Q3 2021 Celsius Holdings Inc Earnings Call
Greetings and welcome to Celsius Holdings, Inc, third quarter, 2021 financial results.
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It is now my pleasure to introduce your host Cameron Donahue Investor Relations for Celsius Holdings. Thank you you may begin.
Thank you and good morning, everyone. We appreciate you joining us today for Celsius Holdings third quarter 2021 earnings Conference call. Joining me on the call today are John Peeler Lake Chairman, President and Chief Executive Officer, now undergone Chief Financial Officer.
Following the prepared remarks, we'll open the call to your questions and instructions will be given at that time.
We released our earnings press released pre market. This morning, all materials will be available on the company's website Celsius Holdings, Inc. Dot com under the Investor Relations section as a reminder, fortunate to call them John the audio replay will be available later today. Please.
Please also be aware this call may contain forward looking statements, which are based on forecasts expectations and other.
Nation available to management as of November 11th 2020.
These statements involve numerous risks and uncertainties, including many that are beyond the company's control except to the extent as required by law Celsius Holdings undertakes no obligations disclaims any duty to update any of these forward looking statements. We encourage you to review in full our safe Harbor statements contained in today's press release, and our quarterly filings with the SEC for additional information.
With that let me turn the call over to Chief Executive Officer, John badly for opening comments John Thank.
Thank you Cameron and good morning, everyone and thank you for joining us today in the third quarter Celsius, not only achieved another sales record for the quarter, but beat our previous quarterly record from Q2 by almost 50%, beating by 46% growth on a sequential basis from Q2 2021 the company accomplished this.
Exponential growth despite their tremendous supply chain constraints that continue to impact the industry.
In order to hit the majority of our of our orders during the quarter. We did have to sacrifice some efficiencies on the margin side, which we believe are either one time costs are short term in nature with specific identifiable processes, we are implementing to improve our margin profile going forward.
The largest one time costs impacting margins during the quarter stemmed from the build out of our six orbit distribution warehouse centers, which we announced in the second quarter, we expect to see tangible efficiencies in both miles on cases freight costs as well as reduced inventory stock outs with our distribution partners going forward from this initiative.
But we did have incremental costs in Q3 as we essentially moved from two main warehouse centers to six while also significantly expanding inventory runs with our co Packers with this we had excess freight costs as we built out an optimized inventory levels across our warehouses, which is reflected in our cost of goods than we are.
<unk> impacted margins by approximately 3% for the quarter. In addition.
We experienced increased freight costs associated with higher labor fuel costs, which we are monitoring.
As on average freight costs have increased industry ride by 20% versus the prior year per D E T.
Trend lines, who tracks freight trends nationwide.
In addition to short term margin impacts we continue to utilize international can sourced which carry a higher cost when we place. These can orders we expected the vast majority of that come in and be utilized during 2021. Unfortunately, many are still outside of the United States were and are waiting at ports to be unloaded which have been.
Offset by purchasing spot rate cans from the U S suppliers, but.
But with the significant increase in aluminum prices spot rate increase significantly with that said the higher spot rate as well as the higher import cans have impacted margin for the quarter by approximately five 3% with that said, we experienced short term and one time margin impacts during the third quarter, which totaled approximate.
Seven 5% when taking this into account our normalized margins would've been approximately 47, 2% for the quarter, including outbound freight.
To further optimize our supply chain going forward, we have added two new contracts with two of the top U S can manufacturers for 2022, which will move us away from the higher spot rate purchases and international cans.
We believe we have adequate U S can source for 'twenty to 'twenty two to support our growth.
We will likely have to cycle, though some of the international cancer that had been delayed depending on when they arrive and get delivered in the U S. Through the first six months of 2022.
But we expect the vast majority of our cans will be from U S sourced on a contract basis materially reducing our <unk> cost versus 2021.
Some other cost increases we saw in the third quarter, such as raw materials co pack fees tolling fees and inefficient less than load shipping costs. We expect the majority of these will be offset in 2022, as we continue to negotiate better pricing with our scale.
While it remains uncertain. The energy category is one of the loan outliers that have not increased pricing driven by the top two players in this space. We believe the key factor in that decision is due to the rapid growth in consumer demand for functional performance energy drinks and the associated increase in new brands coming to market.
The smaller scale, new entrants faced significant higher shipping raw materials co pack fees competition and by not taking price the top two energy drink place an outsized cost on the new entrants entering the market to protect their share.
For Celsius, we have reached a critical mass, where we will not be impact our ability to grow as evidenced by the record third quarter and the only downside is that some of the expedited scale based incremental margin improvements are off being offset by cost increases that are not transitory.
Even with that longer term, we expect margin expansion throughout 2022 as stated prior we have identified one time and short term cost increases and have planned strategies to mitigate as we continue to optimize and transition our stores to DSD distribution.
Further future scale based benefits with our current growth trajectory to.
To conclude our margin analysis as we recognized revenue growth rates more than double in North America over 200% and continue to accelerate further we made a cautious decision in the third quarter to ensure that we have the operational infrastructure to support our revenue growth to much higher levels and fully take advantage of the op.
<unk> to take market share and an increased pace as such we accelerated initiatives on several operational improvements to position us for exponential future growth, which impacted margins by approximately 7% just from the one time items in the third quarter additional increments.
