Bellring Brands Inc (BRBR) 2022 Q1 法說會逐字稿

Welcome to BellRing Brands First Quarter 2022 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) 839-8318. No pass code is required.

(Operator Instructions)

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' First Quarter Fiscal '22 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 section of 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. Additional information regarding these risks and uncertainties is discussed under the forward-looking statements section in the press release we issued yesterday and other press releases we have issued with respect to proposed distribution of its interest in BellRing Brands, which are posted on our website.

We also urge you to read both the registration statements, the proxy statement and prospectuses, the related amendments of these filings and other documents related to the proposed distribution of Post's interest in BellRing Brands that have been and will be filed with the SEC when they become available because they will contain important information. 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 GAAP measures to the nearest GAAP measure, see our press release issued yesterday and posted on our website.

With that, I will turn the call over to Darcy.

Thanks, Jennifer, and thank you all for joining us. Last evening, we reported our first quarter results and posted a supplemental presentation to our website. This presentation is designed to provide more insight into our business, consumption and key metrics and now includes both Premier Protein and Dymatize.

Our first quarter came in slightly ahead of expectations with sales of $307 million and adjusted EBITDA of $60 million. Net sales grew 9% over prior year, led by Dymatize, which was up 41%. Premier Protein grew 5%, with both brands benefiting from pricing actions. This single-digit growth for Premier Protein was expected as we lap prior year promotions that aren't repeating. Our adjusted EBITDA margins were healthy despite significant cost headwinds.

As you saw in yesterday's press release, we reaffirmed our fiscal '22 guidance for both net sales and adjusted EBITDA to grow between 9% and 13%. Other than a slight shift in Dymatize sales from second quarter into first, we don't expect major deviations to the cadence we communicated last quarter. Not surprisingly, inflation ramped up across freight and dairy proteins this quarter. As a result, we announced further price increases on shakes and powders, which will mainly benefit the second half of the year.

We expect Q2 sales to be similar to Q1 and to sequentially grow, reflecting the incremental pricing actions and new capacity. We will experience margin pressure in Q2 until the price increases are implemented. Overall, we believe the balance of the year leans toward upside. However, we have seen how quickly circumstances can change in this environment. While our confidence in the year has grown, at this point, we are reaffirming our guidance. The key drivers that would add opportunity or risk to the year are our ability to deliver our expected production, elasticity relating to upcoming pricing actions and additional inflation.

Now turning to our category brand highlights and updates on capacity expansion. We continue to see robust growth in the convenient nutrition category. Ready-to-drink beverages and ready-to-mix powders both grew 17% versus a year ago. Strong consumer tailwinds around wellness and healthier food solutions are driving this growth. RTD beverages added 2.3 points to household penetration and saw growth in purchase size and volume. Ready-to-mix powders continue to be fueled by an increased interest in proactive health and fitness.

Our brands are growing despite supply chain challenges. Premier Protein shake consumption grew 10% across tracked and untracked channels with e-commerce and mass leading the way. Brand metrics remain strong, demonstrating our high consumer loyalty. Household penetration and repeat rates are holding steady and velocities are at 45% versus a year ago. Our TDPs have started to rebound as we have increased trade inventory levels this quarter. Despite these encouraging signs, we expect Premier Protein RTD shake consumption in Q2 to lag prior year because we are lapping significant promotional periods.

Moving to Dymatize. Dymatize had a fantastic quarter with consumption in the U.S. up 48% across tracked and untracked channels. All key channels contributed with double-digit growth and brand velocities remain strong. Dymatize ISO100 launched 2 exciting new flavors this quarter, Dunkin' Cappuccino and Mocha Latte, both flavors which were co-developed with Dunkin' are off to a great start.

Our operating environment remains challenging. Supply chain disruptions largely around labor availability at our existing co-manufacturers are impacting our ability to rebuild inventory as fast as we want. First quarter production came in slightly below our expectations, mainly due to COVID-driven labor shortages. However, we are encouraged with the improvement in January.

