Q2 2022 Celsius Holdings Inc Earnings Call
Ladies and gentlemen, thank you for your patience. Please remain on the line you conference call will begin momentarily again, we do appreciate your patience. Please remain on the line you conference call will begin momentarily. Thank you.
[music].
Good day, ladies and gentlemen, and welcome to the South you Q2, 2022 earnings call. All lines have been placed on a listen only mode and the floor will be opened for questions and comments. Following the presentation. If you should require assistance throughout the conference. Please press star zero on your telephone keypad for retail.
Operator at this time it is my pleasure to kind of floor over to your host Cameron Donahue Investor Relations, Sir the floor is yours.
Thank you good afternoon, everyone. We appreciate you.
Joining us today for Celsius Holdings second quarter 2022 earnings conference call.
Joining me on the call today are John <unk>, President and Chief Executive Officer, and Jarrod Langhans, Chief Financial Officer.
Following the prepared remarks, well open the call to your questions and instructions will be given at that time. The company released our earnings press release upon market close this afternoon, and all materials will be 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 later today and can be accessed with the same live webcast link in our conference call announcement and earnings press release.
Please also be aware that this call may contain forward looking statements, which are based on forecasts expectations and other information available to management as of August 19, 2020. These.
These statements involve numerous risks and uncertainties, including many third beyond the companys control, except to the extent as required by law Celsius Holdings undertakes no obligation and disclaims any duty to update any of these forward looking statements. We encourage you to review our safe Harbor statements contained in today's press release, and our quarterly filings with the SEC for additional information.
With that I'd like to turn the call over to President and Chief Executive Officer, John <unk> for his prepared remarks John .
Thank you Cameron and good afternoon, everyone and thank you for joining US today, our record second quarter represented our 16th consecutive quarter of sequential growth and an 18% increase over the first quarter of 2022.
Accordingly, this trailing 12 weeks IRI <unk> data as of July 10, 2022 Celsius continues to be the top driver on the energy category growth, representing 34% of the category growth, which corresponds to the number one brand driving category growth. We were also notified last Friday that the S&P announced that cell.
<unk> will be added to the S&P Midcap 400 index, graduating from the S&P Smallcap 600 index. After the close of trading today August night, we continue to see growth across all channels include.
Including those not tracked with the club channel sales, increasing by approximately $24 9 million for the second quarter.
2002 from 2021, and an additional rollout and expansion in over 175, new Bj's wholesale locations happened took place in the second quarter, our vending and foodservice channels continue to see rapid expansion with over 50% growth in sales from the first quarter with approximately $4 4 million in sales in the second quarter.
Additional second quarter retail our highlights include the benefits from the Walmart expansion, we discussed in our two on our Q1 2022 earnings call sales increased over 700% on a year over year basis in accordance to spin. This 12 week data as of June 12, 2022, and in the convenience channel sales increased overall by 220.
7% compared to the second quarter in 2021, and Celsius is now ranked the number five brand in the convenience channel per spans energy 12 week ending June 12, 2022, moving to the most recent highlights for Celsius on Monday August 1st we announced a distribution of an investment agreement with Pepsico is transformational partnership.
<unk> significant near term U S growth acceleration with an estimated 40% increase in incremental distribution on top of our internal projected door growth over the next 12 months. We have also have begun the transition with Pepsico to pet Pepsico through our distribution and expect most of the transition to take place by the end of the fourth quarter.
As part of the transition a $550 million convertible preferred investment was made by Pepsico in Celsius, and the investment aligns incentives for both parties. The underlying the investment is priced at $75 per share. It converts approximately seven 3 million shares which equates to approximately about eight.
5% ownership in southeast on an as converted basis the preferred shares receive a 5% annual dividend paid quarterly in cash or in kind itself is option. One point of clarification, we wanted to be clear on the call last week, we notified and discuss the transition was cash neutral in regards to our distribution.
Network. This way. This is there was not inclusive of the $550 million investment by Pepsico in regards to the distributions settlement and transition cost Pepsico will assist with these charges as part of the distribution channel transition agreements whereby the cost will be cash neutral to Celsius as part of the strategic aligned.
In agreement with Pepsico, we want to officially welcome James lead to our board of Directors James Lee. Mr. Lee is currently the senior Vice President Chief strategy and transformation officer at Pepsico beverages, North America Pepsico's largest operating sector. He is responsible for leading the PV in as long term strategy business.
<unk> digital and value train transformation and sustainability, Mr. Lee joined Pepsico and $19 98, and has had several financial leadership and other leadership roles since that time, including senior Vice President of PV, and <unk> Senior Vice President and CFO of Russia, and Cif's region, Vice President and CFO of South East Europe .
Senior director and CFO of Pepsico, Australia, and New Zealand and senior director of strategy and planning of China beverages, we look forward to utilizing his significant experience in both domestic and international opportunities for those of you who did not have a chance to join our conference call discussing.
Discussing the key drivers of this agreement and transition a replay with the slide presentation can be accessed on the webcast, including the link in the press release that was.
As released Monday August one.
