said in my scripted remarks. It's a hot category. We're the number one player. We are, you know, when you're we I talked a little bit about, you know, the inevitability of increased competition. And I think that it is actually really good for the category. And so I think that all of, you know, we're seeing some real momentum with our retailers. I think this is the first time I've talked about us being category captains. This has been a strong push for the last year. And it's really nice to see and it's and we're having some some big impact. And so all of these things and then of course our innovation. And, you know, this is the first year we've launched two new lines in one year. And it's it's, you know, really starting to gather some movement. We're getting on shelves. It's it's the velocities are turning where we started. So there's just a lot of pieces. And and I think that that is why we just we need a couple more months to work through it. So we can give you a good a good number.

Okay, I'll pass it along. Thank you.

Thank you. Our next question comes from Megan Clap from Morgan Stanley. Please go ahead.

Hi, good morning. Thanks so much. I wanted to ask the competition question maybe a little bit differently. And Darcy you touched a bit on it and your prepared remarks, but I'd love to just hear your updated thoughts in terms of how you're evaluating the single serve opportunity and kind of your desire to move the brand into the mainstream beverage aisle as a way to reach new customers, maybe as competition is getting a little bit more fierce, if that's an okay word in kind of your main club channel. Thank you.

Sure, Megan, I'm going to start with the club competition because I think there's some some context that might be helpful. And then I'll end with just our efforts around where we want to be in the store, what's important. And then lastly, single serve. So if I don't hit all those points, tell me. Okay, let me first with the kind of club situation because it's kind of unique. So when we gained the short term, I mentioned that when we gained our short term club palette, several other competitors also gained some space. So one of our key club retailers decided to increase the RTD and powder floor space in Q3 and it for a short term basis. It's a temporary expansion to fill spots previously meant for tariff impacted categories. So it's a little bit unique. It's supposed to last until the end of the calendar year. So it is, you know, we gained some space, but also some competitors gained some space because they had all this new space to fill. So it's a little bit of a unique scenario and I think that's what I think people are, you know, we're seeing the increased competition. I will say that I was in a club store this weekend and it is it is really it is great for the category. You know, when I was walking around, I bet you 60 to 70 percent of the carts in the store had high protein shake in the cart, which and you know, people it's completely mainstreamed. And so I truly believe that the competition is good for the category. And I think that this is sort of a unique situation where the competition is especially in that channel is kind of increasing for a short period of time because of this unique situation. And then we'll we'll come down a little bit. So it's a little different in other channels where you have to wait for resets and those just happen a little more slowly. So that's one piece that I think is important context. The second piece is just our conversations with retailers about where we want to be in the store and the opportunity. And what I would say is the guidance we are giving retailers is it's less about where you are in the store. We want to be in high traffic area and the category needs to be distinctive from the rest of the store, meaning needs to be have strong signage. You need to clearly see that it's convenient nutrition. It has to have education on to help consumers understand what products they should try. And then these kind of displays outside of the aisle are very important to disrupt consumers in their kind of normal shopping behavior. We are actively so in addition to the work we're doing with our retailers around expanding the category, potentially moving the category, merchandising it better and displaying it throughout the store. We are I think the singles are singles efforts is going to be a big focus next year, which will be around displays throughout the store of singles. Some of those will be ambient because we know that that works very well. Some of them will be in coolers. We've had some success in food accounts where we're getting in coolers, which is nice. So I think that next year we'll be focused on that. We believe that this will be the first year that we're focused on it. So and then I think the next step would be getting after that DSD opportunity. There is and then and really you need the DSD opportunity for convenience.

Okay, awesome. Really thorough. Thanks, Darcy.

Thank you. Our next question comes from Jim from Stevens. Please go ahead.

Good morning. Thanks for taking our question. A lot of questions on competition already and if you'll indulge me in asking the other one kind of a kind of a different way with industry capacity in a better spot and that maybe opening the door to newer upstart brands coming into the category. Can you offer any thoughts on how we should think about promotional cadence going forward? Just conceptually, I think it would make sense. As some of these other brands launch, they would probably have some heavy promo efforts behind that and maybe have several launching maybe a kind of a sequential cadence. It might end up where the promotional calendar from the category as a whole is pretty packed for a year. Any thoughts around that? You need to increase or extend your promotional cadence. Do you feel that maybe other brands are going after different customers? Any details you can offer about how we should think about that going forward?

