BRC Inc. (NYSE:BRCC) Q3 2023 Earnings Call Transcript

BRC Inc. (NYSE:BRCC) Q3 2023 Earnings Call Transcript November 9, 2023

BRC Inc. misses on earnings expectations. Reported EPS is $-0.05 EPS, expectations were $-0.01.

Operator: Greetings and welcome to the Black Rifle Coffee Company’s Third Quarter 2023 Earnings Call. At this time, all participants are in a listen-only mode. A brief question-and-answer session will follow the formal presentation. [Operator Instructions] As a reminder, this conference is being recorded. It is now my pleasure to introduce your host Tanner Doss, Vice President of Investor Relations. Thank you. Tanner, you may begin.

Tanner Doss: Good afternoon, everyone. Thank you for joining Black Rifle Coffee Company’s conference call to discuss our third quarter 2023 financial results, which we released today and can be found on our website at ir.blackriflecoffee.com. With me on today’s call is Evan Hafer, Founder and CEO; Tom Davin, Co-CEO; Chris Mondzelewski, President; and Steve Kadenacy, our Chief Financial Officer. Before we get started, 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 a 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 I’d like to turn the call over to Evan Hafer, Founder and CEO of Black Rifle Coffee Company. Evan?

Evan Hafer: Thank you, Tanner, and good afternoon, everyone. Today, I’m thrilled to discuss our business this quarter as it marks a significant milestone for our company that I founded in my garage with some green beans and a little two pound roaster less than a decade ago. But first before I go into that, I’d like to remind everyone that this weekend is Veterans Day. Veterans Day is a time for us to honor and remember the brave men and women that have served in the armed forces showing our deep appreciation for their sacrifices and dedication to our country. On behalf of Black Rifle Coffee Company, I want to thank all the veterans for their services to this great nation. First, we’re on track for accelerated profitability in an accelerated path to in establishing a self-sustaining cash-generating business that aligns with our mission of serving those who serve.

Steve will take you through some of the details on these financial milestones in his section. But for now, suffice to say our business has never been stronger financially. Second, the evolution of our core leadership team at Black Rifle Coffee has resulted in the most robust team I’ve ever assembled. It takes a distinct kind of leadership team to build a business from zero to $100 million and it takes another team to scale from a $100 million to a $1 billion. Of course, every leader, no matter what their tenure must embrace the critical mission of Black Rifle Coffee. I can confidently say that our efforts to attract the leaders, we need to build a thriving $1 billion revenue business are paying off as evidenced by both brand performance and the efficient operation of the company that is driving our financial results.

I have never been more confident in our future. We’ve added several key team members in the past year, including our President, Chris Mondzelewski; our Chief Financial Officer, Steve Kadenacy; our Chief Technology and Operations Officer, Chris Clark; and our Chief Revenue Officer, Danya Kennedy. This team is delivering at a world class level. While much of our focus has gone into streamlining our prior inefficiencies in our operations, our brand continues to be of paramount importance. Delivery of our ongoing mission requires us to continue to build new relationships with partners and consumers that must always be done through the lens of value creation. In particular, I’d like to highlight Chris Mondzelewski or as he’s known around here Mondz.

He brings over 23 years of experience in CPG having worked with iconic brands at both Kraft Foods and Mars Petcare. Moreover, he is a fellow veteran who shares a deep connection to our mission and an integral part of our DNA. I can confidently say that he is one of the finest executives and one of the finest man, I’ve had the privilege of working with. His performance to date has been nothing short of exceptional. I’m delighted to announce that effectively January 1, Mondz will assume the role as the sole CEO of the company as Tom will step away from day-to-day operations and transition to the Board of Directors. I’m looking forward to remaining deeply involved and working side-by-side with Mondz as the Founder and Executive Chairman of the company.

