Bellring Brands, Inc.: Form 10-Q for the period ended Dec 31, 2021

The following discussion summarizes the significant factors affecting the consolidated operating results, financial condition, liquidity and capital resources of BellRing Brands, Inc. and its consolidated subsidiaries. This discussion should be read in conjunction with our unaudited condensed consolidated financial statements and notes thereto included herein, our audited consolidated financial statements and notes thereto in our Annual Report on Form 10-K for the fiscal year ended September 30, 2021, and the “Cautionary Statement on Forward-Looking Statements” section included below. The terms “our,” “we,” “us,” “Company” and “BellRing” as used herein refer to BellRing Brands, Inc. and its consolidated subsidiaries.

OVERVIEW

We are a consumer products holding company operating in the global convenient nutrition category and a provider of ready-to-drink (“RTD”) protein shakes, other RTD beverages, powders and nutrition bars. We have a single operating and reportable segment, with our principal products being protein-based consumer goods. Our primary brands are Premier Protein and Dymatize.

On October 21, 2019, BellRing Brands, Inc. (“BellRing Inc.”) closed its initial public offering (the “IPO”) of 39.4 million shares of its Class A common stock, $0.01 par value per share (the “Class A Common Stock”) and contributed the net proceeds from the IPO to BellRing Brands, LLC, a Delaware limited liability company and BellRing Inc.’s subsidiary (“BellRing LLC”), in exchange for 39.4 million BellRing LLC non-voting membership units (the “BellRing LLC units”).

As a result of the IPO and certain other transactions completed in connection with the IPO (the “formation transactions”), BellRing LLC became the holder of the active nutrition business of Post Holdings, Inc. (“Post”). BellRing Inc., as a holding company, has no material assets other than its ownership of BellRing LLC units and its indirect interests in the subsidiaries of BellRing LLC and has no independent means of generating revenue or cash flow. For additional information on the IPO, see Note 1 within “Notes to Condensed Consolidated Financial Statements.”

The members of BellRing LLC are Post and BellRing Inc. BellRing Inc. holds the voting membership unit of BellRing LLC (which represents the power to appoint and remove the members of the Board of Managers of, and no economic interest in, BellRing LLC). BellRing Inc. has the right to appoint the members of the BellRing LLC Board of Managers, and therefore, controls BellRing LLC. The Board of Managers is responsible for the oversight of BellRing LLC’s operations and overall performance and strategy, while the management of the day-to-day operations of the business of BellRing LLC and the execution of business strategy are the responsibility of the officers and employees of BellRing LLC and its subsidiaries. Post, in its capacity as a member of BellRing LLC, does not have the power to appoint any members of the Board of Managers or voting rights with respect to BellRing LLC.

In October 2021, we, along with Post, announced the signing of a transaction agreement related to Post’s previously announced plan to distribute a significant portion of its interest in the Company to Post’s shareholders. We expect the distribution to be completed in the second quarter of fiscal 2022, subject to certain customary conditions. See Note 1 within “Notes to Condensed Consolidated Financial Statements” for additional information on the transaction agreement and the transactions contemplated thereby.

COVID-19

The COVID-19 pandemic has caused and continues to cause global economic disruption and uncertainty, including in our business. We continue to closely monitor the impact of the COVID-19 pandemic and developments related thereto on our business and to remain focused on ensuring the health and safety of our employees, maintaining the continuity of our supply chain to serve customers and consumers and preserving financial liquidity to navigate the uncertainty caused by the COVID-19 pandemic. Our primary categories returned to growth rates in line with their pre-pandemic levels during the fourth quarter of fiscal 2020 and have remained strong in subsequent periods.

As the overall economy continues to recover from the impact of the COVID-19 pandemic, input and freight inflation and labor and input availability are pressuring our supply chain. Lower than anticipated production and delays in capacity expansion across the broader third party shake contract manufacturer network have resulted in low inventories and missed sales. Service levels and fill rates remain below normal levels, and certain products have been placed on allocation. These factors are expected to improve but persist throughout fiscal year 2022 and are dependent upon our contract manufacturer partners’ ability to deliver committed volumes, add capacity on expected timelines, retain manufacturing staff and rebuild inventory levels. Raw material, packaging and freight inflation has been widespread, rapid and significant, and has put downward pressure on profit margins. As a result, we have taken pricing actions on nearly all products. For additional discussion, refer to “Liquidity and Capital Resources” and “Cautionary Statement on Forward-Looking Statements” within this section, as well as “Risk Factors” in Item 1A of Part II of this report.

