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Operator: Good day and thank you for standing by. Welcome to BellRing Brands Second Quarter Fiscal Year 2024 Earnings Conference Call. At this time, all participants are in a listen-only mode. After the speakers’ presentation, there will be a question-and-answer session. [Operator Instructions] Please be advised that today’s conference is being recorded. I would now like to hand the conference over to your speaker today, Jennifer Meyer, Investor Relations for BellRing Brands. Please go ahead.

Jennifer Meyer: Good morning. And thank you for joining us today for BellRing Brands’ second quarter fiscal 2024 earnings call. With me today are Darcy Davenport, our President and CEO, and Paul Rode, our CFO. Darcy and Paul will begin with prepared remarks, and afterwards, we’ll have a brief question-and-answer session. The press release and supplemental slide presentation that support the remarks are posted on our website in both the Investor Relations and the SEC filings section at bellring.com. In addition, the release and slides are available on the SEC’s website. Before we continue, I would like to remind you that this call will contain forward-looking statements which are subject to risks and uncertainties that should be carefully considered by investors, as actual results could differ materially from these statements.

These forward-looking statements are current as of the date of this call, and management undertakes no obligation to update these statements. As a reminder, this call is being recorded, and an audio replay will be available on our website. And finally, this call will discuss certain non-GAAP measures. For a reconciliation of these non-GAAP measures to the nearest GAAP measure, see our press release issued yesterday and posted on our website. With that, I will turn the call over to Darcy.

Darcy Davenport: Thanks, Jennifer. And thank you all for joining us. Last evening, we reported our second quarter results and posted a supplemental presentation to our website. I’m happy to share that we had an excellent first half, with Q2 results above our expectations. The business continues to accelerate as we bring on new shake capacity and begin to drive demand. For the first time since 2021, we executed two successful club promotions in one quarter, which sparked a ton of consumer and retailer excitement. Net sales grew 28% over prior year and adjusted EBITDA was up 53%. Our greater-than-expected shake demand, specifically non-promoted, drove the net sales and adjusted EBITDA margin outperformance. As you saw in yesterday’s press release, we raised our outlook for the year.

We now expect net sales to grow 16% to 19% over fiscal 2023 and adjusted EBITDA to grow 18% to 24%. This raise at the top and the bottom line was based on better-than-expected first half performance, strong consumption trends, confidence in our capacity expansion, and our decision to execute a price increase on shakes late in Q4. Moving to shake production. We have made remarkable progress in our plan to grow and diversify our shake supply. We are making more shakes every quarter, with Q2 production coming in as expected and up significantly versus the year-ago quarter. We remain on track to grow production north of 20% this year, enabling strong net sales growth in 2024 and increased weeks of supply by year-end. Now to the category and brand updates.

The convenient nutrition category grew 5% in Q2 as tailwinds around health and wellness and fitness continue to drive growth. Consumer interest in functional beverages and sports nutrition products continues to be high, with mainstream ready-to-drink brands driving most of the growth and bringing new households into the category. RTD led the category, up 10%, driven by promotions and distribution gains. Ready-to-mix grew 3%, slowing this quarter as consumers traded down to value brands and switched to other high protein products, including RTDs. Despite this change in consumer behavior, our powder brands still outperformed the tracked category. Premier Protein shake consumption growth remained strong this quarter at 29%. Growth was robust across all channels in Q2, driven by promotion, strong velocities, and distribution expansion.

The highest growth was in mass and e-commerce. Mass benefited from display activity and distribution gains, while e-commerce saw strong growth behind promotional events. The club channel, boosted by successful promotions at both of the major club retailers, drove healthy volume lifts and household penetration. April consumption remained strong, up 16%, despite some out-of-stocks in tracked channels. Flavors continue to drive retailer and consumer excitement. Our newest 30-gram flavor cookie dough is performing well, with top 10% velocities in mass. Our seasonal flavor, salted caramel popcorn saw solid success. Our brand metrics remain healthy. Premier Protein, with RTD market share of 21%, maintained its top position as the number one brand in the RTD segment as well as the number one in the broader convenient nutrition category.

