Q4 2021 Celsius Holdings Inc Earnings Call
Greetings and welcome to Celsius Holdings fourth quarter, and full year 2021 financial results.
At this time all participants are in a listen only mode.
Question and answer session will follow the formal presentation.
If anyone should require operator assistance during the conference. Please press star zero on your telephone keypad.
As a reminder, this conference is being recorded it is now my pleasure to introduce your host Cameron Donahue Investor Relations for Celsius Holdings. Thank you you may begin.
Good afternoon, everyone.
Thank you joining us today for Celsius Holdings fourth quarter and full year 2021 earnings conference call joining.
Joining me on the call today are John Field, Lee, President and Chief Executive Officer, enabling the Gram Chief Financial Officer.
Following prepared remarks, we'll open the call to your questions and instructions will be given at that time.
The company released its earnings press release upon market close this afternoon preliminary financial results for the fourth quarter and full year ended December 31st 2021, and all materials are available on the company's website Celsius Holdings, Inc. Dot com under the Investor Relations section.
As a reminder, before I turn the call over to John and audio replay will be available on the company's website later today.
Preliminary financial information financial guidance, and gorgeous Shepherd paired by management based on information available to it hasnt been date hereof and should not be viewed as a substitute for financial statements prepared in accordance with GAAP.
The preliminary results are subject to completion of our customary quarterly and annual financial closing audit and review procedures are not comprehensive statements of our financial results for the three months ended in fiscal year ended December 31st 2021, and subject to adjustments as a result of such procedures reconciliations of all non-GAAP financial measures can be downward earnings press release.
And on our website Celsius Holdings, Inc. Dot com.
Please also be aware this call may contain forward looking statements within the meeting to the safe Harbor provisions of the U S.
Litigation Reform Act of 19 hotspot.
Some forecasts expectations and other information available to management as of today.
March 2020.
In some cases you can identify forward looking statements by the words, such as anticipate expect intend plan potentially seek believe project estimate strategy future likely may should will and similar references to future periods.
These statements involve numerous risks and uncertainties, including many that beyond the companys control.
Factors that cause our actual results and financial condition to differ materially from those indicated in the forward looking statements include among others. The following.
Economic and business conditions, our business strategy for expanding our presence in our industry anticipated trends in our financial condition results of operation.
Impact of competition technology change existing and future regulations affecting our business the company's ability to satisfy the timely manner, All securities and exchange Commission required filings the requirements of section where four of the Sarbanes Oxley Act of 2002, and the rules and regulations adopted him, but that section as well as other risks and uncertainties discussed.
Report Celsius Holdings first followed previously with the Securities and Exchange Commission.
Sure.
Except.
As required by law Celsius Holdings undertakes no obligation and disclaims any duty to publicly update or revise any of these forward looking statements written or oral whether its adult of new information future developments or otherwise, we encourage you to view and Paul our Safe Harbor statements contained in today's press release, and our SEC filings for additional information.
With that I'd like to turn the call it a president and Chief Executive Officer, John Lee for his prepared remarks John .
Thank you Cameron and good afternoon, everyone and thank you for joining us today, our record fourth quarter and full year, 2020 , one financial results mirror, our industry, leading growth metrics from third party data providers, indicating that Celsius is grabbing more market share at an accelerated pace across all channels for the first time in company history.
We delivered over $100 million in sales and we did this in the fourth quarter. In addition annual revenues exceeded over 300 million for the first time, which is truly an exciting accomplishment for the team.
This is exemplified by our initial material penetration in the convenience channel, where we grew our store locations by over 95% to over 29000 locations during 2021 now.
Now totaling just under 60000 doors.
While at the same time driving the club channel revenue and we grew Amazon revenue to New records for the company.
This material expansion in historical underrepresented channels in the convenience channel and club channel has not impacted growth in other channels our growth exemplified not only in sales, but also in our customer demographics, we further diversified our industry, leading consumer base over the past year historic.
And the 24 to 44 age range with our fastest growing segment in the 18 to 24 age bracket driving new female energy drink consumers into the category as we maintained our historical 50 50 male female split.
This is in conjunction with driving 20% of our sales from both male and female consumers new to the energy drink category.
Our market share over the past year has been historic even with the top two revenue customers Amazon and Costco not incorporated into track metrics as well as our fitness channel and bending channel.
And third party tracked channels, our share reached 2.1 share of the total energy drink category growing 163% in the prior 52 weeks ending January 23rd 2022 per IRI <unk> plus convenience data total U S.
This is in our first full year of leveraging our national DSD network.
Our future opportunity can be best exemplified by our market share on Amazon, where we were on an even playing field in terms of distribution as of February 12, 2022 Celsius is the number two brand with over a 20% share of the energy category.
These metrics further validate Celsius as a player in the energy category and looking at the last four weeks data scan data as of January 23rd 2022 per IRI total energy use Celsius share in the energy category increased to a three point to share and the category further demonstrating them.
Momentum behind the portfolio.
With this growth in revenue we have also transitioned from a microcap company to a current market cap of over $4 billion over the past 18 months, our investments in building out our world class team and operational infrastructure. During this time has been just as important as our sales growth in conjunction with our internal team we have.
<unk> made significant investments expanding our board of directors as well as engaging Ernst <unk> young as our new Auditor, which we announced in the second quarter of 2021 over the last several quarters. We have accelerated this transition by implementing best practices recommended it brought on by BDO as our internal.
Water consultants to assist with this transition.
This process has been all encompassing and unfortunately, we have multiple weeks in January and early February where a majority of our finance team was out with Covid. In addition, we have had multiple open positions and we have been vigorously recruiting top talent into the company's finance area to support our operations and our strong growth in our business.
Which was impacted by our ability to finalize the Ernst and young first full year audit we filed for an extension on our Form 10-K with the SEC earlier this evening and expect to file our 10-K during the 15 calendar day extension period as of the final audit and internal control procedure work are performed and completed.
