Celsius Holdings (NASDAQ:CELH) Q3 2021 Earnings Call

0:00 Greetings and welcome to Celsius Holdings, Inc. Third Quarter 2021 Financial Results. At this time, all participants are in 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. As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Cameron Donahue, Investor Relations for Celsius Holdings. Thank you. You may begin.

0:32 Thank you, and good morning, everyone. We appreciate you joining us today for Celsius Holdings' third quarter 2021 earnings conference call. Joining me on the call today are John Fieldly, Chairman, President, and Chief Executive Officer, and Edwin Legrand, 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 pre-market this morning. All materials will be available on the company's website Celsius Holdings, Inc. dot com under the investor relations section. As a reminder, before I turn the call over to John, an audio replay will be available later today. 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 November 11, 2021.

1:19 These statements involve numerous risks and uncertainties, including many that are beyond the company's control, except to the extent as required by law Thank you, Cameron. Good morning, everyone, and thank you for joining us today. In the third quarter, Celsius not only achieved another sales record for the quarter,

1:54 but beat our previous quarterly record from Q2 by almost 50%, beating by 46% growth on a sequential basis from Q2 2021. The company accomplished this exponential growth despite their tremendous supply chain constraints that continue to impact the industry. In order to hit the majority of our orders during the quarter, We did have to sacrifice some efficiencies on the margin side, which we believe are either one-time costs or short-term in nature, with specific identifiable processes we are implementing to improve our margin profile going forward. The largest one-time costs impacting margins during the quarter stem from the build-out of our six orbit distribution warehouse centers, which we announced in the second quarter. We expect to see tangible efficiencies in both miles on cases freight costs as well as reduced inventory stock outs with our distribution partners going forward from this initiative.

2:51 But we did have incremental costs in Q3 as we essentially moved from two main warehouse centers to six while also significantly expanding inventory runs with our co-packers. With this, we had excess freight costs as we built out and optimized inventory levels across our warehouses which is reflected in our cost of goods and we estimate impacted margins by approximately 3% for the quarter. In addition, we experienced increased freight costs associated with higher labor fuel costs which we are monitoring as on average freight costs have increased industry ride by 20% versus the prior year per DAT trend lines who tracks freight trends nationwide. In addition to short-term margin impacts, we continue to utilize international cans sourced, which carry a higher cost. When we placed these can orders, we expected the vast majority to come in and be utilized during 2021. Unfortunately, many are still outside of the United States and are waiting at ports to be unloaded, which have been offset by purchasing spot rate cans from the U.S.

3:57 suppliers. But with the significant increase in aluminum prices, spot rate increased significantly. With that said, the higher spot rate as well as the higher import cans have impacted margin for the quarter by approximately 5.3%. With that said, we experienced short-term and one-time margin impacts during the third quarter, which totaled approximately 7.5%. When taking this into account, our normalized margins would have been approximately 47.2% for the quarter, including outbound freight. To further optimize our supply chain going forward, we have added two new contracts with two of the top US can manufacturers for 2022, which will move us away from the higher spot rate purchases and international cans.

4:45 We believe we have adequate US can stores for 2022 to support our growth. We will likely have to cycle, though, some of the international cans that have been delayed depending on when they arrive and get delivered in the U.S. through the first six months of 2022. But we expect the vast majority of our cans will be from U.S. sourced on a contract basis materially reducing our can costs versus 2021. Some other cost increases we saw in the third quarter, such as raw materials, co-pack fees, tolling fees, and inefficient less-than-load shipping costs. We expect the majority of these will be offset in 2022 as we continue to negotiate better pricing with our scale. While it remains uncertain, the energy category is one of the lone outliers that have not increased pricing.

5:34 Driven by the top two players in the space, we believe the key factor in that decision is due to the rapid growth in consumer demand for functional performance energy drinks and the associated increase in new brands coming to market. The smaller scale new entrants face significant higher shipping, raw materials, co-pack fees, competition, and by not taking price, the top two energy drink place an outsized cost on the new entrants entering the market to protect their share. For Celsius, we have reached a critical mass where we will not impact our ability to grow, as evidenced by the record third quarter. And the only downside is that some of the expedited scale-based incremental margin improvements are being offset by cost increases that are not transitory.

6:24 Even with that, longer term, We expect margin expansion throughout 2022. As stated prior, we have identified one-time and short-term cost increases and have planned strategies to mitigate as we continue to optimize and transition our stores to DSD distribution with further future scale-based benefits with our current growth trajectory. To conclude our margin analysis, as we recognize revenue growth rates more than double in North America to over 200% and continue to accelerate further, we made a cautious decision in the third quarter to ensure that we had the operational infrastructure to support our revenue growth to much higher levels and fully take advantage of the opportunities to take market share at an increased pace.

7:10 As such, we accelerated initiatives on several operational improvements to position us for exponential future growth, which impacted margins by approximately 7% just from the one-time items in the third quarter. Additional incremental near-term benefits will be recognized if price increases are initiated by the top brands to our 2022 expectation. In the meantime, we are implementing and further evaluating our promotional strategies. We wanted to ensure we provided a detailed breakdown on margins and that our forward expectations of continued leverage remain unchanged before we detailed the record achievements accomplished in the third quarter. Our record third quarter results are representative of the momentum that the Celsius brand is achieving across the board.

