Bellring Brands Inc

NYSE:BRBR

Earnings Call Transcript 2023-Q3

[Operator]

Good morning and thank you for joining us today for BellRing Brands Third Quarter Fiscal 2023 Earnings Call. With me today are Darcy Davenport, our President and CEO; and Paul Rode, our CFO. Darcy and Paul will begin with prepared remarks. And afterwards, we’ll have a brief question-and-answer session. The press release and supplemental slide presentation that support these remarks are posted on our website in both the Investor Relations and the SEC filings sections at bellring.com.

In addition, the release and slides are available on the SEC’s website. Before we continue, I would like to remind you that this call will contain forward-looking statements, which are subject to risks and uncertainties that should be carefully considered by investors as actual results could differ materially from these statements. These forward-looking statements are current as of the date of this call, and management undertakes no obligation to update these statements. As a reminder, this call is being recorded, and an audio replay will be available on our website. And finally, this call will discuss our 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, President and Chief Executive Officer]

Thanks, Jennifer, and thank you all for joining us. Last evening, we reported our third quarter results and posted a supplemental presentation to our website. I’m pleased to share our Q3 results were above our expectations. Net sales grew 20% over prior year, and adjusted EBITDA was up 8%. The momentum in the business is palpable as we restart demand drivers on shakes. This quarter, we brought new capacity online, which allowed us to relaunch our temporarily discontinued shake flavors and expand our successful limited time offer program. Consumer and retailer excitement around these new flavors is incredible. Both Premier Protein and Dymatize powder businesses are also proving to be strong growth engines with both brands expanding distribution and responding well to media.

You saw last night, we raised our outlook for the year. We now expect net sales to grow between 19% and 22% over fiscal ‘22 with adjusted EBITDA to grow between 22% and 25%. Our better-than-expected Q3 performance drove our decision to raise our full year guide. We are proud of the progress that we made this year. While certainly not finished with our planning process, our initial expectations for next year are to deliver at the high side of our long-term algorithm in both net sales growth and adjusted EBITDA margin. As a reminder, our algorithm and net sales growth of is net sales growth of between 10% and 12% with EBITDA margins of between 18% to 20%. We will provide more details on our fiscal ‘24 outlook in November.

Turning to Q3. Let’s start with shake production. Our production growth over fiscal ‘22 continues to track in line with our expectations with year-to-date production at low double digits. I’m happy to share that we brought a new co-man SunOpta online during Q3. They represent one of our two greenfield facilities in our shake capacity expansion plan, and they have a smooth start-up. They continue to scale up and will be a small contributor to our Q4 but a much larger contributor to fiscal ‘24 and beyond.

Our second greenfield facility in Michael Foods is expected to start up in Q1. While a slight delay, we remain on track to add north of 20% incremental capacity next year. This allows us to rebuild our internal safety stock and deliver robust growth in ‘24 and beyond. Now to the category and brand updates. The convenient nutrition category grew 14% in Q3 as tailwinds around health and wellness and fitness continue to drive growth. Consumer interest in functional beverages and sports nutrition products continues to be high. Ready-to-drink growth led the category at 21% and ready-to-mix grew 16%. Increased supply is lifting ready-to-drink growth while increased promotion, marketing and distribution are boosting both segments.

Moving forward, we expect to see continued strong volume growth, but pricing to be a smaller contributor. Premier Protein shake consumption accelerated this quarter, up 27%. Growth was terrific across all channels driven by improved supply and flavor expansion. The highest growth was in mass and e-commerce as both benefited from our full range of flavors and higher in-stock levels. Our summer limited-time offering, root beer floats was available outside of e-commerce for the first time and demonstrated an impressive 90% incrementality to the brand.

In July, shake consumption continued to grow, up 21%, demonstrating continued strength. Our brand metrics this quarter reflect our building momentum. Premier Protein RTD market share reached 20%, our highest ever quarterly share. I’m also happy to report that Shake TDPs have returned to growth, surpassing our previous high in late fiscal 2021. Recall last quarter, Premier Protein became the #1 brand in the RTD segment and the #1 brand in the broader convenient nutrition category. The brand stayed in the top spot throughout the quarter. All of this is especially encouraging because we still haven’t restarted meaningful marketing and promotion. Premier Protein made great progress in household penetration this quarter with the brand adding nearly 1 percentage point versus Q2 reaching 15% of households.