Our capacity expansions are progressing well and remain on track. As you may remember, we have capacity coming online each quarter starting Q2. We are comfortable with our ramp-up assumptions, despite COVID-related challenges. We also made significant progress, identifying and vetting additional growth partners who are expected to bring on capacity in fiscal '23 and '24.

Finally, I would like to share a brief update on Post distribution of its interest in BellRing. Overall, the transaction remains on track. We have scheduled a special meeting of BellRing stockholders on March 8 to vote on the transaction. Post will announce additional details about the spin-off in coming weeks. We believe upon completion of the transaction, BellRing will have increased strategic flexibility to manage our capital structure and should benefit from more liquidity in our shares.

In closing, we all have been tested over the last few years. I've been impressed by how our employees, manufacturing and logistics partners and customers have navigated this period. I believe we will look back on '22 as a pivotal year for our brands and our company, one where we solidified the foundation of the business so we can really see what our brands are capable in the future. I continue to believe that we are in the early innings of our category and brands growth. Premier Protein and Dymatize are perfectly positioned to attract new households into the category and improve consumers' health along the way.

Thank you, and I look forward to updating you on our progress throughout the year. I will now turn the call over to Paul.

Thanks, Darcy, and good morning, everyone. Net sales for the quarter were $306.5 million, up 8.5%. Adjusted EBITDA was $59.8 million, a slight decline to prior year, and EBITDA margin was 19.5%. Premier Protein net sales grew 4.5%, driven by higher average net selling prices, reflecting reduced promotional activity and price increases. Recall, while we face capacity constraints, we have temporarily reduced Tetra shake SKUs at promotion and marketing. This resulted in expected volume declines for Premier Protein in the quarter. Despite this decline, shipments exceeded consumption in the quarter and resulted in increased retailer inventory.

Dymatize net sales grew 41%, with volumes up 8%. Net sales outpaced volume growth benefiting from higher average net selling prices, which reflected price increases and a favorable mix. Strong velocities and distribution gains drove volume growth. Gross profit of $92 million was flat to last year, with a decrease in gross profit margin to 30.1%. But gross margin decline results from higher dairy protein costs as well as increased freight, which was mitigated by higher net selling prices.

SG&A expenses of $37 million included $2 million of separation costs. Prior year SG&A expenses included $4.6 million of restructuring and facility closure costs. Both items were treated as adjustments for non-GAAP measures. Excluding these items, SG&A increased $1 million and was favorable 50 basis points as a percentage of sales. Our cash flow in the first quarter was unfavorably impacted by higher working capital, a decrease in payables and an increase in powder inventories drove this result. We expect further working capital increases throughout the year as we rebuild our RTD shake inventory levels.

During the quarter, we saw an attractive entry point and repurchased 800,000 shares of our Class A common stock at an average price of $23.34 per share. Our remaining share repurchase authorization is $42 million. As of December 31, net debt was $489 million and net leverage was 2.1x. During the first quarter, we repaid debt of $90 million using cash on hand.

Turning to our outlook. We are maintaining our guidance for net sales of $1.36 billion to $1.41 billion and adjusted EBITDA of $255 million to $265 million. As Darcy highlighted, the year is progressing slightly ahead of expectations with net sales and adjusted EBITDA growth weighted to the second half. Inflation has outpaced our initial estimates, and we expect additional cost headwinds for both shakes and powders. However, we are executing a price increase to help offset these impacts, which will benefit gross margins in the second half.

During the second quarter, we expect high single-digit net sales growth as higher net pricing and volume growth for our powder portfolio is partially offset by volume declines on RTD shakes as we lap promotional activity. We expect adjusted EBITDA to grow significantly from prior year, benefiting from the pullback of promotions and marketing. Second quarter adjusted EBITDA is expected to decline sequentially, driven by inflation ahead of pricing as well as modestly higher SG&A. Finally, as Darcy mentioned, Post's distribution of its interest in BellRing remains on track. We expect approximately $400 million of cash will be distributed to BellRing's stockholders, including Post. As a result, we expect net debt of BellRing will increase to an amount not to exceed 4x adjusted EBITDA. More details will be provided over the coming weeks.