And Tom is equally as excited to continue his involvement at the Board level. This transition is a natural progression. It has been carefully considered and planned and will allow me to spend the vast majority of my time on marketing, brand building and where I can provide the most value for our customers, employees, partners, and shareholders. Mondz is supported by a world-class team with a strong execution mindset and extensive collective experience in running public companies. It has been my ambition from day one in my garage to take Black Rifle to its highest levels. The mission is one embraced by nearly every American, so it’s incumbent upon us to ensure that every American has access to the mission. I look forward to being there on the front lines with Mondz and his team as we develop the roadmap to a $1 billion business.

So with that, I’d like to hand over the call to the President and future CEO, Mondz, take it away.

Chris Mondzelewski: Thank you, Evan. Before we dive into the Q3 results, I want to express my gratitude to Evan and the Board for their trust in me. Given my family, and my personal affiliation to the military and police communities, joining the Black Rifle team has truly been a dream come true. It is not lost on me that heavy responsibility of continuing to bring our mission to life with consumers, customers, investors, but most importantly the veterans, and first responders to whom we serve. Today, I’ll walk you through some of the key highlights from each of our business units for Q3 providing context and insights into our focus areas. Let’s start by emphasizing the strength of the Black Rifle brand, which is nothing short of remarkable.

Having worked with numerous fast-growing consumer packaged goods brands throughout my career, I can confidently say that what’s happening at Black Rifle is unique. Over the past year, we have seen awareness of the brand grow by over 50%. The unique way that Black Rifle brings brands to life, the culture itself of the veteran in the first responder community will ensure that this unique character maintains as we take on new levels of scale across the market. This strength is most evident in our wholesale channel which saw 23% sequential growth in the quarter versus Q2 and an impressive 91% growth year-over-year. Just a year ago, we announced our entry into the FDM market with bagged coffee and rounds. We have since grown that channel from zero to over $100 million in revenue.

Moving forward, we will drive to new heights with our existing partners and work to find new partners aligned with our mission of service and growth. Our brand is now on shelves in 14 FDM partners, up from only one a year ago. We are very early in most of these rollouts, but early indicators show that our newest partner rollouts are on track for strong results. In our largest retail partner, we are now the eight largest coffee brand overall and fourth in bagged coffee and our second largest partner having launched only a few months ago, we have already risen to the number 10 brands. This is a promising sign given the relatively limited number of outlets we currently serve. The potential is enormous. Moving to our ready-to-drink business. We continue to enjoy success with our growth outpacing the overall category.

Specifically, our year-over-year growth stands at over 16%, significantly higher than any other major brand in the category. Our core SKUs consistently ranked in the top 20 for RTD coffee and our ACV or All Commodity Volume, which is a more appropriate way to look at our growth versus doors, has grown nearly 500 basis points to almost 42%, reflecting our distribution efforts. We see RTD as a critical strategic category for Black Rifle and we are committed to dedicating resources to enhance our performance in the market, particularly in demand forecasting and gross margin improvement. Our past inventory challenges are now being successfully addressed, and we expect to benefit from a cash tailwind in the coming quarters. Steve will speak more about this in his prepared comments.

Shifting to our direct-to-consumer business. We are adapting to changing consumer habits and the overall DTC category post-COVID and are implementing a number of improvements that should stabilize this business over the next year. Firstly, we have technological enhancements planned for our website and mobile app, making it easier to guide our loyal customers towards subscription. Additionally, we are introducing innovations within our subscription options, providing customers with more flexibility and variety in their purchases. Our targeted marketing efforts to attract new DTC customers will become increasingly sophisticated and our paid add optimization efforts are already yielding results. Our Black Rifle subscription will continue to progress as a relationship with the brand itself.

As the largest DTC coffee subscription business in the US, we are committed to maintaining our leading position and attracting new DTC customers is vital to our success. Within outposts, the direct retail component of our business, we achieved a 20% year-over-year increase in revenue. However, we had a 15% decline sequentially, which did not meet our expectations. As a result, we are taking a measured approach to investments in this space as we refine our model. As we have communicated over the last few quarters, we have shifted resources to our growing high-margin asset-light FDM business. We believe this focus provides the highest and best return for our shareholders in the short and medium term. That said, outposts remain a key element of our long-term strategy and we are determined to improve our approach in the coming months.

