Celsius Holdings, Inc. (CELH) Earnings Call Transcript & Summary

Good afternoon. I'm Sean King, the U.S. and LatAm beverages analyst at UBS. Joining me for today's fireside chat is Celsius Holdings. Specifically, we have CEO John Fieldly. The format for today's call will be Q&A. Before we start, I'm required to read a legal disclaimer. As a research analyst, I'm required to provide certain disclosures relating to the nature of my own relationship and that of UBS with any company on which I express a view on today's -- at today's meeting. These disclosures are available at www.ubs.com/disclosures. Alternatively, please reach out to me, and I can provide them to you after the call. So with that, let's jump into the Q&A. Thanks for joining us, John.

Excellent. Thanks for having us, Sean. Really appreciate it.

Yes, I guess the first thing I wanted to ask about was just the energy drink category overall. When you look at like Nielsen-tracked channel trends for the last 52 weeks, up high single digits, which is fairly surprising given some of the disruption that we've seen. Now what do you consider to be some of the biggest drivers of momentum for the energy drink category? And what will be key drivers of growth for the energy drink category going forward?

Yes. No, that's a great question. I mean when you look at the category overall, it's been continually driving in North America at those single-digit, mid-single-digit growth rate to high single-digit growth rates over the last several years. So earlier pre- -- during the pandemic, we saw some decreases there due to traffic, really patterns changing, larger pack size, people migrating over. And there was concerns about with the stay-at-home orders, individuals and consumers moving to other alternatives, teas, coffees while they're at home. But what we saw is the category continued to grow. Consumers went out and found those beverages, the energy drinks and other categories if it's at home delivery, Amazon, e-com, big box and so forth, so versus those traditional that we know, the energy drink sales is about 70% of them are derived from that convenience channel. So there's a lot of changes happening. The growth is there. We're seeing new consumers come to the category for the first time. So a lot of millennials, Gen Z and Y are coming in as new consumers, much larger population as well. And individuals are not aging out of the category as well. I mean energy drinks are part of our daily lifestyle, and it's all [ along the ] life. We're getting busier. Just think at the stay-at-home orders most recently. You're at home, you're teaching your children how to attend school and stay on task, plus all the other chores I mean -- that you have. There's a lot going on in our lives. It's just getting busier and the need for products that offer that functionality of better for you, and more energy is going to continue to thrive.

Great. That leads me to the next question. I believe you said that the global functional beverage category -- on functional -- this functional beverage or functional energy drink category can grow at 11% CAGR through 2023. Is that right? What are -- what's driving that category to grow faster than the broader energy category?

Yes, there's a seismic shift happening in the energy category. The global energy drink category is anticipated to grow sizably for the next several years. I mean as the same reasons in North America. New consumers coming in. You're also seeing household, more people being able in the globe to buy products, consumable products as well. So you're seeing that continue to be a driver as well. But most importantly when you look at the overall energy category, the growth is coming from these healthy, better for you, more functional attributed products. In North America we talked about in the industry, a lot of performance energy as a subsegment. We've talked about healthy, better for you for some time now. And it's really what Celsius does, we offer healthy functional alternative to today's traditional energy drinks. We are aligned -- not only are we born in the gyms and health clubs, but we are aligned for the masses in today's category, people want -- traditional energy drink consumers are aging out. They want something alternative, better ingredients. Celsius, over 8 essential vitamins, green tea, ginger, guarana. We offer functionality. No sugar, no crash, no jitter. So we offer something for everyone. That's what's really unique about the category when you're seeing the growth, a lot of the category I mentioned that next generation of consumers coming in. But also more females are coming to the category than ever before. If you look at traditional energy, it's historically 18 to 24 male is really the target, but we're seeing more females come to the category. And Celsius, being a 50-50 female-male demographic and aligned with a multifaceted age brackets, we really offer something unique for buyers in the beverage industry to bring something unique to help expand that category. And if they want to keep up with the category growth rates, they have to bring brands like Celsius into the mix.

Great. Yes, I guess this is -- my next part of question is I guess you sort of addressed this, but you could argue that the energy drink space has relatively low barriers to entry. I mean that's debatable given how concentrated the category is. But how are you really differentiating yourself or your portfolio in this space to sort of maintain or drive share gains when competitions are increasing their -- when the competition is increasing their focus on the category?