TDPs grew 33% over the prior year quarter, but saw a slight sequential decline. With shake supply remaining tight and demand greater than expected this quarter, we experienced some temporary out-of-stocks late in the quarter and into April. Retailer inventory levels are starting to improve, with TDPs stabilizing, and we expect further improvement throughout the second half. I’m pleased to see the brand reach another all-time high in household penetration this quarter, reaching over 18% of households. Premier Protein added 1 percentage point of household penetration versus Q1 and grew 26% over prior year. As of Q1, the brand was a significant contributor to the overall RTD category growth. Premier Protein’s household penetration continues to be the highest in the category and we expect modest growth in the remainder of fiscal 2024.

With the RTD segment’s household penetration below categories such as nutrition bars and energy drinks, we still see tremendous opportunity to grow in our existing channels. Premier Protein powder continued its strong trajectory, growing 52% in Q2 behind brand investments, distribution gains, and strong velocities. We remain encouraged by the growth potential of the Premier Protein brand in this format. Premier powders continue to bring mainstream consumers into the category with 80% of its growth coming from outside the category. Its household penetration reached 1.7% this quarter and we continue to believe the brand will be a contributor to mainstreaming the powder category in the same way Premier did for the ready-to-drink category. Our licensing strategy continues to perform well with cereal and frozen pancakes attracting new consumers to the brand.

Although not a significant revenue driver, these two products boost Premier’s overall household penetration to 19% or nearly one in five households. Turning to Dymatize, US consumption remains strong in mainstream FDM channels, but overall consumption declined 8%, weighed down by ongoing softness in specialty channels and increased competitive activity in e-commerce. Despite these headwinds, I’m encouraged to see the brand maintain its record high household penetration with TDPs and share holding steady. Looking forward, we are increasing our investment behind the brand, both in marketing and promotion. We are excited to expand our national marketing campaign with San Francisco All-Pro running back Christian McCaffrey. We are eager to see the impact that enhanced digital marketing and a top tier influencer will have on the brand awareness and household penetration.

Last, we are putting the final touches on innovation that will expand Dymatize’s product line. Overall, we continue to be bullish on the mainstream powder opportunity with two complementary brands. In closing, our excellent first half results position us well for an above algorithm fiscal year. Our confidence in the long-term outlook for BellRing remains strong. Our brands are leaders in the highest growth areas of an on-trend category. Ready-to-drink and powder segments are in the early stages of growth, with major tailwinds. Premier Protein and Dymatize are leading mainstream brands with low household penetration and strong loyalty. Our momentum continues to grow on shakes as we start to layer in promotion. Our shake capacity plan is on track to support many years of robust growth.

I’m excited to see the momentum continue into 2025 as we layer in more innovation and national marketing. Thank you for your interest in our company. We look forward to sharing our progress next quarter. I’ll now turn the call over to Paul.

Paul Rode : Thanks, Darcy. Good morning, everyone. Net sales for the quarter were $495 million, up 28% over prior year, above our expectations with strong demand for Premier Protein shakes, the biggest driver of the outperformance. The adjusted EBITDA was $104 million, an increase of 53%. Adjusted EBITDA margins were 21% and also exceeded our expectations, benefiting from favorable gross margins and leverage on higher net sales. Starting with brand performance, Premier Protein net sales grew 34% behind strong volume growth for RTD shakes and powders. Promotional activity, distribution gains, and organic growth drove the increase in net sales. Shake consumption dollars grew 29% compared to shipment growth of 34%, with the difference driven primarily by the lapping of a prior-year trade inventory deload.

Dymatize net sales increased 5% this quarter as the brand benefited from increased distribution and promotional activity in domestic mainstream channels along with international strength. These gains were partially offset by continued weakness in the specialty channel and increased e-commerce competitive activity. Gross profit of $164 million grew 40%, with an increase in gross profit margin of 280 basis points to 33.2%. The margin increase resulted from net input cost deflation, partially offset by incremental promotional activity. Compared to our expectations, gross margins benefited from greater-than-expected non-promoted volume and non-recurring cost favorability. SG&A expenses as a percentage of net sales were 14% and roughly flat to prior year.

Advertising and promotion spending increased $3 million, but was flat as a percentage of net sales at 3.1%. Before reviewing our outlook, I would like to make a few comments on cash flow and liquidity. We generated $16 million in cash flow from operations in the second quarter and $90 million in the first half. We expect net working capital growth in fiscal 2024 to modestly exceed our net sales growth rate as we add weeks of shake supply in the second half. As of March 31, net debt was $761 million and net leverage was 1.9 times. With our EBITDA growth and strong cash flow generation, we anticipate net leverage will remain below 2 times in fiscal 2024. With respect to our share repurchases this quarter, we bought 400,000 shares at an average price of $56.46 per share, or $23 million in total.