7:57 Revenue growth driven by continued new store additions, SKU expansion, cold placements, DSD coverage expansion, as well as continuing to transitioning existing accounts Brand recognition, influencers organically supporting Celsius are just a subset of the drivers that accumulated in the record for third quarter results in North America. Total sales for the quarter totaled $94.9 million up 158% from $36.8 million in the year-ago quarter. Our domestic sales revenue increased 214% to $84.5 million up from $26.9 million in the year-ago quarter with both of these percentage growth rates increasing. The highest in our history and the North America sales up 58% from the second quarter sequentially. We continue to see two of our hardest hit channels from COVID, our fitness channel and our vending channel, not only rebound by the drive of new sales records with again reaching triple digit growth rates and contributing approximately $5.2 million in incremental revenue when compared to the prior year.

9:02 International sales grew 5% to 10.4 million for the quarter and 18% to the first nine months of this year. We are still dealing with the impacts of COVID-19 most pronounced in the European markets with all markets facing increased costs and raw materials transportation. Our EU, Middle East, Southeast Asia and Australia operations remain adversely affected by COVID-19 with varying restrictions and lockdowns in the markets. Overall, we continue to see Quarterly improvements quarter over quarter with capacity restrictions as well as reopenings and the hardest hit channels, but there still remains uncertainty as there could be potential reclosings due to new variants during the winter months and case increases in the regions of operations which could force closures in some states and countries.

9:48 Turning to some additional financial highlights for the quarter, our domestic revenue reached that $85.4 million was driven by accelerated triple growth in our channels of trade expansion with world-class retailers, further activation and growth from our distribution partners. Direct store delivery network grew over 429% in revenues when compared to the prior year. Also, our club channel continues to accelerate. Following the expansion rollout of over 550 plus Costco stores, and late Q2 to Q3, Costco growth now has been listed as just over a 10% revenue customer. We are also now rolling out onto their platform, Costco.com. In addition, Sam's Club, we are launching in several test markets during the fourth quarter, driven by the strong growth in Walmart.

10:39 On the convenience channel side in North America, the latest SPINS data shows a growth of 205.5% year-over-year increase for the Celsius product portfolio in the convenience channel Compared to a 13.6% overall growth in the energy drink category as of October 3rd of 2021, last 12 weeks, while during the same period our ACV increased 118% versus the prior year to 34.7% total ACV average. Industry-backed third-party data continues to show accelerated growth metrics. and we are confident that Celsius will continue to drive sales even higher as we continue to accelerate our ACV across channels through additional launches with new nationwide chains and transitioning existing accounts to our DSD network.

11:28 Consumer demand for Celsius accelerated through the third quarter of 2021 to record levels with the most recent Nielsen scan data as of October 23rd, 2021 showing Celsius sales up over 205% year over year for the two weeks Plus 213% for the four weeks and plus 204% for the 12 weeks with a two share of the energy drink category overall for the last four weeks. This compares to the total energy drink category, which grew 14% year over year for the two weeks ending and 12% for the 12 weeks ending over the same period. On Amazon, Celsius is the second largest energy drink with a 18.4 share of the energy drink category. 2.88% ahead of Red Bull at a 15.5 share and just 7.6 share behind Monster Energy at 25.9 share last four weeks ending October 30th, 2021 per Stackline Energy Drink category total US.

12:31 Transitioning to DSD continues and remains a top priority with our retail partners due to the increased velocities that are gained through the preferred route to market. Today, for our latest MULOC retail sales data, we estimate that we have transitioned and initially optimized approximately 50% of the stores reporting in to SPIN's MULOC channel and have further plans and expansion with additional DSD partners through the backup of Q4 and into 2022. Some of the key retailers that have transitioned over 75% of their stores include Target, Walmart, Racetrack, Kroger, Circle K, Speedway, Murphy's USA, with CVS and 7-Eleven also expanding in other markets. Historically, it takes on average two to three months to optimize stores once they have transitioned to DSD before we see that increased velocity levels.

13:21 In addition to transitioning retailers and activating our DSD network, We continue to roll out Celsius branded coolers in the third quarter with an additional 400 coolers placed and over 900 coolers for the first nine months of 2021. We have also implemented comprehensive tracking tools in place to monitor accelerated growth metrics with our retail partners and we plan additional cooler expansion initiatives through the remainder of 2021 with accelerated rollout in 2022. Today in the United States, our total door count now exceeds 118,000 locations nationally, growing 38,000 doors or 48% from the beginning of 2021, with additional expansion planned throughout 2021 and into through 2022 as retailer resets take place.

14:10 In Europe, our Nordic sales totaled 9.5 million compared to a similar amount in the prior year. Thank you for joining us today. with the pending can new redesign and launch, but increased to 9.3% of the total energy market in Sweden in September. In Finland, we launched a mint chocolate bar with a holiday theme wrap highlighted with in-store displays to secure space during the holiday season.

14:56 We also launched a great tasting new RTD protein line, which is launching in the fourth quarter with initial orders of over 300,000. We believe this is a great test market for our products with additional geographic expansion opportunities. Additionally, the fast portfolio bar launched in the U.S. Sales have been going extremely well. They've actually increased 50% in the third quarter from the prior QT run rate, validating the opportunity for further U.S. expansion and potentially expanding in the fitness channel in 2022. We've recently also launched on Amazon EU expanding Expansion began in the United Kingdom with launched three flavors, six fast bars, and Germany also expanded and launched today, most recently, with three flavors of the Celsius portfolio, and we expect additional EU countries to come online in the first quarter and in Q1.

