Yahoo Finance BRC Inc. (NYSE:BRCC) Q1 2024 Earnings Call Transcript
BRC Inc. (NYSE:BRCC) Q1 2024 Earnings Call Transcript May 11, 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, and welcome to the Black Rifle Coffee Company First Quarter 2024 Earnings Call. [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 morning, everyone. Thank you for joining Black Rifle Coffee Company's conference call to discuss our first quarter 2024 financial results, which were released yesterday and can be found on our website at ir.blackriflecoffee.com. Before we start, I would like to remind you of 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 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're 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're also available on our investor website. Now if you could please turn to Slide 4 in the presentation 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 Evan Hafer, our Founder and Executive Chairman, and Steve Kadenacy, our Chief Financial Officer. We've provided a presentation that we will refer to throughout the call, which you can find on our investor website. Please turn to Slide 4. In our last meeting, we discussed the importance of holistic management of our business. We have already demonstrated we have a phenomenal consumer brand and mission, driving fantastic growth and industry-leading loyalty. Over the past 9 months, the management team and I have challenged our organization to build a profitable business as well. While continuing our industry-leading growth, we have stretched our team and resources to deliver core margin and expense control.
I'm proud to say we are succeeding. I could not be prouder of our organization. In Q1, we delivered record margin, profitability and cash flow, all while continuing to achieve industry-leading growth. After 23 years in the CPG business, it has not lost on me the difficulty of what the team is doing, but their dedication goes beyond any other colleagues I've had the chance to lead. Our dedication to the Black Rifle mission drives us every day, and we are certain that the focus on our serving our community will continue to drive success. On top of our core business achievements, we are also excited to announce our partnership with Keurig Dr Pepper. Partnering with an iconic company like KDP is a testament to our team's efforts and the growing impact of our brand throughout the beverage industry.
As was announced a few weeks back, we've entered into a long-term agreement for manufacturing and licensing of our single-serve pods with KDP. We are well on our way to becoming a best-in-class CPG brand. And this partnership will not only accelerate our growth across our current portfolio, but also give us the ability to innovate within the CPG sector through access to new channels we are currently not serving. In turn, the success and profitability of our business allows us to continue to drive the mission of supporting veterans, active duty military, first responders and their families. I will now discuss the trends across our business units in greater detail. Steve will then review our financial performance before turning the call over for the question-and-answer session.
For the first quarter, we have performed strongly against our key metrics. Net revenue was up 18% compared to the prior year, driven by rapid growth within our wholesale business, which was up 51%. We continue to set profitability records, with adjusted EBITDA improving to $14.1 million and 14% of revenue, a remarkable inflection over last year. This material increase in profitability is the result of our significant wholesale growth and the operating leverage that results from it, as well as our continued focus on lowering operational expenses. Steve will discuss in more detail in a moment. Turning to our channel highlights. Please flip to Slide 6. As mentioned earlier, we grew 51% in FDM market. Based on this success, we will continue to leverage the rollout of coffee and K-Cups to the broader market.
We added 3 additional partners in Q1, bringing the total to 26 and expect to increase significantly through the end of the year. Our ACV is currently up to 38%. And as we have said before, we believe we will be fully deployed in FDM by the end of 2025. As others have commented during the earnings season, we believe our FDM business is being positively impacted by consumers migrating from drinking coffee out-of-home to in-home, especially in the premium coffee space. This is the trend we started seeing last year and believe is continuing, which has helped us become one of the fastest-growing premium coffee companies in America. Please turn to Slide 7. In addition to expanding within the vast FDM channel, the partnership with KDP also allows us to enter exclusive channels such as foodservice.
Further, we will shortly be available on keurig.com, which will continue to expand our brand awareness as we are exposed to a broader customer base. Turning to our RTD business on Slide 8. We continue to outpace the RTD industry by 3x the category growth, and we expect the spring reset season to continue that trend. Over the last year, we have been very focused on improving the product margin of our RTD business. I'm thrilled with the progress our team has made, and we are beginning to reap the benefits of all the hard work they've done. First, we've made strides in optimizing our RTD supply chain. Most notably, we reduced our manufacturers from 4 to 1, focusing our business on the highest quality and lowest cost provider. Second, as we've mentioned in the past, we've addressed our excess finished goods inventory through barter transactions.
We will continue to minimize excess inventory risk through sharp business planning and a focus on our core high-velocity SKUs. Third, our logistics team has done an incredible job centralizing our warehouse network down to 2 main hubs versus 7 last year. Finally, and most importantly, we continue to improve our distribution network to ensure that we are working with the best distributors in a given region that can meet increasing consumer demand. These changes, among many others, equate to impressive improvements to our RTD product margins, improving 540 basis points quarter-over-quarter, with additional improvements phasing in through the rest of the year. Moving to Slide 9, which walks through our DTC channel. We have made many enhancements to our website at the start of the year, and there are early indicators that the improvements are paying off, particularly in our subscription business.