Moving to some additional financial highlights for the second quarter sales hit another quarterly record of $154 million in our U S revenue totaled $145 4 million as approximately $22 million increase sequentially from the first quarter and U S. Revenues revenue growth was driven by continued new store additions with C store additional drivers.
A significant portion of the U S growth.
<unk> expansion additional cold placements, where both our branded Celsius cooler and expanding in retail coolers International sales represented approximately five 6% of total sales for the quarter.
Sales down about $2 9 million or 25% to $8 6 million from $11 5 million a year ago quarter, driven by the Nordic revenue decreased to $7 3 million compared to $10 8 million. The prior year. This was partially offset by sales in our other international markets, which totaled approximately $1 3 million.
Was up.
$680000 and included royalties from China.
Gross profit for the quarter increased 110% approximately to $59 3 million up from $28 2 million for the year ago quarter gross margins were approximately 38 five.
5% or about 44%, excluding outbound freight compared to 43, 4% at 51, 8% excluding outbound freight in the prior year quarter. This represented approximately 190% basis point decline from the first quarter margins and is consistent with our expectations that we discussed on our Q1 earnings call and we expect Q2.
As came in as expected with where we saw our margins under pressure due to the large percentage of international cans flushing through during the quarter, we reiterate and I expect expectations of sequential gross margin improvements throughout 2022 with fourth quarter gross profit margin is expected to be in the mid forty's with the exception.
Higher cost with international cans, a majority of our other Cogs increases have been offset by scale efficiencies raw materials production full truck shipments and reducing the miles on cases as well as optimizing our six orbit warehouse expansion, which we announced last fall.
Our product channel mix has also been impacted margins as well in regards to the club channel revenue, which has historically been lower margins due to the secondary re packing facilities that is required and needed with this rapid growth in channel, which represented approximately $30 9 million of revenue in the second quarter.
Has increased the overall margin pressure and we continue to take initiatives and through production initiatives to improve margins in this channel, including working with our co Packers who are working on our capability is to basically conduct a multi packing in line versus hand packing. So this will improve our margins on a go forward basis, which we expect to implement at sometime in the fall.
Quarter.
We're early in Q1 of 2023 overall, we see continued to expect the cycling through the majority of our remaining international cans in the third quarter in conjunction with the price increase rollout. Our we expect our margins to move back to that mid 40 range in the fourth quarter, even with a higher mix of club business. In addition, we are transitioning from a significant number.
Our independent distributors.
A co distribution this will allow our team to consolidate sales marketing and distribution efforts with associated cost benefits, which we expect to recognize in leverage once the transition is complete we will provide additional clarity on both margins operational leverage and targets as we move through the transition, but expect additional net benefits on both of these metrics.
Some additional highlights for the second quarter, our DSD network sales delivered growth of 208% in the second quarter when compared to the prior year totaling approximately $61 9 million with over $41 8 million approximately an incremental revenue generated during the quarter and our fitness and vitamin specialty channels.
Launched a co branded displays with cycle bar and we expanded into a lifetime fitness. We are now the number one selling SKU brand and fitness and saw record revenues in June .
On our mass club channel continues to accelerate the club channel now totals 1337 locations with approximately an expansion of 175 BJ locations as discussed we expanded in the second quarter and.
In the convenience channel our stores continue to increase our store locations increased by 97% or over 40000 locations to 82000 locations at the end of the second quarter of this year. This compares to 42000 locations at the end of the second quarter last year, the convenience store channel accounted for on retail on sale.
According to IRI spins of about $87 million in the second quarter and our sales were up 227% compared to the second quarter and 2021, According to IRI Spence.
Industry backed third party data continues to show accelerated growth metrics. We are confident that Celsius will continue to drive sales, even higher as we increase our ACB across channels and launch additional nationwide and expand our independent chains through our new distribution agreement with Pepsico.
Consumer demand for Celsius on a dollar basis accelerated through the second quarter of 2022 and through July of 2022 to record levels. The most recent reported Nielsen scan data as July 16th 2022. So it shows Celsius sales are up 143% year over year for four weeks, 194% for the 12 weeks of 185 for the <unk>.
<unk> quarter this.
This compares to the earnings that the overall energy category grew 8% for the four weeks, 8% for the 12 weeks of approximately 8% for the second quarter over the same period.
On Amazon Celsius continues to maintain the second largest energy drink spot with a 22, 6% approximately sharing the energy category ahead of Red Bull as a share of approximately 10, 6% Gen. Just behind monster at a 24, 7% approximately this is as of the latest four weeks ending July 32022 stack line energy category data toll.
U S.
Celsius year over year sales is up 185% compared to Amazon energy category, which is up 79% Celsius is outpacing the category growth on the platform by approximately two 5% on a year over year basis and that is the four weeks ending July 32022 stack line total energy total U S.
The company placed an additional 800 coolers in the second quarter of 2022 and over 2007 hundred since the beginning of this year. The company anticipates. The continued acceleration of cooler placements throughout 2022, our total U S store count now totals approximately 196000 locations nationally growing over 59000.
