Q3 2024 BRC Inc Earnings Call
Christopher Mondzelewski, Stephen Kadenacy, Unknown Executive, Chris Mondzelewski, Unknown
Speaker Change: Greetings and welcome to the Black Rifle Coffee Company third quarter 2024 earnings call. At this time, all participants are in a listen-only mode. A question and answer session will follow the formal presentation. If anyone should require operator assistance during the conference, please press star zero on your telephone keypad.
Speaker Change: As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Matt McGinley. Thank you, you may begin.
Matt Mcginley: Good morning, everyone, and thank you for joining Black Rifle Coffee Company's third quarter 2024 financial results conference call.
Matt Mcginley: We released our results yesterday, and they can be found on our website at ir.blackriflecoffee.com. Before we begin, I would like to remind you of the company's safe harvest statement.
Matt Mcginley: For further discussion of these risks, please refer to our previous filings with the SEC.
Speaker Change: Additionally, this call will include non-GAAP financial measures, such as adjusted EBITDA and free cash flow. Whenever we refer to EBITDA, we mean adjusted EBITDA, unless otherwise noted.
Speaker Change: Reconciliations of non-GAAP measures to the most directly comparable GAAP measures are included in our earnings release which was furnished to the SEC and is available on our Investor Relations website. Now please refer to the presentation on our Investor Relations website and turn to slide 4.
Speaker Change: I would now like to turn the call over to Chris Mondzelewski, CEO of Black Rifle Coffee Company. Mondze? Thanks, Matt. And good morning, everyone.
Speaker Change: Joining me today is Evan Hafer, our founder and executive chairman, and Steve Kadenacy, our chief financial officer.
Matt Mcginley: Before we dive into the review of our business, I want to take a moment, with Veterans Day approaching, to express our heartfelt gratitude.
Matt Mcginley: As a veteran-founded company, and with 50% of our employees or their family members connected to the military, we are profoundly grateful to those currently serving and to all who have served.
Matt Mcginley: Your courage and your sacrifice inspire everything we do. Supporting the veteran community is at the heart of who we are, and we are honored to uphold that commitment.
Matt Mcginley: Not just on Veterans Day, but every day.
Matt Mcginley: Turning to our quarterly results, we have made substantial progress this year in building a solid foundation that strengthens the core of our business.
Matt Mcginley: and establishes a scalable model to support the long-term growth and value creation we expect.
Matt Mcginley: Our investments in operational excellence, spanning our supply chain, forecasting capabilities, and overall business management, continue to drive meaningful improvements.
Matt Mcginley: To that end, I'm pleased with our performance this quarter, including an 18-point sequential increase in ACV at grocery, a year-over-year improvement in gross margin of more than 8 points, and 15% growth in adjusted EBITDA compared to the third quarter of last year.
Speaker Change: KDP shares a deep commitment to our mission of supporting veterans' causes, and we are proud to have them as a partner.
Matt Mcginley: According to Nielsen, the energy drink category generates over $20 billion in retail sales across tracked channels, significantly outpacing the two categories where we currently compete, coffee at over $11 billion and ready-to-drink coffee at $4 billion.
Speaker Change: Most importantly, this is a category that aligns well with our fans, especially among younger audiences.
Speaker Change: While our soul will always be in coffee, we are proud to soon offer energy products in a format that broadens both our audience and the occasions for consumption.
Matt Mcginley: KDP's Direct Store Delivery Network, DSD, currently reaches 80% of the U.S. population and will provide us with access to over 180,000 retail outlets nationwide.
Matt Mcginley: This partnership allows us to scale nationally with efficiency and at a speed that would have been difficult to replicate on our own.
Matt Mcginley: We are particularly encouraged by KDP's commitment to capturing market share in the energy category through a portfolio-based strategy.
Matt Mcginley: As more volume flows through KDP's manufacturing and distribution network, we believe every brand in the portfolio will benefit.
Matt Mcginley: We will dive deeper into our energy strategy shortly, but before we do, it's important to reinforce the principles that have defined Black Rifle from day one.
Matt Mcginley: Our company was founded by special operations veterans who are experts in guerrilla warfare.
Matt Mcginley: And we apply that mindset across every facet of Black Rifle.
Matt Mcginley: We are a substantially smaller organization with fewer resources than many of the companies we compete against.
Matt Mcginley: This requires us to deploy small, agile teams, adapt quickly to market changes, and act with speed, much like a guerrilla force in the field.
Matt Mcginley: Resourcefulness is our DNA. We rely on lean operations and unconventional tactics to maximize our impact while keeping costs low.