15:50 In China, we maintain a licensing royalty model in the market where distribution covers approximately 76 cities and approximately 60,000 locations, and we see great opportunities in this growing market. Now moving to the marketing, on a marketing front, we continue to accelerate and target new consumers and existing consumers where they live, work, and play, building meaningful and emotional connections through robust integrated marketing programs, reaching more consumers each and every day. We're not only driving growth in the energy category, but we're also expanding the demographics while bringing an industry-leading percentage of consumers from outside the category who are new. We have also reached another inflection point in our operations and growth. one which positions Celsius for exponential growth and market share gains.

16:36 We have committed the resources, both in personnel and operational infrastructure, to maximize this opportunity and support the incremental growth drivers our national DSD distribution platform has opened in the convenience store channel in the United States. We are also not only seeing significant expansion in ACV across all channels, but doing so while increasing our velocities at retail. We are in a unique position to see material concurring growth and both due to we are just materially entering the most productive convenience channel in the United States while transitioning our existing accounts to DSD network where we have seen incremental growth post-transition. Our team is ready. Our infrastructure is in place to support the sales growth we expect on an expedited basis. I will now turn the call over to Edwin Negron Caballa, our Chief Financial Officer, for his prepared remarks.

17:28 Edwin. Thank you, John. Our third quarter revenue for the three months ended September 30th, 2021 was $94.9 million, an increase of $58.1 million or 158% from $36.8 million for the three months ended September 30th, 2020. 99% of this growth was a result of increased revenues from North America. were third quarter revenues for 2021 were $84.5 million or an increase of $57.6 million or a robust 214% from $26.9 million in the 2020 quarter. The balance of the revenues for the 2021 quarter were mainly related to European revenues of $9.5 million, which were similar to the prior year quarter. Asian revenues, which include royalty revenues from our China licensee, contributed an additional $706,000, an increase of 157% from $275,000 for the prior year quarter. Other international markets generated $177,000 in revenues during the three months ended September 30, 2021, an increase of $32,000, or 22%, from $145,000 for the prior year quarter. Gross profit for Q3 increased by $20.2 million or 115% to $37.7 million

18:58 from $17.5 million for the three months ended September 30th, 2020. Gross profit margins reflected a decrease to 40% for the three months ended September 30th, 2021 from 47.6% for the 2020 quarter. Excluding Freight Out, as some of our competitors do not include this charge as the cost of goods sold, our adjusted gross margin for the 2021 quarter was 49.8% compared to 53.7% in the third quarter of 2020. The increase in gross profit dollars is mainly related to increases in volume, while the decrease in gross profit margins is mainly related to higher raw material costs, ocean freight, transportation costs, and repackaging costs.

20:02 We estimate that the increase in gross profit dollars of $20.2 million included $28 million related to volume increases. An unfavorable cost impact of $7.4 million and a favorable currency impact of $31,000. Sales and marketing expenses for the three months ended September 30th, 2021 were $22.6 million, an increase of $14.4 million or 174% from $8.3 million for the three months ended September 30th, 2020. This increase was mainly related to higher marketing investment activities which resulted in an increase of $7.7 million when compared to the prior year quarter.

20:49 Additionally, employee costs increased by $2.6 million from the year-ago quarter. as we continue to invest in this area in order to have the proper infrastructure to support our growth as well as incurring additional travel and business expenses since we're now able to resume in-person marketing events and selling activities. Similarly, we experienced increases in other sales and marketing expenses in the amount of $400,000 mainly related to trade marketing activities to support our ongoing DSD network expansion. Lastly, storage and distribution expenses as well as broker costs accounted for the remainder of the increase in this area in the amount of $3.7 million from the year-ago quarter.

21:40 As a percentage of revenue, Sales and marketing expenses were 23.8% of revenue in the third quarter of 2021 compared to 22.6% in the third quarter of 2020. General and administrative expenses for the three months ended September 30th, 2021 were $11.1 million, an increase of $6.4 million or 134% from $4.8 million for the three months ended September 30th, 2020. This increase was mainly related to stock option expense which amounted to $5.8 million for the three months ended September 30th, 2021. An increase of $3.7 million which accounts for 50% of the total increase in this area when compared to the prior year quarter.

22:33 Management deems it very important to motivate employees by providing them ownership in the business in order to promote their overall performance. Additionally, employee costs for the three months ended September 30th, 2021 reflect an increase of $1 million or 108% as investments in this area are also required to properly support our higher business volume. Administrative expenses amounted to $2.6 million or an increase of $1.3 million or 97% when compared to the prior year quarter. This variance is mainly related to an increase in bad debt reserve of $200,000 and increases in audit costs, legal expenses, insurance costs, and office rent account for the majority of the remaining fluctuation of $1.1 million.

23:28 Depreciation and amortization increased by $200,000 when compared to the prior year quarter. Lastly, all other administrative expenses which were mainly composed of research, development, and quality control testing increased by $235,000 when compared to the second quarter of 2020. As a percentage of revenue, general and administrative expenses were 11.7% in the third quarter of 2021 when compared to 12.9% for the prior year quarter. If we then exclude the non-operational stock option expense, general and administrative expenses for the 2021 quarter would amount to only 6% of revenues.