Incremental near term benefits will be recognized if price increases or initiative by the top brands to our 2022 expectation in the meantime, we are implementing and further evaluating our promotional strategies.
We wanted to ensure we provided a detailed breakdown on margins and that our forward expectations of continued leverage remain unchanged before we detailed the record achievements accomplished in the third quarter.
Our record third quarter results are representative of the momentum that the Celsius brand is achieving across the board revenue growth driven by continued new store additions SKU expansion KOL placements DSD coverage expansion as well as continuing to transitioning existing accounts.
<unk> reckons ignition influencers organically supporting Celsius, or just a subset of the drivers that culminated in a record for third quarter results in North America total sales for the quarter totaled $94 9 million up 158% from $36 8 million in the year ago quarter, our domestic sales revenue increased 200.
14% to $84 5 million up from $26 9 million in the year ago quarter with both of these percentage growth rates the highest in our history and our North America sales up 58% from the second quarter sequentially.
We continue to see two of our hardest hit channels from Covid, our fitness channel in our vending channel not only rebound by the drive of new sales records with again, reaching triple digit growth rates and contributing approximately $5 2 million in incremental revenue when compared to the prior year International sales grew 5% to $10 4 million.
For the quarter and 18% through the first nine months of this year.
We are still dealing with the impacts of COVID-19, most pronounced in the European markets with all markets facing increased cost in raw materials transportation, our EU Middle East Southeast Asia, and Australia operations remain adversely affected by COVID-19, with various restrictions and lockdowns in the markets overall, we continue to see quarterly improvements over <unk>.
Over quarter with capacity restrictions as well as re openings in our hardest hit channels, but there still remains uncertainty as there could be potential re closings due to new variance during the winter months and case increases in our regions of operations, which could force closures in some states and countries.
Turning to some additional financial highlights for the quarter. Our domestic revenue reached at $85 4 million was driven by accelerated triple growth in our channels of trade expansion with world class retailers further activation and growth from our distribution partners direct store delivery network grew over 429.
Percent in revenues when compared to the prior year also our club channel continues to accelerate.
Following the expansion rollout of over 550, plus Costco stores and cute late Q2 to Q3 Costco growth now has them listed as just over a 10% revenue customer. We are also now rolling out onto their platform Costco Dot Com. In addition, Sam's club we are launching in several tests Mark.
During the fourth quarter, driven by the strong growth in Walmart.
The convenience channel side in North America. The latest spins data shows a growth of 205, 5% year over year increase for the Celsius product portfolio in the convenience channel compared to a 13, 6% overall growth in the energy drink category as of October 3rd of 2021 last 12 weeks while during.
The same period or a C V increased 118% versus the prior year to 34.7% total AC the average.
Industry backed third party data continues to show accelerated growth metrics and we are confident that Celsius will continue to drive sales even higher as we continue to accelerate our a C V across channels through additional launches with new nationwide change and transitioning existing accounts due to our DSD network.
Consumer demand for Celsius accelerators that are eight through the third quarter of 2021 to record levels with the most recent Nielsen scan data as of October 23rd 2021, showing Celsius sales up over 205% year over year for the two weeks plus 213% for the four weeks and plus 204% for the 12 weeks with a two.
Share of the energy drink category overall for the last four weeks. This compares to the total energy drink category, which grew 14% year over year for the two weeks ending and 12% for the 12 weeks ending over the same period.
On Amazon Celsius is the second largest energy drink with a 18.4 share of the energy drink category.
2.88%.
Our head of Red Bull at a 15.5 share and just 7.6 share behind Monster energy at 25 nine share last four weeks ending October 32021 per stack line energy drink category total U S.
Transitioning to DSD continues and remains a top priority with our retail partners due to the increased velocities that are gained through the preferred route to market today per our latest moulage retail sales data, we estimate that we have transitioned and initially optimize approximately 50% of the stores reporting in to spins Moolah channel and.
Have a plan further plans and expansion with additional DSD partners through the back half of Q4 and into 2022.
Some of the key retailers that have transitioned over 75% of their stores include target Walmart Racetrack Kroger Circle, K Speedway Murphy USA with Cvs and 711 also expanding in other markets.
Historically it takes on average two to three months to optimize stores once they have transitioned to DST before we see that increased velocity levels.
In addition to transitioning retailers and activating our DSD network, we continue to rollout Celsius branded coolers in the third quarter with an additional 400 coolers placed in over 900 coolers to the first nine months of 'twenty 'twenty. One we have also implemented comprehensive tracking tools in place to monitor accelerate growth metrics with our retail partners and we plan.
Additional cooler expansion initiatives through the remainder of 2021 with a accelerated rollout in 2022.
Today in the United States, our total door count now exceeds 118000 locations nationally growing 38000 doors are 48% from the beginning of.
2021 with additional expansion plan throughout 'twenty, 'twenty, one and into through 2022 as retailer resets take place.
In Europe, our Nordic sales totaled $9 5 million compared to a similar amount in the prior year. The topline revenue was impacted by a pullback in inventory fills and during the quarter for our new global can launch in September which also included a great fresh Apple flavor or a relaunch of the Celsius brand on our global uniform candidly.
<unk> platform presents a great opportunity for further growth and synergistic alignment globally.
Sharon in Sweden did decrease early in the third quarter with the pending can you re redesigning launch by increased to nine 3% of the total energy market in Sweden in September.
