Prepared remarks
Hello, thank you for standing by. Welcome to BellRing Brands' Third Quarter Fiscal Year 2024 Earnings Conference Call. At this time, all participants are in a listen-only mode. After the speakers' presentation, there will be a question-and-answer session. I would now like to turn the call over to Jennifer Meyer of Investor Relations for BellRing Brands. You may begin.
Good morning, and thank you for joining us today for BellRing Brands' third quarter fiscal 2024 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 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 certain 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.
Thanks, Jennifer, and thank you all for joining us this morning. I have four key messages today that I want you all to walk away with. First, I'm happy to share that we had a strong quarter. The business continues to perform as we bring on new shape capacity and begin to drive demand. Net sales grew 16% over prior year and adjusted EBITDA, up 38%. We saw strength in Premier Protein with net sales up 20%. Our EBITDA margins were above our expectations as we benefited from favorable gross margins. I'm proud of our year-to-date performance with each quarter delivering above our long-term algorithm. My second message, Premier shake demand remains strong. The RTD shake category continues to grow with Premier Protein bringing in new consumers. Our consumption grew 10% in Q3 and accelerated to 20% in July. Premier Protein hit an all-time high in household penetration and remains the highest in the RTD category, outpacing its nearest competitor by six percentage points.
We have the number one velocity SKU across the entire RTD category, and 80% of our products ranked in the top third. We continue to believe that the brand has a ton of untapped potential given we haven't had meaningful marketing or innovation. My third message is that our production delivered to plan and our outlook has improved. Our diversified co-manufacturing network has consistently delivered expectations every quarter this year, and I am happy to share that we have secured incremental capacity in Q4. This additional production enables us to fill remaining customer inventory gaps and allows us to rebuild our internal inventories to our target safety stock levels, setting us up for a strong fiscal 2025. I would be remiss if I didn't give a huge shout-out or as we say, ring the bell for our entire organization, but especially the sales and operations team. It is challenging to manage a rapidly growing business in a dynamic category, but it is incredibly hard to do it with limited safety stock when there is little room for error.
So thank you all for your hard work. What we've learned will benefit us for years to come. My last message really is a culmination of the first three. Our better-than-expected Q3 performance, confidence in demand, and increased Q4 production drove our decision to raise our outlook for the year. We now expect net sales to grow 18% to 20% over fiscal 2023 and adjusted EBITDA to grow 27% to 30%. We are proud of our performance to date and encouraged by our momentum going into 2025. While we are certainly not finished with our planning process, our initial estimates for next year are to deliver at the high side of our long-term net sales growth algorithm of 10% to 12%. We will provide more details on fiscal 2025 outlook in November. Now to get a bit deeper into the category and brand highlights, the convenient nutrition category grew 7% in Q3 and all forms saw stronger growth versus Q2. Ready-to-drink led the category up 11%, driven by strong velocities and distribution gains.
Mainstream RTD brands continue to drive most of the growth and are bringing in new consumers into the category. Ready-to-mix grew 8%, boosted by feature and display activity. Protein continues to have incredible tailwinds and high relevance with a broad swath of consumers. It is beneficial for almost every age depending on their nutrition health goals. It is rare to have a nutrient that is equally critical for a child, a teenager, a pregnant woman, an athlete, and an aging adult while providing a wide variety of benefits ranging from muscle building to weight management. The more we learn, the more our teams get excited about our future, given our brand's mainstream appeal. Turning to our brands, Premier Shake consumption growth remained strong this quarter, up 10%, with volumes up 14%. Growth was robust in mass, food, and eCommerce driven by strong velocities and distribution expansion in mass and food.
Club was the outlier with flat dollar consumption growth versus a year ago because of temporary changes in our assortment and flavor-specific out-of-stocks. Encouragingly, Club's consumption returned to growth in July and overall consumption grew 20%. Our brand metrics remained healthy. Premier Protein, with RTD market share of 21%, maintained its position as the number one brand in the RTD segment as well as the number one brand in the broader convenient nutrition category. Both market share and TDPs grew throughout the quarter with TDPs up 13% versus Q2. Expansion in form, including bottles and pack sizes, along with improved in-stocks drove the distribution gains. And we expect further TDP growth in Q4. As I referenced at the beginning, I'm pleased to see the brand reached another all-time high in household penetration with 19% of households drinking Premier Protein. We surpassed our goal for the year, adding roughly three percentage points of household penetration in fiscal 2024 with repeat and buy rate continuing to hold steady.
