Celsius Holdings, Inc. (CELH) Earnings Call Transcript & Summary

Good day, ladies and gentlemen, and welcome to the Celsius Second Quarter 2023 Earnings Call. [Operator Instructions] At this time, it is my pleasure to turn the floor over to your host, Cameron Donahue, Investor Relations for Celsius.

Thank you, and good afternoon, everyone. We appreciate you joining us today for Celsius Holdings Second Quarter 2023 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 be given at that time. The company released the earnings press release earlier this afternoon, 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 can 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 August 8, 2023. These statements involve numerous risks and uncertainties, including many that are beyond the company's control. Except to the extent as required by law, Celsius Holdings undertakes no obligation and disclaims any duty to update any of these forward-looking statements. We encourage you to review in full our safe harbor statements contained in today's press release and our quarterly filings with the SEC for additional information. With that, I'd like to turn the call over to President and Chief Executive Officer, John Fieldly, for his prepared remarks. John?

Thank you, Cameron. Good afternoon, everyone. We thank you for joining us today. On our first quarter call, I highlighted that it was the first quarter in company history to exceed $200 million in sales. Today, I highlight for the first time in company history, we achieved over $300 million in a single quarter. Our record sales in the second quarter totaled approximately $326 million, an increase of 112% from last year's second quarter of approximately $154 million. In our North America business, revenue increased 114% for the quarter to $311 million, up from $145 million in the prior year second quarter. Celsius continues to be the top driver of growth within the energy category, both in dollars and unit growth in total U.S. MULOC energy for the last 52 weeks ending June 18, 2023, contributing over $665 million in incremental retail sales or 23% of the category growth and $204 million in incremental units, representing 35% of the category growth. Per IRI, in the 4 weeks ending as of June 18, 2023, in MULOC total energy, Celsius maintains the #3 energy drink brand in the United States, representing a new market share record in the company history in the category of 8.6%, doubling its market share of 4.3% in the year ago period. We continue to see growth across all channels, both tracked and nontracked, with our club channel sales hitting another quarterly record of approximately $68 million for the quarter ending June 30, 2023, up 120% approximately, compared to $31 million in the second quarter of 2022. Second quarter channel sales also exceeded our first quarter sales by approximately $20 million, which was driven by a full roll-up of our second new pack size of our Vibe energy pack going into Sam's Club and the first full quarter of our national rollout within BJ's. We also just hit a new record on Amazon with over $28 million in sales, up 108% from the prior period second quarter revenue of $14 million approximately. Celsius maintained its position as the second largest energy drink brand with approximately an 18.6% share of the energy category as of the last 14 weeks' period ending June 30, 2023, per Stackline, energy drink category data, total U.S. on Amazon. In addition, we continue to expand growth opportunities in nontracked foodservice channels and are gaining more distributions in colleges, universities, hospitals, hotels, eateries, casinos and more. Overall, foodservice represented and exceeds approximately 11% of our PepsiCo revenues, and we see this as an area of growth and scale in the future. We have been extremely happy with our PepsiCo partnership and see a long runway of growth ahead across a variety of channels, including expanded retail, convenience and foodservice. As highlighted in our earnings supplement for the 4-week period ending per IRI SPINS, total energy data ending June 18, 2023, as stated in MULOC, Celsius maintains the #3 energy drink position in the U.S. and now has an 8.6% market share, which doubled from the prior year's share of 4.3%. In addition, and according to MULOC, Celsius grew its ACV to a record of 96.8% versus 79.8% in the year ago period, which is a tremendous achievement by our teams and our partner with PepsiCo. And in addition, in convenience, Celsius has gained an additional 31.9 points of ACV growth versus the prior year ending period and resides at a 94.9% ACV compared with 62.9% of ACV in the prior year. This provides a tremendous amount of opportunity as we continue to gain greater availability across the country as we -- and in addition, as we continue to build greater awareness with our consumers. International sales grew 76% in the second quarter totaling $15.1 million compared to $8.6 million in the second quarter of 2022. We believe that there is a significant opportunity for incremental growth going forward with PepsiCo over the next 3 to 5 years. Although earlier in our process, we are mapping out rollout plans and continue to have discussions with our partners on opportunities for 2024 and beyond. While the U.S. transition has taken the majority of our focus to date, we do expect to announce additional international expansion opportunities and plans in the future. With that said, we continue to work towards early 2024 for some opportunities to roll out internationally with 2023 being a year of planning around logistics, production, distribution, et cetera. The goal will be to create a blueprint in a handful of countries in which -- in 2024 for further expansion within '25 and '26. We will provide additional details as we continue to get closer to those dates. Beyond new markets, we are very excited about a number of innovations that our team has been working on throughout the year. We hope to -- some initial exciting launch plans in 2024 and beyond, and we'll provide additional insight as we get closer to those launch dates. The company achieved a record non-GAAP adjusted EBITDA of $78.1 million in the second quarter, representing approximately 24% of sales. This was driven by gross margin improvement by over 1,000 basis points from the year ago period to 48.8%, up from 38.5%. In addition, we saw continued leverage across our sales and marketing with a total of approximately 19.2% of sales in the second quarter compared to 21.1% in the prior year. This leverage was more of a product of accelerated sales as we did increase our spend in the second quarter, as we outlined in our first quarter call. In addition, we have seen some savings as we have rolled out slower pace against our headcount, resulting in our initial budgeted expectations. We will look to add additional headcounts across the back half of 2023. Jarrod will walk you through in more detail some expectation around this area. Celsius was the leader in unit growth over the last 12 weeks ending June 18, 2023, per IRI for the entire beverage category, contributing over 17% of unit growth in LRB, which is liquid -- total liquid refrigerated beverages. As the company continues to gain new consumers, we believe they are unique to the energy category, which further increases the value of each of our customers. With this proximity, equal mix of male and female customers, the average age demographic is 18 to 45 plus, we are expanding the energy category with expanded consumer base and usage occasions to Celsius consumer, making it a daily part of their active lifestyle with consumption patterns that are similar to coffee than traditional impulse purchases with legacy energy drink brands. To close my prepared remarks, both on a dollar and unit growth, Celsius is the industry leading in the category with tracked channels showing acceleration year-over-year. Our customer is unique, expanding the category to new consumers while they're increasing their dollar spend on Celsius. This is even further evident by our record sales in the club channel and on Amazon as well as the rapid growth in ACV expansion we've seen and reported in MULOC. With our top line growth of 112% for the quarter, we saw over approximately 400% growth in operating income, showing the leverage in our operating model to drive further shareholder value. I will now turn the call over to Jarrod Langhans, our Chief Financial Officer, for his prepared remarks. Jarrod?