We have been able to finalize the majority of the pending items prior to our call today, including as reported today in an 8-K filing in a prior period error correction has been made to the noncash stock expense in our second and third quarter financial results for 2021 totaling approximately $2 7 million and 12.
Point 6 million in additional noncash stock expense for those periods, which was the result of prior stock grants that were awarded to foundational individuals', which were modified to allow for continual vesting pass their contracted service States. This was an error of interpretation of a class III.
Rule technical rule, which resulted in an immediate mark to market adjustments for the prior periods stock grants as a noncash expense.
We highlighted this financial impact in our full year updated totals on our flash results table at the beginning of our earnings supplement as well as the financial statements on the earnings supplement included in the 8-K filing today, which outlines the prior period of changes reflected in the non stick cash stock expense for those periods.
In addition in light of this are our management has concluded that a material weakness existed in the company's internal controls over financial reporting for the company's disclosure controls and procedures, which were not effective as of December 31, 2021 which was disclosed in our 8-K filing early Saturday and which will be further discussed interrupt.
Filing.
To close these non operational updates in regards to our previously scope disclosed S. E. C investigation. The matter is ongoing and we are continuing to cooperate with the SEC staff. There has been no material developments in the investigation since the last disclosure.
Now moving to the financial highlights for the fourth quarter as stated sales hit another quarterly record and this was our first quarter to a total over 100 million, which is a major accomplishment for the company.
Revenue growth was driven by continued new store count additions S. SKU expansion cold placements DSD coverage expansion as well as the continued transition of existing accounts to DST as well as the unrepresentative channel growth and a convenience club and bedding.
Total sales for the quarter of $104 3 million up 192% from $35 7 million in the fourth quarter of 2020, our domestic sales increased 238% were a record $95 9 million up from $28 4 million in the fourth quarter of 2020 with both of these percentage grew.
With rates the highest in our history, we continue to see our two hardest hit channels from Covid in 'twenty 'twenty, our fitness and vending channel not only rebound, but drive growth sales up fitness was up 91% for the year and vending was up 186%, which when combined contributed approximately $14 7 million of ink.
Amount of revenue for the full year International sales grew 15% to $8 3 million for the quarter and 17% for the year with a record annual revenues from the Nordics.
Our gross profit margins continued to be impacted as we previously addressed in our third quarter results. We made a strategic decision in late 'twenty 'twenty and early 2021 to import cans to fulfill our demand sacrificing some efficiencies on the margin side. As a result, we are seeing the impacts of these one time short term impact.
<unk> as we run through these higher cost source cans, we anticipate margins will continue to be impacted through the third quarter of 2022 as we processed through these source cans as we move forward. We are confident that U S source cans, making up the majority of our production will be normalized or can input costs going forward. In addition, we are.
Spirits seeing inflationary cost in our operations, which is further impacting our business from increased cost of freight and raw materials, we have implemented promotional pricing strategies to mitigate some of these immediate changes in our business environment, which will start to realize in the coming months. In addition, we further optimized our warehouse supply chain to reduce.
Myles on cases to better service, our customers and reduce costs, we anticipate one cycling through the imported cans our margin will normalize to full year 2020 levels based on current volume run rates too.
To conclude our margin analysis as we recognized revenue.
Growth rates more than double in North America to over 200%, we made a conscious decision to ensure that we had operational infrastructure to support our revenue growth and take full advantage of the opportunity to take share at an increasing pace as such we accelerated initiatives on several operational improvements to position us for future growth, which would impact our.
In the short term additional incremental Neil ensure margin benefit will be realized through pricing and promotional strategies operational efficiency gains through our supply chain and it moved to locally source cans on a go forward basis.
The company continued to improve our order fill rates toward normalized levels through the fourth quarter from an 80% fill rate at the end of Q1 to the end of this year at a 97% fill rate in the fourth quarter and expect to maintain normalized levels, even with accelerated growth rates due to the improvements in our warehousing expansion to our <unk>.
Six orbit infrastructure model, where input what you put in place until the third quarter and expansion in our inventory, which is key as we enter the spring resets and anticipate material new placements as well as further expansion into the club channel.
Some additional highlights for the fourth quarter, our domestic revenues of approximately 96 million was driven by accelerated triple digit growth in traditional channels of trade expansion with worldwide retailers and further activation and growth from our distribution partners direct store delivery DSD network delivered over a 400% growth rate versus.
The prior year and our distribution revenues, we secured additional distribution agreements during the quarter expanding availability into new regions of Celsius continues to build out its network now totaling over 276 regional direct store delivery service centers covering approximately.
I mean, 98% of the U S population when we began 2021 with only 150 D S partners and 80% coverage made substantial improvements throughout the year.
Our vending channel grew over 210% in the fourth quarter, we added over 1200 vending machines in micro markets in 'twenty, one increase in the number of locations by 96% for the year and expect that growth to continue in 2022.
And if it is vitamin specialty channels Celsius launch with lifetime fitness and is now available in over 150 of their locations in your life Cafe. We also signed partnership agreements with cycle bars, their official energy drink and expect more clubs than ever to join before as the country continues to reopen in 2020 , one as we gained more awareness and <unk>.
<unk> and the finished channel.
Our mass club channel to accelerate growth following over the rollout of 561 Costco stores in Q2, Costco's fourth quarter established a new record growing over 1100% for the fourth quarter and the prime versus the prior year. We're also seeing significant opportunities in the club channel and other markets to include <unk>.
Sams club and Bj's through 2022.
And the convenience channel a convenience channel store locations increased by 95% as I said over 29000 locations for the full year totaling 60000, we recently signed a national contract with circle, K, which will drive further expansion in the channel in 2020 to the convenience store channel has the largest growth in number of doors in 2020.
Juan inspect similar growth trends to continue through 2022.
Industry backed third party data continues to show Celsius accelerating growth metrics and we are confident that Celsius will continue to drive sales even higher as we increase our E. C V across channels through additional launches with new nationwide retailers and further transitioning existing accounts to our DSD network consumer data for Celsius access.
