BRC Inc. (NYSE:BRCC) Q4 2023 Earnings Call Transcript March 7, 2024
BRC Inc. isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).
Operator: Greetings. Welcome to the Black Rifle Coffee Company Fourth Quarter 2023 Earnings Call. At this time, all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. [Operator Instructions] Please note this conference is being recorded. I will now turn the conference over to your host Tanner Doss, Vice President of Investor Relations. You may begin.
Tanner Doss: Good morning, everyone. Thank you for joining Black Rifle Coffee Company’s conference call to discuss our fourth quarter 2023 financial results, which we released yesterday and can be found on our website at ir.blackriflecoffee.com. Before we start, I’d like to remind you the company’s Safe Harbor language, which I’m sure you’re all familiar with. On today’s call, management may make forward-looking statements, including guidance and underlying assumptions. Forward-looking statements are based on expectations that involve risks and uncertainties that could cause actual results to differ materially. For further discussion of our risks related to our business, please see our previous filings with the SEC. This call will also contain non-GAAP financial measures such as adjusted EBITDA.
Whenever we refer to EBITDA in our comments, we are referring to adjusted EBITDA unless otherwise noted. Reconciliations of these non-GAAP measures to the most comparable GAAP measures are included in the earnings release furnished to the SEC and they are also available on our investor website. Now please turn to Slide 3 in the presentation that we provided on our Investor Relations website, I’d like to turn the call over now to Chris Mondzelewski, CEO of Black Rifle Coffee Company. Mondz?
Chris Mondzelewski: Thanks, Tanner, and good morning, everyone. Joining me today is Steve Kadenacy, our Chief Financial Officer and Evan Hafer our Founder and Executive Chairman. We’ve also provided a presentation that we will refer to throughout the call, which you can find on our investor website. Please turn to Slide 4 of that presentation. Before I get into the details of our business, I want to reflect for a minute on what it means to lead Black Rifle Coffee Company. Steve and I will talk about an exceptionally healthy business model that we believe is on the precipices of changing how The wider population thinks about brands in the coffee category. In fact, the data would say we are already doing that. But leading Black Rifle goes much deeper.
I have the honor and the responsibility to partner on a mission first set out upon by Evan Hafer and a Founder team that truly understands service to country. Through countless deployments and combat missions they came to know what sacrifice truly means and as a marine before my career in business, I also saw this sacrifice on a day-to-day basis. In fact, nearly half of our employees at Black Rifle are veterans and we’d like to believe we have a deeper understanding of what sacrifice and mission mean than most consumer companies. Demonstrating this, Evan is currently in Florida training for a Founder-led initiative to commemorate the 80th anniversary of D-Day, an event of profound historical significance. To honor this, Evan organized a training trip for employees and fellow veterans to Florida where they will prepare for an era appropriate parachute jump onto the beaches of Normandy during the 80th anniversary.
This initiative not only pays homage to the bravery and sacrifices of our veterans, but also reinforces our ongoing commitments to the veteran community. Americans more than ever are demanding the brands they buy stand for something. And at Black Rifle, we stand for those who serve. My team and I firmly believe that success at Black Rifle is a symbiotic marriage of value creation and mission. With value creation and mission we enable Black Rifle to form strategic partnerships with the world’s most successful companies. This is demonstrated with our ongoing grocery expansion and our recently announced partnership with the UFC. It creates awareness of our brand, enabling sales and thereby multiplying our mission. We will always measure our success through both shareholder value and veteran and first responder lives we impact.
What is enabling us to grow at four times the market and RTD, how did we become the fourth largest bag coffee brand in the world’s largest retailer in just one year, it’s a steadfast unfaltering commitment to both value creation and mission. What we are seeing right now is a company coming into full stride, maturing executing with precision and creating a market through mission in a manner that was never done in this category. In this discussion, we will speak about how we are becoming a more consistent in our delivery, expanding the reach of our brand and strategically taking market share. We will methodically build our market distribution in both packaged coffee and ready-to-drink beverages ensuring we stay true to our high level of service to both partners and consumers.
As should be expected of a super premium mission-oriented brand, Black Rifle will also continue to evaluate partnerships to increase our value and further extend our mission, the service of the veteran and first responder communities is not something we will take on alone. 94% of Americans want to find ways to support the veteran community and we are confident that the biggest companies and brands in the world and most importantly our consumers will continue to support us in bringing this mission to life. I will now discuss our results and the trends across our business units. Steve will then review our financial performance and outlook in greater detail before turning the call over for the question and answer session. Please turn to Slide 5.