Matt Mcginley: Our people and our culture drive this.
Matt Mcginley: Many of our leaders bring this same thinking from their respective military experiences, but all Black Rifle Associates share this mindset.
Matt Mcginley: Our loyal customer base forms the backbone of our success.
Matt Mcginley: A community driven by shared values, much like the morale and identity that fuel elite military units.
Matt Mcginley: We will continue to innovate our product offerings and expand into new categories like energy.
Matt Mcginley: If it makes sense to partner, as it does in energy, we will align with large, well-capitalized operators to magnify our impact.
Matt Mcginley: If it makes sense to develop internal resources, such as roasting our own coffee or using our own sales force to grow distribution and FDM channels, we will pursue that route.
Matt Mcginley: We have a strong team, strong brand identity, and a loyal customer base that understands our mission-driven business model.
Matt Mcginley: As an upstart, we fight hard. We have the ability to capitalize on market opportunities and punch well above our weight.
Matt Mcginley: Returning to the quarter's results, I'll now discuss our channel highlights beginning with slide 6.
Matt Mcginley: According to Nielsen consumption data in the Food, Drug, and Mass channel, we achieved 15% growth in the third quarter, outperforming a flat category.
Matt Mcginley: Year-to-date we have grown nearly 26% while the category declined by 1%.
Matt Mcginley: and we expect continued distribution growth throughout 2025.
Matt Mcginley: With Black Rifle products becoming more widely available at retail, we are excited about the opportunity to expand our reach and better meet consumer demand.
Matt Mcginley: Moving to slide 7.
Matt Mcginley: We gained share and grew distribution and ready to drink in the third quarter.
Matt Mcginley: On a year-to-date basis, the ready-to-drink category has slowed, declining 5.1 percent compared to the prior year time period, but Black Rifle continues to outperform the category by 460 base use points.
Matt Mcginley: Slide eight.
Matt Mcginley: We were able to showcase Black Rifle Energy at the National Association of Convenience Store Conference in Las Vegas last month and received positive feedback on the taste and distinctive packaging.
Matt Mcginley: As we highlighted last quarter, our research suggests that 58% of our consumers are already energy drinkers, and about 90% of our consumers are interested in energy drinks derived from natural sources.
Matt Mcginley: And we believe this category will be a natural extension of the brand.
Matt Mcginley: We've crafted a clean energy system with green coffee extract and other natural caffeine sources in all four launch flavors scored highly with consumers.
Matt Mcginley: Our can design embodies Black Rifle's mission-driven ethos, and we believe it will deliver visibility on shelf or in the coolers, setting us apart from the competition.
Matt Mcginley: Turn to slide 9.
Matt Mcginley: Our direct-to-consumer, or DTC, business continues to be impacted by broader market trends.
Matt Mcginley: with consumers shifting away from DTC channels and returning to retail purchasing patterns in the post-pandemic period.
Matt Mcginley: This is one of the reasons we started building our wholesale coffee business in FDM a little over a year ago.
Matt Mcginley: We've aligned our sales and marketing efforts to prioritize growth in the wholesale channel. We anticipate that some of our DTC customers will continue shifting their purchases from online to in-store.
Matt Mcginley: Our subscription business is the largest revenue contributor to our DTC segment.
Matt Mcginley: We continue to see stabilization in our subscription counts in the third quarter with positive subscriber growth in September.
Matt Mcginley: We've enhanced our website to include simpler subscription bundling options. An average order volume of new subscriptions in the third quarter was 10% higher than with existing subscribers.
Matt Mcginley: Finally, in our outposts, we focused on execution, with the plan implemented in the third quarter gaining momentum in October.
Matt Mcginley: Stronger promotions have driven ticket growth and improved inventory management has enhanced efficiency.
Matt Mcginley: We continue to see significant potential in the outpost business.
Matt Mcginley: but have prioritized investments in wholesale distribution and brand awareness.
Matt Mcginley: with a full strategy for this segment expected next year.
Speaker Change: Steve will now provide a review of our financial results.
Matt Mcginley: Steve
Steve Kadenacy: Thank you, Mondze. Please turn to slide 11.
Steve Kadenacy: Third quarter revenue declined 2% year-over-year, primarily due to cycling of barter transactions from the prior year, shifting consumer preferences away from direct-to-consumer channels and a slower pace of growth in the coffee and ready-to-drink categories.
Steve Kadenacy: While the barter transaction was necessary to address excess RTD inventory last year, it is not a revenue stream we aim to replicate in ongoing operations.
Speaker Change: As Mondze mentioned earlier, we reallocated resources
Speaker Change: The good news is that our strategy is paying off.