Read through through the fourth quarter of 2021 and through February of 'twenty 'twenty Chu to record levels with the most recent Nielsen scan data as of February 12, 2022, showing Celsius sales were up 233% year over year for two weeks up 234% for the four weeks up to.
227% for the 12 weeks with a 3% share of the energy category over the last two weeks.
And on Amazon as I said Celsius is our second largest energy drink with a 20% share of the energy category and approximately 7% share of header had a rebel at a 13% share and moving closer to the number one spot just bore share share points behind monster at a 24% sure. This is of course the last four weeks.
Ending February 12, 2022 stack line energy drink category total U S.
In addition, Celsius as year over year growth rate of about 94% compared to Amazon's Energy's growth rate of 37%. That's just over 2.5 times the category for the last four weeks ending February 12, 2022 in accordance Stateline.
Our U S store count now exceeds 135000 locations nationally growing over 53000 doors are 65% from 82000 at the beginning of 2020 one with additional expansion plans throughout 2022 as retailer resets take place on a co packing front, we continue to expand with our partners and scaling at existing locations.
<unk>, improving our line time priority.
Our total U S co Packer footprint now totals over 13 that are active which will help protect for future out of stocks and support our massive growth as we continue to improve efficiencies in our supply chain.
In the fourth quarter Europe , mainly derived from Nordics totaled $7 4 million compared to $6 9 million in the fourth quarter of 2020, an increase of 7% our market share in our largest market, Sweden increased through the fourth quarter to just over 10% for the full year sales in Europe reached a record with an annual growth rate of 13% for 2020.
One.
We recently launched on Amazon EU expansion begins with Great Britain, which was launched with three skus of Celsius and.
And six fast protein bars and in Germany, We launched with three three great flavors of Celsius. We are also expanding to additional EU markets do include France, and Italy launching in early 2022 and.
In China, we maintain our licensing royalty model in the market with a fixed royalty rate through 'twenty 'twenty, four which then becomes a volume based royalty starting in the first year of 'twenty 'twenty four with a minimum royalty of 2.2 million annually.
In our international markets. Additionally, entering 2021 drove about $3 2 million, an increase of 109% from $1 5 million in the prior year period.
Material markets to include Malaysia, Hong Kong Korea, and Singapore, we saw great growth.
Now moving to the marketing on the marketing front, we continue to activate targeting new and existing consumers, where they live work and play building meaningful emotional connections through robust integrated marketing programs. Our momentum is accelerating and our brand is resonating with a diverse consumer base expanding the category of demographics focused on health and wellness is beyond that.
Now functional energy is recognized throughout the industry as a driver of future growth with retailers and customers.
We are driving and leading growth in the energy category across all channels, expanding the demographic, while bringing an industry leading percentage of consumers from outside and new to the category, while accelerating our share in the growing energy market. We have committed the resources, both in personnel and operational infrastructure to maximize our <unk>.
Opportunity.
I'll now turn the call over to Edwin Negron Carballo, our Chief Financial Officer for his prepared remarks Edwin.
Thank you John I wanted to start by providing additional clarity of the adjustments that John highlighted regarding the noncash stock compensation expense during Q2 and Q3, the company calculated and recognize noncash stock based compensation expense related to options and our.
Refuse Hell.
Hell by former foundational employees and retired directors ratably over the resting period, however, because the options and the Arris use were allowed to continue to pass after the employee separated and the directors retired from the company. Those awards were deemed to have been modified and the expense you would have been <unk>.
<unk> and recognized using the fair market value of the stock as of the day determine termination or retirement. This led to the adjustments that John discussed, which resulted in the understatement of the stock compensation expense in Q2.
And the amount of $3 $1 million and $12 $1 million for Q3.
These aspects are further detailed in the 8-K that we filed today as a result of this situation the company's management and the audit Committee of its board of directors have determined that the company's previously issued interim unaudited financial statements contained in the company's quarterly reports.
On Form 10-Q for each of the affected quarters should no longer be relied upon.
The company's management has also concluded that in light of this situation as previously described a material weakness existed in the company's internal control over the proper valuation of stock compensation expense regarding the modifications perform two stock awards for some former employees and retire Derek.
<unk>.
Now turning to our fourth quarter financial results, we had a record fourth quarter revenue for the three months ended December 31st 2021 of $104.3 million, an increase of $68 $6 million or a strong 192% increase from 35.
$5 $7 million for the three months ended December 31st 2020.
Approximately 98% of this growth was a result of increased revenues from North America, where 2021 fourth quarter revenues were $96 million, an increase of $67.5 million or a robust 238% increase from $28 $4 million in.
In the twenties when he quarter.
The balance of the revenues for the 2021 quarter were mainly related to European revenues of $7 $4 million or 7% higher when compared to $6 $9 million in the year ago period.
<unk> revenues, which included royalty revenues from our China licensee contributed an additional $680000 an increase of 203% from $224000 from the prior year quarter.
Other international markets generated $265000 in revenues during the three months ended December 31, 2021, an increase of $148000 or 127% from $117000 for the prior year quarter.
Gross profit for Q4 increased by $24.2 million or 139% to $42.4 million from $17 $4 million for the three months ended December 31, 2021 .
Gross profit margins reflected a decrease to 39, 9% for the three months ended December 31, 2021 from 48, 9% for the 'twenty 'twenty quarter.
Excluding afraid out as some of our competitors did not do not include this expense as part of cost of goods sold our adjusted gross margin for the fourth quarter was 48, 4%.
Impaired to 57, 2% for the fourth quarter of 2020.
The increase in gross profit dollars is related to increases in volume while the decrease in gross profit margins is mainly related to increase in cost pertaining to imported cans.
Higher raw material costs.
Ocean freight.
And transportation costs and repackaging costs.
Sales and marketing expenses for the three months ended December 31, 2021 were approximately $24 $6 million, an increase of approximately $13 $4 million or 119.2% from $11.2 million for the three months ended December 31 2020 distinct.
This was primarily attributable to higher marketing investment activities, which resulted in an increase of $8 $2 million when compared to the prior year quarter. Additionally, employee costs increased by approximately $1.5 million from the year ago quarter. As we continued to invest in this area in order to have the proper infrastructure.