Our remaining share repurchase authorization is $289 million. Turning to our outlook, we raised our fiscal 2024 guidance for net sales to be $1.93 billion to $1.99 billion and adjusted EBITDA of $400 million to $420 million. Our guidance implies strong top line growth of 16% to 19% and adjusted EBITDA growth of 18% to 24%, with healthy adjusted EBITDA margins of 20.9% at the midpoint. The updated guidance reflects our better-than-expected first half results and strong consumption trends. In the second half of fiscal 2024, product and logistics costs are expected to increase compared to the first half, with pricing actions on shake planned late in the fourth quarter. At the midpoint, our second half net sales are expected to grow 13%, with adjusted EBITDA margins of approximately 20%.

As we enter the second half, we have largely lapped the relaunched shake flavors and expect sales growth to be driven by continued organic momentum and distribution gains. Compared to the second half of fiscal 2023, we expect EBITDA margins to be similar. Turning to the third quarter, our net sales growth is expected to largely track our second half growth rate. Premier Protein drives this growth as volumes are expected to increase in the mid to high teens. Dymatize partially offsets Premier’s strong growth, with the brand facing a tough prior year comparable in Q3 as it laps a club load-in in FDM display activity. Adjusted EBITDA margins are expected to improve modestly from the year-ago quarter, with significantly higher gross margins as we lap peak protein prices.

This increase is mostly offset by incremental marketing spend and SG&A as a percentage of net sales. In closing, we’re pleased with our first half momentum. Our strong first half results give us greater confidence in our full year outlook and long-term growth prospects. I will now turn it over to the operator for questions.

Operator: [Operator Instructions]. Our first question comes from the line of Ken Goldman from J.P. Morgan.

Ken Goldman: I think you mentioned that non-promoted sales of Premier did quite well this quarter too. And I’m just curious if I heard you right there, what do you attribute the acceleration kind of in those base products to, in light of how well the promoted products did at the same time? Is there a natural correlation between the two just in terms of new generation or am I playing that up too much in my head?

Darcy Davenport: What has been true and what continues to be true is about 80% of our growth comes from outside of the category. So we continue to get a ton of new households into the category, showed on our all-time high of household penetration this quarter, and the 1 point jump up. In general, the more we ship, the more we sell. And we really haven’t had healthy fill rates in FDM yet. And so, honestly, this quarter was – we thought strong promotions in our two club customers. Pretty much what we expected to see, but what was higher was actually the non-promoted in pretty much all channels outside of those promotional periods.

Ken Goldman: As we think about the guidance raise and we look ahead toward the upper end of that range, is there potential? And I’m not trying to fish for even higher guidance than what you’ve already looked at, but I’m just trying to get a sense of it. If there is demand there, how much above sort of the high end of your sales guide could you potentially get to, just given some of the capacity constraints that have been mentioned so far?

Darcy Davenport: We have production that can absolutely satisfy the full range of our guidance, obviously. As I’ve said on past calls, we do not have enough internal inventory. We need to build safety stock. However, toward the end of the year, we plan to get up to our target of six to eight weeks. If demand continues to be robust, then we have the flexibility to toggle between building more inventory versus going and satisfying sales. So, I think we’ve always said that we’re going to be nimble this year just because of the that we are building safety stocks, internal inventory. But rest assured that we have the production to satisfy the high end, our full guidance. And then we’re going to have to just assess the situation in Q4 to see if we’re going to build inventory or satisfied if there’s more demand than expected.

Operator: Our next question comes from the line of David Palmer from Evercore ISI.

David Palmer: It was obviously a pretty dynamic quarter with some of the ramp up and promotion mix with the two club promotions. But at the same time, you had the strong gross margins, so I wanted to kind of double click on those two things. What were some of the learnings, both in and out of expectation, from the increase in merchandising from the quarter? And I know you mentioned the two, I was wondering if that meant that was unusual or if this is pretty close to the norm that you would expect in terms of the impact of price mix from promotional activity in the upcoming quarters.