Speaker Change: Year-to-date sales in our wholesale segment have grown 17% compared to the same period last year, and we achieved a 3% revenue growth this quarter in wholesale.
Speaker Change: Sales to our largest customer were steady this quarter compared with the same period last year, and sales to other FDM retailers are three times larger than they were in the third quarter of last year, driven primarily by our products now being carried in more retailers.
Steve Kadenacy: Looking ahead, we expect continued distribution growth in coffee and increased sales of Black Rifle Energy to be key growth drivers in both 2025 and 2026.
Steve Kadenacy: Our earnings and free cash flow metrics continued to improve in the third quarter. EBITDA rose from 6.2 to 7.2% of sales, as gross margin gains outpaced our investments in marketing and advertising.
Steve Kadenacy: On a year-to-date basis, we've seen a $60 million improvement in free cash flow generation compared to the same period in 2023. This improvement is primarily driven by better margins and reduced working capital investment.
Steve Kadenacy: Inventory grew sequentially in the third quarter due to K-Cup purchases, which pulled a launch fee forward into this year, and provided per-cup cost savings to lower COGS as the product sells.
Steve Kadenacy: This program accounted for most of the inventory bill this quarter, and we expect its depletion to generate cash through year-end.
Steve Kadenacy: Moving to slide 12.
Steve Kadenacy: Our focus on productivity improvements has resulted in gross margins exceeding our 40% target for the third consecutive quarter. And we anticipate staying above that threshold for the year.
Steve Kadenacy: Supply chain enhancements have driven productivity gains, adding 400 basis points to our third quarter gross margin. Additionally, favorable product mix provided 160 basis point lift, supported by distribution growth in the coffee aisle at FDM retailers.
Steve Kadenacy: While we actively mitigate margin volatility through forward purchase contracts for green coffee, higher green coffee prices exerted modest pressure on gross margins in the quarter. Overall, we are very pleased with the progress we have made in improving profitability this year.
Steve Kadenacy: We remain committed to optimizing administrative resources and external expenses to support growth, and are confident that this strategy will deliver economies of scale as revenue builds.
Steve Kadenacy: Turning to slide 15, we narrowed our revenue guidance from the prior range with variability primarily driven by the timing of shipments later in the quarter and the ramp in seasonal volume.
Steve Kadenacy: We remain confident in the trajectory of our top-line growth and expect to gain market share in both coffee and ready-to-drink categories.
Steve Kadenacy: Year-to-date, our gross margin has improved by over 8 points to 42.3%, driven by productivity improvements, favorable mix, and lapping RTD headwinds.
Steve Kadenacy: We raised our full year gross margin guidance to 40 to 42 percent and expect fourth quarter gross margin to be in the high 30s range, reflecting normal seasonality and promotions and the absence of smaller one-time benefits.
Steve Kadenacy: We adjusted our free cash flow conversion expectations as a percentage of EBITDA and now expect to be free cash flow positive for the year. This year, we have been laser-focused on improving profitability and reducing working capital, which resulted in an impressive inflection in free cash flow generation year-to-date compared to the same period in 2023.
Steve Kadenacy: Our initial cash flow guidance was based on different assumptions around revenue and product mix. Additionally, we now expect to carry higher inventory than originally planned to support growth in the FDM channel.
Steve Kadenacy: Overall, we have been gaining market share across Bad Coffee, K-Cups, and RTD Coffee, and we expect Black Rifle Energy to deliver similar success in 2025.
Steve Kadenacy: The positive trends in our business are enhancing our ability to further our mission of supporting the veteran community while generating long-term value for shareholders.
Steve Kadenacy: Before we open the call for Q&A, I'd like to mention that we will be hosting an investor event on January 14th at the ICR Conference in Orlando, where we will share more detail on our longer-term goals. We hope you will join us either in person or via webcast.
Steve Kadenacy: With that, I'll turn the call over to the operator for the Q&A session.
Speaker Change: Thank you. We will now be conducting a question and answer session.
Speaker Change: If you would like to ask a question, please press star 1 on your telephone keypad. A confirmation tone will indicate your line is in the question queue. You may press star 2 to remove yourself from the queue. For participants using speaker equipment, it may be necessary to pick up their handset before pressing the star keys.
Speaker Change: Our first question comes from the line of Michael Baker with DA Davidson. Please proceed with your question.
Michael Baker: Okay, great. Thanks guys
Michael Baker: and instead of that expected to come in 2024, I think you were expecting early 2025 from those retailers. Any update on that, how that's progressing, if we still expect to be in those retailers in early 2025?
