Welcome to BellRing Brands Third Quarter 2020 Earnings Conference Call and Webcast. Hosting the call today from BellRing Brands are Darcy Davenport, President and Chief Executive Officer; and Paul Rode, Chief Financial Officer. Today’s call is being recorded and will be available for replay, beginning at 1:30 p.m. Eastern time. The dial-in number is 800-585-8367 and the passcode is 9248828. At this time, all participants have been placed in a listen-only mode. It is now my pleasure to turn the floor over to Jennifer Meyer, Investor Relations of BellRing Brands for introductions. You may begin.

Good morning, and thank you for joining us today for BellRing Brands third quarter fiscal 2020 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 afterward, 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 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.

Thanks Jennifer. And thank you all for joining us this morning. Last evening, we reported our third quarter results as well as posted a supplemental presentation to our website. This presentation is designed to provide more insight into our business, consumption and key metrics. We reported third quarter sales of 204 million and adjusted EBITDA of 38.5 million. As we discussed last quarter, we ended Q2 with inflated trade inventories after our customers overbought following the mid-March consumer stock up. This elevated Q2 sales at the expense of Q3 and factored into our second half planning. In reaffirming guidance in May, we highlighted that the second half would be back loaded. More specifically, we expected roughly 56% of our second half revenue to fall into the fourth quarter. With July net sales coming in at close to 100 million, this plan is proving out. Outside of the timing shift, our actual results were shy of our internal expectations mainly due to a slower than expected RTD category recovery as a result of less on-the-go occasion. Specifically, we forecasted a consistent improvement from the April low, reaching pre-COVID levels by June. Instead, we saw more of a W shaped recovery, with may dipping back down and not reaching pre-COVID levels until after the quarter ended in July, coupled with longer than expected international recovery, this saves $50 million to $60 million from our second half sales forecast, which is equally split between Q3 and Q4. Although we are seeing encouraging signs in the July RTD category consumption period, we lowered our Q4 growth assumptions given the choppy recovery we experienced in Q3. However, because of the over performance in the first half, combined with non-strategic SG&A reductions in the back half of the year, we still expect to deliver our full…

Thanks Darcy and good morning everyone. Net sale for the quarter were 204 million and adjusted EBITDA was 38.5 million. Third quarter results as anticipated were pressured by the impact of COVID as well as changes in customer inventory levels when compared to prior year. COVID impacted our quarterly net sales results on several fronts. First, it took longer for retailers to reduce their on-hand RTD Shake inventory from inflated levels at the beginning of the quarter. Second as Darcy detailed, the RTD liquid category had significant headwinds. Third, our international business, which historically has accounted for 50% of our net sales declined significantly compared to last year. Though we anticipated many of these impacts the category recovery was slower than expected. From a shipment perspective, Premier Protein net sales declined 12%, with RTD Shake net sales down 10%. The disconnect between shipments and our strong 11% consumption growth for RTD Shakes was largely expected. Shipping's lagged consumption as retailers work through an overbuy in March. Additionally, recall we left last year's poll for shipments related to a fourth quarter promotion. These inventory related headwinds were partially offset by strong distribution gains across channels. Dymatize had strong growth in the Club and ecommerce channels, which combined grew 50% in the quarter. We anticipated strong growth for these channels in the second half and the brand continues to gain distribution in FDM and Club while consistently delivering double digit growth within ecommerce. This growth was outweighed by COVID driven declines globally for the specialty business, resulting in an overall net sales decline of 16.6%. PowerBar net sales declined 44%, reflecting the impacts from our portfolio optimization strategy in North America, and lower international volumes driven by specialty store closures. We expect COVID to weigh on the brand's results in the fourth…

Thank you. The floor is now open for questions. [Operator Instructions] Our first question comes from a lot of Andrew Lazar of Barclays.

Great, thanks. Good morning, everybody.

Good morning.