Darcy Davenport: I’ll start with learnings and then you can hit on any price mix. So the learnings from the promotion, so, remember, we haven’t done really any significant club promotions or promotions at all since 2021. So it’s been a while. So we weren’t exactly sure what to expect. Honestly, there was a ton of excitement. I’ve talked about this before. The key for our success on promotion is display. Get out of the aisle, get new people to see our product. And that is where we increase household penetration. We get the bump and stick for the brand. It has been true for the entire time this brand has been around. So, sure enough, that is exactly what happened. We got great displays and a ton of retailer support for the events and that flowed straight into strong results. So I would say, I don’t think it’s a lot of new learnings but more confidence that the fundamentals of the brand are very much intact and there’s a ton of excitement from consumers and retailers.

Paul Rode: And on pricing, we always expected the second quarter to be the most significant headwind on pricing because of the significant promotional activity that we were doing on shakes. As we entered in the second half, we still expect some light promotion in Q4 on shakes. But really from a pricing perspective, it’s pretty balanced in the rest of the year. We aren’t expecting major headwinds or tailwinds in any given quarter on pricing. As we get late in Q4, we are modeling a light benefit in the fourth quarter on pricing, but again, it’s late in the quarter, so it’s a pretty modest benefit. It’s more about 2025, but net-net, not a lot of – at least on the shakes, not a lot of pricing really impact there.

David Palmer: On the gross margin, the 300 or so basis points expansion there, how would you describe that, maybe build up to the 300 basis points in the quarter, and how should we think about that going forward?

Paul Rode: And your question is compared to a year ago.

David Palmer: Around gross margins. I think if you had to – I know it’s hard to break out specifically how many basis points are due to each thing, but if you had to talk about commodity price mix and then volume leverage, net of promotions, how would you think about the gross margin expansion this quarter and then how does that apply to the second half?

Paul Rode: From a gross margin perspective, significant expansion was from lower protein costs. So, as you may recall, last year, we had very high protein costs, especially on our powder business in Q2 and then into Q3. So, if you think of last year by quarter, the second and third quarter were by far the highest protein cost. And then in the fourth quarter, they started to pull back, which is why you see stronger gross margins in our fourth quarter a year ago. So as you look at Q2 specifically, significant expansion at the gross margin line that’s partially offset by significant promotion offsetting that. We also saw about 50 basis points of favorability from what I would call just some non-recurring items. So co-man true-ups, payments for missing on minimum volumes, that’s about 50 basis points, but most expansion is just protein costs offset by promotion.

Operator: Our next question comes from the line of Thomas Palmer from Citi.

Thomas Palmer: I wanted to maybe start off back on the input cost environment. It sounded like you’re expecting less favorability as we move through the year, but you also noted 3Q a year ago was a bit elevated along with that second quarter. So is it kind of less deflation as we move into 3Q and then is there a point we kind of return to inflation or is that more a fiscal 2025 consideration?

Paul Rode: If you look at the second half, we are expecting costs to go up from the second quarter mostly for powders, which go up significantly. It’s about a 50% increase from Q2 to Q3, so it’s significant. Shakes start to modestly head up higher in the third and fourth quarter on proteins. So from a sequential basis, increases. Versus a year ago, we still see fairly significant favorability on proteins in the third quarter, but it does start to significantly moderate in the fourth quarter. So there’s a very little benefit in the fourth quarter, but still pretty significant favorability in the third quarter. And again, that’s just the dynamics of lapping last year’s high kind of peaks at Q2, Q3 last year. And we’re seeing kind of the – I’ll call it the floor in the current protein environment here in the second quarter, then it starts to head up again.

So that’s the dynamic. So we still should see some favorability in the second half, but mostly in the third quarter on our proteins.

Thomas Palmer: On marketing, I think one thing you’ve talked about in recent quarters is kind of some flexibility to pull back on marketing if demand is running particularly strong. And I realize some of this that you’re talking about with marketing is a shift maybe between brands, but it does seem like Premier, you’ve got kind of limited safety stock, very robust demand in the quarter. To what extent are we seeing kind of a shift there with a pullback in Premier versus a ramp up in Dymatize and how does that kind of net out as we think about the second half versus what you’d planned on initially?

Darcy Davenport: I’ll start and then you can add, Paul. We decided to pull back and move the major equity campaign from Q4 this year to 2025. But we pivoted some of those dollars to both Premier Powder, Premier bottles, and Dymatize. So think of kind of the tetra side of our business on Premier as being the constrained side. So, we’re still spending, but on the other parts of our business, but not just Dymatize. So definitely spending on Premier Powder and bottles.

