Greetings, and welcome to the Black Rifle Coffee Company Third Quarter 2022 Earnings Call. [Operator Instructions]. I would now like to turn the call over to Tanner Doss, Vice President of Investor Relations. Thank you. You may begin.

Good morning, everyone. Thank you for joining Black Rifle Coffee Company's conference call to discuss our third quarter 2022 financial results, which we released this morning and can be found on our website at ir.blackriflecoffee.com. With me on the call today is Evan Hefer, Founder and CEO; Tom Davin, Co-CEO; Greg Iverson, our Chief Financial Officer; Toby Johnson, our Chief Operating Officer; and Heath Nielsen, our Chief Retail Officer. Before we get started, I would 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 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. Reconciliations of these non-GAAP measures to the most comparable GAAP measure 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 Tom Davin, Co-CEO of Black Rifle Coffee Company. Tom?

Thanks, Tanner, and good morning, everyone. Thanks for joining our third quarter 2022 earnings call. Today, I will update you on our key strategic initiatives that will continue to power our growth into 2023 and beyond. Evan Hefer will further address our entry into the food, drug and mass channel as well as discuss marketing strategy moving into the new year. And Greg Iverson will walk through our Q3 results and balance sheet. As outlined during our last call, we have 3 key takeaways that summarize the Black Rifle Coffee Company business model. Number one, we are rapidly evolving from a pure play direct-to-consumer company to an omnichannel business model built on a digitally native foundation. Our entry into the food, drug and mass channel is a key piece of the puzzle in order to meet customers wherever they shop. Two, we are continuing to respond to a significant ready-to-drink coffee product demand by adding capacity and execution capability. Number three, Black Rifle Coffee continues to have a unique connection to our loyal and growing community. Let me offer a bit more color on each of these key takeaways. Number one, we are rapidly evolving from a pure-play D2C company to an omnichannel business model built on a digitally native foundation. 3 years ago, we generated more than 90% of our revenue from our D2C business. As you can see from today's results, those numbers are changing rapidly as we take advantage of the ever-evolving landscape where consumers want to access their favorite brands wherever they are shopping. Over 66% of coffee drinkers only purchased their coffee for at-home consumption at retail, typically in the food, drug and mass channel. So in order to satisfy our customer, we needed to enter this channel. Further, with Black Rifle Coffee aided brand…

Thanks, Tom, and good morning, everyone. Thanks again for joining us on our third quarter 2022 earnings call. As Tom mentioned, I wanted to give a bit of background on our decision to enter the FDM space and why we chose to collaborate with Walmart as well as give you a quick update on the marketing and branding side of the house. First and foremost, we're very grateful for our collaboration we have with Walmart. This couldn't have been done without a tremendous amount of work from our team here at Black Rifle Coffee. I think almost every department at Black Rifle Coffee had a hand in getting this across the finish line. from our internal art department mocking up bags in less than a week to our supply chain team working across the globe to find the product. Most of us at Black Rifle Coffee are used to dealing with tight time lines, pressure field situations while we are in the military. So when we gave this time line, everyone put their heads down and got to work. I can't thank our team enough. And I know that when we see this product on the shelves of Walmart, they have just as much pride as I do in getting this across the finish line. To help put the size of this FDM opportunity in perspective, the at-home coffee market is roughly 40% of the overall coffee market or $18 billion plus of the total addressable market and $11 billion plus within our Black Rifle Coffee serviceable addressable market. To date, we have served the at-home segment primarily through the D2C channel. Here is some additional information that will help explain why we're so excited. 4% of coffee purchases for at-home consumption are bought solely online. 30% of households are…

Thanks, Evan, and good morning, everyone. Today, I will expand on the update that Tom provided on our third quarter results and provide a brief update on our balance sheet and liquidity before we open the call to your questions. In the discussion of our third quarter financial results, I will be providing both GAAP and non-GAAP results, which exclude the impact of the RTD production issue that Tom mentioned earlier in the call. We're providing the non-GAAP results because we believe they are a better indication of our overall business performance. Beginning with revenue. For the third quarter, total revenue increased 26% to $75.5 million compared to $60.1 million in Q3 of last year. Excluding the $600,000 adjustment to revenue for the RTD production issue, total revenue increased 27% from a year ago to $76.1 million. The meaningful increase in revenue was driven primarily by our entry into the FDM channel and expansion of our RTD product in our wholesale channel. Now I will give some additional details on our 3 sales channels. First, our direct-to-consumer revenue grew 2% to $38.1 million compared to $37.5 million in Q3 of last year. This increase was primarily due to an increase in pricing on bag coffee partially offset by continued lower sales volumes from nonsubscription customers. We entered the quarter with 278,000 subscribers representing growth of 1.7% over Q3 of last year but a decline of 3.4% sequentially from the end of Q2. The small decline in subscribers from Q2 was a result of our decision to redirect investments to other faster-growing areas of the business as we continue to experience elevated D2C customer acquisition costs. Turning to our wholesale channel. Revenue increased 66% to $32.2 million in Q3 compared to $19.5 million during the prior year period. Excluding the effects…