We continue to see the company transforming on many of our key metrics. We finished the year up 31% in net revenue, while also having the most profitable year-to-date with adjusted EBITDA of $13.3 million. This was primarily due to the remarkable success of our wholesale business, which grew by 89% and our focus on operational excellence, which Steve will discuss in more detail in a moment. Turning to our channel highlights, please turn to Slide 7. 2023 was the first full year that we entered the FDM or Food Drug Mass channel with our bags and rounds. The performance was tremendous. Our success began with our largest customer where we outperformed the category by over 18 times over the last quarter. We are proud of our partnership with the largest FDM retailers significantly outpacing the category in our first full year, all while selling a premium priced coffee.
This continued brand success has allowed us to begin what will be a two-year process of rolling out bagged coffee and rounds into the broader FDM market. It’s clear that the market is welcoming this rollout. We introduced new grocery partners throughout Q3 and Q4, ending the year with 23 retail partners in an all commodity volume or ACV of 37%, up significantly from the beginning of the year, but still only a fraction of the total market. This illustrates that the majority of the opportunity is still in front of us. It is worth pausing for a moment to consider the trends within the bagged coffee and rounds market to understand our success. We are benefiting from a trend towards premiumization of at-home coffee as customers look to replicate the premium experience typically delivered in the out-of-home market.
As a result, super premium brands, particularly Black Rifle are benefiting. Just a few metrics to highlight these macro trends at work. We continue to build distribution across the coffee aisle expanding ACV 8 points from 29% to 37%. In a little over a year, we’ve grown into the eighth largest brand in the coffee aisle, fourth in bagged coffee and our largest partner. In grocery, more broadly we have risen to the number 8 brand, up from number 10 when we spoke last quarter. These early indicators of success are encouraging as we continue to methodically build distribution and availability in 2024. We will do so in an aggressive but measured fashion, ensuring a high level of service and continued super premium positioning and by the end of 2025, we expect to be present in every major FDM retailer.
Turning to Slide 8, we’re showing a similar success story within Ready-To-Drink or RTD. While the category has been stable to slightly down in 2023, we grew significantly, 32% taking 90 basis points of market share on the year. Our core SKUs remain ranked in the top 20 for RTD coffee and our ACV continues to climb ending the year at 43.4%, a 480 basis point jump from a year ago. In 2024, we will continue to drive both distribution of our existing 6 core SKUs, as well as partnership with new retailers across both grocery and convenience stores. Black Rifle has been the clear winner across RTD coffee. Consumers are voting for the brand. We will take advantage of this momentum and similar to our bagged coffee and rounds expect our RTD products to be present in most of the country by 2025.
Additionally, we will focus heavily on our RTD business model through strategic cost optimization. Steve will talk more about this in his section. Beyond our core 6 SKUs for RTD, we will continue to consider the opportunities for strategic innovation. Consumers are increasingly looking for new and interesting alternatives as they drink beverages throughout the day. With our strong brand and coffee credentials, we have the market access and permission to take advantage of trends with new and exciting products. We look forward to sharing more on the timing and specifics of our innovation work later this year. Moving on to Direct-to-Consumer, please flip to Slide 9. Before discussing our DTC business, it is useful to step back and note the trends in the broader DTC market.
The reality is that post-COVID, the behavior of purchasing Direct-to-Consumer is down across the board. Consumer patterns change over time. It’s absolutely critical to be where the consumer wants to buy. Post-COVID, consumers shifted back into stores and that’s okay because we are making significant strides in those locations, as well, while DTC will not likely drive growth for Black Rifle in 2024, we are smartly optimizing the business allowing us to stabilize our subscription and revenue trends. DTC will always be a core piece of our portfolio as it allows us a deeper relationship with our most loyal customers. Many of whom are veterans and first responders themselves. We are committed to maintaining the position of the largest and most exciting DTC coffee subscription business in the US.