Paul Rode: And just to expand, we’ve called previously for low 3s, kind of 3%, 3.5% for the year. We’re still in that ballpark. As Darcy said, we have toggled a little bit between brands and pulled back slightly from our prior expectation, but it’s a modest change.

Operator: Our next question comes from the line of Bryan Spillane from Bank of America.

Bryan Spillane: One, a clarification, Paul. Just following the discussion around gross margins in the back half of the year, will gross margins be up a little bit more in the third quarter versus last year than they will be in the fourth quarter? It sounded to me like 3Q, 4Q should be roughly similar, maybe 3Q a little better because you won’t have as much promo and then 4Q a little less gross margin expansion, but just want to make sure I was hearing that correctly.

Paul Rode: Yeah, you’ve got it correct. So we don’t see – Q3, Q4 ought to be pretty similar from a margin perspective at gross margin, and you’re correct that you will see from a year ago perspective much more favorability in the third quarter than the fourth, and that’s the protein dynamics as proteins start to step up in our second half where they started to step down in last year’s Q4. So that’s why the favorability is less in Q4, but still favorable.

Bryan Spillane: Darcy, can you talk a little bit about the – rather than household penetration, just kind of how the sort of consumer base is changing, if it has? I guess what I’m asking is just, are you recruiting more kids, male versus female, age cohorts? Initially, this was a pretty relatively narrow consumer base, but I’m just curious if it’s expanding. And I ask that, I guess, in the context of, I think with Fairlife and Core Power, they’re definitely seeing a pretty wide age cohort, especially young drinking it. So I’m just curious with Premier shake specifically, right, if you’re beginning to kind of widen the consumer base?

Darcy Davenport: We definitely are. Not kids though, this is definitely adult brand. It’s high protein. But it is more of an adult brand. Honestly, like both the Coke side of the business and our side, we’re the ones driving the category growth with these new households. We are bringing in – yes, we’re bringing in younger people, but honestly, with such a low household penetration brand, we’re bringing in just a really diverse set of age and gender, et cetera. So what’s unique about Premier, and I know I’ve talked to you guys about this, is our ability to really source volume from all ages, kind of people looking for different things. So number one reason why people enter Premier is to lose weight. But we also source volume from the adult nutrition side of the business, from sports nutrition.

Our range of consumers is very, very wide. And more than many other brands out there, we actually have a pretty even split of gender. So what is magical about this brand is just how broad it is. And you can see that in our consumer, the consumers that we’re bringing into the brand.

Operator: Our next question comes from the line of Robert Moskow from TD Cowen.

Robert Moskow: I think in your prepared remarks, you said that TD points are showing signs of stabilization in most recent periods, and that the out of stocks have stabilized. How soon do you think it will be before you can get those ramping higher again? Like, is it in the next few weeks we should expect TDPs to start recovering higher or not?

Darcy Davenport: We’ll see improvement kind of every month. So we’ll see improvement throughout Q3, and then we’ll get back to kind of all-time highs in Q4.

Robert Moskow: A quick follow up. These club promos you did were obviously very successful. Do you think your competitors are going to conduct similar promotions in the second half of the year? And if so, does that present any risk of a shock to your demand in that channel or not?

Darcy Davenport: From a club promotion standpoint, most competitors are already doing promotion. So there’s an exception of – Fairlife hasn’t been doing promotions, but I expect them to, when they get in a good supply – in a supply situation that they will as well. But we’re pretty complementary. I always go back to that – there is room for two strong brands in a low household penetration, high growth category. And we have both been very successful in every single channel, but specifically in the club channel.

Operator: Our next question comes from the line of Kaumil Gajrawala from Jefferies.

Kaumil Gajrawala: Can you talk a bit about aisle placement? I think for quite some time, it was about moving the products to other parts of the store and with the business still being so sort of linked to feature and display and pulling them out of the aisles, are you able to shift where in the store you are or increase the number of places you are within the store?

Darcy Davenport: Our focus right now is just really good at in stock within the pharmacy. We are, as I said earlier, display is a huge driver for us. So, we still think that there is a lot of upside within the pharmacy just getting displays kind of outside of the pharmacy. Longer term, we do see – so think of it just as incremental display that could include some incremental placement. We already are, so for instance, in some mass retailers and food retailers, we have singles up in the cooler, so it’s more for like a grab and go. So we’re aggressively going after those kind of opportunities. So to answer your question, yes, we are absolutely looking for – the more places we can be in the store to kind of to introduce our brand to more people, the better.

