Celsius Holdings Inc

NASDAQ:CELH

Earnings Call Transcript 2022-Q1

[Operator]

Greetings and welcome to Celsius Holdings’ First Quarter 2022 Financial Results. At this time, all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. [Operator Instructions] 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.

[Cameron Donahue, Investor Relations]

Thank you and good afternoon, everyone. We appreciate you joining us today for Celsius Holdings’ first 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 prepared remarks, we will open the call to your questions and instructions will be given at that time.

The company released their earnings press release upon market close this afternoon and all materials will be available in the company’s website, celsiusholdingsinc.com, under the Investor Relations section. As a reminder, before turning the call over to John, an audio replay will be available later today.

Please also be aware that this call may contain forward-looking statements which are based on forecast, expectations and other information available to management as of May 10, 2022. These statements involve numerous risks and uncertainties, including many that are beyond the company’s control. Except to the extent 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 our Safe Harbor statements contained in today’s press release and our quarterly filings with the SEC for additional information.

With that, let’s turn the call over to President and Chief Executive Officer, John Fieldly for his prepared remarks. John?

[John Fieldly, President and Chief Executive Officer]

Thank you, Chairman. Good afternoon, everyone and thank you for joining us today. Our record first quarter represented our 14th consecutive quarter of sequential growth and a 20% increase over the fourth quarter period. According to the trailing 4-week IRI MULO data as of April 17, 2022, Celsius is the number one brand driver of growth in the energy category compared to 2021. For the last 4-week dataset, the energy category grew $101 million. In that period, Celsius added $38 million of the growth accounting for 38% of the total. This is dollar share growth, eclipsing Monster by 1.4x, Alani Nu by 2.2x, Red Bull by 2.5x, Ghost by 3x and C4 by 4x.

During this period, Celsius increased to a $4.1 share and surpassed Rockstar for the number four position in the energy category. This growth has been driven across all channels, including those non-tracked with the two newest channels of club and the vending foodservice channels leading on a percentage growth metric and driving an incremental $25.2 million in revenue for the two channels alone compared to 2021 first quarter.

In March, we also began a full nationwide rollout through Sam’s Club more than doubling the number of stores in the channel adding 589 locations with the launch. In the first quarter, we also expanded into additional Wal-Mart locations now bringing our store count total to over 4,400 stores and expanded our offerings, which now totals on average about 6 facings across the country with expanded distribution as well as new cooler placements in select stores. In the convenience channel, we began a nationwide rollout to over 6,000 Circle K locations. And in the fitness channel, we are now the official energy drink partner and provider of CycleBar nationwide. In addition, since our Q4 launch with Lifetime Fitness, we are now the number one selling drink and have increased sales each month since our launch.

On April 18, we announced the retirement of Edwin Negron and appointed Jarrod Langhans, our CFO. I would like to formally introduce him today and share our excitement of having him join the Celsius team. In addition, I’d like to thank Edwin for his commitment to the company and for the contribution over the years, which will continue to provide lasting positive impacts. We have also recently added Grace Clark [ph] as our new Head of IT and welcome her to the Celsius team. And in addition to the many other new team members who have joined our team, we would like to welcome them as we continue to expand our organization to keep pace with growth and maximize the opportunities we see ahead.

Before I move to operational highlights for the quarter, in regards to our previously disclosed SEC, we continue to fully cooperate and we do not have any material updates at this time. Moving to some of our financial highlights of the first quarter, sales hit another record achieving first quarter revenues in the United States exceeding over $100 million in sales, hitting $123 million growing exponentially. Revenue growth was driven by continued new store additions, flavor expansions, additional cold placements and the optimization and activation of our DSP network as well as growth in underrepresented channels. As we mentioned in the convenience store, we see great expansion in club and vending.

Sales for the first quarter of 2022 totaled $133.4 million, up 167% from $50 million in the prior year quarter. As mentioned, domestic revenues increased 214% to a record $123.5 million, up from $39 million in the prior year quarter. International sales decreased proximately 10% to $9.9 million for the quarter, with Nordic sales down approximately 18% to $8.5 million as a result of timing of trade campaigns, flavor launches as well as supply chain delays, and other international sales grew approximate 114% to $1.4 million.

Gross profit for the quarter increased $162 million to $53.9 million up from $20.6 million in the year ago quarter and gross margins totaled approximately 40.4% of net sales and excluding outbound freight totaled 42.8% of revenues for the 3 months ending March 31, 2022 and from 41.1% or 49.5% when excluding outbound freight for the prior year quarter.

There continues to be margin pressure felt across the beverage industry. And we have not been immune to these impacts. With the expansion of higher cost of international cans, a majority of these cost increases have been offset by efficiencies of scale through our raw materials production, full load shipping, reducing the miles on cases with our 6-orbit warehouse model expansion last fall. Our product channel sales mix has also impacted margins as our club channel revenue has externally had lower margin levels due to secondary repack facilities, which are required with this rapid growth in the channel, which contributed over $26 million in revenue in the first quarter and has increased overall margin pressure. And we have initiated several changes to improve margins in this channel, including the rework working with co-packers and our partners to further drive cost out of the system. Overall, the company still expects to cycle through the remaining of our international cans by the end of the third quarter with margins then moving back up towards the mid-40s based on channel mix.