24:15 Now turning to other income and expenses. Total net other expenses for the three months ended September 30th, 2021 amounted to $353,000, which reflects an increase of $593,000 when compared to net other income of $240,000 for the three months ended September 30th, 2020. The net other expense of $353,000 is composed of foreign currency exchange losses of $328,000, net other expenses of $97,000, interest income of $77,000 related to the note receivable from our China license fee, which were partially offset by other interest expenses of $4,500.

25:10 Net income. As a result of the above, net income for the three months ended September 30th, 2021 was $2.7 million, or 4 cents per share, based on a weighted average of 74.6 million shares outstanding and dilutive earnings of 4 cents per share based on a fully dilutive weighted average of 78.4 million shares outstanding. In comparison, for the three months ended September 30, 2020, the company had net income of $4.8 million, or 7 cents per share based on a weighted average of 70.4 million shares outstanding and a dilutive earnings per share of 6 cents based on a fully dilutive weighted average of 74.8 million shares outstanding.

26:04 Focusing now on liquidity and capital resources. As of September 30th, 2021 and December 31st, 2020, we had cash of $61.4 million and 43.2 million dollars respectively and working capital of 157 million dollars and 65 million dollars respectively with no long-term debt. Cash flows used in operating activities totaled 52 million dollars for the nine months ended September 30th, 2021. which compares to $3.8 million of net cash provided by operating activities for the nine months ended September 30th, 2020. The use of cash is mainly related to the increase in our inventory levels in order to properly service demand for our Celsius products.

26:57 Inventory increased by $104 million during the nine month period ended September 30th, 2021. Sequentially, Inventory increased $58 million from the second quarter of 2021. Without this significant increase in inventory, cash flow from operations for the nine months ended 2021 would have totaled $52 million. This concludes our prepared remarks. Operator, you may now open the call for questions. Thank you. Thank you. Ladies and gentlemen, at this time, we will be conducting a question and answer session. If you'd like to ask your question, you may press star 1 on your telephone keypad. A confirmation tone will indicate your line is in the question queue.

27:43 You may press star 2 if you would like to remove your question from the queue.

27:47 For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star key. Our first question comes from the line of Camille Garjarawa with Credit Suisse. Please proceed with your questions.

28:05 Thanks for taking the call. A couple of questions. The first one, I guess, went a little fast. When you were talking about pricing, did you say you have intentions to take price or that you're not taking pricing because of competition?

28:24 Thank you for your question. Right now, we are evaluating it, and we're really keeping a close eye on the market. Obviously, the top two players, but we are doing pricing strategies in regards to promotional strategies as we go forward in pricing architecture within the portfolio. But it is something we're looking at as we go forward. We do feel, based on these one-time charges in regards to the importing of cans, as well as the freight costs, increases in freight costs we've seen really moving to the six orbit model that we've talked about in the past. We can get back to more of a normalized gross profit once we cycle through the imported cans and move away from the spot rate purchases. But it is something definitely we're looking at as we continue to go forward. We're seeing transitory increases in a variety of other costs.

29:12 The questions are those permanent or transitory which we're evaluating.

29:17 and just your best guess from what you're seeing in the market at the moment. Does it look like the competition is reducing promo, taking price in a way that would make it possible for you guys to follow?

29:30 We are seeing that in the marketplace by other players in regards to promotional strategies. So we're not the anomaly out there.

29:40 Got it. And then if I can ask a little bit about maybe dissecting the growth between – The incremental contribution of all the distribution gains that you're winning versus kind of an equivalent of same-store sales. I don't know if you can give us precise figures, but at least maybe give us some guidance on the growth, which has been substantial. Is it 50-50 new distribution versus old? Is it 70-30? Can you give us a rough idea?

30:09 Yeah, when you look at the numbers, the team is doing a great job, number one. With Coke Energy coming out, we all know that was discontinued. We were able to pick up a lot of incremental points of distribution and taking advantage of that. So when you look at the number of stores that the team was able to capture during the period, which keep in mind is outside of normal reset windows. So that was a great win for us during the quarter. We're seeing same-store sales further increase as we move to migrate them more over to our DSD network. Our DSD network performed phenomenally during the quarter when we were up over 400% there. The team's doing a great job. We've got a lot of good processes in place to currently continue to optimize. We're nowhere near fully optimized within the distribution network, but we're putting processes in place, team members.

31:01 We've hired a variety of great team members that are well experienced and capable to continue to drive revenues here and we also have our cooler placement strategy where we see great opportunities there to further leverage because when we place a cooler with Celsius we see exponential growth there in the existing accounts so lots of opportunities on all fronts and we got strategies in place to leverage.

31:25 Okay and then just finally on what you're seeing in terms of the gyms and fitness and many more.

31:52 and it's great to see it continue to rebound there. Lots of opportunities. I mean, it's great seeing everyone going back. I think that just goes and further shows you the opportunity we have at Celsius. Healthier, better for you. You know, fitness forward position. Celsius is aligned with today's health-minded consumer. The health and wellness trends are even stronger now than ever before, and the transition is taking place, and it's affecting the energy category. So we're in a really good spot. I think that's just good indicators to see that channel come back, even in a stronger pace.

