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. At this time, all participants have been placed in a listen-only mode. 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 Web site in both the Investor Relations and the SEC filings sections at bellring.com. In addition, the release and slides are available on the SEC's Web site.

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 Post's proposed distribution of its interest in BellRing Brands, which are posted on our Web site.

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

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 8th 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 two years.

I have 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 brand's growth. Premier Protein and Dymatize are perfectly positioned to attract households into the category and improve consumer's 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 and promotional marketing. This resulted in expected volume declines for Premier Protein in the quarter. Despite this decline, shipment exceeded consumption in the quarter and resulted in increased retail 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%.

The gross margin decline results from higher dairy protein cost as well as increased freight which was mitigated by higher net selling prices. SG&A expenses of $37 million included 2 million of separation cost. Prior year SG&A expenses include 4.6 million restructuring and facility closure cost.

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 percentage 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 brought these results.

We expect further working capital increases throughout the year as we rebuild our RTD shake inventory levels. During the quarter, we have an attractive entry point and repurchased 800,000 shares of 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 1.36 to 1.41 billion and adjusted EBITDA of 255 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, so 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 in RTD shakes as we lacked 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 four times 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. Your line is open..

Good morning, everybody..

Good morning..

Morning..

Yes, thanks for the question. I guess first off, I know that, Darcy, you've referred to 2021 as kind of a year where BellRing sort of had almost two years of growth sort of compressed into one year.

And a lot of that had a lot to do with, well, 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 skews, our tetra skews this year because of our capacity constraints. We have been able to hold, for the most part, about 90% of our space. Basically, customers are spreading out our facing on our core items because they're one of the most productive skews on the shelf.

So, we're not in a place right now that, for the next year, we're going to be expanding our shelf space on our tetra skews. 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 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? Thanks so much..

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 see what happens in the marketplace place we adjust those assumptions..

Thank you..

Thanks..

The next question comes from Pamela Kaufman with Morgan Stanley. Your line is open..

Good morning..

Good morning..

Morning..

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 in 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 was good, that will obviously be the case, with our upcoming incremental pricing that we took, that we announced this quarter. But from Dymatize, it's a mix. So, it's a mix between volume and pricing.

Paul, anything else that you wanted 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 less disease, and those kinds of things. But it gives us obviously a lot of confidence..

Thanks. And given some of the supply challenges in tetra packs, 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. But bottles are constrained too, so it's really across the end, because of the dramatic demand increase that happened last year, both bottles and tetras are constrained. So, it's not as easy, and our tetra business is so large that the idea of just shifting to another package size is just -- it's just not feasible.

I think we are moving. We're making some kind of co-man shifts on our bottle business, which will dramatically increase our ability to satisfy the increasing demand for our bottles. So, again, it's not as easy as just shifting, but I am confident in our increase that we have planned from a tetra standpoint.

It's later in the year and then into '23, and like I said, bottles are also increasing..

Thank you. Our next question comes from Jason English with Goldman Sachs. Your line is open..

Hey folks, good morning. Thanks for stepping me in..

Good morning, Jason..

I've got couple of questions. First, you all confused me on some of the comments and guidance, it was probably my fault as I'm distracted over here, I'm trying to juggle too many balls.

But can you go back and I think you said sales, similar Q1 to Q2 but sequentially growing, which seemed like they can coexist? And then there was also some comments on EBITDA which sounded upbeat, but then you commented sequentially lower on price cost likes, et cetera. Do you kind of come back revisit clarify those to 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 the second quarter, we expect to be sequentially down from the first quarter, which is consistent with our initial expectation going into the year and that is because there is incremental inflation on our proteins primarily.

So, to 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-in-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, it is almost the second quarter we've 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 pricings.

But we also have significantly higher inflation in the second quarter versus last year in particular; whey protein was at its low point, which is our powder product in the second quarter of last year. And it's significantly higher this year. So, that's the dynamics going on with EBITDA..

Got it, okay..

It is lower because of marketing spend. So, that is 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 EBITDA increase from last year, but again sequentially down to 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 curtain from on those but perhaps reach a 10% sort of penetration level. The penetration growth I'm looking at for the brand has been phenomenal.

I think it's actually accelerated during COVID.