Our first quarter 2022 fill rates were experiencing about – roughly around a 97% fill rate and we expect to maintain these normalized levels even with our accelerated growth rates due to optimization of software improvements warehouse expansion to our 6-orbit infrastructure model put in place during the third quarter and an inventory expansion which has been key to the spring resets load-ins with new accounts expanding and optimization of our national distribution network as well as Sam’s Club, Circle K and the Walmart expansions just to name a few.

Some additional highlights for the first quarter. Our domestic revenues of $123.5 million was driven by accelerated triple growth – triple-digit growth in traditional channels of trade expansion with world class retailers and fuller activation in growth with our distribution partners. Direct store delivery, our DSD network, grew approximately 395% to our – in our distributor revenues when compared to the prior year. Our vending channel grew 296% approximately in the first quarter and drove over $202 million in incremental revenue. We are now in over 12,000 vending and micromarkets placement since the first quarter of 2021, increasing our number of locations by 96% and expect that growth to continue through the rest of the year.

In our fitness vitamins specialty channel, in addition to now being the number one drink at Lifetime Fitness in the quarter, we officially launched with solid core at 70 locations. GNC also expanded their offerings in their corporate sets and are partnership – partnered with CycleBar, which is lied with franchisees ordering product. Our mass club channel continues to accelerate following the rollout of the 561 Costco locations expanded in Q2 of 2021. Costco’s first quarter established a new record in revenue growing over 1,100% for Q1 of 2021 and we continue to gain transaction – traction in the online sales platform on Costco.com. We initiated a sell-in with over a full nationwide rollout with Sam’s Club at 589 locations and we also saw significant additional opportunities we see ahead in penetrating – further penetrating the club channel with BJ’s in 2022.

In Walmart, we expanded our store count of flavor assortment as well as gaining front-end coolers and NCAP activity in select locations and in Target, we have a chain-wide NCAP program, which we expanded our availabilities and also with additional cooler placements and in-store placements throughout the first quarter. In the convenience channel, our convenience store locations increased by 88% from the first quarter of 2021 and now totaled just under 64,000 locations. We began our national Circle K launch, which will be completed by the second quarter and totaled over 6,000 new locations upon completion, second only to our overall 8,000 locations with 7-Eleven in terms of total store size in the convenience store channel, with 7-Eleven and Circle K now being our two largest chains in that channel. RaceTrac was fully converted to DSD in the first quarter and we expanded our shelf placements through approximately between three quarters of a shelf to a full shelf in all locations.

The convenience store channel has the largest growth opportunity and addition expansion indoors in 2021 and we expect that growth to continue in 2022. Industry-backed third-party data continues to show accelerated growth metrics and we are confident that Celsius will continue to drive sales even higher as we increase our ACV across channels through additional launches with new chains and transitioning existing accounts to our DSD network for better optimization and in-product placements.

Consumer demand for Celsius accelerated to the first quarter of 2022 and as of April of 2022 to record levels with the most recent report in Nielsen scan data as of April 9, 2022, showing Celsius sales of up 216% year-over-year for 2 weeks, 215% for the 4 weeks, 230% for the 12 weeks with a 3.4 share according to Nielsen data on the energy category. This compares the energy category, which grew 6% on the 2 weeks, 11% on 12 weeks over the same period. Celsius also saw average price increase of 17.4% over the 52-week period. On Amazon, Celsius is the second largest energy drink with 18.23% share of the energy category, 6.6% share ahead of Red Bull at 11.6% share, and 7.7% share behind Monster at a 25.9% share, approximately that’s 4 weeks ending April 23, 2022 at Stackline data, energy drink category total U.S.

With this, sales hit record quarterly revenues for Amazon which totaled $13.8 million, up 74% from the first quarter of 2021. We continue to see acceleration through all channels and are now beginning to see the additional lift from the conversion of accounts to our national DSD network. This delivered growth of 395% in our distributor revenues when compared to the prior year. We secured additional distribution agreements during the quarter further expanding our availability. The company now has completed nationwide network, which now services approximately 99% of the population.

Our rollout of Celsius branded coolers in the first quarter was expanding with over 700 coolers placed and now over 1,900 coolers placed nationwide in key retailers. We have also implemented a comprehensive tracking tool to leverage growth acceleration metrics with retailers. In addition, over 400 barrel coolers were placed in key locations at premium retailers. And we anticipate additional cooler placements to continue through 2022. Our U.S. door count now exceeds 140,000 locations nationally growing over 49,000 doors or 53% from 93,000 from Q1 2021.

On our co-packer front, we continue to expand our partners and scale at existing locations improving our lifetime priority. Our total U.S. co-packer footprint now totals 13 that are active which will help protect for future out of stocks and support our growth that’s ahead. In Europe, sales totaled $8.5 million, a decrease of approximately 18% as a result of translation costs as well – translation as well as timing and trade campaigns, flavor, timing of flavor launches as well as supply chain delays. And we expect this to continue to optimize in the second and third quarter.