In Finland, we launched a mint chocolate bar with a holiday theme rap highlighted with in store displays to secure space. During the holiday season. We also launched a great tasting new RTD protein protein line, which is launching in the fourth quarter with initial orders of over 300000. We believe this is a great test market for our products with additional geographic expansion.
Pension opportunities. Additionally, the fast portfolio bar launched in the U S sales have been going extremely well have actually increased 50% in the third quarter from the prior Q2 run rate.
Battle at even the opportunity for further U S expansion and potentially expanding in the fitness channel in 2022.
We recently also launched on Amazon EU, expanding spansion begin in the United Kingdom with launched three flavors six fast bars, and Germany also expanded and launched today. Most recently with three flavors of the Celsius portfolio and we expect additional EU countries to come online in the first quarter and in Q1.
In China, we are maintaining our licensing royalty model in the market where distribution covers approximately 76 cities and approximately 60000 locations and we see great opportunities in this growing market now.
Now moving to the marketing on a marketing front, we continue to accelerate and target new consumers and existing consumers, where they live work and play building meaningful and emotional connections through robust integrated marketing programs, reaching more consumers each and every day.
Not only driving growth in the energy category, but are also expanding the demographics, while bringing an industry leading percentage of consumers from outside the category who are new we have also reached another inflection point in our operations and growth, one which positions Celsius for exponential growth and market share gains we have committed the resources both.
Personnel and operational infrastructure to maximize this opportunity and to support the incremental growth drivers our national DSD distribution platform has opened in the convenience store channel in the United States. We're also not only seeing significant expansion in a C V across all channels, but doing so while increasing our velocities at retail.
We are in a unique position to see material concurring growth in both due to we are just materially entering the most productive convenience channel in the United States, while transitioning our existing accounts to DSD network, where you have seen incremental growth post transition.
Our team is ready our infrastructure is in place to support the sales growth, we expect in an expedited basis.
I will now turn the call over to Edwin Negron Carballo, our Chief Financial Officer for his prepared remarks Edwin thank.
Thank you John our third quarter revenue for the three months ended September 30th 2021 was $94 $9 million, an increase of $58 $1 million or 158% from $36.8 million for the three months ended September 30th Twenty-twenty.
99% of this growth was a result of increased revenues from North America, where third quarter revenues were 2021 were $84.5 million or an increase of $57 $6 million or a robust 214% from $26 9 million.
And the 2020 quarter.
The balance of the revenues for the 2021 quarter were mainly related to European revenues of $9 $5 million, which were similar to the prior year quarter.
Asian revenues, which include royalty revenues from our China license fee contributed an additional $706000 an increase of 157% from $275000 for the prior year quarter.
Other international markets generated $177000 in revenues during the three months ended September 30th 'twenty, 'twenty, one an increase of $32000 or 22% from $145000 for the prior year quarter.
Gross profit for Q3 increased by $22 million or 115% to $37.7 million from $17 $5 million for the three months ended September 30th Twenty-twenty.
Gross profit margins reflected a decrease to 40% for the three months ended September 32021 from 47, 6% for the 2020 quarter.
Excluding freight out as some of our competitors do not include this charge as the cost of goods sold our adjusted gross margin for the 2021 quarter was 49, 8% compared to 53, 7% in the third quarter of 'twenty 'twenty.
The increase in gross profit dollars is mainly related to increases in volume while the decrease in gross profit margins is mainly related to higher raw material costs Ocean freight transportation cost and repackaging costs.
We estimate that the increase in gross profit dollars of $22 million included $28 million related to volume increases and unfavorable cost impact of $7.4 million and a favorable currency impact of $31000.
Sales and marketing expenses for the three months ended September 32021 were $22 $6 million, an increase of $14.4 million or 174% from $8 $3 million for the three months ended September 32020.
This increase was mainly related to higher marketing investment activities, which resulted in an increase of $7 $7 million when compared to the prior year quarter. Additionally, employee cost increased by $2 $6 million from the year ago quarter as we continue to invest in this area in order to have.
The proper infrastructure to support our growth as well as incurred in additional travel and business expenses. Since we're now able to resume in market in person marketing events and selling activities.
Similarly, we experienced increases in other sales and marketing expenses in the amount of $400000 mainly related to trade marketing activities to support our ongoing DSD network expansion lastly, storage and distribution expenses as well as broker costs accounted for the remainder of.
The increase in this area in the amount of $3 $7 million from the year ago quarter.
As a percentage of revenue sales and marketing expenses were 23, 8% of revenue in the third quarter of 2021 compared to 22, 6% in the third quarter of 2020.
General and administrative expenses for the three months ended September 32021 were $11 $1 million, an increase of $6 $4 million or 134% from $4 8 million for the three months ended September 30th Twenty-twenty.
This increase was mainly related to stock option expense, which amounted to $5 $8 million for the three months ended September 30th 2021 an increase of $3 $7 million, which accounts for 50% of the total increase in this area when compared to the prior year quarter.
Management deems it very important to motivating employees by providing them ownership in the business in order to promote the over performance.
Additionally, employee cost for the three months ended September 32021 reflect an increase of $1 million or 108% as investments in this area are also required to properly support our Hart our higher business volume.
