BRCC - NYSE

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.

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?

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.

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.

[Operator Instructions] Our first question comes from the line of Sarang Vora with Telsey Group. Please proceed with your question.

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.

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.

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.

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.

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. As our first retailers have done with us, we also have to be able to deliver an exceptionally high level of service both to our partners, our customers, as well as our end consumers. We pride ourselves on that. Our NPS scores as we've talked about are tops and the category. We don't ever want to lose them. And thirdly, we have to make money. We need to be able to deliver value and so, we're very proud of what we've been able to do to start the process of increasing our expense controls, as well as the movement on our margins themselves. And so, as we put our plan together, we're very proud of the growth number. We're significantly above the category in all segments, but it allows us to be able to do all the things I talked about in a really methodical fashion. So that we know we're not just building a business, but we're building a great business.

That’s great. Thank you. It's good to see a balance of growth and profits together. Thank you.

Thanks, Sarang.

Thank you. Our next question comes from the line of Joe Altobello with Raymond James. Please proceed with your question.

Thanks. Hey guys. Good morning. I had a couple questions on the revenue outlook, as well. I guess, first, what percentage of your ‘24 revenue are you expecting from the wholesale channel in terms of growth?

We we didn't guide at the segment level, Joe. But significant growth within the wholesale channel, that’s our primary focus right now.

Okay. Any idea what sort of same-store sales might look like in that channel? And how much is coming from new accounts?

Yeah, we haven't given that level of detail, Joe.

Okay. Understood. Second question on this - the free cash flow guide, the 80% conversion of EBITDA, I guess that would imply about $22 million to $32 million. Could you help us break that down between maybe net income D&A, working capital and CapEx?

Well, I mean the big tail - I'll give you the high level, Joe. I mean the big tailwinds are obviously our inventory reduction during the year. The other tailwind that we have is the barter transaction, which gives us, effectively cash free marketing and advertising. Those would be the big tailwinds.

Okay. So on inventory, I saw that you said that inventory was sort of at an optimum level at this point. So - but we should expect another reduction inventory in ’24?

Yeah, I think it comes –expected to come down a bit on the net side, but we do have some reserves in there that we put in the final quarter. So there's a bit more of a tailwind than would show purely on the net reduction that you'll see during the year.

Okay. And how much cash flow is coming from the barter transaction this year?

We didn't - I don't we didn't it's probably about $8 million.

Okay. And last one for me. I apologize that the other asset of $23 million, is that related to the barter transaction?

Yes.

Okay. Got it. Thank you guys.

Thanks, Joe.

Thanks Joe.

Thank you. [Operator Instructions] Our next question comes from the line of George Kelly with Roth MKM. Please proceed with your question.

Hey everybody. Thanks for taking my questions. So the first one for you is on your gross margin guidance. You listed a bunch of - I understand sort of primary reason for the gross margin improvement in fiscal year ‘24, but you mentioned I think four different initiatives that you're going through that will also help benefit gross margin. And I'm curious if you could just give a little more detail? And I'm especially curious on the RTD side and with respect to RTD, do you anticipate having a significantly higher structural margin in that business now going forward? And I don't know if there's any way to kind of quantify what RTD gross margin is, but would love to learn more especially on the RTD side.

Why don’t I take the core question and Mondz can add color? There's a few things impacting the gross margin. On unadjusted basis, our gross margin has been hit pretty significantly by the oversupply that we had during the year that goes away. Second is, the natural shift in our total revenue into the FDM side of the business is high margin, 40 plus. Third, and this is just part of being a good CPG business is you're always refining the supply chain. And our team is working very hard on market - on the logistics side and the manufacturing side to squeeze margin out. Those things all combined are going to give us that significant improvement. And I'll maybe hand it over to Mondz to talk about the RTD side.