We recently launched our Amazon EU beginning with Great Britain, which launched with three flavors of Celsius and six flavors of our fast protein snack portfolio and Germany launched with three flavors of Celsius. We expect additional EU launches to take place through 2022 include France and Italy momentarily. Additionally, revenues are small today, but we see tremendous opportunities ahead.

In China, we maintain a licensing royalty model in the market, with fixed royalty revenues through 2024 which then becomes a volume based model, but no lower than the minimum royalties of $2.2 million. And our other international market locations driving growth includes Malaysia, Hong Kong, South Korea and Singapore with initial markets penetrating as well as future opportunities with discussions in Japan, Australia and Taiwan. We continue to focus on our approach in these markets to find top distributors to partner with, to drive revenue, profitable revenue and growth opportunities.

Now, moving into the marketing front, on the marketing front, we continue to activate targeting new and existing consumers where they live, work and play building meaningful and emotional connections through robust integrating marketing programs. In the first quarter, we continue to activate through our Celsius Live Fit Tour and we kicked off a Celsius Essential Vibes Tour, which initially kicked off during the Super Bowl at Shaq’s funhouse, which was a great event. In addition, we also partnered with Shaun White around the Olympics and did a lot of activation. And we also launched a great flavor, a Mango Passionfruit in 7-Eleven nationwide, which was a very successful launch for us just to name a few items which we accomplished. We continue to activate and connect with consumers in a meaningful way, bringing new consumers to the Celsius portfolio and energy category.

We are driving leading growth in the energy category across all channels, expanding the demographics by bringing in an industry leading percentage of consumers from outside and new to category while accelerating our share and growing the energy category. We have committed the resources both personnel and operational infrastructure to maximize our opportunity.

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

[Jarrod Langhans, Chief Financial Officer]

Thank you, John. Before I turn to the first quarter financial overview, I wanted to thank John and the entire team at Celsius for all the support they have provided over the last few weeks as we wrapped up our 10-Q and I transitioned into the CFO role. The company is very well positioned and I am excited to join the team as the business continues to accelerate and we progress on the many opportunities ahead of us.

And looking back at our last 10-K, we had noted some internal control weaknesses that we would be remediating this year. Although it has been less than 2 months since the issuance of our 10-K, I am pleased with our progress thus far and we are confident that we will be able to remediate these controls by the end of the year. We are building out our IT and internal audit teams as well as adding additional financial resources to our operations and sales teams in support of our ongoing growth and expansion.

Turning to our first quarter financial results. Our first quarter revenue for the 3 months ended March 31, 2022 was approximately $133.4 million, an increase of $83.4 million or 167% from $50 million in the prior year. As expected, the growth was driven by our North American operations, where first quarter revenues were $123.5 million, an increase of $84.5 million or 217% from the prior year quarter. The balance of the revenues for the 2022 quarter were mainly attributed to European operations, which generated revenue of $8.5 million slightly below the prior year quarter primarily due to foreign exchange rates, raw material sourcing and timing.

Asian revenues, which include royalty revenues from our China licensee, contributed an additional $1 million, an increase of 80% from approximately $500,000 in the prior year. Other international markets generated approximately $0.5 million in revenues during the quarter, an increase of 256% versus the prior year quarter. The total increase in revenue was 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 continue to strong triple-digit growth in traditional distribution channels, combined with an increase in and optimization of our products presence and world class retailers, such as SKU additions, cold placement, and NCAP displays. Additionally, the continued expansion of our direct store delivery network resulted in significant growth of 395% in distributor revenues when compared to the prior year quarter.

Gross profit for the first quarter of 2022 increased by approximately $33.3 million or 162% to $53.9 million. Gross profit margins decreased slightly to 40.4% for the quarter from 41.1% in the prior quarter. The increase in gross profit dollars is related to increases in volume, while the decrease in gross profit margins is mainly related to higher raw material costs, customer mix and inflation across our supply chain.

Sales and marketing expenses for the 3 months ended March 31, 2022 were approximately $31.6 million, an increase of $19.6 million or 164% from $12 million for the 3 months ended March 31, 2021. This increase was primarily attributable to higher marketing investment activities, which resulted in an increase of $9.1 million when compared to the prior year quarter. Additionally, employee cost increased by approximately $1.4 million from the prior year quarter as we continue to invest in this area in order to have the proper infrastructure to support our growth.

Lastly, storage and distribution expenses as well as broker costs accounted for the remainder of the increase in this area in the amount of $9.1 million from the 2021 quarter to the 2022 quarter. As a percentage of sales, sales and marketing was 23% of revenue in the first quarter of 2022 compared to 24% in the first quarter of 2021.