First off, Darcy, as you mentioned, the trends in food and drug in tracked channels seems to be in good shape as is Club or as are Club and ecommerce in untracked. So it does seem like it's primarily mass in tracked channels that that was some of the issue and in some of the data that we all see in scanner. If that's the case, is it primarily sort of promotional timing or there's something else going on there and trying to get a sense of when we would expect to start to see some of that tracked data, which is heavily weighted, I think, towards mass start to look – to improve?

Sure. So one of the things that we experienced during Q3 was that COVID hit Club and mass harder than the other channels and consumer stayed away from the larger stores in favor of smaller local grocery stores and ecommerce. So there is one category aspect of that and we are already seeing that change and improve. Specific to our brands, we are – so specifically in July we're seeing improvement across consumption, but specifically in July, we are lapping promotional timing in both tracked Club and mass and that should turn around later in the quarter.

Got it, great, that's helpful. And then when we think about trial and repeat, you've obviously, talked about the impressive household penetration gains and sort of the 50% or so repeat rate, just as you think – if we think forward a little bit, is there any other research or data points that you guys you tally up what consumers are telling you that makes you feel like that type of repeat rate or the stickiness, if you will, right, of some of the incremental household penetration can be not insignificant if we think forward going into your fiscal '21.

Yeah, I think the biggest predictor of the future is the past. And one of the things I mentioned in my prepared remarks is we included a supplemental deck on our website that goes through some of our key metrics and goes back in time to give you a broader perspective. And one of the pages follows household pens from 2016 to now. And you basically see almost doubling of household penetration, but our repeat rate stays consistent at around 50%. And so I think that right there, I mean, when you increase household penetration, you usually see a decrease in repeat, but we haven't. So for us, our challenge and opportunity has always been to increase household penetration because 6.6 is great growth from 2016, but it's still relatively low in the broader scheme. And we're confident that we'll get the repeat and the loyalty, because we've shown that the brand has some of the strongest in that category.

Thanks so much, Darcy.

Thank you.

Our next question comes from the line of Ken Goldman of JP Morgan.

Hi, thank you. I wanted to dig in a little bit more toward guidance. Obviously, you made changes to your sales number, but not your EBITDA number and you gave us some reasons why. But was there any consideration to maybe given some of the downside surprises this quarter, potentially take the opportunity to take EBITDA down a little bit as well just to give yourself a little bit of cushion or do you really feel like they're just that much visibility into your cost structure, and the related sales that you feel just wasn't necessary.

So we actually evaluated it and as you know, we over it to you the first half and our EBITDA margins have been running toward the high end of our long-term algorithm. And both of those things gave us some EBITDA, flexibility. And then in addition, when we entered into this pandemic, we ensured that we maintained some flight financial flexibility within our P&L just in case that our forecast, our sales forecasts were slightly off. So in many ways, we were ready for this because we wanted to deliver on our annual commitment of EBIT – on EBITDA. So I feel confident we have good visibility into Q4 already. And so – and that's the main reason why we didn't address that.

Thank you for that. And then I wanted to follow up with asking about your skew assortment. You had talked Darcy about some of the products, the oat product doing very well. Was there any pressure from your customers to reduce skews by a more meaningful amount than you would have hoped for or expected during the crisis so far? Or given your limited number of products already, was that something you didn't quite feel as much of?

Yeah, there really was no pressure around skew assortment.

Short and sweet. Thank you.

Thank you.

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

Thanks. Good morning. Just looking at your advertising and consumer marketing, the spending for the first nine months, it looks like that was up almost 200 basis points as a percentage of sales, which I don't – I think that was similar to what you would have thought, but although I remember the promotion and advertising was supposed to be going up 300 basis points. So could you comment on your growth spending year-to-date? Is it in line with what you were going to spend? Do you still plan on spending that same sort of step up in the fourth quarter? And then looking into '21, are you thinking similar amounts of gross spending? In other words, there need not be another step up or maybe even, you don't even need to have the same level in that year and I have a quick follow up.