Yeah. No. Thanks for the question. I think, there's not a ton of detail I'm going to give, but I think what I'll tell you is, I'm just going to build a little bit on what Steve said. I think what we've done is, when you launch a business, and again when you think about the last couple of years, while there have been some operational challenges on RTD, the key for us right now is we're now sitting with four of the top 20 and six of the top 30 SKUs in the market in total coffee RTD. So, we now have significant scale across the core portfolio that we have. So as you recall, a couple periods ago, I talked about wanting to really simplify our approach down to those six core SKUs. And we have our sales team driving hard distribution against those six core SKUs. Having scale in those six core SKUs now allows us to go optimize the supply chain behind that. So, without going into the details, clearly when we're moving more volume through those SKUs, that allows us for cost optimization in different ways across the different elements of the supply chain. So that’s a big component of it. And then the other component when you start to just think about total, is for me, it's all about mix right? We're going to continue to push what we believe is a healthy mix for the business. And we've talked in the past about how our grocery business works very well in regards to that. Our center store coffee business is a 40 plus margin and as we continue to push hard on that that is going to be a great tailwind. We're going to do the same thing within RTD, as well. So I've already alluded a bit to innovation. We're not ready to share specifics on that. But suffice to say, as we continue to expand that business in the future, we will ensure we are doing it in a manner where we are creating a positive mix for us and the ability to drive higher margin.

Okay. That's helpful. And then, two last quick ones if I could on the FDM business. I'm curious is there an opportunity for continued innovation there in launching new products that will maybe help drive sales growth at existing retail partners? And then secondly, as you expand, I think you said to everywhere by year end ’25, what's that going to do to the FDM margin? And are these smaller - I think working with distributors in some of these smaller accounts I'm guessing will carry a lower margin profile, but just curious if you could help with that. Thank you.

Yeah, no, let me address that. I think um first on the innovation piece, yes, absolutely. We will we will bring innovation every year. I think it's a really critical component to competing really in any category within the consumer packaged goods space. But certainly in coffee, where consumers are always looking for new experiences. So as a super premium business that has had success in our initial year and a half in the market, we're having conversations with the retailers we're in now and some of our new retailers about what we can do to help them to continue to reinvent their coffee aisles. And one of the reasons we're doing so, well is that, Black Rifle really in many ways mimics the out-of-home experience for consumers who want to have that in-home. We will continue to drive our innovation in a fashion where we're able to continue to do that. And we believe we can do that in a really high margin profile way. And then your comment on additional customers. That I'll tie that back to the point I made on the previous question, which is around maintaining the profile of super premium brand. We will roll our distribution commensurate to being able to do that. So, absolutely, we're not going to allow ourselves to degrade margin. You're right I think, obviously there are different distribution components that go into smaller customers. We're going to make sure we always have things set up in a way where we can deliver strong service for those customers, as well. But there's no reason in my mind as we roll the majority of the FDM market, that we can't maintain or even increase the margin profiles that we have now.

Thank you.

Thank you.

Thank you. Our next question comes from the line of Jon Anderson with William Blair. Please proceed with your question.

Hey, good morning everybody. I wanted to start on just in FDM with your largest partner. Just if you could give us a bit more detail on kind of where you are now in terms of filling out the assortment and and being represented in all segments in the aisle. And then you've been in there more than a year now. And so any color on kind of how that kind of core part of the assortment there is kind of comping now that you've been in there a year would be helpful. Thanks.

Yeah, thanks John. So let me kind of start with just a quick summarization. I think I mentioned how proud we were of that first year in our largest customer. We continue to build momentum is the best way to I guess, summarize where we are now. I'll get into the detail of your question here in a second. I think what do I mean by that? Well, we continue to advance on a number of statistics. So if you if you look at it across the total business, we are the number for brand now in total ground bagged coffee. We are the number 8 brand overall in total. And to the point you made, there are some segments we're not represented and that's why it's a lower number when you look at total coffee versus the number 1 - I'm sorry, the number 4 in total bagged. The bottom-line is, we're going to continue to play where we believe we as a super premium brand should be playing. So, there are some segments of the market that are going to be less interesting thus. It doesn't mean that we would never roll products out into those segments. But what we would rather do is continue to compete at a higher and higher level in the segments that we believe a super premium coffee brand should be present. So, we've been very proud of the business that we've built in PODS. We're very proud of the fact that we've built again this strong number 4 bagged coffee business. And we do have a canister business which continues to grow. We only have one SKU there. So, again, I think for us, the opportunity is going to be within some of the segments that we compete in now, how do we really continue to build our share momentum there and help our retail partners to build their categories, which is something that we've been phenomenal at so far. And then yes, we will continue to evaluate. So an example of that would be the concentrate that we went into. We're now a 13 share in cold brew concentrate. That's a small segment, but growing very rapidly. So, obviously we had our eye on the ball on that and we're very pleased with what we've been able to do thus far. We'll continue to evaluate other segments in coffee as those develop, as well.