Doors in locations or 54% growth from 109000 doors or stores reported as of the end of the second quarter of 2021 with additional expansion plan throughout 2022 and acceleration anticipated with the new partnership with Pepsico.
On a co Packer front, we continue to expand our co Packer partners in scale at existing locations improving line priority time, our total U S. Co Packer footprint totals 13 that are active which will help protect future out of stocks and support our massive growth.
Internationally Nordics revenue totaled $7 3 million a decrease from the prior quarter, primarily due to foreign exchange rates and timing of orders and both timing of new launches with end consumers as well as supply chain delays in the market revenue from other markets totaled at $1 $3 million was up 957% from 680 <unk>.
Which included revenues from China.
As we have publicly stated on past several calls we continue to explore discussions with large scale international distribution partners, which can facilitate material worldwide expansion I am excited to say we have now found that partner as part of the Pepsico distribution agreement Celsius is now the preferred global energy partner with Pepsico, which holds the number.
<unk> position in beverage distribution globally, while we just began our distribution partnership with Pepsico and the initial focus will be on U S distribution transition to their networks, we see significant opportunities to capitalize on global scale, reflecting the changes in consumer preferences for better for you offering which will now include the distribution partnership to accomplish our.
International expansion goals.
Before I turn the call over to Jared I want to close my prepared remarks, recognizing the amazing job of our entire team and all of our partners has what they have done establishing Celsius is the leading driver of brand growth in the energy category over the first half of 2022 and the incremental opportunities for growth going forward with our new.
Partner Pepsico.
To turn the call now over to Gerry Lyons, our Chief Financial Officer for his prepared remarks Jared.
Thank you John and good afternoon, everyone before jumping into the results I'll cover a quick housekeeping item as an update to our previously disclosed SEC inquiry. We have fully responded to all follow up questions, but do not have any material updates to data on this process other than reaffirming our previous comments.
Turning to our second quarter financial results, our second quarter revenue for the three months ended June 32022 was approximately $154 million, an increase of $88 $9 million or 137% from $65 1 million for the three months ended June 32021 Approx.
Approximately 103% of this growth was as a result of increased revenue from North America, where our second quarter 2022 revenues were $145 4 million, an increase of $91 8 million.
Or 171% from the 2021 quarter.
The balance of the revenue for 2022 was mainly attributed to European revenue of $7 $3 million, which decreased from the prior year quarter, primarily due to foreign exchange rates and timing.
Asian revenues.
Which include royalty revenues from our China licensee contributed an additional approximately $900000 an increase of 43% from approximately $600000 for the prior year quarter, which includes increases in royalties payable under our licensing agreement.
Other international markets generated approximately $400000 in revenues during the 2022 quarter, an increase of roughly $400000 or 634% from the prior year quarter.
Total increase in revenue was largely attributable to increases in sales volumes as opposed to increases in product pricing. The primary factors behind the increase in North American sales volume were related to continued strong triple digit growth in traditional distribution channels combined with an increase in optimization of our product presence in world class retailers I E.
Additional skus.
Additionally, the continued expansion of our DSD or direct store delivery network resulted in significant growth in distributor revenues of in excess of 200% when compared to the prior year quarter.
Gross profit for the three months ended June 32022, gross profit increased by approximately $31 1 million or 110% to $59 3 million from $28 2 million for the three months ended June 32021.
Gross profit margins reflected a decrease of 38, 5%, 44% excluding outbound freight for the three months ended June 32022 from 43, 4% or 51, 8%, excluding outbound freight for the 2021 quarter.
The increase in gross profit dollars is related to increases in volumes, while the decrease in gross profit margins is mainly related to higher raw material costs, primarily aluminum cans ocean freight costs transportation costs and repackaging costs.
We estimate that the increase in gross profit dollars of approximately $31 $1 million from the 2021 quarter to the 2022 quarter included $47 million related to volume increases as well as an unfavorable cost impact of approximately $7 $5 million in unfavorable currency impact of $2 1 million.
Yeah.
As a percentage of sales sales and marketing was 21% of revenue in the second quarter of 2022 compared to 24% in the second quarter of 2021, as we were able to leverage our accelerated growth.
General and administrative expenses for the three months ended June 32022 were approximately $14 4 million, an increase of $2 1 million or 17% from $12 3 million for the three months ended June 32021.
Employee costs for the three months ended June 32020 to reflect an increase of $1 million in investments in this area also required to properly support our higher business volume in the commercial and operation areas of the business as well as travelling expenses, which are now being incurred.
Administrative expenses amounted to $6 $8 million or an increase of $4 $1 million when compared to the prior year quarter, depreciation and amortization increased by approximately $200000 when compared to the prior year quarter.
These increases were offset by a $3 million decrease in stock based compensation, which amounted to $4 $2 million when compared to the prior year quarter.
Management deemed it very important to motivate employees by providing them ownership in the business in order to promote over performance, which translates into the continued success of our business based on key performance attributes all other administrative expenses, which were mainly composed of research development and quality control testing decreased by approximately $200000 from the second quarter of 2010.
One.
Lastly, as a total percent of revenue G&A costs decreased to 9% of sales for the three months ended June 32022, compared to 19% in the prior year.
