Celsius Holdings Inc (CELH) 2022 Q3 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Celsius Quarter 3 2022 Earnings Call. (Operator Instructions)

At this time, it is my pleasure to turn the floor over to your host, Cameron Donahue. Sir, the floor is yours.

Thank you. Good afternoon, everyone. We appreciate you joining us today for Celsius Holdings Third Quarter 2022 Earnings Conference Call. Joining on the call today are John Fieldly, President and Chief Executive Officer; and Jarrod Langhans, 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 the earnings press release upon market close this afternoon, and all materials will be available on the company's website, celsiusholdingsinc.com. 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 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 November 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 statement containing 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 Fieldly, for his prepared remarks. John?

Thank you, Cameron. Good afternoon, everyone, and thank you for joining us today. The company achieved a record quarter in the third quarter of 2022, with sales over $188 million, delivering revenue growth of over 98%. And according to the most recent scan data at retail per IRI MULO+C Total Energy, 1 week ending October 23, 2022, Celsius is now the third largest energy drink in the United States. In addition, according to the trailing 12-week IRI MULO+C Total Energy as of October 2, 2022, representing the majority of the third quarter, Celsius was again the #1 brand driver of growth in the energy category in the United States, responsible for 29% of the category growth, driving over approximately incremental $123 million in sales for the category.

This represents the third consecutive quarter at the #1 spot and prior to the transition to the PepsiCo distribution network, which started October 1, 2022, and will be represented in our fourth quarter numbers. We continue to see growth across all channels, including the non-tracked, with our club channel sales in the third quarter totaling over $34 million in sales increased -- increasing by approximately $20 million from the third quarter of 2021. Amazon sales, another non-track channel, for the third quarter hit a new quarterly record of approximately $16 million. And year-to-date, in 2022, totaled approximately $43 million and was up 108% compared to approximately $21 million in the 9 months ending 2021. Third quarter retailer highlights include the benefits from our Walmart expansions announced in the first quarter of this year, on a year-to-date basis, continuing to hit new revenue records.

In the convenience channel, where we see the largest opportunity, Celsius continues to perform extremely well and according to the convenience in gas, IRI as of the 12 weeks ending October 2, 2022, Total U.S. Energy, Celsius sales increased 158% in the channel, setting a new sales record. In the grocery channel, both Kroger and Publix lead the incremental revenue growth in the third quarter of 2022, with both retailers setting new records in sales and share gains in the energy category.

We officially commenced our distribution partnership with PepsiCo subsequently to the third quarter with the distribution to most of our retail accounts transitioning as of October 1, 2022. While early initial track data on both ACV and items carried per store growth indicate impressive gains already gained and exceeding our initial expectations on both these tangible metrics. In addition, the transition process with respect to our retail partners as well as our consumers also have exceeded our initial expectations. As highlighted in the earnings supplement for the 1 week ending October 23, 2022, IRI data reported in MULO+C, Total Energy, Celsius has past surpassed Bang to be the #3 energy drink in the United States with a 4.9% market share compared to Bang's 4.4.

In addition, Celsius has seen approximately 11% increase in ACV since October 1, 2022, and the initial launch with the PepsiCo distribution network, with average items carried per store increasing from an average of 7.7% to 8.3% over the same time, 3-week time frame. In the convenience store channel, Celsius has seen the largest gain with approximately a 23% increase in ACV since October 1 of this year. Our third quarter sales hit another record of approximately $188 million in the -- with U.S. sales totaling about $179.5 million and approximately $34 million sequential increase from the second quarter of this year.

Revenue growth was driven by over a $60,000 increase in door count from the prior quarter with convenience store additions, representing 37,000 of the 60,000 increase, club channel expansion as well as increased items carried at locations in conjunction with increased placements at retailers, including both branded coolers at retail locations. International sales only represented approximately about 4.6% of total sales for the quarter with total sales of approximately $8.7 million compared to $10.4 million in the prior year quarter.

Our European revenues represented a $7.5 million of international revenue compared to $9.5 million a year ago quarter, a decrease of approximately 21%, with around 1/3 of the revenue decrease associated with foreign exchange impacts as well as timing of innovation and supply chain disruptions. Revenue for the other international markets totaled $1.1 million, up approximately 30% from $883,000, which included royalties from China. We believe there is significant opportunity for international growth going forward with PepsiCo as part of our distribution agreement that we entered into.

