Q3 2022 Celsius Holdings Inc Earnings Call
[music].
Good day, ladies and gentlemen, and welcome to the Celsius quarter, three 2022 earnings call.
Lines are in a listen only mode.
Sorry.
And the floor will be open for questions and comments following the presentation.
If you should require assistance throughout the conference. Please press star zero on your telephone keypad to reach a live operator.
At this time it is my pleasure to turn the floor over to your host Cameron Donahue, Sir the floor is yours.
Yes.
Thank you good afternoon, everyone.
Joining us today for Celsius Holdings third quarter 2020, Q2 earnings Conference call joining me on the call today are John .
President and Chief Executive Officer, and Jeff <unk> Chief.
<unk> financial officer.
Valued at fair remarks, well open the call to your questions and instructions will be given at that time.
Company released our earnings press release on Monday closed.
Raw materials will be available on the company's website.
<unk> Holdings, Inc. Dot Com as a reminder, call turn the call good job, although a replay will be available.
Later today, you can access with the same logic webcast conference call.
Please also be aware this call may contain forward looking statements, which are based on forecasts expectations and other information available to management as of November nine 2022.
These statements involve numerous risks and uncertainties, including many that are beyond the companys control.
Except 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 statement contained in today's press release.
In our quarterly filings with the SEC for additional information.
With that let me turn the call.
It keeps executive officer, John <unk>.
Yeah.
Thank you Cameron and good afternoon, everyone and thank you for joining US today the company achieved a record quarter in the third quarter of 2022 with sales over $188 million delivering revenue growth of over 98% and according to their most recent scan data at retail per IRI <unk> total energy one week.
Ending October 23, 2022 Celsius is now the third largest energy drink in the United States.
In addition, according to the trailing 12 week IRI <unk> total energy as of October <unk> 2022, representing the majority of the third quarter Celsius was again the number one brand driver of growth in the energy category in the United States responsible for 29% of the category growth driving over approximate incremental.
$123 million in sales for the category.
This represents the third consecutive quarter at the number one spot in prior to the transition to the Pepsico distribution network, which started October one 2022 and will be represented in our fourth quarter numbers, we continue to see growth across all channels, including the non tracked with our club channel sales.
In the third quarter totaling over $34 million and sales increased by increasing by approximately $20 million from the third quarter of 2021.
Amazon sales and other non tracked channel for the third quarter hit a new quarterly record of approximately $16 million and year to date in 2022 totaled approximately $43 million and was up 108% compared to approximately $21 million in the nine months ending 2021.
Third quarter retailer highlights include the benefits from our Walmart expansions announced in the first quarter of this year on a year to date basis, continuing its hit new revenue records in the convenience channel, where we see the largest opportunity Celsius continues to perform extremely well and accordingly, the convenience and gas IRI as of the 12 weeks ending October .
<unk> 2022, total U S energy Celsius sales increased 158% of channels setting a new sales record.
In the grocery channel, both Kroger and Publix lead the incremental revenue growth in the third quarter of 2022 with both retailers setting new records in sales and share gains in the energy category.
We officially commenced our distribution partnership with Pepsico subsequently to the third quarter with the distribution to most of our retail accounts transitioning as of October one 2022, while early initial track data on both HCV and items carried per store growth indicate impressive gains already <unk>.
<unk> and exceeding our expectations on both these tangible metrics. In addition, the transition process with respect to our retail partners as well as our consumers also has exceeded our initial expectations as highlighted in the earnings supplement for the one week ending October 23 2022.
IRI IRI data reported in Mueller total energy Celsius has passed their bank to be the number three energy drink in the United States with a 4.9 market share compared to <unk> $4. Four in addition, celsis has seen an approximate 11% increase in HCV since October .
Cobra one of 2022 and the initial launch with the Pepsico distributions network with average items carried per store increasing from an average of seven 7% to $8 three over the same time three week timeframe. The convenience store channel Celsius has seen the largest gain with approximately a 23.
<unk> increase in <unk> since October one of this year.
Our third quarter sales hit another record of approximately $188 million.
With U S sales totaling about $179 5 million and approximately $34 million sequential increase in the second quarter of this year.
Revenue growth was driven by over a 60000 increase in door count from the prior quarter with convenience store additions representing 37000 of the 60000 increase club channel expansion as well as increase items carried at locations in conjunction with increased placements at retailers, including both branded coolers at retail load.
Cases.
International sales only represented approximately about four 6% of total sales for the quarter with total sales of approximately $8 7 million compared to $10 4 million in the prior year quarter.
Our European revenues represented a $7 5 million of increments.
International revenue compared to $9 5 million a year ago quarter, a decrease of approximately 21%.