I trust you can sense our excitement for the future. To recap the 3 key takeaways for this call: Number one, we are rapidly evolving from a pure-play D2C company to an omnichannel business model built on a digitally native foundation. Our entry into the FDM segment is a key piece of the puzzle in order to meet our customers wherever they shop; Number two, we are continuing to respond to significant ready-to-drink product demand by adding capacity and execution capability; Number three, Black Rifle Coffee is a unique connection to our loyal and growing community. With that, I'll turn the call over to the operator for questions.

[Operator Instructions]. Our first question has come from the line of George Kelly with Roth Capital Partners.

So first one for you, just has to do with this year's guidance, the cut there, the $20 million. Wondering you may have sort of detailed or quantified exactly where that's coming from. I think most of it's RTD, but could you just specify exactly what that is?

Sure, George, it's Greg Iverson. Happy to do that. And it was -- included our remarks, but just reiterating, it relates entirely to the RTD products line, and there's really 2 factors. One is we mentioned a production issue where we have some products that we ultimately decided we're not going to sell. And then we also had a delay in -- from a supply chain perspective and products getting to our new co-mans that delayed those start-ups. We said that of the reduction in our outlook for Q4, about 1/3 of it was related to the product manufacturing issue and then about 2/3 related to getting the ingredients to the co-mans.

Okay. Okay. Excellent. And then second question, another 1 on RTD, but I believe you said in your prepared remarks that you now have Three with these 2 additional partners, you now have 3x the capacity that you had before? And so were you able to secure -- I believe that to step up from where you were prior. So were you able to secure additional capacity within those 2? Or are there planned additional partners kind of down the road that gets you to that 3x?

George, it's Toby. So the additional capacity that we talked about is with our original co-man partner plus the additional 2 that we've signed on. So we've completed the startup phase with those 2 incremental comments and the tripling of the capacity is just taking that run rate of that additional capacity and annualizing it into 2023. So we feel good about the fact that we are through that start-up phase, and we have enough capacity without having to do any additional startups in 2023.

Okay. Okay. And then last question for me is about the Walmart launch. I know it's early, but can you talk about what you've seen in your D2C business since you launched? And has there been any kind of noticeable change either uptake or down to cannibalization that you've noticed?

George, Tom Davin here. Thanks for the question. We have not. So obviously, shopping at Walmart is a different occasion than somebody buying online. And we've been very pleased that not only are we doing at Walmart but our churn has stayed very constant in the direct-to-consumer business.

Our next questions come from the line of Michael Baker with D.A. Davidson.

Okay. Also a question on the Walmart initiative, which I think is the big news of the day. Yes, it's early, we get that. But any initial POS data sell-through, et cetera?

So our initial velocities are at or slightly above what we had projected. We are relatively new in the distribution, but we're really excited about the performance out of the gates. One, from a consumer standpoint, the feedback from our consumers has been strong. there's about 30 million people a day that go into a Walmart and they seem to be really happy as they go down the coffee aisle and find Black rifle on the shelf. We've also looked at it from a competitive standpoint at our initial entry into Walmart. We're about a 2.4 share of the overall coffee category in Walmart based on the data. And we're looking versus the competition. I think we mentioned in our prepared remarks. For the last 4 weeks, we've passed some established copy brands in our size, including Pets and death wish and continue to grow as we add in new SKUs, et cetera, with our full rollout plan. So we're anticipating that growth to continue to build, and we are really excited about the collaboration with Walmart.

All right. That's helpful. And that sort of is a good segue into my next question. That $500 million plan next year, what is that sort of -- what are you embedding in there in terms of the rollout to Walmart? I mean, is that sort of like maxing out at Walmart full capacity? Or is that still early in the rollout, likened what could that $500 million eventually be as you grow with Walmart?