Thank you, John, and thank you all for joining us. It was another great quarter where we continued to exceed both internal and external expectations. Not only are we continuing to benefit from the distribution system of Pepsi, but we're also delivering on increased SKU count, improved placement, increased displays and continuous improvement within velocities. As we look to Q3 and beyond, we will continue to invest in our growth, and we have multiple opportunities and strategies that we will be testing in the back half of the year. In addition, we have seen the opportunities of leverage across our business with gross margins, operating margins and EBITDA margins all improving quarter-over-quarter. Before I jump into the results, let's start with some administrative comments. In regards to progress on clearing our material weaknesses, as things stand through the second quarter, we have seen very good progress, and we have a clear path ahead of us. With that said, we will not be able to provide full clearance until we get through the entire year and complete all testing. In terms of legal updates, in mid-July, we reached a preliminary agreement to settle the securities class action suit. The agreement provides for a single cash payment of $7.9 million in exchange for the release of claims. Although we were confident that we would have prevailed, our leadership team felt that our time was best spent on growing the business and the many opportunities ahead of us as opposed to replaying challenges that existed as a result of the pace of our growth from a few years back. Regarding the SEC review, we will continue to cooperate with any inquiries or requests that are received. With that said, we do not have any further updates at this point in time. Turning to our second quarter financial results. Our second quarter revenue for the 3 months ended June 30, 2023, was approximately $326 million, an increase of 112% from $154 million for the 3 months ended June 30, 2022, driven by our North American business, where second quarter revenues were $311 million, an increase of 114% from the same period in 2022. International revenue grew 76% to $15 million as we saw a recovery of the business from the challenging environment that existed in the prior year. The acceleration of growth relative to Q1 in North America sales volume can be attributed to several key factors. A primary driver has been our successful integration into the Pepsi distribution system, which has resulted in continued growth. Notably, we have experienced consistent and robust expansion in traditional distribution channels and club channels with SKU increases and SKU placement contributing significantly. Moreover, our products have found their way into several new channels within [ CNG ] and foodservice, further fueling the sales growth. Additionally, following substantial growth in our ACV, we have observed a notable increase in product velocity. During the quarter, we did not see a significant increase in days inventory outstanding within the Pepsi mixing centers relative to the end of Q1 2023 as the changes likely contributed less than $5 million in incremental growth and therefore, was not a key driver of our growth in Q2. In looking at our promotional allowance, we continue to see a consistent rate relative to prior quarters. As we look to the back half of the year, we would expect this to see some increases as our 100 Days of Summer program will incorporate incentive programs that fall within this bucket as opposed to the sales and marketing bucket. As a result, there will be some movement between promotional allowances as a percentage of sales and sales and marketing as a percentage of sales in Q3, which, in essence, will reduce the top line, but overall, will not impact expectations around total EBITDA or net income as it is simply where the spend is classified within the P&L. Gross profit for the 3 months ended June 30, 2023, increased 168% to $159 million, up from $59 million in the year ago quarter. Gross profit margins in the second quarter were approximately 49% of revenues compared to approximately 39% for the prior year second quarter. The improvement in gross profit margins is attributed to lower package and raw material unit costs, reduced product waste and scrap and improved inbound and outbound freight efficiency. Q2 was the third quarter that we were operating within our new distribution system, and we continue to drive efficiencies and optimization within the system while maintaining our #1 goal of keeping the shelf stocked in order to meet the consumer demand. And looking towards the second half of the year, we believe that we will