Michael Baker: Hey Michael, it's Chris. Thanks for the question. So yeah, it continues to progress exactly the way that we had talked about it last quarter.
Michael Baker: That has continued to move our distribution northward, 47% ACV right now.
Michael Baker: If you look at the top five brands in the category, they all exist kind of in that 70-75% ACV range. We continue to believe that that is the right.
Michael Baker: Unknown Executive, Chris Mondzelewski
Michael Baker: was more of a timing thing, and we should get that next year, which I think is helpful.
Michael Baker: One more follow-up and then I'll turn it to others or clarification the free capsule guide. I'm a little
Speaker Change: So presumably, I suppose going from 80% flow through to now just positive, what I'm hearing is that the free cash flow guidance will be a little bit lower because you're adding, because of higher inventory. Is that the right interpretation? It's just a little unclear.
Steve Kadenacy: That's right. This is Steve. Good question.
Michael Baker: We still expect very good cash flow for the year. We've already improved our cash flow year over year by 60 million. We expect very robust cash flow in Q4, but we did have acceleration of K-cup purchases in the quarter.
Michael Baker: We did that strategically because we received a $0.03 per cup, and it was 26 million cups discount going forward. And as you know, in the gross margin,
Michael Baker: All the little things that you do really add up. So we are focused on the pennies to drive the profit But we still expect robust cash flow But given the inventory changes we did change the way we were looking at it
Speaker Change: Yeah, no, good. Take the discount. That makes perfect sense. Okay, great. I'll turn it over to others. Thanks.
Speaker Change: Thank you. Our next question comes from the line of Saran Agora with Telsey Advisory Group. Please proceed with your question.
Saran Agora: Great. Good morning, guys. So two questions here. First...
Unknown Speaker: Unknown Speaker So curious to know like what's driving that sequential change? Are you seeing a bit of
Chris Mondzelewski: Unknown Executive, Chris Mondzelewski
Chris Mondzelewski: You know, it's a good question. Obviously, we had some headwinds in the quarter relative to our DTC business and our outpost business, which we expected to be down. We let you all know that. But we had enough tailwinds to make up for
Michael Baker: Also cycling that KBS transaction. If you look at ex-KBS, revenue overall was up 2%. FBMX, our largest customer, was up 200% or 3x.
Michael Baker: And Wholesale X, the barter transaction, was up 12%. So in the markets that we're focused on, we are succeeding. And that's coming out in our ACV and it's coming out in our underlying growth rates.
Speaker Change: And I think just to build on that, you know, Sarang, we talked a little bit last quarter about wanting to...
Chris Mondzelewski: Unknown Executive, Chris Mondzelewski
Michael Baker: with any of our key customers. And that will continue, you know, as we look at Q4. So we hope that this momentum that we have right now is going to push forward into Q4.
Speaker Change: and that you know largely is the driver even in RTD I want to you know mention we've got
Chris Mondzelewski: Unknown Executive, Chris Mondzelewski
Speaker Change: That's great.
Speaker Change: More exciting one is the energy drinks. I mean, we can't wait to try what comes out in December.
Speaker Change: Just curious if you can share, you know, I know there's an analyst day coming up to the extent you can share like, you know, how we should think about the ramp into 25 or any color you can give us on the margin structure of the energy business is still like 40% gross margin above or how do you plan to distribute it like, you know, rollout nationwide in 25 any color or thoughts, early thoughts would be helpful.
Speaker Change: on Energy Drink.
Speaker Change: Great. Well, let me start and, you know, Steve will probably build on a few of my comments.
Speaker Change: We're extremely excited. So, you know, I talked a little bit in my opening remarks about, you know, for us as a business,
Speaker Change: You know, KDP has been a fantastic example of that. You know, we've talked already about partnership and pods, and we're seeing success with that already.
Speaker Change: We're extremely excited about this partnership and energy with KDP. So they will play a key role, clearly, in the rollout of this. We've been designing…
Speaker Change: The product, you know, with them together. We're designing the rollout plan with them That rollout, you know will happen Efficiently, and we're going to do it in a smart manner. We're going to focus very much on On demand channels such as C store, you know in the early going to ensure that we can get strong trial of the product
Speaker Change: Clearly, we'll have a lot of promotion and advertising.
Speaker Change: behind that as well, so we can ensure we're very, very proud of the product quality.
Speaker Change: It's a no sugar item, you know, the flavor profile is fantastic, you will get to try it, you know, hopefully here soon.
Speaker Change: And we want to make sure we get those cans in folks' hands.
Speaker Change: you know, in the DSD arena.