With around a third of the revenue decrease associated with foreign exchange impacts as well as timing of innovation and supply chain disruptions.
Revenue for the other international markets totaled $1 1 million up approximately 30% from 883000, which included royalties from China. We believe there is significant opportunity for international growth going forward with Pepsico as part of our distribution agreements that we entered into.
Both Pepsi and Celsius are committed and expanding internationally utilizing Pepsi is best in class International distribution system. While we just began our distribution partnership with Pepsi and our initial focus will be in the U S distribution and transitioning our distribution to the Pepsico.
U S distribution network, we see significant opportunity to capitalize on a global scale, reflecting the changes in consumer preferences for better for you offerings, low and no sugar and more need for more energy while the U S. Transition has taken a majority of our focus to date, we expect to have additional international Rollouts details through additional.
Calls and quarterly going forward through 2023.
Gross profit for the quarter increased 109% to approximately $79 million up from approximately $38 million a year ago quarter and gross profit margins were 41, 8% and 49, 6% excluding outbound freight for the three months ending October or September 32022, compared to $39 seven and 48.
Eight excluding outbound freight in the prior year quarter.
It represents a 330 point basis point increase from the second quarter gross margin percent and consistent with our expectations and discussions from our second quarter earnings Conference call. We reiterate our expectations for continued sequential gross margin percent improvements through the fourth quarter with gross margin percent is expected to be.
<unk> in the mid <unk> by year end.
Our product channel mix sale.
Sales mix also has been impacted margins as the club channel revenues has historically had a lower margin levels due to the secondary repack nature of the product with.
With the rapid growth of the channel, which contributed to approximately $34 million in revenue in the third quarter and has increased our overall margin pressure and we continue to initiate production efficiencies to improve margins in this channel, including working with our co Packers, who have the capabilities to produce in inline and also so we can limit the number of secondary.
<unk> production facilities, even with higher sales than originally forecasted <unk> sales mix in the club channel our margin guidance guidance has stayed consistent for 2022, as we continue to optimize our supply chain and gaining incremental efficiencies against rising inflation pressures.
In addition, with our other trends with our transition from a significant number of independent distribution partners to the Pepsico distribution network. This will allow our team to consolidate sales marketing distribution efforts with planned associated cost benefits, which we expect to recognize and leverage through 2023 and beyond we are.
We will also provide additional clarity on both gross and operating leverage and targets as we move forward through the transition, but I expect to see additional leverage as we look to drive efficiencies post transition.
Some additional highlights for the third quarter, 92% of our <unk> reported <unk> retail store locations are now serviced through our DSD network up from 72%.
Third quarter of 2021, our mass channel is now more or less 100% DSD service and 99% of our convenience channel and serviced by DSD.
Industry backed third party data continues to show accelerating growth metrics and we are confident that Celsius will continue to drive sales, even higher as we increase our HCV across channels through additional launches with nationwide retailers independent chains and through our new partnership with Pepsico distribution network.
Tumor demand for Celsius on a dollar basis accelerated in the third quarter of 2022 and as reassert accelerated after the initial distribution shift on October one this year to Pepsico distribution network.
Most recently reported Nielsen data as of October 22022 shows Celsius sales were up 118% year over year for the two weeks, 120% for the 12 weeks and 126% for the third quarter. This compares to the total energy category, which grew 10% for the two week period.
Pending 10% for the 12 week period, and 10% in the third quarter over the same time period.
Amazon Celsius is the second largest energy drink with an $18 five share of the energy drink category ahead of Red Bull at a 12 point as your 1% share and trailing monster at a 26 point to share on a year to date basis.
<unk> October 22022, and according to stack line total U S energy on Amazon.
Celsius reported sales year over year grew 79% compared to Amazon energy drink sales business, which grew at 39% outpacing the category.
The company placed an additional 550 coolers in the third quarter of 2022 and over 3500 since the beginning of 2021. The company anticipates, a continued acceleration of cooler placements through 2022 and into and through 2023. In addition to the incremental placements and Pepsi energy coolers, which.
Provides approximately over 50000 additional placements that are rolling out right now.
Store count now totals 174000 locations nationwide in the U S. Growing over 60000 doors are 54% from 114000 doors as reported in the third quarter of 2021 with additional expansion planned throughout the rest of the year and into 2023.
Acceleration by the and get being accelerated by the Pepsico distribution agreement.
Convenience store locations increased by largest by 77% or approximately 37000 locations to 86000 locations at the end of the third quarter of 2022 compared to 49000 locations at the end of the third quarter and 2021.
On a co Packer front, we continue to expand our partners and scale at existing locations improving lifetime priority. Our total U S. Co Packer footprint now totals 13 that are active which will help keep our products in stock and support our massive growth.
