Celsius Holdings, Inc. (CELH) Q4 2022 Earnings Call Transcript

Celsius Holdings, Inc. (NASDAQ:CELH) Q4 2022 Earnings Conference Call March 1, 2023 4:30 PM ET

Company Participants

Cameron Donahue - IR

John Fieldly - President, CEO & Chairman

Jarrod Langhans - CFO

Conference Call Participants

Kevin Grundy - Jefferies

Mark Astrachan - Stifel, Nicolaus & Company

Kaumil Gajrawala - Crédit Suisse

Jeffrey Van Sinderen - B. Riley Securities

Peter Grom - UBS

Jeffrey Cohen - Ladenburg Thalmann

Jonathan Keypour - Bank of America Merrill Lynch

Anthony Vendetti - Maxim Group

Sean McGowan - ROTH MKM Partners

Gerald Pascarelli - Wedbush Securities

Operator

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

Thank you, and good afternoon, everyone. We appreciate you joining us today for Celsius Holdings Fourth Quarter 2022 Earnings Conference Call. Joining me on the call today are John Fieldly, President and Chief Executive Officer; and Jarrod Langhans, Chief Financial Officer. Following the prepared remarks, we'll open the call to your questions and instructions will begin at that time.

The company released our earnings press release earlier this evening, and all materials will be available on the company's website, celsiusholdingsinc.com. As a reminder, before I turn the call over to John, an audio replay will be available later today and will be accessed with the same live webcast link in our conference call announcement press release.

Please also be aware that this call may contain forward-looking statements, which are based on forecasts, expectations and other information available to management as of March 1, 2023. These statements involve numerous risks and uncertainties, including many that are beyond the company's control. Except to the extent as required by law, Celsius undertakes no obligations and disclaims any duty to update any of these forward-looking statements.

We encourage you to review in full our safe harbor statements contained in today's press release and our filings with the SEC for additional information. With that, let me turn the call over to President and Chief Executive Officer, John Fieldly, for his prepared remarks. John?

John Fieldly

Thank you, Cameron. Good afternoon, everyone, and thank you for joining us today. We achieved record sales for the fourth quarter of $178 million, an increase of 71% from last year's fourth quarter of $104 million. This revenue growth was driven despite approximately $15 million to $20 million we discussed in the third quarter that was driven by the inventory pipe fill by the Pepsi system in the preparation for distribution transition that began October 1, 2022. We believe the distributor inventory levels are now back to normalized levels as we began the first quarter of this year.

For the full year, sales totaled $654 million, up 108% or $340 million growth compared to $314 million in 2021. According to the January 1, 2023, 52-week IRI energy category SPINS MULO+C data, representing the calendar year for 2022, Celsius is the #1 brand driver of growth in the energy category in all of 2022, responsible for 22% of the category dollar growth, driving $474 million approximately in incremental retail sales for the category.

We continue to see growth across all channels, including those non-tracked, with the club channel sales totaling over $138 million for the year ending December 31, 2022, which were up 247% compared to $40 million last year. We also hit record sales through Amazon in 2022, with full year sales of approximately $58 million versus full year sales in 2021, up $32 million, up 83% approximately. In addition, according to the trailing 12 weeks IRI MULO+C Total Energy as of January 1, 2023, representing the majority of the fourth quarter, Celsius is now the #3 energy drink brand in the category with dollar sales growing approximately 128% versus the same period in the prior year.

Our fourth quarter represented our first quarter since the commencement and distribution partnership with PepsiCo. During the fourth quarter, we had an additional $38 million in expense of sales and marketing related to termination associated expenses from prior distributors, which was recognized. Most of these distributors were transitioned by November 1, 2022, and in conjunction with approximately $156 million of similar book charges that were recorded in the third quarter.

For the full year, transition costs totaled $194 million associated with -- mainly associated with distributor termination costs. This completes our distributor transition to the PepsiCo network, and we do not anticipate any further material changes going forward. We have been extremely happy with the transition, both from our PepsiCo partner as well as with our Celsius team. And I'd like to thank all of our previous distributors for their amazing work that they did helping us build the Celsius brand, especially through these challenging macroeconomic times over the last few years.

As highlighted in our earnings supplement for the 4 weeks period and according to SPINS and IRI Total Energy as of January 1, 2023, in the MULO+C, Celsius is the #3 energy drink with a $6.4 share in the energy category versus $3.4 share in the year ago period, with an ACV now reaching approximately 89.7% versus 59.6% in the year ago period. In addition, in the convenience channel, Celsius has seen approximately a 96% increase in ACV growing 89% compared to 45.3% in the year ago period.

