BellRing Brands, Inc. — Q2 Fiscal 2023 Form 10-Q
Reporting period: Quarter and six months ended March 31, 2023. BellRing sells convenient nutrition products, principally Premier Protein and Dymatize protein shakes, beverages and powders. All dollar amounts below are in millions unless noted.
Key financial results
| Metric | Three months ended Mar. 31, 2023 | Year-over-year change | Six months ended Mar. 31, 2023 | Year-over-year change |
|---|---|---|---|---|
| Net sales | $385.6 | +22% | $748.3 | +20% |
| Gross profit | $117.1 | +$30.1 | $238.9 | +$59.6 |
| Gross margin | 30.4% | 27.6% in prior year | 31.9% | 28.8% in prior year |
| Operating profit | $58.0 | +75% | $133.2 | +59% |
| Operating margin | 15.0% | 10.5% in prior year | 17.8% | 13.5% in prior year |
| Net earnings available to common stockholders | $30.9 | Prior year: $1.3 | $75.1 | Prior year: $9.5 |
| Diluted earnings per share | $0.23 | Prior year: $0.02 | $0.56 | Prior year: $0.19 |
Quarterly sales growth was led by Premier Protein, up $65.1 (26%), with average selling prices higher and volumes up 6%. Dymatize sales rose $5.8 (11%); prices increased while volumes fell 1%. For the six months, Premier Protein sales rose 25% and Dymatize sales rose 7%; Dymatize volumes declined 10%, partly due to lapping prior-year product discontinuations.
Management attributed improved operating profit primarily to higher sales and lower separation costs, partly offset by higher product costs and advertising. Net product costs rose $26.2 in the quarter and $51.0 for the six months, mainly due to raw-material costs; lower freight costs partly offset the increases. Advertising expense increased $7.4 in the quarter and $8.4 for the six months. The prior-year comparison also included a $17.6 debt-extinguishment loss; none was recorded in 2023. Interest expense increased as debt balances and borrowing rates rose.
Cash, debt and liquidity
- Six-month operating cash flow was $20.3, versus $17.6 a year earlier. Inventory growth used $64.5 of cash and receivables growth used $19.8; operating cash flow also reflected higher net earnings. Management cited $28.5 of increased tax payments and $20.6 of increased interest payments as offsets.
- Cash was $25.5 at March 31, 2023, down from $35.8 at September 30, 2022. Investing activities used $0.5; financing activities used $30.7. The resulting net cash decrease was $10.3.
- Long-term debt was $970.1 net of issuance costs; principal debt was $979.0, comprising $840.0 of 7.00% senior notes due 2030 and $139.0 drawn on the revolving facility. Revolver borrowings were $99.0 at September 30, 2022. Available revolver capacity was $111.0.
- Reported weighted-average interest rates on total debt were 7.3% for the quarter and 7.2% for the six months, versus 5.6% and 5.2%, respectively, in the prior-year periods. Revolver rates ranged from 7.86% to 10.00% at quarter-end.
- The company repurchased 2.7 million shares for $68.8 during the six months, including commissions and accrued excise tax. Stockholders’ deficit was $363.1 at March 31, 2023.
Outlook, risks and unusual items
- No specific numerical revenue or earnings guidance is provided. Management expects positive operating cash flows and believes cash on hand, operating cash flow and possible future credit facilities will fund foreseeable requirements. It planned no significant capital expenditures for the remainder of fiscal 2023; capital spending has averaged less than 1% of sales over the prior three fiscal years.
- Management said raw-material and packaging inflation continued to pressure margins and expected inflationary pressure to persist during fiscal 2023. Price increases or cost savings may not fully offset costs, and pricing actions could affect demand.
- A December 2022 co-manufacturing agreement added $200.0 of purchase commitments through fiscal 2028, including $40.0 due within 12 months, through minimum-purchase and take-or-pay terms.
- The company was in compliance with its revolving-credit covenant requiring a total net leverage ratio no greater than 6.00:1.00 at quarter-end. Management did not believe noncompliance was reasonably likely in the foreseeable future. Debt covenants and variable-rate borrowings remain relevant risks.
- Joint Juice litigation includes a $12.9 judgment in a New York case under appeal and other pending cases. The company had a $16.0 estimated liability for these matters and said it did not expect the litigation to materially affect its financial condition, results or cash flows. California cases were scheduled for trial in September 2023.
- A contract manufacturer’s voluntary recall of certain RTD shakes produced from December 2021 through July 2022 was described as having an immaterial impact. Management reported no material changes to previously disclosed risk factors.
- The company’s May 3, 2023 repurchase authorization of $80.0 followed the quarter and replaced the prior authorization; it is a subsequent event, not quarter-end liquidity.
Important facts for investors to verify
- Whether pricing actions and volume trends, especially Dymatize’s volume decline, remain sustainable as inflation and promotional activity evolve.
- How inventory and receivables convert to cash, given the substantial first-half inventory build and relatively modest operating cash flow.
- Debt service capacity, variable-rate exposure, remaining revolver availability and compliance with leverage covenants.
- The timing and economic impact of the $200.0 co-manufacturing commitments, including the $40.0 due in the next 12 months.
- Developments in the Joint Juice litigation, including the appeal and scheduled California trials, and whether the recorded $16.0 liability remains adequate.
- Comparability of prior-year earnings: the Spin-off changed the company’s tax and ownership structure, and prior-year results included redeemable noncontrolling interests and separation-related costs.