operate with gross margins in the mid- to high 40s. The second quarter saw improved freight lanes as a percentage of net revenues relative to Q1. This is one area that we will continue to monitor but has the potential to fluctuate during the back half of the year. In addition, increased promotional allowances will put some pressure on the top line relative to gross margins, both of which are driving our overall margin expectations. Sales and marketing expenses for the 3 months ended June 30, 2023, were approximately $63 million, an increase of approximately 93% compared to the second quarter of 2022. We saw increased marketing and sales investment during the quarter, but at the same time, saw our SKU count and velocities accelerate at a rate in excess of our budget, delivering good leverage across the sales and marketing expense lines. As a percentage of sales, sales and marketing was 19% compared to 21% in the prior year. On a full year basis, we will continue to invest in our sales and marketing expenditures and would expect to see some further increase as our 100 Days of Summer program only included 1 month in Q2 with 2-plus months in the third quarter. As we look to Q4, we are working on some strategic investment programs across the U.S., which will include programs with our distribution partner as well as specific sales and marketing activities beyond our budgeted pillar strategy, albeit we would not expect these opportunities and investments to exceed our historical sales and marketing spend from prior years. General and administrative expenses for the 3 months ended June 30, 2023, were approximately $32 million, an increase of 119% relative to Q2 2022. This increase was due to increased administrative fees such as legal as well as audit and other consulting fees. G&A expense as a percentage of sales was 10% for the second quarter of 2023 versus 9% in the prior year and versus 8% in the prior quarter, which is higher than expected primarily due to the class action litigation settlement accrual that was booked in Q2. Adjusting for this accrual, G&A was better aligned with historical rates. Looking at the first half of the year. Revenue for the 6 months ended June 30, 2023, was approximately $586 million, an increase of 104% from $287 million for the 6 months ended June 30, 2022. This was driven by our North American business, where first half revenues were $559 million, an increase of 108% from the same period in 2022. International revenue grew 43% to $27 million in the first half of the year. Gross profit for the 6 months ended June 30, 2023, increased 141% to $273 million, up from $113 million in the year ago first half. Gross profit margins in the first half were approximately 47% of revenues compared to approximately 39% for the prior year first half. The improvement in gross profit margins is attributed to lower package and raw material unit costs and improved inbound and outbound freight efficiency in the second quarter. As a percentage of sales, sales and marketing was 19% in the first half of 2023 compared to 22% in the prior year first half. G&A expense as a percentage of sales was 9% for the first half of 2023 versus 9% in the prior year same period. Focusing now on liquidity and capital resources. As of June 30, 2023, we had cash in excess of $680 million and net working capital in excess of $800 million. In the second quarter, we returned in excess of $30 million for the balances due to Pepsi, representing excess funds provided by Pepsi for our distributor transition and this reduced restricted cash on the balance sheet by the same amount. Cash flows provided by operating activities totaled $45 million for the 6 months ended June 30, 2023, which compares to $42 million in net cash provided by operating activities for the 6 months ended June 30, 2022. The increase in cash generation was driven by an increase in net income and improvements in working capital, offset in part by the reimbursement to Pepsi, which I just noted. Looking at inventory. Total inventory ended at just above $150 million, flat versus the prior quarter. This was driven in large part by the significant increase that we saw in our sales volume. As we look to the second half of the year, we will see production increases to accommodate the demand of the market. Going forward, we will continue to monitor inventory to ensure we are able to keep up with the significant growth we are experiencing. At the same time, we do see opportunities to continue to drive efficiency in our DIO as we move through 2023 and into 2024. This concludes our prepared remarks. Operator, you may now open the call for questions. Thank you all.