We see substantial growth opportunities and convenience on a go-forward basis. In addition, in the foodservice channel, we have now expanded over 1,600 colleges and universities and over 1,600 health care locations in the United States. And we're also continuing to drive authorizations with key Pepsi customers such as the Marriott and Hilton as well as travel and airport segment and casinos, which are all incremental to the brand. International sales did see a 38% growth in the fourth quarter, totaling $11.5 million compared to $8.3 million in the fourth quarter of 2021. We believe there is significant opportunities for international growth going forward with PepsiCo.

While we just began our distribution partnership with Pepsi and the initial focus has been on the U.S. distribution transition to their network, we have begun initial discussions and we see significant opportunities to capitalize on a global scale in the future, reflecting the changes in consumer preferences for better-for-you offerings.

While the U.S. transition has taken the majority of our focus to date, we do expect to announce additional international expansion initiatives in additional countries in the future. Turning to our gross profit. Gross profit for the quarter increased approximately 90% in the fourth quarter to a record for the quarter of $79 million, up $42 million in the year ago quarter.

Our gross margins for the quarter totaled 44.4% and increased approximately 445 basis points from the prior year. As discussed on our last earnings call, we reiterate our expectations for continued sequential margin percentage improvements as we further gain efficiencies through our supply chain. And as stated on our last call, our goal was to achieve a mid-40 gross profit margin upon our exit of 2022, which we have achieved.

The improvement was made despite the significant growth we saw in the club channel as this channel has a story had lower margins due to secondary repacking facilities, which is required for the pack size. We continue to initiate production efficiencies to improve margins in this channel, including working with our co-packers to transition to in-line packing. So the product doesn't have to be moved to a secondary location facility.

In addition, we are working to increase our pack size from a 15 pack to an 18 pack size through this transition, which started in the fourth quarter. We did launch a second SKU of multipack in the fourth quarter at Costco and in the first -- through -- and will continue through the first quarter of 2023. And we launched a second SKU also at a club pack at Sam's Club. And in the first quarter of 2023, we are fully rolling out through BJ's nationally.

The company does see opportunities to drive incremental efficiencies in 2023 and beyond from both the expected improvements in the club channel, in addition to with our transition from a significant number of independent distributors to PepsiCo's distribution. This will allow our team to consolidate sales, marketing and distribution efforts, which will have associated cost benefits, which we expect to recognize and leverage in the future.

International third-party back data continues to show accelerated growth metrics, and we are confident that Celsius will continue to drive sales even higher as we increase our ACV across channels through additional launches with new national retailers and independent chains and further leveraging our new partnership with PepsiCo.

Consumer demand for Celsius on a dollar basis reaccelerated to the fourth quarter of 2022 and into the first quarter of 2023 from the initial distribution shift, which started October 1, 2022. The most recent period Nielsen scan data and Energy reported as of January 28, 2023, so Celsius sales were up as of the 4 weeks, 136% year-over-year, 129.8% for the 12 weeks ending, 127.5% for the fourth quarter.

This compares to the energy category, which grew approximately 17.1% for the 4-week period, ending 18.8% for the 12-week period ending and 10.8% for the fourth quarter over the same period. On Amazon, Celsius is the second largest energy drink brand with a 16.94% share in the category, ahead of Red Bull, which is at 11.71% share and just behind Monster, which is at a 26.38% share year-over-year periods as of February 11, 2023, per Stackline, Total Energy, Total U.S.

Amazon full year 2022 sales hit a record for us at $58 million versus the prior year, which totaled $32 million, which, as we stated earlier, was up 83%. We see great opportunities as we continue to leverage consumers in the omnichannel world. The company has plans to acquire place an additional 15,000 dedicated branded Celsius coolers in 2023, which will bring our total dedicated Celsius coolers in the U.S. to over 20,000 by the end of this year of 2023.

This will be the incremental to the additional co-placements we expect to gain as we discussed before in the PepsiCo energy dedicated coolers, which provides an additional incremental up to 50,000 additional placement opportunities. Our U.S. store count now exceeds over 210,000 locations nationally, growing approximately 20% from the third quarter, with additional expansions planned through 2023, accelerated by the PepsiCo distribution agreement.

Before I turn the call over to Jarrod, I want to outline some key pillars the company is focusing on to drive further shareholder value. The first pillar is top line growth, which includes increasing the number of stores and channels that carry Celsius. New retailers, national expansions within existing channels, such as our recent national expansion, as mentioned earlier, with BJ's and also a national rollout, which starts this quarter -- the first quarter of 2023 with ALDI.

In addition, leveraging and expanding new channels such as foodservice and college universities, also increasing the number of items carried per location, focusing on key drivers to drive velocity rates and the opportunities to leverage with international growth. Our second pillar is the operational excellence. These drivers include a focus on gross margin. Our focus on gross margin will be driving efficiencies and leverage as we scale, leveraging our orbit model -- our distribution orbit model to drive more efficiencies.