Premier Protein continues to bring in new category consumers with almost all of our growth coming from outside the category. All of this is especially encouraging because in a high-growth category with low household penetration, we see plenty of room to continue to grow our brand and expand the category. Premier Protein Powder continued its strong trajectory, growing 44% in Q3 behind distribution gains and strong velocities. In fact, at a major mass customer, we have the number one velocity item in the retailer's powder category. We remain encouraged by the growth potential of the Premier Protein brand in this format and are investing more marketing dollars behind it in Q4. Its household penetration reached 1.8% this quarter, and we continue to believe the brand will be a contributor in mainstreaming the powder category in the same way that Premier did for the ready-to-drink category. Turning to Dymatize, the brand remains one of the strongest in the category with velocities in the top third at key customers.
However, U.S. consumption, which covers about 60% of the global brand, was challenged this quarter as a result of tough comparables, continued competitive pressures, and ongoing softness in the specialty channel. Despite these headwinds, July had a record eCommerce promotion showing there's still a ton of excitement for the brand. It is also worth noting that Dymatize's international business, which represents about 30% of the brand, continues to be strong with net sales up 18% this quarter. Looking forward, we are increasing investment behind Dymatize in the U.S., both in marketing and promotion. Our national marketing campaign with San Francisco All-Pro running back Christian McCaffrey launches this month. We are excited to see what this type of top-tier spokesperson and amazing creative can do for the brand. Overall, we continue to be bullish on the mainstream powder potential with two complementary brands.
In closing, I am proud of our year-to-date progress. We are on track to deliver results ahead of our guidance last November. Our confidence in the long-term outlook for BellRing Brands remains high. Ready-to-drink and powder segments are in the early stages of growth with major tailwinds. Premier Protein and Dymatize are leading mainstream brands with low household penetration and strong loyalty, with Premier Protein maintaining the number one share position in the category. Our momentum continues to grow on shakes as we start to drive demand. Our capacity plan is on track to support many years of robust growth. I'm excited to see our organization pivot from supply-focused to demand-driven. At our core, we are a growth company. So our entire organization is eager to have all of our demand drivers in place for 2025, including our national marketing campaign on our biggest brand. Thank you for your interest in the company. We look forward to providing more specifics around fiscal 2025 next quarter. I will now turn the call over to Paul.
Thanks, Darcy, and good morning everyone. Net sales for the quarter were $515 million, up 16% over prior year, modestly above our expectations. Adjusted EBITDA was $120 million, an increase of 38%. Adjusted EBITDA margins were 23.2%, meaningfully exceeding our expectations and lifted primarily by favorable gross margins. Starting with brand performance, Premier Protein net sales grew 20% behind strong volume growth for RTD shakes and powders. RTD shake growth of 19% was driven by organic growth, distribution gains, and to a lesser extent, higher trade inventory levels. Shipment growth outpaced consumption dollar growth as a result of late Q3 trade inventory builds and lower net retail pricing. Entering the fourth quarter, trade inventory levels are improved and nearly to target levels with the remaining gaps to be filled in Q4. Dymatize net sales decreased 3% this quarter on 4% higher volumes, with double-digit growth for international more than offset by declines domestically.
For domestic, recall we are lapping a challenging comparable period that included heavy display activity and changes in club distribution. Promotional activity on unfavorable mix were also a headwind to growth this quarter. Gross profit of $190 million grew 40% with an increase in margin of 630 basis points to 36.8%. The margin increase resulted primarily from net input cost deflation as we lapped elevated protein costs in the prior year. Gross profit in the quarter also included an unrealized mark-to-market gain on our commodity hedges, which drove 80 basis points of the year-over-year increase. Compared to our expectations, gross margins benefited from more favorable whey protein costs than expected and to a lesser extent, non-recurring cost favorability. SG&A expenses as a percentage of net sales were 14.4%, relatively in line with the second quarter, with advertising promotion spend at 2.9% of net sales.