[Operator Instructions] And we'll take our first question from Jon Keypour from Bank of America.

Congratulations on the quarter. I guess to start, could you guys tell us anything you've seen in terms of exit rate out of 2Q and maybe what quarter-to-date has looked like so far?

Thank you. Appreciate the question. Teams did a great job in the second quarter being north of $300 million. We're really excited about the performance of the brand in our portfolio. We don't give any forward guidance right now. So -- but I will say that the company performed extremely well during the quarter.

Okay. If I could ask a follow-up. You guys mentioned the 11% of sales through Pepsi went into the foodservice channel. I was just wondering if you could -- I know it will be in the Q, but if you could let us know what the Pepsi size was. And I guess, how should we think about that channel going forward as the school year starts up pretty soon? Are you guys fully distributed across colleges? Is the opportunity in the next 2 quarters coming from that, specifically from colleges, or is it -- there's a lot more to be had? Are you guys also sort of distributed in the other foodservice channels you guys mentioned?

Yes. That's a good point, Jon. When you look at the quarter, 11% of our revenue through Pepsi was attributed to the foodservice division, and that does include college and universities, and we know that was pretty much down for the quarter. So with the summer and everyone getting back to college and campus and Celsius, we launched our Celsius University and graduated 170 students just 2 weeks ago that are going to be going back to campuses around the country. So really excited about that. That is correct. That volume is not included in that second quarter, and there could be some opportunities for us in Q3 as everyone gets back to campus. In regards to the overall revenue, it represented about 56.7%, was the Pepsi revenue. That's -- so you can take 11% of that number.

And we'll take our next question from Mark Astrachan from Stifel.

I guess my shout-out is going to be to whoever in marketing decided to invest in the fight this past weekend and the Miami FC sponsorship pre Messi. So hats off to that person or persons. On a question, I guess, from your standpoint, are you surprised at the level of distribution that you've achieved through Pepsi? If yes, what channels have surprised you? And then how do you think about where the distribution points can go in terms of where, in absolute -- or where, on a percentage basis -- or if you don't want to answer specifically, how to just broadly think about where we are today versus where you could be in certain key channels?

Yes. Mark, I mean, great question. I see the relationship with Pepsi has been just a great transition and a great opportunity. I think it's exceeded all of our expectations internally in our internal budgets. Again, hats off to our team or all of our sales team members and our marketing team members and operations and finance team. I mean it's really -- it's a 360 approach, the way we're able to tie in and just forge a really great partnership. And everyone on the PepsiCo within all their divisions have been very collaborative. We've been hiring a lot of staff members that work closely with them. It was a seamless transition. I think the biggest opportunity we saw going into the partnership was really gaining additional distribution in convenience and gas. And that's -- the biggest ACV gains that we've seen is in convenience and gas and then seeing the number of items being -- that are scanning at each point of distribution has increased as well. So the foodservice was something we weren't even thinking about, and having that represent 11% of our revenue just really surprised us. I think we know Celsius is being consumed outside of that traditional energy drink usage occasion, pairing it with food and those of the likes. So that was -- I mean, we saw that as an opportunity, but we didn't think it would be as large of an opportunity as it is today, representing 11%. And then we talked about in the last to Jon at Bank of America in regards to college and universities are really going to be opening up next month. So that was a big surprise. And everything is going extremely smoothly with the partnership, and we look forward to a bright future together.