Both Pepsi and Celsius are committed and expanding internationally, utilizing Pepsi's best-in-class international distribution system, while we just began our distribution partnership with Pepsi and our initial focus will be in the U.S. distribution and transitioning our distribution to the PepsiCo U.S. distribution network, we see significant opportunity to capitalize on a global scale reflecting the changes in consumer preferences for better-for-you offerings, low and no sugar and more -- the need for more energy.

While the U.S. transition has taken a majority of our focus to date, we expect to have additional international rollouts details through additional calls and quarterlies going forward through 2023. Gross profit for the quarter increased 109% to approximately $79 million, up from approximately $38 million in the year ago quarter, and gross profit margins were 41.8% and 49.6%, excluding outbound freight for the 3 months ending October -- or September 30, 2022, compared to 39.7% and 48.8% excluding outbound free in the prior year quarter. This represents a 330 basis point increase from the second quarter gross margin percent and consistent with our expectations and discussions from our second quarter earnings conference call.

We reiterate our expectations for continued sequential gross margin percent improvement through the fourth quarter, with gross margin percent expected to be in the mid-40s by year-end. Our product channel mix -- sales mix also has been impacted margins as the club channel revenues has historically had a lower margin levels due to the secondary repack nature of the product. With the rapid growth of the channel, which contributed to approximately $34 million in revenue in the third quarter and has increased our overall margin pressure, and we continue to initiate production efficiencies to improve margins in this channel, including working with our co-packers who have the capabilities to produce in line and also so we can limit the number of secondary production facilities. Even with higher sales than originally forecasted in the sales mix in the club channel, our margin guidance has stayed consistent for 2022 as we continue to optimize our supply chain and gaining incremental efficiencies against rising inflation pressures.

In addition, with our transition from a significant number of independent distribution partners to the PepsiCo distribution network, this will allow our team to consolidate sales, marketing, distribution efforts with planned associated cost benefits, which we expect to recognize and leverage through 2023 and beyond. We will also provide additional clarity on both gross and operating leverage and targets as we move through the transition, but I expect to see additional leverage as we look to drive efficiencies post transition.

Some additional highlights for the third quarter, 92% of our MULO+C -- reported MULO+C retail store locations are now serviced through our DSD network, up from 72% in the third quarter of 2021. Our mass channel is now more or less 100% DSD serviced and 99% of our convenience channel is serviced by DSD. Industry-backed third-party data continues to show accelerating growth metrics, and we are confident that Celsius will continue to drive sales even higher as we increase our ACV across channels through additional launches with nationwide retailers independent chains and through our new partnership with the PepsiCo distribution network. Consumer demand for Celsius on a dollar basis accelerated in the third quarter of 2022 and has reaccelerated after the initial distribution shift on October 1 of this year to the PepsiCo distribution network.

The most recently reported Nielsen data, as of October 22, 2022, shows Celsius sales were up 118% year-over-year for the 2 weeks, 120% for the 12 weeks and 126% for the third quarter. This compares to the total energy category, which grew 10% for the 2-week period, ending 10% for the 12-week period and 10% in the third quarter over the same time period.

On Amazon, Celsius is the second largest energy drink with an 18.5% share of the energy drink category ahead of Red Bull at 12.01% share and trailing Monster at a 26.2% share on a year-to-date basis ending October 22, 2022, and according to Stackline, total U.S. Energy on Amazon. Celsius reported sales year-over-year grew 79% compared to Amazon energy drink sales business, which grew at 39%, outpacing the category.

The company placed an additional 550 coolers in the third quarter of 2022 and over 3,500 since the beginning of 2021. The company anticipates a continued acceleration of cooler placements through 2022 and into and through 2023 in addition to the incremental placements and Pepsi energy coolers, which provides approximately over 50,000 additional placements that are rolling out right now. U.S. store count now totals 174,000 locations nationwide in the U.S., growing over 60,000 doors or 54% from 114,000 doors as reported in the third quarter of 2021, with additional expansion planned throughout the rest of the year and into 2023, accelerated by the end being accelerated by the PepsiCo distribution agreement. Convenience store locations increased by largest by 77% or approximately 37,000 locations to 86,000 locations at the end of the third quarter of 2022 compared to 49,000 locations at the end of the third quarter in 2021.

On our co-packer front, we continue to expand our partners and scale at existing locations, improving line time priority. Our total U.S. co-packer footprint now totals 13 that are active, which will help keep our product in stock and support our massive growth.

Before I turn the call over to Jarrod, I want to close my prepared comments recognizing the amazing job of the entire team and our partners, which they have done, establishing Celsius as a leading brand, driving growth in the entire energy drink category in the U.S. Our consumer demand remains robust. Our portfolio is resonating with a broad consumer base, and our teams are positioned to leverage opportunities for growth going forward with our new partner, PepsiCo.