Before I turn the call over to Jerry I want to close my prepared comments, recognizing the amazing job of the entire team and our partners, which they have done establishing Celsius as a leading brand driving growth in the entire energy drink category in the U S. Our consumer demand remains robust our portfolio is resonating with a broad consumer.
Base and our teams are positioned to leverage opportunities for growth going forward with our new partner Pepsico I will now turn the call over to Gerry Lyons, Our Chief financial Officer for his prepared remarks.
Eric.
Thank you John before jumping into the financial results for the quarter I'll cover a few administrative items, including transaction related items stemming from our Pepsico distribution agreement.
It was a very exciting and busy quarter.
<unk> of the partnership with Pepsi through a distribution agreement and investment is a significant step in our growth and key to our ability to not only continue to grow the category, but to grow market share.
Although Pepsi did not start distributing our product until October one we worked in conjunction with their operations team to make sure that they add Celsius and all of their key locations across the U S.
As John mentioned, the transition has gone very well and we are excited to see the early results of this long term partnership.
So let's walk through some accounting highlights associated with this transaction.
Let's start with the termination expenses included within our quarterly results, we recorded $155 $4 million of termination expenses associated with termination notices issued during the quarter. So that we could transfer distribution to Pepsi.
We had an additional $50 million of termination expenses agreed upon in the fourth quarter as well, which will be recorded in our Q4 results.
We've already transitioned most of our distribution footprint over to Pepsi, but there'll be some activity in Q4 and through the beginning of Q1 2023.
These expenditures were funded by Pepsi and as a result, we have recorded the funding as a deferred revenue that will be amortized over the 20 year period of the associated distribution agreement.
And looking at the preferred share investment, we received $550 million in cash from Pepsi during the quarter as a payment for the series a preferred shares.
As a part of generally accepted accounting principles, we value this instrument at $832 $5 million and recorded this valuation net of issuance costs within the mezzanine section of our balance sheet.
The difference in cash proceeds and the valuation was recorded as an other asset and we will amortize this balance over the 20 year period associated with the distribution agreement as a contra revenue.
Let's stop taxes as well.
Our effective tax rate for the nine months ended September 32022.
Was negative 33, 5%.
Nine months ended September 32022 differed from the statutory federal income tax rate of 21%, primarily due to the tax impact of the $282 5 million series, a preferred stock value adjustment, which will be expensed over 20 years for book purposes.
This expense is nondeductible for tax purposes, we recorded 71 $4 million in deferred tax liabilities in the third quarter as a discrete item.
<unk> income tax rate for the nine months ended September 30 was also impacted by disallowed stock based compensation expense state and local income taxes and the release of certain state income tax reserves.
I believe that covers the unique items from the agreements with Pepsi and.
And looking at other activities that occurred during the quarter. We had previously planned on bringing our fast bar brand to the U S from Finland, but as a result of the Pepsi partnership we will be focusing on our core Celsius energy brand in the U S transition and rolling this product out internationally and in turn we performed evaluation, whereby we determined that the fast brand was impaired and the amount of $2 four.
$1 million.
Moving onto litigation costs as was noted in an 8-K that we issued last month, we have agreed to settle the class action on filing in the amount of $7 $8 million associated with our can label.
Although we believe that our claims and they can are accurate, we believe that the cost of energy and focus that would've been needed was better utilized on transit transitioning over to Pepsi and growing our business.
In regards to the SEC review, we do not have an update but we'll continue to cooperate with any inquiries or requests that are received.
Turning to our third quarter financial results. Our third quarter ended September 32022 had revenue up our.
Revenue of approximately $188 $2 million, an increase of $93 $3 million or <unk>, 98% from $94 $9 million for the three months ended September 32021.
Approximately 102% of this growth was a result of increased revenues from North America, where third quarter 2022 revenues were $179 5 million, an increase of $95 $1 million or 112% from the same period in 2021.
The balance of the revenues for the three months ended September 32022 quarter were mainly attributable to European revenues of $7 $5 million, which decreased by $2 million from the same period in 2021 due to foreign exchange rates.
Timing of new product launches and continuing supply chain challenges Asian revenues, which include royalty revenues from our China licensee contributed an additional $1 million an increase of 37% from approximately $700000 for the same period in 2021.
Other international markets generated approximately $200000 in revenues during the three months ended September 32022, an increase of 3%.
The total increase in revenue is largely attributable to increases in sales volume 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 an optimization of our products presence in world class retailers.
Additionally, revenues were increased as a result of building inventories at Pepsi warehouses and distribution centers in anticipation of the transition to the Pepsi distribution network. These revenues were offset by the prior distribution network, which reduced their inventory balances as a majority of the prior distribution system was terminated as of September 30th 2022.