We’ll keep you informed of our progress as we continue to analyze this segment. In the meantime, we will focus on maximizing the performance of our existing stores in supporting our franchisees. In conclusion, I want to reiterate the priorities I discussed in the previous quarter’s call, our focus is on driving sustainable profitable growth through rigorous execution within the business and the marketplace. We are committed to delivering on our promises and ensuring efficient predictable growth and profitability for the foreseeable future, which in turn supports our mission. With that, I’d like to now introduce you to one of the newest members of our team. Steve Kadenacy formerly joined our team about two months ago. Steve has a long history with Black Rifle, however.

In fact, his organization Silver Box Capital partnered with Black Rifle during the de-SPAC process. To have a CFO in my team with Steve’s experience has been a real pleasure and amazing spark to the organization. Steve has always been one of our key investors and now he is there with us day to day in the trenches instantaneously multiplying our strategic and executional capabilities. It amazes me the quality of talent drawn to emission-oriented business such as Black Rifle. I’ll hand the call over to Steve for a more detailed dive into our Q3 results.

Steve Kadenacy: Thank you, Mondz. First, I’d like to express my excitement officially becoming a part of the Black Rifle team. Having been involved with the company for over two years, our team at Silver Box was thrilled to join forces with Black Rifle and many of our partners and investors remain shareholders to this day including myself. We invested and continue to invest in this company because we wholeheartedly believe in the mission and are deeply passionate about the exceptional brand. We see a clear path to exponential profitable growth for the company in the years to come. My decision to join as the CFO stems from the belief that I can make a difference by leveraging my public company experience and my commitment to drive operational excellence across all areas of the business.

My key objectives are centered around improving execution against our business plan driving data-driven decision making, enhancing our focus on investor returns and building a world-class finance team. I’m pleased to report that we are well on track to achieving these objectives and my optimism about the company’s future has only gotten stronger since I joined the management team. Our Q3 results further bolster this optimism. During the third quarter, our total revenue increased 33% to $100.5 million with the wholesale channel leading the way with a remarkable 91% growth. Additionally, our RTD business continued to expand its reach, up 16%, delivering well over market growth. Our gross margin improved by 220 basis points from a year ago, reaching 33.9%.

However, we acknowledge there is room for improvement here. We’ve been candid about our sub-optimal execution in this area and we are focused on rectifying this moving forward. Our growing pains in the ready-to-drink business are mostly behind us, though we have incurred non-cash losses, which are reflected in our third quarter earnings and will continue to impact earnings through the middle of Q1. However, once these non-recurring losses have run their course before the end of the first quarter of 2024, our RTD inventory will be rightsized and we will be well-positioned to further execute our plans to grow our RTD business. Meanwhile, we are confident that our cash flow before debt service in 2024 will surpass EBITDA. We also anticipate a substantial improvement in gross margin in 2024 as we work towards enhancing RTD margins across the supply chain and expand our presence in the broader FDM market.

We look forward to providing more details on our 2024 outlook in next quarter’s call. As I mentioned earlier, operational excellence is a core passion and we are committed to executing relentlessly to capture the profitability gains that come with growth and scale. This is reflected in our SG&A cost, which are starting to show the results of our cost reduction efforts and resource reallocation. Our hard work over the past few quarters is paying off as our top line revenue of 33% has significantly outpaced the modest 4% rise in operating expenses. Our adjusted EBITDA is now at record levels and we anticipate further acceleration in Q4. It’s worth noting additionally that in Q4, we will implement actions that will lead to significant further improvement in 2024 SG&A.