Speaker Change: So I think, you know, the ramp up next year will be.
Speaker Change: What I like to call immediate demand channels like C-Store, other areas, gas stations, etc. And then, as we build that scale, we'll go into larger customers as we move into 26. So again, we're not going to talk to the specifics of that, but we're very excited about the plan we have in place. We think it's going to be successful.
Speaker Change: Answering relative to your question on energy margins.
Speaker Change: Over time, energy margins are going to be very strong. The first year...
Speaker Change: related to rolling out the product. So just something to keep in mind there, strong but growing significantly over time.
Speaker Change: And maybe just to expand that to...
Speaker Change: how you should think about 2025. And we're not giving guidance now, but
Speaker Change: We will have stronger growth, but we still have some headwinds. So on the strong growth side, we'll have energy, we'll continue to expand in FDM. And, you know, but we will still be cycling the barter transactions of 15 million that we have year to date.
Chris Mondzelewski: Unknown Executive, Chris Mondzelewski
Speaker Change: One final point just to reinforce is that we've talked a lot about building our margin this year.
Speaker Change: through management of the inventory, coupled with the strong margin we have in our business, you know, gives us the room to go out there and do the most important thing. At the end of the day at Black Rifle, you know, our brand is first and foremost, so the majority of the investment that we will be putting into this is going to be out there building that brand.
Speaker Change: That's great. Super helpful, guys. Good luck. I'll pass it on. Thanks.
Speaker Change: Thank you. As a reminder, if anyone has any questions, you may press star one on your telephone keypad to join the queue and ask a question.
Speaker Change: Our next question comes from the line of John Anderson with William Blair. Please proceed with your question.
John Anderson: Okay, good morning, everybody. Thanks for the questions.
John Anderson: I wanted to ask on FDM, you made solid progress sequentially on ACV.
Speaker Change: I think.
Speaker Change: sitting at 41% right now. You may have referred to this earlier, but I want to just clarification.
Speaker Change: Are you still expecting to get towards kind of full your full distribution target by the end of 2025? And what level do you anticipate reaching at that at that point in time? Is it 75%? Is it 85%? What's kind of the underlying goal there? Thanks
Speaker Change: Hi John, thanks for the question.
Speaker Change: With those customers shifting into next year, I'll reinforce, you know, kind of what I said before, we...
Speaker Change: We feel every one of those conversations has gone exceptionally well. So, yes, we do believe that by the end of 26.
Speaker Change: We're going to be in what we would consider to be, you know, quote unquote, full distribution, which is going, you know, again, if I look at the top five brands in the category they tend to play in that 70 to 75 percent range, that ultimately would be the goal, you know, for the business as we look at the end of 26.
Speaker Change: That's helpful. Thanks. And with your you referred to your largest customer and the business being stable year over year and any more
Speaker Change: Color you might be able to provide on your business with that largest customer how its velocities are performing What what you're thinking from maybe an item level distribution opportunity, you know going forward. Thanks
Speaker Change: Sure. Yeah, we feel great about our business in our largest customer. You know, we sit at a four share currently.
Speaker Change: We continue to be a leading growth player there, you know, we have strong growth in the current period.
Speaker Change: So we'll continue that plan going forward. As far as how we manage that next year, yes. We're not ready to talk specifics on that, but we do have some exciting innovation ideas. We talked a lot about energy. Clearly, we put a lot of resource into building that, but as you would imagine,
Speaker Change: Unknown Speaker Having a strong center store coffee business with the margins that it has, our innovation teams have been working hard there as well to ensure that, you know, as you look at our existing lines.
Speaker Change: a business that we have in our largest customer. And as we're expanding it to new customers, we will have new items to be able to cut into the shelves there as those resets happen next year.
Speaker Change: That's really helpful, thanks, good to hear. I did want to ask on energy...
Speaker Change: The research that you've done around this sounds very encouraging with respect to the receptivity of your users.
Speaker Change: Thank you.
Speaker Change: You know, do you think there's a real
Speaker Change: opportunity for energy to be highly incremental? Or is there some risk that it could be cannibalistic to the customers in terms of looking for
Chris Mondzelewski: Unknown Executive, Chris Mondzelewski
Speaker Change: Serving existing users across more occasions. So heightening the buy rate for the brand overall
Speaker Change: Yeah, that's a fantastic question. We've put a lot of
Speaker Change: You know, energy plays a very different role than coffee does. There are certainly consumers who drink both.