I think that, eventually, more in kind of the medium, longer term, we do think it’s interesting to actually change aisles, but for now we think that there’s a ton of upside just through building our base business within the pharmacy section and then getting incremental placement and display throughout the store.

Kaumil Gajrawala: And on the price increase, maybe just some more details on why is it linked to where costs are because it looks like it’s coming through just as its capacity is going to kick up again. So, just any more details on the thought process behind the price increase?

Darcy Davenport: We’ve seen cost increases in co-man costs, logistics, packaging, and so – and actually, many of our competitors have taken price. Our biggest competitor took price in Q1. So this is – and mainly, it’s because the entire category is really seeing rising costs. Honestly, outside of kind of dairy inputs, however, dairy inputs are also supposed to, as Paul talked about, to start rising again. So it’s late in the year. You talked about late in Q4. And I think that we feel comfortable with our price difference versus competition after the price increase.

Operator: Our next question comes from the line of Jim Salera from Stephens.

Jim Salera: Darcy, I wanted to drill down a little bit on the TDPs that you mentioned from the out of stocks. Do you have any sense for what retailers did with those shelf placements as there were some out of stocks? They flex bars in, do they move a competitor in? Just any color there would be helpful.

Darcy Davenport: We didn’t lose any space. We knew that it was going to be temporary. And honestly, Jim, they’re sporadic. So what happens is that we have certain flavors, a four count going out for a period of time, then 12 count. And so the space – retailers, honestly, there are holes on the shelf occasionally. So it’s not about that – maybe they expand the products on the shelf to kind of fill in the holes. But the idea is that it is for a relatively short period of time, and it’s never so broad that the entire brand is off the shelf.

Jim Salera: I guess as a follow up to that, do you have the ability to see, for example, if my favorite flavor is on shelf, do I just then reach for chocolate, which is two slots down? Or does that typically end up in just kind of a lost sale?

Darcy Davenport: You’re describing the challenge with forecasting because what we’re finding is that, yes, there’s, for the most part, there is – especially because our biggest capacity constraints has been on 4 count. So consumers will just change to a different – most of the time, to a different flavor. Every once in a while they’ll also change to a different pack type. So four count chocolate’s not available, they’ll go to 12 count chocolate, for instance. There’s even some channel shifting. So they might go to a different channel because it might be available there. So that is the challenge of forecasting accurately because there’s so much interplay between the flavors and the pack sizes. For the most part, they are staying within the brand.

There are times – and I would say it’s more the minority – that if somebody has a favorite flavor, they will just kind of wait to purchase for that cycle, and then they’ll see if it’s back on the shelf the next time they shop.

Operator: Our next question comes from the line of Matt Smith from Stifel.

Matt Smith: I wanted to ask Paul a follow-up question about the third quarter guidance. He said it was tracking to the implied second half growth rates for revenue. That implies fairly even phasing of growth in the second half of the year with a tougher comparison in the fourth quarter. Do I have that right? And can you talk about the phasing of promotional activity for the rest of the year? Are there any large incremental events year-over-year that we should be aware of?

Paul Rode: Yes, you are tracking it correctly that we expect growth to be pretty similar in Q3 and Q4 compared to a year ago. In the fourth quarter, we have some light promotion, but it’s not – it’s nothing we had – we also had some light promotion on shakes in the fourth quarter of last year, so I think overall there’s not a dramatic change in promotional activity between the years.

Matt Smith: And just one more follow up for me and I’ll pass it on after. Shipments were in line with consumption in the current quarter. Do you expect that to persist through the second half of the year? Is there potential for retailers to start to increase their inventory levels exiting the year?

Paul Rode: Our expectation is that shipments and consumption will largely track. It would likely modestly swing towards the shipments. It’s a little bit of a inventory load, but nothing – we’re not expecting anything dramatic in the second half. So again, we’re trying to replenish shelves as well as keep up with the demand. So we would expect a little bit of shipments above consumption in the second half.

Operator: Our next question comes from the line of Matt McGinley from Needham.

Matt McGinley: You noted the increased e-commerce competition for Dymatize this quarter. Can you expand on what you saw there competitively? And is that something you expect to persist or is that something that is more unique to this quarter?