To support our growth as well as incurring in additional travel and business expenses. Since we are now able to resume in person marketing events and selling activities.
Additionally, stores and distribution expenses as well as broker costs accounted for the remainder of the increase in this area in the amount of $4 $2 million from the Twenty-twenty quarter basically related to the increase in business in business and revenue volume Lastly, there were slight offsets.
In other sales and marketing expenses in the amount of $487000 mainly related to savings in trade marketing activities.
As a percentage of revenue sales and marketing charges amounted to 23, 6% for the fourth quarter of 2020 , one compared to 31, 5% to the fourth quarter of 'twenty 'twenty.
General and administrative expenses for the three months ended December 31, 2021 were $14 $2 million, an increase of $8 $4 million or 147% from $5 $7 million for the three months ended December 31st 2022.
This increase was mainly related to stock option expense, which amounted to $7.8 million for the three months ended December 31st 2021, an increase of $6 $2 million, which accounts for 74% of the total increase in this area when compared to the prior year quarter.
This increase is mainly related to the noncash expense adjustments that I mentioned at the beginning of my prepared comments.
Additionally, employee costs for the three months ended December 31, 2021 reflected an increase of $804000 or 53, 8% as investments in this area are also required to properly support our higher business volume and commercial and operational areas of the business as.
Well as the increased travel and expenses that are now being incurred.
Administrative expenses.
How's it to $3 $5 million, an increase of $2 $1 million or 153% when compared to the prior year quarter. This variance includes an increase in the bad debt reserve of $425000 as well as increases in audit costs legal expenses insurance.
Cost and office rent, which account for the majority of the remaining fluctuation of $1.7 million.
Depreciation and amortization decreased by approximately $222000 when compared to the prior year quarter.
As a percentage of revenue G&A costs amounted to 14% for the three months ended December 31, 2021 compared to 60% in the prior year. However.
However, excluding the noncash stock option expense for both periods G&A decrease as a percentage of revenue for the fourth quarter of 2021 to six 1% compared to 11, 5% for the fourth quarter of 2020.
Other income and other expenses total net other income for the three months ended December 31st 2021 amounted to $250000, which reflects a decrease of $350000 when compared to the total net other income of $600000 for three months ended.
At December 31st 2020.
The prior year quarter quarter included a foreign exchange gain of $730000, which accounts for the majority of the variance from the 2021 fourth quarter.
The net other income of $250000 for the fourth quarter of 2021 is composed of foreign currency exchange gains of $175000.
And interest income of $77400 related to the note receivable from our China, licensee, which were partially offset by miscellaneous other interest expenses of $2100.
Net income our net income for the net for the three months ended December 31, 2021 was $11 $9 million, which included a tax benefit of $8 $8 million, mainly related to the release of valuation allowances regarding prior year tax losses as.
As such earnings for the three months ended December 31, 2021 were 16 cents per share based on weighted average of 674 8 million shares outstanding and diluted earnings per share of <unk> 15 cents based on a fully diluted weighted average of $78 4 million shares.
Sandy, which includes the dilutive impact of stock options to purchase $3 6 million shares.
In comparison for the three months ended December 31, 2020, the company had fourth quarter net income of $950000 or one cent per basic share and the Luna share based on 70 based on basic shares of 71 9 million shares.
And 76.5 million fully diluted shares.
Now focusing on liquidity and capital resources as of December 31st 2021, and December 31, 2020, we had cash of approximately $16 $3 million and 43 point $2.2 million respectively.
And working capital of approximately $169 million and $66 $8 million, respectively with no long term debt.
Cash flow used in operation and operating activities totaled $95 $8 million during 2021 , which compares to $3 $4 million provided by operating activities for the three for the year ended December 31 2020.
The use of cash in the 2020 , one year was primarily driven by higher inventory levels in order to properly service the demand for our products support our new six orbit warehouse model and mitigate the impact of supply chain inefficiencies and consistency as well as also too.
<unk> anticipate our upcoming spring resets.
Specifically, our net inventory value increase of $172.8 million from $18 $4 million in the fourth quarter of 'twenty 'twenty.
$291.2 million for the year ended December 31, 2021, excluding the significant increase in inventory cash flow from operations for the full year December 31, 2021 would have would have totaled approximately $84 $3 million.
Our current cash position together with the expected results from operations should provide us with sufficient cash to operate our business as we're also normalizing and optimizing our inventory levels, which should release significant funds over the next 12 to 15 months.
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. If you'd like to ask a question you May press star one on your telephone keypad, a confirmation tone will indicate your line is in the question queue.
You May press Star two if you would like to remove your question from the Q4 participants using speaker equipment. It may be necessary to pick up your handset before pressing the starkey.
Our first question comes from the line of Kevin Grundy with Jefferies. Please proceed with your question.
Hey, Thanks, Good evening guys.
Good evening Kevin.
First.
Just a housekeeping question on the control issue can you just confirm that the issue here is as you wait for the audit to wrap up as best you know are just going to be exclusively isolated to the stock based comp accounting.
That's the indication hi, Kevin This is Alan yes, that's the indication we have right now, but yes, you will pointed out we're still going through the audit in obviously internal controls as a major aspect of what's remaining so that's the expectation, but we'll see what happens.
Okay fair enough. Thanks for that two more quick ones for me.
John you were pretty optimistic on the shelf space reset, which is encouraging I think the comment was you expect material new placements and expansion and expansion in the club channel, maybe just spend a little bit of time on that John I guess within the answer we can see the really positive trends in Nielsen.
Scan data at about 2% market share maybe as part of your response is talk a little bit about how you expect distribution velocity to kind of play out here and where you expect that share to go within scan channel over the next 12 to 36 months.
Yeah, Kevin not Youre, absolutely right I mean, the scan data has been extremely strong. So we're talking earlier about on the call and we look at that what's interesting is as we're expanding into these reported channels. We're still seeing great increases velocity in the club channel mainly at Cosco and also on Amazon seeing that improve so.
