Greetings and welcome to the Celsius Holdings Fourth Quarter Fiscal Year 2022 Earnings Call. 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.

Thank you, and good afternoon, everyone. We appreciate you joining us today for Celsius Holdings Fourth Quarter 2022 Earnings Conference Call. Joining me 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 begin at that time. The company released our earnings press release earlier this evening, and all materials will be available on the company's website, celsiusholdingsinc.com. As a reminder, before I turn the call over to John, an audio replay will be available later today and will be accessed with the same live webcast link in our conference call announcement press release. Please also be aware that this call may contain forward-looking statements, which are based on forecasts, expectations and other information available to management as of March 1, 2023. These statements involve numerous risks and uncertainties, including many that are beyond the company's control. Except to the extent required by law, Celsius undertakes no obligations and disclaims any duty to update any of these forward-looking statements. We encourage you to review in full our safe harbor statements contained in today's press release and our filings with the SEC for additional information. With that, let me 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. We achieved record sales for the fourth quarter of $178 million, an increase of 71% from last year's fourth quarter of $104 million. This revenue growth was driven despite approximately $15 million to $20 million we discussed in the third quarter that was driven by the inventory pipe fill by the Pepsi system in the preparation for distribution transition that began October 1, 2022. We believe the distributor inventory levels are now back to normalized levels as we began the first quarter of this year. For the full year, sales totaled $654 million, up 108% or $340 million growth compared to $314 million in 2021. According to the January 1, 2023, 52-week IRI energy category SPINS MULO+C data, representing the calendar year for 2022, Celsius is the number one brand driver of growth in the energy category in all of 2022, responsible for 22% of the category dollar growth, driving approximately $474 million in incremental retail sales for the category. We continue to see growth across all channels, including those non-tracked, with the club channel sales totaling over $138 million for the year ending December 31, 2022, which were up 247% compared to $40 million last year. We also hit record sales through Amazon in 2022, with full-year sales of approximately $58 million versus full-year sales in 2021, up $32 million or approximately 83%. In addition, according to the trailing 12 weeks IRI MULO+C Total Energy as of January 1, 2023, representing the majority of the fourth quarter, Celsius is now the number three energy drink brand in the category with dollar sales growing approximately 128% versus the same period in the prior year. Our fourth quarter represented our first quarter since the commencement of the distribution partnership with PepsiCo. During the fourth quarter, we had an additional $38 million in sales and marketing expenses related to termination associated expenses from prior distributors, which was recognized. Most of these distributors were transitioned by November 1, 2022, and in conjunction with approximately $156 million of similar book charges that were recorded in the third quarter. For the full year, transition costs totaled $194 million associated primarily with distributor termination costs. This completes our distributor transition to the PepsiCo network, and we do not anticipate any further material changes going forward. We have been extremely happy with the transition, both from our PepsiCo partner as well as with our Celsius team. And I'd like to thank all of our previous distributors for their amazing work that they did helping us build the Celsius brand, especially through these challenging macroeconomic times over the last few years. As highlighted in our earnings supplement for the four weeks period and according to SPINS and IRI Total Energy as of January 1, 2023, in the MULO+C, Celsius is the number three energy drink with a $6.4 share in the energy category versus $3.4 share in the year-ago period, with an ACV now reaching approximately 89.7% versus 59.6% in the year-ago period. In addition, in the convenience channel, Celsius has seen approximately a 96% increase in ACV growing to 89% compared to 45.3% in the year-ago period. We see substantial growth opportunities and convenience on a go-forward basis. In addition, in the foodservice channel, we have now expanded into over 1,600 colleges and universities and over 1,600 healthcare locations in the United States. We're also continuing to drive authorizations with key Pepsi customers such as Marriott, Hilton, as well as in the travel, airport segment, and casinos, which are all incremental to the brand. International sales did see a 38% growth in the fourth quarter, totaling $11.5 million compared to $8.3 million in the fourth quarter of 2021. We believe there are significant opportunities for international growth going forward with PepsiCo. While we just began our distribution partnership with Pepsi, and the initial focus has been on the U.S. distribution transition to their network, we have begun initial discussions and see significant opportunities to capitalize on a global scale in the future, reflecting the changes in consumer preferences for better-for-you offerings. While the U.S. transition has taken the majority of our focus to date, we do expect to announce additional international expansion initiatives in additional countries in the future. Turning to our gross profit. Gross profit for the quarter increased approximately 90% in the fourth quarter to a record $79 million, up $42 million from the year-ago quarter. Our gross margins for the quarter totaled 44.4% and increased approximately 445 basis points from the prior year. As discussed on our last earnings call, we reiterate our expectations for continued sequential margin percentage improvements as we further gain efficiencies through our supply chain. And as stated on our last call, our goal was to achieve a mid-40 gross profit margin upon our exit of 2022, which we have achieved. The improvement was made despite the significant growth we saw in the club channel as this channel has historically had lower margins due to secondary repacking facilities, which is required for the pack size. We continue to initiate production efficiencies to improve margins in this channel, including working with our co-packers to transition to in-line packing, so the product doesn't have to be moved to a secondary facility. In addition, we are working to increase our pack size from a 15 pack to an 18 pack size through this transition, which started in the fourth quarter. We launched a second SKU of multipack in the fourth quarter at Costco and will continue through the first quarter of 2023. We launched a second SKU also at a club pack at Sam's Club. In the first quarter of 2023, we are fully rolling out through BJ's nationally. The company does see opportunities to drive incremental efficiencies in 2023 and beyond from both the