Administrative expenses amounted to $2 $6 million or an increase of $1.3 million or 97% when compared to the prior year quarter.
This variance is mainly related to an increase in bad debt reserve of $200000 in increases in audit costs legal expenses insurance costs and office rent account for the majority of the remaining fluctuation of $1 $1 million.
Depreciation and amortization increased by $200000 when compared to the prior year quarter. Lastly, all other administrative expenses, which were mainly composed of research development and quality control testing increased by $235000 when compared to the second quarter.
'twenty 'twenty.
As a percentage of revenue general and administrative expenses were 11, 7% in the third quarter of 2021, when compared to 12, 9% for the prior year quarter.
If we then exclude the nonoperational stock option expense general and administrative expenses for the 2021 quarter would amount to only 6% of revenues.
Now turning to other income and expenses.
Total net other expenses for the three months ended September 30th 2021 amounted to $353000, which reflects an increase of $593000 when compared to net other income of $240000 for the three months ended.
September 30th 2020.
The net other expense of $353000 is composed of foreign currency exchange losses of $328000 net other expenses of $97000 interest income of $77000 related to the note receivable from our China licensee.
Which were partially offset by other interest expenses of $4500.
Net income.
As a result of the above net income for the three months ended September 30th 2021 was $2 $7 million or four cents per share based on a weighted average of $74 6 million shares outstanding and dilutive earnings of four cents per share based on a fee.
Fully diluted weighted average of 78 4 million shares outstanding in comparison for the three months ended September 32020. The company had net income of $4 $8 million or seven cents per share based on a weighted average of 74 million shares outstanding.
And a dilutive earnings per share of six cents based on a fully dilutive weighted average of 74 8 million shares outstanding.
Focusing now on liquidity and capital resources as of September 30th 2021 and December 31, 2020, we had cash of $61 $4 million and $43 $2 million respectively.
And working capital of $157 million and $65 million, respectively with no long term debt.
Cash flows used in operating activities totaled $52 million for the nine months ended September 30th 'twenty, 'twenty, one, which compares to $3 $8 million of net cash provided by operating activities for the nine months ended September 32020.
The use of cash is mainly related to the increase in our inventory levels in order to properly service demand for our Celsis products.
Inventory increased by $104 million during the during the nine month period ended September 32021 sequentially.
Sequentially inventory increased $58 million from the second quarter of 2021 without this significant increase in inventory cash flow from operations for the nine months ended 2021 would have totaled $52 million.
This concludes our prepared remarks, operator, you may now open the call for questions. Thank you.
Thank you ladies and gentlemen at this time, we will be conducting a question and answer session.
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Our first question comes from the line of Camille Garza Wawa with Credit Suisse. Please proceed with your question.
Hi, guys. Thanks for taking the taking the call a couple of questions on the first one I guess, a printer mulch went a little fast.
Can you just when you were talking about pricing did you say you have intentions to take price or.
That youre not youre, not youre, not taking pricing because of competition.
Yes.
Thank you for your question right now we are evaluating it.
We're really keeping a close eye on the market, obviously, a lot of top tier players, but we are doing pricing strategy is in regards to promotional strategies as we go forward and pricing architecture within the portfolio, but it is something we're looking at as we go forward we do feel.
Based on these one time charges in regards to importing of cans.
As well as the freight cost increases in freight cost we've seen really moving to the six orbit model that we've talked about in the past we can't get back to more of a normalized gross profit once we cycle through the imported cans and move away from the spot rate purchases.
But it is something definitely we are looking at as we continue to go forward, we're seeing transitory increases in a variety of other cost the questions are those permanent or transitory in which we're evaluating.
And just your best guess from what Youre seeing in the market at the moment does it look like the competition is.
Reducing promo taking price.
In a way that would make it.
Possible for you guys to follow.
We are seeing that in the marketplace.
Players.
In regards to promotional strategy so.
We're not the phenomenally out there.
Got it and then if I can if I can ask a little bit about maybe dissecting the growth between.
You have the incremental contribution of all of the distribution gains that youre winning versus kind of the equivalent of same store sales I don't know if you can.
Give us precise figures, but at least maybe give us some guidance on the growth which has been substantial is it 50.
50, 50, new distribution versus old is it 70, 30 can you give us a rough idea.
Yeah, and I think when you look at the numbers.
It's quite a.
The team is doing a great job number one.
With Coke energy coming out we all know that was discontinued we were able to pick up a lot of incremental points of distribution.
The advantage of that so when you look at the number of stores that the team was able to capture during the period, which keep in mind, it's outside of normal reset windows. So that was a great win for us during the quarter.
We're seeing same store sales further increase as we move to migrate them more over to our DSD network, our DSD network performed phenomenally.
During the quarter, we were up over 400% there. So the team is doing a great job. We've got a lot of good processes in place to currently continue to optimize we're nowhere near fully optimized within the distribution network, but we're putting processes in place team members we've.
<unk>.
A variety of great team members that are well experienced and capable to continue to drive revenues here and we also have our cooler placement strategy, where we see great opportunities there to further leverage as we replace a cooler with Celsius, we see exponential growth there.
Existing accounts, so lots of opportunities on all fronts, and we've got strategies in place to leverage.
Okay, and then just finally on what Youre seeing in terms of.
The gyms and fitness.
Business Yusuf.
