Celsius Holdings, Inc.

Ladies and gentlemen, thank you for your patience. Please remain on the line. Your conference call will begin momentarily. Again, we do appreciate your patience. Please remain on the line. Your conference call will begin momentarily. Thank you. Let's pray. Good day, ladies and gentlemen, and welcome to the Celsius Q2 2022 earnings call. All lines have been placed on a listen-only mode, 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, Investor Relations. Sir, the floor is yours.

Thank you. Good afternoon, everyone. We appreciate you joining us today for Celsius Holdings' second quarter 2022 earnings conference call. Joining me on the call today are John Fieldley, President and Chief Executive Officer, and Jared Langans, Chief Financial Officer. Following the prepared remarks, we'll open the call to your questions and instructions will be given at that time. The company released their earnings press release upon market close this afternoon, and all materials will be available on the company's website, CelsiusHoldingsInc.com, under the investor relations section. As a reminder, before I turn the call to John, an audio replay will be available later today and can be accessed with the same live webcast link in our conference call announcement and earnings press release. Please also be aware that this call may contain forward-looking statements, which are based on forecasts, expectations, and other information available to management as of August 9, 2022. These statements involve numerous risks and uncertainties, including many that are beyond the company's control. Except to the extent as required by law, Celsius Holdings undertakes no obligations and disclaims any duty to update any of these forward-looking statements. We encourage you to review in full our safe harbor statements contained in today's press release and our quarterly filings with the SEC for additional information. With that, I'd like to turn the call over to President and Chief Executive Officer John Fieldley for his prepared remarks.