expected improvements in the club channel, in addition to our transition from a significant number of independent distributors to PepsiCo's distribution. This will allow our team to consolidate sales, marketing, and distribution efforts, which we expect to recognize and leverage in the future. International third-party back data continues to show accelerated 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 new national retailers and independent chains and further leveraging our new partnership with PepsiCo. Consumer demand for Celsius on a dollar basis reaccelerated to the fourth quarter of 2022 and into the first quarter of 2023 from the initial distribution shift, which started October 1, 2022. The most recent period Nielsen scan data and Energy reported as of January 28, 2023, indicate that Celsius sales were up as of the 4 weeks, 136% year-over-year, 129.8% for the 12 weeks ending, and 127.5% for the fourth quarter. This compares to the energy category, which grew approximately 17.1% for the 4-week period, ending 18.8% for the 12-week period ending and 10.8% for the fourth quarter over the same period. On Amazon, Celsius is the second largest energy drink brand with a 16.94% share in the category, ahead of Red Bull, which is at 11.71% share and just behind Monster, which is at a 26.38% share year-over-year periods as of February 11, 2023, per Stackline, Total Energy, Total U.S. Amazon full year 2022 sales hit a record for us at $58 million versus the prior year, which totaled $32 million, which was up 83%. We see great opportunities as we continue to leverage consumers in the omnichannel world. The company plans to place an additional 15,000 dedicated branded Celsius coolers in 2023, which will bring our total dedicated Celsius coolers in the U.S. to over 20,000 by the end of this year of 2023. This will be incremental to the additional co-placements we expect to gain as we discussed before in the PepsiCo energy dedicated coolers, which provides an additional incremental up to 50,000 additional placement opportunities. Our U.S. store count now exceeds over 210,000 locations nationally, growing approximately 20% from the third quarter, with additional expansions planned through 2023, accelerated by the PepsiCo distribution agreement. Before I turn the call over to Jarrod, I want to outline some key pillars the company is focusing on to drive further shareholder value. The first pillar is top-line growth, which includes increasing the number of stores and channels that carry Celsius. New retailers, national expansions within existing channels, such as our recent national expansion with BJ's and also a national rollout, which starts this quarter with ALDI. In addition, leveraging and expanding new channels such as foodservice and college universities, also increasing the number of items carried per location, focusing on key drivers to drive velocity rates and the opportunities to leverage with international growth. Our second pillar is operational excellence. These drivers include a focus on gross margin. Our focus on gross margin will be driving efficiencies and leverage as we scale, leveraging our orbit model to drive more efficiencies. As an example, shipping from co-packers straight to distributor, optimizing freight warehousing costs, vertically integrating and improving our scrap and waste efficiencies. Also focusing on sales and marketing initiatives to gain further leverage, optimizing our PepsiCo partnership and focusing on building our internal and expertise internally to drive scale. The driver of the final pillar is cash generation and EBITDA leverage. The goal of driving increased EBITDA as we scale. I close my prepared remarks with the PepsiCo transition now complete; Celsius is positioned for the next phase of growth with further opportunities as we begin to expand into international markets to further capitalize on our future and optimize our leverage, driving further value for our shareholders. Celsius is now established as a leader in the energy category in the United States, driving growth for the entire category in all of 2022, with incremental opportunities to further drive growth to 2023 and beyond. 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 year and the quarter, I'll cover a few administrative items. It was another very exciting and busy quarter. For the quarter, we successfully integrated into the Pepsi distribution system going from an ACV in the mid-60s to the high 80s very quickly. In addition to moving to the Pepsi system, we processed the majority of our prior distributor terminations, including final payments, inventory returns, et cetera. As John mentioned, the transition continues to go very well, and we are excited to see the results of this long-term partnership. So let's walk through some accounting updates. Let's start with transition-related expenses. Included within our annual results, we recorded approximately $194 million of termination expenses associated with termination notices issued in 2022, primarily related to the transfer of distribution to Pepsi. As of the first quarter of 2023, we have effectively transferred all activities that we had set out to transfer to Pepsi, plus a few additional areas. During the fourth quarter, we saw some increases in inventory reserves and other related costs as we transitioned from our prior distribution network into the Pepsi system. As part of our contract with the prior distributors, we accepted return product and had to make decisions on whether to take the product back or dispose of it. In a number of instances, we chose to donate or dispose of the product. Additionally, in the fourth quarter, we decided to over-invest as part of the integration into the Pepsi system in order to support significant expansion. More on that later. Now let’s talk taxes. As a reminder, from our Q3 call, our effective tax rate for the year differed from the statutory federal income tax rate of 21%, primarily due to the tax impact of the $282.5 million Series A preferred stock value adjustment, which is being expensed over 20 years for book purposes. As this expense is nondeductible for tax purposes, we recorded a deferred tax liability in the third quarter as a discrete item. The effective income tax rate for the year was also impacted by a disallowed stock-based compensation expense, state and local income taxes, and the release of certain state income tax reserves. Moving on to a few legal items. We have progressed on the settlement associated with our can label. As of mid-February, the notification process was completed, and we expect to close this out prior to the end of the second quarter. As many of you know, we received an unfavorable verdict in January of 2023 regarding litigation involving Flo Rida. We have incorporated a detailed discussion within our 10-K as well as a range of potential outcomes. We are in the process of appealing and believe that we will ultimately prevail. In regard to the SEC review, we continue to cooperate with any inquiries or requests that we receive, but don't really have any updates beyond that. Before moving to the results, I wanted to make a few comments on our internal control environment. We have significantly expanded our finance team, especially during the fourth quarter, and our control environment has seen great