In closing, we are encouraged by the solid start to the fiscal year. While we and our industry are facing short-term challenges and historical inflation, our optimism and outlook for our business has never been [brighter]. I will now turn it over to the operator for questions.

(Operator Instructions)

We will take our first question today from Andrew Lazar with Barclays.

I guess, first off, I know that Darcy, you referred to 2021 as kind of a year where BellRing sort of had almost 2 years of growth sort of compressed into 1 year. And a lot of that had a lot to do with, of course, having the capacity, but also a lot of the incremental shelf space gains in a lot of key -- sort of key customers that you benefited from. I'm curious if you could kind of maybe characterize how that looks as we go through this year. Are there major shelf reset windows where you think there can still be incremental progress made? And obviously, how does the capacity situation play into your ability to sort of take advantage of those windows. But I'm assuming others are having sort of similar issues as you are. And then I've just got a follow-up.

Sure. So that right now, as you know, we reduced our SKUs, our Tetra SKU this year because of our capacity constraint, for the most part, about 90% of our space. Basically, customers are spreading out or facing on our core items because they're one of the most productive SKUs on the shelf. So we are not in the place right now that for the next year, we're going to be expanding our shelf space on our Tetra SKUs. What's, I think, encouraging is we do have some innovation coming on outside of the 30-gram line toward the end of the year. But for the most part, this year -- as it's a catch-up year for the 30-gram shake line, and so we're not going to be expanding shelf space considerably.

Got it. And then I think when you took some of the initial price increases heading into this year, at least for planning purposes, you had assumed that competitors would not necessarily follow. So it was that kind of a prudent conservative stance heading in. I guess are you making a similar assumption with some of the incremental pricing that you're taking? Or -- and how do you think about your elasticity assumptions for this next round of pricing, at least from how you're forecasting and modeling it internally?

We are. We're assuming that we included some modest elasticity in our assumptions, so staying on the conservative side. In our first round, we tended to be the first to move on pricing in the category and then most competitors followed fairly soon afterwards. But we have an approach to when we take pricing, we assume elasticity, and then when we -- then we see what happens in the marketplace, we adjust those assumptions.

Next question comes from Pamela Kaufman with Morgan Stanley.

You mentioned that production in the first quarter was slightly below expectations. Can you talk about how much of your fiscal '22 top line outlook is dependent on additional capacity coming online over the next few quarters? And it seems like the balance has shifted more towards pricing now, given the incremental pricing you've taken in the quarter. So is that kind of the right way to think about the composition of your top line outlook for the year?

So I'll hit the first, the production question first. The production below expectations in Q1 was related to -- it was mostly in our existing co-manufacturers. So the new capacity that is coming online starts in Q2. And then your question around how much is associated with existing versus new, the vast majority of our production this coming year is from existing co-manufacturers. I think what's encouraging is that we are seeing an improvement in January with our existing co-manufacturers. It really was related to kind of the Omicron variant and having absences. We are still seeing some absences, but what's encouraging in January is, despite the fact that we are seeing absences and kind of labor shortages, we're still getting the production. So that tells me that we're being prioritized over other customers. So that was the first one.

The second piece is just the composition of our growth. It depends on which brand we're talking about. From a Premier standpoint, the growth was predominantly coming from pricing originally, and that will obviously be the case with our upcoming incremental pricing that we took -- that we announced this quarter. And then -- but for Dymatize, it's a mix. So it's a mix between volume and pricing. Paul, anything else that you want to add?

So obviously, with the price increase, that does obviously push a bit more towards pricing. But as Darcy talked about in her prepared remarks, the increases obviously gives us confidence in the year, but we're waiting to kind of see how things play out with elasticities and those kind of things but it gives us, obviously, a lot of confidence.