As an example, shipping from co-packers straight to distributor, optimizing freight warehousing costs, vertically integrating and improving our scrap and waste efficiencies. Also focusing on sales and marketing initiatives to gain further leverage, optimizing our PepsiCo partnership and in the G&A, optimizing our revenue per employee, leveraging software optimizations and focusing on building our internal and expertise internally to drive scale.

The driver of the final pillar is cash generation and EBITDA leverage. Goal of driving increased EBITDA and as we scale. I close my prepared remarks with the PepsiCo transition now complete, Celsius is positioned for the next phase of growth with further opportunities as we begin to expand international markets to further capitalize on our future and optimize our leverage, driving further value for our shareholders. Celsius is now established as a leader in the energy category in the United States, driving growth for the entire category at all of 2022, with incremental opportunities to further drive growth to 2023 and beyond. I will now turn the call over to Jarrod Langhans, our Chief Financial Officer, for his prepared remarks. Jarrod?

Jarrod Langhans

Thank you, John. Before jumping into the financial results for the year and the quarter, I'll cover a few administrative items. It was another very exciting and busy quarter. For the quarter, we successfully integrated into the Pepsi distribution system going from an ACV in the mid-60s to the high 80s very quickly. In addition to moving to the Pepsi system, we processed the majority of our prior distributors terminations, including final payments, inventory returns, et cetera.

As John mentioned, the transition continues to go very well, and we are excited to see the results of this long-term partnership. So let's walk through some accounting updates. Let's start with transition-related expenses. Included within our annual results, we recorded approximately $194 million of termination expenses associated with termination notices issued in 2022, primarily related to the transfer of distribution of Pepsi.

As of the first quarter of 2023, we have effectively transferred all activities that we had set out to transfer to Pepsi, plus a few additional areas. During the fourth quarter, we saw some increases in inventory reserves and other related costs as we transition from our prior distribution network and into the Pepsi system. As a part of our contract with the prior distributors, we accepted return product and had to make decisions on the product in terms of taking the product back or disposing of the product.

In a number of instances, we chose the donator disposes the product. In addition, in the fourth quarter, we made a decision to overinvest as a part of the integration into the Pepsi system in order to support the significant expansion. More on that later.

Now let's talk taxes. As a reminder, from our Q3 call, our effective tax rate for the year deferred from the statutory federal income tax rate of 21%, primarily due to the tax impact of the $282.5 million Series A preferred stock value adjustment, which is being expensed over 20 years for book purposes. As this expense is nondeductible for tax purposes, we recorded a deferred tax liability in the third quarter as a discrete item.

The effective income tax rate for the year was also impacted by a disallowed stock-based compensation expense, state and local income taxes and the release of certain state income tax reserves. Moving on to a few legal items. We have progressed on the settlement associated with our can label. As of the middle of February, the notification process was completed, and we would expect to close this out prior to the end of the second quarter.

As many of you know, we received an unfavorable verdict in January of 2023 around litigation involving Flo Rida. We have incorporated a detailed discussion within our 10-K as well as a range of potential outcomes. We are in the process of appealing and believe that we will ultimately prevail. In regards to the SEC review, we continue to cooperate with any inquiries or requests that are received, but don't really have any updates beyond that.

Before moving to the results, I wanted to make a few comments on our internal control environment. We have significantly expanded our finance team, especially during the fourth quarter, and our control environment has seen great improvements across 2022. With that said, 2022 was a very busy year with our significant growth, Pepsi transition and new team members. And as a result, although we were able to make progress and saw many improvements, we were not able to get to a position where we could fully clear the material weaknesses from 2021. This is reflected in our 10-K.

As we look out across 2023, the team is focused on working towards fully clearing these items, and we will work diligently to get across the finish line. Turning to our fourth quarter financial results. Revenue was approximately $178 million, an increase of 71% from $104 million, driven by North America, where fourth quarter revenues were $160 million, an increase of 74% from the same period in 2021. The primary factors behind the increase in North American sales volume were related to our integration into the Pepsi distribution system as well as continued strong growth in traditional distribution channels, combined with an increase in an optimization of our product's presence across our footprint.

As a reminder, we discussed on our third call that revenue in the third quarter was elevated as a result of building inventories at Pepsi warehouses and distribution centers. This was a onetime pipe fill of around $15 million to $20 million. Gross profit for the quarter increased 90% to $79 million, up from $42 million in the year ago quarter. Gross profit margin in the fourth quarter were 44% of revenues compared to 40% for the prior year fourth quarter. The improvements in gross profit margins were due to lower average can prices, improvements in freight lanes from our orbit model and transition into Pepsi as well as pricing benefits.