improvements across 2022. With that said, 2022 was a very busy year with our significant growth, Pepsi transition, and new team members. As a result, although we were able to make progress and saw many improvements, we were not able to get to a position where we could fully clear the material weaknesses from 2021. This is reflected in our 10-K. As we look into 2023, the team is focused on working towards fully clearing these items, and we will work diligently to get across the finish line. Turning to our fourth quarter financial results. Revenue was approximately $178 million, an increase of 71% from $104 million, driven by North America, where fourth-quarter revenues were $160 million, an increase of 74% from the same period in 2021. The primary factors behind the increase in North American sales volume were related to our integration into the Pepsi distribution system as well as continued strong growth in traditional distribution channels, combined with an increase and optimization of our product's presence across our footprint. As a reminder, we discussed on our third call that revenue in the third quarter was elevated as a result of building inventories at Pepsi warehouses and distribution centers. This was a one-time pipe fill of around $15 million to $20 million. Gross profit for the quarter increased 90% to $79 million, up from $42 million in the year-ago quarter. Gross profit margins in the fourth quarter were 44% of revenues compared to 40% for the prior year's fourth quarter. The improvements in gross profit margins were due to lower average can prices, improvements in freight lanes from our orbit model and transition to Pepsi as well as pricing benefits. Sales and marketing expenses for the three months ended December 31, 2022, were approximately $90 million, an increase of approximately 265%. This increase was primarily attributable to termination expenses of prior distributors in the amount of $38 million as well as an intentional increase in marketing spend versus budget in the amount of $15 million as we moved into the Pepsi distribution system. With the huge gains made in ACV, we felt that it was appropriate to overinvest in marketing in support of this expansion. As a percentage of sales, sales and marketing would have been in line with historical rates had we not incurred the termination expenses and put forth the additional marketing investment. As we moved into Q1 2023, we expect our sales and marketing spend to be in line with historical rates as a percentage of sales. General and administrative expenses for the three months ended December 31, 2022, were approximately $22 million, an increase of 54% relative to 2021. This increase was due to increased employee costs associated with building back shop that can scale as we grow as well as administrative fees such as legal, audit, and other consulting fees. G&A expense as a percentage of sales was 12% for the fourth quarter of 2022 versus 14% in the prior year, which was in line with our annual rate. We would expect to see this area leverage during 2023 once we have fully built out the team. Turning to our full year financial results. We had revenue of approximately $654 million, an increase of $340 million or 108% from $314 million in the prior year, driven by 126% revenue growth in North America. The primary factors behind the increase in North American sales volumes were related to continued strong growth in traditional distribution channels, combined with an increase in optimization of our products across North America as well as our transition into the Pepsi system. Gross profit increased 111% to $271 million, up from $128 million in the prior year. Gross profit margins were also improved, up 66 basis points on a full-year basis. We saw gradual improvement in our gross profit margins across the back half of 2022 as we saw improvements in our average can cost with fewer higher-priced international cans, more efficient freight lanes with our orbit model, and also some pricing benefits. Sales and marketing expenses for the year ended December 31, 2022, were $353 million, an increase of $278 million or 372% from $75 million in the prior year. The largest increase was due to $194 million of termination expenses related to our prior distribution network. Additionally, we had increased incremental marketing investment activities of roughly $48 million, saw increased employee costs of $8 million, and had increases of $28 million across storage, distribution, broker costs, and trade spend. Sales and marketing costs as a percentage of sales were consistent year-over-year when excluding the $194 million in termination expenses and the fourth-quarter incremental marketing spend. General and administrative expenses were approximately $76 million, an increase of $18 million or 32% from $58 million. Employee costs for the year ended December 31, 2022, reflected an increase of $5 million as investments in this area were required to properly support our higher business volume in commercial and operation areas of the business. Administrative costs drove an increase of $26 million, mainly related to increases in legal expenses, audit costs, insurance costs, and other consulting fees. Depreciation, amortization, and impairment had an increase of $3 million when compared to the prior year due to investments in operational equipment, mainly coolers, and the impairment of the Func Food brand name. The increased expenses were offset by lower stock option expense in 2022, which was $21 million, a decrease of $16 million from the prior year period. G&A expense as a percentage of sales was 12% versus 18% in the prior year. Excluding stock-based compensation, G&A expense as a percentage of sales was 8% versus 7% in the prior year. Focusing now on liquidity and capital resources. As of December 31, 2022, and December 31, 2021, we had cash of approximately $653 million and $16 million, respectively, and working capital of approximately $757 million and $169 million, respectively. Included within the 2022 cash balance was approximately $39 million of restricted cash that represents $35 million due back to Pepsi, representing excess funds provided by Pepsi for our distributor transition and $4 million of remaining accrued payments due to former distributors. Cash flows provided by operating activities totaled $108 million for 2022, compared to $97 million in net cash used in operating activities in 2021. The approximately $205 million increase in cash generation was driven by continued growth in operations of the company as well as working capital benefits, including the timing of transactional costs associated with the Pepsi distribution transition. Looking at inventory, total inventory ended at $173 million, down over $18 million versus the prior year. We will continue to carry additional inventory to ensure that we can keep up with the significant growth we are experiencing. However, we would expect to continue to drive efficiencies in our DIO as we move through 2023. With the business generating cash and the injection of funds from our PepsiCo partnership, we have sufficient resources to take our business to the next level across the U.S. and eventually internationally in the coming years. This concludes our prepared remarks. Operator, you may now open the call for questions. Thank you.