Before reviewing our outlook, I would like to make a few comments on cash flow and liquidity. We generated $69 million in cash flow from operations in the third quarter and $160 million year-to-date. As expected, shake inventory levels increased in the third quarter with further increases expected in the fourth quarter, driven by incremental production. As of June 30th, net debt was $776 million and net leverage was 1.8 times. With our EBITDA growth and strong cash flow generation, we anticipate net leverage will remain below two times in fiscal 2024. With respect to our share repurchases this quarter, we bought 1.3 million shares at an average price of $58.08 per share or $74 million in total. Our remaining share repurchase authorization is $216 million. Turning to our outlook, we raised our fiscal 2024 guidance for net sales to be $1.96 billion to $2 billion, and adjusted EBITDA of $430 million to $440 million.
Our guidance implies strong top-line growth of 18% to 20% and adjusted EBITDA growth of 27% to 30% with healthy adjusted EBITDA margins of 22.0% at the midpoint. The updated guidance reflects our better-than-expected Q3 results, confidence in demand, and increased shake production in the fourth quarter. Our updated guidance implies fourth quarter net sales growth of 14% at the midpoint, with Premier Protein being the main driver. Dymatize and all others are expected to be relatively flat year-over-year. Premier Protein growth is largely volume-based on distribution gains, higher LTO volumes, and continued robust organic growth, partially offset by reduced club promotional activity. We expect shipment dollar growth for Premier RTD shakes to modestly outpace consumption growth as we fill the remaining retailer inventory gaps and grow new distribution. Fourth quarter gross margins are expected to improve meaningfully over the year ago quarter, benefiting from lower net input costs, while higher marketing outweighs the gross profit margin improvement.
Lastly, we expect fourth quarter adjusted EBITDA margins to be down slightly compared to the prior year. In closing, we are pleased with our year-to-date performance. Our momentum is high, and we are well-positioned to close out the year.
Questions and answers
Thank you. Our first question comes from the line of Andrew Lazar with Barclays. Your line is open.
Great. Good morning everybody.
Good morning.
Darcy and Paul, I think last quarter you mentioned you were planning for a price increase to start hitting in the fourth quarter on Premier ready-to-drink shakes. Is that still the plan given that you had much more favorability in input costs this quarter than you thought?
Yes. We are still moving forward with the price increase. Keep in mind that a lot of the favorability in this particular quarter was related to whey protein powders, which is the input cost for our powder business, not our shakes. So a lot of the favorability was on whey protein. And that is, as you may recall from last quarter, we talked about there was a very sharp rise expected in the third quarter on whey protein cost. For us, we were just a bit conservative on how quickly that flowed into our P&L. And so we saw some favorability because primarily the whey protein was not as much related to shakes. Shakes were pretty much largely on track on calls.
Great. And then Darcy, you mentioned securing some incremental capacity that will help you in the fourth quarter to get back to your target sort of inventory or safety stock levels. Was that incremental capacity that was in the pipeline that's just now sort of coming online? Or was it incremental to sort of what you had planned for this year? And then as part of that, have you formally committed to increasing the number of lines beyond the initial four at each of your two greenfield facilities yet? I know you've been considering it for some time, but I'm just wondering how that looks as you think through potential supply needs for 2026 and 2027? Thanks a lot.
Yes, the additional capacity exceeded our initial expectations at the start of the year, which is encouraging. We have been advocating for more capacity from our current co-manufacturers for the last few years, and this is the first time we've successfully secured some. It is indeed positive news that our co-manufacturers have stabilized and are achieving efficiencies that they can pass on to us. Overall, it's great news. Regarding the expansion of our co-manufacturers with new lines, we are currently assessing our options for expansion. However, the timeline remains unchanged, and we anticipate needing new capacity by 2026.
Thank you. Please standby for our next question. Our next question comes from the line of Ken Goldman with JPMorgan. Your line is open.