We anticipate that this level off at some point as we're gaining more broader distribution, but initial feedback has been I mean, the data looks really strong as we stand now, especially when looking at that February data. The most recent.
When we talk about the club channel that was a big surprise for us in 2021, seeing how well the product was performing.
And we're talking to Sam's club.
Right now and hopefully, we'll see opportunities with them in 2020 two as well.
Mentioned in the Big win and Circle K is of course in the convenience channel and that's where about 6000 stores.
Now, we're getting a national distribution agreement with so we're going to continue to expand.
Great <unk>, we've talked about that in the third quarter in October the company had one of the best snacks.
Those that I've ever attended where the company. So we feel we're in a good spot we got a great key accounts team as well, it's been working really hard and we're going to see that.
Roots of other hard work here over the next several quarter next several months really.
Got it thanks, guys just one more for me and then I'll pass it on I have a number of questions. We can take offline, but just on the gross margin Edwin maybe just I know you guys don't like to guide, but maybe just at a high level now what the expectation is given commodity cost pressure you made the comment that you have a higher cost can't sitting in inventory and inventory.
He is up materially here as we look at inventory days in the fourth quarter can you just help give us some directional guidance on how you expect gross margin to sort.
The trend here as we look out in 'twenty, two and then within that but anything you can give more broadly.
There's sort of this near term pressure, which is a little bit worried some new investors, but this massive longer term opportunity for margin expansion.
As you could potentially approach monster like EBITDA margins. So maybe just sort of marry up near term expectation versus sort of the promise of what could be really material margin expansion longer term and then I'll pass it on thank you.
Thanks, Kevin Yes, sure I mean, as we said in the past there are several variables to that equation to say the least one of them is kind of the mix between the local source cans and cans that we source out of the U S, which are a higher cost. So clearly that's going to have an impact and we're seeing that that's probably going to be they're going to be.
Flowing through cost of goods sold at least through Q2, a little bit thereafter, as well so that's going to be an impact and then obviously.
The the issues that we're seeing whether it's supply chain in terms of freight we're all seeing the impact of the macroeconomics in terms of the.
Price of oil and all that so we'll have to see how that plays out as well in terms of transportation costs. We saw a one point for a cost of a container all the way close to $20000. So again theres a lot of variables in this equation, which is very difficult at this point too.
For us who kind of evaluate.
And as again.
Mix between the local cans and the and the foreign Kansas is also going to play out.
An important part of this equation as we cycle those cans through in terms of the EBITDA or going forward, yes at one point hopefully when this normalizes.
There's always talk about this inflationary being transition transition in nature. So were transitory in nature nature I should say so once we normalize sure I think the expectation is that we go back to.
So kind of the gross profitability that we were seeing initially in.
In 2020.
Thereafter also continue to leverage with the volume that we have to ban improve our EBITDA margin.
I'll just chime in when we look at our internal forecast, we are expecting to cycle through the import camp store scans.
Currently sometime in the third quarter, so expect that to be normal or normalized for 2020 levels as we cycle through and we are working on a variety of pricing promotional strategies to offset some of this inflationary pressure that we're currently seeing.
Got it very good guys. Thank you good luck.
Thank you thank you Kevin.
Our next question comes from the line of Mark Astrachan with Stifel. Please proceed with your question.
Yeah. Thanks afternoon, guys.
I guess first just following up on the <unk>.
Stock based comp.
Commentary.
And when I think you said, that's the expectation that it was it was.
Just just.
Pacific to that so are you, saying that there's nothing else that youre aware of that could potentially come up at least at this point I respect the fact that it could potentially come up over the next 15 days, but are you, saying, there's nothing else that youre aware of beyond that and then related to that.
Was this in any way related to the SEC investigation.
Well no first of all I mean, it's a first year audit right. So clearly you know when I've been in the other side of that when I was an auditor and first your audits or more.
Go into a lot more scrutiny that kind of thing we're playing now in the big leagues with Ericsson young so perhaps there's something that could surface at this point, we're not you'll see some things of that nature, but you never know that that's why you know kind of leave the door open at that point or at this point because again, they're doing a very thorough job and thats fine and Thats what were.
Second to do you'll that kind of thing in terms of your other comment.
I'm not sure as it relates to that and not necessarily it's more of a situation that happened regarding regarding.
Some of the awards that had to be.
Youll properly valued at fair market value for some of these employees that were separated and some of the board members have also retired.
Just trying to in regards to some of the employees. It was also.
It's a technical aspect there because some of them are still providing services through contractual services. So there was just a technicality.
Uh huh.
That was an error in interpretation there.
<unk>.
Stock Awards so.
It definitely wasn't oversight in a correction that was noted.
I think also management feels pretty very confident in the numbers, we put out a preliminary numbers. So obviously you think anything can come up but at this point, we wouldn't put out preliminary numbers unless management felt confident in the in the numbers provided today.
Got it Okay. That's helpful and then switching over to the business John .
If you look at your market share on a state by state basis.
Pretty pretty interesting that your homestay share is something slightly in excess of 10% relative to our.
Current national share it at somewhere in the mid threes based on the latest data that we've seen so I guess I'm curious if you could talk a bit about how you think about those two numbers sort of ultimately working in unison and is there anything that would potentially.
Prevent your state market share from improving in some material way once you get more distribution I guess sort of related to that maybe you could talk about the state of distribution. The further you move away from <unk>.
Florida from just an overall penetration standpoint.
Yes.
The share count you referenced in Florida is phenomenal I mean, the company has been working extremely hard at that and also I think you're really seeing the power of the DSD network, Florida has been fully covered now for a little over almost going on two years now so you're really seeing that availability that increased ACD.
Also you saw circle K, we didn't land circle K in the southeast so that came on as well in 711 and a variety of other of our key accounts as well as publix. So we've been doing extremely phenomenal. There I think it's just an indicator. It's another indicator given the same opportunity Celsius will perform.
At the same level, if not better than the competition. So.
Florida is extremely a great state for us as well as Texas, and California, and several other states around the country are starting to really.