Got it. Okay. Maybe a similar sort of question but put differently. So the shelf space that you're getting and total distribution points increasing obviously a lot, how much of that is coming from other energy brands versus incremental space in additional coolers? And what do you think the opportunity is for the latter, assuming that, that's a contributing factor here?

Yes. I think that's a great point. I know in the latest IRI MULOC data as of June 18, 2023, we had about -- in the last 4 weeks, we had about 14.6 [ facings ] in the U.S. So that is a sizable increase from where we started the year at. And those resets really helped with a lot of our retailers. We did have some summer cut-ins with variety packs, which added to that number as we're heading in -- as we're going through summer. The coolers have really helped. We have -- our teams have been working very collaboratively with Pepsi, not only going in some of the PepsiCo energy coolers, but also Celsius-focused and dedicated coolers that we've been investing in and placing around the country. So I would say it's a mix. Whatever the shelves or the planograms, the way they were adjusted in the first -- beginning of the year, I'm not sure we took space from other brands in regards to like midyear summer resets. But it seems like we did gain incrementality. We are hearing from a variety of buyers. They're looking at further -- potentially reducing maybe some juice -- the juice-coffee category, also potentially looking at some CSDs to give more space to energy as they look for the resets in '24.

And we'll take our next question from Peter Grom from UBS.

So John, you kind of touched on this a little bit, but I would love to kind of get some updated thoughts on the international rollout that you outlined last quarter. Just any views on potential markets. How do you think about the market share opportunity over the next couple of years? And just -- it's probably hard to do right now, but just any parameters you can provide in terms of how we should think about the contribution to growth looking ahead would be really helpful.

Peter, it's Jarrod. If you use one of our competitors that you guys have available data for as a proxy, they run about 35% to 40% of their revenues in the international markets. So I think that's a good barometer for the eventual size of the prize. Obviously, we've got work to do to get any kind of scale internationally. We are working with our partner on a number of opportunities to expand across the globe. We have mentioned we'll probably focus on the energy categories or energy countries that are more familiar with energy as opposed to trying to go in and creating the category. In terms of timing, we're working through a number of things. We would expect to launch some opportunities in early 2024. But we're going to hold off until we get closer to that time period before we start announcing plans and in part due to competitive measures because we've got to keep some of that close to the vest for now. But we see it as a big opportunity over the next 3 to 5 years. We'll have more data available as we get closer to the end of the year and closer to the launch period.

Super helpful, Jarrod. If I can just follow up on gross margin. Obviously, very strong. But I think back in May, the expectation was for 40% or mid-40% gross margin. So can you maybe -- you talked about the drivers of the expansion, but can you maybe just help us understand the drivers of the upside versus kind of what you outlined back in May? And then looking ahead, I think you mentioned -- I may have misheard this, but I think you mentioned mid- to high 40s gross margin. Is that simply conservatism? Or is there a reason why margins would kind of moderate sequentially versus what we just saw here in the second quarter?

Yes. When we were -- back in December and -- or actually last November, we were talking about mid-40s as kind of the target. As we did our Q1 call, we talked about probably on the low end of the mid-40s in the first half of the year and the high end of the mid-40s in the back half of the year. I think we did see some really good leverage across our finished goods, but also, I think we had about 100 basis points of improvement within freight, which was very helpful. So I think there is some opportunity to maintain where we got to. Now the freight is kind of a bit of an outlier. The goal is to be closer to the freight rate that we were at this quarter, but there is still -- that is still kind of a variable that we're not comfortable locking in at the moment. So there could be some volatility there. We also have some opportunity from a slotting and -- perspective and from, call it, a contra-revenue perspective in the back half of the year to push some sales and to push further growth. So that could put a little bit of pressure on the margins, which is kind of why we were pointing to more of, call it, mid-40s, back on to that kind of high end of the mid-40s as opposed to going higher from that perspective.

Congrats again on the great results.

And next, we'll go to Jeff Van Sinderen from B. Riley.

Let me add my congratulations on strong metrics for the quarter. How much do you think Q2 benefited from stocking ahead of the summer seasonal sell-through peak? And any sense you have of product inventory levels in the channel? I realize that's a really tough question. And then how are you thinking about sales growth for Q3, whether you think it would moderate because maybe there was a little stocking in Q2 or just the sell-throughs are so strong that there's no reason that it would moderate?