Hi. Thanks so much. I appreciate the early look into the top-line next year with the understanding that the year hasn't even started yet. I was just curious, are there any early reads on just as we think about the flow-through of the top-line to the bottom-line, any particular tailwinds or headwinds we should think about in terms of costs that might lead EBITDA growth to vary more than usual or positively or negatively from where sales growth is?
Good morning, Ken. As we consider fiscal 2025, we anticipate that our shake business will drive demand, which indicates a likely increase in marketing and promotional spending. From 2024 to 2025, we expect to see some escalation in our marketing and promotion efforts, and we will adjust between the two as we focus on driving demand. Additionally, we expect inflation to rise in 2025 compared to 2024, impacting our powder business more significantly. We foresee a considerable increase beginning in the fourth quarter and continuing into the first half of next year. While inflation will affect both our powder and shake businesses, we have implemented a price increase for shakes that should help us offset these costs. However, we do expect some challenges related to inflation and potentially on marketing and promotion moving forward.
Thank you. And then for a follow-up, we started to see your biggest shakes competitor, or at least what we would see as your biggest one, gaining shelf space in the mainstream beverage aisle and a couple of sort of traditional supermarkets. I'm just curious, is this something that's getting more widespread? Is it more anecdotal? And I'm just curious if it sort of accelerates your desire to migrate the Premier Shake brand a little bit more into the more mainstream part of stores as well or if it's not really a consideration at this point? Thank you.
We have been closely monitoring the situation, and it’s accurate that there has been some growth, particularly through DFD. It's not surprising that our competitor has expanded into the beverage aisle. As you may recall, moving out of the aisle is an important element of our strategy. This has a couple of aspects. One is end aisle displays, and another involves displays in different areas of the store. We are actively pursuing both strategies, especially as it plays a crucial role in our overall approach. We saw a lot of end aisle displays this quarter, and we expect to see ample bottled displays next quarter, including in coolers and other parts of the store like near the deli. So, this is definitely a key part of our strategy. In terms of our long-term plans, which I believe is what you are inquiring about, we are still actively assessing the possibility of moving into a more mainstream aisle. We believe that we can gain a significant amount of visibility and trial through our current strategies, such as end-aisle displays and various placements around the store, rather than explicitly relocating our category. However, we are indeed evaluating this option.
Please stand-by for our next question. Our next question comes from the line of Thomas Palmer with Citi. Your line is open.
Good morning and thanks for the question. You noted in the prepared remarks how innovation for Premier Protein has maybe not been as big of a focus in part due to some constraints. Is there a point as we look out towards next year that this starts to ramp up and become a bigger focus? And then just any examples to highlight on this front.
Yes. So I would put innovation into two buckets. The first bucket is what I call little eye innovation, which is basically pack size, format expansion. So that can be a combination of like we have bottles. It can be bigger packs, smaller packs. It can be different sizes, which will get at different macro levels of protein. So that in my mind is kind of little eye innovation. Flavor also is put into that segment. We see just a ton of opportunity with little eye innovation. When you talk about big-eye innovation, and that is really going for incremental consumers and incremental occasions. Yes, so that we have kind of put on the back burner because of capacity. But you'll see us an increasing focus and increasing launches of new lines in 2025. Obviously, I'm not going to get into what that innovation is on a public call, but you will see a couple of new lines come out on Premier Protein next year.
Great. Thank you. And then on Dymatize, what's the messaging I guess in this new marketing campaign? And what's the target? Is it more customer awareness for the brand? Is it trying to differentiate the brand in what seems to be maybe a little bit more of a competitive segment right now? Just any help on the – as we move into the back half of this campaign launch.
Yes. The campaign is launching this week, and our main focus is on increasing brand awareness. Currently, our household penetration is at 1%, so we need to make more consumers aware of the brand. Dymatize is a premium product, and we want to communicate its value and encourage consumers to choose Dymatize. We are leveraging the authenticity of Christian McCaffrey, who already integrates Dymatize into his nutrition and training, contributing to his success. Timing the campaign with the start of football season is intentional, given his prominence. This initiative is centered on brand awareness and the Dymatize identity. Alongside this equity campaign, we have additional advertisements highlighting flavor. We are implementing both upper and lower funnel strategies in our marketing efforts starting in Q4, which will extend into 2025.