Our household penetration continues to be the highest in the category, and we expect our Q4 marketing and promotional activities to further grow household penetration. Our repeat and buy rates are holding steady, demonstrating our consumer loyalty. The Premier Protein brand is proving it can travel to other forms in categories. Premier powders consumption was up 85% behind new distribution and strong velocities. In the same way that Premier mainstreamed the RTD category, we believe the brand can do the same within the powder category. In addition, we are seeing early success with our licensing strategy in both cereal and frozen pancakes. Although not a significant revenue driver, we’re encouraged that the brand can be successful in other high-traffic aisles.

Turning to Dymatize. The brand had another strong quarter with consumption dollars up 39%. We saw double-digit growth in nearly all channels driven by distribution gains, promotion and marketing. The brand’s strength continued into July. Dymatize’s success with mainstream consumers continues. This fiscal year marks the first time the brand has meaningfully invested in broader media and the strategy is working. Base velocities on our flagship line, ISO 100, are up 30% versus the pre-media period, market share, TDPs and household penetration new highs this quarter with a ton of upside still in our future. Encouragingly, as Dymatize adds new households and distribution points, repeat and buy rates are holding steady.

In closing, I’m delighted with our year-to-date progress. We are on track to deliver results ahead of our guide last November. We are accelerating and gaining momentum in almost every part of our business. Our first Shake greenfield facility is now up and running, bringing us closer to realizing a step change in our shape production run rate. Premier Protein maintains the #1 share position in our growing on-trend convenient nutrition category. We have begun to drive demand by relaunching our full assortment of flavors. Both Premier Protein and Dymatize are delighting mainstream consumers and reaching all-time highs in market share. Much of this momentum has come without major marketing and promotion.

Looking forward, we can’t wait to bring the premier protein of Dymatize brands to more consumers and help grow the category with our retail partners. We look forward to providing more specifics around fiscal ‘24 next quarter. Thank you for your continued support. And I’ll now turn the call over to Paul.

[Paul Rode, Chief Financial Officer]

Thanks, Darcy, and good morning, everyone. As Darcy highlighted, our third quarter performance was modestly above our expectations. Net sales for the quarter were $446 million and adjusted EBITDA was $87 million. Net sales grew 20% over prior year, and adjusted EBITDA increased 8% with adjusted EBITDA margin of 19.5%. Starting with brand performance. Premier Protein net sales grew 20% with growth split evenly across volume and pricing. Volume grew 10%, benefiting from increased shake production compared to a year ago, the relaunch of temporarily discontinued flavors and strong growth from Premier Powders.

As a reminder, we have fully lapped our April 2022 price increase for RTD shakes and will continue to benefit from the October 2022 price increase through the end of fiscal ‘23. Shake consumption dollars grew 27%, outpacing shipment growth 19% as last year’s April price increase was not fully reflected at retail until later in the third quarter. Additionally, shipment growth was modestly impacted by the lapping of a trade inventory build in the prior year. Dymatize net sales were up 32% this quarter, with volumes growing 46%. Strong volume growth was driven by distribution gains, organic growth and promotional activity. Additionally, volumes benefited from the lapping of an easier prior year comparable driven by price elasticities and lower shipments of non-core products resulting from supply constraints. Price/mix was a 4% headwind at Dymatize’s growth rate in Q3, driven by higher trade promotional activity and unfavorable product mix. Gross profit of $136 million grew 13% with a decrease in gross profit margin to 30.5%.

The margin decline resulted from higher input cost and trade promotion. This was partially mitigated by pricing actions and favorable freight rates. Gross profit in the quarter also included a $2 million unrealized mark-to-market adjustment on our commodity hedges, which was a 40 basis point headwind to our gross profit margin. Excluding onetime costs in the prior year period, SG&A expenses as a percentage of net sales increased 30 basis points. The increase was driven by a 130 basis point increase in our marketing spend primarily on our powder business, partially offset by leverage on the remainder of our G&A base.

Before reviewing our outlook, I would like to make a few comments on cash flow and liquidity. I’m pleased to share that we generated $110 million in cash flow from operations in the third quarter and $131 million year-to-date. As expected, net working capital decreased significantly from the second quarter, with reductions in both raw material and Dymatize finished goods inventory.

During the quarter, we repaid $60 million against our revolving credit facility. As of June 30, net debt was $893 million and net leverage was 2.8x. With our EBITDA growth and continued strong cash generation expected in Q4, we anticipate net leverage to be approximately 2.5x by the end of fiscal ‘23. With respect to our share repurchases this quarter, we bought 1.3 million shares at an average price of $36.13 per share or $49 million in total. Our remaining share repurchase authorization is $31 million.