John? Thank you, Cameron. Good afternoon, everyone, and thank you for joining us today. Our record second quarter represented our 16th consecutive quarter of sequential growth and an 18% increase over the first quarter of 2022. According to the trailing 12 weeks IRI MULOC data, as of July 10, 2022, Celsius continues to be the top driver of the energy category growth, representing 34% of the category growth, which corresponds to the number one brand driving category growth. We were also notified last Friday that the S&P announced that Celsius will be added to the S&P Mid Cap 400 Index, graduating from the S&P Small Cap 600 Index after the close of trading today, August 9th. We continue to see growth across all channels, including those not tracked with the club channel sales increasing by approximately 24.9 million for the second quarter uh in 2002 from 2021 an additional rollout and expansion in over 175 new bj wholesale locations happened took place in the second quarter our vending and food service channels continue to see rapid expansion with over 50 growth in sales from the first quarter with approximately 4.4 million in sales in the second quarter additional uh second quarter retailer highlights include the benefits from the walmart expansion we discussed in our two on our q1 2022 earnings call sales increased over 700 percent on a year-over-year basis in accordance with spins 12-week data as of june 12 2022 and in the convenience channel sales increased overall by 227 percent compared to the second quarter in 2021 and celsius is now ranked the number five brand in the convenience channel per spins energy 12-week ending June 12, 2022. moving to the most recent highlights for celsius on monday august 1st we announced the distribution and investment agreement with pepsico this transformational partnership provides significant near-term u.s growth acceleration with an estimated 40 percent increase in incremental distribution on top of our internal projected door growth over the next 12 months we have also have begun the transition with pepsico to pepsico through our distribution and expects most of the transition to take place by the end of the fourth quarter As part of the transition, a $550 million convertible preferred investment was made by PepsiCo in Celsius, and the investment aligns incentives for both parties. The underlying investment is priced at $75 per share. It converts approximately 7.3 million shares, which equates to approximately about 8.5% ownership in Celsius on an as-converted basis. The preferred shares receive a 5% annual dividend paid quarterly in cash or in kind at Celsius option. One point of clarification we want to be clear. On a call last week, we notified and discussed the transition was cash neutral in regards to our distribution network. This was not inclusive of the 550 million investment by PepsiCo. In regards to the distribution settlement and transition cost, PepsiCo will assist with these charges as part of the distribution channel transition agreements whereby the cost will be cash neutral to Celsius. As part of the strategic alignment and agreement with PepsiCo, we want to officially welcome James Lee to our board of directors. James Lee, Mr. Lee is currently the Senior Vice President, Chief Strategy and Transformational Officer of PepsiCo Beverages North America. PepsiCo's largest operating sector. He is responsible for leading the PB&A's long-term strategy, business development, digital and value change transformation and sustainability. Mr. Lee joined PepsiCo in 1998 and has had several financial leadership and other leadership roles since that time, including Senior Vice President of PB&A, Senior Vice President and CFO of Russia and CIS region, Vice President and CFO of Southeast Europe, Senior Director and CFO of PepsiCo Australia and New Zealand, and Senior Director Strategy and Planning of China Beverages. We look forward to utilizing his significant experience in both domestic and international opportunities. For those of you that did not have a chance to join our conference call discussing the key drivers of this agreement and transition, a replay with the slide presentation can be accessed on the webcast, including the link and the press release that was released Monday, August 1st. Moving to some additional financial highlights for the second quarter, sales hit another quarterly record of $154 million and our U.S. revenue totaled $145.4 million as approximately $22 million increased sequentially from the first quarter and U.S. revenues. Revenue growth was driven by continued new store additions with C-Store additional drivers, a significant portion of the U.S. growth, FKU expansion, additional cold placements with both our branded Celsius coolers and expanding and retail coolers. International sales represented approximately 5.6% of total sales for the quarter with sales down about 2.9 million or 25% to 8.6 million from 11.5 million a year ago quarter. Driven by the Nordic, revenue decreased to 7.3 million compared to 10.8 million the prior year. This was partially offset by sales under other international markets which totaled approximately 1.3 million, was up $680,000 and included royalties from China. Gross profit for the quarter increased 110% approximately to $59.3 million, up from $28.2 million for the year-ago quarter. Gross margins were approximately 38.5% or about 44%, excluding outbound freight, compared to 40%. 3.4% and 51.8% excluding outbound freight in the prior year quarter. This represented approximately 190% basis point decline from the first quarter margins and is consistent with our expectations that we discussed on our Q1 earnings call. We expect Q2 as came in as expected where we saw our margins under pressure due to the large percentage of international cans flushing through during the quarter. We reiterate and expect expectations of sequential gross margin improvements throughout 2022, with fourth quarter gross profit margins expected to be in the mid 40s. With the exception of higher costs with international cans, a majority of our other COGS increases have been offset by scale efficiencies to raw materials production, full truck shipments, and reducing the miles on cases, as well as optimizing our six orbit warehouse expansion, which we announced last fall. Our product channel mix has also been impacted margins as well in regards to the club channel revenue, which has historically been lower margins due to the secondary repacking facilities that is required and needed. With this rapid growth in the channel, which represented approximately $30.9 million in revenue in the second quarter, it has increased the overall margin pressure. We continue to take initiatives through production initiatives to improve margins in this channel including working with our co-packers who are working on capabilities to basically conduct the multi-packing in-line versus hand-packing. So this will improve our margins on a go-forward basis, which we expect to implement sometime in the fourth quarter. or early Q1 of 2023. Overall, we see continue to expect cycling through the majority of remaining international cans in the third quarter. In conjunction with the price increase rollout, we expect our margins to move back to that mid-40 range in the fourth quarter, even with a higher mix of club business. In addition, we are transitioning from a significant number of our independent distributors to the PepsiCo distribution. This will allow our team to consolidate sales, marketing, distribution efforts with associated cost benefits, which we expect to recognize and leverage once the transition is complete. We will provide additional clarity on both margins and operational leverage and targets as we move through the transition, but expect additional net benefits on both of these metrics. Some additional highlights for the second quarter, our DSD network sales delivered growth of 208% in the second quarter when compared to the prior year, totaling approximately 61.9 million with over 41.8 million approximately in incremental revenue generated during the quarter. On our fitness and vitamin specialty channels, we launched a co-branded displays with Cyclebar and we expanded into Lifetime Fitness. We are now the number one selling SKU brand in fitness and sold record revenues in June. On our mass club channel, continues to accelerate. The club channel now totals 1,337 locations with approximately the expansion of 175 BJ locations as discussed, we expanded in the second quarter. In the convenience channel, our stores continue to increase, our store locations increased by 97% or over 40,000 locations to 82,000 locations at the end of the second quarter of this year. This compares the 42,000 locations at the end of the second quarter of last year. the convenience store channel accounted for on retail on on sales according to iri spins about 87 million dollars in the second quarter and our sales were up 227 compared to the second quarter and 2021 according to iri spins Industry-backed third-party data continues to show accelerated growth metrics. We are confident that Celsius will continue to drive sales even higher as we increase our ACV across channels and launch additional nationwide and expand our independent chains through our new distribution agreement with PepsiCo. Consumer demand for Celsius on a dollar base accelerated through the second quarter of 2022 and through July of 2022 to record levels. Their most recent reported Nielsen scan data as July 16, 2022 shows Celsius sales are up 143% year-over-year for four weeks, 194% for the 12 weeks, and 185% for the second quarter. This compares to the overall energy category, which grew 8% for the four weeks, 8% for the 12 weeks, and approximately 8% for the second quarter over the same period. On Amazon, Celsius continues to maintain the second largest energy drink spot with a 22.6% approximately share in the energy category, ahead of Red Bull that has a share of approximately 10.6%, and just behind Monster at a 24.7% approximately, and this is as of the latest four weeks ending, July 30th, 2022, Stackline Energy Category Data Total U.S. Celsius year-over-year sales is up 185% compared to Amazon energy category, which is up 79%. Celsius is outpacing the category growth on the platform by approximately 2.5% on a year-over-year basis. And that is the four weeks ending July 30th, 2022 stack line, total energy, total US. The company placed an additional 800 coolers in the second quarter of 2022 and over 2,700 since the beginning of this year. The company anticipates the continued acceleration of cooler placements throughout 2022. Our total U.S. store count now totals approximately 196,000 locations nationally, growing over 59,000 doors and locations or 54% growth from 109,000 stores reported as of the end of the second quarter of 2021, with additional expansion planned throughout 2022 and acceleration anticipated with the new partnership with PepsiCo. On our co-packer front, we continue to expand our co-packer partners and scale at existing locations, improving our line priority time. Our total U.S. co-packer footprint totals 13 that are active, which will help protect future out-of-stocks and support our massive growth. Internationally, Nordic's revenue totaled at $7.3 million. It decreased from the prior quarter primarily due to foreign exchange rates. and timing of orders and both timing of new launches with end consumers, as well as supply chain delays in the market. Revenue from other markets totaled at 1.3 million. It was up 957% from 680,000, which included revenues from China. As we have publicly stated on past several calls, we continue to explore discussions with large-scale international distribution partners which can facilitate material worldwide expansion. I'm excited to say we have now found that partner. As part of the PepsiCo distribution agreement, Celsius is now the preferred global energy partner with PepsiCo, which holds the number two position in beverage distribution globally. While we just began our distribution partnership with PepsiCo, and the initial focus will be on U.S. distribution transition to their networks, we see significant opportunities to capitalize on global scale, reflecting the changes in consumer preferences for better for you offering, which will now include the distribution partnership to accomplish our international expansion goals. Before I turn the call over to Jared, I want to close my prepared remarks recognizing the amazing job of our entire team and all of our partners, which they have done. establishing Celsius as the leading driver of brand growth in the energy category over the first half of 2022, and the incremental opportunities for growth going forward with our new partner, PepsiCo. I'd like to turn the call now over to Jared Langens, our Chief Financial Officer, for his prepared remarks. Jared?