And given the -- some of the supply challenges in Tetra Pak, have you explored other options for packaging, I know you also sell bottled RTDs? Can you more meaningfully shift your mix to that format?

So we do have bottles. And -- but bottles are constrained too. So it's really the -- across the -- because of the dramatic demand increase that happened last year, both bottles and Tetras are constrained. So it's as easy and our Tetra business is so large that the idea of just shifting to another package size, it's just not feasible. I think we are moving our -- we are making some type of comanships on our bottle business, which will dramatically increase our ability to satisfy the increasing demand for our bottles. So it's -- again, it's not as easy as just shifting, but I am confident in our increase that we have planned from attacher standpoint. It's later in the year and then into '23, and like I said, bottles are also increasing.

Our next question comes from Jason English with Goldman Sachs.

A couple of questions. First, you all confused me on some of the comments and guidance, but it's probably my fault as I'm distracted over here and trying to juggle too many balls, but can you go back. I think you said sales similar, Q1 to Q2, but sequentially growing, which seem like they can coexist. And then there was also some comments on EBITDA, which sounded upbeat, but then you commented sequentially lower on price, costs like et cetera. Can you just kind of comeback and if you can clarify those for me, please?

Sure. I'll hit the net sales, and I'm going to let Paul hit EBITDA. Net sales, you nailed. It's -- that Q2 similar to Q1 and then sequentially growing. And then, Paul, do you want to talk about EBITDA?

Yes. So our comments on EBITDA in the second quarter to be sequentially down from the first quarter, which is consistent with our initial expectations going into the year. And that is because there is incremental inflation on our proteins, primarily. So the step up from Q1 into Q2 ahead of our pricing. And then we do expect a modest increase in SG&A. So the comment was that EBITDA will be sequentially down from Q1.

Yes. But it always kind of is with seasonality. But was there a year-on-year comment in there, though, that I missed, too?

There was not. Year-over-year, obviously, there's -- it's a different dynamic because in last year, in the second quarter -- if you're talking about the second quarter, we promoted heavily in the second quarter, typically. That is not the case this year. So there's a benefit on pricing both from reducing the promotion spend as well as the list price increases that we took on powders in October and back on shakes back in April. So we have the benefit of pricing, but we also have a significantly higher inflation in the second quarter versus last year.

Particularly, whey protein was at its low point. which is our powdered product in the second quarter of last year, and it's significantly higher this year. So that's the dynamics going on with EBITDA. But you're right, historically, it was lower because of marketing spend and that's the piece -- the one piece I did miss to mention is that we're also -- we typically spend pretty heavily in marketing in the second quarter because we do TV advertising, and we're not planning to do that this year. So that's another element of the EBITDA increase from last year, but again, sequentially down from Q1.

Understood. And bigger picture question for you, Darcy. I remember around the time of separation, you talked about your aspirations to have Premier reach. I think, and correct me if I'm wrong on this, but have Premier reach for 10% sort of penetration level. The penetration growth I'm looking at for the brand has been phenomenal. I think it's actually accelerated here in COVID. You're now north of 8%. So are we approaching sort of an upward governing limit of where you think this can go? Or is there now more scope for penetration growth than perhaps you were envisioning just a few years ago?

Yes. I think this brand continually surprises. I think that not only do I think that there's more upside from a category standpoint, but we are increasing household penetration faster than I would have predicted. So yes, I think that we're going to -- I believe that we can get up to -- I mean so one of the -- some of the comparisons I have used are some of the mainstream brands like Clif and Kind in the nutrition bar space, and they are right above 10, 11, 12. And so I use that as a barometer, and I still use that as a barometer of where we can get to in the kind of medium term.

We'll go now to Ben Bienvenu with Stephens.