Turning to our outlook. We raised our fiscal 2023 guidance range for net sales to be $1.63 billion to $1.67 billion and adjusted EBITDA of $330 million to $338 million. The updated guidance reflects our better-than-expected third quarter results, while our outlook for the fourth quarter remains largely unchanged.

In Q4, we expect Premier Protein net sales to grow double digits with volume a larger contributor to the net sales growth rate than pricing as we restart light promotions and ship fall resets. Similar to Q3, the reintroduction of our temporary discontinued flavors and higher RTP production will also drive year-over-year volume growth. Dymatize space is a tough comparable in Q4 as we lap the impact of high international and specialty shipments in the prior year. We expect fourth quarter adjusted EBITDA margins to be down slightly compared to prior year as our higher SG&A as a percentage of net sales was partially offset by higher gross margins. Gross margins are expected to benefit from lower protein costs, offset partially by increased promotional spend and other input cost inflation.

In closing, we are pleased with our year-to-date performance. Our momentum continues to grow, and we are well positioned to close out the year. I will now turn it over to the operator for questions.

[Operator]

[Operator Instructions] Our first question comes from the line of Andrew Lazar with Barclays.

[Andrew Lazar, Barclays]

Good morning, Paul and Darcy.

[Darcy Davenport, President and Chief Executive Officer]

Good morning.

[Paul Rode, Chief Financial Officer]

Good morning.

[Andrew Lazar, Barclays]

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

[Darcy Davenport, President and Chief Executive Officer]

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

[Andrew Lazar, Barclays]

Got it. And then given the very strong momentum in the business, I’m curious if you’ve yet optioned for more lines to be built at your two new greenfield facilities beyond the 4 lines, I think that each is starting with such that you’re thinking about capacity for 25 and 26, not to get too far ahead of ourselves.

[Darcy Davenport, President and Chief Executive Officer]

Yes. I mean, I probably talk a little more in generalities here. But we are absolutely – we’re now planning 3 to 5 years out. So we are actively talking to our partners for 26 and 25, 26 and 27. We’re talking – we are building out our long-range plan and absolutely, we are talking about expansion.

[Andrew Lazar, Barclays]

Got it. Thanks so much.

[Darcy Davenport, President and Chief Executive Officer]

Thank you.

[Operator]

Thank you. [Operator Instructions] And our next question comes from the line of Ken Goldman with JPMorgan.

[Ken Goldman, JPMorgan]

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

[Darcy Davenport, President and Chief Executive Officer]

Yes, I think we are giving ourselves some flexibility with the 28% plus and the main reason is because remember, we just started up SunOpta. It is going well. But they aren’t at their – it takes somewhere between two and three quarters to really fully ramp up and to get to the levels that we are expecting. So there’s still a ways to go. And then we haven’t produced a single shape at MFI. So I think that we are giving ourselves some kind of latitude in that 20% plus. I feel good about that number but I also don’t feel confident enough to give any more above that number. And then just your question about inventory build, yes, I mean, we’ve talked about the kind of delta between – call it, 20% production and the high side of our algo and that difference. We have to rebuild – we only have about 4 weeks of safety stock right now. We are at the bare minimum to operate our business right now. We’ve – it’s hard on our organization, and we basically have to be really, really good at forecasting specifically at the different sizes and at all the different facilities and it’s difficult. And so we need to – our idea – our ideal safety stock is at 8 weeks. So we have to build and anywhere between anything better than 4. So 6 to 8 is really the ideal 8 being perfect. And so we’re going to next year plan on building inventory so we can operate effectively.

[Ken Goldman, JPMorgan]

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

[Darcy Davenport, President and Chief Executive Officer]

Paul, do you want to answer that?

[Paul Rode, Chief Financial Officer]

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

[Ken Goldman, JPMorgan]

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

[Paul Rode, Chief Financial Officer]

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

[Ken Goldman, JPMorgan]

Got it. Great. Thank you for that.

[Operator]

Thank you. [Operator Instructions] Our next question comes from the line of Bryan Spillane with Bank of America.

[Bryan Spillane, Bank of America]

Thanks, operator. Good morning, everyone.

[Darcy Davenport, President and Chief Executive Officer]

Good morning.

[Paul Rode, Chief Financial Officer]

Good morning.