Our first question comes from Kevin Grundy with Jefferies.

First for me, I think just in the interest of clarity, just trying to reconcile a bit the performance in North America on sales growth relative to what we saw in the scan channels. I know a handful of moving parts here, not the least of which would be, Jarrod, the pull forward of the $15 million to $20 million, which you quantified last call and mentioned again. Jarrod, you also mentioned some product returns, which would be a drag. I guess kind of going the other way, you also had strong growth in the club again. You had some distribution wins, which John talked about before. Maybe just comment a bit on the gap that we saw with North America up 74%. Nielsen channel is up very strongly, up about 130%. Can you just kind of reconcile the two for us a bit?

Yes, Kevin, if you look at the pipe fill, that would have brought us up to in excess of 90% from a North American perspective. We are hoping a little bit to some of our bigger customers in terms of seasonality or in terms of timing. So I suspect there was also a little bit of working capital management at the end of the year, which would have pulled inventories down a little bit. So from that perspective, I think the scan data continues to be accurate. If you look at Q1 and how we've done thus far, we continue to accelerate our growth and do very well. So I think there's a little bit of clunkiness around Q3 and Q4 with the onboarding and integration into the Pepsi system and the pipe fill and also some year-end working capital type activities associated with some of our customers.

Yes, yes, that definitely makes sense, Jarrod. And then just the follow-up, just more broadly, the transition to the Pepsi system, it seems like it's gone really, really well. Maybe just some color on the spring shelf space resets wins there, where you guys sort of expect to land? And then just further context for kind of where we are. We see the ACV ramp. You guys mentioned some of that. We can see it in the Nielsen data, but maybe just some context from where we are and ultimately, where you think the company will land as we think about ACV, as we think about total distribution points and even as we think about non-track channels, some of the wins you guys have on college campuses, health care, et cetera? Just give us a sense for where we are and ultimately, when this starts to look something closer to where the ambition is from a fully distributed perspective.

Yes, Kevin, that's a great question. There is significant momentum, particularly in the first quarter of 2023. We finished the year with an average ACV around 90%, approximately 89%, as we mentioned earlier. The execution during the transition with the Pepsi system was excellent, although we did have some distributors that transitioned during the quarter, meaning it wasn't entirely the Pepsi system from the October 1 transition. However, we anticipate gaining additional ACV points, especially with the upcoming spring resets. We have also been proactive in securing more shelf space, and I want to recognize the key accounts team for their hard work in achieving incremental distribution and acquiring new distribution. We are really looking forward to the upcoming resets. As previously mentioned, there are also opportunities within the club channel, specifically with BJ's, for more incremental shelf space. The foodservice sector presents a significant opportunity, with about 1,600 colleges and universities and approximately 1,600 hospitals already involved. We are just beginning our journey in the foodservice business, which holds tremendous potential, especially as the usage occasion for Celsius continues to grow. Currently, we are in a solid position and are excited about the prospects for 2023, although we will not be providing forward-looking ACV guidance at this time.