I think our promotional cadence has been pretty consistent. I think now, you know, obviously last quarter we upleveled, we announced that we upleveled our Q4 club promotions and that really got us back to what we used to do before capacity constraints. So, you know, when you look at the quarter Q1 for us, that's October, November, December, that's a low promotional period historically for the category as well as for us. The biggest promotional period is that January, February, March. That will continue being it. It's when most new people enter into the category. And then there are some usually small, you know, some minor promotions in Q3 and then another kind of big promotional period in the back to school, back to sports timeframe which is our Q4. So I don't expect, you know, I think that is, that has been the promotional kind of cadence ever since I've been in the category, you know, and I think that is and that's really just, it's following the consumer behavior. And that's, you know, this last year or this year, 25, was our first year of kind of full promotion. And like I said, getting back to what we used to do pre capacity constraints. So I think that will be the same going forward.

Thank you. Our next question comes from Yasmin Deswendi from Bank of America. Please go ahead.

Hey guys, thank you for the question. So I just wanted to follow up on Andrew's question earlier and maybe phrase it a little differently. Obviously understanding that you won't get into details about next year until later this year. I think in the past you've alluded, you know, that on algo growth could be in the books for next year, at least on Topline. You know, you'll be lapping this year's innovation, incremental promotions, you've launched two new lines this year. So I'm not asking for any numbers, but just kind of qualitatively. How much confidence do you have in achieving that on algo growth? And, you know, what are the qualitative things that we should consider for next year? Just on Topline. Thank you.

Yeah, I think we feel good about it. I think that, you know, this is if you think of the last several years, we have been lapping capacity constraints in some way. So I think that we have been adding incrementally different demand drivers. You know, we started off adding back our full line. We still had even as close as last year, we had we still had some out of stocks that we were lapping. This we then added promotion. We started with club promotion, then we added FDM promotion. This is the first year we added back our marketing, our marketing drivers. So I think this in 25 is the first year that we had all of our demand drivers. So as we go on to 26 and beyond, we are kind of back to normal. And so I think that as you look at that, I think that, you know, you know, we have said that, you know, our kind of long term commitment is 10 to 12% Topline at 18 to 20% margins. So I think that, you know, that is the expectation. And but it I think that that when you look at it, when you zoom out and you remember what we've been doing for the last several years, I think it gives it gives good context to where we are going forward. And like I said, I think that I think what is exciting about what's going on is it when you have a explosive category, and you are the number one player, if you look at any other category that, you know, grew high growth category, then that you know, number one player definitely benefits. And we're seeing that and that's why we think it's really important to, you know, be category captain and help really mold the future and really go after these incremental displays and being able to put our fingerprint on the assortment and or at least be able to give them thought leadership. So we can give them guidance about where the consumer is going and how we can help.

Okay, great. Thank you so much.

Our next question comes from Brian Holland from D.A. Davidson. Please go ahead.

Yeah, thanks. Good morning. A lot of the questions, I think on the numbers have sort of been addressed to the extent that they can. So maybe just asking. Obviously, there have been a lot of questions about the competition as well. I'm just curious, Darcy, if you could sort of frame for us how you think about the value proposition of premier protein and for context, you know, obviously we have, you know, new innovation and this is a category that has and will continue to bring a lot of innovation to market. And so as that evolves as consumer taste and preferences evolve, the positioning of premier protein, the value proposition of that product -a-vis some of the other products and macros that are out there available to the consumer. What gives you the confidence from that standpoint that you can, you know, hold or grow your share going forward?