RESULTS OF OPERATIONS

dollars in millions

Net Sales

Net sales increased $24.1 million, or 9%, during the three months ended December 31, 2021, compared to the prior year period. Sales of Premier Protein products were up $10.8 million, or 5%, driven by higher average net selling prices. Average net selling prices increased in the three months ended December 31, 2021 due to decreased promotional spending and targeted price increases. These positive impacts were partially offset by volume decreases of 6%, which were primarily the result of supply constraints and reduced demand-driving activity. Sales of Dymatize products were up $12.9 million, or 41%, with volume up 8%. Average net selling prices increased in the three months ended December 31, 2021 due to decreased promotional spending, favorable mix and targeted price increases. Sales of all other products were up $0.4 million.

Operating Profit

Operating profit increased $2.8 million, or 6%, during the three months ended December 31, 2021, when compared to the prior year period. This increase was primarily driven by higher net sales, as previously discussed, and reduced advertising and promotional spend of $1.1 million. These positive impacts were partially offset by higher net product costs of $29.8 million due to unfavorable raw material and freight costs, higher employee-related costs, and costs related to the separation from Post of $2.0 million. Additionally, prior year operating profit was negatively impacted by restructuring and facility closure costs of $4.7 million.

Interest Expense, Net

Interest expense, net decreased $4.4 million during the three months ended December 31, 2021 compared to the prior year period. This decrease was primarily due to lower aggregate principal amounts outstanding under BellRing LLC’s term loan B facility (the “Term B Facility”) and under BellRing LLC’s revolving credit facility (the “Revolving Credit Facility”) and net hedging gains (compared to losses in the prior year period) of $0.9 million recognized on interest rate swaps. In addition, the weighted-average interest rate on the aggregate principal amounts outstanding under the Term B Facility and under the Revolving Credit Facility decreased to 4.8% for the three months ended December 31, 2021 from 6.0% for the three months ended December 31, 2020, driven by lower aggregate principal amounts, as previously discussed, and the refinancing of the Term B Facility during the second quarter of fiscal 2021. See Note 14 and Note 12 within “Notes to Condensed Consolidated Financial Statements” for additional information on our debt and interest rate swaps, respectively.

Income Taxes

Our effective income tax rate was 6.9% for the three months ended December 31, 2021, and 6.0% for the three months ended December 31, 2020. In accordance with Accounting Standards Codification (“ASC”) Topic 740, “Income Taxes,” we recorded income tax expense for interim periods using the estimated annual effective income tax rate for the full fiscal year adjusted for the impact of discrete items occurring during the interim periods.

LIQUIDITY AND CAPITAL RESOURCES

We expect to generate positive cash flows from operations and believe our cash on hand, cash flows from operations and possible future credit facilities will be sufficient to satisfy our future working capital requirements, research and development activities, debt repayments, including both scheduled amortization payments and any mandatory prepayments required from excess cash flow, and other financing requirements for the foreseeable future. Our asset-light business model requires modest capital expenditures, with annual capital expenditures over the last three fiscal years averaging less than 1% of net sales. No significant capital expenditures are planned for the remainder of fiscal 2022. Our ability to generate positive cash flows from operations is dependent on general economic conditions, competitive pressures and other business risk factors. If we are unable to generate sufficient cash flows from operations, or otherwise to comply with the terms of BellRing LLC’s credit facilities, we may be required to seek additional financing alternatives. Additionally, we may continue to repurchase shares of our Class A Common Stock. Such repurchases, if any, will depend on prevailing market conditions, our liquidity requirements, contractual restrictions and other factors. The amounts involved may be material.