Jim Salera on for Ben. I wanted to ask a little bit on the production side and inflation. How long of a lead time will there be to get fill rates and service levels back to normal, assuming the Omicron production kind of shakes out in the second quarter. So if production is normal at the end of the second quarter, do fill rates get back to normal levels in the third quarter or fourth quarter, or is that still looking into next year?

Yes. Our fill rates and service levels will continue to increase. We are already seeing kind of month-on-month small increases, and we'll continue to see that throughout the year. I think we'll be in a much -- I mean this quarter, our trade inventory levels improved. And again, we'll continue to see that, but I would say, Q3 they're going to look a lot -- beginning of Q3, they're going to be looking a lot better.

Okay. And if I could ask one more. Do you guys have any visibility in the freight costs in the back half of the year? Whether you anticipated to be kind of where it's been at, for the first half, it's going to go off maybe a little bit of leap there.

Yes, we do expect that freight will go up into the third quarter and then based on the essence we've seen it kind of flattens out at that point. And so from a year-over-year perspective, we have more of a headwind in the first half than we have in the second half. So that's our current thinking.

The next question comes from Bill Chappell with Truist Securities.

Darcy, I guess first question on Premier Protein. What do you envision elasticity looks like in that category as you raise prices? Because I mean you have a highly loyal base and a pretty high market share within the drink side of it. Are people just buying less in general, if they are -- there's elasticity? Are they switching to lower-priced brands? Are they switching to some other form? Just trying to understand -- I mean it doesn't seem like there'd be a whole lot of elasticity, especially with your base, but I assume you're factoring some in, one way or the other, with higher prices.

To date, we have seen no elasticity. We have been watching it. Basically, we increased price and volume went up. However, we are not assuming that's going to continue. So we are assuming some modest elasticity until we see it in marketplace and kind of the facts and circumstances that we see in the marketplace based on what competitors do, et cetera. How much the retailer reflects that shelf then we will make any adjustments to our assumptions.

Okay. And then just kind of on the cost front, I'm trying to understand, for lack of better terms, how much of this is short term in nature, but certainly, everything from labor to freight to -- but when it's coming from the co-man, how much do you think rolls off as commodities get better in 6 months or conversely, labors kind of here to stay at a higher rate? Any thoughts there in terms of -- as you're thinking about kind of profitability going forward?

Yes. So I'll break it into 2 pieces. So from a commodity front, what we're seeing is whey protein and even milk proteins are at historical highs. Whey protein has been pretty tight in the supply and demand dynamic. And so that's got to get better, but it doesn't look like it's likely until fiscal '23 or at least that's the kind of the current thinking. So I do think there's some opportunity, obviously, as we get on the other side because we're talking about protein rates on our powder business that are 2x or plus what they were just a year ago.

So that's got to come back down. So obviously, that's one element. Milk protein, they kind of going up, as our shakes, and so I think that one we'll have to keep an eye on, but it seems like both those markets should come back down. Those seem like there should be a transitory piece of that.

On our co-man, our relationships there are typically long-term contracts, and I don't want to get into specifics because it varies by customer, but we're a little bit insulated from that. But if labor costs obviously stay high, it will obviously get absorbed at some point as it's passed along to us, but that's totaling the production cost is somewhere 15%, 20% of our overall cost. It's really the commodities that are driving the profitability.

We'll go now to Chris Growe with Stifel.

I just had a quick question for you, and sorry if I missed this. But have you said -- just to get an order of magnitude on the size of the price increases you have in placed the new ones for shakes and for powders?

Price increase...

Go ahead, Darcy. Go ahead. Sorry.

You can tell we're not together. So the second round of pricing is slightly higher than the ones we took before. We didn't just -- order of magnitude, the first one was single digits on Premier Protein, double digits on Dymatize and this round is slightly higher than that.

Okay. And that's mostly going to take something in the third quarter kind of going in place during the second quarter. Is that right?

Correct.

Correct.