Sure. Great. Great question. Okay. Value proposition. Why do consumers love premier? Approachable positioning, fantastic taste and flavors, and great nutritionals like the trifecta. A key part of fantastic taste is this kind of thicker milkshake decadent consistency and a wide variety of flavors. So consumers are drinking this product or product every day. They get they get tired of chocolate and vanilla. They want to try root beer float and pumpkin spice and lemon bar and all of these other things that are super exciting. They will not sacrifice taste for anything. So that is the value proposition. That is what has made premier so successful and will continue. What we have and when we kind of map out, we've done a lot of work on where the white space in the category is and kind of where the biggest growth potential big buckets are. And I think that, you know, we feel that there's opportunity in and again without going into kind of our innovation strategy. But like we think that we are in a great space in that when we map out what consumers want, you know, most and I have exact percentages, but most want thick decadent shakes that fill you up. Some want kind of thinner, thinner products that are that can be consumed sort of more as a beverage. Most want kind of this idea of around 30 grams of protein, let's call it 20 to 30 grams of protein. Some want higher or lower. Most want sweet. Some want sweet. And so I'm giving you this most some because it starts mapping out what the future of this category is going to be. The beauty of a kind of young category is it starts with a few brands and then there's a few products and then it starts expanding into you go after the most. And then you start expanding different line extensions and even other some brands going after some of the other pieces. And so I think that some of the new I mean, I'll use, you know, ultra filtered milk as an example for a product standpoint. It is much thinner. It's much more like high protein milk, whereas our product is much more of a milkshake. So our consumer loves that thicker decadent shake type experience because it fills them up. And so going to like a thinner product is not a great trade for a loyal premier consumer. However, there's an opportunity for that. And so I think that's how we're kind of looking at the innovation. But we feel like we're in a great place because as we look at there are a lot more of those people who are looking for great tasting, approachable positioning, great nutritionals. And that's part of our marketing campaign. That's part of getting out of the aisle. That's part of all, you know, even some the backbone of some of our innovation strategy.

Appreciate all the color. Thank you.

Our next question comes from Peter Grom from UBS. Please go ahead.

Thanks, operator. Good morning, everyone. A lot of questions on the top line, so maybe just some some questions on profit support. I think you mentioned that the fourth quarter gross margin is going to be under significant pressure. Is there any way you can put some guardrails on that? And then I guess related, obviously, I think the year with some margin pressure here and I know we'll get building blocks at 26 in a few months. But can you maybe just help us understand of these headwinds you're dealing with in the fourth quarter? What do you view as transitory versus what should linger as we look ahead? Thanks.

Sure. So from a Q4 perspective, you're correct. We expect even a margin to decline about 300 basis points versus a year ago. We do expect SG&A dollars to be lower. So, you know, significant leverage on SG&A greater than 300 basis points. So it's really gross margins that are declining from there. And the biggest pieces or two biggest pieces, which are promo. So we're laying on obviously promo compared to a year ago, especially in clubs. So that is the biggest headwind, I guess, to last year. And then we are seeing some inflation on proteins and our input cost. Proteins do step up from the third quarter and it's a headwind to the fourth quarter for both shakes and powders. And then one last piece, which is a lesser impact, is that we do have some one timers in the quarter on gross margin, which is related to the packaging redesign cost that we've called out previously. And then we are lapping some favorability of some non-recurring costs. So that's about 100 basis point headwind. So again, promo and cogs are the biggest pieces. I call out in my prepared remarks that on whey protein in particular, which is the input cost on our powder business for both Dymatize and Premier, we do expect that headwind to continue into fiscal 26. So we continue to expect the whey proteins will be elevated and will be a headwind to next year. And so we're looking at obviously mitigating efforts on that. And then really, again, not getting into 26 much at this point, but tariffs, I think, is the other piece as we go into next year that we've called out. And I mentioned it again in my prepared remarks that we do expect some cost headwinds from tariffs to impact us in fiscal 26. We won't be able to fully mitigate them by just changing suppliers or changing ingredients. So there will be some headwinds that we will work on. But we also have a number of opportunities, we think, to pull costs out of our products, out of our supply chain. So that's a big effort for 26 that we're working on. And then I do expect, you know, we'll see some G&A leverage as we continue to grow the top line. So those are kind of the bigger pieces as we think through 26.

Got it. Thanks so much. I'll pass it on.

Our next question comes from Matt Smith from Stiefel. Please go ahead.