Sales and marketing expenses for the 3 months ended December 31, 2022, were approximately $90 million, an increase of approximately 265%. This increase was primarily attributable to termination expenses of prior distributors in the amount of $38 million as well as an intentional increase in marketing spend versus budget in the amount of $15 million as we moved into the Pepsi distribution system.

With the huge gains that were made in ACV, we felt that it was appropriate to overinvest in marketing in support of this expansion. As a percentage of sales, sales and marketing would have been in line with historical rates had we not incurred the termination expenses and put forth the additional marketing investment. As we moved into Q1 2023, we expect our sales and marketing spend to be in line with historical rates as a percentage of sales.

General and administrative expenses for the 3 months ended December 31, 2022, were approximately $22 million, an increase of 54% relative to 2021. This increase was due to increased employee costs associated with building back shop that can scale as we grow as well as administrative fees such as legal, audit and other consulting fees. G&A expense as a percentage of sales was 12% for the fourth quarter of 2022 versus 14% in the prior year, which was in line with our annual rate. We would expect to see this area leverage during 2023 once we have fully built out the team.

Turning to our full year financial results. We had revenue of approximately $654 million, an increase of $340 million or 108% from $314 million in the prior year, driven by 126% revenue growth in North America. The primary factors behind the increase in North American sales volumes were related to continued strong growth in traditional distribution channels, combined with an increase in optimization of our products across North America as well as our transition into the Pepsi system.

Gross profit increased 111% to $271 million, up from $128 million in the prior year. Gross profit margins were also improved, up 66 basis points on a full year basis. We saw gradual improvement in our gross profit margins across the back half of 2022 as we saw improvements in our average can cost with less higher-priced international cans, more efficient freight lanes with our orbit model and also some pricing benefits.

Sales and marketing expense for the year ended December 31, 2022, were $353 million, an increase of $278 million or 372% from $75 million in the prior year. The largest increase was from $194 million of termination expenses to our prior distribution network. In addition, we had increased incremental marketing investment activities of roughly $48 million, saw increased employee costs of $8 million and had increases of $28 million across storage, distribution, broker costs and trade spend.

Sales and marketing costs as a percentage of sales were consistent year-over-year when excluding the $194 million in termination expenses and fourth quarter incremental marketing spend. General and administrative expenses were approximately $76 million, an increase of $18 million or 32% from $58 million. Employee costs for the year ended December 31, 2022, reflected an increase of $5 million as investments in this area were required to properly support our higher business volume in commercial and operation areas of the business.

Administrative costs drove an increase of $26 million, mainly related to increases in legal expenses, audit costs, insurance costs and other consulting fees. Depreciation, amortization and impairment had an increase of $3 million when compared to the prior year due to investments in operational equipment, mainly coolers and the impairment of the Func Food brand name, the increased expenses were offset by lower stock option expense in 2022, which was $21 million, a decrease of $16 million from the prior year period.

This change in stock option expense was mainly attributable to the revaluation of certain share-based payment awards that were modified during 2021. G&A expense as a percentage of sales was 12% versus 18% in the prior year. Excluding stock-based compensation, G&A expense as a percentage of sales was 8% versus 7% in the prior year. Focusing now on liquidity and capital resources. As of December 31, 2022, and December 31, 2021, we had cash of approximately $653 million and $16 million, respectively, and working capital of approximately $757 million and $169 million, respectively.

Included within the 2022 cash balance was approximately $39 million of restricted cash that represents $35 million due back to Pepsi, representing excess funds provided by Pepsi for our distributor transition and $4 million of remaining accrued payments due to former distributors. Cash flows provided by operating activities totaled $108 million for 2022, which compares to $97 million in net cash used in operating activities in 2021.

The approximately $205 million increase in cash generation was driven by continued growth in operations of the company as well as working capital benefits, including the timing of transactional costs associated with the Pepsi distribution transition. And looking at inventory, total inventory ended at $173 million, down over $18 million versus the prior year. We'll continue to carry additional inventory in order to make sure that we are able to keep up with the significant growth we are experiencing. But we would expect to continue to drive efficiencies in our DIO as we move through 2023.

With the business generating cash as well as the injection of funds from our PepsiCo partnership, we have sufficient firepower to take our business to the next level across the U.S. and eventually internationally in the coming years. This concludes our prepared remarks. Operator, you may now open the call for questions. Thank you.

Question-and-Answer Session

Operator

[Operator Instructions]. Our first question comes from the line of Kevin Grundy with Jefferies.

Kevin Grundy

First for me, I think just in the interest of clarity, just trying to reconcile a bit the performance in North America on sales growth relative to what we saw in the scan channels. I know a handful of moving parts here, not the least of which would be, Jarrod, the pull forward the $15 million to $20 million, which you quantified last call and mentioned again.