Yes, Michael, it's Greg Iverson. So if you remember on our earnings call last quarter, we said that across the entirety of the wholesale channel, expect that to comprise more than 60% of our revenues. And so that still is absolutely true. In terms of the 2 big growth opportunities, Walmart and the FDM channel broadly is definitely 1 of the big opportunities and RTD is a big opportunity as well. And so we have some information in terms of what this initial rollout looks like. Toby just gave the update in terms of where we're at today in terms of share. We certainly see the opportunity as well as our partner sees the opportunity for us to continue to gain share. So it will continue to ramp up in each of the quarters. I don't know that we'd ever stay at a point where we've fully penetrated within Walmart. We see a lot of opportunity to continue to grow our brand presence within their footprint.

Well, so I guess not to [indiscernible] maybe let me ask 1 other way. What -- so the share right now is 2.4%, what share is embedded in that $500 million? Is that something you've quantified or willing to share?

It's something we've quantified is something we think about and work through something we certainly discussed with them, but no, it's not something we're guiding to.

[Operator Instructions]. Our next questions come from the line of Bill Chappell with Truist Securities.

This is Stephen Lang on for Bill Chappell. Can you maybe talk about what you're seeing in direct-to-consumer sales? It seems like the channels kind of continued to gain a fairly substantial amount of subscribers, but the revenues are kind of only slightly up. But can you provide some further color on if there's some shift in spending or maybe something else that we're not seeing?

Yes. I would say -- and again, this is Tom Davin, so thanks for the question. In the direct-to-consumer subscriber side of the business, we're seeing that as very steady. There's a slight decline versus sequential Q2 numbers on the subscriber side and a little softness in the non-sub business on D2C but overall, very steady versus prior quarter in the prior year.

Yes. And I think that, that mainly -- this is Evan, by the way. I think what that mainly constitutes is we've had to shift the way that we're spending marketing dollars to a more omnichannel spend perspective. So we're not allocating 90% of our marketing budget to a D2C marketing plan. So as we start to look at how we market our product as we expand into different channels, we've got to diversify our marketing spend, which obviously will deemphasize some of the channels that's just kind of a low math, I guess.

And then just a quick clarification. I see inventories are kind of up almost like 50% since the end of June. Is this kind of getting ahead of the holiday selling period? Or can you kind of talk about more what that build looks like?

Sure, Steve. It's Greg Iverson Happy to do that. The building inventory really relates to the ready-to-drink product. And so as we mentioned on our last call, with this emphasis in the wholesale channel, our primary use of capital near term is for us to build out inventories and then ultimately receivables to support the rapid growth across both the ready-to-drink product as well as the food, drug and mass channel. With the new co-mans that we brought on and Toby addressed just a moment ago in terms of the capacity, but we've built up a lot of raw material ingredient inventory to support the growth in that channel. So it's something that we've planned on. It's a big part of the reason why, as you probably also saw that this morning, we announced a new $65 million senior credit facility that allow us to continue to fund that working capital build.

Our next questions come from the line of Matt Curtis with William Blair.

I guess a question on Outpost. I mean, obviously, the stores are still opening very strongly. But now that to while since you've begun opening out post. I'm just wondering what you can tell us about what the maturity curve of sales volumes looks like. I mean, are you seeing a significant honeymoon bulge that then sells into a more consistent sales volume. Just anything you could tell us would be helpful.

Heath Nielsen, you want to take that one?

Yes. It's Heath Nielsen. So I think in any natural retail opening, you will see that. What we've been very pleased to see is how our average transaction has continued to hold very, very strong. And with the addition of specific LTOs that we've had, and we just most recently launched our [indiscernible] and pay that we've been able to continue to gain traction within the retail outpost.

Okay. Great. And then I guess just getting back to the sales guidance for the fourth quarter. I guess I'm still just surprised by the magnitude of the adjustment I mean, is there anything you can tell us to help us be reconcile exactly what is driving the reduction or the magnitude of the reduction, I mean?

Well, I think we tried to lay out in our script and then reiterated it here just a moment ago, but there's 2 factors. So the first was this manufacturing issue. And we said that was about 1/3 of the total reduction in our outlook. And I think a big part of it is just there's -- as we mentioned before, there's incredible demand for our ready-to-drink product. And we've historically been very capacity constrained. It's been such a critical initiative for us to get these new co-manufacturers and expand the capacity. We launched those initial test runs and then went through all the QA process and then went into production. And unfortunately, we have this production issue with 1 of those co-mans where we had to -- or issuance we had to, we made the decision voluntarily to pull the product. And so it's just simply the size of those production runs are large. And so the effect of pulling 1 of those has a big impact on the quarter. And then similarly, too, when Toby just shared the amount we've added to our capacity, which is a -- it's a big, big increase. And so as you appreciate, a delay in those production runs has a big impact on the quarter. The important thing for us is we resolved both. So we're now shipping full production runs from both co-manufacturers. And so while it had a meaningful impact on the third quarter and a bigger impact on the fourth quarter, these are things that we've resolved and won't be impacting 2023.