When excluding stock based compensation G&A costs decreased to 7% of sales for the three months ended June 32022, compared to 8% in the prior year.
Net income for the three months ended June 32022 was $9 2 million or <unk> 12 per share based on a weighted average of $75 million 451165 shares outstanding and dilutive earnings per share of <unk> 12 based on a fully diluted weighted average of 78070 $8 million three.
Third 71705 shares outstanding which includes the dilutive impact share based awards of 2.920 million 540 shares and.
In comparison for the three months ended June 32021, the company had net income of approximately $800000 or one seven per share based on a weighted average of $73 million 158836 shares outstanding and the dilutive earnings per share of <unk> based on fully dilutive weighted average of 77 two <unk>.
Hundred 38389 shares outstanding.
Focusing now on liquidity and capital reserves as of June 32022, and December 31, 2021, we had cash of approximately $60 million and $16 $3 million, respectively, and working capital of approximately $197 $9 million and $169 $2 million, respectively with no long term debt.
Cash flows provided by operating activities totaled approximately $42 $3 million for the six months ended June 32022, which compares to $30 3 million net cash used in operating activities for the six months ended June 32021, the approximately $72 $6 million increase in cash generation was driven by <unk>.
The increase in net income and improvements in working capital.
I wanted to cover a few additional metrics, we believe provide a good.
Good perspective of our operational performance in the second quarter, starting with inventory total Q2, ending inventory decreased $262 million from $191 million as of December 31, 2021. In addition, raw material inventory decrease from approximately $90 million in the first quarter of 2000 $22 million to $57 million in the second quarter.
<unk> with the reduction primarily representing the pull through of international can as long as the fantastic job, our sales and operations teams have done and selling product over the summer.
As we've stated a number of times, even with this decrease we are carrying some additional inventory as we work our way through the busy selling season and also with the ongoing supply chain challenges, but we have not seen any major disruptions in our supply chain network as demonstrated by our phenomenal fill rate with the latest injection of funds from our Pepsico transaction, we have sufficient firepower.
Take our business to the next level as we transition into the Pepsico distribution network across the U S and then internationally.
This concludes our prepared remarks, operator, you may now open the call for questions. Thank you.
Thank you the floor is now open for questions. If you would like to ask a question. Please press star one on your telephone keypad at this time.
Our first question comes from.
Peter Grom with UBS. Please state your question.
Hey, good afternoon, and congrats on another strong result, so I know, it's really only been a week here, but would just love to get some perspective on whether you have some.
Updated thoughts on the Pepsi distribution agreement have you begun to wrap your head around like kind of a long term revenue opportunity and how we should be really thinking about the benefits of topline growth looking out to 2023.
Yes, Thank you Peter.
The team did a great job of results and we are starting to work through that process.
Based on our analysis when we look at it when you look at the opportunity. We are also looking at the results from Bang relationship on the increase in points of distribution in GDP. We do anticipate the expansion into these alternative channels are unreported as well in regards to food service and also independent.
Independent convenience, we see a huge opportunity for the brand to expand and we anticipate about a 40% increase in distribution at the end.
Define this relationship over the first 12 months and it could be a significant upside from that number but initially it's earning internally, we're going with a 40% increase over our expected growth rates.
We are internally had over the last 12 months.
Got it Super helpful and then.
Yes, following up on a separate topic just the gross margin progression I know you reiterated sequential improvement, but still kind of a meaningful gap versus where you landed in Q2 versus kind of getting back to that mid <unk> and <unk>. So is there any way to frame kind of the expectation for <unk> and then kind of the build up from there.
Thanks.
Yes. Thank you Peter we spoken to I think it was our Q4 call we talked about like some of the impact on the percentage.
Roughly around 6% in regards to some of the impact we are getting from the international cans. So we are still cycling through so I know it looks like a big increase as we expect to be back in the mid 40 percents in Q4.
Q3, probably could be somewhat similar there is some upside we do you think.
There is potential for sequential growth.
We're working through cycling through the rest of these international cans that are on our balance sheet. All the cans down a majority of the cans are now in finished goods. So.
We will be cycling, we anticipate the cycle through the majority of the finish of.
The international cans in the third quarter, so it's hard to say.
The exact percent where that will land, but we do think there is sequential growth in the third quarter and then our goal is to get back to the mid 40 range by the end of the Q by the end of the fourth quarter.
Thanks, so much and congrats again.
John .
Thank you.
Our next question comes from.
Come off <unk> with credit Suisse. Please state your question.
Thanks, everybody.
Could you talk about the club channel a little bit you mentioned you gave a good amount of congrats on your success in club how much of that was.
First time.
<unk>.
Or some kind of continuation, obviously bj's seems to be a bit new.
And can you maybe just talk about what we should expect from this channel going forward now that you seem to be in.
Quite a few more stores.
Yes.
A question the company has been really surprising to US. We first started expanding in that channel and really that happened in the fourth quarter with the national rollout at Cosco.
And then in the first quarter of this year, we expanded into Sam's club, so when youre looking at the second.