Jarrod, you also mentioned some product returns, which would be a drag. I guess kind of going the other way, you also had strong growth in club again. You had some distribution wins, which John talked about before. Maybe just comment a bit on the gap that we saw with North America up 74%. Nielsen channel is up very strongly, up about 130%. Can you just kind of reconcile the 2 for us a bit?

Jarrod Langhans

Yes, Kevin, if you look at the pipe fill that would have brought us up to in excess of 90% from a North American perspective. We are hoping a little bit to some of our bigger customers in terms of seasonality or in terms of timing. So I suspect there was also a little bit of working capital management at the end of the year, which would have pulled inventories down a little bit. So from that perspective, I think the scan data continues to be accurate.

If you look at Q1 and how we've done thus far, we continue to accelerate our growth and do very well. So I think there's a little bit of clunkiness around Q3 and Q4 with the onboarding and integration into the Pepsi system and the pipe fill and also some kind of year-end working capital type activities associated with some of our customers.

Kevin Grundy

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

John Fieldly

Yes, Kevin, great question. I think there's a lot of momentum, as Jarrod mentioned, especially in the first quarter of 2023. Our ACV, we finished the year right around 90%, give it right around an averaging 90% ACV, about 89%, as we talked earlier. Great execution through the transition with the Pepsi system. Keep in mind we still had some distributors that transferred over in the quarter. So it weren't purely 100% Pepsi system from that October 1 transition window.

But we do expect to pick up additional ACV points, especially with the spring resets that are coming ahead. We also have been very aggressive and gaining additional bank space has been out there. So the teams -- I just hats off to the teams working extremely hard on our key accounts team, gaining incremental distribution and also picking up new distribution as well. So we're really excited about the next resets coming out.

As I talked about earlier, we talked about BJ's as well and the club channel, non-tracked. I think there's opportunities there that's rolling out, also meaning incremental shelf space. And then in the alternative channel, foodservice has been a big opportunity for us. I just touched on the college and university where we have about 1,600 currently and then hospitals as well as around 1,600, but we're really just getting started in the foodservice business. That could be a considerable amount of upside, especially when we're seeing the usage occasion with Celsius really expanding.

So we're really excited right now. We're not going to provide forward-looking ACV guidance. But where it stands right now, we're in really good shape and look forward to a great 2023.

Operator

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

Mark Astrachan

Two questions for me, please. First is on just thinking about distribution, not ACV, but actual distribution points. Could you just talk about how you're thinking about where you're going in '23? We're close to spring resets at this point. What have you secured on a percentage basis?

And maybe more broadly, how do we think about where the product is going? Is it in existing energy coolers? Or are you moving into more dedicated performance functional, helpful coolers? That's the first question.

John Fieldly

Yes. Thank you, Mark. I'll jump in. In regards to distribution points, we talked about currently rightly around 210,000 as reported, but we are gaining considerable amounts of distribution incrementally in the nonreported as just talked about earlier, the foodservice. And then as Pepsi calls it, the OTS segment, which is the independent market, which Pepsi is really strong. And we talked about that in the third quarter being involved in their metals program, which is really their independent loyalty program. And that's going to be a great opportunity for us.

There's resets taking place for 2023 now. So that could add considerable amounts. We're -- there's over 150,000 additional doors or locations that are out there. So we're watching that closely, and there's definitely considerable upside. Then when you look at the reported channel segment, I think there's additional opportunities there in regards to Tier 3 and Tier 4 accounts and on a regional basis as well as we gain further ACV gains in a variety of new markets and territories for us.

In addition, to where the product is being placed, we're going core energy. So that's where we're mainly gaining our shelf space and doing extremely well, and the team has done a great job expanding that space, and we expect the next resets to be expanded with additional items per location. Also, I talked about the coolers that we're investing in. We anticipate by the end of the year to have over 20,000 dedicated Celsius coolers. And so that's a really great opportunity, and we've never had that before.

In addition to the PepsiCo energy coolers, which were total up to about 50,000, currently that gives us opportunity. So definitely opportunities ahead in 2023 to expand a number of stores, locations and coolers availability.

Mark Astrachan

Got it. That's helpful. And maybe just a clarification on some previous points. So I'm still trying to understand the puts and takes of the pipeline fill. So $15 million to $20 million of sales ahead of actual sales in the third quarter. So why wouldn't you add that to the fourth quarter be coming out of fourth quarter, fourth quarter is essentially just servicing what demand is, right? So that run rate should then be higher, right, because then you're servicing kind of what was there previously.

So I guess maybe put all together, I'm surprised sales were as strong as they were given that you had that headwind in the third quarter. So is the run rate we should be thinking about the number in the fourth quarter plus the $15 million? And then you made some comments about the inventory destocking as well in December. So kind of help put those pieces together, please?