Yes, I mean the barriers to entry in the category historically have been very low. Not just in energy, in beverage in general. I would say today, the barriers to entry are a little bit harder with this whole can -- pandemic that we've had, a limited availability for cans. So the barriers to entry are a little bit higher just trying to get packaging as well as other components of your beverage. But historically, it is low barriers to entry, but really high barriers of staying power. I think there's over about 5,000 new brands that traditionally come to market every year. Not 1% of them will ever make it to 10 million in sales. And of those brands that make it to 10 million in sales, 1% of those will make it to 100 million in sales. So there's a lot of difficulty to get to that point and a lot of difficulty in the staying power. So one thing that you need with Celsius, you have to have a unique proposition. And one thing that -- with Celsius, we are authentic. We were, as I mentioned, at gyms and health clubs we were born. We're also a thermogenic. We offer clinically proven functionality, accelerated metabolism and burned body fat, and have those great ingredients that we talked about that healthy functional energy aspects. That's a point of differentiation. And we taste great. So you've got to taste great in beverage. That's the key.

Yes, that's true. I guess some of the -- when I look at some of the very strong sales that you had through the course of the pandemic, you're running at almost triple-digit growth as you know at times. Can you provide any color on how you think about that sales trajectory? At least I'm referring to the -- how channels will evolve as we kind of -- the economy begins to reopen and normal traffic patterns resume?

Yes. We're evaluating that. We're watching that very closely. I think what's very unique when you look at really the sales trajectory where we are, we're #3 on Amazon. We're just 0.2 percentage points below Red Bull. So it shows you apples-to-apples providing Celsius the same opportunity, we. Will turn faster than some of the leading brands in the category, and that's demonstrated with that stack line data that Rodney Sacks just released on Monster's earnings call. So there is -- we were very surprised. I mean about 20% of our revenue has been derived from the fitness specialty channel. And with that channel being closed, we were concerned with people -- everyone working from home and those type of things that they would move to alternatives. But what we saw Celsius, and it's validated and we've been talking about this for some time, Celsius is more than an energy drink. It is part of a daily lifestyle, part of a daily routine. And we noticed that because most of our sales have been sold warm. If you physically have to go buy Celsius to chill it and then drink it as part of a daily active lifestyle, and with the gyms closing and that distribution going down and then seeing the growth in online grocery, mass and drug and the drug channel, we saw the distribution. We still put up record revenues each quarter, and we didn't really lose any sales. I think we could have done much better if the fitness channel is open. There's no question about it. Plus, resets in 2020 were delayed. We had a great opportunity to really expand into convenience. And that's where we know all the volume is. What we've been able to do as we built Celsius, it's really around convenience. I mean we've done extremely well in grocery, mass, drug. We're also starting -- you'll see us at some divisions on Costco, you'll find us around. We're doing extremely well there and then online. So the next endeavor we're focused on right now is the convenience channel. That's where the DSD distributors come in, and that's where we see, like, the biggest opportunity right now. But it is really -- we are more than a traditional energy drink.

Great. Yes, back to your comment on sort of the health and fitness channel. So do you think that as that channel comes back -- or has that channel, first off, has that channel begun to come back? And do you think that that's just a shift of volume from other channels? Or do you think that that could be incremental for growth into a post-vaccinated economy?

Yes, I think it's going to be incremental. What we're seeing with the growth on -- like as an example Amazon, walmart.com, target.com, Instacart as well as within traditional retail, it is -- we are getting better placements. We're also -- we're seeing the brand really resonate well with more consumers as we're getting expanded shelf placements. As an example, during the summer we ran some great off-shelf programs at Target for the first time chain-wide, got really good traction. We actually came back a couple of weeks later. We're opted in another trade program with Target. So we're getting more of those great partnerships together. We also started to see coolers. We're seeing great ROI with strategic Celsius coolers placed in key accounts where we're seeing great rotation there. So there's a lot of opportunity ahead from us. I think it's staying power. If you look at the latest Nielsen data and SPINS data, it's extremely strong. I know most recently in Nielsen, they had us at over a 1% share about 2 weeks ago on the trailing 4 weeks data point. So really excited. That's a major accomplishment to grab 1% share in the category, and we look forward to what's ahead.