[Bryan Spillane, Bank of America]

I just – I have a question about the long-term EBITDA margin algorithm. And I guess thinking a little bit about just how different maybe the business is today versus what it was when you originally set that. Like how should we think about, I guess, whether that’s the right range? And I guess what I was thinking is the channel mix is changing, right? Less club, more mass and food your supply chain has changed, right? You’ve got a wider network of co-mans Dymatize, I guess, a little bit of a bigger part of the mix than it was when you really said that. So if you could just kind of talk about the puts and takes there. And I guess, as you’re looking out over Darcy, you said you’re doing kind of multiyear planning now. Just is 18% to 20% still the right algorithm could it maybe be different than that, again, just relative to EBITDA margins. Thanks.

[Paul Rode, Chief Financial Officer]

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

[Darcy Davenport, President and Chief Executive Officer]

Yes, I would just add, the channel – all the things – I mean, you described the changes of the business and they absolutely are true, but just to reiterate what Paul mentioned, from a channel mix standpoint and a product mix standpoint, the margins are not are pretty close. So that changed. It’s more about just the scale and we absolutely do get some scale benefits, but not as much as some other businesses. With our co-man model. I think where we get scale benefits are things like G&A, etcetera, we do get some from kind of procurement, etcetera. And we will get some from the network. So that will move but also, I think we want to keep our – I mean, this is a branded business. And we’re bringing in new households into the category and that takes marketing. And we want to continue to build these brands to keep the loyalty up. And we – and so that’s why I think, again, I think we’re being a little conservative by keeping the algorithm where it is, because remember, we haven’t really – we haven’t started marketing and promotion again on our biggest business. So we want to get kind of a year under our belt, and then we will reassess.

[Bryan Spillane, Bank of America]

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

[Darcy Davenport, President and Chief Executive Officer]

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

[Bryan Spillane, Bank of America]

Thanks, Darcy.

[Operator]

Thank you. [Operator Instructions] And our next question comes from the line of Jim Salera with Stephens.

[Jim Salera, Stephens]

Hi, good morning, guys. Thanks for taking our questions. Just, I think, first of all, you talked about the powder buyer for Premier and the opportunity to take that brand outside of ready-to-drink shake and kind of expand that. When you see the powder buyer, is that an existing RTD shake buyer and they are just expanding their overall buy with the brand? Or are they largely incremental to the brand?

[Darcy Davenport, President and Chief Executive Officer]

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

[Jim Salera, Stephens]

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

[Darcy Davenport, President and Chief Executive Officer]

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

[Jim Salera, Stephens]

Okay, thanks. I will hop back in queue.

[Darcy Davenport, President and Chief Executive Officer]

Thank you.

[Operator]

Thank you. [Operator Instructions] Our next question comes from the line of Matt McGinley with Needham & Company.

[Matt McGinley, Needham & Company]

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

[Paul Rode, Chief Financial Officer]

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

[Matt McGinley, Needham & Company]

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

[Darcy Davenport, President and Chief Executive Officer]

Yes and yes. Flavors, favors continue to bring in excitement and new people into the brand-new side. Really, the big thing we added this quarter was the three discontinued, the temporarily discontinued flavors as well as our LTO expansion of [32:53]beer float. But with that, you saw a bump up of almost 1 point of household pen. So they work. They provide excitement. People get really sick of chocolate and vanilla. So we see a long runway for flavors. And then – but then I’d say and yes, because we’re also looking at different formulas, so think of everything from anything to bring in either a new occasion or a new consumer. So think of different levels of protein, different types of protein, different formulation. So all of that, we have a very active R&D team that is thinking of ideas to bring in new – to introduce Premier protein to a broader set of consumers.

[Matt McGinley, Needham & Company]

Okay. Great. Thank you very much.

[Operator]

Thank you. [Operator Instructions] Our next question comes from the line of Jason English with Goldman Sachs.

[Jason English, Goldman Sachs]

Hi, folks. Thanks for taking.

[Darcy Davenport, President and Chief Executive Officer]

Hi, Jason.

[Jason English, Goldman Sachs]

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

[Darcy Davenport, President and Chief Executive Officer]