Thank you, John, and good afternoon, everyone. Before jumping into the results, I'll cover a quick housekeeping item. As an update to our previously disclosed SEC inquiry, we have fully responded to all follow-up questions, but do not have any material updates to date on this process other than reaffirming our previous comments. Turning to our second quarter financial results, our second quarter revenue for the three months ended June 30th, 2022 was approximately $154 million, an increase of $88.9 million or 137% from $65.1 million for the three months ended June 30th, 2021. Approximately 103% of this growth was as a result of increased revenue from North America, where second quarter 2022 revenues were $145.4 million, an increase of $91.8 million, or 171% from the 2021 quarter. The balance of the revenue for 2022 was mainly attributed to European revenue of $7.3 million, which decreased from the prior year quarter primarily due to foreign exchange rates and timings. Asian revenues, which include royalty revenues from our China licensee, contributed an additional approximately $900,000, an increase of 43% from approximately $600,000 for the prior year quarter, which includes increases in royalties payable under our licensing agreement. Other international markets generated approximately $400,000 in revenues during the 2022 quarter, an increase of roughly $400,000 or 634% from the prior year quarter. Total increase in revenue is largely attributable to increases in sales volumes as opposed to increases in product pricing. The primary factors behind the increase in North American sales volume were related to continued strong triple-digit growth in traditional distribution channels, combined with an increase in optimization of our product's presence in world-class retailers, i.e., additional SKUs. Additionally, the continued expansion of our DSD or direct store delivery network resulted in significant growth in distributor revenues of in excess of 200% when compared to the prior year quarter. Gross profit for the three months ended June 30th, 2022 gross profit increased by approximately $31.1 million or 110% to $59.3 million from $28.2 million for the three months ended June 30th, 2021. Gross profit margins reflected a decrease to 38.5%, 44% excluding outbound freight for the three-month end of June 30, 2022, from 43.4% or 51.8% excluding outbound freight for the 2021 quarter. The increase in gross profit dollars is related to increases in volumes, while the decrease in gross profit margins is mainly related to higher raw material costs, primarily aluminum cans, ocean freight costs, transportation costs, and repackaging costs. We estimate that the increase in gross profit dollars of approximately $31.1 million from the 2021 quarter to the 2022 quarter included $40.7 million related to volume increases, as well as an unfavorable cost impact of approximately $7.5 million and unfavorable currency impact of $2.1 million. As a percentage of sales, sales and marketing was 21% of revenue in the second quarter of 2022 compared to 24% in the second quarter of 2021 as we were able to leverage our accelerated growth. General and administrative expenses for the three months ended June 30th, 2022 were approximately $14.4 million, an increase of $2.1 million or 17% from $12.3 million for the three months ended June 30th, 2021. Employee costs for the three months ended June 30th, 2022 reflect an increase of $1 million in investments in this area, also required to properly support our higher business volume in the commercial and operation areas of the business, as well as travel and expenses, which are now being incurred. Administrative expenses amounted to $6.8 million or an increase of $4.1 million when compared to the prior year quarter. Depreciation and amortization increased by approximately $200,000 when compared to the prior year quarter. These increases were offset by a $3 million decrease in stock-based compensation, which amounted to $4.2 million when compared to the prior year quarter. Management deems it very important to motivate employees by providing them ownership in the business in order to promote overperformance, which translates into the continued success of our business based on key performance attributes. All other administrative expenses, which were mainly composed of research, development, and quality control testing, decreased by approximately $200,000 from the second quarter of 2021. Lastly, as a total percent of revenue, G&A costs decreased to 9% of sales for the three months into June 30, 2022, compared to 19% in the prior year. When excluding stock-based compensation, G&A costs decreased to 7% of sales for the three months ended June 30, 2022, compared to 8% in the prior year. Debt income for the three months ended June 30, 2022, was $9.2 million or $0.12 per share based on a weighted average of 75,451,165 shares outstanding, and dilutive earnings per share of 12 cents based on a fully diluted weighted average of 78,378,371,705 shares outstanding, which includes the dilutive impact share-based awards of 2,920,540 shares. In comparison, for the three-month end of June 30th, 2021, the company had net income of approximately $800,000, or one cent per share based on a weighted average of 73,158,836 shares outstanding, and a dilutive earnings per share of one cent based on fully dilutive weighted average of 77,238,389 shares outstanding. Focusing now on liquidity and capital reserves, as of June 30, 2022 and December 31, 2021, we had cash of approximately $60 million and $16.3 million, respectively, and working capital of approximately $197.9 million and $169.2 million, respectively, with no long-term debt. Cash flows provided by operating activities totaled approximately $42.3 million for the six months ended June 30th, 2022, which compares to 30.3 million net cash used in operating activities for the six months ended June 30th, 2021. The approximately $72.6 million increase in cash generation was driven by an increase in net income and improvements in working capital. I also wanted to cover a few additional metrics we believe provide a good a good perspective of our operational performance in the second quarter. Starting with inventory, total Q2 ending inventory decreased to $162 million from $191 million as of December 31, 2021. In addition, raw material inventory decreased from approximately $90 million in the first quarter of 2022 to $57 million in the second quarter, with the reduction primarily representing the pull-through of international cans as well as the fantastic jobs our sales and operations teams have done in selling product over the summer. As we've stated a number of times, even with this decrease, we are carrying some additional inventory as we work our way through the busy selling season and also with the ongoing supply chain challenges, but we have not seen any major disruptions in our supply chain network as demonstrated by our phenomenal fill rate. With the latest injection of funds from our PepsiCo transaction, we have sufficient firepower to take our business to the next level as we transition into the PepsiCo distribution network across the U.S. and then internationally. This concludes our prepared remarks. Operator, you may now open the call for questions. Thank you.