Very notably turned around we understand there will be a mix effect away from that business, but maybe just what youre seeing in that channel.
Would be would be helpful.
Yes, really like I highlighted the fitness channel, obviously, that's been a core for Celsius.
Since inception, and its great to see it continue to rebound there.
Lots of opportunities I mean, that's great seeing everyone going back I think that just goes and further shows the opportunity we have with Celsius healthier better for you.
Fitness for a physician.
Celsius is aligned with today's health minded consumer health and wellness trends are even stronger now than ever before and in that transition is taking place and it's affecting the energy category. So we're in a really good spot I think thats just good indicators to see that that channel come back even in a stronger pace.
Okay, great. Thank you guys.
Thank you.
Our next question comes from the line of Kevin Grundy with Jefferies. Please proceed with your question.
Great. Thanks, Good morning, guys and congratulations on the continued momentum.
I wanted to kind of pick up on the same line of questioning just around the U S business, specifically and the conversion to DSD.
When we look at the Nielsen data the distribution gains look great.
And importantly, the velocity gains quite good as well John I think as you rightly pointed out the brand is still very under represented in the convenience channel, which is obviously a huge opportunity.
Just a handful of questions here on this topic, just just confirm I think the number is 50% of accounts had been switched over to DSD. At this point I think the longer term goal was 80% just confirm those numbers and how quickly you can get to that long term goal.
Relatedly, how has distribution and velocity tracked relative to the company's own internal expectations and then just lastly in this area do you have any early reads on shelf space, what those gains could look like.
Think about next year, and then I have a follow up thank you.
Yes. Thank you.
In regards to the 50% number I put out there in regards to that was Lula reported channels.
So right now we're at 50% I think eight store at 80% numbers ideal currently with our distribution.
Map it and network, we would like that number to go higher but I think 80% would be it would be a great number for the company to continue to strive for or working on that.
As we move into 2022, I think youll see more of our distribution continuing to convert over and also all the new distribution coming on that we anticipate is most likely being serviced by our distribution network.
When you look at the velocities velocities are.
Meeting our internal expectations.
Lastly is as you've seen in the scan data has continued to increase.
So even as we're increasing our ACD, which is a good good thing to see there.
Brand's resonating well when you look at 2022 space opportunities. We're really excited about that we just attended <unk> many of them to call. Its the largest show in the country in the U S and the convenience channel, where we had a great first a great presence in some of the initial feedback we got from the show was really positive now we don't.
No until resets take place likely around March April timeframe is usually when they take place in the convenience store industry.
But we feel really optimistic there.
Initial feedback has been positive we will continue to keep everyone updated as we gain more distribution in stores, we won't know until the resets are final, but it was probably one of the best next shows we've had in company history. So really excited about that.
Thanks, Chad.
Just pivoting to the to the margin outlook, but a little bit more longer term oriented I guess I would say.
I think there's an expectation in the marketplace that the the margin potential here could be substantial over time, John and Ed One for you as well. Please just your updated thoughts on broadly your vision for this business, how you're balancing the market share opportunity with a substantial scope for margin improvement understanding those dynamics are not mutually exclusive.
But your updated thoughts there would be helpful. And then I have one last follow up thank you.
Sure Kevin I think what's interesting if you look at our average scan.
On a per account basis has increased on the 12 week and 24. So we had been at reducing our promotions so that promotional strategy that's been taking place.
Place and it hasnt decreased the velocity levels. So we do feel there is opportunities there as we scale in regards to the overall margins. We historically said that we can get back to our pre COVID-19 margin profiles in our existing setup.
Setup, we feel there's further opportunities to leverage our scale as we drive further volume as well as the synergistic benefits of moving towards our six orbit distribution, our warehouse model, where we can better serve our customers in a more efficient more effective.
Manner and keep them in stock as well so there's a lot of opportunities there on a go forward basis I would agree with you there is a lot of margin upside.
The team is working on strategies to implement that I will turn it over to Edwin as well yeah. Thanks, John Yeah, absolutely, Kevin I mean, one of the things that I wanted to add.
Youre absolutely right from my perspective, as we continue to gain market share, which translates into additional volume that's going to drive more synergies and as we normalize or the supply chain normalizes going forward that should also benefit.
There are significant opportunities from our standpoint, and as Jon said once we start getting the benefits of those six orbitz.
Although space should have a very good positive effect on margins.
Got it. Thank you both just one last one for me and then I'll pass it on so cash flow running negative, but the business requiring investment in coolers also inventory up and up to a degree greater than sales growth could you just provide your updated thoughts on your ability to fund the business organically at this.
What are your thoughts for the year what are your thoughts looking out to next year as you think about the capital requirements to fund your topline objectives and I'll pass it on thank you.
Yeah. Thank you Kevin I'll jump in first part of that in regards to our cash position. We feel we have sufficient cash to meet our demands or needs are going to go forward basis. We did increase in inventories that were strategic we spoke about that prior as well.
And we feel we're optimized we're going to continue to invest in the business and inventory personnel and resources as we continue to scale. So we can drive that optimal leverage and reach our goals.
Sure Yeah, Yeah, I'd like to that I mean, if we back out the inventory aspect or buildup.
We would've delivered over $50 million of cash flow from operations, even if you back out all the working capital components.
To have a normalize your pro forma cash flow, we would've delivered over $13 billion of cash. So I agree fully agree with John that we have.