Hi, Darcy. You talked about the competitive environment, maybe in the more near term. Can you provide more details about your expectations for the fall shelf reset? And as the category enters this new wave of competition, how do you measure success from here from a market share perspective? And has the view of the required level of ANP for bell ring changed in this new or in this more competitive environment? Thank you.

We feel good about the fall resets. So we'll be continuing to expand distribution TDPs on Premier Protein, both like so single serve. We're getting more expansion of single serve than our core products as well as our innovation. So and I mentioned that temporary incremental palette in club. So feel great about the fall resets that that are coming up. So that was one piece. The market share. This is the beauty of a growing category and a low household penetration category. If you actually look at our market share over time, we've actually grown very well and had a pretty stable market share. And so I think that we expect I think that it is not our growth isn't predicated on increasing market share necessarily. We can actually be quite successful in just holding market share. So I think that that is one piece. And then what was the third question? My

marketing spent.

Oh, you want to take that?

Sure. Yeah.

So, Matt,

yeah, we from a marketing spend perspective, we we have called out previously that we would we would expect over time to increase our marketing spend from where it's been. Darcy said this year we layered on promotional activity, but we do think that going forward that again, I don't think we're talking about big changes, but we would expect that we could lean a little bit further into marketing spend as percent of sales. But mostly that should get offset as we get GNA leverage as well. But to answer your question, yes, I would think that our A&P spend would slowly go up over time.

Thank you. I'll pass it on.

Our next question comes from John Anderson from William Blair. Please go ahead. Good

morning.

Thanks

for the question. A question on innovation was wondering if you could talk a little bit more about indulgence that line and whether how incremental you're seeing that business in terms of attracting an additional occasion or occasions. And then also on almond milk, it may be too early, but how the brand, the premier brand is translating in a kind of a different sub segment of the category. And then if I could just throw in a follow up maybe for Paul, any any a lot of talk about competition, obviously, and investment levels and focus. Any thoughts on changes to kind of your capital allocation priorities going forward? Thanks.

Okay, so I'll start. Indulgence. So first of all, I would say that that's the one we have the most history on right now because it launched earlier in the year. And it's a really strong performance. I think that we launched it first in mass and it did very well. Three out of the four flavors are in the top third. We actually got the fourth item in there because of that success and the success in mass also translated into expanding distribution into other places. So and we're continuing, you know, as I just talked about the TDP gains in Q4 will be expanding indulgence into kind of more the rest of mass as well as other food channels include and also got it into close to the top. And then we also have a club as well, a club account as well. So feel really good about that. Strong incrementality. You asked about the whole concept of indulgence was that it would be incremental from like an occasion standpoint. And that is exactly the numbers are are showing that about half of the sales are actually driven by category expansion. So that is exactly what we want to see. I think the bonus was that we actually are getting some new consumers. You know, the the design of it was incremental occasions. So, you know, having your own consumers buy more for a different occasion. So that is happening. I said 50 percent. But I think what's nice is the bonus is that we're actually getting some incremental consumers as well who just see the concept and they and they resonate to the concept. So that feels really good on almond. You know, exactly what you said. It's just too early. You know, we just launched. Really, we only have it right now in Amazon. We were, you know, saw they just had a promotion earlier or last month. It was included in that. Saw some good trial there. And now we're rolling out into other food and mass customers in in the fall. We've got a test in mass, et cetera. So too early to tell. But I would say that the on ecom, it's actually, you know, it's a little bit of a We're having good pick up. It's a it's a personal family favorite in my household. So that goes a long way.

And on capital allocation, I would say no real change to our priorities. We will continue to balance kind of debt pay downs on a revolver and share buybacks, you know, opportunistic share buybacks using our free cash flow or strong free cash flow to on those items. I think M&A is still more meeting the long term. We continue to focus on organic growth. I would say not any significant real changes to our capital allocation approach as we go forward.

Thanks so much. Our next question comes from Steve Powers from Deutsche Bank. Please go ahead.