I will now turn the call over to Jarrod Langhans, our Chief Financial Officer, for his prepared remarks. Jarrod?

Thank you, John. Before jumping into the financial results for the quarter, I'll cover a few administrative items, including transaction-related items stemming from our PepsiCo distribution agreement. It was a very exciting and busy quarter. The announcement of the partnership with Pepsi through a distribution agreement and investment is a significant step in our growth and key to our ability to not only continue to grow the category but to grow market share. Although Pepsi did not start distributing our product until October 1, we worked in conjunction with their operations team to make sure that they add Celsius in all of their key locations across the U.S. As John mentioned, the transition has gone very well, and we are excited to see the early results of this long-term partnership.

So let's walk through some accounting highlights associated with this transaction. Let's start with the termination expenses. Included within our quarterly results, we recorded $155.4 million of termination expenses associated with termination notices issued during the quarter so that we could transfer distribution to Pepsi. We had an additional $50 million of termination expenses agreed upon in the fourth quarter as well, which will be recorded in our Q4 results. We have already transitioned most of our distribution footprint over to Pepsi but there will be some activity in Q4 and through the beginning of Q1 2023. These expenditures were funded by Pepsi, and as a result, we have recorded the funding as a deferred revenue that will be amortized over the 20-year period of the associated distribution agreement.

Looking at the preferred share investment. We received $550 million in cash from Pepsi during the quarter as a payment for the Series A preferred shares. As a part of generally accepted accounting principles, we value this instrument at $832.5 million and recorded this valuation net of issuance costs within the mezzanine section of our balance sheet. The difference in cash proceeds and the valuation was recorded as another asset, and we will amortize this balance over the 20-year period associated with the distribution agreement as a contra revenue.

Let's talk taxes as well. Our effective tax rate for the 9 months ended September 30, 2022...

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9 months ended September 30, 2022, deferred from the statutory federal income tax rate of 21%, primarily due to the tax impact of the $282.5 million Series A preferred stock value adjustment, which will be expensed over 20 years for book purposes. As this expense is nondeductible for tax purposes, we recorded $71.4 million in deferred tax liabilities in the third quarter as a discrete item. The effective income tax rate for the 9 months ended September 30 was also impacted by disallowed stock-based compensation expense, state and local income taxes and the release of certain state income tax reserves. I believe that covers the unique items from the agreements with Pepsi.

And looking at other activities that occurred during the quarter, we had previously planned on bringing our FAST brand to the U.S. from Finland, but as a result of the Pepsi partnership, we will be focusing on our core Celsius Energy brand in the U.S. transition and rolling this product out internationally, and in turn, we performed a valuation whereby we determined that the FAST brand was impaired in the amount of $2.4 million.

Moving on to litigation costs. As was noted in an 8-K that we issued last month, we have agreed to settle a class action filing in the amount of $7.8 million associated with our can label. Although we believe that our claims on the can were accurate, we believe that the cost, energy and focus that would have been needed was better utilized on transitioning over to Pepsi and growing our business. In regards to the SEC review, we do not have an update, but we'll continue to cooperate with any inquiries or requests that are received.

Turning to our third quarter financial results. Our third quarter ended September 30, 2022, had revenue of approximately $188.2 million, an increase of $93.3 million or 98% from $94.9 million for the 3 months ended September 30, 2021. Approximately 102% of this growth was a result of increased revenues from North America, where third quarter 2022 revenues were $179.5 million, an increase of $95.1 million or 112% from the same period in 2021. The balance of the revenues for the 3 months ended September 30, 2020 quarter, were mainly attributable to European revenues of $7.5 million, which decreased by $2 million from the same period in 2021 due to foreign exchange rates, timing of new product launches and continuing supply chain challenges.

Asian revenues, which include royalty revenues from our China licensee, contributed an additional $1 million, an increase of 37% from approximately $700,000 for the same period in 2021. Other international markets generated approximately $200,000 in revenues during the 3 months ended September 30, 2022, an increase of 3%. The total increase in revenue is largely attributable to increases in sales volume as opposed to increases in product pricing.

The primary factors behind the increase in North American sales volume were related to continued strong triple-digit growth in traditional distribution channels, combined with an increase in an optimization of our products presence in world-class retailers. Additionally, revenues were increased as a result of building inventories at Pepsi warehouses and distribution centers in anticipation of the transition to the Pepsi distribution network. These revenues were offset by the prior distribution network, which reduced their inventory balances as the majority of the prior distribution system was terminated as of September 30, 2022.