John Fieldly

Yes. With regards to the comments that Jarrod and I made in the prepared remarks, when you look at the -- it's right around $15 million to $20 million what was incremental in regards to a price sales. So adding that to Q4, I think, gets you to kind of what we saw as a normalized run rate. We are -- there is some year-end inventory felt there was inventory control metrics or potentially there could have been. So we're watching the inventory levels very closely.

We don't have full transparency on the inventory levels, but we do think pulling forward that $20 million in Q3 that will be -- $15 million to $20 million in Q3 kind of gets you to a normalized level for Q4. Keep in mind there were several other distributors that were transitioning in the quarter too. So you're not looking at a full 100% distributor partnership with our PepsiCo leveraging the full power of the distribution of PepsiCo. So there's still some large markets for Celsius that were transitioning during that time. I don't know if you have any other comments, Jarrod.

Jarrod Langhans

Yes, I think we need a little bit of history, too, to understand some of the ebbs and flows in terms of the inventory management of our partners, in particular, our biggest partner to see kind of is a pull down something that's going to recur at the end of every quarter. And obviously, after we get to a couple of quarters, then we'll have a good and a baseline and it won't really be impactful because it will be more kind of like that onetime item that happens.

But at the moment, we're seeing great scan data, we're getting good pull-through across the board with our customers and our primary distributor. So we're seeing -- things are looking up. Q1 obviously is not as big as we expect when we get to Q2 and Q3. And Q4 and Q1 are probably more consistent with each other from a seasonality perspective.

Operator

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

Kaumil Gajrawala

Can you -- you alluded a little bit to some increased selling expenses related to some of these big distribution gains. Can you maybe just give us some context on how much was incremental? What's the right run rate in terms of how to think about selling expenses as a percentage of revenue during this phase of sort of this distribution boom? And then maybe more of a how we should look at it on a more of a run rate standpoint? .

John Fieldly

Yes, Kaumil, great question. We did invest through the transition. If you look at the -- we made a strategic decision, Jarrod kind of alluded to it in his prepared remarks about how we went over budget by about $15 million in the quarter, really supporting the distribution gains and the ACV gains. And the company has seen a considerable amount of increase in ACV going from October 1 to where we ended the year. We made it a strategic initiative to really continue to invest ahead of those ACV gains to make sure consumers know where we are, where they can purchase Celsius and continue to drive velocity.

So that was really key. I think it's very important we continue to invest with the expansion of the number of points of distribution and the ACV. I think when you look at historical rates, if you go back, we've been running around 23, 23.5. And if you back out -- in the fourth quarter, if you back out the $15 million that Jarrod was referencing, that was over plus back out the transition fees of about $38 million, you kind of get it back to that same run rate around 22% of revenue there.

So we're going to continue to invest in the brand, continue to build the brand, especially as we continue to increase the distribution, and we're really focused on driving velocity, especially heading into resets.

Jarrod Langhans

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

Kaumil Gajrawala

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

John Fieldly

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

Operator

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

Peter Grom

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

John Fieldly

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

Peter Grom

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

Jarrod Langhans

Peter, so this is Jarrod. So I think from a gross margin perspective, the idea was to exit the quarter at kind of that mid-40s, which we have. Actually, we kind of hit the mid-40s for the entire quarter. So we did see the improvements that we expect to come through. We're no longer beholden to the expense of cans that we had historically over the last kind of 18 months. We're seeing good opportunity within the freight lanes as we deliver products straight to distribution centers or mixing centers with Pepsi.

We're also seeing some other areas from a COGS perspective or raw materials perspective, where we're seeing some advantages or some benefits. So we think kind of that mid-40s throughout 2023 is still valid. Is there opportunity as we work through the year to do better? Definitely. But at the moment, we think kind of sticking with that is the way to go, seeing that we don't really know how the rest of the year will go when it comes to commodities and things like that.

But at the moment, we're confident in that mid-40s, and we're probably more on the side of seeing opportunities than we are seeing other areas that would not allow us to hit those numbers. .

Operator

[Operator Instructions]. Our next question comes from the line of Gerald Pascarelli with Wedbush.

Gerald Pascarelli

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

John Fieldly

Yes. No, great question. In Amazon, we saw -- in our prepared remarks, have a really strong Amazon business. The quarter is -- we're going to be watching that closely. That's why we wanted to share the information there. As we gain more ACV, we're going to have to watch to see how that performs, but it was great to see it up for the quarter and continuing to show good, solid growth.

In the quarter, we did have some in regards to some warehouse movements underlying around Amazon, which potentially caused some delays as they were moving products in different locations closing some locations and opening additional locations. So there was definitely some inventory movement that was taking place, especially around the holiday season, and they were -- obviously, they were likely going through substantial volumes through their warehouses.