Okay. Got it. And then, I guess, the last question for me. It sounds like you're still making a lot of progress on the product innovation front. Can you tell us how many new SKUs you plan to launch next year, if you've decided that yet? Maybe it makes more sense to talk about that by channel.

So I'll hop in on RTD, in particular. And we're really excited. We brought our innovation to NAX in early October to interface with our distributors, customers directly. We have samples of everything that we're planning to launch in 2023. And this is the first time we're bringing news to the category. We are focused on growth and being agile as a company, but we're also disciplined where we need to be. And in the case of RTD, we've been focused on our 4 core SKUs. But as we unlock our capacity, we can bring news to the category. So in addition to those 4 SKUs, we are adding permanent SKUs to the lineup. Those will launch in Q1 and be available for all the resets that are taking place. One is a 15-ounce SKU of vanilla. We also have an 11-ounce SKU of salted caramel and a highly incremental SKU 6.5 ounce that we're really excited to complement the portfolio with. We additionally shared a couple of limited time offers, 1 for the summer, a very white and blue very patriotic and highlights what we stand for as a company and then a fall Pumpkin Spice LTO. The feedback was incredible. We're taking orders and beginning production on the permanent SKUs right now. so that we can add those to our reset windows in the first half. And across the rest of the portfolio, I mean, innovation is part of our DNA. We launched a new ECS coffee every month. That will continue. We're looking at channel innovation as we continue our expansion, and we'll continue to innovate across the portfolio to drive growth and excitement for our consumers.

The retail post innovation has a lot to do with the cold beverage platform. We talked about our penetration of cold beverages being in the mid-30s. So for Heath and the retail team driving that up is a huge priority. Plus we have seasonal LTOs. We've got several in the market right now, the retail output. So that is all going well.

[Operator Instructions]. Our next questions come from the line of Michael Baker with D.A. Davidson.

Just a quick follow-up as it relates to the fourth quarter. One, you keep talking about -- I guess, what was the plan for the fourth quarter? Do we just take the full year guidance of $321 million and subtract year-to-date and was that the original plan? And I guess implicit in that is that the $76 million roughly in the third quarter was in line with your plan? And then a follow-up, any color on how to think about the EBITDA in the fourth quarter, given the lower sales?

Yes. Yes, Mike. So with regard to Q3, Q3 came in pretty much in line with what we were expecting to see. If you remember, last quarter in our outlook, we talked about a full year number, but then we referenced, expect about 60% or more of the revenue to fall in the fourth quarter. So based on that math, you can see we came in, in Q3 right in line with that expectation. So you're absolutely right. It's if you take the fourth quarter guidance versus the 9-month year-to-date, that's what we're guiding to for the full year. And then in answer to the second part of your question, from a Q4 profitability perspective, starting first with Q3, we had a relatively strong Q3 quarter from a profitability perspective. You can see we had a step-up sequentially in our gross margin, we had a meaningful step-up sequentially in our adjusted EBITDA. From a Q4 perspective, there's a couple of things that are important from a seasonal perspective. So number 1 is we do run more promotions and discounts within our D2C channel during the peak holiday shopping season. And so that historically has a meaningful impact on our gross margin. So bringing Q4 margins down lower than Q3. From a pricing perspective, we had a nice lift in Q3 related to pricing. We don't have any significant incremental pricing actions that are built into the fourth quarter. And the last thing I'll mention is our marketing spend is also more significant in the fourth quarter. Evan mentioned earlier today, we have a couple of significant activations in the fourth quarter but then we'll also be spending a little bit more to drive traffic to the sites related to, like I said, this peak holiday shopping season. So netting all that out, expect adjusted EBITDA not to be at the same level as we had in Q3. So somewhere between where we were in Q2 and Q3.

Thank you. There are no further questions at this time. I would now like to hand the call back over to Tom Davin for any closing comments.

Thank you very much. And so we're pleased to report the third quarter and we're charging hard into the fourth quarter. Thank you, everyone, for joining the call, and we'll see you out in the marketplace.

This does conclude today's teleconference. We appreciate your participation. You may disconnect your lines at this time. Enjoy the rest of your day.