What are you really looking at Reorders from those customers now about 175.
Stores for Bj's aren't new but in general Youre looking at majority of Reorders that are flowing through those clubs.
Volume going through those clubs is just really exciting because.
It shows the opportunity and we're not seeing any slowdown as an alternative from the other channels as well. So it was really incremental to our overall sales.
Okay, Great and then on.
Been a week now you've probably had some tough.
Tough conversations on the on the transition over to the Pepsi system could you just talk about.
What youre doing to try to keep it be assumed as possible.
Yes, we're working with the teams have spent a lot of time today with the teams as well trying to work on to get our plans had we have a lot of team members that if it works through the Pepsico transitioned in the past.
And I think with the groups involved theyre going to hopefully be able to mitigate as much disruption as possible. We know there will be disruption, where we're trying to put plans in place to mitigate that especially with the transition of the timing.
When the your existing distributors and your new partner I can start servicing chains, we're trying to work closely with a lot of our distributors, we're going to start.
Really working with them on the transition piece trying to limit the impact that you see in the marketplace.
That's the best we can do at this point, we do have plans in place and we're working to fill that supply chain on the Mexico system working on that over the next several weeks, we'll be throwing a lot of their mixing centers at first.
Where we go and then we'll move to direct with some of the larger distributors to really optimize.
Shipping costs and logistics costs as well.
Got it great. Thank you.
Our next question comes from.
Kevin Grundy with Jefferies. Please state your question.
Great. Thanks, Good afternoon guys.
I want to pivot to the international business. Two part question. The first one just sort of near term cleanup Jared I think you mentioned the results in Europe .
Some of it was timing related.
Certainly the stronger dollar played a part.
Should we expect to see that reverse if there's such a smaller part of the business, but I think it's sort of enough to move the needle a bit versus versus the street in the quarter, maybe just comment on some of the near term dynamics and I think John more importantly of course is going to be the opportunity.
With Pepsico, where I understand that they are a writer first refusal.
For the international distribution, maybe just speak to how quickly you can move on that opportunity balancing the significant opportunity you have.
In the U S as well.
Yes, so the first part.
There was some issues in getting the supplies of the product that we need it.
Especially for a new line that we were trying to get into new SKU into Sweden, and so we werent able to get that into the selling season. So we did miss that.
If you look at July we've had very good results.
The team worked and been very focused on making sure that we've got products on the shelves and so we are moving back into the right direction and we fully expect.
The team to be good shape in the back half of the year.
After the year when we did have a lot of supply chain issues.
Many of those were around the location in terms of availability of transportation because it will be utilized for other other needs.
But at the moment, we are we are ready and the product is on the shelf and we saw that.
Very good results.
In July and we expect good results the rest of the year.
Yes, and Kevin I'm part to your question regards to the international opportunity.
We see massive opportunities like I said before the <unk> health and wellness trends that we see in North America or global trends.
Fitness health and wellness trend is a mega trend that's going to.
Really taking on all regions of the globe.
I think it's going to be training and sequencing, we do not want to we don't want to make sure that when we entered the market we answer it correctly.
Methodically on our approaches that we've done to make sure we build that loyal consumer to really become part of a daily lifestyle daily routine really adamant on that as we build scale.
I want to be cognizant entered a new market, but I'm talking about the UK and Germany near term opportunities.
But right now we're really focused as a company on this transition we want to make sure there's North America transition.
Completed.
Lease disruption as possible and then we do have ongoing discussions.
Opportunities in the UK and Germany to explore.
Thank you both.
Quick follow up on what Youre seeing with current trends as we look at the Nielsen data the category has slowed a little bit.
Data still looks quite good I think the distribution gains excuse me the sales gains are.
Year over year sales growth being more driven by distribution and velocity I think than it has been more recently you wanted to speak to that at all or has anything been surprising to you in terms of how your results have come in or with respect to pull through from.
From a velocity perspective as you've expanded.
Into into additional doors.
Yes, Kevin I think the brands performing really well.
Given the growth we've seen especially over the most recent resets and entering new markets and new retailers so well.
What we are watching it we watch it very closely.
Do see good growth coming out of our established market some of our new markets as you enter new market. Your velocity is not going to be as high as some of your more mature markets that are building. So we're being very cognizant of not very methodical on our targeted marketing programs and really making sure. We're building the brand awareness in those markets, where our strategies over the next really right now in Q3, we have a lot of great pro.
Graham is going on and see that towards the back into the back half of this year and into 2023. So that is something we're watching very closely but we think the velocity levels are extremely strong, especially given the expansion in the ACD gates.
Okay very good. Thank you both of the time I appreciate it and congrats on the quarter.
Thanks, Kevin.
Our next question comes from.
Mark after Tan with FIFO. Please state your question.
Yes, Thanks and afternoon, everyone, partly just following up on that question. So if you look at where your penetration is versus the energy drink category in larger peers you have roughly.
50% of sales coming from C stores. So I guess as you think about expanding that probably via the Pepsi.
Partnership how how do you factor in the velocity and what should be a higher sales per unit or per space channel. That's the first question.