Speaker Change: We find that the consumers that drink both will tend to do it during different usage occasions. So coffee tends to skew towards the morning, energy will tend to skew more towards the afternoon. There are a lot of consumers, however, that really do have preferences in one arena or the other. They're either coffee drinkers and they want to be able to add an RTD coffee to their existing routine, which may involve hot coffee already.
Speaker Change: flavor profile beverages, these tend to be the younger demographics. And, you know, as we looked at the Black Rifle fan base, you know, I would remind everyone, we have a huge fan base already, right? I mean, across all of our media sources.
Speaker Change: You know, we have up to 13 million, you know, folks who are following Black Rifle. As we access that fan base, you know, we find that a huge percentage
Speaker Change: of them are already, you know, energy drinkers and open to, you know, energy as a brand. The other thing we feel good about is that even within the energy category, we believe that we will be highly incremental.
Speaker Change: You know, there are certainly brands out there that we will compete with. You know, it's a crowded category as far as the number of brands, but it's a giant category at 20 billion. So there's plenty of room to come in and we believe that with our lifestyle positioning, our focus on mission,
Speaker Change: And then, you know, the product profile that we put together, again, clean ingredients, zero sugar, we really believe that, you know, again, not only are we going to be incremental to our coffee business, we think we could be quite incremental to the energy category as a whole.
Speaker Change: The subscription business had The subscriber base that actually inflected positive in September or a minimum you were seen slowing declines. What are your expectations on? That going forward now. Should we think about that in the 25? Thanks
Speaker Change: So, yeah, just to give you a little bit of context on where it is now.
Speaker Change: We are happy with, you know, what we're calling the stabilization. That element of our business has continued to decline. You know, we've talked about that. That is driven entirely by the consumer dynamic.
Speaker Change: The reality is that we are seeing a good number of our consumers, you know, as we have more data available, we're seeing a reasonable number of our consumers flowing into grocery. So that's good. You know, we're very happy about that. As long as we can maintain them as consumers, our goal is obviously to ensure that we are putting our products...
Speaker Change: You know, wherever they want to be able to buy it. What we continue to be most focused on in our subscription business are the subscribers themselves.
Speaker Change: Again, we're always very happy to sell someone, you know, a one-time purchase off of one of our sites. Again, we want to meet their needs where they want to buy at, but the subscribers are very valuable to us. And to the point you made, you know, we have seen, actually, in this latest period, we've seen an increase.
Speaker Change: to the point where we're starting to see those cancel each other out, and we've even had weeks where we're seeing a net positive. So that will continue to be our goal. I'm not going to give specific guidance on that element of our business for 25 right now. I would tell you it's not where we believe we're going to get strong growth, simply because that consumer dynamic continues to shift back in store. But our focus will be on the subscribers themselves, ensuring that we see stabilization. And then I'd like to believe over time, growth back in that segment of our overall DTC business.
Speaker Change: Thank you so much. Really helpful.
Speaker Change: Thank you. Our next question comes from the line of J.P. Wallum with Roth Capital Partners. Please proceed with your question.
J.P. Wallum: Good morning guys. Thanks for taking my question. If I could maybe just start on the FDM side.
J.P. Wallum: I want to kind of dig in a little bit to Albertson's and just sort of understand how it's ramped. I think that's one of your maybe main account or...
J.P. Wallum: large retailers that you've been in kind of for a year plus at this point. So if you could maybe just share kind of where your market share is at Albertsons and just sort of what that ramp means for your expectations as you roll out on shelves next year at additional retailers.
Speaker Change: Sure, thanks for the question.
Speaker Change: Yes, as you indicated, we rolled out...
J.P. Wallum: As far as numbers, you know, our RTD business, which was actually in distribution even earlier, is growing 15%, which is a very strong number versus the category. And then overall, we're seeing close to 60% growth. Again, we're lapping, you know, the introduction of this a year ago.
J.P. Wallum: So very strong growth numbers versus that period. But even as we then move into that full distribution period, based off of the execution we are seeing, some of the promotion we've put in, which is pushing up velocity similar to the other customers that we're in, we expect to continue to see that share growth as we progress all the way through 25. So.
J.P. Wallum: Overall, we consider it to be a very successful rollout, a lot of room for improvement, you know, the the share still hovers between one and two. And as you know, we're a four share and our largest customer. So as we look at that, you know, we'll continue to drive and really manage, you know, our portfolio and store behind our success to ensure that we can continue.
J.P. Wallum: to get as much leverage out of those continued share gains as we move into 2025. I think that last point is really important. We have massive improvement in front of us. We have a small share as we roll out in new retail outlets.
J.P. Wallum: And then we expand SKUs over time. So, ACD is only one element, then comes the revenue on those SKUs, then comes...