Hey, thanks. Not to take us backwards, but Darcy, if I think if I had told you three months ago that consumption would have ended at 19% for three Q. I think you would have said that that indicated momentum that would likely yield better than the high teens, low 20s consumption that you're now calling for and for Q. So can you just be a little bit more precise as to what may have temporarily inflated three Q and then conversely what may be dampening for Q versus versus, you know, kind of your expectation three months ago? And then, you know, if I could just, you know, looking forward, I just want to be really clear because I've heard different things. I've heard it's too early for 26. I've heard it's too soon to call. But then I've also heard more recently you said, you know, 10% plus is your assumption. So, you know, coming out of four Q, given the current momentum, you know, are you saying that next year is supposed to be a 10% plus growth year or are you not sure about that?

Okay, so Steve, can you go back to the first question just around? So you're asking about the consumption of Q, of Q3 being 19% and then the expectation of Q4?

Right, because your call coming into the quarter in three Q was mid to high teens consumption growth. You came in at the high end of that, which implies momentum that I think would have all else equal put you towards the top end of your range. That's now, you know, we've kind of ratcheted down towards the midpoint of the range. So just what may have temporarily inflated consumption in three Q and or what is dampening for Q consumption relative to, you know, what your expected curve was, you know, three months ago?

Yeah, so I'll just I'll go back to the kind of puts and takes I talked about at the beginning. First of all, the Q3 consumption, I mean, it was slight. I mean, we were a little bit on the high side, but it more it was, you know, less actually volume. It was more on the pricing side. So I kind of talked about maybe it's a benefit of a couple million dollars. We the other piece that was on the positive side for Q4 is we gained that short term palette. We got a couple of months benefit there. One was promoted and then what what what offset what reverses and this is these are assumptions. But what reverses those two gains is that when we got that short term club palette, several other competitors also gained short term space. And so we're assuming that this increases the competitive pressures and reverses the two gains that I talked about. Now, these are small pieces. You know, these are minor. These are we're all talking about, you know, two percent up, two percent down. So it's just not that extreme. But, you know, again, those are the those are the puts and takes. You know, as we go through a quarter, we have a million puts and takes. But those are those are the those are the keys.

OK, OK. And then can you just because I'm getting questions from a lot of people on 26. Are you saying you don't know or are you saying 10 percent plus?

Yeah, we are in the middle of our planning process. What I said about 10 percent plus is that's our long term algorithm. That's our goal.

OK. OK, I'll leave it there. Thank you.

Our next question comes from John Baumgartner from Azuho Securities. Please go ahead.

Good morning. Thanks for the question. Darcy, in your remarks, you mentioned innovation and the appeal of ultra filter milk and ready to drink has been proven at scale at this point. There's more competitors coming in with that formula. You touched on it a few moments ago, but just to keep with that line of thinking, setting aside the viscosity element of it, are there specific demographics where you're seeing filtered milk appeal more strongly? Are you seeing more new households coming into the category through filtered milk relative to MPCs at this point? If you could just speak to how you segmentation and ready to drink going forward, you know, aside from the loyal premier consumers that are out there and whether you would consider launching an ultra filtered format yourself for premier. Thank you.

Yeah, John. So we see a pretty even like again, we don't really filter. We don't know pen intended. We don't look at things through ultra filtered milk versus MPC. But I understand what you're asking. Interestingly enough, we've done a fair amount of research on it just recently and consumers actually don't know what ultra filtered milk or MPC is. Like ultimately, the source of protein is not a key driver for purchase. Brands are actually the key driver for purchase. So, you know, even, you know, loyal consumers of ultra filtered milk products, they actually don't know that it's ultra filtered milk. So the brands and the taste and texture, that's actually what drives and the macros are actually what drives. But what drives consumption and purchase and trials. But having said that, when we're looking at new people coming into the category and if you were to look at, you know, ultra filtered milk versus MPC products, they're about even. And again, I think that goes to consumers aren't distinguishing between the two. But what they're coming in on is what flavors resonate with me, what brands resonate with me, what macro levels resonate with me. And so I think that even some packaging formats resonate with me. So those are those are the decisions that consumers are making. They're not looking at the type of protein that actually the products are made in.

Thanks, Ashley. The question and answer session is now closed. Thank you for your participation in today's conference. This does conclude the program. You may now disconnect.