Thank you. The floor is now open for questions. If you would like to ask a question, please press star 1 on your telephone keypad at this time. Our first question comes from Peter Grom with UBS. Please state your question.

Hey, good afternoon and congrats on another strong result. I know it's really only been a week here, but would just, you know, love to get some perspective on whether you have some, you know, updated thoughts on the Pepsi distribution agreement. Have you begun to wrap your head around like kind of the long-term revenue opportunity and how we should be really thinking about, you know, the benefits of top line growth looking out to 2023? Yeah.

Thank you, Peter. You know, the team did a great job of results and we are starting to work through that process. You know, based on our analysis, when we look at it, we look at the opportunity we're, also looking at the results from bang relationship on the increase of points of distribution and tdp we do anticipate the expansion into these alternative channels which are unreported as well in regards to food service um and also uh independent convenience we see a huge opportunity for for the brand to expand and we anticipate about a 40 increase in distribution at the end of solidifying this relationship over the first 12 months. And it could be a significant upside from that number. But initially, internally, we're going with a 40% increase over our expected growth rates that we were internally had over the last 12 months.

Got it. Super helpful. And then I guess, you know, following up on a separate topic, just the gross margin progression. I know you reiterated sequential improvement, but still kind of a meaningful gap versus where you landed in 2Q versus kind of getting back to that mid-40s in 4Q. So is there any way to frame kind of the expectation for 3Q and then kind of the buildup from there into 4Q? Thanks.

Yeah. Yeah, thank you, Peter. We spoke in our, I think it was our Q4 call, we talked about like some of the impact and the percentage, you know, roughly around like 6% in regards to some of the impact we were getting from the international cans. So we're still cycling through. So I know it looks like a big increase as we expect to be back in the mid-40s in Q4. You know, Q3 probably could be somewhat similar. There is some upside. We do think there's potential for sequential growth. We're working through cycling through the rest of these international cans that are on our balance sheet. All the cans now, the majority of the cans are now in finished goods. So we'll be cycling. We anticipate to cycle through the majority of the finished cans, of the international cans in the third quarter or so. It's hard to say, you know, on the exact percent where that will land, but we do think there's sequential growth in third quarter, and then our goal is to get back to the mid-40 range by the end of the fourth quarter.

Thanks so much, and congrats again. I'll pass it on. Thank you.

Our next question comes from Kamal Garjuala with Credit Suisse. Please state your question.

Thanks, everybody. Can we talk about the club channel a little bit? You mentioned you gave us a good amount of figures on your success in the club. How much of that was, you know, kind of first-time fill-in versus kind of continuation? Obviously, BJ's seems to be a bit new, and can you maybe just talk about what we should expect from this channel going forward now that you seem to be in quite a few more stores?

Yeah, Kamal, I have a quick question. The club channel has been really surprising to us. We first, you know, started expanding in that channel, and really that happened in the fourth quarter with the national rollout at Costco. And then in the first quarter of this year, we expanded into Sam's Club. So when you're looking at the second quarter, you're really looking at reorders from those customers. Now those 175 stores from BJ's are new. But in general, you're looking at majority of reorders that are flowing through those clubs. And the volume going through those clubs is just really exciting because it just shows you the opportunity, and we're not seeing any slowdowns in the other channels as well. So it was really incremental to our overall sales.