Okay. And then I just was curious, you had a chart in your -- the slide deck around showing TDPs and how they've started to increase. So I just want to get a sense of -- it sounds like your -- the supply of product was a little below what you thought, doesn't mean it didn't grow. Obviously, it did grow, they're more available. Does that line keep going up? Do you continue to see an increase in TDPs as you get more and more supply availability? I guess is that what's going to determine that rebuild there?

Yes. I mean generally. I think there will be -- so you'll see a slight increase as our fill rates and service levels increase. However, we do expect TDPs to be down versus a year ago because of the temporary reduction of SKUs.

Yes. Okay. And I guess, just to be clear on that then, as I'm thinking like for the second quarter, if you're promoting less, that presumably would negatively affect TDPs. Again, not that it can't grow, but it would certainly have a year-over-year effect on TDPs. Is that right?

I mean the promotion won't have anything to do with the TDPs, if I'm understanding your question, but just the number of SKUs on the shelf. So we will see -- so I mean, that is really what's affecting the TDP.

We'll go now to Rob Dickerson with Jefferies.

I just have a quick question on the inventory side. Darcy, you're saying, it sounds like basically, maybe all production this year is turning from existing suppliers. It sounds like maybe some of them were being a little bit better as you kind of get to Q2. Consumption is still obviously up decently, volumes are down. So I think that's a gap. So I'm just curious like kind of in terms of the inventory situation you have with retailers, when we compare that with the reduction in SKUs.

It's like -- you feel like you're in a pretty good place as you look forward through the year, right? Like you've reduced the SKUs, maybe the retailers are burning for a little bit of inventory, but as you rightsize the SKUs relative to your capacities, there shouldn't be kind of further decline, right, just given the lower capacity relative to consumption demands, if that catches up, if you know what I mean.

So Robert, are you asking about -- I mean I would say, our strategy is sound, meaning that we do not expect any change to the number of SKUs that we're going to have. And we believe that the fill rate and service levels will continuously increase throughout the year. We will also gradually increase our safety stock throughout the year. Is that what you're asking?

Yes. I just want to make sure that if you reduce the SKUs, right? If you've looked and you've forecasted yourself that the amount of capacity you have, should be able to continue to fill those SKUs that you plan to have on shelf this year.

Yes. Yes, absolutely. That's correct. The one thing I will just note is that when you're looking at consumption, we have pretty high -- we have some high highs, I mean, we've increases when we have promotions. And so when you're looking at consumption, you just have to factor in that you're going to see some negatives on Premier when we're lapping promotion and that is expected. And so I think that it's just -- it's good to have that in the back of your mind when you're looking at the kind of tracked channel consumption on a week-to-week basis.

Okay. Fair enough. And then I guess back to Jason's question quickly, there's a lot in there on kind of EBITDA sequentially and what have you. I mean is -- we're thinking about Q2 just in absolute EBITDA dollars. Would you say that maybe kind of similar to sale sequentially from Q1 and Q2 that maybe EBITDA would see like a similar absolute dollar number. I mean I know you're not specifically guiding to that number, but obviously, with just kind of where the full year EBITDA guide is, right, it does imply material back half improvement?

So no. I would not quite characterize it that way. So we -- just to be clear, we expect EBITDA to decline sequentially from Q1 to Q2. We expect it to be higher than last year because we're lapping a lot of marketing that we do expect it to decline. And that is, again, because of higher inflation and so that there is the primary piece. But no, we expect it to be down. Keep in mind that we've said that we expect that sales and EBITDA growth will be weighted to the second half of the fiscal year, but we do expect it to be switching down.

Right. So I mean kind of net-net year where you came in, in Q1 and Q2 despite all the moving pieces and volatility. I mean it seems like the business is still tracking kind of how you expected coming out of Q4.

Yes. I mean...

First half is tracking -- yes, the first half of tracking like we expected with a slight shift of Dymatize sales into Q1 from Q2. But yes, the first half is tracking as we expected.