Increase.
Sure enough in those markets as we build out the DSD network and really been able to activate those accounts those key accounts.
More distribution.
Got it okay I just want to clarify one thing going back to the SEC's, who Edwin the SEC investigation related to this or are these separate they are separate items.
Again, they are completely separate.
Yes, I mean internal aspect, okay perfect I appreciate it guys. Thanks.
Okay.
Our next question comes from the line of Jeff than Cinerin with B. Riley. Please proceed with your question.
Hi, everybody.
So just wanted to follow up on the the circle K a contract what we're looking at there as far as the rollout and then also wanted to follow up just on the DSD.
Expansion kind of where we are now in overall.
Percentage and then what you think is a reasonable target by the end of fiscal 'twenty two.
Yes, Jeff Thank you.
When we look at our overall, where we're at when we see circle K that was a great opportunity. We've been you know a long term partner with 711 circle creates a great opportunity for us and we've been testing in some regions. So getting this national contract. The national rollout is really exciting so it puts us in about approximately about 6000 doors.
<unk> nationwide with about probably around right around average about four flavors and is a great really.
Jumpstart to the DSD network. So we're bringing another great key account to our distribution network, we got a bunch more comment as well.
And that's going to further activate and allow us to close that white space. That's out there. So we talked about I mentioned earlier in the comments some of the DSD.
Gaps that have been closed in 2021, the team did a whole DSD management team has done a phenomenal job.
Really working on closing those gaps which is extremely difficult to do.
We're up to almost 200 and over 270 in direct store delivery, you know really warehouses at facilities that are out there that are being managed we got systems processes in place and we're at about 98% of the population covered so we do have some gaps in certain states. We're working to close the teams getting closer and we're looking to get majority.
Coverage and be able to service.
All of our key accounts nationwide.
By the end of 2022 is definitely in the plants and we're pretty much able to service 98% of the population now so.
It's really the next phase 2022 is all about activation activating our DSD network driving more distribution, increasing velocity and getting a better activating sales and bringing new consumers to the portfolio.
Okay, Great and then if we could just turn to the.
Six orbit warehouse model can you give us more detail on.
Guess, where you are on ramping that up what the next milestones are that you're targeting there timeframe around that and then if you could speak more about what level of benefit you anticipate once the six orbit system is fully optimized.
Yes, we started that fixed service model in the third quarter.
<unk> built that out building the warehouses, we did increase inventories as you can see in our balance sheet.
We feel we're at a really good inventory.
We're going to be able to activate them.
[noise] about at that optimization, so Q4 is about optimizing inventory levels.
And also really getting those proper servicing liens established within the logistics supply chain. So we're working with some of the largest logistics suppliers providers to provide us the best the.
The best rates to service, our customers, reducing the number of days to service customers, our lead times and most importantly, driving more efficiencies through the network's full truckloads full pallet flavors those type of things, which is really improve your will be able to improve our freight costs as well so.
And margins so that's where we're at we're looking to be you know really when you look at Q1, where we're going to be for the really further optimized by the end of the first quarter. That's what the team is really working on so always optimizing always trying to improve and get better but.
By the end of the queue, but at the end of Q1 2022, we should be really well optimized for 2022.
Okay, Great I'll take the rest offline. Thanks for taking my question is the best of luck.
Thank you Jeff.
Our next question comes from the line of Camille Gosh Waller with Credit Suisse. Please proceed with your question.
Hi, guys. If I can follow up on the last question as it relates to <unk>.
How much how many of those accounts, you've actually changed over of the 98% I think you gave a lot of examples of accounts specific names but.
Are you now 60% converted 70, I don't know if I missed it or maybe we never got that figure.
Yeah, Yeah, no worries.
In regards to the 98% as a population coverage. So we're able to service our key accounts.
Assuming they were all flipped over to our DSD network, we will be able to service about 98% of the population.
So that's really what we meant by the 98% when you look at our.
Right now if you break it down if you look in the press release, we kind of break it out we have about 65% of our move lock step Mulan and convenience stores are now being serviced by DSD. So are we.
We have a lot more apt to be optimization to go and that's what the teams are working on in 2022. So new accounts are all coming on through DSD and some of our existing established accounts, we're working on converting them over so.
As I said on prior calls it does take time, it's not as easy as an.
An overnight flip.
Flicking a switch there is a process that has to take place and the teams are working hard to mature because we know when servicing by having Celsius serviced by DSD, we increase velocity increase.
Within the given stores, so and its benefits everyone benefits the store owners of benefits, our distributors and benefits benefits us.
And then move that number is representative of your overall that sounds fair.
Yeah, Yeah, okay.
Our next question on margins can you give maybe a little more context on what the.
Perhaps the spread is on the imported cans versus the domestic can we look at how much gross margins were down as well.
With that it's been down half as much.
You were sourcing domestically and a third can you maybe just give us some context, though as you work through that inventory and you have a sense of where margins are margins should look like.
Yeah, I mean, as we worked through the margins I mean, we said once we cycle through the international Kansas, We expect to be back to margins somewhere closer to the full year of 2020, So that's really where we see the margins at this current level, where our current run rate is.
But when you when you look at the international or the sum of these source cans. They are coming in as Edwin mentioned some of the can costs around containers or 20 20000 of container, we're starting to see container prices drop a little bit we do have some more imported cans that have to come over and we have some on the water. So that's why we anticipate those have cycled through some time based on our current internal.
Cast right around the third quarter, so 2022.
And youre seeing some of those imported cans are right around a 3% or 3% to 4% margin impact over our so it is pretty substantial and then we have some also some transitory freight increases that we've seen in raw material costs. So that we're working through and we're trying to offset and mitigate some of those increases with <unk>.
Pricing and promotional strategies that we've implemented.
Okay, Great and then finally, if I could ask about marketing spend you're now.
As you push to fulfill that 98%.
And as you mentioned 'twenty two is all about activation how should we be thinking about your.
Marketing and sales spending.
Well, we are investing ahead of revenue base.