Okay, great. And then it's been a week now. You've probably had some, I guess, tough conversations on the transition over to the Pepsi system. Could you just talk about what you're doing to try to – you know, keep it be as smooth as possible?

Yeah, we're working with the teams. I've spent a lot of time today with the teams as well, trying to work on a, you know, get our plans ahead. We have a lot of team members that have worked through the PepsiCo transition in the past. And I think, you know, with the groups involved, we're going to hopefully be able to mitigate as much of the disruption as possible. We know there will be disruption, but we're trying to put plans in place to mitigate that, especially with the transition of the timing. And when the existing distributors and your new partner, I can start servicing chains. We're trying to work closely with a lot of our distributors. We're going to start really working with them on the transition piece to try to limit the impact that you see in the marketplace That's the best we can do at this point. We do have plans in place, and we're working to fill the supply chain on the PepsiCo system. We're working on that over the next several weeks. We'll be filling a lot of their mixing centers at first before we go, and then we'll move to direct with some of the larger distributors to really optimize shipping costs and logistics costs as well.

Got it. Great. Thank you. Excellent.

Our next question comes from Kevin Grundy with Jefferies. Please state your question.

Great. Thanks. Good afternoon, guys. I want to pivot to the international business. Two-part question. The first one just sort of near term and clean up. Jared, I think you mentioned the results in Europe. Some of it was timing related. Certainly the stronger dollar played a part. Should we expect to see that reverse? It's such a smaller part of the business, but I think it's sort of enough to move the needle a bit versus the street and the quarter. Maybe just comment on some of the near-term dynamics. And I think, John, more importantly, of course, is going to be the opportunity with PepsiCo, where I understand they have a right of first refusal for the international distribution. Maybe just speak to how quickly you can move on that opportunity, balancing the you know, the significant opportunity you have in the U.S. as well.

Yeah, so, Kevin, the first part, there was some issues in getting the supplies and the product in that we needed, especially for a new line that we were trying to get in, a new SKU into Sweden. And so we weren't able to get that in for the selling season. So we did miss that. If you look at July, we've had very good results. You know, the team's worked and been very focused on making sure that we've got products on the shelves. And so we are moving back into the right direction. We fully expect the team to be in good shape in the back half of the year versus the first half of the year. But we did have a lot of supply chain issues. Many of those were around the location in terms of availability of transportation because it was being utilized for other means. But at the moment, we are ready. The product is on the shelf, and we saw, like I said, very good results in July, and we expect good results the rest of the year.

Yeah, and Kevin, on part two of your question in regards to the international opportunity, you know, we see massive opportunities. Like I said before, the same health and wellness trends that we see in North America are global trends, and this fitness health and wellness trend is a megatrend that's really taking on all regions of the globe. So if You know, I think it's going to be timing and sequencing. We do not want to make sure that when we enter a new market, we enter it correctly, very methodically on our approach as we've done to make sure we build that loyal consumer and really become part of a daily lifestyle and a daily routine. We're really adamant on that as we build scale. You know, we want to be cognizant on entering new markets, but talking about the U.K. and Germany as near-term opportunities, Right now, we're really focused as a company on this transition. We want to make sure this North American transition gets completed with at least disruption as possible. And then we do have ongoing discussions now with opportunities in the U.K. and Germany we're looking to explore.

Thank you both. Just a quick follow-up on what you're seeing with current trends. As we look at the Nielsen data, the category slowed a little bit. Your data still looks quite good. I think the distribution gains, excuse me, the sales gains or year-over-year sales growth being more driven by distribution than velocity. I think that it has been more recently. Do you want to speak to that at all? Has anything been surprising to you in terms of how your results have come in or with respect to pull through from a velocity perspective as you've expanded into additional doors?

Yeah, no, Kevin, I think the brand's performing really well, given the growth we've seen, especially over the most recent resets and entering new markets and new retailers. So we've been watching it. We watch it very closely. We do see good growth coming out of our established markets. Some of our new markets, as you enter a new market, your velocity is not going to be as high as some of your more mature markets that are building. So we're being very cognizant of that, very methodical in our targeted marketing programs. really making sure we're building the brand awareness in those markets, a lot of strategies over the next, really right now in Q3, we have a lot of great programs going on. You'll see that towards the back half of this year and into 2023. So, you know, that is something we're watching very closely, but we think the velocity levels are extremely strong, especially given the expansion in the ACB gates.

Okay, very good. Thank you both for the time. We appreciate it, and congrats on the quarter. Thanks. Thank you.

Our next question comes from Mark Astor-Chan with Stifel, please state your question.

Yeah, thanks, and afternoon, everyone. I'm partly just following up on that question. So if you look at where your penetration is versus the energy drink category and larger peers, you know, you have roughly 50% of sales coming from C stores. So I guess if you think about expanding that probably via the Pepsi category, partnerships, how do you factor in the velocities in what should be a higher sales per unit or per space channel? That's the first question.