Gross profit for the three months ended September 32022, gross profit increased by approximately $41 million or 109% to $78 7 million.
Gross profit margin reflected in increased to 41, 8% 49, 6% excluding outbound freight of revenues for the three months ended September 32022 relative to 39, 7% or 48, 8%, excluding outbound freight for the prior year quarter.
The improvement in gross profit dollars was due in part to the improved average cam prices within our inventory as well as improved freight costs relative to the third quarter of last year.
Sales and marketing expenses for the three months ended September 32022 were approximately $198 $8 million, an increase of approximately $176 $1 million or 779% relative to September 30 of 2021. This.
This increase was primarily attributable to termination expenses of prior distributors, which resulted in an increase of $155 $4 million when compared to the prior year quarter.
As a percentage of sales sales and marketing represented approximately 23% of revenue in the third quarter of 2022 after backing out the $155 $4 million of termination fees compared to 24% for the third quarter of 2021.
General administer and administrative expenses for the three months ended September 32022 were approximately $27 $5 million, an increase of $4 $2 million or 18% from $23 3 million for the three months ended September 32021.
<unk> costs for the three months ended September 30 of 2020 to reflect an increase of $900000 as investment in this area are also required to properly support our higher business volume and the commercial and operational areas of our business.
<unk> expenses increased by approximately $2 $4 million when compared to the prior year quarter. These increases were offset by an $11 $7 million decrease in stock based compensation, which amounted to $6 $3 million in the current quarter when compared to the prior year quarter.
Management teams at 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.
Administrative expenses also increased by $12 $3 million, primarily due to a litigation settlement in the amount of $7 8 million as well as increased costs associated with third party service providers, including internal control and Sox compliance audit fees and other litigation.
Lastly, all other administrative expenses, which were mainly composed of research development and quality control testing increased by approximately $300000.
As a total percent of revenue G&A costs decreased to 15% of sales for the three months ended September 32022, compared to 25% in the prior year.
When you take some of the outliers out of the equation and exclude items, such as $7 8 million for the litigation settlement agreement $2 4 million related to the brand impairment charge and stock based compensation of $6 3 million G&A expense as a percentage of sales was 6% for the third quarter 2022, and excluding the stock based compensation of <unk>.
<unk> $9 million in 2021, the G&A expense as a percentage of sales was 6% as well.
Focusing now on liquidity and capital resources as of September 32022, and December 31, 2021, we had cash of approximately $727 million and $16 $3 million, respectively, and working capital of approximately $755 $7 million and $169 $2 million respectively.
Included within the Q3 2022 cash balance was approximately $135 million of cash that will be utilized for termination payments.
Cash flows provided by operating activities totaled $171 million for the nine months ended September 32022, which compares to $52 $1 million and net cash used in operating activities for the nine months ended September 32021, the approximately $223 million increase in cash generation was driven by the timing of the transaction.
External costs associated with the Pepsi distribution system as well as continued growth in the operations of the company.
And looking at inventory total Q3 inventory ended at $154 million down relative to the $191 million at the end of December 2021.
As we benefited from growth in our business as well as the pipe fill in advance of Pepsi beginning to distribute our product we would expect some increases as we continue to grow and also as we prepare to launch a number of new flavors in the first quarter of 2023, we will continue to carry some additional inventory in order to make sure that we're able to keep up with the significant growth we are experiencing but would expect to start.
To drive some efficiencies in our <unk> as we move through 2023 with.
With the latest injection of funds from our Pepsico transaction, we have sufficient firepower to take our business to the next level as we transition into the Pepsi 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 do have a question. Please press star one on your telephone keypad at this time.
Question has been answered you could remove yourself from the queue by pressing one.
Ladies and gentlemen at Star one to ask a question and our first question comes from Mark Astrachan from Stifel Go ahead Mark.
Yes, Thanks and afternoon everyone.
I guess I wanted to start on the distribution gains in the shelf space. So.
We all know these are challenges that bang is.
Dealing with Youre, obviously also transitioning into basically the same shelf. They had so is it.
Simply a one to one sort of tradeoff there how do you think about what your shelf space is going to look like as you go forward over the next kind of three to six months is the changeover is completed heading into the spring sets do you think you can end up with more space. How do you think about the number of Skus you can put on shelves relative to where.
You are aware Bang is.
Today, and maybe Thats just a good starting point thanks.
Yes, Thank you Mark.
<unk> a great question.
Audio difficulty the team down in South, Florida, we are in the middle of a little bit of a hurricane but with weather coming three years, but if we get a little choppiness, but great question Mark I mean, what we're seeing there is a lot of opportunities out there I think what you are seeing especially with the gains right now that we're seeing as of October one.
As referenced in the prepared remarks, where we did see the number of Skus just under a three week period increase.