32:25 Okay, great. Thank you, guys. Thank you. Our next question comes from the line of Kevin Grundy with Jefferies. Please proceed with your question.

32:38 Great, thanks. Morning, guys, and congratulations on the continued momentum. I want to kind of pick up on the same line of questioning just around the U.S. business specifically and the conversion to DSD. We look at the Nielsen data, the distribution gains look great, and importantly, the velocity gain is quite good as well. John, I think as you rightly pointed out, the brand is still very underrepresented in the convenience channel, which is obviously a huge opportunity. Just a handful of questions here on this topic. Just confirm, I think the number is 50% of the accounts have been switched over to DSD at this point. I think the longer-term goal was 80%. Just confirm those numbers and how quickly you can get to that long-term goal. Relatedly, how has distribution velocity tracked relative to the company's own internal expectations? And then just lastly in this area, do you have any early reads on shelf space, what those gains could look like as you think about next year?

33:37 And then I have a follow-up. Thank you.

33:40 Yeah, thank you, Kevin. In regards to the 50% number I put out there, in regards to that was MULOC reported channels. So right now we're at 50%. I think still at 80% numbers ideal currently with our distribution map and network. We would like that number to go higher, but I think 80% would be a great number for the company to continue to strive for. We're working on that. As we move into 2022, I think you'll see more of our distribution continuing to convert over and also all the new distribution coming on that we anticipate is most likely being serviced by our distribution network. When you look at the velocities, the velocities are meeting our internal expectations.

34:25 Velocities, as you've seen in the scan data, has continued to increase. So even as we're increasing our ACV, which is a good thing to see there, and the brand's resonating well, when you look at 2022 space opportunities, we're really excited about that. We just attended NACS, many of you on the call, it's the largest show in the country, in the U.S., in the convenience channel, where we had a great booth, a great presence, and some of the initial feedback we got from the show was really positive. Now, we don't know until resets take place. Likely around March, April timeframe is usually when they take place in the convenience store industry. But we feel really optimistic there. And initial feedback has been positive. We'll continue to keep everyone updated as we gain more distribution in stores. We won't know until the resets are final.

35:12 But it was probably one of the best NACS shows we've had in company history. So really excited about that.

35:19 Great. Thanks, John. Just pivoting to the margin outlook, but a little bit more longer-term oriented, I guess I would say. I think there's an expectation in the marketplace that the margin potential here could be substantial over time. John and Edwin, for you as well, please, just your updated thoughts on broadly your vision for this business. How you're balancing the market share opportunity with the substantial scope for margin improvement. Understanding those dynamics are not mutually exclusive, but your updated thoughts there would be helpful. And then I have one last follow-up. Thank you.

35:52 Sure, Kevin. I think what's interesting, if you look at our average scan on a per-camp basis, has increased on the 12-week and 24. So we have been reducing our promotions. So that promotional strategy has been taking place. and it hasn't really decreased the velocity levels. So we do feel there's opportunities there as we scale. In regards to the overall margins, we've historically said that we can get back to our pre-COVID margin profiles and our existing setup. We feel there's further opportunities to leverage our scale as we drive further volume as well as the synergistic benefits of moving towards our six-orbit distribution or warehouse model where we can better serve our customers in a more efficient, more effective manner and keep them in stock as well.

36:38 So there's a lot of opportunities there on a go-forward basis. I would agree with you. There's a lot of margin upside, and the team is working on strategies to implement that. I'll turn it over to Edwin as well. Yeah, thanks, John. Yeah, absolutely, Kevin.

36:50 I mean, one of the things that I wanted to add, you're absolutely right. From my perspective, as we continue to gain market share, which translates into additional volume, that's going to drive more synergies And as we normalize or the supply chain normalizes going forward, that should also benefit. So there are significant opportunities from our standpoint. And as John said, once we start getting the benefits of those six orbits, all those things should have a very good positive effect on margins.

37:21 Thank you both. Just one last one for me and then I'll pass it on. So cash flow running negative, but the business requiring investment in coolers, also inventory up and up to a degree greater than sales growth. Could you just provide your updated thoughts on your ability to fund the business organically at this point? What are your thoughts for the year? What are your thoughts looking out to next year as you think about the capital requirements to fund your top line objectives? And then I'll pass it on. Thank you.

37:49 Yeah, thank you, Kevin. I'll jump in on the first part of that. In regards to our cash position, we feel we have sufficient cash to meet our needs on a go-forward basis. We did increase inventories that were strategic. We spoke about that prior as well, and we feel we're optimized. We're going to continue to invest in the business, in inventory, personnel, and resources as we continue to scale so we can drive that optimal leverage and reach our goals. So,

38:17 Sure. Yeah, I'd like to add, I mean, if we back out the inventory aspect or build-up, you know, we would deliver over $50 million of, you know, cash flow from operations. Even if you back out all the working capital components to have a normalized, you know, pro forma cash flow, we would have delivered over $13 million of cash. So I fully agree with John that we have, you know, the business is generating sufficient cash flow going forward, and we did make significant investments in the coolers. But again, that's going to translate into incremental volume as well. So I don't, you know, there's no doubt, you know, going forward that we should be able to, you know, generate sufficient cash flow.

38:55 And in the quarter, we also, if you look at the prepaid balance in inventory, right about $40 million, and that was strategically done to secure raw materials during the inventory constraints that we received in the COVID environment in Q2 and Q3. So taking that into effect, that should normalize and we shouldn't have significant prepaids on a go-forward basis as Our next question comes from the line of Jeff Van Sinneren with B. Reilly. Please proceed with your question.