General and administrative expenses for the 3 months ended March 31, 2022 were approximately $12.2 million, an increase of $4.4 million or 56% from $7.8 million for the 3 months ended March 31, 2021. This increase was primarily attributable to other administrative expenses, which drove an increase of $2.4 million or 116% increase when compared to the prior year quarter. The other administrative expenses are mainly related to increases in audit costs, legal expenses, bad debt reserves and insurance costs. Additionally, employee costs for the 3 months ended March 31, 2022 reflect an increase of $1.2 million or an increase of 76.2% as investments in this area are being made to support our higher business volumes being generated by our commercial and operational teams.

We also saw a $700,000 increase in stock option expense 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 over performance, which translates into the continued success of our business based on key performance attributes.

Depreciation and amortization increases were minor at approximately $100,000 when compared to the prior year quarter. As a total percent of revenue, G&A costs decreased to 9% of sales for the 3 months ended March 31, 2022 compared to 16% in the prior year as we were able to leverage G&A against our growth.

Net income for the 3 months ended March 31, 2022 was $6.7 million or $0.09 per share based on a weighted average of 75.2 million shares outstanding and diluted earnings per share of $0.09 based on a fully diluted weighted average of 78.3 million shares outstanding. In comparison for the 3 months ended March 31, 2021, the company had net income of approximately $600,000 or $0.01 per share based on a weighted average of 72.5 million shares outstanding and the diluted earnings per share of $0.01 based on a fully diluted weighted average of 76.9 million shares outstanding.

Focusing on liquidity as of March 31, 2022 and December 31, 2021, we had cash of approximately $25.5 million and $16.3 million respectively and working capital or net current assets of approximately $186.5 million and $169.2 million respectively, with no long-term debt. Cash flows provided by operating activities totaled approximately $9.1 million for the 3 months ended March 31, 2022, which compares to $13.3 million of net cash used in operating activities for the 3 months ended March 31, 2021. The approximately $22 million increase in cash generation was driven by an increase in net income and improvements in working capital.

Working capital improvements were driven primarily by the stabilization of our inventory as we have established optimal levels to service the demand of our products as well as timing of accounts payable offset in part by increases of accounts receivable driven by the significant growth in our business. Our current growing cash position, together with the expected results from operations should provide us with sufficient cash to operate our business as we continue to operate inventory levels and deliver strong growth throughout the year.

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

[Operator]

Thank you. [Operator Instructions] Our first question comes from the line of Kevin Grundy with Jefferies. Please proceed with your question.

[Kevin Grundy, Jefferies]

Great. Thanks. Good evening, guys or good afternoon and congratulations on a really strong result. John, why don’t we start I guess with sort of the state of the consumer, your businesses is obviously doing extremely well given the significant expansion of distribution as well as some really nice improvement in velocity. The Nielsen data still looks very good for the category. Are you picking up anything from distributors or anything perhaps from your sales folks in any geographies that gives you any concern around the state of the consumer? And then this kind of dovetails into a broader question around pricing and it’s not lost on you for a moment that, that Monster moved on that which is good news for the category. Maybe just comment on that sort of twofold state of the consumer and then given the likelihood the category moves with Monster pricing, any pause with that given what is viewed to be perhaps an increasingly fragile consumer? So sorry for the long winded question, John.

[John Fieldly, President and Chief Executive Officer]

No, Kevin, great question. I think when you look at it, there is a lot of discussions going on, right in regards to what’s going to happen with the consumer, what’s taking place with the customers. And like any of us, we are all very concerned. So I mean, there is talk about recession now. It looks like the inflation that we are all experiencing is not transitory. So everyone is making adjustments on that. We have spoken in prior calls about doing promotional strategies. And we have been hesitant on taking overall frontline pricing. We did initiate a frontline price increase, which we put out notices on April 1, which will slowly take into effect over the next couple of quarters, but that started to be implemented as of April 1. So, those are things we are working on. Their consumer sentiment seems to be quite mixed, especially with the news and what’s happening in the markets most recently. We do feel there is opportunities for Celsius to have a premium position and maintain a premium position in the category. Due to the pricing elasticity and the testing that we have done with some of our promotional strategies, we felt that we were able to take price, which will offset a lot of the inflationary costs that we have been experiencing in the beverage category overall.

So, we are watching it closely. This will give us additional leeway, where we can further adjust them promotional strategies on a go forward basis. But we do see, overall, the category continues to grow. We are watching it. Our growth is continuing. We think there is a lot of opportunity ahead based on where our pricing is at. We do think we are in a pretty good position given that we are not in over luxury position, product or offering.

[Kevin Grundy, Jefferies]

Got it. Thanks. Quick point clarification and one for Jarrod, the amount of the pricing that you took on April 1, was that across the entire portfolio and what was the amount?

[John Fieldly, President and Chief Executive Officer]

Yes, we haven’t – we did take frontline price where we haven’t disclosed, we are not going to disclose the percentage of the increase. That is something we are working on. It is a – I mean, it has been implemented within the frontline pricing portfolio and will continue to optimize, but we are not – at this point, we are not going to disclose the actual percentage that we took. We are taking a sufficient amount of price in order to protect the increases that we are experiencing in the inflationary environment.