Gross profit. For the 3 months ended September 30, 2022, gross profit increased by approximately $41 million or 109% to $78.7 million. Gross profit margin reflected an increase to 41.8%, 49.6% excluding outbound freight of revenues for the 3 months ended September 30, 2022, relative to 39.7% or 48.8% excluding outbound freight for the prior year quarter. The improvement in gross profit dollars was due in part to the improved average can prices within our inventory as well as improved freight costs relative to the third quarter of last year.

Sales and marketing expenses for the 3 months ended September 30, 2022, were approximately $198.8 million, an increase of approximately $176.1 million or 779%, relative to September 30, 2021. This increase was primarily attributable to termination expenses of prior distributors, which resulted in an increase of $155.4 million when compared to the prior year quarter. As a percentage of sales, sales and marketing represented approximately 23% of revenue in the third quarter of 2022 after backing out the $155.4 million of termination fees compared to 24% for the third quarter of 2021.

General and administrative expenses for the 3 months ended September 30, 2022, were approximately $27.5 million, an increase of $4.2 million or 18% from $23.3 million for the 3 months ended September 30, 2021. Employee costs for the 3 months ended September 30, 2022, reflect an increase of $900,000 as investment in this area are also required to properly support our higher business volume and the commercial and operational areas of our business.

Impairment expenses increased by approximately $2.4 million when compared to the prior year quarter. These increases were offset by an $11.7 million decrease in stock-based compensation, which amounted to $6.3 million in the current quarter when compared to the prior year quarter. Management 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. Administrative expenses also increased by $12.3 million, primarily due to a litigation settlement in the amount of $7.8 million as well as increased costs associated with third-party service providers including internal control on SOX compliance, audit fees and other litigation.

Lastly, all other administrative expenses, which were mainly composed of research, development and quality control testing increased by approximately $300,000. As a total percent of revenue, G&A costs decreased to 15% of sales for the 3 months ended September 30, 2022, compared to 25% in the prior year. When you take some of the outliers out of the equation and exclude items such as $7.8 million for the litigation settlement agreement, $2.4 million related to the brand impairment charge and stock-based compensation is $6.3 million, G&A expense as a percentage of sales was 6% for the third quarter 2022. And excluding the stock-based compensation of $17.9 million in 2021, the G&A expense as a percentage of sales was 6% as well.

Focusing now on liquidity and capital resources. As of September 30, 2022, and December 31, 2021, we had cash of approximately $727 million and $16.3 million, respectively, and working capital of approximately $755.7 million and $169.2 million, respectively. Included within the Q3 2022 cash balance was approximately $135 million of cash that will be utilized for termination payments.

Cash flow is provided by operating activities totaled $171 million for the 9 months ended September 30, 2022, which compares to $52.1 million in net cash used in operating activities for the 9 months ended September 30, 2021. The approximately $223 million increase in cash generation was driven by the timing of transactional costs associated with the Pepsi distribution system as well as continued growth in the operations of the company.

And looking at inventory, total Q3 inventory ended at $154 million, down relative to the $191 million at the end of December 2021, as we benefited from growth in our business as well as a pipe filling in advance of Pepsi beginning to distribute our product. We expect some increases as we continue to grow and also as we prepare to launch a number of new flavors in the first quarter of 2023. We will continue to carry some additional inventory in order to make sure that we are able to keep up with the significant growth we are experiencing, but we'd expect to start to drive some efficiencies in our DIO as we move through 2023. With the latest injection of funds from our PepsiCo transaction, we have sufficient firepower to take our business to the next level as we transition into the Pepsi distribution network across the U.S. and then internationally.

This concludes our prepared remarks. Operator, you may now open the call for questions. Thank you.

(Operator Instructions)

And our first question comes from Mark Astrachan from Stifel.

I guess I wanted to start on the distribution gains and the shelf space. So obviously, we all know the challenges that the Bang is dealing with, you're obviously also transitioning into basically the same shelves that they had. So is it simply a one-to-one sort of trade-off there? How do you think about what your shelf space is going to look like as you go forward over the next kind of 3 to 6 months as the changeover is completed heading into the spring resets? Do you think you can end up with more space? How do you think about the number of SKUs you can put on shelves relative to where you are or where Bang is today? And maybe that's just a good starting point.