Thank you. Please standby for our next question. Our next question comes from the line of Brian Holland with D.A. Davidson. Your line is open.
Yeah. Thanks. Good morning. Maybe just referring back to Paul's earlier response and question about pricing mindful of when commodities are flowing through the P&L? And also more broadly, just kind of the challenging volume backdrop across CPG. Just any sense you can provide or share with respect to customer response to the pricing that you announced last quarter?
Paul, do you want me to answer that?
Yeah, please.
Pricing is always a challenging issue. However, it helps that other competitors have recently increased their prices as well, mainly due to rising costs in manufacturing, labor, and freight. We are observing some increases, and others have implemented similar changes before us, which is beneficial. There hasn’t been any significant pushback on our pricing adjustments, and we've managed to meet all expectations.
Thank you. I wanted to inquire about private label competitive dynamics, especially regarding recent rollouts in whey powder. Darcy, could you share some insights on how private label is performing in the categories where you compete? Additionally, any historical context that illustrates what private label has achieved in this category and its potential limitations in capturing market share would be appreciated.
Yes, private label is definitely less prevalent and not as mature in this category compared to others. In ready-to-drink products, it's around 9%, while in powders, it's about 4.5%. It's important to note that much of the powder category isn't well-tracked. Our estimates suggest that for powders, it’s likely closer to the 9% to 10% range when looking at the entire marketplace. The same applies to bars. What's interesting is that private labels are maintaining their market share rather than growing faster than branded products; they've been consistent in their share over the last few years. There are varying levels of strength among private labels, depending on the retailer. Generally, in this category, consumers prefer trusted brands. Bars were the first to shift towards private label, followed by powders, and ready-to-drink products will likely be the last to make that transition. This is due to the complexities involved in producing private label ready-to-drink products, which tend to be concentrated among a few retailers. Others have attempted it and faced challenges, which has made them cautious. Does this help provide some context?
Please standby for our next question. Our next question comes from the line of Yasmin Deswanhai with Bank of America. Your line is open.
Hey, guys. Good morning. Thanks for the question. So I just had a quick one on Premier. So you said you had strong consumption growth in all key channels with Club being the exception. Are you able to quantify the impact of the temporary changes in assortment? And also you mentioned that club consumption began to accelerate in June and into July. So is there any way to quantify that? And do you expect that acceleration to hold in Q4 or even accelerate further from there?
Okay. Sorry, there were a lot of questions in there, Yasmin. Can you repeat the question one more time?
Sorry. Yes. So just the first question of all of that is just are you able to quantify the impact of the temporary changes in assortment in Q4 just as it relates to club kind of being weaker than the rest of the channels in Premier?
And you said Q4...
Yes. Paul, do you want to get that?
Well, I just want to clarify. Are you seeing the temporary changes in Q3? Or you said Q4? I just want to make sure.
Yes.
Okay. Yes. So we did have some changes in club assortment in the third quarter primarily with one of our largest club customers, which did start to ship in late in the quarter and early in the fourth quarter. So we should see the year-over-year headwind of that change in Q4 as we move forward. I don't know if I have a precise number of what we think that impact was, but certainly it had an impact on the club growth in the quarter, as well as just some of the out-of-stocks and some of our other club customers, which vastly improved as we got later into Q3, and you're seeing that in the growth as we hit late Q3 and Q4.
And Yasmin, if you're considering challenges to consumption, our Q3 consumption was lower than we anticipated. We expected it to be about four percentage points higher than what we experienced. This difference was primarily due to some delayed shipments. Approximately three points of that shortfall was linked to replenishing out-of-stock items, while about one point resulted from new products being shipped in. I hope this clarifies the situation regarding the four points of consumption.
Okay. Great. That's really helpful. And just a quick follow-up and it's a more higher-level question. I just had a quick one on your target consumer base as it relates to growing household penetration. I know you said previously that this is a more adult brand, but I saw recently that there was an activation in New York, and these pop-ups tend to skew towards younger audiences. So could you just talk a little bit about the consumers that you plan to address from here and how you expect that to drive continued household penetration growth?