[Kevin Grundy, Jefferies]

Okay, that’s good news. A quick one for Jarrod and then I will pass it on. So, Jarrod again, congrats again, and understanding it’s really early days, I think perhaps maybe just some early observation in terms of what you see as opportunity, whether this is around return optimization tools or SKU management, profitability, working capital, etcetera. Any comments there would be helpful? And I’ll pass it on. Thanks.

[Jarrod Langhans, Chief Financial Officer]

Yes. Thanks, Kevin. I think early opportunities are really blocking and tackling. The company has grown significantly over the last 2 years, so really coming in and on the finance side looking at people processes and technology. So, we don’t want to be disruptive to the business. But I think there is a lot of opportunity from a data analytic perspective and from a finance perspective to really help the operations and sales teams in terms of analyzing the data, building out models and different things like that. The team has done a great job obviously doing that. But I think there is different processes we can implement to become more effective and efficient at what we do as well as some different tools from a technology perspective, so that we can do even better than we have done. So I think that’s probably there is some low hanging fruit from that perspective. And really, it’s just about building a team from a G&A perspective that can support the business as we continue to grow and excel.

[Kevin Grundy, Jefferies]

Very good. Thanks, guys. Good luck.

[John Fieldly, President and Chief Executive Officer]

Thank you.

[Operator]

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

[Kaumil Gajrawala, Credit Suisse]

Hi, guys. So, first question on club stores and kind of all the incremental growth from the club stores. Are you also delivering DSD to clubs? And then maybe if you could just talk a little bit about what velocity looks like there versus some of your other channels?

[John Fieldly, President and Chief Executive Officer]

Yes, thank you, Kaumil. In regards to the club channel, it’s been quite surprising for us. If you look over the last several quarters there, you see the growth that we delivered in Q1. Costco has been just an extreme success for the company. And we are told by one of the top selling beverages in the energy sec at Costco. So lots of opportunity to still grow and scale, especially leverage their online platforms, which we are working on. We do have some DSD. Mainly, the business is direct at this point. But I think the big opportunity for us in the club channel is to further leverage and optimize Sam’s Club and then also through 2022 opportunities that lie ahead with BJ’s. So, it’s a great channel, what’s interesting it didn’t affect our other channels, which are continuing to grow. When you look at the growth that we saw on Amazon as well as in all of our channels, it’s great.

[Kaumil Gajrawala, Credit Suisse]

Okay, great. And then I am like, I noticed your 10-Q was out already. So that’s a little faster than last quarter. Since it’s out, maybe I can just ask about the freight expense. Maybe as I read it all too fast. But it looks like last year was up 3 – it was $3.2 million and only $4.2 million this year is that given how much you grew, I might have expected that to look quite different. I am just curious, is this linked at something related to timing, something with the orbit model? Just curious if there is just anything that might skew us a little bit?

[John Fieldly, President and Chief Executive Officer]

Yes, no, no, great question. I’ll turn it over to Jerrod.

[Jarrod Langhans, Chief Financial Officer]

Yes, it’s something that we look into really, because we noticed the same thing over the last 6 weeks or so. But Paul and his team have done a great job managing freight in the first quarter. We did have a few opportunities that we took advantage of during the quarter and we benefited from. Some of that is the mix, so Costco as an example and also different kinds of packaging and growth at other specific customers where we are able to really leverage that orbit model that we have created, so that we were able to use local freight in many instances, which was much in terms of pricing per load, it was significantly reduced relative to what we were paying. So we did see a lot of good call it or lower costs come in from a freight perspective. We are going to continue to utilize that that opportunity. But it will vary depending upon the volume of the packaging and where the growth is happening. But with the growth in stores like Costco where we are closer to the warehousing and the production sites and where we can use local freight that will allow us to save some costs.

[Kaumil Gajrawala, Credit Suisse]

Got it. Thank you. And then maybe just on – one more quick one, getting back to club stores, is there anything timing there that we should be aware of as it relates to just whether it’s filling inventory or anything like that, I just want to make sure I don’t get kind of a future comp…

[John Fieldly, President and Chief Executive Officer]

No. The revenue at Costco is just continue to be standard recurring revenue now that we have been in there a couple of quarters. Now, when you look at the sales of that took place in the quarter, that was a fill-in. But we did receive a reorder as well, so in the quarter. So, it was a fill-in and a reorder. So, I think we are going to – we had a lot to learn about Sam’s Club and the opportunity that lies there. We are just in the initial phases. I think we have a better understanding once we get through the second quarter. And maybe what does that initial run rate look like. Keep in mind when you go into a new retailer, historically, it has taken us some time to get up to ramped levels or enable that continual run rate. Although Costco seems to be what of an anomaly in some of the new retailers, we are entering now, just due to the brand awareness, sales are turning at a fairly good velocity level. So, a lot to learn there in the club channel. We will see how – I think we will have a better look at the end of the second quarter with the performance of Sam’s Club.

[Kaumil Gajrawala, Credit Suisse]

Okay, great. Thank you, guys.

[John Fieldly, President and Chief Executive Officer]

Thank you.