Yes. Thank you, Mark. We appreciate it. Great question. We have some audio difficulty. The team down in South Florida. We are in the middle of a little bit of a hurricane, but with weather coming through here, we expect to have a little choppiness. But great question, Mark. I mean what we're seeing, there is a lot of opportunities out there. I think what you're seeing, especially with the gains right now that we're seeing as of October 1, as referenced in the prepared remarks, where we did see the number of SKUs just in the 3-week period increase on shelf space with the largest gain coming from convenience. There is obviously disruption that's out there with Bang and the distribution network that they have exited and what they're putting together. So there is opportunities that are really coming out of normal course of resets that the team is vigorously working to take advantage on as well as every other brand in the energy category.

We do look at -- when you look at what we were able to capture with Coke Energy when that was going through and being delisted in many retailers, we're able to take advantage of a lot of that opportunity and gain incremental shelf space on that change. I think the momentum we have allows us to be one of the top choices. When you look at -- when retailers are looking to add and find a replacement, if that's what they so choose at certain retailer locations. So I think we're in a good advantage to take -- to move into some of that space as we have, as you're seeing with a variety of key retailers.

And then as you look forward and we look for the spring resets, I think we're in a really great position. We know we're incremental to the category. We know being the #1 driver of growth in the category, it puts us in a really good position as we're looking for resets. And right now, we're in the midst of buyer season -- selling season coming out of one of the greatest macs the company has ever had out in Vegas, and I know there was a lot of retailers coming by the booth. So I think we're well positioned. Obviously, we don't provide forward guidance on revenues, but we feel really optimistic on where this brand is positioned, especially leveraging Pepsi and our new distribution partnership.

That's great. Maybe just one sort of related follow-up there. If you could talk a bit about the velocity in terms of sales per point of distribution or however you want to think about that metric as you transition, especially into convenience stores where you're selling single-serve items, how should we be thinking generally about kind of where the current trends are and how we think about that going forward?

Yes, that's something we're watching really closely. Now keep in mind, like when we're looking -- we're entering a lot of new distribution. And we're also entering some new markets where the brand has lower awareness than really where we've been building out over the last, call it, 2 to 3 years in some of our core markets. So as you saw in our P&L, we're further increasing our investments and expanding -- it's something we're really watching closely. I think you're also -- we're getting into more of those Tier 3, Tier 4 accounts that as we go forward, potentially may not be as productive as the Tier 1 and Tier 2 accounts, which we are in today.

So we're watching that closely. When we look at it, it seems to be at a level basis right now, kind of what we're seeing over the last several data pools, but that's really to be determined. The brand has been performing really well. So it's something we're watching closely as well. I can't really give you an answer on that at this point.

And our next question comes from Kevin Grundy from Jefferies.

This is Noah on for Kevin. I was looking to dig a little further into your PepsiCo distribution transition. And first, starting off in the U.S., could you give us a little more context on how much business has already been transitioned sort of some early observations in the areas of your business that has been shifted and what your expectations are for the remainder of the year?

Kevin, if you listen to the Pepsi call that was about a month ago, there were 2 weeks into October, they already announced that we were in excess of 80% with our DSD business, and we've continued to expand out there. And like I said on the call, there are a handful more geographies or territories that Pepsi will be rolling out into over the course of Q4 and into Q1. But really, everything that we've planned on transferring to them plus additional territory has been kind of locked in. So although I don't have an exact number for you, we're confident by the time we get to early Q1, we'll be in great shape. Now there are still a couple of distributors out there that we are not transitioning. But at the end of the day, we'll end up transitioning most of all of our DSD network.

Yes, I think -- just to chime in as well, add a little bit more color in regards to what we're seeing. When you look at that data point that we referenced in the prerecording and also in our earnings supplement that was filed, when you look at the momentum we've gained since October 1, I think it really shows the team is doing an excellent job on the way we're wired into Pepsi and a lot of our team members. So the transition is moving really nicely. And talking about those 50,000 incremental cooler spaces in that Coke Energy, we're already seeing those come to fruition as well as food service as well coming to fruition, especially at the college/university level. So we're seeing a lot of extreme positive just over the, really, call it, the first 3 to 4 weeks of the relationship.

Great. That's really helpful. And just one more, if I may. In terms of the potential international expansion that could occur, could you maybe just share some thoughts on sort of how you're thinking about expansion and sort of where -- what the time line is on that and how that would work to the systems?

