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August 12, 2020

BellRing Brands playing long game after Q3 stumble – top takeaways

BellRing Brands tripped up in its latest quarter, with a sales decline that surprised the market, but the US active nutrition business insists it has the stamina to succeed.

By Dean Best

BellRing Brands tripped up in its latest quarter, with a sales decline that surprised the market, but the US active nutrition business insists the road ahead looks less bumpy and it has the stamina to succeed. Dean Best reports.

Shares in BellRing Brands have taken a bit of a tumble in recent days in the wake of a quarterly results announcement that surprised the market – but the US active nutrition business believes it can dust itself off and push on.

On Thursday (6 August), the Premier Protein and PowerBar owner said it saw its net sales drop more than 14% in its fiscal third quarter, prompting a cut to its forecast for annual sales.

BellRing stuck to its forecast for annual “adjusted EBITDA” but the company’s shares slid on Thursday in after-hours trading and, even after recovering some ground on Friday, fell again on Monday and Tuesday to close at $18.89. When Post listed BellRing back in October, the company’s shares ended their first day of trading at $16.50.

“I continue to have confidence in our brand fundamentals and I am energised by the business momentum, expanded distribution, innovation pipeline and our long runway for growth,” BellRing CEO Darcy Davenport told analysts on a post-results conference call on Friday.

BellRing Q3 sales hit bum note

BellRing, which was the active nutrition arm of Post Holdings until the US food manufacturer spun off and listed the business last autumn, pointed to retail customers carrying “higher-than-normal” inventories for the pressure on its third-quarter sales. The company also said on-the-go consumption hadn’t recovered as much it had expected back in May at time of reporting its Q2 numbers. During Q3, for example, sales of bars were down by almost a quarter.

The company, also home to the Dymatize brand, saw its group net sales slide 14.1% in its fiscal third quarter to US$204.2m. Operating profit for the three-month period to 30 June stood at $30.6m, compared to $52.8m a year earlier. 

In May, BellRing, in which Post still owns a majority stake, forecast its annual net sales would be $1bn-1.05bn. The company is now predicting a full-year top-line of $960-980m. It maintained its forecast for adjusted EBITDA of $192-202m.

“As we discussed last quarter, we ended Q2 with inflated trade inventories after our customers over-bought following the mid-March consumer stock-up. This elevated Q2 sales at the expense of Q3 and factored into our second-half planning,” Davenport told analysts. “We expected roughly 56% of our second-half revenue to fall into the fourth quarter. With July net sales coming in at close to $100m, this plan is proving out. Outside of the timing shift, our actual results were shy of our internal expectations mainly due to a slower-than-expected RTD category recovery, as a result of less on-the-go occasions.”

Nevertheless, Davenport said BellRing’s “over-performance” in the first half of its financial year (when net sales jumped by almost a quarter) plus a series of “non-strategic” cuts to SG&A costs meant the company has been able to stick to its EBITDA forecast.

The inventory issue

When BellRing announced its second-quarter and half-year results in May, the company did give mention to the prospect of pressure on Q3 sales after some of its retail customers, in the face of a spike in demand in late-March, beefed up their orders and ran up inventory, which subsequently had to be unwound in April and May. On Friday, BellRing CFO Paul Rode said, for example, it took longer for retailers to “reduce their on-hand RTD shake inventory from inflated levels at the beginning of the quarter”.

However, the Q3 sales decline seemed to take a number of analysts by surprise and Davenport acknowledged (as, incidentally, did Post CEO Rob Vitale on a separate call to discuss the Weetabix owner’s results) BellRing needed to improve the way it communicated to the market.

“We did our best to communicate the high customer inventory at the end of Q2, which benefited Q2 but hurt Q3. And that, when you’re looking at the back half, it was back-loaded to Q4. We need to do a better job because we look back at the script and we thought we were clear, but clearly not, so we can work on that for sure,” Davenport said.

Bumpy recovery for on-the-go

BellRing held up its hands on not correctly forecasting the trajectory for on-the-go consumption of its products, which had started to be hit by the government restrictions on movement introduced in March and April. Most of the consumption of BellRing’s products like RTD shakes happens at home but on-the-go is another factor driving sales, especially for bars, and government attempts to tackle Covid-19 has hit sales in a number of on-the-go segments across the food industry.

Davenport said there had been signs of recovery in April but that didn’t continue. “We forecasted a consistent improvement from the April low, reaching pre-Covid levels by June. Instead, we saw more of a W-shaped recovery, with May dipping back down and not reaching pre-Covid levels until after the quarter ended in July.”