The combined impact of the work we have done year-to-date coupled with further optimization in 2023 will yield cost savings of upwards of $30 million. While these actions may seem dramatic, we believe our resources are now effectively aligned against our opportunities. Further, these cost-saving opportunities will not impair in anyway our ability to continue our market leading growth providing flexibility to lean harder into investments in both brand building and additional capabilities to support growth in the wholesale business. Once again, we will provide more insight into our 2024 expectations next quarter. Turning to our balance sheet, we ended the quarter with $6.7 million in cash and $77.3 million in long-term debt. The increase in our year-over-year debt is due to our recent refinancing, which has given us increased liquidity.

We forecast continued and significant improvement in cash through 2024 as discussed earlier in these remarks. Furthermore, we are pleased to report that our inventory levels have been reduced in the last quarter to $91.4 million and over $18 million reduction from Q2 and we expect them to continue to come down over the next three quarters. This was driven by healthy demand and strong execution in the business. Turning to guidance. As we head into our final quarter, our visibility is clear in our expected annual results. We continue to expect to be at the low end of our revenue forecast of $400 million to $440 million and well within the range of our adjusted EBITDA guidance. Our gross margin guidance of 36% to 37.5% will not be achieved due to the reasons we have discussed, but we are pleased to have more than made up for the shortfall with better execution below the gross margin line.

As I mentioned earlier, we expect material improvements in gross margin in 2024. To summarize, I see a clear improving trend in Black Rifle’s financial conditions. Given the continued strength of the brand and the tight execution of the business, we are clearly trending towards profitability and positive cash flow. This acceleration and profitability in cash flow will enable us to invest in new opportunities and fulfill our mission of serving the veteran and first responder communities. I’ve been involved Black Rifle for over two years. Now after having my boots on the ground for the last couple of months, I have increased conviction at the opportunity in front of us. The incredible senior leadership team and the explosive momentum in the business is further proof that Black Rifle can become a $1 billion business over time.

With that, I’ll hand the call over to the operator for the Q&A session.

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Q&A Session

Operator: Thank you. We will now be conducting a question-and-answer session. [Operator Instructions] Our first question is from Michael Baker with DA Davidson. Please proceed with your question.

Michael Baker: Hey, great. Thanks, guys. A couple of things, one, I’m curious, you said 14 wholesale partners. Can you give some more color there. We know it’s Walmart, is a big one. You said you’re going to be in a second big partner who I don’t know if you’ve officially announced it, but we think we know who that is, but who the other 14? I imagine a lot of smaller FDM partners, but any color on that would be helpful? Thank you.

Chris Mondzelewski: Hey, Michael, this is Chris. I’ll address your question. So yeah, our largest partner is Walmart. We’ve been thrilled with that partnership. We did talk last quarter about the second largest partner we’ve got into Albertsons and that launch has thus far gone really well. We’re still in early days, a full distribution with them, but as we mentioned on the call, so far, the performance looks great. I think as far as the other 14 customers, it’s a collection of mid and smaller-sized customers. I would say at this point we’re having conversations with really all major customers in the US. So what we’re going to continue to do is find the biggest ACV opportunities, focus our resources against that and we’re going to continue to drive the right partnership for Black Rifle.

So we’re going to continue to make sure that we are operating with the customers that gives us an opportunity to create great value overall in the premium coffee category, but then also meet our mission, which obviously is very fundamental to us.

Michael Baker: Okay. And the other — the other wholesale question the RTD business, just update us if you wouldn’t mind with a little bit more color on what’s going on there? I guess we get the growth, but it sounds like you’re taking inventory write-down. So you’re limiting SKUs, I think, that have underperformed, what — a little bit more color on what’s going on in the ready-to-drink business, please?

Steve Kadenacy: Sure. This is Steve. I’ll take that one just relative to the write-downs and the adjustments that we took. Obviously during the year, we were a bit over-inventoried and we’ve been doing everything we can to bring that down. We’ve struck a few deals to help us in that regard, which all kind of improved our position going into 2024. There’s a little bit to be done in the fourth quarter, but we’ve taken some non-cash hits that allowed us to offload inventory during the quarter plus we’ve had a strong demand as Mondz mentioned in his prepared comments for RTD in general, which has brought down our inventory overall, but the non-cash hits really I think are mostly done other than the deal that we’ve done with KBS which will help us bring down inventory in Q4 and a little bit in Q1 as well.