And 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 as perhaps you're envisioning just a few years ago?.

Yes, I think this brand continually surprise us. I think that not only do I think that there's more upside from a category standpoint, but we're increasing our 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] [Ph] 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, you know, the kind of medium-term..

Got it. Okay, thank you. I'll pass it on..

Thanks..

We'll go now to Ben Bienvenu with Stephens. Your line is open..

Hey, guys, good morning. 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'll be to get fill rates and service levels back to normal, assuming the Omicron production kind of shakes out in the second quarter.

So, it actually is normal at the end of the second quarter to fill rates get back to normal levels in the third quarter, fourth quarter, that's still looking into the 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 by, I would say Q3 they're going to look a lot better, beginning of Q3, they're going to be looking a lot better..

Thank you.

And in fact I could ask one more, you guys have any visibility into freight costs in the back half of the year, whether it's you anticipated to be kind of where it's been at for the first-half, it's going to go up maybe a little bit late there?.

Yes, we do expect the freight will go up into the third quarter. And then based on the evidence 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..

Got it, thanks, guys. I will pass it on..

Thank you..

The next question comes from Bill Chappell with Truist Securities. Your line is open..

Thanks. Good morning..

Good morning..

Good morning..

Hi, Darcy, I guess this goes on Premier Protein. What do you envision elasticity looks like in that category as you rise prices, because it means you have a highly loyal base and a pretty high market share within the drinks side of it.

Are people just buying less general, if they are -- there's elasticity, are they switching to lower priced brands? Are they switching to some other form, just try to understand I mean it doesn't seem like there would 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?.

Today, we have seen no elasticity. We have been watching it and 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. Thanks. And then, just look kind of on that -- on the cost front.

You're trying to understand for lack of better term, so 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 the commodities get better in six months or conversely laborers 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've written into two 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, the supply and demand dynamic and so that, that's got to get better, but it doesn't look like it's likely until fiscal '23 or early that's the kind of the current thinking.

So, I do think there's some opportunity to us obviously as we get on the other side, because we're kind of 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, no protein, but kind of steadily going up besides our shakes and so that that was -- that one, we'll have to keep an eye on, but it seems like both those markets should come back down.

So, it seemed like there should be a transitory piece of that on our co-mans, your relationships, they're 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 as labor costs obviously stay high.

It will obviously get absorbed at some point as it's passed along to us, but that's totally that the production cost is somewhere 15%-20% of our overall cost, which really the commodities that are driving the profitability..

Got it. Thanks so much for the color..

We'll go now to Chris Growe with Stifel. Your line is open..

Thank you. Good morning..

Good morning..

Good morning..

Hi, 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 place the new ones for shakes and for powders?.

Go ahead Darcy, go ahead. Sorry..

You can tell we're not together. That so the second round of pricing is slightly higher than the ones we took before. We didn't specifically just add 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 most significant, 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 have a chart in your, the slide deck around showing TDPs and how they 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, the more available, does that line keep going up to -- do you keep -- continue to see an increase in TDPs as you get more and more supply availability.

I guess that's 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 year ago because of that temporary reduction SKUs..

Yes. Okay. And I guess just to be clear on that, then this is 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 --.

Yes..

We will see. So, I mean that is really what's affecting the TDPs..

Okay, I got it. Thank you..

Thanks..

We will go now to Rob Dickerson with Jefferies. Your line is open..

Great, thanks. Just have a quick question on the inventory side. Darcy, you're saying, it sounds like basically, maybe all production this year started from existing suppliers, sounds like maybe some of them are getting a little bit better as you kind of get through to consumption still obviously, up decently, volumes are down, say when 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 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.

They really recharge or burning for a little bit inventory, but as you right size the SKU is relative to your capacities, like there shouldn't be kind of further decline, right, just given that a blower capacity relative to consumption demand, like if that catches jobs you know, what I mean..

So Rob, 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 you reduce the SKUs, right. If you've looked in, you forecasted yourself that the amount of capacity you have..

Yes..

Should be able to continue to sell those SKUs that you plan to have on shelf this year..

Yes. That, yes. Absolutely, that's correct. The one thing I will just know is that when you're looking at consumption, we have pretty high, we have some high highs and we've increases when we have promotions.