Great. Looking back through your -- I guess, the first 3 quarters of the year and so the strong growth that you had, can you help us sort of unpack, I guess, the drivers of growth in terms of same-store sales growth versus incremental distribution that you've achieved versus innovation or e-commerce? Like if you kind of unpack what the major drivers of growth have been this past year, that would be helpful.

Yes. Through the first 9 months of 2020, the growth drivers has really been the grocery mass and online and drug as well, those channels. We've seen just great sales and same-store sales as we continue to get better placements and execute. And more consumers are aware that Celsius is in those outlets. It takes us, what we've noticed, about 2 to 3 years really to optimize retailers we're in, that third year with many of these retailers. And then in addition, we started to transition some of those accounts over to DSD, which speed up that process, especially with new accounts coming on board. Because the DSD offers a white glove service, make sure your products stay in stock, on shelf, proper pricing and most importantly, keeping the product cold. And we know where we're cold, the velocity rates increases exponentially at retail. So that's really the next phase. And what we're working on, right, really in the third quarter and beyond into '20, and the future years really optimizing this DSD network and getting that service levels further increased. Through the first 9 months, we had a lot of out-of-stocks at CVS and many of our key accounts. It was difficult to keep the shelf stocks going through the warehouses and the wholesalers. So there's a lot of opportunities there. And when we see things coming back to normal, we are hearing a lot of great things coming from our fitness channel as well. I know we touched on that in the last comment. But a lot of our fitness distributors are really excited and very bullish on really the pent-up demand of, really, members coming back and getting back into the gym. So we are very much focused on maintaining that and doing a lot of strategic partnerships with the gym channel.

Great. You talked a lot about is the DSD expansion and the partnerships that you're signing. Like where do you stand today? And where do you kind of see yourself in terms of percentage of your business being on DSD by the end of the year or even into 2022?

Well, when we -- at the end of the third quarter, we're at about 147 premium distributors. We're looking to further expand that throughout Q4. And when we looked at it at the end of September, we estimated about roughly approximately about 30% of retail was currently serviced by DSD. And we expected that to increase, not only throughout Q4 but throughout 2021. It takes time to transition these retailers over. We've been working on that with Target, CVS and Rite Aid and many of our Meijer's as well and several other accounts. So we anticipate all of our retail will transition over. The timing of that is to be determined. We're working on that. That is a high priority, but we do not have a specific time line stated at the moment.

Is there -- within that, is there sort of between gross down to operating margin, is there some puts and takes when you shift over to a DSD model?

Yes, there is a margin share when you switch over to DSD, but there's a lot of opportunities as well on costs you save by transitioning over to that model. As an example, improved freight costs, and we've talked about that of the industry. A lot of individuals have spoken about the freight costs. And freight costs continue to go up, so that's a big challenge. Instead of shipping smaller pack sizes going LTL, you can ship full truckloads at a much reduced cost per case to a DSD partner. So that's an increase in reduced cost and gross profit for us. The other opportunity is a lot of warehouses or profit centers for wholesalers and retailers. So you're taking some of those costs and those bills back out of the equation. But then most importantly, you're expanding the HCV. So you're increasing your velocities by getting that cold placement. Also getting access to more regional accounts, which you couldn't have access to or independents. Remember, there are about 100,000, 150,000 independent convenience stores in the United States that report into Nielsen. So there's a lot of opportunity out there that you can't really touch unless you have access to a DSD network. And that's why we're very fortunate to have some great partners with us. And we look forward to activating them in the coming beverage season in 2021.

Great. I believe in one of the earlier calls, you had mentioned sort of the opportunity with more -- once you get placement in the stores, the opportunity being an incremental opportunity with more SKUs. So I guess the question becomes, how do you think about sort of innovation as a contribution to 2021? Or what does your innovation pipeline look like in 2021? And how important is that to the growth story?