Yes, we think thats. Thank you Mark.
That's the biggest opportunity as well.
With the Pepsico system is really being able to further expand the ACB inconvenience at the latest data shows 67% of the volume in the energy category is coming from the convenience channel and.
When you look at the data.
And I look at how the product is performing in some of the broader retailers getting circle K Speedway Qt racetrack just to name a few of those the product is doing extremely well in those retailers and as we're entering.
As we enter new markets, you are going to see a slower velocity at in the beginning but we're seeing a higher velocity than we saw prior several years back when we were entering new markets. So the velocity level doesn't seem too.
The new stores you enter slowly neither get cargo get involved into the daily consumers' lives, but then we do see that building. So we do think that'll balance out now as we further expand into the larger convenience store channel and we get a higher ECB. Some of those stores will not be as productive as some of the stores that we're in currently so just keep that in mind.
As well just given the geography the volumes on some of these other call it tier three or tier four account that will be entering so that's something to keep in mind.
We'll also benefit from moving into the mixing centers because it will be able to go with Pepsi and with their products into these smaller can be used as opposed to just going in on our own so there'll be some benefit.
Combining with them and working with them on their metals program and a variety of different things that can help keep our velocity up at the same time. So we think there's some things that will help it go.
But there's definitely as we enter new markets and new territories.
We're pleased with what we're seeing but it is a little slower to get things moving.
Like Johns mentioned a variety of times, we're really excited to see what we can do with foodservice as well, yeah, and I think just as well when you look at where the opportunity lies is better placement in existing accounts as well and better placement of new new distribution points getting into that what we call the bullseye within the coolers and getting it in that store.
Right.
<unk> been working on we think Pepsico would be able to really leverage that especially through their metals program as we expand independents.
Okay.
Got it that's helpful. And then maybe just following up two related questions to that one.
Why isn't looking at Bang distribution point, the ultimate opportunity rather than just the 40% increment italic that you are talking about I think if you look at the data roughly in place the points of distribution that Celsius is today and then second question just on the mixing piece of it maybe.
Maybe talk a bit about that.
Is that a potential starting point, how do you think about potentially working with Hep C from a co packing standpoint, as well to sort of more cohabitate everything together under one roof.
Yes, I think your first question regards to the 40% increase in distribution I think that's a great reference point, that's really what we're using internally we were just.
Mentioning Bang, we did watch that expansion through that process, but I agree just a 40% increase.
The overall distribution is kind of what we're expecting here over the next 12 months. When you do look at the initial rollout with Pepsico on logistics and operations side, we will be entering their mixing centers for immediate efficiencies to feed out to their distribution networks in a very most efficient manner and then we will continue to optimize.
That going direct with some of the larger houses.
When you look at production and co packing I think thats opportunities down the road, but something we're not discussing today.
And just to be clear distributions.
Top line.
I think you've got that mark, but just to be clear on the call. We're not looking for all of a sudden the topline to be 40% higher than we had expected we're looking to get to the distribution of 40%.
Yes, no I think that's well understood by folks thank you.
Thank you.
Yeah.
Our next question comes from.
Jeff Van <unk> with B Riley. Please state your question.
Yes, Hi, I just wanted to follow up on that.
The Nordics business, the Pepsi partnership change and oil business in that in those countries.
As well as the fast protein business associated with that.
Hey, Geoff Great question, right now really not we haven't really.
Explore those opportunities, yes, I do think we do think there's a big opportunity for the SaaS portfolio Pepsico based snacks business as we all know.
And our fast portfolio is one of the leading protein snack portfolio in Finland. So there is opportunities there, but I think we're a little bit earlier in the phase on the discussions there, but there is opportunities from Newark opportunities to get further synergies and leverage best practices and their distribution partners throughout those regions.
Okay, and then I wanted to ask you about your plans for coolers I know, obviously, you have a lot more capital to put into to buy more coolers, but.
Co location with Pepsi coolers, or how does that all above now with Pepsi.
Far as being called.
<unk> is another great opportunity, we spent spending some time talking about we're going to be entering some of their co branded energy coolers better.
Roughly about $50 to 70000 of them out there in the marketplace just in North America alone. It will be included in those coolers. So we're pretty excited about that in addition, we will be placing one of the big strategies as we all know we displacing coolers and we have over 2700 that we placed so far this year in the first six months.
We're looking to ramp that up we do have orders in hand already placed for larger cooler placements.
Getting a lot of interest on those as well I'm trying to get him six feet from the checkout is ideal thats, where we want to be obviously, great rotations and great opportunities, but we're definitely focused on placing coolers that front checkout.
Okay, and then just one more if I could squeeze it in just any comments on pricing your pricing strategy.
Our pricing strategy has not changed.
We're pricing strategy, we did take price as we announced we will expect we are growing that through a phased approach.
And we are monitoring pricing very closely as we continue to move forward. The category is price sensitive a promotion sensitive as well. So we do think there's opportunities for to take price with the brand as we maintain our premium position.
Okay, Thanks, and best of luck.
Hey, Jeff.
Okay.
Our next question comes from.