39:31 Good morning, and let me add my congratulations on the phenomenal revenue growth. Just wanted to follow up on a couple of things. On SG&A, I know you mentioned one time items associated with the six orbit warehouse strategy. Can you maybe speak about any extraordinary costs and expenses you anticipate into Q4 and early 22 around that? Just wondering when we should expect those inputs around the six orbit strategy to be more normalized. And then I guess what sort of contribution to P&L leverage could we see in 22 from that?

40:08 Yeah, thank you, Jeff. The team's working really hard. Appreciate the question. In regards to forward-looking information, we're not going to provide any true forward-looking guidance on leverage specifically on that. We do see, you know, in the short term, our warehouse costs will increase going to the sixth orbit because we're investing ahead of our overall top-line revenue. So just keep that in mind that our warehousing costs will increase as we're moving from two warehouses, move to six warehouses. We'll have those into the full fourth quarter and beyond where revenue needs to scale up to get that margin profile. Also, keep in mind also we are investing in marketing as well. Events have come back extremely strong in the third quarter and in the fourth quarter. So the company is investing in marketing, really touching those consumers where they live, work, and play. But as we go forward with the growth rates we're seeing, We feel we're making the right moves in infrastructure, resources, and to really be able to continue to drive top-line revenue and market share within the operation channels we're operating in.

41:12 Edwin, do you want to add any additional comments?

41:13 Sure. Yeah. And I think Jeff mentioned, you know, in the GNA area, yeah, we had, I mentioned, you know, an increase in the fact that we served. about 200,000. And again, that's driven by the more volume that we have, we want to be conservative in that area. But yeah, and we're seeing also some increases in professional expenses, again, to support the business. So those kind of things are in there as well and have impacted our profitability.

41:42 Okay, fair enough. And then it seems like you have a pretty substantial opportunity to grow the business in You're up outside of the Nordics. Just wondering if you could speak more about plans for further rollout into Germany and the UK.

41:58 Yeah, we were really excited to initially start and be able to service those markets through Amazon. So we're really excited about that opportunity and we're talking to and significant larger distributors in those markets as well. You know, really when you look at the success of the U.S., that is gaining a lot of interest as well overseas with substantial potential partners. So the company is evaluating. Our main focus is North America as well and continue to optimize and grow in the Nordics. But as we see opportunities in additional markets, we'll continue to evaluate. And the U.K. in Germany is an area of great opportunity for Celsius and we expect to Further Optimize, initial, is the rollout with Amazon, and we're looking for partners locally to continue to drive scale.

42:41 I agree. To me, the key is, like John has mentioned, to have a light model there. In other words, go through either partners like Amazon or distributors where we don't have to make a significant investment, set up legal entities in the countries, that type of thing. That's a more profitable model, and we can invoice in U.S. dollars and avoid any of the effects of exposure.

43:06 Okay, and if I could just squeeze in one more, just wondering about the rollout of the fast bars beyond Amazon and also the protein drink line rollout.

43:17 Yeah, in regards to the fast bars, we've been, you know, it's a very methodical approach. We're investing as we see increased sales invest and initially tested it in the second quarter on Amazon. So we have placed additional orders for the bars. They taste great. Initial feedback has been extremely positive in the U.S. We are currently importing the bars from Europe, so they have some supply constraints, but we're working with the and many other manufacturers to be able to produce in the US on a go-forward basis. So the business is under evaluation. We're really learning about the consumers and how best to go to market to drive scale efficiently and profitably. So initial feedback has been really positive. Like I said, sales were up 50% on Amazon with the fast protein snack portfolio in the US. is very excited as well. The team in Finland launched a new protein RTD indulgence product line, which tastes extremely amazing. Initial feedback has been extremely positive, and it launched with initial orders roughly around 300,000, which is extremely a success.

44:21 So we're evaluating that. We see a lot of opportunities as we continue to you know expand and grow into the protein space mainly in Finland where a fast protein snack portfolio is one of the top selling brands and with this protein line we are able to increase our overall margin profile versus the prior product so team's doing a great job we'll continue to evaluate that as we continue to grow and scale.

44:48 Okay thanks and best of luck in the remainder of Q4. Thank you. Thank you Jeff. As a reminder, it is star one to ask a question. Our next question comes from the line of Jeffrey Cohen with Lattenberg Diamond. Please proceed with your question.

45:05 Hi, John and Edwin. How are you? Hello.

45:09 Excellent, Jeffrey. Doing well.

45:10 Just a little follow-up on Jeff's question. Can you talk about number of SKUs now in Finland on the fast line and then talk about SKUs on the protein line as far as actual numbers I think you have at the moment? Two SKUs that you've introduced in the U.S.?

45:28 Yeah, we have. We have two flavors now currently available on Amazon. We're also looking at additional flavors to further drive our variety of offerings there. So, you know, we're continuing to evaluate the supply chain of importing them into the U.S. Obviously, it's challenging, so we don't want to drive too much scale, but we do want to build our consumer following. and that's what the teams are doing right now. And we look into 2022 of potential rolling out additional channels of opportunity once we can produce locally and really drive efficient margin profile to further invest in the brands, the fast brand in the U.S. Right now in Finland, they launched an initial RTD protein line which is an indulgence product. It tastes phenomenal. The team is extremely excited about that.