Our next question comes from the line of Mark Astrachan with Stifel.

Two questions for me, please. First is on just thinking about distribution, not ACV, but actual distribution points. Could you just talk about how you're thinking about where you're going in '23? We're close to spring resets at this point. What have you secured on a percentage basis? And maybe more broadly, how do we think about where the product is going? Is it in existing energy coolers? Or are you moving into more dedicated performance functional, helpful coolers? That's the first question.

Thank you, Mark. I’ll jump in. Currently, we have around 210,000 distribution points, but we are making significant gains in non-reported areas, particularly in foodservice and the independent market, where Pepsi has a strong presence. In the third quarter, we participated in their metals program, which supports their independent loyalty initiatives, presenting a great opportunity for us. As we enter 2023, there are resets occurring that could lead to additional distribution as there are over 150,000 locations available. We closely monitor this potential for significant growth. Within the reported segment, there are further opportunities in Tier 3 and Tier 4 accounts, as well as in various new markets and regions. Our focus is on core energy products, where we've been expanding our shelf space effectively, and we anticipate that the next resets will allow for more items per location. We are also investing in coolers, with plans to have over 20,000 dedicated Celsius coolers by year-end, alongside PepsiCo’s additional coolers, totaling around 50,000. This creates substantial opportunities for expansion in 2023 in terms of store count, locations, and cooler availability.

Got it. That's helpful. And maybe just a clarification on some previous points. So I'm still trying to understand the puts and takes of the pipeline fill. So $15 million to $20 million of sales ahead of actual sales in the third quarter. So why wouldn't you add that to the fourth quarter be coming out of fourth quarter, fourth quarter is essentially just servicing what demand is, right? So that run rate should then be higher, right, because then you're servicing kind of what was there previously. So I guess maybe put all together, I'm surprised sales were as strong as they were given that you had that headwind in the third quarter. So is the run rate we should be thinking about the number in the fourth quarter plus the $15 million? And then you made some comments about the inventory destocking as well in December. So kind of help put those pieces together, please?

Yes. Regarding the comments that Jarrod and I made in the prepared remarks, we're looking at an additional $15 million to $20 million related to price sales. Adding that to Q4, we believe that reflects a normalized run rate. We are monitoring our year-end inventory closely, although we don't have complete transparency on the levels. However, we think that pulling forward $20 million in Q3, plus an additional $15 million to $20 million, will bring us to a normalized level for Q4. It's important to keep in mind that several distributors were transitioning during the quarter, so we weren't fully leveraging the strength of PepsiCo across all partnerships.

Yes, I believe it's important to consider some historical context to understand the fluctuations in inventory management, particularly with our largest partner, to determine if a reduction at the end of each quarter is likely to continue. After a few quarters, we'll establish a solid baseline, and such reductions will be seen as more of an isolated event. Currently, we are observing positive sales data and strong performance with our customers and main distributors. Overall, things are improving. The first quarter is typically smaller than what we expect for the second and third quarters. The fourth and first quarters are likely to show more consistency in terms of seasonality.

Our next question comes from the line of Kaumil Gajrawala with Credit Suisse.

Can you provide some context on the increased selling expenses related to the significant distribution gains? How much of this was incremental? What is the appropriate run rate for selling expenses as a percentage of revenue during this distribution boom? Additionally, how should we consider this from a run rate perspective?

Yes, Kaumil, that's a great question. We did make investments during the transition. We made a strategic decision, as Jarrod mentioned in his remarks, to go over budget by about $15 million in the quarter to support our distribution and ACV gains. The company has seen a significant increase in ACV from October 1 to the end of the year. We prioritized investing ahead of these ACV gains to ensure consumers know where to find Celsius and to drive velocity. It's crucial for us to continue investing as we expand our distribution points and ACV. Historically, we've been operating around 23, 23.5. If you exclude the $15 million that Jarrod mentioned and also the $38 million in transition fees from the fourth quarter, you can see that we return to a run rate of about 22% of revenue. We will keep investing in the brand and building our presence, particularly as we expand distribution and focus on driving velocity, especially as we approach resets.

Yes. And so for Q1, the idea would be back to more along that 22%.

Okay. Great. And then it seems very intentional some of the commentary about the international rollout. You're doing very well in the United States, obviously, and your share is high compared to where you came from, but still a long way to go. Why is now the right time to start thinking about or talking about international?