Great, I'll hit the strategy and then if Paul has anything specific to add, he will. From a strategy standpoint, our plan from a A&P standpoint was always to focus our biggest spend in Q2 which is around New Year when most people are entering the category and then we're going to have a smaller spend in the back half. We chose to move that smaller spend into Q3 and spend it in Q3 because we felt like we had a very strong promotional plan in Q4. And candidly, we are seeing softness in the category. And we also saw benefits on cheaper advertising rates, more eyeballs, et cetera. So overall, from the year, our media spend is very similar to what we expected. And then and just to specify, but in Q4, we will not have – we will have a small A&P budget because of our heavy promotional spend. On the '21 question, we saw this year as really – this was our first year with television advertising. It was very effective in building household penetration, which was our main goal. So we expect and plan to increase that in '21. And obviously, we're in the process of doing that planning right now.

As we're looking into '21, there's probably – there's many gives and takes here with regard to how we should think about your top line, you're kind of unlucky with a lot of the on-the-go this year. But then again, you're lapping some out of stock issues or supply chain issues and then God knows how things will work as far as the recovery rate of on-the-go into this next year. So how are you thinking about the major chunks of gives and takes as you – as we try to model fiscal '21, particularly as it is – in regard to the top line? Thanks.

Yeah, I don't think we're in the position right now to talk in detail on '21, which we will obviously do in the next quarter, but we are seeing improved category trends in July. So we are – we actually – although, the recovery took longer than we predicted, we are actually – it was actually only about a month difference than what we predicted. So we are seeing July, liquid category up above pre-COVID levels. So in many ways, although, there are no promises with COVID, but in many ways we believe we are back to having the category a tailwind. We know what works to drive our business. And it's kind of back to our original playbook.

Thank you.

Thank you.

Our next question comes from the line of Jason English of Goldman Sachs.

Hey, good morning, folks.

Good morning.3

Darcy, your performances clearly definitely caused a little bit flat footed in terms of the magnitude of decline, but your forecast for next quarter implies a pretty robust snapback I think at the midpoint your guidance and pass around 23% growth, roughly speaking. Yeah, I'm hearing you reference consumption in July of around 12 on Premier, I'm assuming international Dymatize, PowerBar still down. So somewhere in the mid to high single digit overall consumption for the portfolio in aggregate and tell me if I'm off base there. If that's the – if that is generally right, what's going to drive the incremental growth to get to that 23% type level in the fourth quarter?

Yeah, so you're exactly right that we're expecting continued declines in the international business so specifically Dymatize, PowerBar, but we are expecting to see pretty robust growth in Premier Shakes specifically. And that's really driven by promotions that we have in almost every single major account, as well as the category rebound of being more of a tailwind than it has been. I think that what is encouraging is at this point in the quarter, we actually have very good visibility to at least two thirds of our quarter from a shipment perspective. And candidly, that's what's given – that is what's giving us confidence.

The other thing I would add to – the only thing I would add quickly is that, recall that we were also lapping some favorable comp in the fourth quarter prior year because of the early load in Q3. So that is about 9% of benefit to the fourth quarter.

Okay. And for my follow up, I'm going to try to cheat a little bit here and squeeze two questions in, but my apologies. And I know Jennifer's going to punish me later for it. But first, the volatility of the business, I mean, from up 32 to up 19 to down 14 to up 23. And that's just this year and we see the volatility going back. Is there ever a scenario or a case where we don't have as much volatility going forward? Is there anything you could do to manage the business for a little more? A little more consistency, I suppose. And then the second part of the question, which is totally unrelated in the cheat of the second question, I look around this world does not feel anything like a post-COVID world yet, and I'm not expecting a pre-COVID world yet. I'm not expecting to feel like a pre-COVID world for quite some time. Why should we expect your business to perform at pre-COVID type levels for anytime in the next six months even though it may have hit that level in July, why should we believe it will be durable?