Chris Mondzelewski: Unknown Executive, Chris Mondzelewski
Speaker Change: That's very helpful. And then maybe, I just want to make sure that I understand. It sounds like, I think,
Chris Mondzelewski: I believe it was maybe by end of 2025 and on past calls. So I just want to double check A, that that's correct. And then B, if you could just kind of dig in a little bit, have conversations with retailers about resets not gone as planned, any additional color there would be very helpful. Thank you guys.
Speaker Change: So just to reiterate, yes, that is correct. So we believe by the end of 26, we're going to be in full distribution. I had quoted that number of 70 to 75 are where the top players are at. As we add every major customer in the U.S., we believe that that's where we can net out.
Speaker Change: As far as, yes, we did talk last quarter about shifting of customers. So, we did have some customers that shifted from 25 to 26, and this did adjust our expectations a bit. The great news is, just building on Steve's point,
Speaker Change: Great hope that over time, you know, we'll be able to add additional SKUs and continue to push our share picture up in each one of them.
Speaker Change: Understood. Thank you and happy Veterans Day to everyone over there. Thank you guys for service. Thank you. Thanks for calling that out.
Speaker Change: Thank you. Our next question comes from the line of Joe Altobello with Raymond James. Please proceed with your question.
Joe Altobello: Thanks. Hey, guys. Good morning. First, a quick housekeeping item. The Revenue Guidance or the Implied Revenue Guide for Q4, what are you guys assuming in terms of initial trade load for energy? I know it's late in the quarter, so it's probably small, but I'm curious.
Speaker Change: What do we assume what for energy sorry Joe? The initial trade load for energy.
Speaker Change: To be honest, the trade comes when it gets on shelf. So anything that we would guide, that we would book would be an estimate at this point.
Speaker Change: We can't give you exact numbers, but it is an immaterial and it books as contra-revenue.
Speaker Change: Gotcha. Okay. And in terms of 25, I know you're not giving guidance today, but, you know, you did mention some margin headwinds next year, higher grain coffee prices, the energy launch, et cetera. So at least directionally, can you kind of help us think about how we should think about EBITDA margins next year after the big improvement this year?
Speaker Change: There's no question that our trade and slotting fees are going to be higher next year, our coffee prices are going to be higher, but we're also focused on other productivity improvements within the supply chain to drive gross margin. And as I mentioned, I kind of gave guidance that energy will be below 40%.
Speaker Change: That is going to be the primary driver in addition to the marketing expense around the energy launch. So I can't give you the exact numbers, but I wouldn't expect significant growth from a percentage standpoint on the bottom line.
Speaker Change: Thank you. Our next question comes from the line of Bill Chappell with Truist Securities. Please proceed with your question.
Bill Chappell: Thanks. Good morning.
Bill Chappell: First question, on the coffee outlook, the overall category has been weak for the past few months on a volume basis and as you look to next year, do you expect distribution and in market share to primarily be the drivers or do you think the category bounces back to some extent?
Speaker Change: Hey Bill, thanks for the question. So, I think, you know, let me break it apart. I think each category we have a different perspective on.
Speaker Change: When you look at Center Store Coffee, we actually saw an increase in the latest period. It did have a weak year overall so far, but there's 3% growth in the latest period, and we believe that that will continue to recover.
Bill Chappell: Over the seasons so to speak in as far as we how we go in the next year
Bill Chappell: Our belief is that, you know, coffee is a category that has been around a long time in the U.S. It has gone through dips at times. We believe it's here to stay. You know, I don't think that, you know, center store coffee is going to be an explosive category necessarily, the way that we see some of the RTD segments.
Bill Chappell: Strong growth through those two elements.
Bill Chappell: When it comes to RTD, it has been weaker, and I think there's a number of factors that play into that. You know, RTD coffee tends to be a bit more of an expensive...
Bill Chappell: Unknown Executive, Chris Mondzelewski, Unknown Executive, Chris Mondzelewski, Unknown Executive,
Bill Chappell: Well, we don't necessarily expect
Bill Chappell: We do believe that we can still grow rather explosively versus that category given our ability to continue to meet consumer demands where they are at. I'm not going to talk in specifics about this.
Bill Chappell: But just like any other segment of our business, we're going to continue to evolve our portfolio. We believe that we can do that at a greater speed in exactness than our competition, given how we're constructed as a business, and we will take advantage of that as we go into 25.
Speaker Change: You know, why them having a diversified approach with C4 and now company-owned Ghost is a good thing for you? Because I just don't see all three of those brands as completely mutually exclusive in terms of target audience.