So I'll take the first part of that. From a DIO perspective, we're pretty consistent. I mentioned that on my prepared remarks, would have been less than a $5 million kind of benefit in the quarter. So really, the DIO over the course of the quarter when we're looking at Q1 and Q2 was pretty consistent. We would hope that, that kind of rate would stay the same in Q3 from a DIO perspective in terms of kind of growth and depletion and those kind of things.

Yes. When you look at where we are, Jeff, I think if you look at the second quarter, the numbers, just really solid results all the way around. We saw velocities expand slightly. We saw the distribution grow, number of items per store grow. We're really pushing on a variety of marketing vehicles in the quarter for Q3. We talked about the MLS opportunity that we just recently aligned with as well as the recent Jake Paul fight over the weekend, lots of activation, social radiation. The teams are doing really well. We're in 100 Days of Summer program. So really excited for the summer. I mean we're watching it. We'll have to see how everything pans out for the rest of the quarter here. But based on the latest data and scan datas that we were seeing, it looks like we're -- we'll continue to maintain on trend.

Yes, pretty good there. Do you have enough production capacity, do you think, to meet demand? And since -- we did notice a couple of stock outs in the club channel, obviously, a high-class challenge. How are you flexing the remedy where you get sort of -- I think it's a very small thing. I don't think it's happening widespread, but when you're getting those stock outs, how are you flexing the remedy those?

Yes. I think if you look at the percentage of our sales to our inventory balance, I think we're in a pretty good shape when you look at that on a percentage basis as we're maintaining. But right now, I have the operation team trying to produce enough product, and I have the sales team trying to outsell them. But things are going well. I think we've got a good inventory balance. I think we did have some short shipments in the quarter, but we're still shipping 95%-plus shipping rates. So I think we're in really good shape there. We might have a couple of sporadic out of stocks during the quarter in certain markets. But otherwise, it was all pretty much over 95%. And as we head into summer, we're looking to trying to build inventory at the moment slightly, but we're in good shape. We have about 17 co-packers and partners around the country. And we're able to continue to keep up with demand plus.

And we -- as John noted, we just onboarded a couple of co-packers as well so -- to get up to that 17 number. So we're in good shape in terms of having the capacity and having the co-packers that we need, and we'll actually look to build out what was once a six orbit model, looking to make that more of an eight orbit model over the course of the back half of the year. So from a capacity perspective, we're in great shape. We've onboarded some additional partners. And so we'll make sure that shelves are stocked in Q3 and Q4.

And we'll take our next question from Michael Lavery from Piper Sandler.

Just as a consumer, I've noticed some but growing number of secondary placements, including some of the branded fridges. And you touched on this in your prepared remarks, but can you maybe give a sense of how big a push you have behind that? And maybe that, coupled with just -- as you've had your 3 quarters into Pepsi distribution, as you come up on resets, another round, are you getting kind of a second push as the momentum has been so much stronger? Just some -- what's some of the distribution upside ahead and how much is some of the secondary placements or the branded fridges a big part of that?

Yes. No, Michael, that's a great question. And in regards to building a brand, especially in the energy category and just in the beverage category in general and the competitive nature, we've got a lot of great marketing. We're reaching consumers on the top funnel, walking them down for -- to drive that awareness. And then most importantly, we got to get what they call the lips and create that loyalty, what you get when you connect the consumer with Celsius. So the secondary displays are extremely critical as we continue to grow within the category. We have a variety -- all of our sales team members are really focused on those secondary placements. Most importantly, the cold placements are extremely critical. What we're doing is capitalizing on that impulse purchase opportunity that's out there, cold checkouts to create that connection with the consumer and most importantly, create that loyalty because we know we have a really high loyalty rate once a consumer tries, which we're really excited about. The Celsius coolers have been a big push. There's a variety of them out there. I think the biggest opportunity when you look ahead is further gaining additional SKUs in cold placements. I know a lot of the cold placements of some of the larger chains maybe in grocery and mass is somewhat limited to only a few flavors versus some of the larger convenience store chains now. We're getting closer to almost a full shelf in a lot of these locations within certain regions of the country. So that's going to be a big opportunity is the cold placements. So that's what our teams are focusing on. Next year for resets, we're talking with buyers now. We're looking for -- really to gain more cold availability and secondary placements really within that outer wall of the stores, so you get the higher foot traffic. But that's really critical as we continue to grow forward. We need to continue to capitalize on that. I don't know if you've gone into Circle K, we just launched our [ Cosmic bot ]. It's been out for a few weeks. And we did have [ K stack ] displays in all Circle Ks, which was great. And also, the 7-Eleven has been a big supporter of the brand as well, providing secondary placements.