<unk> Cohen with Ladenburg. Please state your question.
Hello, gentlemen, congrats on the news last week and congrats on the S&P upgrade.
Thanks, Jeff.
Just a couple of questions from our side, so any commentary specifically on the rollout of the the heat to go sticks as far as early learnings and I'm assuming <unk>. Six are also part of the deal with perhaps you as well.
Yes, thanks, Jeff the powder product is going to be something we're managing internally that's.
That's not part of the Pep secured arrangement.
Are seeing great interest in our powder products, you'll see him at expanding into Walmart, many retailers, including down here in Florida publics as.
Well online we do think on the go for our core consumer.
A smaller portion of our revenues does contribute to good growth good.
Gross margins, but and it tastes great. So there is an opportunity in the portfolio, but that is not part of that Pepsico.
Our ratios, but you will start to see it in more retailers around the country, Yes, we do see an opportunity to really expand the distribution across the retail market and it's a product that can be transported pretty easily because of its lightweight so we'll be able to roll it straight into the distribution centers of the various retailers.
Okay got it that's helpful. Jerry could you maybe walk us through and comment on the.
Sales and marketing and G&A for the back half the year and going forward does it just doesn't seem unreasonable that we should expect a more muted ramp with the Pepsico arrangement.
Yes.
In Q3 will probably keep our foot on the gas.
Sales and marketing piece.
Where we're seeing our leverage within G&A and within Essent.
Is that really our people costs, where we're able to scale up our business without adding the same number of heads over the last if you look year over year. So we got about 1%.
Mining of percent on the G&A line.
From.
Expand at the same rate from a personnel needs. So I think we'll be able to continue to maintain.
That kind of trajectory both from a marketing and a sales perspective, we will keep our foot on the gas.
And keep that going while we while we're doing the restock and model and really rolling into the Pepsi footprint do you want to keep the velocity not only want to keep the demand there and keep the brand in front of mind.
Got it perfect. Thanks for taking our questions.
Thank you.
Okay. Our next question comes from.
Yeah.
Anthony Vendetti with Maxim Group. Please state your question.
Thanks.
Just a couple of questions first on the <unk>.
Expanded distribution, you've mentioned, 40% plus.
Plus.
With the Pepsi distribution agreement you'd be able to expand by 40% just on the capacity side.
How quickly are you able to ramp up capacity to meet that is that is that currently in your current capacity you do have to sign additional co packer agreements and just kind of where you're at with that and then I have a question about the termination agreements with the distributors.
Yes within our current orbit structure that we've set up we do have that capacity to flex up.
Meet the demand of the extra 40% in 2023 and also to continue to expand in 2024 and 2025. So as we look out over the next three years from an expectation perspective, we've got plenty of capacity with our current system to meet the demand.
And then on the termination agreements I know that.
He's going to help with that.
What percent approximately that you're going to pay.
Of those terminations agreements with your DSD networks.
Yes.
Yes.
Got it.
We're not going to be able to get all of our DSD network.
This year, we think we can get most of it in this year.
I think the way, we're managing is consistent with how pepsi's managed Rockstar and Bang in terms of growing into distribution there will be some distributors that we keep.
And there will be some distributors that over the next year or two years or maybe even three years that will rollout. So.
As we get farther away.
Further discussions will happen with between us and Pepsi in terms of where we want to go.
At the moment, a majority or most of the cost of these terminations will be borne by Pepsi as a part of the partnership.
Partnership Okay.
Alright.
That's all I have for now thanks.
Thank you Anthony.
Okay. Our next question comes from Sean Mcgowan with Roth Capital. Please state your question.
Thank you.
Following up on some similar questioning before.
Is there a scenario where you might imagine.
Sales and gross margin actually dipping ahead.
The full benefit of the transition sort of disruptive scenario, where you actually have a slowdown in sales and a drop in gross margin or should we expect it to be kind of smooth up into the right right from the get go.
Hello.
In regards to extraordinary well.
You will see the third quarter, we are going to have.
Ordering to fill order into the Pepsico system and then we will have some returns.
That are going to be coming through as we pick up inventory. So it is going to be there's going to be a lot going on in the P&L in the third quarter in regards to sales with the pipe order to Phil and then returns estimated returns on product.
In case, we have to pick up product, which we likely will be picking up product from.
From those distributors that will be terminating so.
The margins, we do feel should be somewhat accretive from this point forward, but.
Soft guidance on that I don't know Jerry so anything there.
It's really going to be at those to make sure that we're meeting our fill rates.
So that's what we've been planning with our operations team and our sales and marketing team is really to make sure. We got the product on the shelf so long as the products on the shelves the consumer will notice the difference.
There will potentially could be some selling and as we move away from one group of distributors and into the other groups. So there could be a little bit of noise on the back side, but we believe that we'll be able to keep a good.
Tightly on things in terms of making sure your product on shelf.
Okay. Thanks.
Yes.
So on your head Jared.
You talked on the last call last week about some things that you might help us out with on how they will be accounted for.
These distribution fees I don't imagine, it's kind of all hit in one quarter.