Yeah, we think that's – thank you, Mark. We think that's the biggest opportunity as well is, you know, with the PepsiCo system is really being able to further expand the ACV inconvenience as the latest data shows 67% of the volume in the energy category is coming from the convenience channel. And, you know, when you look at the data and look at how the product is performing in some of the broader retailers, given, you know, Circle K, Speedway, QT, Racetrack, just to name a few of those, the product is doing extremely well in those retailers. And as we're entering, you know, as we enter new markets, you are going to see a slower velocity in the beginning, but we're seeing a higher velocity than we saw prior several years back when we were entering new markets. So the velocity level does seem to On the new stores, you enter slowly. You need to get involved into the daily consumer's lives, but then we do see that building on. So we do think that'll balance out. Now, as we further expand into the larger convenience store channel, we get a higher ACV. Some of those stores will not be as productive as some of the stores that we're in currently. So just keep that in mind as well, just given the geography, the volumes of some of these other, call it tier three or tier four accounts that we'll be entering. So that's something to keep in mind.

It will also benefit from moving into the mixing centers because we'll be able to go with Pepsi and with their products into these smaller convenience as opposed to just going in on our own. So there will be some benefit in combining with them and working with them on their metals program and a variety of different things that can help keep our velocity up at the same time. So we think there's some things that will help it go, but there's definitely – as we enter new markets and new territories – you know, we're pleased with what we're seeing, but it is a little slower to get things moving. And, you know, like John's mentioned a variety of times, we're really excited to see what we can do with food service as well.

Yeah, and I think just as well, when you look at where the opportunity lies is better placement in existing accounts as well and better placement in new distribution points, you know, getting into that, what we call the bullseye within the coolers and getting into that strike zone that the sales team's been working on. We think PepsiCo will be able to really leverage that, especially through their metals program as we expand in independence.

Got it. That's helpful. And maybe just following up two related questions to that. One, why isn't looking at bang distribution points the ultimate opportunity rather than just the 40% incrementality that you're talking about? I think if you look at the data, bang is roughly in twice the points of distribution that Celsius is today. And then second question, just on the mixing piece of it, maybe talk a bit about Is that a potential starting point? How do you think about potentially working with Pepsi from a co-packing standpoint as well to sort of more cohabitate everything together under one roof?

Yeah, I think your first question regards to the 40% increase in distribution. I think that's a great reference point. That's really what we're using internally. We were just mentioning the bang. We did watch that expansion through that process. But I agree, just the 40% increase in the overall distribution is kind of what we're expecting here over the next 12 months. When you do look at the initial rollout with PepsiCo on the logistics and operations side, we will be entering their mixing centers for immediate efficiencies to feed out to their distribution networks in a very most efficient manner. And then we'll continue to optimize that going direct to some of the larger houses. When you look at production and co-packing, I think that's opportunities down the road, but something we're not discussing today.

And just to be clear, it's distribution, so it's not top line. I think you got that, Mark, but just to be clear on the call, we're not looking for all of a sudden the top line to be 40% higher than we had expected. We're looking to get the distribution up 40%.

Yeah, no, I think that's well understood by folks. Thank you. Thank you.

Our next question comes from Jeff Van Sinderen with B. Riley, if he states your question.

Yes, hi. I just wanted to follow up on the Nordics business. Does the Pepsi partnership change how you'll handle business in those countries as well as the fast protein business associated with that?

Hey, Jeff, no, great question. Right now, I mean, we haven't really discussed We haven't explored those opportunities yet. We do think there's a big opportunity for the fast portfolio. PepsiCo does have a big snacks business, as we all know, and our fast portfolio is one of the leading protein snack portfolios in Finland. So there is opportunities there, but I think we're a little bit earlier in the phase on the discussions there. But there is opportunities for Nordic Opportunity to get further synergies and leverage fast practices and their distribution partners throughout those regions.

Okay, and then I wanted to ask you about your plans for coolers. I know, obviously, you have a lot more capital to put into buying more coolers, but co-location with Pepsi coolers, or how does that all evolve now with Pepsi as far as being cold?

It's another great opportunity we've been spending some time talking about. We're going to be entering some of their co-branded energy coolers. There's roughly about 50,000 to 70,000 of them out there in the marketplace just in North America alone, and we'll be included in those coolers. So we're pretty excited about that. In addition, we will be placing one of the big strategies, as we all know, which is placing coolers. We have over 2,700 that we've placed so far this year in the first six months. We're looking to ramp that up. We do have orders already placed for larger cooler placements, And getting a lot of interest on those as well. Trying to get them six feet from the checkout is ideal. That's where we want to be. We see great rotations and great opportunities. But we're definitely focused on placing coolers at front checkouts.

Okay. And then just one more if I could squeeze it in. Just any comments on pricing, your pricing strategy?

Pricing strategy has not changed. You know, we're a pricing strategy. We did take price as we announced. We are rolling that through a phased approach, and we're monitoring pricing very closely as we continue to move forward. The category is price sensitive. Promotion is sensitive as well. So we do think there's opportunities for us to take price with the brand as we maintain our premium position.

Okay. Thanks, and best of luck.

Thank you, Jeff.