So there were some challenges in the quarter with inventory in regards to some of the warehouses. But I think -- as we look forward, I think that's still going to be a really strong business for us. We live in an omnichannel world. Consumers want it, how they want it, when they want it. And we embrace all platforms, including Instacart as well and driving to retail and home delivery, which we see great results as well.

Operator

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

Jonathan Keypour

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

John Fieldly

Yes, Jonathan, great question. Historically, we have been, prior to PepsiCo, mainly regionally focus with a higher ACV. And prior to PepsiCo, we were roughly around, I believe, like 65%, 67% ACV at the time. So -- and very much regionally to certain pockets of the country, the Northeast, Southeast, Texas markets and Southern California, we saw our bigger higher ACV markets.

But with the transition to Pepsi, we're seeing ACV gains really open up broadly in other markets. And that really goes back to that additional investment in marketing that we made in Q4 because of the ACV gains as we wanted to continue to drive velocity rates and educate consumers what Celsius is and where we're located.

And when you look at that area, you're looking at the center of the country, you're looking in the Northwest. We gained a lot of distribution. So those areas, we saw some great gains, especially in regards to the mid-Atlantic areas as well. So we're roughly around 90%, 89% ACV right now nationwide.

Jonathan Keypour

Great. And then just a follow-up. In terms of -- I guess I'm trying to think about how a store you're in depending on whether or not you have a fridge, it's an own fridge or not. I guess I just -- I'm trying to get a sense of how productivity in each of those kinds of go-to-market scenarios, how do those compare?

So basically, like -- is it like a 1.5x better sales pull-through when you guys have an own fridge in a location, something like just trying to get a sense of that kind of relative effectiveness.

John Fieldly

Yes. No, I mean, a great question. We haven't really discussed that the exact number. What we have stated prior is, historically, we've gone back, like last year, we were talking about coolers and the payback period on the cooler was roughly around 5 months. But what I will tell you, when we have a cooler, the sales increase exponentially when we have that cold placement, it's got to be 60 from the register, an optimally placed to get the maximum benefit. And that's really what the teams are focused on. The goal is to be upfront and 60 from the register.

So definitely, coolers are great tools for us, the product. It's -- they see it and our consumers are able to buy it and you get a higher rotation as we were saying many times before, if it's cold, it's sold. So that's something we really say internally. But that's really all I can comment on that.

Operator

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

Jeffrey Van Sinderen

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

John Fieldly

Yes, Jeff, great question. I think when you look at our current -- when you're looking at the current ACV number, the average items carried per store has increased exponentially since the PepsiCo partnership, and we're currently sitting at roughly -- it's 12.5, like 12.5 items per store, we do anticipate that to continue to increase with the next resets. Where that lands? I think we not really comfortable on commenting on that. We have internal expectations.

But I think we'll have a better understanding as we get through the resets that are taking place, and we look maybe around April start looking at the data in April, you should be able to get a better set on where we will be for the rest of the back half of the year.

Jeffrey Van Sinderen

Okay. Good. That's helpful. And then just a couple of things around margins. Your latest thoughts on efficiency opportunities with Pepsi -- overall Pepsi distribution and then maybe club distribution and the potential benefit to P&L metrics from that process. Also noticed you mentioned taking some price. I'm wondering if you're planning to take more price this year. .

Jarrod Langhans

Yes. This is Jarrod. I'll start with some efficiencies. With the club channel, John did mention that, historically, we've had to go to a secondary packing facility. We have found a number of co-packers that can pack that in line for us so that is definitely an efficiency and will help drive margin as we look out over 2023. We did start doing that a little bit in Q4 and start expanding that to most of the club channel in Q1.

We do have pricing that was kind of fully in play in Q4, but that will benefit us across 2023. We haven't announced anything for 2023 at the moment. So we'll sit tight on that and see where we land. But other opportunities really it's the orbit model we've created to continue to drive the freight lines and continue to drive efficiencies there and also taking advantage of our scale when it comes to raw material purchases and benefiting from some of the changes we've seen across the raw materials categories in terms of pricing.

Operator

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

Sean McGowan

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

Jarrod Langhans

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

Sean McGowan

Specifically on the club, I mentioned specifically on those extra pack, the 18 packs in the clubs, like how much higher margin would that be if you got more cans in there and a more efficient process on a thinner hardboard, it's not corrugated anymore. So how much higher margin is that item from what you had 6 months ago?

Jarrod Langhans

I mean, ultimately, we have to get it all into the same co-packer set in order to get that benefit. So we haven't fully transitioned, but I think we'll have the opportunity to do that this year. If you looked at the club margin, it's pretty good. It could be a couple of percentage points, but you got to remember that the club is only a small piece of our business from that perspective. So there is some opportunity there on that piece of the business. I think there's also opportunity, like I said, with the freight lanes on improving that. If you look at our historical rates. Over the course of the last 2 years, the freight lines have gone down for us.