And so, when you're looking at consumption, you'd have to factor in that you're going to see some negatives on premiere, when we're lacking promotions. 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 track 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 to kind of EBITDA sequentially.

And what have you -- I mean, it's like, if we're thinking about Q2, just in absolute EBITDA dollars, would you say that maybe kind of similar to sales sequentially from Q1 to 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 EBITIDA 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 the EBITDA to decline sequentially from Q1 to Q2. We expect it to be higher than last year because we're lacking a lot of marketing that we do expect it to decline and that is, again because of higher inflation.

And so, that day is the primary piece, but now 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. We do expect it to be switching down..

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

Yes, I mean --.

The first-half is tracking. Yes, the first-half of tracking like we expected with the 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 a big picture. This year and 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. So, I mean, but all other than the inflation and the pricing action, the cadence is largely what we expected..

Perfect. Thank you..

Thanks..

We'll go now to Ken Zaslow with Bank of Montreal. Your line is open..

Hi, good morning, guys..

Good morning..

Good morning..

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

Yes, so basically, we have increased capacity every quarter four 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 let's 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 three new ones in '22. And we add two more in '23.

And the big ones, which are new facilities like MFI, we talk to -- 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 just 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 the -- of '23. And then continue -- and then it ramps up from there. And remember, we can still affect, so because some of the new capacity in '23, they're 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 coming online, you answered an earlier question that you think household penetration kind of you look to certain brands in this 10% and it's 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.

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 going to be difficult; it just seems odd to come up with some arbitrary 10% just I don't know, just a thought. I'll leave it there..

Yes, 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 earnings, 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 are at close to 50%. So, 45% household penetration, where our RTD shakes are only at 25, powders or 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 needs, 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..

Great, appreciate it..

Thank you..

We'll go now to Kaumil Gajrawala with Credit Suisse. Your line is open..

Hey, everybody. Good morning. 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 were 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?.

Yes, 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..

Okay, great. That's all. Thank you..

Thank you..

Our next question comes from John Baumgartner with Mizuho. Your line is open..

Good morning, thanks for the question..

Hey, John..

Maybe first off, hi Darcy, congrats on the time. I'd like to ask about powders against the broader evolution of the category maybe you are moving beyond COVID volatility into the new normal, with work from home and such, and how you think about the role for powder within the category.

Have you seen a 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 our 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 of bars are more snacking, RTDs are more meal replacement, although can be used kind of in between meals, but more meal replacement. Well, powders are mostly used with food, with smoothies, after workouts where they're consumed RTDs and nutrition bars mostly on the go, powders at home. So, they're very complementary.

And we have been very successful on Premier Protein with powders, obviously, Dymatize is our number one 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, great. And I guess from 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 F23, F24 that sort of place you in 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 in 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 at where we currently from a production standpoint, for instance, we have five locations now in 4-ish years we will be doubling that. We are expanding our bottle -- 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..

Okay. Thanks for your time. Appreciate it..

Thank you..

We will go now to Bryan Spillane with Bank of America. Your line is open..

Hi. Thanks, Operator. Good morning. I just had one question and it's if you look at fiscal -- we look at the current fiscal year and just the amount of consumer-facing spend that you are anticipating this year, I guess so both promotions and advertising and marketing.

What is that relative to normal? And I guess what I am trying to get at is as we move 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 promotion. This year we are pulling back on that around 2%.

Going forward obviously we want [indiscernible] we also think that will drive top line growth as well as we've seen from our recent past that's it's very -- our products are very receptive to marketing. And so, we think it would drive obviously top line.

But, yes, we would expect over the longer term to at least spend back to 3% level and perhaps look to increase that over time as our [indiscernible]..

Is the order [of magnitude] [Ph] 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 the next fiscal year, 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 fiscal year because fiscal year, I think it was fiscal ['18] [Ph] that had a stepped up margin. But a part of that was too because protein cost 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, it sometimes depends on what commodities do and we will have to make sure we are right sizing that. At least historical high prices, it gets harder to get back to the gross margins that we had 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 have been historically coming at 33-34 range, which allows us to spend marketing at higher level and promotion..

All right, thank you..

We have no further questions in queue at this time. This will conclude today's program. Thank you for your participation, and you may disconnect at any time..