Yes. Right now, we're extremely focused on the U.S. transition. The opportunity -- both parties see opportunities on an international front with over 126 markets that Pepsi has great distribution in. It's timing and sequencing. So I think it's -- we're very cognizant about that, being very methodical in our approach when you look at. They're going to be our preferred partner going forward, and we'll have more details to come as we really look through 2023. But we're really taking timing and sequencing as we scale. And we want to make sure that it's -- that we enter these markets appropriately and have the right strategy in place as well.

And our next question comes from Peter Grom from UBS.

So I guess just to start, can you maybe just help us understand the impact from the sales to Pepsi in the quarter? I think the 10-Q says that Pepsi made up about 12.4% of sales, which is pretty substantial. So I guess, is there any way to kind of quantify or break out what was kind of onetime in nature versus kind of what is recurring? And I guess what I'm really trying to get at and understand, you don't give forward guidance, but how should we be thinking about 4Q revenue growth in North America, given all the noise that kind of occurred through this transition?

Yes, Peter. Good to hear from you. Let me talk about on the call back in August, it's going to be noisy this quarter and next quarter. We did have a pipe fill. So there is some timing there. To be honest, it's very difficult to put an exact number on what was the benefit of the pipe fill versus the offset of the distributors winding down their inventory and then pulling back at the end retailer or the end customer. If we had to kind of peg it, are we talking -- I don't know, $15 million, $20 million, somewhere in that range, that could potentially be shifted from 1 quarter to the other on the top end. I don't know if that's the exact number, but that's kind of the gut feel I have. Again, you got the transition where there's a little bit of a dip you take. If you go back and look at some of the data with Bang, they have the same impact.

At the same time, we're getting into a lot of space that we haven't been in. So as we look at Q4 and then into Q1, those coolers John talked about, food service. So we were -- it's not an apples-to-apples comparison when we look at what happened with Bang in terms of what is the data telling us. So we think there's still a very big opportunity in Q4 and into Q1 to get into a lot of space we haven't been to before. On top of expanding the SKU count and the retailers we're at and getting into more space from -- as there's some disruption within the industry. So I think overall, that's probably the best I could do for you. It's not exact. I don't have a bunch of data to support it, but that's kind of the feel we have.

Got it. That's really helpful. And then can I just ask one on just the gross margin trajectory? I may have missed this, so apologies. But are we through the higher-cost cans at this point? And then, John, I think you mentioned 4 mid-40s by year-end. I might be reading too much into this, but is that in reference to an exit rate? Or should we still be expecting fourth quarter gross margins to still be in that same ballpark?

Yes. No, Peter, excellent question. I mean the international cans, we were anticipating cycling through the majority of our international cans by the end of the third quarter. Due to the flow of some of the international cans, the way they've come in on East Coast, West Coast, we are sitting on still some international cans, although a much smaller amount of our overall total inventory, mainly on the West Coast of the country. So when we look at our margins and some of the improvements, also the sales mix we talked about with the Costco pack or IT packs, when we look at the mid-40s, we believe we can hit the mid-40% range by the end -- continue to hit the mid-40 range by the end of the year. We're looking at somewhere between 43.5% to 47.5%, somewhere around that range.

It's a little bit hard to say with -- you got gas prices that come down, we're seeing some softening in the aluminum pricing as well, and then we will be cycling through some of those international cans on that mix as we go through here. And then we did have some returns come through as well of some product that's flowing through in regards to the -- moving out of the prior distribution network. So little bit of, as Jarrod mentioned, noise that's coming through the system. But getting that mid-40% range, I think, is definitely an eye for us as an organization.

(Operator Instructions)

Our next question comes from Jeffrey Van Sinderen from B. Riley.

Just wanted to circle back to a couple of things on the ramp with Pepsi's DSD. Sounds like it's going extremely well. I guess what are the next steps that you've touched on a lot in Q4, but what are the next steps as we think about Q1? I know you mentioned kind of the spring resets? And then overall, what are the milestones we should be looking for to track the progress when you report Q4 and Q1?

Yes. I think -- Jeff, great question. I mean, we are seeing a great opportunity. I think the milestones you're going to see within us is really the expansion in convenience. We started to see that really just in a few weeks. I mean we see a huge opportunity in convenience expanding that ACV and the number of SKUs and items per store. So that's really where you're going to see robust growth out of the organization and also maintaining that velocity at retail, which is so critical. So those are the metrics we're really watching.

Convenience is a massive opportunity and PepsiCo has this program of metals program, which is a loyalty program with over 150 independent retailers. So that's going to be a big opportunity as we start to penetrate that opportunity and then the foodservice opportunity that's out there. Unfortunately, that channel as majority is unreported. So when you're looking at reported numbers. Really, I think the opportunity is getting that ACV number. When you look at the 2 largest players north of that 90 ACV range where we have room to grow as it stands now.