[Operator]

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

[Jeff Van Sinderen, B. Riley]

Hi everyone, and let me add my congratulations. Just as we are on the topic club stores, just wonder if you could speak more about the opportunity with BJ’s, the status of BJ’s? What kind of the next steps are there and what we should look for?

[John Fieldly, President and Chief Executive Officer]

Yes. I mean we are in some BJ’s currently, Jeff, and thank you. The team has worked really great on the accomplishments. I mean it was a great quarter all around. Team is working really hard. And like I said on the call my prepared remarks, the amount of new team members joining the team is just really exciting time. So, we are just continuing to get better each and every quarter. But in regards to the BJ’s opportunity, right now, we are testing in some stores and regionally. But we feel pretty confident we will be able to hopefully get a larger rollout here within this year, it should – we should definitely get reset throughout this year. I think initial store tests have been positive. But that’s all will be dependent on the buyers, their decisions. But due to the success at Costco and initial success at Sam’s Club, we feel pretty confident about that. So, just a little bit premature on where those revenues will come in at. We are also looking at some additional pack size configurations to try to better optimize the margins for that business. And then we will look at the mix as we go forward, lots of opportunity.

[Jeff Van Sinderen, B. Riley]

Okay. And then just sort of, I guess a follow-up to that, just thinking about your overall take on spring resets, maybe you can just touch on that.

[John Fieldly, President and Chief Executive Officer]

Yes. Pre-resets, we have an amazing key accounts team and actually had two individuals that started this week on their team as well as we further expand. The spring resets, like I said, we got Circle K, about 6,000 locations. They were – some divisions were delayed. They have about 13 divisions. So, you will start to see us in a variety of locations in the Circle K divisions today. But they will also be continuing to further roll out over the next several weeks, that due to really a lot of our – there has been a lot of delays with labor shortages on some of these resets, where some of these retailers have pushed out the reset delays due to labor shortages. So, we are working on that. But we think we are going to have a great reset. I talked about Walmart expansion earlier, Target. We are getting a lot of interest from existing accounts where we are going to see additional flavors on. We launched in the first quarter with the mango passion fruit, it was such a great success. If anyone has not tried the product, please go to 7-Eleven and try it, it’s amazing. It’s going to be a winner for us. And we have some new flavors coming out in Q2 that we just launched. So, I think it’s going to be a great summer as we head into summer beverage season. So, we are well positioned. You are starting to see that DSD network really come alive as the team further activates them we get better distribution, better placement and most importantly get it cold, so which we know we have a winning portfolio when it’s cold.

[Jeff Van Sinderen, B. Riley]

Okay. Great. Thanks for taking my questions and continued success.

[John Fieldly, President and Chief Executive Officer]

Thank you, Jeff.

[Operator]

Our next question comes from the line of Mark Astrachan with Stifel. Please proceed with your question. Okay. I think you might have hung up. Our next question comes from the line of Jeffrey Cohen with Ladenburg Thalmann. Please proceed with your question.

[Jeffrey Cohen, Ladenburg Thalmann]

Hi, John and Jarrod, how are you?

[John Fieldly, President and Chief Executive Officer]

Excellent, Jeff.

[Jeffrey Cohen, Ladenburg Thalmann]

So, I think John, you were referring to strawberry lemonade, and Arctic five, which is my question. And it looks like 38 SKUs now. Can you talk a little bit about the launch cadence anticipated for the balance of the year? And then anything to call out specifically on go to sticks, either the regulars or the heats?

[John Fieldly, President and Chief Executive Officer]

Yes. No, that’s a great question, strawberry lemonade, I am being told that it’s probably the first best tasting energy drink out there. So, those we are really excited about that, this summer is going to be a great summer launch. And the Arctic five [ph], which is rolling out in the second quarter brings one of our – expand our Vibe portfolio, which is performing extremely well. And the convenience channel is a little bit more inviting fun. We got some great experiential marketing programs behind it for the summer. So, we think that’s going to be a great hit is a frozen berry flavor profile. So, we are excited about that. So, we will have about three flavors there coming to retail over the next several months. And when you look at our around on the go sticks, which is quite interesting. We are seeing a lot of demand for the on the go sticks. And although currently represents a smaller portion of the revenue, we did launch our heat on the go sticks, which is now available in a variety of retailers plus Walmart, and nationwide. So, lots of opportunities on the, on the go, is a portion of the core portfolio. And we continue to bring great innovative flavors to the category, our marketing team and innovation team is doing a great job. So, keep your eyes out. So, some great new flavors.

[Jeffrey Cohen, Ladenburg Thalmann]

That’s super and I have a follow-up, a wonder if you could call out anything in the international business outside of Nordics and China, any specific territories to call out, which are or could be perhaps, million plus territories this year?

[John Fieldly, President and Chief Executive Officer]

Look, I mean it was a great, that’s in North America, we are getting a lot of interest from some a, top tier distributors in other markets. I think it’s too preliminary to really talk about those markets right now. But we are getting a lot of interest from some Tier 1 distributors and distribution partners that you know, upon putting the right structure together to allow us to further expand and drive profitable growth, as we have talked about as we look at international and further expansion opportunities. So, we see a lot of great markets with same health and wellness trends in the U.S. or in Europe and in Asia. So, we have a global opportunity here.