I mean, Rob, I would just say, big picture. This year is going much like we expected. Slight movement of sales from Q2 to Q1 and that is just -- it's really nothing. It's just a little sales phasing. And then we saw inflation kick up higher than we expected. Although we saw the -- we saw that coming on the last call, and therefore, we took price and that affects the back half. I mean -- but all -- other than the inflation and the pricing action, the cadence is largely what we expected.

We'll go now to Ken Zaslow with Bank of Montreal.

Two questions. One is, can you walk us through the capacity still over the next 18 to 24 months of how it works exactly? How much incremental capacity is coming online over the next -- on a quarter-by-quarter basis?

Yes. So basically, we have increased capacity every quarter for through '23. I mean -- and so we see increased and that mostly comes from -- the existing co-mans are pretty stable. So the increases come from new co-mans. They start slotting in. In Q2 of this year, there is not a huge benefit this year in '22. So still, call it, 90% of our production is coming from existing for '22, but then those new co-mans start increasing and become contributors -- real contributors in '23. Then we also bring on additional co-mans in '23. So we basically add 3 new ones in '22, and we add 2 more in '23. And the big ones, which are new facilities like MFI, we talked -- sorry, Michael Foods would come on in later '23, they start up later in the year and so become kind of smaller contributors in '23, but bigger contributors in '24.

Would you say that 2023 additional capacity is 5%, 10%, 15%. And then when you get to '24, how would you kind of do that?

Hold on, I'm calculating.

Take your time.

So call it, less in '22. New capacity is less than 10%, it becomes, yes, 20% to 25% of '23, and then it ramps up from there. And remember, we can still affect -- so because some of the new capacity in '23, there are actually new greenfield facilities. That timeline is basically 24 months. We are still talking to partners for kind of late '23 and '24.

Okay. My second question is, if you believe this capacity is coming online, you answered an earlier question that you think household penetration kind of -- you look to certain brands and the 10% and the 100 basis points from where you are right now, 25% more capacity coming online. You obviously don't really believe that 10% is your high watermark, right? I mean that doesn't -- I mean you obviously believe that you're building capacity because there's demand, and that demand is going to take you above that 10% household penetration, I'm assuming. So again, why would you even know that there is a limit to the demand of what it is? Why limit yourself to a household penetration? It seems like you've hit a tipping point, and I'm not trying to be typical, it just seems odd to come up with some arbitrary 10%? Just -- I don't know, it's just a thought and I'll leave it there.

I totally agree. I completely agree. And I don't -- and by the way, I don't see it as a limit. I think it is a step along the way. And I truly believe that this brand has -- I think the category in general is just -- I mean, I said early innings, but it has so much more upside. And I've used this analogy before, but even within our category, nutrition bars have mainstreamed much faster than any other forms within the category, and they're at close to 50%.

So 45% household penetration where RTD shakes are only at 25%. Powders are even lower. So there's no reason why shakes can't get close to nutrition bars. And so I think that the upside is immense, and I think Premier Protein is perfectly positioned to take advantage of that because it's a mainstream approachable brand that shows that it appeals to kind of every need state and kind of every consumer within the category. So I do not believe that 10% is the limit at all, I think it's a step along the way.

We'll go now to Kaumil Gajrawala with Crédit Suisse.

First one, a very quick one. When you talk about these capacity additions for '23, '24, is that fiscal or calendar?

Fiscal.

Fiscal. Got it. And then one of the things that we didn't talk about as it relates to capacity is, if there are any key ingredients or inputs or materials packaging that have created bottlenecks. I know in the past, they have. I think you mentioned those little foil wrappers, things like that. Is that all resolved now? Or is it still some areas of things to watch out for?

No, there's nothing that's problematic at the moment. We extended lead times early on to try to prevent those things from happening. Yes, we haven't seen any impacts.

Our next question comes from John Baumgartner with Mizuho.