On shelf space with the largest gains coming from convenience.
There is a disruption.
Disruption that's out there with bang in the distribution network that they have exited and what they're putting together. So there is opportunities that are really coming out of out of normal course of research that the team has vigorously working to take advantage on as well as every other brand and this that and the energy category.
We do look at when you look at what we were able to capture with Coke energy when that was going through and being delisted and many retailers were able to take advantage of a lot of that opportunity and gain incremental shelf space on that change I think the momentum we have allows us to be one of the top choices.
When you look at when retailers are looking to add in and find a replacement if that's what they so choose at certain retailer locations. So.
Good advantage to take.
To move into some of that space.
We have as Youre seeing in a variety of key retailers and then <unk>.
As you look forward and we look for the spring reset I think we're in really great position, we know were incremental to the category, we know being the number one driver of growth in the category puts us in really good position as we are looking.
For research and right now we're in the midst of buyer season, selling season coming out of one of the greatest match. The company has ever had out in Vegas, and I know, there's a lot of retailers coming by the booth. So I think we're well positioned obviously, we don't provide forward guidance on.
On revenues, but we feel really optimistic on where this brand is positioned, especially leveraging Pepsi and a new distribution partnership.
Okay, that's great and maybe just one sort of related follow up there.
Could talk a bit about the velocity in terms of sales per point of distribution or however, you want to think about that metric as you transition, especially into convenience stores, where youre selling single serve items, how should we be thinking generally about kind of where the current trends are and how we think about that going forward.
Yes, that's something we're watching really closely now keep in mind.
We're looking we're entering a lot of new distribution.
And we're also entering some new markets, where the brand.
Lower awareness.
Really where we've been building out over the last call. It two to three years in some of our core market. So as you saw in our P&L. We are further increasing our investments in expanding.
So it's something we're really watching closely I think youre also we're getting into more of those tier three tier four accounts that as we go forward potentially.
May not be as productive as the tier one.
Tier two accounts, which we are in today. So we're watching that closely we look at it.
It seems to be at a level basis, right now kind of what we're seeing over the last several data pools, but.
That's really to be determined and the brand has been performing really well. So it's something we're watching closely as well I can't really give you an answer on that at this point.
Got it alright, well thanks al.
Excellent. Thank you Mark.
Thank you and our next question comes from Kevin Grundy from Jefferies Go ahead, Kevin.
Hey, everyone. This is no on for Kevin.
I was looking to dig a little further into your Pepsico distribution transition and first just starting off on the U S. Could you give us a little more context on how much business has already been transitioned.
Some early observations in the areas of your business that Hasnt shifted and what your expectations are for the remainder of the year.
Yes, I mean, if you listen to the Pepsi call that was.
About a month ago. There are two weeks into October they already announced.
Were in excess of 80%.
With our DSD business and we've continued to expand out there.
On the call there are four more.
Geographies or territory that perhaps you will be rolling out into over the course of Q4 and into Q1.
Really everything that we planned on transferring to them plus additional territory.
<unk>.
It has been kind of locked in so.
Although I don't have an exact number for you we're confident by the time, we get to early Q1 will be in great shape. Now there are still a couple of distributors out there that we are we are not transitioning.
But at the end of the day, we'll end up transitioning most of all of our DSD network.
Yes, I think Noah.
To chime in as well that a little bit more color in regards to what we're seeing.
When you look at that data point that we referenced in the pre recording and also in our earnings supplement that was filed when you look at the momentum we've gained since October one I think it really shows the team's doing an excellent job on the way, we're wired into Pepsi and a lot of our team members. So that transition is moving really nicely and you're talking about the fit.
<unk> thousand incremental cooler space isn't that Coke energy, we're already seeing those come to fruition as well as foodservice as well coming to fruition, especially at the college University level. So we're seeing a lot of extreme positive just over that you really call. It the first three to four weeks of the relationship.
Great. That's really helpful and just one more if I may in terms of the potential international expansion that could occur could you maybe just share some thoughts on sort of how youre thinking about expansion and sort of where what the timeline is on that and how that would work through the systems.
Yes, right now we're extremely focused on the U S transition.
The opportunity we both see both parties see opportunities on an international front with over 126 markets that Pepsi has great distribution and its timing and sequencing. So I think we're very cognizant about that being very methodical in our approach when you look at.
They're going to be our preferred partner going forward and we'll have more details to come as we really look through 2023, but we're really taking the timing and sequencing and as we scale and we want to make sure that it's that we enter these markets appropriately.
Have the right right strategy in place as well.
Great. Thanks, guys.
Thank you.
And our next question comes from Peter Grom from UBS go ahead Peter.
Thanks, operator.