Okay. That's helpful. And then if we could switch to the club channel for a minute. I know you mentioned Walmart. I'm not sure if you mentioned Sam's Club. Maybe I missed it, but just wondering as you sit here today, what do you feel is left to do in the club channel? I know you mentioned margins there, too. But -- and then maybe any other retailers that are not part of the network or maybe they are part of the network that you're eyeing here and could potentially add?

So from the club channel, we just started getting into Sam's Club at the end of Q1. So if you kind of looked at Costco a year before that, it took 2, 3 quarters for it to get ramped up. So Sam's Club is really starting to ramp up for us, and it's starting to really produce very well for us. So I think we still have good continued growth in Sam's Club, consistent with what we saw with Costco. And then there's still BJs, which we're in stores now, but we've got some more opportunity to expand across their entire footprint. So I think there's still some good room to grow for club and club is going to be a good area for us.

The other thing is we've seen the demographics coming out of club has -- it's not cannibalized the growth in other channels. So it seems to be a consumer that's got the same interest, same live fit, interest, essential energy and those kind of things, but it's a consumer that may not be shopping in the other channels. So we're seeing good growth come out of both areas, and it's continued.

Makes sense. And then just one more for the housekeeping. I'm just wondering how many coolers that Pepsi has that you're getting into in their network at this point?

Yes. I think at this point, we don't really have a clear number on the total opportunity, but what we've been told and really what we're working towards is there's roughly around 50,000 energy Pepsi-owned coolers that we will be gaining additional placement in. But we're -- there's also other opportunities that given retailers that Pepsi owns the space and we're able to participate in. So it's probably a much larger number than that, but 50,000 is kind of what we're -- 50,000 is really what we're told is immediate opportunity to that.

Yes. There's the other coolers that we see as well. So as I make my rounds across Florida, I've seen us enter different coolers over the last 3 weeks. I'll be in a store or a shopping center in 1 week. If we're not there and then give the sales guys a hard time and we're there in the next week. So that's an area that they are rolling us out. They could get us there in week 1, but the goal is to really get it across the 50,000 energy coolers, but then also the opportunity to get into their other coolers as well.

And our next question comes from Jeffrey Cohen from Ladenburg Thalmann.

Couple of questions from our end. Jarrod, you're talking earlier about the termination expense paid. So, one, was that paid? You said it was paid by Pepsi and it will show up under deferred revenue. Is that right?

Yes, it was paid by Pepsi. Yes, so we had an initial tranche of $174.7 million, of which we ended up accruing $155 million for. So we've got Whatever we don't spend, we sent back, but then we also did some settlements in Q4 as well.

Right. That would be -- I think you stated $50 million for Q4. Is there any follow-on after Q4 expected or that should be wrapping it up.

It's a good question. I think that we're in great shape from that perspective. I can't say absolutely nothing after that, but the goal is to really be in a position that we're locked in moving into 2023 clean and really focused on getting into all the locations and having them with a stable footprint and knowing exactly what they need to do as we roll out and we look to really start to capture market share in 2023.

Got it. Okay. And then secondly, for us, could you talk a little bit about SKUs from 2 perspectives, I imagine. The first perspective being -- what's the right number for some of these retailers and SKUs? I know you started out with 1s and 2s and 3s in a number of them. Talk about that a little bit and then talk about SKUs from the company's perspective as far as the totals you have? And John did mention some new flavors coming to '23. Will flavors more out of favor go away as new flavors are added on? Or how should we think about that in 3 .

Yes. I think it's -- you've been following the company for some time. We have entered stores in 1 or 2 flavors, and now we've grown -- look at Publix as an example. We have over -- almost -- well over 15 flavors and SKUs and products now in retail as well as multipacks. So there's a massive opportunity for us where we stand. And I think when you look at where we're at now on average nationwide, you're looking at about 8.6% items. So a lot of the major other players and leaders in the category have north of 20 to 30 items in a given outlet. So the opportunity to grow is, we're just getting started here. Now the #3 energy drink officially as the last data pool for the 1 week, just really excited about that.

I think that's going to open up additional opportunities, especially with the Bang transition. And also, when you look at the resets that are taken to take place next year upon retailers resetting for the transformation of the energy category, better for you in new age energy, which Celsius is a major contributor to. So I don't have a real specific number for you, but we're going to get as much space as we can out there, for sure.

