BellRing Brands, Inc. — Form 10-Q Summary
Reporting period: Fiscal second quarter and six months ended March 31, 2020. Results are unaudited. BellRing completed its IPO in October 2019; prior-year periods largely reflect the business before the IPO, so earnings attributable to public Class A stockholders are not directly comparable.
Business context
BellRing is a convenient nutrition company whose principal brands are Premier Protein, Dymatize and PowerBar. Its products include ready-to-drink protein shakes and other beverages, powders, bars and supplements. Post Holdings retained a 71.2% economic interest in BellRing LLC at quarter-end; BellRing Inc. owned 28.8%.
Key financial results
| Metric | Three months ended Mar. 31, 2020 | Prior-year quarter | Six months ended Mar. 31, 2020 | Prior-year six months |
|---|---|---|---|---|
| Net sales | $257.5 million | $216.5 million | $501.5 million | $402.3 million |
| Gross profit | $88.2 million | $79.0 million | $179.5 million | $144.6 million |
| Operating profit | $35.1 million | $40.8 million | $84.4 million | $73.7 million |
| Net earnings, including redeemable NCI | $18.6 million | $31.0 million | $50.4 million | $56.1 million |
| Net earnings available to Class A stockholders | $4.2 million | Not applicable | $10.2 million | Not applicable |
| Class A diluted EPS | $0.11 | Not applicable | $0.26 | Not applicable |
Quarterly sales rose 19%; six-month sales rose 25%. Gross margin was approximately 34.3% for the quarter and 35.8% for six months, versus approximately 36.5% and 36.0%, respectively, in the prior-year periods. Operating margin was approximately 13.6% for the quarter and 16.8% for six months, versus 18.8% and 18.3%.
Quarterly operating profit declined 14%, despite higher sales, as increased advertising and promotions, product costs, employee expenses and public-company costs outweighed sales growth. Six-month operating profit increased 15%, primarily on higher sales, partly offset by similar cost increases. Net interest expense was $14.3 million for the quarter and $25.9 million for six months, reflecting debt issued in connection with the IPO transactions.
Cash flow and liquidity: Six-month operating cash flow was negative $5.1 million, compared with positive $1.6 million a year earlier; capital expenditures were $1.2 million. Cash was $76.7 million at March 31, 2020, versus $5.5 million at September 30, 2019. Current assets were $349.5 million and current liabilities $128.0 million. The company reported $80.0 million of remaining availability on its $200 million revolving facility.
Debt: At March 31, principal outstanding was $691.3 million under the Term B Facility and $120.0 million under the revolver. The balance sheet reported $791.4 million of debt carrying value, including current debt and net of unamortized issuance costs and discount. The facilities mature in October 2024; the Term B loan bears a 5.00% Eurodollar margin or 4.00% base-rate margin. BellRing was within its 6.00-to-1.00 maximum total net leverage covenant at quarter-end.
Material changes and management commentary
- Premier Protein quarterly sales increased 26%, with volume up 27%; management cited distribution gains, lapping prior-year capacity constraints and pandemic-related consumer purchases. Six-month Premier Protein sales rose 34%.
- Dymatize quarterly sales fell 2% and six-month sales fell 6%, reflecting mix and weaker FDM and international sales, partly offset by eCommerce. PowerBar sales fell 20% in the quarter and 16% for six months, affected by product discontinuations and weaker international volumes.
- COVID-19 drove pantry loading in March through food, drug and mass, club and eCommerce channels, but store closures and stay-at-home measures hurt specialty-channel sales. Management said the duration and financial impact remained uncertain; it drew an additional $65 million on the revolver to strengthen liquidity and took steps to limit spending.
- Management expects positive operating cash flow and believes cash, operating cash flow and possible future credit facilities will meet requirements for the foreseeable future. No significant capital expenditures were planned for the rest of fiscal 2020. The filing gives no quantified earnings or sales guidance.
- The company reported a $10.6 million fair value liability on interest rate swaps, with $350 million notional, and a $10.6 million pre-tax hedging loss in accumulated OCI. It expects approximately $3.8 million of that loss to be reclassified to earnings within 12 months.
Risks, contingencies and other items
Principal risks include ongoing COVID-19 effects on demand, manufacturing, supply chains and capital markets; reliance on RTD protein shakes and a limited number of manufacturers and suppliers; commodity and input-cost volatility; competition; high leverage and debt service; and Post’s control and continuing contractual relationships. The company said it could not predict the pandemic’s ultimate impact.
Joint Juice consumer class-action litigation remains pending, including an appeal and multiple state cases. The company is vigorously defending the claims, considers a material adverse outcome unlikely, and had an $8.5 million accrual at March 31, 2020. Management said other legal and regulatory matters were not expected to be material.
Important facts for investors to verify
- Whether March pantry-loading sales persisted, and how COVID-19 restrictions affected specialty channels, supply and future demand.
- Revenue growth, margins and operating profit trends by brand, particularly Premier Protein’s contribution and the performance of Dymatize and PowerBar.
- Working-capital needs and cash generation, including the impact of receivables and inventory, and remaining revolver availability.
- Debt principal, interest expense, covenant headroom and the company’s ability to service debt under changing operating conditions.
- The economics of Post’s 71.2% BellRing LLC interest, related-party arrangements and tax receivable agreement obligations.
- Developments in the Joint Juice litigation and the adequacy of the related accrual.