During the second quarter of fiscal 2021, BellRing LLC entered into a second amendment to its credit agreement (as amended, the “Credit Agreement,” and such amendment, the “Amendment”). The Amendment provided for the refinancing of the Term B Facility on substantially the same terms as in effect prior to the Amendment, except that it (i) reduced the interest rate margin by 100 basis points resulting in (A) for Eurodollar rate loans, an interest rate of the Eurodollar rate plus a margin of 4.00% and (B) for base rate loans, an interest rate of the base rate plus a margin of 3.00%, (ii) reduced the floor for the Eurodollar rate to 0.75%, (iii) modified the Credit Agreement to address the anticipated unavailability of the London Interbank Offered Rate as a reference interest rate and (iv) provided that if on or before August 26, 2021 BellRing LLC repaid the Term B Facility in whole or in part with the proceeds of new or replacement debt at a lower effective interest rate, or further amended the Credit Agreement to reduce the effective interest rate applicable to the Term B Facility, BellRing LLC would have paid a 1.00% premium on the amount repaid or subject to the interest rate reduction. BellRing LLC did not repay the Term B Facility or further amend the Credit Agreement on or before August 26, 2021.

During the three months ended December 31, 2021, we repurchased 0.8 million shares of our Class A Common Stock at an average share price of $23.36 per share for a total cost of $18.1 million, including broker’s commissions.

The following table shows select cash flow data, which is discussed below.

dollars in millions

Operating Activities

Cash used in operating activities for the three months ended December 31, 2021 was $9.1 million compared to cash provided by operating activities of $23.3 million for the three months ended December 31, 2020. The decrease was primarily driven by unfavorable working capital changes of $36.9 million, which were primarily due to fluctuations in the timing of purchases and payments of trade payables, the build up of powder inventory levels in the current period from supply-constrained levels at prior year end and fluctuations in the timing of sales and collections of trade receivables. These negative impacts were partially offset by increased net earnings of $6.4 million.

Investing Activities

Cash used in investing activities for the three months ended December 31, 2021 increased $0.6 million compared to the corresponding period in the prior year resulting from an increase in capital expenditures.

Financing Activities

Three months ended December 31, 2021

Cash used in financing activities for the three months ended December 31, 2021 was $112.5 million. BellRing LLC repaid $90.1 million on the principal balance of the Term B Facility and did not have any draws or repayments of the Revolving Credit Facility during the period. BellRing Inc. paid $18.1 million, including broker’s commissions, for the repurchase of shares of Class A Common Stock during the quarter. In addition, BellRing LLC had net cash transfers of $3.2 million to Post which included tax distributions to Post pursuant to BellRing LLC’s amended and restated limited liability company agreement and state tax withholdings payments on behalf of Post.

Three months ended December 31, 2020

Cash used in financing activities for the three months ended December 31, 2020 was $22.0 million. BellRing LLC drew an aggregate of $20.0 million under the Revolving Credit Facility and repaid $37.5 million on the principal balance of the Term B Facility during the period. In addition, BellRing LLC had net cash transfers of $3.6 million to Post, which included tax distributions to Post pursuant to BellRing LLC’s amended and restated limited liability company agreement and state tax withholdings payments on behalf of Post.

Debt Covenants

Under the terms of the Credit Agreement, BellRing LLC is required to comply with a financial covenant requiring BellRing LLC to maintain a total net leverage ratio (as defined in the Credit Agreement) not to exceed 6.00 to 1.00, measured as of the last day of each fiscal quarter. BellRing LLC was in compliance with its financial covenant as of December 31, 2021, and we do not believe non-compliance is reasonably likely in the foreseeable future.

The Credit Agreement provides for potential incremental revolving and term facilities, and also permits BellRing LLC to incur other secured or unsecured debt, in all cases subject to conditions and limitations on the amount as specified in the Credit Agreement.

CRITICAL ACCOUNTING POLICIES AND ESTIMATES

Our critical accounting policies and estimates are more fully described in our Annual Report on Form 10-K for the year ended September 30, 2021, as filed with the Securities and Exchange Commission (the “SEC”) on November 19, 2021. There have been no significant changes to our critical accounting policies and estimates since September 30, 2021.

RECENTLY ISSUED AND ADOPTED ACCOUNTING STANDARDS

See Note 2 within “Notes to Condensed Consolidated Financial Statements” for a discussion regarding recently issued and adopted accounting standards.