Yes. We do have opportunities internationally with Pepsi. We're mainly focused on the United States and the expansion opportunities we have here, but we do see opportunities on a global basis, and there are partners through the PepsiCo system as well as our existing partners looking at in the Nordics and also our Asia distribution and APAC markets where we've been really laying a foundation. The energy market continues to grow around the globe, and we see these health and wellness trends continuing to gain momentum, and we're getting more interest from Celsius. But our main priority is North America.

Our next question comes from the line of Peter Grom with UBS.

So I just wanted to ask a quick clarification in response to Kevin's question on the quarter-to-date acceleration. Is that just a broad-based comment? Are you actually seeing top line growth quarter-to-date stronger than the 90-plus percent growth you saw in 4Q after adjusting for the Pepsi transition?

Yes. I think what Jarrod was alluding to is the Nielsen scan data and IRI SPINS data that he's referencing that we weren't providing any forward guidance on Q1.

Okay. All right. That's helpful. And then, I guess, I just wanted to ask around gross margin. So you've seen some nice sequential progression in 3Q and 4Q. So how does the exit rate of 44% plus kind of inform your view on gross margin looking out to 2023? And just would you expect sequential improvement from here as we move through the year?

Peter, so this is Jarrod. So I think from a gross margin perspective, the idea was to exit the quarter at kind of that mid-40s, which we have. Actually, we hit the mid-40s for the entire quarter. So we did see the improvements that we expect to come through. We're no longer beholden to the expense of cans that we had historically over the last kind of 18 months. We're seeing good opportunity within the freight lanes as we deliver products straight to distribution centers or mixing centers with Pepsi. We're also seeing some other areas from a COGS perspective or raw materials perspective, where we're seeing some advantages or some benefits. So we think kind of that mid-40s throughout 2023 is still valid. Is there an opportunity as we work through the year to do better? Definitely. But at the moment, we think kind of sticking with that is the way to go, seeing that we don't really know how the rest of the year will go when it comes to commodities and things like that. But at the moment, we're confident in that mid-40s, and we're probably more on the side of seeing opportunities than we are seeing other areas that would not allow us to hit those numbers.

Our next question comes from Gerald Pascarelli with Wedbush.

Mine is actually on the Amazon channel specifically. Obviously, when you look at track channels, trends have looked as good as they ever have. But you did see some deceleration in the Amazon channel. And so if you could talk about any drivers behind that? And then specifically, any color you could provide on how that channel specifically has trended over the first couple of months here, I think that would be helpful?

Yes, that's a great question. We have a really strong Amazon business as mentioned in our prepared remarks. We will be monitoring it closely this quarter, which is why we wanted to share this information. As we gain more annual contract value, we need to observe its performance; however, it was encouraging to see growth this quarter. We experienced some inventory movements affecting Amazon because they were repositioning products, closing some warehouses, and opening new ones. This led to a few delays, especially during the holiday season when substantial volumes were processed. There were indeed challenges with inventory in certain warehouses this quarter. Nevertheless, looking ahead, we believe this will remain a robust business for us. We operate in an omnichannel environment where consumers expect flexibility in delivery options. We embrace all platforms, including Instacart, retail, and home delivery, which have yielded positive results for us.

Our next question comes from the line of Jonathan Keypour with Bank of America.

I'm just wondering in 4Q, where the ACV was filled geographically in the states sort of what regions did you guys move into. And then what is left to move into? And then also, I guess, as you guys spend to activate and kind of get consumers aware of the product, how should we think about maybe like a lag on entering a new geography before you kind of operating at like optimal consumption or more optimal consumption. I guess, what is sort of the flow-through of the marketing into consumer response?

Yes, Jonathan, that's a great question. Historically, we focused primarily on higher ACV in specific regions before joining PepsiCo, with around 65% to 67% ACV at that time. Our larger higher ACV markets were concentrated in certain areas like the Northeast, Southeast, Texas, and Southern California. However, since our transition to Pepsi, we've seen ACV gains expand significantly into other markets. This aligns with the extra investment in marketing we made in Q4 to drive velocity rates and educate consumers about Celsius and our locations. We've gained significant distribution in the center of the country and the Northwest, with particularly strong gains in the mid-Atlantic regions. Currently, we stand at approximately 89% to 90% ACV nationwide.

Great. I have a follow-up question regarding how productivity varies depending on whether a store has an own fridge or not. I'm trying to understand the comparison in sales performance across different go-to-market scenarios. Specifically, does having an own fridge in a location lead to significantly better sales, such as a 1.5 times increase in sales pull-through?