Michael Baker: Got it. Okay. If I could ask one more and I hope you will answer it, I imagine you won’t, but you’re talking about clear path to a $1 billion. Can you help us see that clear path in terms of which channels and how long and at one point, you’d be talking about a 20% EBITDA margin. A lot has changed since you guys first went out with a 20% EBITDA margin. I mean, is that still on the table in anyway? Thanks.

Evan Hafer: Yeah. So, I’ll start off and then I’ll kick it over to Steve. So as far as the route to $1 billion, I’m not going to go into a lot of detail on that. We’ll continue to reveal more as we write our strategic plan here over the next year. But suffice to say we’re only in the beginning stages of penetrating the wholesale channel as a starting point, right. If you look at our ACV, we’re at about 32% on packaged coffee, we’re at 41% within RTD. So given our strong results, we expect that we should continue to be able to push those ACV numbers significantly higher. Within the doors themselves that we’re in currently, again, there is strong room for expansion and the customers that we’ve already been in for a year, we had a lot of success in getting innovation in year to continue to push our distribution and our share numbers higher.

So again, that ability to really work within the doors is a secondary factor. And then, the third is really what are all the other areas that a super-premium Coffee Company can operate and again we’ve talked about our outpost business in the past, we have 30 stores now, we have taken a bit of a tactical pause on outpost, as we have been investing in the areas of the growth that we think are most accretive to building our brand and build on the momentum that we’ve had, but in the background, we are of course working strategy there as well. So all of these pieces will play a factor in our route to $1 billion.

Steve Kadenacy: Yeah. Just to add to that in terms of our longer-term goals for profitability, we’re going to come back to you in Q4 and talk much more detail, obviously, about 2024 and ideally, we hope to be able to give you some insight into kind of high-level goals for ’25 and ’26 as well. But you’re clearly seeing currently an inflection in the business, you’ve got significant synergies of scale happening where the growth on the top line is 33% as I mentioned in my prepared comments, and only 4% growth in total OpEx and then we’re taking out as I mentioned another $15 million of cost in Q4 for a total of 30 year-over-year and some of that will put back into our marketing, but you’re clearly seeing an inflection of profitability for the business and also by the way, relative to our liquidity and inflection in cash flow into 2024 which I mentioned in my prepared comments as well.

Michael Baker: Okay. Thanks. Appreciate the color.

Evan Hafer: Thank you.

Operator: Thank you. Our next question is from Sarang Vora with Telsey Group. Please proceed with your question.

Sarang Vora: Great. Congrats Chris and Steve on the new roles, and good to see the acceleration of the business. Let me start first with the Walmart thing, can you — it seems like the relationship is going fine strong for you guys. We were in stores, we saw the new canisters and instant coffee and stuff, so can you help us understand how the new products are driving success over there and then it is almost a year that you will have the Black Coffee. So how are you thinking about growth of the Black Coffee business at Walmart and then any changes you plan to do over there in terms of pricing promotion as you start to lap go into the second year of the business at Walmart, the back ones?

Chris Mondzelewski: Hey, Sarang. Thanks for the question. Let me kick off. I think, yeah, we’ve had an outstanding partnership with Walmart through the existence of the brand there. So to specifically address your question about some of the new items that we talked about in the last quarter’s call. Yeah, the performance has been outstanding. I think our share position has continued to advance. As you recall the share was at $1.3. We talked about it being $3.8 is now $4.2 of the latest 13 weeks. So as that share continues to advance an element of that of course is those new items and those new segments that have — that have come into our product portfolio there. Moving forward, we will continue to drive our core business as well as look for ways to expand as we would with any customer.