Okay. That's great color. And can I just have a clarification question on 3Q? You mentioned some of the greater promotional spending tied to 100 Days of Summer, but I guess 2 things. One, maybe could you quantify that at all? Or either way, would we be right to think that if it's a promotional price reduction, we would see that in the scanner data as well. It's not an adjustment from that, that we would need to make, right?

It's a mix. There's -- I won't get into a gap too deep with ASC 606. There are certain things that you can do from an incentive perspective that gets recorded as a contra-revenue. It may not be something, let's say, buy 2 for 4 type concept. So there's another number of incentives that you can offer through that type of activity that would still be put there, and you might not pick it up in the scan data. I'd say probably the easiest way to look at it is if you kind of -- within our 10-Q, which is also filed, so you can pull it now. But if you take a look at kind of the promotional activity, the promotional dollars that we spent relative to -- you have to do it based off gross sales, so you got to take the promos, add it to our net sales number, and that will give you kind of the percentage that we've been running. We've typically been running around 20%. So I'd look for that to go up a bit when we look at Q3.

And we'll take our next call from Gerald Pascarelli from Wedbush Securities.

So I just -- I had a clarification I was hoping that you could help me with on distributor inventory levels. So just to make sure I'm understanding this correctly, you had $20 million to $25 million last quarter that was shipped into the Pepsi distribution system ahead of summer. I think you called out $5 million on the call today. So just to be clear, like -- is this expected to reverse? Or is it one of those things like given kind of how new your partnership is with Pepsi, they're still trying to find the right inventory levels and there's a chance that there's essentially no reversal in these, in particular, given how strong your consumer takeaway trends have been? Just any incremental color you could provide there would be great.

Yes. So it was less than $5 million. That was just rounding up. So it was kind of de minimis this quarter. So the DIO is very consistent quarter-over-quarter. And that goes back to -- in Q4, we felt inventories were low. So they are at a level that we would prefer they stay. But obviously, it's part of the partnership, so it's not just us. Now will that change? It could. Again, right now, Q1 and Q2 have been consistent from a DIO perspective. We'd expect that to continue on to Q3. When we get to Q4, I'm not sure if that will stay at. It's kind of what I'll call, a preferred run rate or if it would go down, that's something that our partner will have to make that decision in terms of how they want to kind of end the year prior to moving into the Q1 2024.

Perfect. Just one more for me on nonmeasured channels. I know that in club, you're getting some distribution with Sam's, with BJ's, which is new to this year. But you really did expand your distribution in Costco over the course of 2022. And I think that where revenues came in for 2Q were a little higher certainly than I would have expected as -- in addition to your revenues in Amazon. So maybe just some incremental color on the drivers there. I assume Costco has probably the Vibe variety pack relative to the prior quarter, but any color you could provide there would be great.

Yes. Gerald, I'll just jump in. You are correct. We did have that Vibe pack rollout. It's been really successful. So now we have 2 packs in Costco. We also did some promotional activities and then with the rollout of Sam's. So that's why we're seeing that club channel have a really good quarter within the second quarter, and we'll see how that progresses into Q3.

And next, we'll go to Jim Salera from Stephens.

I wanted to dig down a little bit on the club channel. Do you have any sense for how many of the consumers that are purchasing in club are incremental to the brand, given that it's probably a different consumer than would be in a c-store or maybe even a traditional [ FEM ]? Do you have any sense for how many of them are new or have trialed it in a single-serve option and then are buying the pack in club?

Yes. Jim, I think that's a great point. And if you've been tracking the company for some time, when we expanded into the club channel, it was really like all tides rose at the same level. So it has been incremental to our overall sales, and we haven't seen any cannibalization. So it does seem like it's incremental to our overall revenues.