CAUTIONARY STATEMENT ON FORWARD-LOOKING STATEMENTS

Forward-looking statements, within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), are made throughout this report, including statements regarding the effect of the COVID-19 pandemic on our business and our continuing response to the COVID-19 pandemic and the proposed transaction between Post and us for the distribution of a significant portion of Post’s interest in us to Post’s shareholders, including the amount of our equity Post intends to distribute, the form of the distribution and the expected timing of the completion of the proposed transaction. These forward-looking statements are sometimes identified from the use of forward-looking words such as “believe,” “should,” “could,” “potential,” “continue,” “expect,” “project,” “estimate,” “predict,” “anticipate,” “aim,” “intend,” “plan,” “forecast,” “target,” “is likely,” “will,” “can,” “may” or “would” or the negative of these terms or similar expressions elsewhere in this report. Our financial condition, results of operations and cash flows may differ materially from those in the forward-looking statements. Such statements are based on management’s current views and assumptions and involve risks and uncertainties that could affect expected results. Those risks and uncertainties include, but are not limited to, the following:

• the impact of the COVID-19 pandemic, including negative impacts on the global economy and capital markets, the health of our employees, our ability and the ability of our third party contract manufacturers to manufacture and deliver our products, operating costs, demand for our on-the-go products and our operations generally;
• our dependence on sales from our RTD protein shakes;
• our ability to continue to compete in our product categories and our ability to retain our market position and favorable perceptions of our brands;
• disruptions or inefficiencies in our supply chain, including as a result of our reliance on third party suppliers or manufacturers for the manufacturing of many of our products, pandemics (including the COVID-19 pandemic) and other outbreaks of contagious diseases, labor shortages, fires and evacuations related thereto, changes in weather conditions, natural disasters, agricultural diseases and pests and other events beyond our control;
• our dependence on a limited number of third party contract manufacturers for the manufacturing of most of our products, including one manufacturer for the substantial majority of our RTD protein shakes;
• the ability of our third party contract manufacturers to produce an amount of our products that enables us to meet customer and consumer demand for the products;
• our reliance on a limited number of third party suppliers to provide certain ingredients and packaging;
• significant volatility in the cost or availability of inputs to our business (including freight, raw materials, packaging, energy, labor and other supplies);
• our ability to anticipate and respond to changes in consumer and customer preferences and behaviors and introduce new products;
• consolidation in our distribution channels;
• our ability to expand existing market penetration and enter into new markets;
• the loss of, a significant reduction of purchases by or the bankruptcy of a major customer;
• legal and regulatory factors, such as compliance with existing laws and regulations, as well as new laws and regulations and changes to existing laws and regulations and interpretations thereof, affecting our business, including current and future laws and regulations regarding food safety, advertising, labeling, tax matters and environmental matters;
• fluctuations in our business due to changes in our promotional activities and seasonality;
• our ability to maintain the net selling prices of our products and manage promotional activities with respect to our products;
• our high leverage, our ability to obtain additional financing (including both secured and unsecured debt) and our ability to service our outstanding debt (including covenants that restrict the operation of our business);
• the accuracy of our market data and attributes and related information;
• changes in estimates in critical accounting judgments;
• economic downturns that limit customer and consumer demand for our products;
• changes in economic conditions, disruptions in the United States (“U.S.”) and global capital and credit markets, changes in interest rates, volatility in the market value of derivatives and fluctuations in foreign currency exchange rates;
• risks related to our ongoing relationship with Post, including Post’s control over us and ability to control the direction of our business, conflicts of interest or disputes that may arise between Post and us, and our obligations under various agreements with Post, including under the tax receivable agreement;
• conflicting interests or the appearance of conflicting interests resulting from certain of our directors also serving as officers or directors of Post;
• risks related to the proposed distribution by Post of a significant portion of its ownership interest in our Company, including that it is subject to various conditions and may not occur, our inability to take certain actions because such actions could jeopardize the tax-free status of the proposed distribution and our possible responsibility for U.S. federal tax liabilities related to the proposed distribution;
• the ultimate impact litigation or other regulatory matters may have on us;
• risks associated with our international business;
• our ability to protect our intellectual property and other assets and to continue to use third party intellectual property subject to intellectual property licenses;
• costs, business disruptions and reputational damage associated with information technology failures, cybersecurity incidents and/or information security breaches;
• impairment in the carrying value of goodwill or other intangibles;
• our ability to identify, complete and integrate or otherwise effectively execute acquisitions or other strategic transactions and effectively manage our growth;
• our ability to satisfy the requirements of Section 404 of the Sarbanes-Oxley Act of 2002;
• significant differences in our actual operating results from any guidance we may give regarding our performance;
• our ability to hire and retain talented personnel, employee absenteeism, labor strikes, work stoppages or unionization efforts; and
• other risks and uncertainties included under “Risk Factors” in this report and in our Annual Report on Form 10-K for the fiscal year ended September 30, 2021, filed with the SEC on November 19, 2021.