46:16 Initial rollout has been positive. comes in three great flavors currently. And we'll continue to evaluate that. And as it continues to, there is obviously synergistic opportunities to further scale in other markets as we grow. Health-minded consumers, it's the complementary product to Celsius. And we'll continue to evaluate.

46:39 Would you anticipate manufacturing in the U.S. in 2022?

46:43 We anticipate manufacturing in the U.S. in 2022 with the protein snack portfolio, which is mainly the bars. We're evaluating the protein RTDs with some of our local production as well. So those are initial businesses in the early infancy in the U.S., but it is definitely something the team is currently evaluating.

47:02 Okay, got it. And looking for a little further commentary on the cooler front. Anticipated goals or aspirations for Q4 or for 2022 as far as aggregate numbers?

47:15 Yeah, I mean, if you look at where our coolers, in the first nine months of this year, we placed over 900. So 400 just in Q3 alone. So we anticipate that momentum to continue to increase. You know, it's very important. We don't want to over push out coolers. We want to make sure these coolers are placed in the right location. So it's more of a methodical approach. But we are getting a lot more requests with the success that they're seeing. So we place a few coolers within a distributor. They see the success, and it's truly a partnership. And then we work together to really get into their top 20 accounts, top 20% of their accounts. We would love to have great coolers and great placements there. So if you see a Celsius cooler out there, we've got some great new designs coming with a logo on the front, and they look extremely well, and they sell extremely well.

48:01 So grab a cold Celsius if you see one.

48:05 And then lastly for us, any updates on U.S. flavors and SKUs? Should we expect more or will they widen out in the future?

48:16 Talking in regards to the vibe line?

48:19 Yes.

48:20 Yeah. You know, our vibe line has done extremely well. Our peach vibe and our tropical vibe has been one of our top sellers in the initial launch where we rolled out new innovative flavors. We expect to continue that strategy, and we'll be coming out with a new vibe this summer. So we're not going to disclose the flavor yet, but do anticipate a new vibe coming that's going to taste great and amazing, and we'll have a great marketing strategy behind that, which is innovative and really connects with consumers in a meaningful way.

48:51 Super. Thanks for taking our questions. Congrats on the quarter.

48:54 Thank you, Jeffrey. Thanks. Our next question comes from the line of Anthony Vendetti with Maxim Group. Please proceed with your question.

49:04 Thanks. Good morning, John. Good morning, Edwin. How are you?

49:08 Good morning. Excellent.

49:11 So just a couple questions on the store fronts or the doors that you're in. Did you say you're at 118,000 at this point, and how many were added this quarter?

49:22 Yep, yep, that's correct, Anthony. We're at storefront. We're up to 118,000. We have the stores that were added during the... We said that were added year-to-date. That was the number that was about a 40% increase that we had in the greater store count this year. Correct. There's a lot of opportunities on further expansion there in new doors, so I think that's... A great area. The team's working hard. We have a great key accounts team that's focused on new distribution and all channels of trade. Obviously, the biggest opportunity we see currently is in the convenience channel and really leveraging the DSD. Just keep in mind before our key accounts team is more handling the national accounts, but now leveraging our DSD partners, we're able to activate and work with the local regional chains where these DSD partners have local relationships.

50:15 We're excited about that, and that's a big initiative through the rest of this year and

50:19 into 2022. Okay, and then just on the DSD front, you have, I believe, 224 regional DSD partners, and that covers 92% of the U.S. counties that you're currently serving. Is that the right number?

50:39 That is correct. That is the right number. We had the largest increase in DSD partners in the third quarter. Really sign up. Keep in mind, once we sign these distributors, it does take some time to get product to them, product through their warehouse, educate their team members, and really optimize the account, the network and the distributors. We do new product launches. It's the education process. So it does take time, but it was the largest quarter, the increase in distribution partners. And we are at about 92% of all counties in the U.S. are now covered. So a large portion of the population is covered. And now the teams are working on converting our key accounts over to DSD. And really, we're in the optimization phase as well as bringing on new accounts.

51:27 And that's why you saw, I think, when you look at the great growth we had in our DSD network was up over 400% for the quarter and up sequentially as well. So great, great opportunities there as we continue to execute and optimize.

51:40 And then just on the supply chain, I know you talked about the cans and and the trouble getting some of those from overseas. So you had to source some of those here in the U.S. on the spot market. You said you have enough right now, but what about the freight issue? From what we're hearing, this is industry-wide across a lot of industries, not just the consumer packaged goods industry or the drink industry, right? How are you planning to deal with that the rest of this year and into 2022 if it continues to be an issue?

52:22 Yeah, no, great question. You have to, you know, really on the scale of the business, I mean, obviously if we were at a larger scale and we weren't seeing our growth rates where they are, We would have more of a material effect on our freight that we're seeing on the overall general nationwide cost increases of freight. And I mentioned, according to DAT, it was about 20% overall. Keep in mind, we were going from two warehouses, now we're migrating to six warehouses, where when we were running at two warehouses, and we're bringing on DSD as well, we are shipping a lot of product, what they call less than a truck. It's called LTL. So that is much higher costs of shipping product around the country, and we're shipping long hauls as well on LTL, less than a truckload. So once we move to this orbit model and we bring on our distributors, our distributors can take full truckloads. So not only are we shipping a full truck opportunity as we continue to optimize these distributors, we're shipping that truck at a shorter distance.