Based on where we are in our lifecycle and our growth cycle. So we're hiring a variety of staff members in all departments from finance sales marketing operations. So we're really building out our teams. So we are investing head count resources in regards to marketing, we're trying to be very methodical in our approach on marketing, but we are as Edwin.
Mentioned in his comments prepared comments, we're getting back into events, where we're really seeing some great activation, we're gaining more distribution as well. So it's very important as we gained distribution we continue to market and invest behind the brand to continue to drive those new consumers to the portfolio to maintain those velocities at retail so we're working on that.
We're going to gain more efficiencies as we go I think you look at what.
Our current quarter, we're probably somewhere around maintained some of those spending levels currently.
On a go forward basis through 2022.
And if you look at the G&A I think if you back out some of the.
Stock based compensation expense there that was in the fourth quarter, we're right around a 6% six 1% and that does include increased costs associated with accounting and legal and those type of fees as well as consultants that are helping us as well so.
There's definitely a lot of leverage in the model as we grow.
Okay, great. Thank you.
Thank you.
Our next question comes from the line of Sean Mcgowan with Roth Capital. Please proceed with your question.
Thank you guys, Yeah I wanted to start with a couple of quick he's too. So is everyone is all of the stock based compensation expense taken in the G&A line, it's like a 100% of that is in that line.
Correct, yes.
And at the level that we see that for the fourth quarter.
Just do you think that's going to be like a normal level that we should expect to see each quarter or is there some catch up.
This issue that you've.
Flag and when you'd see that number will actually go down over time.
It should be around what youre seeing now or what will you know we commented on going forward.
Okay.
Thank you Bill and shifting.
Housekeeping on taxes.
Can you give us what the dollar amount was of that.
Tax credit reversal.
This.
Yes, I think it was around $8 million eight five.
Okay don't like almost a whole thing what what would you expect would be the tax rate going forward.
Well, we still have some nols so it again and we're cycling through that in terms of the provision and finalizing those up those.
Those computations, so, but yeah, we still going to have some a little bit of Nols going forward.
Okay, but it should be higher I mean, some significantly higher rate than what we've been showing right.
Yeah, obviously, depending on the profitability and so forth, but yes.
Okay, a couple of other questions.
Could you provide a little bit more color on the inventory build.
How much of that is just pure inflation and where do you expect maybe more easily where would you expect days of inventory to be 12 months from now.
Yes, it's a jump in as well.
But our days of inventory were.
We're looking at when you look back you've got to look forward on a go forward and we did prepay.
A lot of a big chunk of raw materials. So we got a little right around $60 million to $70 million of an additional prepaid associated with cans in raw materials is still a lot of very difficult out there environment raw materials, we took advantage of making strict strategic prepayments, making sure we secured raw materials as we enter 2022 and enter.
Really this.
You start to get in position for resets in summer.
Summer beverage season as well so.
That puts us in a good position so we maintain stock levels, but as you go forward I mean, and the growth that we're seeing some of the growth rate, especially in North America upwards of 200% you really need to be very close to the inventory levels. It's important that we maintain a higher inventory level.
As we go forward with these growth rates, but ideally we want to be somewhere at this stage.
Right around 90 to 120 days on hand, we're sitting currently at the end of the year at a higher level just due to the large production runs we made in December are strategically positioning us for 2022.
Okay.
And then final question on the.
Internationally, we've talked quite a bit over the course of the last year about North America being the focus because that's where so much low hanging fruit and opportunity is there anything else. That's constraining international sales from being higher can we expect that growth rate to accelerate.
I think there is.
I've always said Uh huh.
Somewhat conservative on international currently we do see a lot of opportunities there we did you.
You have that opportunity in the nordics to expand out we've started to do that on Amazon as mentioned entering.
And in the U K and also in Germany. So there is opportunities also in Asia with South Southeast Asia, There's a lot of opportunities there, but we're being very methodical in our approach as we continue to grow and scale as we see increased velocities will put increased investments in our currently but I think the current.
We stand out as being a very methodical approach and conservative I've always said international the key aspect here is to identify good partners. Your master distributors. So that then you avoid having a large footprint and again, even things like currency exposure and things of that nature. So like John said, it's always about identifying those key.
Key partners in those in those different markets.
Okay.
Thank you very much guys.
Thank you.
Our next question comes from the line of Sean King with UBS. Please proceed with your question.
Alright. Thanks for the question I guess I was just looking at how strong the growth was in the quarter and thinking about some of the difficult comparisons in the back half of 2022.
How should we be thinking about sort of bumping up against production constraints and I guess the confidence that you have that you can keep up this level of growth.
Yeah, I think when you look at the growth we've had I mean, we're going to continue.
We're forecasting internally in regards to our inventory levels, we expect to continue to drive continued momentum and share in the category. So.
As we mentioned we got a 13 co Packers that are active we're talking to a variety of others.
Paul story, we brought on.
Last year grew.
Great knowledge of the beverage industry, especially with co packing and associated with energy drinks. So we're really feeling where they were in a really good position currently as we scale. We have capacity levels were telling us internally, we're telling sales to outsell production and having an internal competition on it so.
I think we're in really good position, we feel in a really good space things happened.
That can happen out of your control, but as we sit right now.
Ready for to continue to drive scale.
Alright, Thank you very much.
Okay.
Our next question comes from the line of Jeffrey Cohen with Ladenburg Thalmann. Please proceed with your question.
Oh, Hi, John and Edward how are you.
Hello excellent Jeff.
If I could follow up a little bit as far as the co Packers you're up to 13 now.
How does that pace look over the third quarter and what would you anticipate domestically for 'twenty two.
Right now we're at six Orbitz youre going to see us.
What do you what do we want to do is as we can to drive efficiencies you'll want to keep your supply chain in your warehouses and in orbit you really don't want to ship outside of in orbit to gain efficiencies. So right now our volumes are at rather six orbit, but as we grow and scale will continue to create more orbits.
Which will further drive efficiencies through the model and the supply chain so that.
That is really based on how fast and how quickly we scale.
And that we're building our plans and you'll see those to come alive. So.