Speaker Change: KDP doesn't have kind of unlimited shelf space to put your brands and other brands. And so I'm just trying to understand, you know, how this is incrementally beneficial versus just having a distributor where you were kind of the primary focus.
Speaker Change: Yeah, that's a great question. I'm going to start by, you know,
Speaker Change: saying, you know, KDP is a business that we have been strategically aligned with, you know, since the beginning of the year. We've...
Speaker Change: We've been talking and they've been extremely transparent with us. One of the things we're most excited about is
Speaker Change: their overall ambition to be winners in the energy space. They talked a lot about this.
Speaker Change: and their recent call.
Speaker Change: in a category of that size. So, you know, we knew from day one that that would be the case.
Speaker Change: The reality is that the portfolio brands they've put together are winning brands. And you're right, there's never complete exclusivity between brands that compete in the same category. But I would tell you that it is a very carefully constructed portfolio. When you look at each of those brands, they really do play in completely different segments of the energy market. I'll use Ghost as an example.
Speaker Change: being the most recent element that they added.
Speaker Change: When you look at, you know, simply the flavor profiles of a black rifle versus a ghost, you know, you have ghosts with Sour Patch Kids with Swedish Fish.
Speaker Change: will win
Speaker Change: Based on how those brands themselves win, right? You're competing with these brands one way or the other at the end of the day
Speaker Change: The brands that are able to win the choice among consumers are the brands ultimately that are going to get distributed. So while it gives you a very strong route to market, it gives us efficiency and it allows us to build distribution much faster than if we were to do that on our own, you know, the brand ultimately will be what dictates
Speaker Change: whether or not you stick over time. And that's where we have a very, very high level of confidence in our brand. Again, every segment, every category we have gone into, we have been able to be a share winner. We continue to be a share winner in any of those segments. So we believe it'll be the same in energy.
Speaker Change: Okay, thanks.
Speaker Change: Thank you.
Speaker Change: Our next question comes from the line of Daniel Biolci with Hedgeye. Please proceed with your question.
Daniel Biolci: Thank you. I wanted to ask about your marketing spend plans, what we saw in Q3. Is that an investment spend ahead of next year's distribution gains, or is 10% of sales what I should be modeling going forward?
Speaker Change: You said marketing spend? Yes.
Speaker Change: Yeah, well, we definitely ramped on the promotion side during the quarter in ads, agencies, and shopper marketing. And so there's the promo aspect.
Chris Mondzelewski: Unknown Executive, Chris Mondzelewski
Speaker Change: Typically through the year, energy will likely change that because we're on a rollout phase even in Q1 and Q2 of 2025.
Speaker Change: Okay, and then I just wanted to follow up on a previous question.
Speaker Change: Unknown Executive, Chris Mondzelewski, Unknown Executive, Chris Mondzelewski, Unknown Executive,
Chris Mondzelewski: Yeah.
Chris Mondzelewski: That's exactly right. So, it was a reasonably easy decision for us for a number of reasons. One is that, you know, Black Rifle, again, our brand is everything to us. That brand...
Chris Mondzelewski: Unknown Executive, Chris Mondzelewski, Unknown Executive, Chris Mondzelewski, Unknown Executive,
Chris Mondzelewski: Unknown Executive, Christopher Mondzelewski, Evan Hafer, Stephen Kadenacy, Unknown Executive,
Chris Mondzelewski: So, we knew the same would be true in energy. We wanted to use the best ingredients. This is why we put together an energy blend that is completely naturally sourced, you know, using green coffee beans, other natural extracts.
Chris Mondzelewski: And the no sugar piece, to your point, you know, that is what our consumers demand right now. They're looking for a product, you know, this is a double digit growth.
Chris Mondzelewski: And, you know, again, from a flavor standpoint, you know, we've talked about this, that's a much more subjective item, but when we've done testing, you know, each one of our flavors has tested extremely well, you know, versus what we would consider to be like products in the rest of the categories. So we feel quite confident in the product delivery.
Speaker Change: Thank you.
Speaker Change: Thank you.
Speaker Change: Thank you. And we have reached the end of the question and answer session. I'll now turn the call over to Chris.
Speaker Change: for Closing Remarks.
Speaker Change: We're particularly excited about our new partnership, our growing partnership with KDP as we gear up for the energy launch. And we're very much looking forward to being able to share some more detail on this at our ICR event in January, so hopefully we'll get a chance to see all of you down there. Thanks for the continued support, everyone. Have a great day.
Speaker Change: Thank you. This does conclude today's teleconference. We thank you for your participation. You may disconnect your lines at this time.
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Speaker Change: [music]