The business is generating sufficient cash flow going forward and we did make significant investments in the coolers, but again thats going to translate into incremental volume as well so I don't know.
No doubt going forward that we should be able to generate sufficient cash flow and in the quarter. We also as you look at the prepaid balances inventory right about $40 million and that was strategically done to secure raw materials. During the inventory constraints that we received in the Covid environment in Q2, and Q3, so taking that into effect that should normalize and we shouldn't have significant.
Prepays on a go forward basis as the environment gets more normalization.
Very good. Thank you both good luck thank.
Thank you thank you Kevin.
Our next question comes from the line of Jeff Van <unk> with B Riley. Please proceed with your question.
Good morning, and let me add my congratulations on the phenomenal revenue growth.
Just wanted to follow up on a couple of things on SG&A and I know you mentioned, one time items associated with the six orbit warehouse strategy can you maybe speak about.
Any extraordinary cost and expenses you anticipate into Q4 and early 'twenty two around that just wondering when we should expect those inputs.
The six orbit strategy to be more normalized and then I guess, what sort of contribution to the P&L leverage.
Could we see in 'twenty two from that.
Yes, Thank you, Jeff and his team is working really hard.
A question.
The forward looking information ready to provide any true forward looking guidance on leverage specifically on that we do see in the short term our warehouse costs will increase going into six orbit. Because we were investing ahead of our overall topline revenue. So just keep that in mind that our warehousing costs will increase as we're moving from two warehouses moved to six warehouses.
We'll have those into the full fourth quarter and beyond where revenue needs to scale up to get that margin profile also.
Keep in mind also we are investing in marketing as well events have come back extremely strong.
In the third quarter and in the fourth quarter. So the company is investing in marketing really touching those consumers, where they live work and play but as we go forward with the growth rates, we're seeing we feel we're making the right moves and infrastructure resources.
And to really be able to continue to drive.
Topline revenue and market share within the operation channels, we're operating it.
And when you want to add any more additional comment yes, I think Jeff mentioned, you know in the G&A area. Yes, we had I mentioned an increase in the bad debt reserve of about 200000, and again thats driven by the more volume that we have we want to be conservative in that area, but yes, and we are seeing also some increases in professional expenses again to support the business.
So those kind of things are in there as well.
And have impacted our profitability.
Okay Fair enough and then it seems like you have a pretty substantial opportunity to grow the business and.
Outside of the Nordics just wondering if you could speak more about plans for further rollout into Germany and the UK.
Yeah, we're really excited to initially start and be able to service those markets through Amazon.
So we're really excited about that opportunity and we're talking to.
Significant larger distributors in those markets as well really when the when you look at the success of the U S that is gaining a lot of interest as well overseas.
Substantial potential partners. So the company is evaluating our main focus is north America, as well and continue to optimize and grow in the nordics, but as we see opportunities in additional markets. We will continue to evaluate and the UK and Germany is an area of great opportunity for Celsius, and we expect to further optimize our initial is the rollout of it.
Amazon and we're looking for partners locally to continue to drive scale.
I agree and I am to be the key is like John has mentioned me to have a light model. There in other words, you'll go through either partners like Amazon or distributors, where we don't have to make a significant investment set up legal entities in the countries that type of thing and that's that's a more profitable model and we can invoice in U S dollars and avoid any of the.
FX exposure.
Okay, and if I could just squeezing one more just wondering about the rollout of the SaaS far beyond Amazon and also the protein drink line rollout.
Yeah in regards to the SaaS bars, we've been.
Very methodical approach, we're investing as we see increased sales invest and initially tested it in the second quarter on Amazon.
We have placed additional orders for the bars. They taste great initial feedback has been extremely positive in the U S.
We are currently importing the bars from Europe. So they have some supply constraints, but we're working with the manufacturer to be able to produce in the U S. On a go forward basis. So the business is under evaluation and we're really learning about the consumers and how best to go to market.
To drive scale efficiently and profitably. So initial feedback has been really positive I said sales were up 50% on Amazon with the fast protein snack portfolio in the U S.
He is very excited as well the team and Finland launched a totally new protein RTD indulgence product line, which is taste.
Truly amazing initial feedback has been extremely positive and it launched with initial orders are roughly around 300000, which is extremely a success. So we're evaluating that and see a lot of opportunities as we continue to.
Expand and grow into the protein space, mainly in Finland, where a fast protein snack portfolio is one of the top selling brands and with this.
This protein line, we are able to increase our overall margin profile versus the prior products. So it seems doing a great job will continue to evaluate that as we continue to grow in scale.
Okay, Thanks, and best of luck in the remainder of Q4.
Thank you thank you Jeff.
As a reminder, it is star one to ask a question. Our next question comes from the line of Jeffrey Cohen with Ladenburg Thalmann. Please proceed with your question.
Oh, Hi, Jonathan how are you.
Hello <unk>.
Jeffrey doing well.
We'll follow up on Jeff's question, you talked about Nebraska use now in our industry.
And then on the fast line and then talk about our Skus on the protein line as far as actual numbers into queue at the moment.
Two skus that you've introduced in the U S.
Yes, we have we have two flavors now currently available on.
Amazon We're also looking at additional flavors.
To further drive a variety of offerings there so.