Yeah, great question. Okay, I'll hit the first one around consistency. So our business is just naturally – because of we have some Club concentrations, we have a natural kind of lumpiness in our quarter-to-quarter. However, what we are and hopefully, you guys have had a chance to look at that supplemental deck is by providing more transparency to what we usually see quarter-by-quarter, our goal is that you guys start understanding that it actually can be more predictable. This year, not predictable, obviously and even last year we had our capacity constraints, but there should be some predictability around promotions because in essence the difference between quarter-to-quarter is usually just promotional loads and D loads. So that's the first piece. The second piece is just around – I agree it does not feel like we are in a post-COVID world. I think some of the dynamics that are unique to our category, specifically when I'm – so when you think about convenient nutrition, the bars – the on-the-go piece and bars have definitely gotten hit the most. I mean, in the quarter bars were down 24% were our TDs were only down 4% on what's happening within our TDs is I still – even in July where it is up 7% versus pre-COVID levels of stacks. Why I think there are some unique things happening. One, I still believe that the on-the-go usage occasion is still under indexing. People are not out and about like they were before. However, the in-home youth is over indexing. And what we're seeing is some new trends around food as medicine or proactive health and not as really benefiting the adult nutrition side of our business. But it's also benefiting the R side of the business, the everyday nutrition side of the business. It’s hurting weight management and sports nutrition. But I think those are some of the dynamics that where our business actually can benefit candidly from kind of a post-COVID or a COVID world.

Thank you very much.

Thank you.

Our next question comes from the line of Rob Dickerson of Jefferies.

Great, thank you so much. So I guess kind of a follow up that is made in terms of maybe for some benefit at home consumption around – used kind of as a medicine equivalent so to speak. I feel like, if I remember correctly, I thought in the last call, you discussed how maybe a decent percentage of your overall buyer base actually consumes the product at home, right, so not on-the-go and obviously primarily buying that in a Club channel. So I guess the question I would have is, if that consumer base relative to other consumer bases within the category consume more at home, is there something you can do to essentially support ongoing food at home consumption of your product and/or potentially shift or think about adjacencies call it confections, snacks, what have you?

Yeah, it's a great question. So you're exactly right, we see about 80%, 85% of our business at consumed in the house or at home. And those are – and what we're doing is like many other CPGs as we're evaluating these changes consumer behavior and adjusting. So we've adjusted our communication strategy, we did it right away to focus more about using our products and recipes which has always been very successful on social. Obviously, we adjusted our A&P strategy. I think as we go forward, we are looking at different ways we can kind of renovate or use packaging call out on our packages, to call out certain benefits that we have to really leverage some of these trends and then on the longer standpoint, we are definitely looking at product ideas that would be leveraging some of the trends that I already talked about.

Okay, great. And then secondly, just speaking with a number of over people within the industry, and more specifically around your category, there's a feel it's kind of brewing that as we kind of go into shelf resets later this year that retailers overall are still kind of supporting some of the larger brands, right, I mean, that's not the case because other food, but more specifically this category. And given there's so many players, right within a higher growth category like sports nutrition, especially in the bar side, it feels that maybe some of the larger players could actually benefit through the shelf resets. Now I realize you're focused more on Club, maybe the reset isn't taking the thing is consistent or it will be different, but how do you feel about your share gain potential as we go through this process and as you are promoting heavily, right, and as you are trying to span that household penetration further.

Yeah, I'm really excited about the upcoming resets and specifically the bulk – I think in the past I've talked about kind of 50% of the shelf reset in the fall, 50% in the spring, backend change to be more of a 60-40 split. And so we have visibility to the new resets that are coming up in our Q1. And I think what you explained about retailer supporting the larger brands, specifically, the larger growing brands. I think that our resets will show you that and we're gaining some significant space, which I would argue is long overdue, but I'm very excited to see it.

That's great to hear. I'll pass it on. Thank you so much.

Thanks.

Our next question comes from the line of John Baumgartner of Wells Fargo.

Good morning, thanks for the question.

Hi, John.

Paul, I wanted to come back to the gross margins, just given the pressure this quarter the pressure last quarter, the outsource model, you're not seeing as much leverage as you would if it was in sourced and can you drill down a bit more into the components there of that pressure? You mentioned the cost inflation in your comments between cost inflation changes in year-on-year promo. Maybe just more detail there. And then as a follow up with the dislocations from COVID, how is that impacting any sort of changes in your outlook for dairy cost inflation going forward? Thanks.