[Jeffrey Cohen, Ladenburg Thalmann]

Super. Okay. Thanks for taking the questions. Nice quarter.

[John Fieldly, President and Chief Executive Officer]

Thank you.

[Operator]

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

[Mark Astrachan, Stifel]

Let’s try that again. Can you guys hear me?

[John Fieldly, President and Chief Executive Officer]

Actually, Mark?

[Mark Astrachan, Stifel]

Perfect. So, I wanted to go back on pricing, John, if you could go into the scanner data since April 1. It doesn’t look like your pricing has gone up. So, is there some sort of lag that we should be taking into account, is there offsets of the reduced promotional activity that you were doing in lieu of pricing? Prior to that and just might as well for related to the pricing, was there any sort of selling in the March quarter ahead of the price increase?

[John Fieldly, President and Chief Executive Officer]

Yes. Well, I think when you look at just that period in April 1, what we are seeing there is it’s benchmarking off the prior year. So, during that same timeframe, you are seeing some pricing adjustments which took place. We have reduced a lot of our promotions in regards to, the Buy Juice, Buy One Get strategies there. The pricing, frontline pricing we have taken is not going to be seen in retail, for likely, really impacted on the scanner data until like right around the third quarter. So, we started take frontline pricing, it is a process that we have implemented. And it’s going to take some time to set. But we did notify the mark – some of our key our key customers, and retailers which you have to provide notice for as of April 1st. So, you are not starting to see that in the scanner data that you are looking at today. But we did start to initiate a price increase as of April 1st.

[Mark Astrachan, Stifel]

Got it. So, to be clear, we are going to see that in the data starting at what point in 3Q?

[John Fieldly, President and Chief Executive Officer]

You will likely start to start seeing that in the data, starting in the third quarter and then continuing through the fourth quarter.

[Mark Astrachan, Stifel]

Got it. Okay. And then maybe just shifting to your comments and some of the work that we have done on the incrementality of both you as well as your performance, Energy brand, is there anything you can kind of point to in terms of how much you keep it to use specifically if you want in terms of incremental consumption, or incremental consumers to the energy drink category, versus sourcing share from more traditional players like Monster and Red Bull?

[John Fieldly, President and Chief Executive Officer]

Yes. I think that’s the great opportunity we have with Celsius. And that’s really the message we are providing retailers and our key customers. And what we are seeing in our key customers is we are not cannibalizing the sales of other leading players. So, what – we are incremental. And when you look at the category growth, we brought in over that time period contributed about 38% of the growth during that period. So, we are bringing in a new consumer into the energy category. We are helping the category further expand. Our demo has been 50-50, male-female. So, very much incremental to the category. There is some cannibalization slightly that you are seeing. But the majority of it is all new to category is what we are really seeing with some of our data.

[Mark Astrachan, Stifel]

Great. That’s helpful. Thanks guys.

[John Fieldly, President and Chief Executive Officer]

Thank you, Mark.

[Operator]

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

[Unidentified Analyst]

Hi, good afternoon. This is actually Jeremy on the line for Anthony. Two quick questions for me, I know you mentioned on the call that you said the convenience store, I think that’s your greatest growth opportunity. Maybe could you talk a little more, so where do you see that growth coming from within the convenience store? Is that within current stores, you are in and if you are expanding the growth there or expanding store, stores in general?

[John Fieldly, President and Chief Executive Officer]

Yes. Jeremy, great question. I mean you look at the opportunity for us. And we have talked about this before on a variety of calls. But really what we are doing, we are really back-dooring the Energy category, when you look at it. The company has performed very well on Amazon, the e-com, the club channel, grocery, mass and extremely well in club at CVS. And the next frontier really is the convenience channel where 70% of energy drinks are sold. So, the team has done a great job, we talked about expansion at Race Track, 7-Eleven, you look at Circle K. So, by no means are we tapped out with the number of doors to capture in the convenience channel, we are just scratching the surface and just getting really in position in many of the leading convenience chains today. And you look at the like Loves and Flying J as well, we just recently entered. So, lots of opportunities, not only in expanding the ACV in the convenience channel, but also expanding the offerings, when you look at the number of offerings that Celsius currently has versus some of the leading players in the leading competition. So, we have a long runway ahead in that category for sure we feel.

[Unidentified Analyst]

Okay. Great. And then just one more shift into gross margins, and on the call, you also mentioned that you have a lot of initiatives to offset inflationary costs. And this is I think before you even you took price, or you mentioned you took price, is there is there any more room in those initiatives for to help bump up the gross margins, or is that all have been baked in?