Good evening everyone.
I guess just to start can you maybe just help us understand.
The impact from the sales to Pepsi in the quarter. I think you said that Pepsi made up about 12, 4% of sales, which is pretty substantial. So I guess is there any way to kind of quantify or breakout what what kind of onetime in nature versus kind of what is where.
And I guess, what I'm really trying to get an understanding you don't give forward guidance, but how should we be thinking about <unk> revenue growth in North America, given all the noise that kind of occurred.
Transmission.
Yes.
Yes, Peter.
Good to hear from you.
Like we talked about on the call back in August it's going to be noisy this quarter and next quarter, we did have a pipe fill.
So there is some timing there.
Honest.
Difficult to put an exact number on it.
What was the benefit of the pipe fill versus the offset of the distributors winding down their inventory.
And then pulling back at the end retail Airbnb customer.
We had to kind of peg it.
Are we talking and.
I don't know.
$15 million to $20 million somewhere in that range that could potentially be shifted from one quarter to the other on the on the top end.
I don't know if thats, the exact number but thats kind of a gut feel I have again, you've got the transition where.
There's a little bit of a dip you take if you go back and look at some of the data with Bang. They had the same impact at the same time, we're getting into a lot of space that we haven't been in so as we look at Q4 and then into Q1 those coolers John talked about foodservice. So we were.
It's not an apples to apples comparison.
What happened with Bang in terms of what is the data telling us so we think there.
Still a very big opportunity in Q4 and into Q1 to get into a lot of space, we haven't been to before on top of expanding the SKU count in the retailers where they're at.
And getting into more space from as there is some disruption within the industry. So I think overall thats, probably the best I can do for you it's not.
Exact I don't have a bunch of data to support it but thats kind of assuming we have.
Got it that's really helpful. And then can I just ask one on just the gross margin trajectory.
I may have missed this so apologies, but are we through the higher cost can't at this point and then John I think you mentioned.
For mid 40% by year end.
I might be reading too much into this but is that in reference to exit rate or should we still be expecting fourth quarter gross margin to still be in that same ballpark.
Yes, no Peter excellent question I mean, the international cans, we were anticipating cycling through the majority of our international cans.
By the end of the third quarter due to the flow of some of the international cans the way they've come in on East Coast West Coast.
We are sitting on still some international cans, although much smaller amount of our overall total inventory mainly on the west coast.
The country. So when we look at our margins and some of the improvements also the sales mix, we talked about with the Costco pack variety packs.
When we look at the mid $40. We believe we can hit the mid 40 range by the yen continue to hit the mid 40 range by the end of the year, you're looking at somewhere between 43, 5% to 47, five somewhere around that range, it's a little bit hard to say with you've got gas prices that come down we're seeing some softening in the aluminum pricing as well.
And then we will be cycling through some of those international cans on that mix.
As we go through here and then we did have some returns come through as well.
Some product thats flowing through in regards to the deal.
Moving out of the prior distribution network, so little bit of as Jerry mentioned noise, that's coming through.
Through the system, but getting that mid 40 range I think is definitely an eye for us as an organization.
Thank you again, ladies and gentlemen to queue up for questions. Its star one. Our next question comes from Jeff Anderson from B Riley go ahead, Jeff.
Hi, everyone just want.
So I'll go back to a couple of things on the ramp with Pepsi DSP.
Sounds like it's going extremely well I guess what are the next steps you've touched on a lot in Q4, what are the next steps as we think about Q1 I know you mentioned kind of the spring reset and then overall what are the milestones we should be looking for to track the progress when you report Q4 and Q1.
Yeah, I think Geoff Great question, I mean, we aren't seeing a great opportunity I think the milestones youre going to youre going to see within <unk> is real.
The expansion inconvenience, we started to see that really just in a few weeks.
We see a huge opportunity inconvenience, expanding that ACD and the number of Skus and items per store, so that's really where youre going to see.
Robust growth out of the organization and also maintaining that velocity at retail which is so critical so those are the metrics we're really watching.
Convenience is a massive opportunity and Pepsico has this program of metals program, which is a loyalty program with over 150 independent retailers. So that's going to be a big opportunity as we start to penetrate that that opportunity and then the foodservice image.
Opportunity that's out there.
Fortunately that channel is majority is unreported so when youre looking at reported numbers you really I think the opportunity is getting that ACB number when you look at.
The two largest players north of that 90 ACD range.
We have room to grow as it stands now.
Okay. That's helpful. And then if we could switch to the club channel for a minute.
I know you mentioned Walmart I'm not sure if you mentioned Samsung maybe I missed it but just wondering.
As you sit here today, what do you feel is left to do in the club channel.
Margins, there too but.
Any other retailers.