Yes. So you saw the ice-cream pop-up.
Yes. I saw that.
Yes, that's very successful. Our brand has low household penetration, and currently, the average age of our consumers is in the early 40s, but it varies. Our marketing campaign will focus on attracting a younger audience to bring them into the category early and retain them. That was one activation, and as we develop our marketing campaign for next year for Premier, you will see changes in the creative and our targeting efforts to appeal to this demographic.
We standby for our next question. Our next question comes from the line of Robert Moskow with TD Cowen. Your line is open.
Hi. Thanks for the question. Just to clarify, I think you said consumption was about 400 basis points lower than what you thought for various factors. Was that for all channels? Or is that just for club? I didn't catch it.
All channels were affected, but the majority of the impact came from the club, along with some from food.
Okay. The reason I ask is that if you look at slide 8 and the consumption trends for Premier Protein RTD, which is your largest segment, the comparisons become quite challenging in October, and overall growth in the fourth quarter is projected to be 36%. Are you anticipating a significant acceleration in the tracked consumption pattern for Q4? How would that impact shipments, especially since you're still addressing inventory gaps? Do you believe shipments might exceed that growth rate?
Yes, I will take the latter.
Yes, you can do that.
Darcy, you go first. You are CEO. So please, go ahead.
Well, I know that we are both focused. Go ahead.
Darcy, you go first. You are CEO. So please. Go ahead.
I know that everyone is paying a lot of attention to consumption, which is understandable. To provide some clarity, I want to share our expectations for monthly trends in Q4. We saw a very strong performance in July with a growth of 20%. However, we anticipate that overall consumption for Q4 will settle in the low-teens range. As Paul mentioned, in August, particularly towards the end of the month, we expect a dip in consumption. This is primarily due to comparing against a club promotion from previous periods that isn't included in untracked channels but is reflected in mill or plus figures. We expect to see an uptick in September following this dip. So, while July showed strong performance, we expect a slight decline in August due to the promotion, followed by a recovery in September.
That's very helpful. Thank you very much.
Yes.
Thank you. Please standby for our next question. Our next question comes from the line of David Palmer with Evercore ISI. Your line is open.
Thanks, and thanks also for that last point. Just a follow-up on that. If we were to broaden out and just think about volatility as we're seeing in the data, or maybe we can do a retrospective and look at how the sales have been volatile in the past, how much of that volatility do you think it's related to not only an ebb and flow in your capacity constraints, but also a key competitor's capacity constraints maybe being different than yours, maybe they had a different points in the past, making for easy comparisons competitively? And then you perhaps had some constraints in addition to the assortment reset that you talked about in this last quarter. Just any comments on that and even how that governs the comparisons that we'll be seeing in the coming quarters?
Sure. I'll start by saying that our changes in consumption patterns are definitely linked to our limited safety stock and trade inventory. As I mentioned earlier, consumption in Q3 was below our expectations due to timing issues. We had some shipments scheduled for May that were delayed until June, which in turn pushed the related consumption to July. This type of delay isn’t unusual, but when we have sufficient trade inventory and safety stock, it generally doesn't show up in consumption figures. Since we currently lack those buffers, it does have an impact on our consumption data. Once we restore our safety stock and trade inventory to adequate levels, we should see a reduction in these fluctuations. Additionally, this situation is more about our inventory management rather than competition. Interestingly enough, I mean, I talked about the category being that is really, the growth is driven by the mainstream brands, well, the mainstream brands, us as well as our biggest competitor, all of our growth, almost all of our growth is coming from outside of the category. So there really is not very much brand shifting between the two brands.
Thank you for that. And just by judging on your EBITDA margins for this year. It looks like you'll finish above the 18% to 20% long-term guidance. How are you thinking about your long-term margin now? Is that something that could be in the low 20s longer term?
Yes, we are having a strong margin year, but it's important to note that this is not a year driven by full demand, particularly for our largest brand, Premier Protein. Therefore, I wouldn't consider a 20% margin to be our new standard. However, we are assessing our position. We appreciate our long-term algorithm that provides us with spending flexibility and have consistently aimed for the upper range of that target. We will keep reevaluating our margins, and in November, we will share our insights on how this will impact fiscal 2025.