I think if you look over the last couple of years, it's gone from roughly 6% to 4% on an annualized basis. So we've seen some gains there across that. We'll see what the aluminum cans as well where that was putting pressure on us. And there's opportunity with other things like sucralose and caffeine as well.

Sean McGowan

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

John Fieldly

Yes. Yes. So absolutely. We definitely don't want to be buy your ankles that you mentioned there. So our goal is to get out of the cutter and get out of the nose bleed and getting the we say. And that's what our key accounts team is focused on -- if you look at a lot of the areas we're getting very close and targeting some of the bank space that's out there. So I expected us to be pretty prominent on the next resets and hopefully, you start seeing us in much better places as we go forward, especially we have the distribution power of PepsiCo now. .

Operator

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

Jeffrey Cohen

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

John Fieldly

Yes. Yes. In regards to the Nordics, Celsius Europe has been mainly Sweden distribution in Finland. It's been going really well, and they had a great fourth quarter, had some new innovation that came in, and they're doing a great job with the Celsius portfolio. With our fast brand, our snack portfolio, which is focused on Finland. And there's opportunities there. We're not -- it's not -- we haven't really had any discussions with PepsiCo now on potentially distributing that in other areas.

And we've had somewhat challenges in Europe with supply chains as well with some of the protein bar raw materials. But the business continue to maintain the business. And at the right time, there could be opportunities internationally just not right now.

Jeffrey Cohen

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

John Fieldly

Yes. Internationally, we have -- we're starting to leverage our -- the global supply chain as well, trying to gain more efficiencies. So really look internationally to leverage some of the innovation collaboratively because really, when you look at the world today, especially with social media, the awareness and radiation, it goes cross Atlantic. So we're trying to get more aligned, more strategic in our flavor launches. And as we go forward, we expect to have more consistency. But flavor innovation is extremely key has been driving the category and expect us to continue to lead in flavor innovation.

Jeffrey Cohen

Yes. I know I took a couple of weeks to get that And then lastly, talk about ALDI a little bit. How many stores -- geographical rollouts and what we may see during '23?

John Fieldly

Yes. ALDI, we have a national rollout that's taking place. So expect to find us in an ALDI in the near future. And the number of stores, I believe, there -- it's roughly -- I think there was like 600 and growing roughly approximately.

Operator

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

Anthony Vendetti

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

John Fieldly

That's correct. We have placed in retail is our internal goal, and we have about 15,000 on owner currently. So -- and we're working on placing those strategically in a variety of our core markets and core retailers.

Anthony Vendetti

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

John Fieldly

We didn't disclose the number that was being -- that we placed in the fourth quarter. But we did place a good number. But through the transition, we kind of pulled back a little bit, and we expect that to continue to increase upon the new year.

Jarrod Langhans

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

Anthony Vendetti

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

John Fieldly

Yes. I don't have that current number in regards to how many of the 50,000 we're in. We're working on getting those reset. I expect us to have a -- I'd like to be in the majority of them by the end of the year. That's the goal. So we're part of the PepsiCo energy portfolio, and we expect to be in every single one by the end of the year, and we'll work towards that goal.

Anthony Vendetti

Okay. And the last question is on erythritol, the sugar substitute. How many of your products have that right now? And are you concerned about the recent news that could cause an increase in stroke -- in heart attack?

John Fieldly

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

Jarrod Langhans

And we're looking into it.

Operator

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

Kaumil Gajrawala

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

John Fieldly

Well, just to clarify, when we stated in the prepared remarks that the transition has been complete. When we talk about distributed distribution, that's our distribution partners. So we're about 90%, 95% being serviced now by PepsiCo in North America. We did keep on a few of our prior distributors and partners in certain markets. But other than that, we are pretty much 100% complete with the transition within the PepsiCo agreement that started October 1 of 2022.

Now when you look at the opportunity on store distribution and store expansion, we have reached that 89% ACV number of reported stores. We do think there's considerable -- there is additional upside from there, but we're not in a position right now to really comment on where that will arrive. I think we'll have a better indication at the April data to see where the company will really probably finish the year at.

Now there is nonreported stores and locations that we're able to gain additional distribution and cooler placements. And that's really those OTS stores which are nonreported, which is new PepsiCo's metals program, and we're told there's about 150,000 of those so independent locations.

So we're working through those. Our resets are taking place as well. And then also in foodservice, there's a huge opportunity in foodservice and really just scratching the surface there. So that's another big opportunity for us.

Operator

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

John Fieldly

Thank you. On behalf of the company, we'd like to thank everyone for their continued interest and support. Our results demonstrates, our products are gaining considerable momentum, and we're capitalizing on today's global health and wellness trends and the transformation taking place in today's energy drink category.

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

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.