Yes, that's a great question. We haven't discussed exact numbers on that. Historically, we've mentioned that last year, the payback period on our coolers was about five months. I can tell you that our sales significantly increase when we have a cooler placed optimally, which is about 60 degrees from the register to achieve the best results. That's what our teams are concentrating on. The aim is to have the coolers positioned in the front and at that ideal temperature. Coolers are extremely beneficial for us as they help consumers see and buy the product more easily, leading to higher sales rotation. As we've often said, if it's cold, it's sold. That's essentially all I can share on that subject.

Our next question comes from the line of Jeff Van Sinderen with B. Riley.

I just wanted to kind of circle back to the opportunity to increase SKU count this year. Maybe just give us a sense, if you could, by channel, where specifically do you expect those accounts to grow most maybe if you think about it first half, second half, just any thoughts around that?

Yes, great question. When you look at our current ACV number, the average items carried per store has increased significantly since the PepsiCo partnership, and we are currently at approximately 12.5 items per store. We expect this number to continue to grow with the upcoming resets. However, we are not quite ready to comment on where that will land. We have internal expectations, but we will have a clearer understanding as we progress through the resets. By around April, we should have more data that will give us a better idea of what to expect for the latter half of the year.

Okay, that's helpful. I have a couple of questions regarding margins. What are your thoughts on efficiency opportunities with Pepsi, specifically in overall distribution and possibly club distribution, and how that could benefit P&L metrics? I also noticed you mentioned taking some price increases. Are you planning to implement more price increases this year?

Yes. This is Jarrod. I'll start with some efficiencies. With the club channel, John did mention that, historically, we've had to go to a secondary packing facility. We have found a number of co-packers that can pack that in line for us, so that is definitely an efficiency and will help drive margin as we look out over 2023. We did start doing that a little bit in Q4 and started expanding that to most of the club channel in Q1. We do have pricing that was kind of fully in play in Q4, but that will benefit us across 2023. We haven't announced anything for 2023 at the moment. So we'll sit tight on that and see where we land. But other opportunities really are the orbit model we've created to continue to drive the freight lines and continue to drive efficiencies there and also taking advantage of our scale when it comes to raw material purchases and benefiting from some of the changes we've seen across the raw materials categories in terms of pricing.

Next question comes from the line of Sean McGowan with ROTH Capital Partners.

Following up, Jarrod, on the comments you made regarding efficiencies, can you give us some sense of what the kind of order of magnitude upside is on that margin improvement? I got to think that taking the cans off the line, putting it in the Fort Knox box you used to have cut into the margins. So what is the upside? Are you talking about hundreds of basis points of improvement potential?

Yes. I mean, I guess mid-40s is a wide range. I think last call, we mentioned out...

Specifically on the club, I mentioned specifically on those extra pack, the 18 packs in the clubs, like how much higher margin would that be if you got more cans in there and a more efficient process on a thinner hardboard, it’s not corrugated anymore. So how much higher margin is that item from what you had six months ago?

I mean, ultimately, we have to get it all into the same co-packer set in order to get that benefit. So we haven't fully transitioned, but I think we'll have the opportunity to do that this year. If you looked at the club margin, it’s pretty good. It could be a couple of percentage points, but you’ve got to remember that the club is only a small piece of our business from that perspective. So there is some opportunity there on that piece of the business. I think there’s also opportunity, like I said, with the freight lanes on improving that. If you look at our historical rates, over the course of the last two years, the freight lines have gone down for us. I think if you look over the last couple of years, it’s gone from roughly 6% to 4% on an annualized basis. So we’ve seen some gains there across that. We’ll see what the aluminum cans as well where that was putting pressure on us. And there’s opportunity with other things like sucralose and caffeine as well.

Okay. And then following up on the earlier comments about potential placement or resets and the benefits that could come in April. Would you also expect to get kind of better position within some of the back wall refrigerators, going to some stores and you're kind of down by the ankle? Would you expect to get some better placement higher up on a reset?

Yes, we definitely don't want to be in a low position as you mentioned. Our goal is to move out of that situation and into a more prominent spot. Our key accounts team is focused on this, especially as we are getting close to securing opportunities in the banking sector. I anticipate that we will have a strong presence in the upcoming resets, and you should start to see us in better positions moving forward, particularly with the distribution capabilities provided by PepsiCo.

Our next question comes from the line of Jeffrey Cohen with Ladenburg Diamond.

Just a few from my end. I know I heard impairment on the fund. Can you talk a little bit about what’s going on there with Splunk and any of the fast forwards out to fill in? And then maybe talk about what you can as far as Pepsico and some of their SKUs as far as food and production goes and what discussions and opportunities may be going on there as far as SKU expansion from year-end?

In relation to the Nordics, Celsius Europe has primarily focused on distribution in Sweden and Finland. The performance has been strong, especially in the fourth quarter, bolstered by new innovations and effective management of the Celsius portfolio. With our fast brand, we're also concentrating on our snack offerings in Finland, where there are additional opportunities. However, we have not engaged in discussions with PepsiCo regarding potential distribution in other regions at this time. Additionally, we have faced some challenges in Europe related to supply chains, particularly concerning raw materials for protein bars. Despite these issues, the business is stable, and there may be chances for international expansion in the future, though that is not currently on the horizon.