And maybe just to add a little bit on the end of that. We're seeing similar characteristics, on sales and velocity as we break into the rest of the FDM market, as well. And so, the product is really resonating and as a result the diversification of our sales on a customer basis is quite significant during the course of 2024.

That was helpful. That was going to be my next kind of follow-on question. So I appreciate that tag on. In the RTD business, could you talk a little bit about where you are? I mean, obviously you've made significant strides from an inventory perspective. You've got SKUs performing at very high levels in terms of top 20 and top 30-ish you mentioned. Where is that business from a gross margin perspective, not asking you for a absolute figure, but just relative to where you think it should be down the road? And what are some of the levers that you can pull or plan to pull to improve the margins in that part of the business?

Yeah, thanks. So I’d start by saying, we've made enormous strides forward. So as you think about the overall, margin improvements in the business and what we have planned for ‘24, RTD plays a huge role in that, right? So, we feel great about a lot of the improvements that we've made thus far. As I discussed though, no, we're not done. I mean, we're not pleased necessarily with where we are right now as a final landing spot. I think one of the things we've also discussed in previous calls is, RTD operates under a different margin structure than say, center store coffee, those categories simply compete differently. So we understand that. Our goal will be as a super premium position brand, we believe that we should be able to build a margin structure that is at the higher end of the market. And so, that is what we are working towards with that. And again just to reiterate I said before there's two components to that. I think we're going to continue to work on the margin profile of the existing products that we have. And we will consider when we think about innovation, what are some of the areas that we can go that allow us to not only operate first and foremost well as a brand, but to continue to build that margin further forward. And we're looking at all components of this as we do this. Again, it's not just what we do alone. To have a great RTD business you have to have partners, right? We talked about our distribution partners. We talked about our manufacturing partners. And so, we're always considering all of those elements, as well. What are the ways that we partner in a way that we can really ultimately create the most overall value in the markets, for the entire supply chain.

And when you look at our ACV of around 43% for RTD, that's kind of, stating the obvious but volume creates margin, as well. So we're kind of poised given the fact that we're growing significantly faster than the RTD coffee category as a whole that as we expand that ACV through the expansion of our distribution that we're poised to take margin in that regard, as well.

Great. That's really helpful. And then as you reflect kind of free cash flow positive in ‘24, any thoughts on kind of use of cash or just kind of capital allocation in general? Thanks. Appreciated.

We don't have significant CapEx during the year, significantly lower because we have put the tactical pause on stores, which was the largest capital expenditure category for us previously. So, during the year, we expect CapEx to be somewhere around $8 million significantly lower. And that's that I would say that's more routine maintenance CapEx. So the cash flow the free cash flow that we expect would be primarily to delever and lower interest rate until we determine in our long-range plans how to allocate that capital to growth again.

Very helpful. Thank you.

You're welcome.

Thank you. And we have reached the end of the question and answer session. I'll now turn the call back over to CEO, Chris Mondzelewski for closing remarks.

Yeah, thank you, everyone. Yeah, the piece I want to just mention on closing, I think we always get appropriately some wonderful questions around the financial performance of our business. But I'm going to close by just reminding folks of what I talked about in the beginning, as well, which is that for us, it's always going to be a two-prong strategy. Yes value creation is always going to be a key component of our business. That's what keeps us thriving in the market. But our ability to go back and impact veteran and first responder lives is why we all do this. And I'll give you one example of that. I think we did a we did a Veterans Day fight in November of last year with the UFC. This was at the very beginning stages of our partnership. We brought an organization that is a partner of ours HunterSeven, who focuses on cancer - cancer victims who have come back from conflict zones. In one night, we raised $250,000 by bringing them into that fight. So it goes to show the incredible impact in the engagements. In order to raise that kind of money we had to have many, many consumers and fans around the United States get involved in that. And it proves to us that this is a brand proposition that people want to be involved in and if we do it correctly we're going to be able to make a massive impact on a segment of our population the veterans and first responders who absolutely need our help. So, thanks everyone very much for your engagement and questions. We appreciate it and everyone have a great day.