Our next question comes from Jeffrey Cohen with Lattenburg. Please state your question.

Hi, John and Jared. Congrats on the news last week, and congrats on the S&P upgrade.

Thanks, Jeff. Thank you, Jeff.

Just a couple questions from our side. So any commentary specifically on the rollout of the heat-to-go sticks as far as early learnings? And I'm assuming the to-go sticks are also part of the deal with Pepsi as well.

Yeah, thanks, Jeff. The powder product is going to be something we're managing internally. That's not part of the Pepsi card arrangement. We are seeing great interest in our powder products. You'll see them at spin-ins, Walmart, many retailers, including down here in Florida, Publix, does well online. We do think on the go for our core consumer, it is a smaller portion of our revenues, does contribute to good gross, does have good gross margins, and they taste great. So there's an opportunity in the portfolio, but that is not part of that. PepsiCo arrangements. But you will start to see it in more retailers around the country.

Yeah, we do see an opportunity to really expand the distribution across the retail market. And it's a product that can be transported pretty easily because it's lightweight. So we'll be able to roll it straight into the distribution centers of the various retailers.

Okay, got it. That's helpful. Jared, could you maybe walk us through and comment on – sales and marketing and G&A for the back half of the year and going forward? Does it seem unreasonable that we should expect a more muted ramp with the PepsiCo arrangement?

Yeah, well, you know, especially in Q3, we'll probably keep our foot on the gas on the sales and marketing piece. Where we're seeing our leverage within G&A and within S&M is really our people cost. where we're able to scale up our business without adding the same number of heads over the last, if you look year over year, so we got about a percent on the S&M line and a percent on the G&A line from expanding at the same rate from a personnel need. So I think we'll be able to continue to maintain that kind of trajectory. But from a marketing and a sales perspective, we will keep our foot on the gas and and keep that going while we're doing the restocks and while we're really rolling into the Pepsi footprint. We want to keep the velocity going. We want to keep the demand there and keep the brand in front of mind.

Got it. Perfect. Thanks for taking our questions. Thank you.

Okay. Our next question comes from Anthony Vendetti with Maxim Group. Please state your question.

Thanks. Yeah, just a couple questions. First on the expanded distribution, you've mentioned 40% plus with the PEPC distribution agreement, you'd be able to expand by 40%. Just on the capacity side, You know, how quickly are you able to ramp up capacity to meet that? Is that currently in your current capacity? Do you have to sign additional co-packer agreements and just kind of where you're at with that? And then I have a question about the termination agreements with the distributors.

Yeah, within our current orbit structure that we've set up, we do have that capacity to flex up to meet the demand of the extra 40% in 2023. and also to continue to expand in 2024 and 2025. So as we look out over the next three years, from an expectation perspective, we've got plenty of capacity with our current system to meet the demand.

And then on the termination agreements, I know that Pepsi is going to help with that. What percent approximately are they going to pay of those termination agreements with your DSD networks?

Yeah, so we've got the – we're not going to be able to get all of our DSD network in this year. We think we can get most of it in this year. I think the way we're managing it is consistent with how Pepsi has managed Rockstar and Bang in terms of rolling in the distribution. There will be some distributors that we keep, and there will be some distributors that over the next year or two years or maybe even three years that will roll out. So, As we get farther away, further discussions will happen between us and PEPC in terms of where we want to go. But at the moment, a majority or most of the cost of these terminations will be borne by PEPC as a part of the partnership.

Partnership. Okay. All right. I think that's all I have for now. Thanks.

Thank you, Anthony.

Okay, our next question comes from Sean McGowan with Roth Capital. Please state your question.

Thank you. Following up on some similar questioning before, is there a scenario where you might imagine sales and gross margin actually dipping ahead of the full benefit of the transition? Is there a disruptive scenario where you actually have a slowdown in sales and a drop in gross margin, or is Should we expect this to be kind of smooth, you know, up and to the right, right from the get-go?

Well, in regards to astronomy, the way we're seeing the third quarter, we are going to have a pipe order and a fill order into the PepsiCo system, and then we will have some returns that are going to be coming through as we pick up inventory. So, you know, it is going to be – there's going to be a lot going on in the P&L in the third quarter in regards to sales with a pipe order to fill and And then returns, estimated returns on product that will, in case we have to pick up product, which we likely will be picking up product from those distributors that we'll be terminating. So, you know, the margins we do feel should be somewhat accretive from this point forward. But, you know, I think soft guidance on that. I don't know, Jared, do you have anything to add? Yeah, I mean, it's really going to be up those to make sure that we're meeting our fill rates.

And so that's what we've been planning with our operations team and our sales and marketing team is really to make sure we've got the product on the shelves. As long as the product's on the shelves, the consumer won't notice the difference. There will or potentially could be some sell-ins as we move away from one group of distributors and into the other group. So there could be a little bit of noise on the backside, but we believe that we'll be able to keep a good – you know, tight-lipped on things in terms of making sure products on the shelf.