We're talking to a variety of additional co Packers strategically placed around the country as well as additional warehouse facilities that we'll be able to.
You want to put the least amount of miles on cases.
Fishing as you as we possibly can so that's what we're working on but we feel we're in a good position right now given our current growth levels and our current volume.
Got it and I wanted to touch base again on the inventory levels and can't specifically, so domestic canceled caught up as far as supply and demand out there.
Good way to look at it over the past few months.
I Wouldnt say its a youre still hearing a lot of capacity constraints out there. So we feel we're in a good position based on some Kang term.
Agreements and arrangements, we've made but in general can supply is still tight if you look at a lot of the major can manufacturers that are out there in the comments that they're saying.
It's a it's tight right now and it's a.
It's going to be difficult for a lot of smaller brands.
You're still seeing a lot of smaller brands wrapping cans.
Out there you know obviously, that's a lot more expensive than importing cans are sourcing candidates abroad.
But we feel based on our volume we have additional leverage to be able to buy and purchase an unsecured domestic cans on a go forward basis based on our current internal forecast once we cycle through these source, Kansas that we have currently in inventory.
Okay, and when we think of inventory can you give us a sense of.
What percentage of that.
As opposed to filled and finished products.
Yeah.
We're probably about.
15% to 20% of our inventory is probably <unk>.
Currently.
Within our packaging components.
Got it.
Okay and the balance is finished products.
We do have some additional raw materials in there as well packaging material.
Okay got it and then any sense on I know you talked a little bit about some of the challenges.
Labor and logistics.
Any sense of how then this.
Most profit differential between the outbound freight in the gross profit going forward does it feel like it's it's peaked out or to potentially continue to diverge slightly.
Ah Theres. So many macro elements that are happening right now I mean gas prices and what's happening in the current environment. So we're sitting in a really unknown area going forward I mean, we're trying to mitigate as much as we can.
In regards to labor Theres still a lot of labor shortages around where we're having that those challenges internally here and all of our departments we have positions open.
We're trying to.
You know really qualified good talent into the company so.
Every company is being affected these days in regards to.
Logistics and.
In trucking labor that as short as well I don't have the number in front of me I think I had it on the last call. There was a substantial number of open positions and drivers and also now you have a gas prices that are anticipated to continue to climb. So we're getting into somewhat of a an interesting area, which we're going to all be impacted by.
The GAAP and outbound freight as.
There's always been you around 8% to 10%, so, yes, who knows again with the gas prices and all of that how that's going up further.
Perhaps I'll make that gap of broader but that's what it's been in the past historically.
Okay got it and then lastly for us.
Cycle bar exclusive as though with all the national cycle borrowers I think there's a couple of hundred golf there.
Uh huh.
There's a couple of hundred currently out there.
That's a great partnership for us great great great.
Great partnership Great, Brad and I were looking for a great year with them. So we got a lot of things planned a lot of events planned.
Cross promotions planned and it should be exciting.
Fantastic Thanks for taking our questions.
Thank you. Thank you.
Our next question comes from the line of Anthony Vendetti with Maxim Group. Please proceed with your question.
Hi, Thanks for taking the question. This is actually Jeremy on the line for Anthony. So just two quick questions first regarding store expansion how much runway do you think you have left for that you had a really tremendous growth in 2021, and how should we look at the growth in store expansion in 2022.
Well I think the biggest opportunity for us right now.
It's two fold. So number one is optimizing existing accounts, so gaining better placements additional flavors cold placements as a big opportunity, where we see increased velocity. So that's what our teams are really working on is really better having that perfect store are working towards that perfect stores, So and that's really leveraging the DSD network and our teams so.
That is one component so existing same store sales opportunities and then number two when you look at where our convenience as.
The convenience channel, where sitting roughly around a 44% ACB. So lots of runway left just in the reported stores.
In the convenience channel Youre looking at you know.
You had almost a 56% opportunity of additional distribution in convenience, which is usually the higher in the energy space a higher velocity location and then the expansion in non reported tracked channels is a great opportunity for us. So we're you know.
It's a little bit of a variety of things same store sales optimization convenience channel big opportunity and then some of the opportunities that lie in untracked channels.
Okay. Thanks, and then ship the Costco contract I know that you're about it and you said you were in about 500 stores and Costco.
561 today roughly.
Right. Okay. And then is there is it plans to grow because I know that I have about 880 stores nationwide our warehouses they call them.
Yeah warehouses.
We're in about a 561 I left to check on the expansion number but roughly.
No.
561, I think it was the last count but.
Should be in a Costco near you.
I have seen it has seen it just so just is there any risk to that I know of.
I shop at Costco, a lot I see a lot of time products they have.
They are there for a little bit and then they're out and you don't see them again or is there a risk that they have certain you have certain metrics you have to hit is a risk that they could pull that contract when or how it works exactly if you could give us a little more insight into that.
Yes, that's the beverage business, so pretty much any business in retail. So you really have about six months to perform otherwise you're out so.
Retail shelf is expensive not only at Costco, but every single retailer in the country. So.
It's important to continue to drive velocity drive consumers drive growth and share in a category. So.
That's just the business we operate in.
And it's extremely important that we rotate our retail.
Otherwise you start losing distribution at this point, we're gaining distribution because of the velocity that's happening in existing accounts.
Okay. Thank you for taking the questions.
Thank you that is all the time, we have for questions I'd like to hand, the call back over to John fairly for closing remarks.
Thank you on behalf of the company I'd like to thank everyone for their continued interest and support our results demonstrate the products are gaining considerable momentum we're capitalizing on today's health and wellness trends and transformation taking place in the energy category. Our active lifestyle position is a global position with mass appeal or building upon our core leveraging best practices, we've been winning.
Portfolio strategy and team in a rapidly transformation category, we see great opportunities. We believe we will navigate through the challenges ahead, and we are well positioned to thrive in today's energy drink category. Thank you everyone for your time today and confidence in the team.
Stacy Stacy.
Stay safe stay healthy and lift it thank you.
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.