We're continuing to evaluate the supply chain of importing them into the U S. Obviously is challenging so we don't want to drive too much scale, but we do want to build our consumer following and that's what the teams are doing right now and we look into 2022, a potential rolling out additional channels of opportunity. Once we can produce locally and really drive efficient margin profile to further invest.
And the brands.
<unk> brand in the U S right now in Finland.
They launched an initial RTD protein line, which is.
<unk> product that tastes phenomenal. The team is extremely excited about that initial rollout has been positive comes in three great flavors currently.
And.
We will continue to evaluate that and as it continues to if there is.
Honestly synergistic opportunities to further scale in other markets as we grow health minded consumers, it's a complementary product to Celsius.
And we'll.
We will continue to evaluate.
Would you anticipate manufacturing in the U S in 2022.
We anticipate manufacturing in the U S in 2022, and with the protein snack portfolio, which is mainly the bars.
<unk> the protein <unk> with some of our.
Local production as well so those are initial businesses nearly emphases in the U S. But it is definitely something that team is currently evaluating.
Okay got it and I'm looking for a little further commentary on the cooler front any.
Anticipated goals or aspirations for Q4 or for 2022 as far as your aggregate numbers.
Yeah, I mean, if you look at where our coolers and the first nine months of this year replaced over 900. So 400, just in Q3 alone. So we anticipate that momentum to continue to increase.
It's very important we don't want to.
Over pushout coolers, we want to make sure. These coolers are placed in the right locations. So it's more of a methodical approach, but we are getting a lot more quest with the success that they're seeing so we place a few coolers within a distributor they see the success and it is truly a partnership and then we work together to really get into their top 20 accounts, our top 20% of their accounts.
Would love to have great coolers and great placements there so.
If you see a Celsius cooler out there we've got some great new designs coming.
Whether it's a logo on the front and they look extremely well and they sell extremely well so grab a cold Celsius, if you see one.
And then.
Actually for us.
Any updates on the U S flavors in their Skus should we expect more or will they want in the future.
I'm talking in regards to the <unk> line, yes.
Yeah, our Bottomline has done extremely well our peach five in our tropical vibe has been one of our top sellers in our initial launch will be rolled out new innovative flavors. We expect continue that strategy and will be coming out with a new vibe. This summer. So we're not going to disclose the flavor yet, but do you anticipate a new vibe.
Coming that's going to taste, great and amazing and we'll have a lot of great.
A great marketing strategy behind that which is innovative and really connects with consumers in a meaningful way.
Super Thanks for taking my questions congrats on the quarter.
Jeffrey.
Our next question comes from the line of Anthony Vendetti with Maxim Group. Please proceed with your question.
Thanks, Good morning, John Good morning, everyone. How are you.
Good morning.
Excellent.
So just a couple of questions on the storefront or the doors that did you say you're at 118000 at this point and how many were added this quarter.
Yes, yes, that's correct Anthony we're storefront, we're up to 118000.
We have the stores that were added during the we said that were added year to date.
That was the number that was about a <unk>.
A 40% increase that we had in the greater store count this year correct.
Yes, there's a lot of opportunity is on further expansion there in new doors, So I think thats.
Great area of the teams working hard we have a great key accounts team that's focused on new distribution in all channels of trade obviously the biggest opportunity. We see currently is in the convenience channel and really leveraging the DSD, let's keep in mind before our key accounts team has more handling the national accounts, but now leveraging our DSD partners, we're able to.
To activate and work with the local regional chains, where these DSD partners have local relationships so for.
We're excited about that and that's a big initiative through the rest of this year and into 2022.
Okay, and then just on the DSD front.
With your you had.
Believe 224 regional DSD partners and that covers 92% of the U S counties.
That you're you're currently serving you said is that the right number.
That is correct that is the right number.
We had the largest increase in DSD partners in the third quarter.
Really sign up keep in mind once we sign these distributors. It does take some time to get product to them products or their warehouse educate their team members.
And really optimize the accounts.
At work and the distributors so.
We do new product launches, it's the education process. So it does take time, but it was the largest quarter the increase in distribution partners and we are at about 92% of all counties in the U S are now covered so large portion of the population is covered and now the teams are working on converting our key.
Accounts over to DSD and really we're in the optimization phase as well as bringing on new accounts. So and that's why you saw that I think when you look at the great growth. We had in our DSD network was up over 400% for the quarter and up sequentially as well so great great opportunities there as we continue to execute and optimize.
And then just on the supply chain I know you talked about the cans and and the trouble getting some of those from from overseas.
So you had to source some of those here in the U S. On the spot market. You said you have enough right now but.
What about what about the freight issue.
From what we are hearing this is this is industry wide.
Of course, a lot of industries, not just not just the consumer packaged good industry the drink industry rate.
On.
How are you planning to deal with that of the rest of this year and into 2022, if it continues to be.
To be an issue.
Yes, no great question.
Really on the scale of the business I mean, obviously, if we were at a larger scale and we weren't seeing our growth rates, where they are we would have more of a material effect on our freight that we're seeing on the overall general nationwide cost increases or freight I mentioned according to <unk> was about 20% of overall keep in mind.
And we were going from two warehouses now we're migrating the six warehouses, where when we were running at two warehouses and we're bringing on DST as well, we're shipping a lot of product what they call less than a truck it's called LPL. So that is.