As a result, we are investing in our platform to make it better. We recently implemented changes to our website and mobile app giving our 226,000 coffee club subscribers more subscription options and providing them flexibility in variety with their current subscription offerings. On the back end, these optimizations have also helped us with customer retention, satisfaction and further supply chain optimization. We look to our Direct-to-Consumer Channel as a lab for innovation as we can rapidly iterate innovative ideas to our most loyal customer base. Please move to Slide 10. We ended the year with 36 outposts, our version of coffee shops. While we are still in our tactical pause phase with outposts and not allocating any growth capital to them in 2024, we remain bullish that they will be a key element to our long-term growth, which we expect will recommence in 2025 and beyond.
As we’ve communicated previously, we are analyzing the segment to support our franchisees and maximize the performance of our existing locations before pushing forward with the rapid expansion of this critical market. I am personally spending a lot of time working with our franchise partners and internal outpost team to ensure that the next evolution of the Black Rifle outposts will represent a unique Black Rifle experience. Before Steve dives into more detail about our financial results, I want to reiterate how proud I am of our new leadership team. I continue to be amazed by the talent our brand attracts. And the team has really gelled in pursuit of a common purpose over the last year. We have faced a number of challenges head-on and we have been able to navigate our way while implementing processes and procedures to ensure that our business is prepared for a decade of sustainable growth.
Our team’s commitment to the mission, unmatched CPG and public company knowledge and tireless effort on focused execution make this possible. I couldn’t be prouder to stand alongside you as we build and execute the roadmap to becoming a billion-dollar business. With that, turning to our financial results, Steve.
Steve Kadenacy : Thanks, Mondz. Please turn to Slide 13. On our last call, I told you that our key objectives when joining the Black Rifle team include improving execution against our business plan, driving data center decision,-making, enhancing our focus on investor returns and building a world-class finance team. With another quarter behind us, I can say that we have made significant progress towards all of these goals and we are bearing the fruit of this progress in our financials. In the last 90 days of the year, we took on four critical operational excellence initiatives. First, we right-sized our headcount to our market opportunities and focused the company on these key activities. The result is that we are starting the year with 288 fewer headcount than a year ago.
Second, we also reduced operating expenditure significantly, particularly in the area of outside professional fees and reduced our marketing spend by allocating those dollars to our highest growth businesses and improving its effectiveness by deploying a more analytical approach. Third, we took focused action to ensure inventory oversupply that had been created during the first half of 2023 was dealt with and we are now right-sized for the future. This action resulted in significant non-cash write-downs in Q4, but has positioned us well for the future. Our inventory levels have now been reduced to $56.5 million, a 38% decrease from Q3. These issues are behind us now as we’re nearing optimal inventory levels driven by healthy demand, strong execution in the business and the inventory cleanup that we took care of in Q4.
Fourth, we established several initiatives to improve our gross margin, which I’ll drill into a bit more. Please turn to Slide 14, drilling down on the gross margin initiatives, we are expecting continued improvements as our initiatives take hold. We are improving efficiency across all facets of the supply chain while we’re seeing the natural benefits from increasing mix of FDM, which carries a strong gross. margin we’re also making improvements in distribution and logistics, manufacturing and sourcing that will more than offset anticipated inflation and drive us towards our goal of 40 plus percent gross margins. Please turn to Slide 15. Turning to the quarter, our total revenue increased 28% to $119.7 million with the wholesale channel growing by a strong 79%.
The results of the cost savings initiatives are encouraging and are evident in Q4. Our SG&A represented 38% of our revenue, compared to 52.3% in the year prior, and our adjusted EBA of $12.2 million is both sequentially and annually expansive. This is the highest adjusted EBITDA quarter we have achieved and I expect strong profitability to continue in 2024 and beyond. Please turn to Slide 16. For the year our revenue is up 31%. Adjusted gross margin is up 360 basis points and adjusted EBITDA improved from a loss of $34 million to positive $13 million. In terms of our balance sheet, we ended the quarter with $12.4 million in cash and $71 million in long-term debt. As previously discussed, we have reached an inflection point in the business and we are now forecasting continued and significant improvements in cash flow throughout 2024.
Please turn to slide 18. We are excited to give you more details pertaining to 2024 outlook. We expect revenue to be between $430 million and $460 million. Gross margins to be between 37% and 40%, adjusted EBITDA to be between $27 million and $40 million and we expect free cash flow conversion of 80% of adjusted EBITDA. A few comments on our guidance. While our revenue growth rate is 16% at the high end of guidance, it’s worth noting that revenue of $430 million to $460 million includes approximately 6.5 million from a barter transaction to right-size our RTD inventory as compared to $395.6 million of revenue in 2023, which included $28.8 million from the same barter transaction. The reduction in one-time barter transactions negatively impacts 2024 revenue by 6% to 8%.