Trying to forecast consumption and sales in the middle of a pandemic is a difficult business; no executive should be admonished too strongly for a forecast not playing out as they expected three months earlier, particularly in a country like the US where lockdown measures have not been applied in the exactly the same way cross the nation and have had to have been reapplied in certain jurisdictions.

Confidence about Q4 growth

One of the reasons BellRing stuck to its full-year forecast for EBITDA was the company’s belief its sales growth will return in the final three months of its financial year.

BellRing’s management had predicted a “back-loaded” second half and say the company’s sales figures in July have borne that out.

“In Q4, we have significant growth drivers lined up, including promotions in most major retailers, expanded distribution and we already have a strong July in the books,” Davenport said. “Although, the recovery took longer than we predicted, it was actually only about a month difference than what we predicted. So, we are seeing in July, the liquid [product] category up above pre-Covid levels.”

Rode added: “Category dynamics have improved from the third quarter and the fourth quarter is off to a great start as evidenced by our strong July net sales. Premier Protein, which is 80% of our net sales, has continued to register double digit consumption growth in the face of Covid and we expect that growth trend to continue in Q4.”

Nonetheless, BellRing did face questions about why it was confident it could see the level of growth it was expecting in the fourth quarter, especially when the company was expecting to see another decline from its international business (which amounts to 12% of sales). Goldman Sachs analyst Jason English suggested BellRing was indicating it was expecting fourth-quarter growth of around 23%. “If that is generally right, what’s going to drive the incremental growth to get to that 23%-type level in the fourth quarter?” he asked.

Davenport replied: “We’re expecting continued declines in the international business – so specifically Dymatize, PowerBar – but we are expecting to see pretty robust growth in Premier shakes specifically. That’s really driven by promotions that we have in almost every single major account, as well as the category rebound being more of a tailwind than it has been. What is encouraging is, at this point in the quarter, we actually have very good visibility to at least two thirds of our quarter from a shipment perspective.”

Can BellRing be more “consistent”?

Nonetheless, investors will be wanting BellRing, in the medium term, to be more dependable in its sales growth. A jump in Q2, a decline in Q3 and another (expected) rise in Q4 will make it hard for the market to decide whether the company presents a reliable proposition.

Goldman Sachs’ English asked whether BellRing saw a scenario where there isn’t “as much volatility going forward”. In response, Davenport pointed to the make-up of BellRing’s sales mix – club stores, at present, account for 60% of the company’s sales – but said the business should be more predictable moving forward.

“Our business is just naturally, because we have certain club concentrations, we have a natural kind of lumpiness in our quarter to quarter,” she said. “However … our goal is that you guys start understanding that it actually can be more predictable. This year, not predictable, obviously, and even last year we had our capacity constraints, but there should be some predictability around promotions because, in essence, the difference between quarter-to-quarter is usually just promotional loads and de-loads.”

Looking ahead

Naturally, especially given the up-and-down nature of BellRing’s sales performance in its current financial year, analysts were still looking for any kind of commentary from the company on how it sees the fiscal 2021 period playing out, even if predictions are proving problematic at present.

“I don’t think we’re in the position right now to talk in detail on ’21, which we will obviously do in the next quarter, but we are seeing improved category trends in July,” Davenport said.

There are positive signs for the company on metrics such as household penetration and repeat rates among consumers, as well as sales in July, but the uncertainty presented by Covid-19 means making firm predictions is hazardous, even if some analysts covering the business might push for comment on the quarters ahead.

Indeed, given BellRing’s incorrect estimate on the shape of on-the-go consumption was a factor in its Q3 sales miss, the company might be more reticent in providing too many detailed forecasts in the near term. 

However, Davenport did sound optimistic about the longer-term prospects for BellRing. “In many ways, although there are no promises with Covid, we believe we are back to having the category [be] a tailwind. We know what works to drive our business – and it’s kind of back to our original playbook.”

Nevertheless, Goldman Sachs’ English questioned why the market should expect BellRing to perform “at pre-Covid-type levels for anytime in the next six months”, even if sales in July were healthy. “Why should we believe it will be durable?” he asked, understandably.

“I agree it does not feel like we are in a post-Covid world. One, I still believe that the on-the-go usage occasion is still under-indexing. People are not out and about like they were before,” Davenport reflected. “However, the in-home use is over-indexing and what we’re seeing is some new trends around food as medicine or proactive health. It’s benefiting the everyday nutrition side of the business. I think those are some of the dynamics where our business actually can benefit candidly from kind of a post-Covid or a Covid world.”

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