That are not part of the network or maybe they are part of the network that you're that you're eyeing here to potentially add.
Yeah, So from the club channel.
We just started getting into Sam's club at the end of Q1.
So if you kind of looked at Costco a year before that.
It took two or three quarters for it to get ramped up so Samsung is really starting to ramp up for us.
And it's starting to really produce very well for us. So I think we still have good continued growth in Sam's club consistent with what we saw with Costco and then Theres still Djs, which were in stores now, but we've got some more opportunity to expand across their entire footprint.
I think there's still some good room to grow per club and club is going to be a good area for us. The other thing is we've seen the demographics coming out of.
Yes.
It is not cannibalized.
Both in other channels, so it seems to be okay.
Tumor that's got the same interest.
Yes.
Interest in <unk>.
And those kind of things, but it's a consumer that may not be shopping the other channels. So we're seeing good growth come out of both areas and it's continued.
Thanks, and then just one more sort of housekeeping I was just wondering how many coolers that Pepsi has that youre getting into.
And their network at this point.
Yes, I think at this point.
We don't really have a clear number on the total opportunity, but what we've been told and really what we're working towards is roughly around 50000 energy.
<unk> coolers that we will be gaining additional placement in but.
There is also other opportunities that given retailers that.
Pepsi owns this space and we are able to participate in so it's probably a lot much larger number than that but the 50 is kind of what were 50000 is really what we're told is an immediate opportunity today, yes, there's the other coolers that we see as well so.
As I made my round across Florida, I've seen that or different coolers over the last three weeks.
Store.
<unk> Center and one week, we're not there.
The sales guys a hard time in.
We are there in the next week so.
That's an area that they are rolling it out that could get us there we've won.
But the goal is to really get us across the 50000 energy coolers, but then also the opportunity to get into their other quarters as well.
Okay.
Excellent best of luck with.
The remainder of the transition and Pepsi.
Okay.
Thank you and our next question comes from Jeffrey Cohen from Ladenburg Thalmann go ahead Jaffray.
Hi, John insurers are you.
Thanks, Good morning, Jeff.
Just a couple of questions from our end.
Joe you're talking earlier about the.
The termination expense period so.
One.
Okay.
So that was paid by Pepsi and it'll show up under deferred revenue.
We it was paid by Apache yet.
An initial tranche of $174 $7 million.
Which we ended.
Accruing 155 quarters, So we've got.
Whenever we don't spend we sent back.
But then we also.
Some settlement.
Q4 as well.
Right that would be I think you stated 60 for Q4 is there any follow on after Q4 expected or that should be wrapping it up.
It's a good question I think that were.
We're in great shape from that perspective, I can't see absolutely nothing after that but.
The goal is to really be in a position that where we're locked in.
Moving into 2023 clean.
And really focused on.
Getting into all the locations and having them.
With a stable footprint and knowing exactly what they need to do as we rollout.
When we start to capture market share in 'twenty three.
Got it Okay, and then secondly could you talk a little bit about that.
Skus from troop restructures.
The first prospective b.
What's the right number for some of these retailers I'm just curious on where you started out with ones and twos and threes and the number of them talk about that a little bit and talk about <unk>.
Skus from the company's perspective as far as the totals you have.
And John did mentioned, some new flavors coming into 'twenty three.
We will we'll flavors more out of favor.
Go away as new flavors are added on or how should we think about 'twenty three.
Yes.
<unk> been.
Following the company for some time with in our stores with one or two flavors and now we've grown look at Publix as an example, we have over almost.
Well over 15 flavors and Skus and products now in retail as well as multi packs. So.
Mass of opportunity for us, where we stand and I think when you look at where we're at now on average nationwide you're looking at about $8 six items.
A lot of the major other players and leaders in the category north of $20 to 30.
Items in a given outlet so the opportunity to grow as it were just getting started here.
Now the number three energy drink officially as of.
The last data point with the one week I'm, just really excited about that I think thats going to open up additional opportunities, especially with the bank transition and also when you look at the reset or taken to take place.
Next year.
Our retailers resetting for the transformation of the energy category and better for you and new age energy, which Celsius is a major contributor to so.
I don't have a real specific number for you, but we're going to get as much space as we can out there for sure.
Got it and then lastly for US is 13, a good number on the co Packer front or.
Should that change based on ore volumes going to our geographies.
So we're we're at 13 now, but we've got backup one beyond that so we've got co Packers that we can turn on.
<unk>.
And some of them we.
A number of co Packers that have multiple locations. So we were co packing in some other locations. So we can flip on their other locations as well so we're set up.
From a capacity perspective for a number of years to come.
Perfect for us thanks for taking the questions.
Excellent.
Thank you and our next question comes from Anthony Vendetti from Maxim Group go ahead.