Darcy Davenport: This one was a new one. So, obviously Q2, new year, new you, we always see increases in promotion and marketing because it’s the time when the most new people enter into the category. But this year was much more extreme than in the past, meaning a ton of – more of the emerging brands, so the smaller brands, doing very deep discounting and really leaning into marketing. So highly competitive and, I would say, and that’s very much the entire powder category. We also saw some consumers seeking value, so not only buying brands on deal that I just referenced, but also some trading down to value brands. And then even – what we saw in Dymatize is actually buying – looking for value, but actually upsizing. So going from a 20 serve, for instance, to a 5 lbs because it was a better value.

So a lot of deal shopping in general, just value seeking. Do we expect it to continue? It continued in April. So I think, in general, we expect that it will continue through Q3. I think the big question is in the powder category, when commodities decrease, for the most part competitors invest that money into promotion. Well, now prices – commodities are going to start increasing again. So we do believe that there will be less deep discounting because of that.

Matt McGinley: And one quick follow-up on the revenue trend in the back half. It’s a little bit difficult to tease out your seasonal trends given all the volatility you’ve had in the supply chain for the past few years. Do you expect the third quarter to generate more revenue than you did in the second, or does that step down?

Paul Rode: We expect it to modestly increase from the second quarter sequentially.

Operator: Our next question comes from the line of Jon Andersen from William Blair.

Jon Andersen: Two quick ones. I was just hoping you could give us an update on your kind of capacity plans, not for the balance of 2024, but looking out to 2025 and supporting growth in 2025, what your expectation is there in terms of shake capacity additions. And then the second question is just on powders. It looks like Premier Protein powder was up, consumption was up very nicely in the quarter, Dymatize a bit softer. Are you seeing anything in the market that would have you maybe thinking about balancing your resources against those two equities differently going forward in the Powder segment?

Darcy Davenport: Production first, so 2025 production, we feel good about the production increases. I know you weren’t asking about 2024, but on track for 20% plus production increase. And remember, that was always back-end loaded. So we are expected to see strong production – we saw strong production in Q2 and that will continue into Q3 and Q4 of this year. When we go into 2025, that will continue into 2025. So without specific numbers, we have enough production to support high end of our algo plus buffer capacity, plus any – so the needed production to rebuild internal inventory if we do not get back to target levels by the end of 2024. So I feel really good about the production ramp up. Just know that we are still scaling up our two greenfield facilities.

And so, those start every quarter becoming more and more important. So that’s one piece. Secondly, around powder. The one thing I didn’t say when I was talking about ecom and the dynamic of consumer-seeking value, Premier has been a big beneficiary of that. So think of Dymatize as being kind of a super-premium athletes brand. Well, Premier is very much a mainstream powder brand that is a good value. And so, we’ve actually seen one of the reasons why Premier’s doing so well is because of the dynamic going on. So, yes, to answer your question. I think it’s less about diverting resources from Dymatize to Premier Powder, but we have the ability to support both businesses and we will continue to increase the support on Premier Powder because we’re really encouraged by that format.

And I said it in my prepared remarks, but we believe with 80% of the growth coming from outside of the category, we really think that Premier can help mainstream the powder category very much like the brand did for RTD. So we’re really bullish on the opportunity with Premier Powder.

Operator: Our next question comes from the line of John Baumgartner from Mizuho Securities.

John Baumgartner: Maybe first off, I just wanted to follow-up on promo, Darcy, and getting more display outside of the aisle. Right now, this category and brand stand out for growth and retailer interest follows. But that also takes you into greater, I guess, conflicts or overlap for space with other food and beverage that’s maybe higher margins for the retailer, or I guess even general merchandise. How do you think about sustaining outside the aisle merch over the longer term? Is placement mostly contingent on retailers maintaining their interest in health and wellness shelf sets? Does the cost of display go up? Is outside the aisle just destined to be more of a seasonal phenomenon? How do you think about that over time?

Darcy Davenport: It’s an interesting question. So I can tell you that every single one of our conversations with retailers, they see the trends within health and wellness. They see the growth coming from this category, and specifically RTDs. And it is stronger than almost any other category in the store. So it has the attention, it has the support. They also know that it’s a low household penetration category, so the growth should continue. I think it’s less concern around the retailer support and borrowing from other categories. I think it’s there. Right now, our conversations are really – and we’re seeing it – is that space is increasing. Space is increasing not only for RTDs, but within – and taking space from the other parts of the business or the other segments, but also increasing the overall space for convenient nutrition.