Yes, for sure. So I’ll answer the marketing question. Paul, if you want to add anything else about the margin. But – so this brand, you’re right. We definitely have a lower percentage of marketing spend than I think other beverage brands. It’s unique. It’s a brand that because of our loyalty, our consumer loyalty, we are able to spend less, and I’ll give you and I’ll explain why. Once we put – so in ‘21, when we actually did TV, we had a campaign, we also had digital, etcetera. We still – we were able to put it out on the error. But then our – follow our social and influencer following basically take that message and really organically get it out to all of their followers and it just has to do with how passionate our consumers are. So I do not think we will ever need to spend at the levels of some of the big beverage brands now. Having said that, we will increase our marketing. We haven’t for the last – we’ve never really spent for – we will never spend really during Q1, but think of 9 months, we’ve never spent at the level, I think, that we should for 9 months because when we have the increase was too steep and we ran into capacity constraints, that will not happen. I think that we will – and if it does, I guess, that’s a good problem. But I think that as we – towards the end of ‘24, we’re going to ease in to support in ‘24. We will start with promotion in Q2, and then we will ease in marketing toward the back half of ‘24 and think of kind of the very back half into ‘25 is when you’re going to start seeing Q4 of ‘24 is when you’re going to start seeing some major TV campaigns, digital support, where you’re going to see us really bring the brand to life.

[Jason English, Goldman Sachs]

Okay. And I think there was – you guys are going to weigh in on the margins as well.

[Paul Rode, Chief Financial Officer]

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

[Jason English, Goldman Sachs]

Okay. Okay, thank you. I will pass it on.

[Paul Rode, Chief Financial Officer]

Thanks, Jason.

[Operator]

Thank you. [Operator Instructions] Our next question comes from the line of David Palmer with Evercore ISI.

[David Palmer, Evercore ISI]

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

[Darcy Davenport, President and Chief Executive Officer]

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

[David Palmer, Evercore ISI]

In red, yes, exactly.

[Darcy Davenport, President and Chief Executive Officer]

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

[David Palmer, Evercore ISI]

That’s very helpful. Thanks. I will pass it on.

[Operator]

Thank you. [Operator Instructions] And our next question comes from the line of Jon Andersen with William Blair.

[Jon Andersen, William Blair]

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

[Darcy Davenport, President and Chief Executive Officer]

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

[Jon Andersen, William Blair]

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

[Darcy Davenport, President and Chief Executive Officer]

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

[Operator]

Thank you. [Operator Instructions] And our next question comes from the line of Robert Dickerson with Jefferies.

[Robert Dickerson, Jefferies]

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

[Darcy Davenport, President and Chief Executive Officer]

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

[Robert Dickerson, Jefferies]

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

[Darcy Davenport, President and Chief Executive Officer]

Yes. Our plan, we have – I think we have talked about this before. In Q4 to next quarter, we have some very late promotions. And then we usually – we don’t promote in Q1. But if you think of then Q2 was a big time, we will layer on more normal New Year new promotion, in-store promotion and then layer on marketing in kind of Q3, Q4 of next year. We don’t feel like we need to do it all at the same time. We always have kind of a baseline of marketing activity on all of our social channels and some small digital – some digital spend. But I think what you are talking about is similar to what Jason was asking about is more of the bigger campaign and that would come later in ‘24.

[Robert Dickerson, Jefferies]

Super. Thank you.

[Darcy Davenport, President and Chief Executive Officer]

Right. Thank you.

[Operator]

Thank you. [Operator Instructions] And our next question comes from the line of John Baumgartner with Mizuho.

[John Baumgartner, Mizuho]

Good morning. Thanks for the questions.

[Darcy Davenport, President and Chief Executive Officer]

Hi John.

[John Baumgartner, Mizuho]

Darcy, first off, on the subject of household penetration for Premier, you mentioned it’s the highest penetration in the category, but it’s the only fraction of the total category. And when you think about where Premier is not present right now, how do you prioritize segmenting that opportunity? Do you have to hit on anything different to ship like the next 5% to 10% of households even different for the 5% to 10%, like after that? I mean, aside from just more marketing, more flavors, I guess what if anything needs to evolve through the households from here?

[Darcy Davenport, President and Chief Executive Officer]

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

[John Baumgartner, Mizuho]

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

[Darcy Davenport, President and Chief Executive Officer]

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

[John Baumgartner, Mizuho]

Okay. Thanks Dracy.

[Operator]

Thank you. [Operator Instructions] And our next question comes from the line of Matt Smith with Stifel.

[Matt Smith, Stifel]

Hi. Good morning Darcy.

[Darcy Davenport, President and Chief Executive Officer]

Good morning.

[Matt Smith, Stifel]

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

[Darcy Davenport, President and Chief Executive Officer]

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

[Matt Smith, Stifel]

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

[Darcy Davenport, President and Chief Executive Officer]

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

[Matt Smith, Stifel]

Great. I appreciate the color and I will pass it on.

[Operator]

Thank you. Ladies and gentlemen, that concludes today’s conference call. Thank you for participating and you may now disconnect.