You should not rely upon forward-looking statements as predictions of future events. Although we believe that the expectations reflected in the forward-looking statements are reasonable, we cannot guarantee that the future results, levels of activity, performance or events and circumstances reflected in the forward-looking statements will be achieved or occur. Moreover, we undertake no obligation to update publicly any forward-looking statements for any reason after the date of this report to conform these statements to actual results or to changes in our expectations.

The COVID-19 pandemic has resulted in significant volatility and uncertainty in the markets in which the Company operates. At the time of this filing, the COVID-19 pandemic has not had, and the Company does not currently believe will have, a significant impact on its exposure to market risk from commodity prices, foreign currency exchange rates and interest rates, among others. For additional discussion, refer to “Liquidity and Capital Resources” and “Cautionary Statement on Forward-Looking Statements” in Item 2 of Part I of this report, as well as “Risk Factors” in Item 1A of Part II of this report.

Commodity Price Risk

In the ordinary course of business, the Company is exposed to commodity price risks relating to the purchases of raw materials. The Company manages the impact of cost increases, wherever possible, on commercially reasonable terms, by locking in prices on the quantities through purchase commitments required to meet production requirements. In addition, the Company may attempt to offset the effect of increased costs by raising prices to customers. However, for competitive reasons, the Company may not be able to pass along the full effect of increases in raw materials and other input costs as they are incurred.

Foreign Currency Risk

Related to Active Nutrition International GmbH whose functional currency is the Euro, the Company is exposed to risks of fluctuations in future cash flows and earnings due to changes in exchange rates.

Interest Rate Risk

Long-term debt

As of December 31, 2021 and September 30, 2021, BellRing LLC had aggregate principal amounts of $519.8 million and $609.9 million outstanding on its Term B Facility, respectively. There were no amounts drawn under the Revolving Credit Facility as of December 31, 2021 and September 30, 2021. Borrowings under the Term B Facility and the Revolving Credit Facility bear interest at variable rates. Including the impact of interest rate swaps, a hypothetical 10% increase in interest rates would have an immaterial impact on both interest expense and interest paid during each of the three months ended December 31, 2021 and 2020. For additional information regarding BellRing LLC’s debt, see Note 14 within “Notes to Condensed Consolidated Financial Statements.”

Interest rate swaps

As of both December 31, 2021 and September 30, 2021, the Company had interest rate swaps with a notional value of $350.0 million. A hypothetical 10% adverse change in interest rates would have an immaterial impact on the fair value of the interest rate swaps as of both December 31, 2021 and September 30, 2021. For additional information regarding the Company’s interest rate swap contracts, see Note 12 within “Notes to Condensed Consolidated Financial Statements.”

Evaluation of Disclosure Controls and Procedures

Management, with the Executive Chairman, Chief Executive Officer (“CEO”) and Chief Financial Officer (“CFO”) of the Company, has evaluated the effectiveness of its disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act) as of the end of the period covered by this report. Based on that evaluation, the Executive Chairman, CEO and CFO concluded that, as of the end of the period covered by this report, the Company’s disclosure controls and procedures were effective to provide reasonable assurance of achieving the desired control objectives.

Changes in Internal Control Over Financial Reporting

There were no significant changes in the Company’s internal control over financial reporting during the quarter ended December 31, 2021 that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

In addition to the information set forth elsewhere in this Quarterly Report on Form 10-Q (the “Quarterly Report”), you should carefully consider the risk factors we previously disclosed in our Annual Report on Form 10-K, filed with the United States Securities and Exchange Commission on November 19, 2021, as of and for the year ended September 30, 2021, (the “Annual Report”). As of the date of this Quarterly Report, there have been no material changes to the risk factors previously disclosed in the Annual Report. These risks could materially and adversely affect our business, financial condition, results of operations and cash flows. The enumerated risks have been or may be heightened, or in some cases manifested, by the impacts of the COVID-19 pandemic and are not the only risks we face. Additional risks and uncertainties not presently known to us or that we currently deem immaterial also may impair our business, financial condition, results of operations and cash flows.