A much higher cost of shipping product around the country and we're shipping a long hauls as well on LPL less than truckload. So once we move to this orbit model and we bring on our distributors our distributors can take full truckloads. So not only are we.
Shipping a full truck opportunity as we continue to optimize these distributors were shipping that truck at a lower cost at a lower or shorter distance. So theres a lot of synergistic benefits on freight just as we continue to scale and grow and gain that leverage versus more of a mature business in this current environment with the increases.
And freight.
We're all industries receding.
That's very helpful. And then just what you did you say or did Edwin.
There was a one time cost that impacted.
This quarter before the movement from these two to six.
Warehouses I stated that is calculating it roughly around 3% and that's really associated we're moving from two warehouses six warehouses and we're really optimizing in the fourth quarter as well just keep that in mind, we're not fully optimized in the fourth quarter. We will continue to optimize in Q1 and Q2, but when we move to <unk>.
We increased our inventory levels.
We're still shipping longer longer longer loads longer lead times and longer distances as the inventory really optimized as we have a variety of flavors as we all know so it's very important that we have all the flavors that each warehouse in order to be able to ship very efficiently. So that's why you saw our inventory levels increase at the end of September.
<unk>.
And there's further optimization there yes, yes.
No John I, just wanted to add in that sense as we established like you're saying the additional orbitz or warehouses, yes. There has been some incremental intra warehouse freights and moving and redeploying some of the inventory to Dan get the synergies or the benefits going forward. So I think that's what we were alluding to.
Earlier.
Okay, great. Thanks, very much guys I appreciate the color.
Thank you Andy.
Our next question comes from the line of Sean Mcgowan with Roth Capital. Please proceed with your question.
Thank you good morning, guys.
A couple of questions surrounding the idea of what is normal going forward. When you said you can get back to pre Covid margins.
Is that to suggest that you paid.
When you were putting up before let's say the first quarter of.
Covid is that what you aspire to get to our 10 all of the.
The scale and I really get you well beyond that so.
What do you consider to be normalized gross margins now X ray.
Yes, I think.
Well our margins include freight so I mean, if you look at it that way.
We anticipate to get back around.
Like that 46, 47%.
<unk> profiles that we had in 2020 I think.
Vida area, just currently as we continue to optimize but as we gain more scale. We can we anticipate to be able to go north of that but we're also looking at these transitory costs over keeping that in mind as well. So you know at the timing of those decreasing and getting back to a more normalization, but looking at a normal profile, we say like mid to upper Forty's.
It's kind of an area. We feel we can get back to you I don't know if you want to yes, no I agree with that to me, it's more of the timing because I fully agree with John that we will be able to get to that it's just more of the timing.
When that normalization occurs and we start getting all those benefits perhaps towards the backend of 2022.
That type of thing, but to me, yes, without a doubt we can get to that is just more of a timing issue. Okay.
Alright, that's helpful and just to clarify when you give some of those color commentary on it.
What the various puts and takes worth to the gross margin do we should we be interpreting that as those are like when you say, 3% hit a three percentage points off the gross margin is that the way.
With that.
Yes, that's correct I mean, the total adjustment if you look at the increasing really the cans and some of the other input costs as well as the freight 3%. That's how we're driving at the 7% overall great. Thank.
Thank you and then.
Last thing again trying to figure out what's normal two to what extent is the inventory build here.
A way of dealing with logistical and supply chain challenges.
As opposed to just feeding.
Consumer demand at retail expansion.
Much over builders there in the inventory to try to smooth out some of those shipping challenges.
There's not we're not building at this point and in the third quarter, we were building it to drive efficiencies and margins.
We were building inventory to drive and fulfill demand so.
The efficiencies are going to come down the road.
As we look at 2022.
But right now I mean, we were our inventory does have a mix of spot rate product cans, we have import gas.
And it's more of a at a higher level of cost when you look at the overall cost on a per case basis. So those are things that are currently but we're building our inventories to justify and fill the the six warehouses that were bringing on board as we optimize our six orbit model. In addition to meet the growing demand and the anticipated new stores coming on in the end.
<unk> as well as the optimization of the DSD network.
From my perspective. It also there's always two ways to look at this base like I say looking back and looking forward.
And looking forward.
Based on based on hand.
Some compensations.
We're probably like around 120 days so again.
Something that it's not it's something that that's still within the range of optimal that we're looking for.
Okay. Thank you very much.
We have run out of time for questions I'd like to hand, the call back to Mr. Purely for closing remarks.
Thank you on behalf of the company, we'd like to thank everyone. Today for their continued interest and support our results demonstrates our products are gaining considerable momentum as we're capitalizing on today's global health and wellness trends and the transformation taking place in today's energy drink category. Our active lifestyle position is a global position with mass appeal.
We're building upon our core and leveraging opportunities and deploying best practices.
We have a winning portfolio strategy and team and a large rapidly growing market that consumers want we believe we will be able to navigate through the challenges ahead. As a result of the COVID-19, and we are well positioned to thrive in the transformation of today's energy drink category. In addition, like to thank all of our investors for their continued support and confidence in our team.
Thank you everyone have a safe day stay healthy and grab a celsius.
Ladies and gentlemen, this does conclude today's teleconference. Thank you for your participation.
You may disconnect your lines at this time and have a wonderful day.
Sure.