Our profitability and cash flow are expected to be markedly better in 2024. Operational efficiencies are driving real improvements here. The low end of our adjusted EBITDA range is more than double the adjusted EBITDA of the year we just completed. And for the first time ever, we’re guiding to robust cash flow. To summarize, each quarter, we continue to see revenue growth and sequential improvements in profit. This profitability and cash flow acceleration will enable us to invest in new opportunities, fulfill our mission of serving the shareholders and the veteran and first responder communities, while growing our business profitably for the foreseeable future. With that, I’ll pass the call over to the operator for the Q&A session.
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Q&A Session
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Operator: [Operator Instructions] Our first question comes from the line of Sarang Vora with Telsey Group. Please proceed with your question.
Sarang Vora : Good day, Steve and Chris and great job on managing the profits and outlook for ‘24. My first question staying on the on the quarter. Can you help us explain a little bit about this barter transaction in fourth quarter? It was kind of about the advertising services. So just curious to know how it transpired and then will the benefits of advertising services and brand awareness help you guys in ’24 from that? And then I have one more question after that.
Steve Kadenacy: Sure, Sarang. I’ll take the first part of the question and then flip it to Mondz. This is Steve. The transaction – the barter transaction was similar to the one that we did in Q3 just more robust and the intent of it and ultimately the success of it is that we were able to write-down less of our over inventory that we had built in the first half. How it works basically is, we sell them RTD at a discount and they give us in return future marketing dollars. We are already up and running across all platforms using those marketing dollars. So the benefit is really on our cash flow going forward and it’s working quite well and we expect a bit more of that in Q1 and after that we’ll be off of those barter transactions entirely. I’ll give you the second half to Mondz.
Chris Mondzelewski : Yeah. So, great to hear from you Sarang. I think, just to build on that, I think one thing I’d note, as a reminder, we had a fantastic year in RTD as we talked about. We outgrew the category significantly. But we had had that forecasting issue and so, for us the barter transaction was a fantastic way to deal with a difficult inventory situation. What we’ve been able to do is, we’ve been able to now take those credits as we’ve moved into ‘24, and convert them into advertising dollars, which is something that was a big part of our plan anyway. So as we’ve talked about we’re on a on a mission to continue to bring the brand to additional audiences, advertising is not something that the brand had done a ton of in the past.
We’ve leaned heavily on social media. We’re still pressing on social media. But we’ve now been able to add the advertising component, as well. So, in a way the credits were actually a perfect fit for us from a value creation standpoint.
Sarang Vora : That’s great. And I have one question on the outlook. When you provide the sales guidance 9% to 16%, can you help us understand? What is inbuilt in that like number of new FDM accounts? Or is it the 23 accounts that you have those will continue to grow? As well as like, can you talk about RTD innovation like is it built into the outlook? And then last, any store plans into the outlook for ‘24 sales guidance? Thanks.
Chris Mondzelewski : Yeah. Thanks for that question. I think so, I’ll step back to ‘23 for a minute. I think as we’ve been thinking about, as you would imagine as a management team, we’re really thinking about, the full kind of three year trajectory for this business and how we want to plan things out to optimally create value over that period. ‘23 was an exciting year for us. It was a chance for us to prove to the market that we could really operate at scale, first full year in full distribution with the largest customer in the country. And as we have discussed, we did exceptionally well. We’re very proud of those results. So in ’24, what that gives us the opportunity to do is to really start to set up what Black Rifle looks like at full national scale.
And there’s a couple of different aspects to that. One is, as we’ve talked about we’re going to continue to roll our product across the country, whether you’re talking about the bag coffee, the PODS or the RTD business, our goal is to be in almost all retailers by the end of ’25. So that’s going to be a methodical roll out for us. And we’re going to consider ways to do that either internally or through partnerships. So all options are on the table. For us, it’s really important. So, with the growth rate, it it’s very important that we do this the right way. We need to build a super premium business. So as we rolled a new retailers, we’re going to do that in a fashion where we believe Black Rifle will be positioned as a super premium coffee.