Yes. Thanks, most of my questions have been answered, but just on the on the marketing front.
Pepsi.
Pending any direct dollars other than.
Working.
On the distributor side.
Sure.
Youre asking used in their coolers and so forth are they are they spending any actual marketing dollars.
On the road or is that all going to be under Celsius.
Yes, so it's still early in the relationship so there's definitely opportunities to partner on different things in different programs, whether we've talked about the college opportunity. So there are different is there a college program that we can partner on it from a sponsorship perspective. So those are definitely on the table.
I'm not saying, we're specifically, having a discussion about that but I'm, saying those types of things we are having discussions about how.
How can we work together when it comes to the various pricing and the go to market strategy. There are some opportunities for us to if you would think kind of co op for things like that.
<unk>.
The energy drink category is very promotional so there are opportunities and we will be running kind of joint promotions. When it comes to the pricing of the cases and working with our especially our key accounts across the board and then Theres the metals program.
That Pepsi has as well that there is opportunities. So I guess you could call some of that more back back shop promotion the front facing promotions again.
Please.
But those are really going to be more of our focus.
To really push the brand and pushed the velocity when it comes to that that component yes.
And just just to follow up on the coolers right because you placed 550 youre now at over.
<unk> 3500 50 heads.
<unk> thousand initial coolers youre going to look at it but you mentioned youre looking at to roll out more.
Pacific Southeast coolers.
Does that still make sense.
And if so why.
Versus.
Just focusing on the on the Pepsi closed at this point.
Yes, I think.
We're really we're.
We're focused on all opportunities and the Celsius brand and cool.
<unk> wholly owned by Celsius, and there'll be.
The only carry Celsius.
Huge opportunity there we see the benefit on both the.
Co branded are coexist in the energy Pepsi coolers for availability and our brand and coolers are silent salesperson that's out there for us. So we see the great returns, we got great ROI and we do have a significant amount of coolers on order currently.
Okay, Great I'll hop back in the queue. Thanks.
Okay.
And our next question comes from Sean Mcgowan from Roth Capital Go ahead, Sean.
Thank you.
So I just wanted to Jared if you wouldn't mind repeating the comments you made in your prepared remarks.
On the tax kind of noise in the quarter I think recording got a little muffled. There. So would you mind repeating some of that and then I have a follow up.
Yes.
The noise. This quarter is when we valued the preferred shares we put them on the books.
$832.
Yes.
So in $282 $5 million basically all at a premium.
That is reported as an asset.
Amortized contra revenue over the the distribution agreements so roughly 20 years.
And so from a tax perspective, its not deductible.
So there is a book tax timing.
Basically a DCF.
We booked bringing that through the tax line this quarter, so thats what.
Right.
Okay. So what do you think we should be using as the effective tax rate kind of going forward. When you don't have it sounds like that.
So I kind of look through the 21% federal and roughly 5% 6% state rate.
Okay.
Yes.
Alright.
Thank you for that and then on the the other question I had was.
Can you remind us did you take any additional price increases during the third quarter.
And the reason I'm asking is relative to my.
My expectation is accounts receivable were low or higher in inventory was lower than I thought which suggests to me that the timing may have been some shipments may have been later than we thought and how does that was there was there any price increase during the quarter that might have helped the gross margin because it came after a price increase.
Yes.
No I mean, we have kind of a rollout.
Yes.
So nothing's changed from that.
Okay.
And you had a little bit.
Well.
We've got these accounts because.
We've been picking up before.
Even throughout this year right.
So from a pricing perspective, nothing's changed from the prior commentary from a margin perspective.
Right.
So for us.
But as we are benefiting from our orbit auto.
But our onboard freight.
Gross profit, excluding onboard freight relative to risk.
Last year, we had a really good up so that's that's contributing a lot of our benefit and the profit line.
And then the other piece is we are seeing.
The average cap rate.
As we cycle through those candidly cycle pursue.
<unk>.
Mory.
A better overall raw material space.
Okay.
Okay.
Okay. Thank you.
At this time I would now like to turn it back to management for any closing remarks.
Thank you on behalf of the company like to thank everyone for their continued interest and support our results demonstrate our products are gaining considerable momentum and we're capitalizing on today's global health and wellness trends and the transformation taking place in today's energy drink category are active position as a global position with mass appeal will build upon our core business and leveraging opportunities.
Deploying our 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 of our investors for their continued support and confidence in our team and thank you everyone for your interest in Celsius stay healthy stay fit.
Thank you. This does conclude today's conference. We thank you for your participation you may disconnect. Your lines at this time and have a wonderful day.
Okay.
Okay.
Yeah.
Okay.
Okay.
Yeah.
Hum.
Yeah.