[John Fieldly, President and Chief Executive Officer]

Yes. I mean the challenge we have now and we have talked about it as well as these imported cans the company has to cycle through. So, the good news is, is that all the cans that we originally imported are now arriving. The final cans have arrived into the U.S. So, now it’s about flushing them or using them through this – through using them up and flowing them through the system. So, in Q2, we did have a good portion of international can mix. In our first quarter, we had a good portion of international can mix that was flowing through our cost of goods. In Q2, we anticipate the percentage of international cans to increase, which will further put somewhat pressure on our margins from Q1. And then we expect to use up those international cans by the end of the third quarter and get back to more of a normalized gross profit level somewhere in the mid-40s and by the fourth quarter and into 2023. We are working to further improve upon that. But that’s really kind of what we are looking at today based on the current environment. We are analyzing and optimizing the six orbit model, as Jarrod mentioned, to seeing the opportunities on local delivery savings versus the long haul rates. And then there are just so many other variables out there today. With aluminum alloy, you are seeing aluminum alloy come down in the most recent week, prior [ph], that’s been going up substantially. So, lots of movement there that we are looking at. But that’s kind of what we are seeing now.

[Unidentified Analyst]

Okay, great. Thanks a lot. I will hop in the queue.

[John Fieldly, President and Chief Executive Officer]

Thank you.

[Operator]

Our next question comes from the line of Sean McGowan with ROTH. Please proceed with your question.

[Sean McGowan, ROTH]

Thank you. First, John, if I could ask you to clarify something he spoke kind of quickly on in your opening remarks. When you were talking about Europe, and the decline in some markets there, I think you said you will continue to see optimization. So, can you clarify whether or not we should expect to see those revenues turn around and be positive year-over-year, or are you saying continuing to see some negative pressure there?

[John Fieldly, President and Chief Executive Officer]

Yes. I mean, I think we are still looking at – we had the team in Florida last week going over the strategies. I think we are still looking at somewhere of a 10% to 15% revenue growth rate for the year. At this point, we have had some delays in the first quarter associated with timing. There is also a lot of logistical challenges with railways being shutdown due to the activity in Europe and also some of the protein snacks portfolio had shortages of raw materials. So we have had a lot of things that impacted the first quarter. We are watching it closely for the second quarter. We have great programs and new flavor launches we will be working on. And I think we are – there is lot of opportunities in the European market. And it’s been a little bit slower than initially anticipated. But we do see a long runway ahead.

[Sean McGowan, ROTH]

Okay. Thanks. And then if I can ask two other quickies? What’s the outlook for your inventory levels relative to sales? I think you had said at the end of the fourth quarter that, that was unusually high and you would expect to see that coming down, obviously, really strong sales performance. But would you expect that kind of ratio of inventory to sales come down further from current levels?

[John Fieldly, President and Chief Executive Officer]

Yes. I mean, right now, when you look at our inventory and you look at the Q, I mean, we are sitting at, we did reduce inventory levels by about $6 million. You did have additional cans of those international cans move from a deposit into inventory, because we physically took possession. And then we finalized the purchase of the international cans we committed to when they – we had the cash shortages that took place. So we are going to be cycling through those cans, which I think is about right around 20 million or so that’s on the books, currently. I think, really good inventory levels, which is allowing us to really service customers on a 97% fill rate. We have a new distribution coming on. We are entering beverage selling season. And you are starting to hear about shortages and supply chains. So, when we talk to a lot of our year – a lot of our suppliers, there is talk about shortages again that are that have been talked about. So we feel we are in a good position. We have good inventory levels on raw. We are watching the markets very closely and we will take action as needed.

[Sean McGowan, ROTH]

Okay, thank you. And then just to touch on the price increase that one of your competitors announced kind of get a kick out of them saying, we are taking price up about 6% in 4 months, do you expect your customers to kind of load up on a lot of Monster product between now and then that could clog the channel a little bit?

[John Fieldly, President and Chief Executive Officer]

I mean, anytime you do a price increase you do get some load-ins there. I would assume 6% to get a return that you could make in a couple of months if that’s the [indiscernible], but I want to see how that there is challenges each and everyday in this business. So, it’s a street war. We got some really good distributors that will make sure we are housing our position. We don’t feel there is going to be any slowdown in our trajectory or the opportunity we lie ahead. We got really great team members, like I said and distributors and partners and we think we are in a good position.

[Sean McGowan, ROTH]

Great. Thank you.

[Operator]

That brings us to the end of our question-and-answer session. I’d like to hand the call back over to John Fieldly for closing remarks.

[John Fieldly, President and Chief Executive Officer]

Thank you on behalf of the company, and just like thank you everyone for their continued support and interest. Our results demonstrate our products are gaining considerable momentum as we capitalize on today’s global health and wellness trends and the transformation taking place in the energy category. Our active lifestyle position is a global position with mass appeal. We are building upon our core business and leveraging opportunities and deploying our best practices. We have a winning portfolio strategy and team and a large, rapidly growing market that consumers want. We believe we will be able to navigate through the challenges ahead and we will continue to position and thrive in the transformation of today’s energy category. And additionally, I would like to thank all our investors for their continued support and confidence in our team. Thank you everyone. Have a great day. Stay healthy, stay fit.

[Operator]

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.