Is that a fair assumption that it could be.
Spread out over several quarters, how is that going to be accounted for and how are you going to treat the assistance that you get from a P&L standpoint, and as the Pepsi investment right now sitting on the balance sheet as $550 million in preferred stock.
Yes.
Okay.
That settlement fees the termination expenses.
We'll have to book an accrual for any.
Distributors that we basically sent a letter sent determining.
No Don So majority of the termination expense will be on the books at Q3, there will be some that have not.
10 letters for there are some that we need to.
Don't have a.
Yes.
60 day term or 90 day term of 120 day term that might have a one year term. So we wouldn't have sent that yet.
So there will be most of them will be on the books.
Stragglers out there, but the majority of that will be in Q3, it will be recorded within opex as an expense. So it would be very significant.
To give you a perspective I think when we look back at Monster It was something like.
I don't know.
$12 million or something.
That impact.
So it will be significant on our P&L, it will likely be higher than that with inflation that monster pay their fees.
While ago.
With that said the assistance that we will get we will be.
Recorded into the balance sheet and it will be amortized over the life of the agreement with Pepsi We are kind of reviewing what we believe that churn would be.
Because theres a variety of clauses within the agreement that we need to make sure lineup with gap and that we're making the right decision in terms of what.
The lifetime of that rollout would be so.
Expense more or less will be hitting the P&L.
The impact of.
Assistance from Pepsi will be borne over a number of years in terms of the preferred stock at the moment. The based on the way we are reading the research is that it will be a mezzanine equity.
Should be finalizing that up in the next few weeks so in terms of what our expectations are.
Or can that aspect.
Okay, and then on the termination fees just to clarify so if you know that youre going to be taking just a hypothetical number of $150 million you booked at $150 million as an expense in Q3, even if you did lay out all of that cash in Q3. So some portion of the offset would be assistance from Pepsi and the rest.
It would be just simply didn't pay any cash it right. It's just.
Prepaid asset or something like that right.
So the cash the cash impact.
Should be nominal.
But it will be expense is just the timing thing so.
On the cash flow statement, it will be nominal there might be a little bit of timing, probably probably not much if any.
Right, but on the <unk>.
Yes.
It will actually be the deferred revenue deferred.
Deferred revenue Okay, alright, thank you.
Okay.
Our next question from from.
Anthony.
<unk> with the Maxim Group. Please state your question.
Yes, thanks for taking the follow up just a quick question on the.
The international revenue.
I think you mentioned on the call John .
Jared I don't know, but timing of some shipments supply chain issues.
That's something.
North Americas.
Incredibly strong growing well over 100% for the last couple of course.
Is it a distribution issue or.
Or is it is it a combination of distribution supply chain is that something even though I know, it's not a focus right now but is that something that you think.
FC distributor agreement will help address.
Yes, so over in the Nordics it was more of an ingredient issue.
Getting the ingredients to our co pack partner in order to manufacture the product.
And there were some distribution or not distribution, but supply chain channels that got disrupted because.
The activity that was going on over there still continues to go on over in that part of the world. So that was the biggest piece and because we couldnt get the right raw materials.
The new products, we are launching a new SKU, we were launching we werent able to get that to market in time for the summer selling season, so that was the.
The biggest component over in Sweden other than obviously, the FX impact that we had there was a little bit of the same kind of things that happened.
Finland as well from an ingredient perspective, those suppliers are back on track again, we've got our product and we have been working with Paul who's over in the U S.
Yes on making sure that we've got enough stock over with.
With our actually the German co Packer as we go forward. So that we don't have to worry about the stocks that we had before.
So is that something you expect to be resolved here in the current quarter or is that going to take another couple of quarters.
This result.
A lot of logistical challenges in the second quarter to Anthony.
Jared mentioned there was a lot of.
A lot of disruption in supply chain.
Our European partners.
And the second part of your question related with Pepsi.
With their organization and their scale and ability from a procurement perspective, it will definitely benefit us from a supply chain perspective, and a purchasing perspective.
Both here and over in Europe , but like you said it will be a huge opportunity for growth in Europe , because they've already got the supply chain set up the distribution setup, we do have product that we're already manufacturing over there. So we are over there.
So launching over there would be will be less complicated than if we didn't have anything over there already.
So it does set us up well as well as over in Asia in that part of the growth.
Because we've got a co packer over there as well.
Okay, great. Thanks, guys I appreciate it.
Thank you.
I will turn the call back over to management for closing remarks.
Thank you on behalf of the company would like to thank everyone for their continued support and interest our results demonstrates our products are gaining considerable momentum we're capitalizing on today's global health and wellness trends and the transformation is taking place in the energy category.
Active lifestyle position is a global position with mass appeal, we're building upon our core leveraging opportunities and deploying best practices.
We have a winning portfolio strategy and team and a large rapidly growing market that consumers want in addition, I'd like to thank all our investors for their continued support and confidence in our team and thank you to everyone for their interest in southeast stay healthy stay fit.
Okay.
Thank you. This concludes today's conference call. We thank you for your participation you may disconnect. Your lines at this time and have a great day.
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