53:27 So there's a lot of synergistic benefits on freight just as we continue to scale and grow and gain that leverage versus more of a mature business in this current environment with the increases in freight that the overall industry is receiving.

53:42 No, that's very helpful. And then just, did you say or did Edwin say there was a one-time cost that impacted this quarter for the movement from these two to six warehouses?

53:56 Yeah, I stated that as calculating it roughly around 3%. And that's really associated. When we were moving from two warehouses to six warehouses, and we're really optimizing in the fourth quarter as well. Just keep that in mind. We're not fully optimized in the fourth quarter. We'll continue to optimize in Q1 and Q2. But when we moved to six orbits, we increased our inventory levels. We're still shipping longer lead times and longer distances as the inventory really optimizes. We have a variety of flavors, as we all know, so it's very important that we have all the flavors at each warehouse in order to be able to ship very efficiently. That's why you saw our inventory levels increase at the end of September. and there's further optimization there.

54:41 Yeah, no, John, I just wanted to add in that sense, as we establish, like you're saying, the additional orbits or warehouses, yeah, there's been some incremental intra-warehouse freights and moving and redeploying some of the inventory to then get the synergies or the benefits going forward. So I think that's what we were alluding to earlier.

55:03 Okay, great. Thanks very much, guys. Appreciate the call.

55:06 Thank you. Thank you, Anthony. Our next question comes from the line of Sean McGowan with Roth Capital. Please proceed with your question.

55:17 Thank you. Good morning, guys. A couple of questions surrounding the idea of what is normal going forward. When you said you can get back to pre-COVID margins, is that to suggest that what you were putting up before, let's say, the first quarter of is that what you aspire to get to or can all of the economies of scale and everything get you well beyond that? So what do you consider to be normalized gross margins now, X freight?

55:46 Yeah, I think our margins include freight. So, I mean, if you look at it that way, you know, we anticipate to get back around, you know, like that 46% 47% margin profiles that we had in 2020, I think, be an area just currently as we continue to optimize. But as we gain more scale, we anticipate to be able to go north of that. But we're also looking at these transitory costs. So we're keeping that in mind as well. So at the timing of those decreasing and getting back to more normalization. But looking at a normal profile, we say like and so forth. Mid to upper 40s is kind of an area we feel we can get back to. I don't know, Edwin, do you want to?

56:28 Yeah, no, I agree with that. To me, it's more of, you know, the timing because I fully agree with John that we will be able to get to that. It's just more of the timing when that normalization occurs and we start getting all those benefits, perhaps towards, you know, the back end of 2022, you know, that type of thing. But to me, yeah, without a doubt, we can get to that. It's just more the timing issue. Yeah.

56:54 All right, that's helpful. And just to clarify, when you give some of those color commentary on what the various puts and takes were to the gross margin, should we be interpreting that as those are like when you say 3% hit? That's 3 percentage points off of the gross margin? Is that the way you interpret that?

57:13 Yeah, that's correct. I mean, the total adjustment, look at the increasing... really the cans and some of the other input costs as well as the freight of 3%. That's how we're driving at the 7% overall. Great.

57:27 Thank you. And then last thing, again, trying to figure out what's normal. To what extent is the inventory build here a way of dealing with logistical and supply chain challenges as opposed to just feeding consumer demand and retail expansion? How much overbuild is there in the inventory to to try to smooth out some of those shipping challenges.

57:53 At this point and in the third quarter, we weren't building to drive efficiencies and margins. We were building inventory to drive and fulfill demand. So the efficiencies are going to come down the road maybe as we look at 2022. But right now, I mean, our inventory does have a mix of spot rate, product cans, we have import cans, and it's more at a higher level of cost when you look at the overall cost on a per case basis. So those are things that are currently, but we're building our inventories to justify and fill the six warehouses that we're bringing on board as we optimize our six orbit model. in addition to meet the growing demand and the anticipated new stores coming on in the future as well as the optimization of the DSD network.

58:42 From my perspective, there's always two ways to look at this. Like I say, looking back and looking forward. Looking forward, based on hand, some computations, we're probably around 120 days. Again, It's something that's still within the range of optimal that we're looking for.

59:05 Okay. Thank you very much. We have run out of time for questions. I'd like to hand the call back to Mr. Pealey for closing remarks.

59:22 Thank you. On behalf of the company, we'd like to thank everyone today. for their continued interest and support. Our results demonstrate our products are gaining considerable momentum as we are capitalizing on today's global health and wellness trends and the transformation taking place in today's energy drink category. Our active lifestyle position is a global position with mass appeal. We're building upon our core and leveraging opportunities and employing best practice. We have a winning portfolio, strategy, and team in a large, rapidly growing market that consumers want. We believe we'll be able to navigate through the challenges ahead as a result of the COVID-19, and we are well positioned to thrive in the transformation of today's energy drink category. In addition, I'd like to thank all of our investors for their continued support and confidence in our team.

1:00:07 Thank you, everyone. Have a safe day, stay healthy, and grab a Celsius. Ladies and gentlemen, this does conclude today's teleconference. Thank you for your participation. You may disconnect your lines at this time. and have a wonderful day.