Got it. And then lastly for us, is 13 a good number on the co-packer front? Or could that change based on volumes and/or geographies?

So we're at 13% now, but we've got backup ones beyond that. So we've got co-packers that we can turn on, quickly. And some of them, there's a number of co-packers that have multiple locations, so we're co-packing in some of their locations so we can flip on their other locations as well. So we're set up from a capacity perspective for a number of years to come.

And our next question comes from Anthony Vendetti from Maxim Group.

Most of my questions have been answered. But just on the marketing front, is Pepsi spending any direct dollars other than working on the distributor side and putting your SKUs and their coolers and so forth? Are they spending any actual marketing dollars on their own? Or is that all going to be under Celsius?

Yes. So it's still early in the relationship. So there's definitely opportunities to partner on different things and different programs, whether we've talked about the college opportunities. So there are different -- is there a college program that we can partner on from a sponsorship perspective. So those are definitely on the table. And I'm not saying we're specifically having any discussion about that, but I'm saying those types of things we are having discussions about as to how can we work together.

When it comes to the various pricing and the go-to-market strategy, there are some opportunities for us to -- if you would think kind of co-op for things like that. The energy drink category is very promotional. So there are opportunities, and we will be running kind of joint promotions when it comes to the pricing of the cases and working with our -- especially our key accounts across the board. And then there's the metals program that Pepsi has as well that there's opportunity. So I guess you could call some of that more back-shop promotions, the front-facing promotions, again, (technical difficulty) but those are really going to be more of our focus. It's up to us to really push the brand and push the velocity when it comes to that component.

And just a follow-up on the coolers, right, because you placed 550. You're now at over 3,500. Pepsi has 50,000 initial coolers you're going to look at. But you mentioned you're looking to roll out more specific Celsius coolers, does that still make sense? And if so, why, versus just focusing on the Pepsi coolers at this point?

Yes. I think -- I mean, we're really -- we're focused on all opportunities. And the Celsius brand will be wholly owned by Celsius, and they will only carry Celsius. And there's a huge opportunity there. We see the benefit on both the co-branded or coexistent in the energy Pepsi coolers for availability. And our branding coolers are a salient salesperson that's out there for us. So we see the great returns. We've got great ROI, and we do have a significant amount of coolers on order currently.

And our next question comes from Sean McGowan from ROTH Capital.

First, I just wanted to, Jarrod, if you wouldn't mind repeating the comments you made in your prepared remarks on the tax kind of noise in the quarter? I think your recording got a little muffled there. So would you mind repeating some of that? And then I have a follow-up.

Yes. So the gist of the noise this quarter is when we value the preferred shares, we put them on the books at $832.5 million and $282.5 million basically is premium. That's reported as an asset (technical difficulty) amortized as contra revenue over the total distribution agreement, so roughly 20 years. And so from a tax perspective, it's not deductible. So there's a flip tax timing (technical difficulty) basically a DTL, and we book -- ran that through the tax line this quarter. So that's a (technical difficulty) positive noise.

Okay. So what do you think the -- we should be using as the effective tax rate kind of going forward when you don't have an event like that?

I'll kind of look to the 21% federal, and roughly, 5%, 6% from the state rate. (technical difficulty).

All right. And then on the -- the other question I had was, can you remind us, did you take any additional price increases during the third quarter? And the reason I'm asking is like relative to my expectations, accounts receivable were higher and inventory was lower than I thought, which suggests to me that the timing may have been -- some shipments may even later than I thought. And how does that -- is there any price increase during the quarter that might have helped the gross margin because it came after a price increase?

No. I mean we have kind of a rollout (technical difficulty) so nothing has changed from perspective. And that continued a little bit in Q4 as well (technical difficulty) we've gotten some of these accounts because our growth, we've been picking up (technical difficulty) even throughout this year, right? So from a pricing perspective, nothing has changed from the prior commentary.

From a margin perspective, we (technical difficulty) we're benefiting from our (technical difficulty) model from a greater onboard freight gross profit, excluding onboard freight relative to Q3 of last year. We had a really good pick up. So that's contributing a lot of our benefit in the profit line. And then the other piece is, we are seeing the average can prices (technical difficulty) came through as we cycle through those cans and we cycle the percentage in (technical difficulty) more and more into a better overall (technical difficulty) raw material average case as (technical difficulty).

At this time, I would now like to turn it back to management for any closing remarks.

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

Thank you. This does conclude today's conference. We thank you for your participation. You may disconnect your lines at this time, and have a wonderful day.