As part of the migration, we cleaned up our subscriber list, which resulted in consolidating some accounts. So from a high level, there appears to be a drop-off in subscribers. With the new site features that optimize the subscription experience, we're seeing that new subscribers' average order value increased 17% relative to our past experience. These results are encouraging, and we believe we will see the DTC business stabilize this year as a result. Turn to Slide 10. As highlighted last quarter, we remain on a tactical pause within our outpost business. We are taking advantage of this capital investment pause on outposts to sharpen our strategic plans. As part of the improvements in unit economics, we're scouring and optimizing all contracts and opportunities for operational efficiency, especially in the stores that are not meeting our high internal return thresholds.
Ultimately, this exercise will position us to rapidly scale beyond 2025. As promised, we expect to give investors a longer-term view of our outpost strategy by the end of the year. Moving on to Slide 11. As always, all of our efforts culminate in our mission. More than ever, Americans demand that our brands they buy stand for something. And at Black Rifle, we stand for those who serve and have served. On our last call, I mentioned that Evan was in Florida training for a Founder-led initiative to commemorate the 80th anniversary of D-Day, and we're getting closer to that June 6 date. To commemorate the bravery of the hundreds of thousands of soldiers, sailors, airmen and marines, we are developing a custom long-form content to highlight the harrowing experience of each service, told through the stories of survivors of the battle.
On top of this, our founders and friends from various military communities will commemorate this event with an era appropriate honorary jump over the hallowed battlefields. This event will allow BRCC to embody our core values of remembrance and respect. We will commemorate this historic event not only by honoring the sacrifices made by the brave individuals who served, but also by reaffirming our commitment to preserving and sharing stories of courage and perseverance. We hope to connect with our audience on a deeper level and foster a sense of shared purpose and solidarity within our community. Now turning to our financial results. Steve?
Steve Kadenacy : Thank you, Mondz. Please turn to Slide 13. In Q1, our focus on operational excellence continued to pay off, as we saw profitability really gain momentum. Our team's dedication to the strategic initiatives that we kicked off last year has propelled us forward, particularly in the productivity initiatives benefiting freight and logistics. Supply chain efficiencies added 330 basis points to our gross margin quarter-over-quarter. We also benefited from pricing and mix shifts towards high-end margin FDM business, adding 250 basis points from last quarter. With these gross margin improvements, we achieved our long-range gross margin goal of 40% plus this quarter, a few quarters before I expected we would. Below the line, we saw SG&A improvements from last year's cost initiatives of reducing reliance on external consultants and aligning our headcount to reflect the shift in the business towards the FDM channel.
With that, SG&A dropped to 38.9% of revenue this quarter compared to 53.6% just a year ago. Turning to Slide 14. Top line growth of 18% was driven by substantial growth in our wholesale business, primarily from FDM. It's worth noting that we made a change to the terms and conditions of our loyalty program in Q1 to align with best practices and provide more predictability in our financials. This change resulted in $3.4 million of additional revenue in the quarter as we reduced our reserve. This event increased our DTC revenue in the quarter, but also fell straight through to the gross margin, boosting our gross margin by 2%. That said, even without the boost from the loyalty program, our gross margin still exceeded our 40% goal. Shifting to overall profitability, we've reached a significant milestone.
Net income was positive for the first time at $1.9 million, and adjusted EBITDA increased to $14.1 million, up from a loss of $5.2 million a year ago. Turning to Slide 16. With our performance in Q1, we are increasing our guidance forecast. While we are maintaining our revenue targets of $430 million to $460 million, we expect to be at the top end of our gross margin range of 37% to 40%. Additionally, we are increasing our full-year EBITDA range to $32 million to $42 million, up from $27 million to $40 million. With respect to cash, we still expect 80% free cash flow conversion. Although we are not providing quarterly guidance, it's worth noting that while we are super proud of the quarter's profitability and expect strong levels of profitability for the remainder of the year, there are some benefits in Q1 that may not repeat in Q2 that you should consider as you build your models.
We do not expect another loyalty reserve release. Our compensation increases kick in, in Q2. And lastly, given our focus on profitable revenue growth, we expect advertising and marketing expense to ramp up a bit in the next 3 quarters. Consequently, we expect lower EBITDA in Q2 as compared to Q1, but then we expect to see EBITDA ramping in Q3 and Q4. In summary, this was an exceptionally strong quarter for the company. 3 quarters ago, we indicated that our business was at an inflection point and our consistently improving results are proving that to be true as we continue to see sequential revenue and profitability growth. This performance, in turn, converts to cash flow, which opens new opportunities for reinvesting in the business and fulfilling our mission of serving our shareholders and the veteran and first responder communities.
With that, I'll pass the call to the operator for the Q&A session.
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