So if you’re talking about displays, obviously, it’s more competitive, but the retailers appear to be very excited about the opportunity, and I’ve never heard the margin pushback as to giving display space versus other categories.

John Baumgartner: In terms of Dymatize and the e-commerce pressure there, you stress pricing as a big factor. But I’m curious with the advantage Dymatize has over these emerging brands, bricks and mortar, and marketing resources, is there anything you can do in physical channels to drive more engagement, more ingredients awareness, and sampling purchases that then converts back to stronger e-com sales even at the higher price points?

Darcy Davenport: Yeah, I think there’s a lot Dymatize can do. I think that we learned a fair amount this last quarter. I think it caught us a little off guard how aggressive a lot of these emerging brands were on e-com. And we had a marketing campaign, but we were a little conservative on the weight. So our share of voice was lower than it needed to be. I think ton of learning. We’re going to be aggressive on the back half, not only with marketing campaign across all channels, but really supporting e-com. We’re going to be looking at leaning a little more into promotion, just to be competitive. And then also just from a campaign standpoint really excited about Christian McCaffrey and being able to – that is just a timing thing of when we signed him and when we can actually get access out there.

So that’s going to be really exciting to be able to lean into his celebrity and push that out. Dymatize is an amazing brand. It’s second biggest whey protein brand on ecom. So I feel great about the business. Little bit of learning in Q2, but nothing that I don’t think we can – we’ll be able to ride it in the back half to get back to growth.

Operator: Our next question comes from the line of Bill Chappell from Truist Securities.

Bill Chappell: Darcy, just maybe a follow-up on Bryan’s question in terms of new consumers, and I just didn’t know if there was a way to quantify, like, the percentage that are now male, the repeat rates, stuff like that you might have. And the reason I ask is, I just – and this is not specific to you, I just have a tough time with the household penetration kind of metric because it would – you say that you have low household penetration, but then also being at 18%, 19%, seems like one in five households is pretty good household penetration for this stage of the category or even if it – to say, one in five households of a beverage category seems like you should be a lot bigger in revenue. So I’m just trying to understand what does that mean, or how do you look at the opportunity beyond household penetration, or even how do you quantify household penetration to kind of get you excited?

Because it seems like repeat rate or quantifying new consumers into the category would be helpful, at least to us, to better understand the metric.

Darcy Davenport: It’s a great question, Bill. First of all, male-female split. So I think, again, what’s unique about Premier is it’s a pretty even split, little more male than female. So, call it, 60/40, 55/45. But good split between male and female. That is unique. So you think of the diet brands, more women than men; sports nutrition, more men than women. Most of the other brands in the category kind of have a specific lane and a defined consumer. And really, it’s hard because of the brand to get out of that. So that is one of the things that’s really unique about Premier. First of all, just hit that one. On the household penetration and repeat rate, so here’s the way I look at it. First of all, strong category leading repeat rate, about 50%.

And on the household penetration, so we’re right around, call it, 18%. The RTD shake category, about 45%; convenient nutrition overall, about 75%. So, overall, I think that like there is a lot of room. When I go to another category, which is relatively new, but more mature, or relatively – kind of conflicting, I guess they’re about the same age, so to speak, but bigger, is energy drinks. And when I look at that, the energy drink category, about the same household penetration as convenient nutrition, so call it 70%, 75%. But the number one market share and number two market share players are at 50%. So I look at that and I’m like, okay, so there is a ton of room to grow here, knowing that the top two brands are bringing in a lot of new consumers, 80% of our growth is coming from outside of the category and that – and it’s already coming from outside of the category and we really haven’t started marketing.

That just tells me there is a ton of room to grow both the brand as well as the category. Does that help, Bill?

Bill Chappell: Yeah, yeah, definitely. I’m sorry, I could probably keep going, but I will keep it all short. Just then go to Dymatize, one follow-up. Do you think the growth of Premier Powder is leading to some trade-down that’s affecting Dymatize or is it mainly discounting from other brands?

Darcy Davenport: They’re very different consumers. There is not a lot of interaction. So definitely other brands. And like I said, so the beauty – again, same dynamics between Premier RTD and Premier Powder. Over 80% of the growth on both businesses are coming from outside of the category. So it’s less switching and trading down, but actually consumers are entering the powder category through Premier.

Operator: Thank you. At this time, I am showing no further questions. This concludes today’s conference call. Thank you for participating. You may now all disconnect.