Got it. And could you talk about SKU expansion or new flavors or all flavors and targeting ex-U.S. territories as far as Europe? Will they be kind of country specific on the SKUs and flavors?

Yes. Internationally, we are beginning to utilize the global supply chain to achieve greater efficiencies. We are looking to collaborate on innovation across borders, particularly because today’s world, influenced by social media, tends to spread awareness widely. We aim to align ourselves more strategically with our flavor launches moving forward, and we anticipate more consistency in this area. Flavor innovation is crucial and has been a strong driver for the category, and we plan to maintain our leadership in this area.

Yes, I know it took a couple of weeks to get that. Lastly, can you discuss ALDI a little bit? How many stores are involved in the geographical rollouts, and what can we expect during '23?

Yes, we have a national rollout with ALDI underway, so you can expect to see us in an ALDI soon. I believe the number of stores is around 600 and is increasing.

Our next question comes from the line of Anthony Vendetti with Maxim Group.

Just wanted to follow up on the coolers. Did you say, John, about 20,000 coolers you expect to be in terms of branded Celsius coolers by the end of '23?

That's correct. We have set an internal goal to place our products in retail, and we currently have about 15,000 units available. We are working on distributing those strategically across various core markets and retailers.

And how many were placed in this quarter, 4Q '22?

We didn't disclose the number we placed in the fourth quarter, but we did place a good number. However, during the transition, we scaled back a bit, and we expect that to continue increasing into the new year.

Yeah, we're probably somewhere between 4,500 and 5,000 by the end of the year. But overall, we held back on that as we were doing the transition. And also, we really ramped up our ordering in Q3 and Q4. So they do have a little bit of lead time. So we're starting to see all those come ashore.

Okay. And then lastly on the Pepsi energy coolers. You mentioned there are 50,000 of those. How many are Celsius in right now? And what's the goal by the end of '23 for those Pepsi coolers?

I don't have the current number regarding how many of the 50,000 we are in. We’re working on getting those reset. I expect us to have a significant presence in the majority of them by the end of the year. That’s the goal. We are part of the PepsiCo energy portfolio, and we expect to be in all of them by year’s end, and we will work towards that goal.

Okay. The last question is about erythritol, the sugar substitute. How many of your products contain that right now? Are you concerned about the recent news that might lead to an increase in strokes or heart attacks?

Yes, it's a very minor piece of the portfolio. There are certain store types that have wanted the Stevia-type branded product from us. So I'd be surprised if it was more than 1% of our sales. So not really a big volume for us. It's something that we provided to a customer set that's wanted it, but not really core to our portfolio.

And we're looking into it.

Our next question is a follow-up from the line of Kaumil Gajrawala with Credit Suisse.

I wanted to bring it back to a little more high level on talking about distribution. You mentioned the Pepsi transition is complete, but the actual practical conversions, they're still sometimes similar to what we saw during the Anheuser-Busch transition. How much is left? You've given a lot of very detailed figures about kind of piecemeal it, but are you 100% available but only 60% converted. How much is left on the PepsiCo actual availability side?

To clarify, when we mentioned that the transition has been complete, we were referring to our distribution partners. Currently, around 90% to 95% of our distribution in North America is managed by PepsiCo. We have retained a few of our previous distributors and partners in certain markets, but aside from that, we are essentially 100% finished with the transition that began on October 1, 2022, under the PepsiCo agreement. Regarding our store distribution and expansion, we've reached 89% of our reported stores in terms of ACV. We believe there is still significant potential for growth, but we cannot provide specific details on how much further we might go until we analyze the April data to see our year-end position. Additionally, we have opportunities with non-reported stores and locations, which could enhance our distribution and cooler placements; these include new independent locations as part of PepsiCo's metals program, which comprises about 150,000 stores. We are actively working on those. Our resets are also in progress. In foodservice, we recognize a substantial opportunity, and we are just beginning to explore that potential fully.

There are no further questions in the queue. I'd like to hand the call back to management for closing remarks.

Thank you. On behalf of the company, we'd like to thank everyone for their continued interest and support. Our results demonstrate that 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 lifestyle position is a global position with mass appeal. We're building upon our core and leveraging opportunities and deploying best practices. We have a winning portfolio, strategy, and team in a large, rapidly growing market. I would like to thank all of our investors for their continued support and confidence in our team. The company will be attending several upcoming investor conferences the week of March 13, including attending Bank of America, UBS, ROTH Conference, investor conferences. And we look forward to meeting many of you there. Thank you, everyone, for your interest in 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.