Sure. Yeah, so from a third quarter perspective versus last year, you're correct, our margins were down and it's really two primary components. It is the increased promotional spend as well as the increase in milk protein cost. So it's kind of a 60-40 split really, from the drivers on the margin side. As we look into next year, dairy costs have been somewhat volatile, since it's kind of after COVID. We were expecting higher protein costs as we went into fiscal '21. That's been a little bit temporary based on the markets recently, but we're still expecting some minor headwinds on the milk protein side. On weight protein, actually, we made that – those have been a bit more favorable, not increasing, and so there may be a marginal benefit there, but any protein costs for next year, our thinking is that with some of our supply chain initiatives and there's opportunity to offset some of that, but we do think there will be some modest headwinds for Protein as we go into next year.

And is there any ability to actually hedge more than you have historically, any changes in the supply chain initiatives on that front or still just historically to meet the norm in terms of I guess, moving up more to chance as opposed to hedging?

Yeah, we're evaluating several strategies. At any given time, we're looking at different ways to do that. And we have even in this fiscal year implemented some different strategies than we have executed in the past. And we're continuing to explore some additional opportunities there. So yeah, we're continuing to evaluate to find the best way to mitigate that.

Okay. Thanks Paul.

Yeah, thanks.

Our next question comes from the line of Pamela Kaufman of Morgan Stanley. Pamela, make sure you're not on mute. Our next question comes from the line of Brian Holland of D.A. Davidson.

Thanks. Good morning. Most of my questions have been answered, so maybe just two quick kind of follow on. One, Darcy, it sounds like from everything you're saying that you have pretty good line of sight on distribution gains amidst the upcoming shelf reset, which is certainly encouraging to hear given the kind of the landscape and some uncertainty going in about how shelf reset timer was going to play out. So maybe just first point of clarification, do you feel very comfortable with the line of sight you have on distribution gains going into fall?

Yes, we do. We'll get some – we have some minor reset happening in the grocery side of a business in Q4, but the major ones we will see in our Q1. And yes, we already know where those will land and it's positive for our brand.

Okay, got it. And then just quickly on the scanner data, obviously some scrutiny there that's been referenced throughout the call and you did a great job of walking through the puts and takes there. But just to help us understand as we watch this data over the next few months, I know you had lapped some material promotional events in the prior year period, just taking the COVID backdrop out of this. As we look forward over the next couple of months, no significant events that we are lapping that maybe won't be repeated that we should just be mindful of one way or the other that might impact the way the scanner would look.

I always want to be careful with none, but no major ones. If you remember, so last year, we actually only did – we did only a handful of promotions, specifically, in our Club account. And we had a small promotion in mass, which we're lapping right now. But what's different about this year is we basically have promotions in almost all of our different retailers.

Appreciate the color, best of luck.

Thank you.

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

Thanks. Good morning.

Good morning.

First question, I just want to go back to the third quarter, the inventory or the trade inventory issue. I'm just trying to understand, did we just miss model that or did it happen a little different than expected? Because I think I was going back and I think the comment was, it was expected to be kind of a $50 million hit to demand equally over the next two quarters, but it seems like majority of it happened in three queues. So did something happen differently or did we just not get the message?

Yeah, I think there are two things. So we did our best to communicate the high customer inventory at the end of Q2, which benefited Q2 but hurt Q3. And that the – when you're looking at the, the back half, it was back loaded to Q4. Clearly, we need to do a better job because we look back at the script and we thought we were clear, but clearly not, so we can work on that for sure. What we meant was and what was the new information is the rate of recovery of the category. And that was what I was talking about kind of the W. I mean, if you go back to the overall convenient nutrition category, but specifically liquids, you'll see week-on-week that it hit a low in April and then toward the end of April, the category actually saw a steady recovery. We expected at that time with the information we had that that would continue gradually up to pre-COVID levels as of June. Obviously, that – it actually went back down and that was that W curve that I talked about. So that was really honestly the miss as opposed to we had visibility to obviously, the high customer inventories.