Okay. Thank you.
Thank you. Please standby for our next question. Our next question comes from the line of Jim Salera with Stephens. Your line is open.
Yes. Thank you for taking our question. Darcy, I wanted to drill down a little bit in club in my area in the Midwest, I've seen a pretty significant increase in promotion from, albeit smaller competitors, but other competitors that have RTD shake offerings. I guess, first question is, is that something that you see more broadly or maybe that's more concentrated in my area? And two, as you think about maybe the promotional cadence moving forward and maybe the ability for the category to take price, should we think about kind of alternating promotions between brands as putting a ceiling on pricing power for the category?
Let me address your first question, and then I may need some clarification on the second one. In our clubs, promotional intensity has increased somewhat, and it's not just the top two brands but rather all the others as you mentioned. This isn't a new trend; it's been happening for about the past year. There always seems to be a brand on promotion, which I would consider a long-term trend. Regarding your second question, it definitely reflects trends in the broader marketplace, particularly in powders. I mentioned this in the last call, and the trend has persisted with an increase in discounting and promotional intensity for powders across the market. For ready-to-drink products, the situation hasn't been as drastic, but there has been a noticeable rise in promotions. I believe this is related to the increased capacity we have, allowing brands to focus on driving demand. Now, what was your second question again?
Yes. The second part was really just if there's this always-on promotional calendar for the space, does that limit pricing power just given the value gaps if there's always somebody in the category that has a promo on, even as your promos roll on and off to that limit, how much price you can take because you need to keep kind of a relative gap levers on promo at that time?
No. I think I can speak for our brand when I say that I feel very confident about our pricing power. We have a very strong brand with high loyalty, and this has been consistently demonstrated over the past few years. Despite capacity constraints, consumers have remained with us. Therefore, we do not need to rely heavily on promotions. I have mentioned before that our main focus for promotions is securing display placements. We will only use temporary price reductions as necessary to achieve this, as displays attract attention, which leads to trial, and subsequently, repeat purchases. This will be our priority. We have two main drive periods: one in Q2, during January, February, and March, when many consumers enter the category. We resumed promotions in Q2 this year and expect to do the same next year. Additionally, there will be a second drive period in Q4, but it will be less intense because we have learned that we don't need to promote as deeply or as frequently.
Okay, great. I appreciate the color. I’ll get back in the queue. Thank you. Please standby for our next question. Our next question comes from the line of Jon Andersen with William Blair. Your line is open.
Hi. Thanks for the question. I was wondering if you could talk a little bit about fall shelf resets, and how your expectations are there perhaps relative to last year. And is that kind of factored into your expectations for shipments to run ahead of consumption in the fourth quarter? And then the second follow-up question is just on capacity. You've had your base plan for capacity and now secured some incremental capacity on top of that. I'm just wondering where that maybe puts you in terms of supporting sales growth in 2025. Thanks.
In Q4, we do expect some increases in TDPs. If you look at the supplemental presentation, Page 10 effectively illustrates these increases. Last year, we saw a significant increase, primarily from a major retailer where we expanded shelf space considerably. While we anticipate some increase in Q4, it won't be as substantial as last year's, but we did secure additional shelf space in that retailer. Moreover, we will see some improvement from filling the gap in trade inventory that we couldn’t address in Q3. The increases will come from filling remaining trade inventory and new distribution shipments. We do expect shipments to slightly outpace consumption in Q4, as Paul mentioned in his prepared remarks. Regarding capacity, the additional production we secured this quarter positions us well. It enables us to meet and even raise our guidance while also getting us to our target of eight weeks of safety stock going into 2025. Overall, we are well-positioned to meet demand moving forward.
Thank you. Please standby for our next question. Our next question comes from the line of Bill Chappell with Truist Securities. Your line is open.
Thanks. Good morning. Just two questions. One, I didn't fully understand when you talked about the consumption 400 basis points below your expectations and a lot of that coming from the club channel. I'm just trying to understand why it was below your expectations as you just seem to have a good handle on obviously club channel on shipments and products and stuff like that. So, was there something that surprised you intra-quarter? Or just help us understand that.