What would drive -- so are they consumers that are new to the brand and are just buying -- because I would think buying a larger pack size is like -- of an 18-pack is something that core energy drink consumer would buy, but you guys have done a very good job of kind of reaching outside that core energy drink buyer. So do you have any sense for -- is this like a traditional coffee or a tea consumer that's trying Celsius because it has a different positioning than the traditional energy beverage?

Yes. I think you really kind of nailed it. That's something that's unique about Celsius is where our demographic of 50-50 male/female, our 18- to 45-plus consumer. One thing at the club channel, you're able to gain -- we have lots of sampling activities as well as we do see it as an incremental consumer, somewhat older as well, we've seen. Still getting more data points there, but I think that's one thing that differentiates Celsius from maybe other traditional energy drinks is really when you look at the opportunity we have on the different age demographics, the incrementality of the energy category. And then when you look at -- I talked about it in my prepared remarks, about the percentage of growth within LRB, which is liquid refrigerated beverages, just all of those beverages, we're really a unit growth driver that we saw in the last data. So truly incremental. It's really an exciting time. The club channel has been a great business for us. And it's something we're monitoring closely. It doesn't seem like it's cannibalizing at all.

[Operator Instructions] And we'll take our next question from Sean McGowan from ROTH.

First, a quick clarification. Is 100% of that legal settlement in the G&A line?

Yes, that's correct, Sean.

Okay. Then I wanted to get a little bit more color on sales and marketing. I think it would be fair to say that as a percentage of revenue, that came in lower than -- it seems like it was [ again ] lower than you expected. Did the dollar spend come in lower than expected? Or was that in line? And kind of give us a little bit more color, if you can, on what we should expect to see in the balance of the year given some of the comments you've made about promotion that would be a contra-revenue.

Yes. This is Jarrod. I'd expect some of the -- where we would kind of position the sales and marketing to be actually up in contra-revenue. We have been running between that 19% and 20% as opposed to close to that 22%. So we have been seeing really good leverage come through. Some of that is the sales have exceeded expectations. And some of that is we are getting better leverage through the system. And then the other piece is from a headcount perspective and a budgeting headcount perspective, we're adding heads but not at the same clip that we thought we may have needed to. So we will still continue to add headcount, which will drive a little bit of cost. Some of that will get moved up into contra. So we do -- we will look in the back half of the year to spend that kind of historical rate close to that 22%. But again, some of it will be bucketed up in contra-revenue. And then really, we just need to get the headcount in to continue to drive the velocity and to drive the business. From a -- if you go just specifically to marketing, call it, advertising, we have actually been spending a little bit ahead of historical rates. So it's in some of those other buckets that we've seen kind of savings like storage and warehousing and some of the other sales lines where we've been able to really leverage the system. And our DIO, our internal DIO has gone down a bit. And so we've been able to leverage that across some of the sales and marketing spend as well.

[Operator Instructions] And we'll take the next question from Anthony Vendetti from Maxim Group.

This is [ Thomas ] on for Anthony. So just kind of you guys just mentioned and you talked about it in the prepared remarks, but on the headcount additions, it seems like it might not be super aggressive in terms of expanding headcount, but just looking to get a little bit more color on where we might expect to see these headcount additions and kind of what you hope to achieve through this.

Yes. [ Thomas ], thank you. We're looking at applying additional resources as we continue to grow and scale. We're not going to, just a strategic standpoint, identify where we're adding additional resources within our operations, marketing and sales. But we do have additional headcounts planned for the back half of the year. We will be further building out our teams. And I did mention earlier, we did add 170 college university students to our university program that are heading to universities around the country right now.

Congrats on the quarter, guys.

[Operator Instructions] And there are no further questions at this time. I'd like to turn the floor back to John Fieldly for closing remarks.

Thank you, Karen. Thank you -- on behalf of the company, we'd like to thank everyone for their continued support and interest. Our results demonstrate our products are gaining considerable momentum. We are capitalizing on today's global health and wellness trends and the transformation that's taking place today 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 that consumers want. I would like to take this time to thank our investors for their continued support and confidence in our team. The company will be attending several upcoming investor conferencings throughout the month of September, including Piper Sandler's, Barclays, Wells Fargo and B. Riley investor conferences, and we look forward to seeing many of you there. Thank you for your interest in Celsius. Stay healthy and live fit.

Thank you. Ladies and gentlemen, this does conclude today's teleconference. We thank you for your participation. You may disconnect your lines at this time, and have a great day.