Got it and kind of follow up on the same lines, like what are your kind of current thoughts for active nutrition's over the – as we come out of COVID and the reason I say that is, if you saw, if your numbers were declining, I mean, sales of ketchup and frozen potatoes were tripling. And so clearly there're consumers that are gone to comfort food and are still on comfort food and didn't know if you thought it would reach back as everybody's trying to shed the pounds and be more active and more nutritious coming out of this or whether there's kind of a permanent pause on some of the active nutrition growth as people slowly come out of it.

Yeah, so I mean, big picture from a trend perspective, we still are – there's the temporary piece, which is really this on-the-go reduction. So that I think will continue once there's a vaccine, even it's starting to come back I think as more people – as we all start – as we're all learning more about the virus and understanding how to function with it. So I think that is a temporary piece that we're already starting to improve. I think that when you look at need state, the area that is benefiting is adult nutrition and somewhat the everyday nutrition. What's getting hit is weight management and sports nutrition. I believe that those will come back. So sports nutrition has been hit for a while, but I believe they will come back I think as people start getting – wanting to get back into their health routines, et cetera. So the fundamentals of this category are strong. People are looking to improve their health. They want convenience. So I have no doubt that this category will rebound.

Okay, great. Thanks for the color.

Thank you.

Our next question comes from the line of Ken Zaslow of Bank of Montreal.

Hey, good morning, everyone.

Good morning.

Good morning.

How does this affect your long-term growth rate?

It doesn't. So if you remember, we had planned – to our long-term algorithm we had planned to have a higher growth rate this year because we were lapping this few constraints, but the long-term was 10% to 12% growth with 18% to 20% EBITDA margins. And actually what we're seeing because of COVID is we're actually still delivering on that long-term algorithms. However, we thought we would be over delivering this year.

Okay, my second question is when you did the promotional shift from second quarter to third quarter and fourth quarter, how did that play out? And then I'll leave it there.

The promotional shift?

Yeah. And two quarters ago, you said that there was going to be – you were delaying the promotions from the second quarter to the third and fourth unless I made a mistake and misread the transcript. Is that not the case?

Yeah. No, you're right. So a couple things happened, so we actually this last quarter because of – so those moved to Q4 and actually into Q1, but what changed in this quarter is we actually ended up doing an incremental promotion because in our Club accounts, mainly because our Club accounts saw the decline in category and we were their first call. So net-net we actually ended up with the same amount of promotions in this year even though we thought they were moving.

Great, I'll leave everything for later. Thank you very much.

Thank you.

And our final question comes from the line of Chris Growe of Stifel.

Hi, this is Matt Smith on for Chris. My first question relates to the inventory position at retail. Could you talk about what happens in the fourth quarter? When I look at the bars on the slide that you provided it looks like there's potentially more inventory de-loading to go?

Paul, you want to take that?

Of course, yes. Coming out of the third quarter, we feel like the inventory levels are imbalanced at our key customers where we have full visibility, so we do not anticipate the fourth quarter having significant deviations between shipments and consumption.

Okay, great. And then my follow up would be as it relates to the household penetration and repeat rates that you provided, could you talk about the benefit of new products? And how those are impacting repeat rates? And then on TDPs, are there varying repeat rates based on the new products that are influencing the performance?

Sure. So there are a few things that kind of you expect with repeat rates is that as you expand distribution and you expand household is that your both buy rate and repeat rate would go down. I think that's one of the things that I was saying at the very beginning is – that's what I'm really excited about is that we actually see a very stable repeat rate over the years. So that feels really good. And with regards to buy rate, we are seeing some decline in buy rate mainly just because we're going from big packs in Clubs to smaller packs in FDM, but still very strong. So I think I answered your question. Did I get everything?

Thank you.

Thank you.

And ladies and gentlemen, that was our final question. And with that we do conclude today's conference call. You may disconnect your lines at this time and have a wonderful day.

Thank you.