Yes, please continue. Go ahead.
Yes, I think Darcy mentioned this earlier. It really comes down to the timing of shipments. We did have some shipments to clubs and other customers to replenish out-of-stock items, as well as to distribute some new flavors. However, these shipments occurred later in the quarter than we anticipated. This timing directly affected our consumption growth in the fourth quarter, which Darcy pointed out was about a 40 basis point setback. If we had received those shipments on time, our consumption growth would have been around 14%, instead of the approximately 10% we experienced. We do encounter shipment timing changes occasionally, and when we’re not maintaining full safety stock internally, these issues can arise, which is what we faced this quarter.
Got it. And I have a follow-up and then I have another follow-up. But did that then impact your July sales, is why you got a boost because of the timing of shipments?
I would not say it necessarily had a negative impact. You saw consumption begin to accelerate in June and continue into July, primarily because we managed to replenish our out-of-stocks and improved our distribution. This directly influenced consumption, which is why you observed the acceleration in June and then into July.
Got it. Okay. And then my real follow-up just back on pricing and especially as we move forward. I mean I'm just trying to couple the commentary of everyone in your category is playing well in the sandbox on pricing, but you're sourcing most of your new customers outside the category. And so as we hear of CSDs and energy drinks and others talking about more promotional levels just to kind of revive their categories. Does that come into your thought process as you think about pricing and promotion as we move into fiscal 2025? I believe this relates to what consumers are trading off to purchase a shake. For example, many of our occasions serve as breakfast replacements, meaning that people are giving up items like muffins, bagels, and cream cheese, which are generally more expensive than a $2 shake. Therefore, not only is our option more affordable, but it also offers a healthier breakfast. This is why our data indicates that we have pricing power.
Got it. No, that helps a lot. Thank you.
Thank you. Our next question comes from the line of John Baumgartner with Mizuho Securities. Your line is open.
Hi, good morning. Thanks for the question.
Good morning.
First off, Darcy, I wanted to ask about innovation and long-term development of active nutrition. And you touched on it a bit with your comment on big eye innovation. But more broadly as we see the high-protein, low-sugar formulations becoming standardized, to what extent do you think this category can evolve? I guess similarly, the energy drinks where you're now including ingredients and functions in combination with caffeine. I mean how do you assess protein's ability to evolve similarly between liquids and powder? And I'm thinking here three, five, seven years, not a fiscal 2025 comment.
I believe the first aspect to address is the incredible value of protein and how it benefits a diverse range of people. This has significant implications for innovation, especially given the benefits it offers. There is an immense opportunity here. While you inquired about major innovations, this is precisely why we are optimistic about smaller innovations. We can enhance our existing formula or something similar by offering it in various packaging, sizes, and formats, which opens up considerable household penetration potential. As for larger innovations, if we look ahead five to ten years, I anticipate protein will be integrated with other functional ingredients. The mainstream sector is primarily influenced by two areas: sports nutrition and the specialty world, such as vitamin shops. In those environments, we see a trend toward real food combinations and a strong focus on functionality. I believe this is the direction the category will take.
Great. Thanks. And then as a follow-up, in terms of competition in RTD. Tetra's supply has been the standard and tightness has been a major barrier to entry. But we're seeing some of the newer entrants adopting bottles. And I'm curious, your take on industry bottle capacity, the extent it can be a means for newer players to sort of circumvent the tetra tightness and the extent to which bottles complaint channels such as mass and club as opposed to just more of a single-serve opportunity.
Bottles are also facing constraints, primarily due to limitations in upstream aseptic processing. Whether the product is packaged in a bottle or a tetra, it is the capacity for aseptic processing that is limited. However, as tetra capacity is increasing, so too is bottle capacity, which is what we are observing. We do see opportunities for bottles since it's a smaller segment of our business, and we believe the growth potential for bottles could be significant. When I mention format, bottles are one of the formats where we see potential.
Thank you, Darcy.
Thank you. Ladies and gentlemen, I'm showing no further questions in the queue. This concludes today's conference call. Thank you for your participation. You may now disconnect.