Okay. Thanks. While your mic is still on your hand, Jared, you talked on the last call last week about some things that you might help us out with on how they'll be accounted for. You know, these distribution fees, I don't imagine it's going to all hit in one quarter. Is that a fair assumption that it could, you know, kind of be spread out over several quarters? How is that going to be accounted for? How are you going to treat the assistance that you get from a P&L standpoint and And is the Pepsi investment right now sitting on the balance sheet as $550 million in preferred stock?

The settlement fees, the termination expenses, we will have to book an accrual for any distributors that we've basically sent a letter or sent a termination note on. So a majority of the termination expense will be on the books at Q3. There will be some that have not – sent letters for. There are some that we need to, you know, that don't have a, you know, 60-day term or 90-day term or 120-day term. They might have a one-year term. So we wouldn't have sent that yet. You know, so there will be most of them will be on the books. There are a couple stragglers out there, but a majority of them will be in Q3. It will be recorded within OpEx as an expense, so it would be very significant to To give you a perspective, I think when we look back at Monster, it was something like $112 million or something to that impact. So it will be significant on our P&L. It will likely be higher than that with inflation that Monster paid their fees quite a while ago. With that said, the assistance that we will get will be – recorded into the balance sheet and it will be amortized over the life of the agreement. With Pepsi, we are, you know, kind of reviewing what we believe that term would be because there's a variety of clauses within the agreement that we need to make sure line up with GAAP and that we're making the right decision in terms of what the lifetime of that rollout would be. So the expense more or less will be hitting the P&L. the impact of the assistance from Pepsi will be borne over a number of years. In terms of the preferred stock, at the moment, based on the way we're reading the research, it will be mezzanine equity. We should be finalizing that up in the next few weeks, though, in terms of where expectations are from that aspect.

Okay. And then on the determination fees, just to clarify, so If you know that you're going to be taking just a hypothetical number of $150 million, you would book that $150 million as an expense in Q3, even if you didn't lay out all of that cash in Q3. So some portion of the offset would be assistance from Pepsi, and the rest would be you simply didn't pay it in cash yet, right? It's just a prepaid asset or something like that, right?

Yeah, so the cash impact should be nominal, right? But the expense is just a timing thing. So, you know, on the cash flow statement, it'll be nominal. There might be a little bit of timing, probably not much, if any. Right. But on the P&L, yeah, it'll be up in, it'll actually be a deferred revenue. Deferred revenue. Okay.

All right. Thank you.

Our next question comes from Anthony Vendetti with the Maxson Group. Please state your question.

Oh, yes, thanks for taking the follow-up. Just a quick question on the international revenue. I think you mentioned on the call, John or Jared, I don't know, but timing of some shipments, supply chain issues. Is that something, you know, obviously North America is incredibly strong, growing well over 100% for the last couple of quarters. Is it a distribution issue or is it a combination of distribution and supply chain? Is that something, even though I know it's not a focus right now, but is that something that you think the Pepsi distributor agreement will help address?

Yeah, so over in the Nordics, it was more of an ingredient issue and getting the ingredients to our COPAC partner in order to manufacture the product. And there was some supply chain channels that got disrupted because of the activity that was going on over there and still continues to go on over in that part of the world. So that was the biggest piece because we couldn't get the right raw materials in for the new product we were launching or the new SKU we were launching. We weren't able to get that to marketing time for the summer selling season. So that was the biggest component over in Sweden. other than obviously the FX impact that we had. There was a little bit of the same kind of thing that happened in Finland as well from an ingredient perspective. Those suppliers are back on track again. We've got our product, and we have been working with Paul, who's over in the U.S., on making sure that we've got enough stock over with our – actually, it's a German co-packer – as we go forward so that we don't have to worry about the out-of-stocks that we had before.

So is that something you expect to be resolved here in the current quarter, or is that going to take another couple quarters to resolve? It's resolved.

Okay. A lot of logistical challenges in the second quarter, too, Anthony. As Jared mentioned, there was a lot of disruption in supply chain for our European partners.

And the second part of your question was, you know, with Pepsi, With their organization and their scale and ability from a procurement perspective, it will definitely benefit us from a supply chain perspective and a purchasing perspective, you know, both here and over in Europe. But like you said, it will be a huge opportunity for us in Europe because they've already got the supply chain set up, the distribution set up. We do have product that we're already manufacturing over there, so we are over there. So launching over there will be less complicated than if we didn't have anything over there already. So it does set us up well, as well as over in Asia and that part of the world, because we've got a co-packer over there as well.

Okay, great. Thanks, guys. Appreciate it.

Thank you.

I'll turn the call back over to management for closing remarks.

Thank you. On behalf of the company, I'd like to thank everyone for their continued support and interest. Our results demonstrate our product are gaining considerable momentum. We're capitalizing on today's global health and wellness trends and the transformations taking place in the energy category. Our active lifestyle position is a global position with mass appeal. We're building upon our core, leveraging opportunities, and deploying best practices. We have a winning portfolio, strategy, and team, and a large, rapidly growing market that consumers want. In addition, I'd like to thank all our investors for their continued support and confidence in our team. And thank you to everyone for their interest in Celsius. Stay healthy, stay fit.

Thank you. This concludes today's conference call. We thank you for your participation. You may disconnect your lines at this time and have a great day.