Maybe first off, Darcy, congrats on Dymatize. I'd like to ask about powders against the broader evolution of the category, maybe moving beyond COVID volatility into the new normal with work from home and such. And how do you think about the role for powder within the category? Have you seen the core consumer for powder change at all pre versus post-COVID? How do you see powders and RTD coexisting as powders grow from here? And then for BellRing, how can you best, I guess, make powder products complementary to the RTD business?

Yes, it's a great question. So I'm going to pick up where I was talking about the potential of RTDs versus nutrition bars. Powders have even lower household penetration than RTDs. So I think that is -- and where Premier helped mainstream or has started to help mainstream RTDs, I also believe that powders are at kind of earlier stage of that mainstream trajectory. So they're different than -- all of the different forms are -- have kind of unique occasions. So if you think bars are more snacking, RTDs are more meal replacement, although can be used kind of in between meals, but more meal replacement.

While powders are mostly used with food, with smoothies and after workout. Where they're consumed, RTDs and nutrition bars, mostly on the go, powders at home. So they're very complementary. So I -- we have been very successful on Premier Protein with powders. Obviously, Dymatize is our #1 powder brand. Both of them go after unique and complementary consumers, and then, of course, as I was saying before, they have kind of unique and complementary occasions as well.

Okay. Okay. Great. And I guess from a supply chain perspective, there's a lot of focus now, understandably, on the month-to-month and quarter-to-quarter. But aside from just, I guess, simply increasing volume availability, are there opportunities underway here with the changes in supplier base now, I guess, through F '23, F '24 that sort of placing a better position either format-wise or profit-wise to come out of this recalibration with new channels for growth, whether it's out-of-home, C-stores, instant consumption. Is there opportunity to sort of affect the change in the composition of your capabilities and channels for the longer term sort of coming out of this year?

Absolutely. So I think that -- I said this in my prepared remarks just about how I think we're going to look back at '21 as a really pivotal year because I think that what we're going to look back on is really kind of laying the foundation, laying the table for kind of outsized growth in the future. Building up where we currently, from a production standpoint, for instance, we have 5 locations now. In 4-ish years, we'll be doubling that.

We're expanding our bottle capacity dramatically, which will allow us to go -- we can really sell bottles or Tetras within kind of convenience and up and down the street, et cetera. But we start being able to match products to different places and then expanding our distribution from there. So yes, I believe this year is more about capability building so then we could take advantage of that in the future.

We'll go now to Bryan Spillane with Bank of America.

I just had one question, and it's -- if we look at fiscal -- if we look at the current fiscal year and just the amount of consumer-facing spend that you're anticipating this year, I guess, of both promotions and advertising and marketing, what is that relative to normal? And I guess what I'm trying to get at is, we moved past the supply constraints. How much more marketing would we have to add back as we go forward?

Yes. So on the marketing side, I think, in '21, we spent around 3% of net sales on what we call advertising and promotion. This year, we're pulling back on that around 2%. Going forward, obviously, we want to invest in that, but we also think that will drive top line growth as well as we've seen from our recent past that it's very -- our products are very receptive to marketing, so we think it would drive obviously top line. But yes, we would expect over the longer term to at least spend back at the 3% level and perhaps, look to increase that over time as our supply comes on.

Is the order of -- if I remember this correctly, at the time of the separation, right, you had been through a supply chain or supply constraints prior to the separation. And then that next fiscal year, the margin step back because there was more marketing spend that went in. So just like order of magnitude, will it look like that?

No. So the situation was a little bit different back then. So we did see -- a fiscal year, I think, it was fiscal (inaudible) had a stepped-up margin. The part of that was too was because protein costs had come down. So we benefited from a price increase as well as from favorable protein cost. But no, I don't think our margin structure should be impacted. Obviously, some of this depends on what commodities do and we'll have to make sure we're rightsizing that. At least historical high prices, it gets harder to get back to the gross margins that we've experienced in the past. But I do think over the long term, things will even out, and we should see gross margins back where they've been historically come in that 33, 34 range, which allows us to spend marketing at higher levels and promotion.

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