Yes, what we're noticing is as we take more retail data, more scan data, as the product is getting more shelf presence, we're really watching the velocity on a SKU level and how that reacts by the number of SKUs that we place in the given outlet and the position in-store and retail. So what we're noticing in cold availability when we add additional flavors or additional SKUs, the velocity, it does not cannibalize sales. We're seeing sales increase at an increasing rate, which is great to see. So that further increases your same-store sales and that we're getting advantage of that billboard effect. So -- and what we also noticed is that Celsius really doesn't have one flavor that's leading or driving a lot of the growth. It comes through a variety of -- the flavors all perform roughly approximately about the same, which is great to see. So as we add more flavors, we're increasing the velocity of all flavors at the same -- roughly around the same rate. So -- that's a really great data point that we're learning. As we continue to go -- our flavor innovation team, we've got some great new flavors planned for 2021. We're coming out with summer. We got a great program ramped around that. We're very excited about that. We're going to be taking it coast-to-coast to the DSD network. We've got key accounts partnerships and some great activation plans. So please keep an eye on us this summer. It should be really exciting.

Great. Moving over to a key question for a lot of the beverage companies is that just input costs inflation and what you're having to do given the can shortages, and even the freight costs that you're facing. And how we should be thinking about those headwinds, and if you do have an opportunity to maybe take pricing in order to help offset some of that? I know that was -- I bundled a few questions together there, but...

Yes, it's definitely something we're evaluating, taking price at this point. I think there's other opportunities to maintain -- or maintain our margins by not increasing frontline pricing. But we said in our third quarter report that due to the importation of cans, and in Q1 we were wrapping cans as well just due to the -- really the constraints until our international can landed in the U.S. which we're packing them out right now, we will be impacted due to the increase in freight costs and import costs and tariffs. So we said somewhere around the low 40s, which we're working to improve through the back half of 2021 and then further improve on into 2022. So we are all going to get impacted in the industry. We're keeping an eye on it. We do think it's a short-term impact. A lot of our can manufacturers are indicating that more capacity is coming online in the U.S. at the back half of 2021 and into 2022. And then also what happens with consumers, the consumers go back to food service and on-premise beverages, which therefore eases up some of the can supply. So there's a lot of variables there, but we do see this as a short impact. We do see it as a competitive advantage leveraging our global teams where we're able to secure cans very quickly. So a limited impact on wrapping cans, which is pretty expensive, is very limited as it currently stands. So we think we're in a good position. We've got enough can supply to meet and exceed our expectations. We are actually warehousing some cans where we will be and really partnering with our co-packers as well. So we think we're in a good position for 2021 and getting through this can shortage.

Great. All you -- I mean you're still in a very high-growth mode. So when you think about marketing spend, what are the key areas of marketing spend for your business model? And do you expect that to sort of continue to move higher with sales -- with the sales growth in order to help fuel that growth?

We feel we have a really good algorithm that we're working off of. We do a variety of different marketing tactics, experiential marketing, both in-person and social activation, really engaging with our targeted consumers in an extremely effective way. So as a percentage of revenue, I don't see that changing. Obviously, as revenues increase, we will have to invest more. We are gaining -- anticipate gaining more distribution with new retailers coming on board. So it's very important we continue to market. But we are -- we do feel very strongly, and we've stated this publicly, we're driving profitable growth. And we feel with our algorithm, we can definitely do that. We're excited about that. And also -- so on the marketing spend, it's everything is methodical on it and methodical approach, ROI-positive. And we'll continue to do what we're doing here, which is working out really well.

Great. Yes, when I -- sort of digging into that a little bit more, when -- with broadly a co-pack network and then with marketing spending, moving with the sales growth to help fuel that growth, where do you really -- from top line to bottom line, where do you think you really can extract sort of operating leverage to help really grow earnings going forward?

Yes, the operating leverage is going to come from, not only enhancements in gross profit, also this really -- we have expanded a large -- over the last, really, several quarters, we've added a lot of sales staff to support the new distribution growth, activate our key distributors. We expanded our marketing teams as well. We've also expanded each department, really going through a transitional phase of growth. That's on the logistics side, accounting. We're really transforming this organization for scale and building a firm foundation on it. We'll start to see the leverage. If you look at Monster in its early days, you can see where they started to build leverage. We're following that same algorithm very closely. And at inflection points, we will start to -- more EBITDA as a larger percentage. We haven't set any targets. We don't have any targets that are public at the moment, but we do feel we have a really strong algorithm. And as we continue to scale, we'll be able to leverage each one of our investments within our SG&A.

Got it. Sort of seeing domestic here, a question on with some of the growth that you've gotten out of the e-commerce and your major partner there, is that -- how is that in margin terms relative to brick-and-mortar, or brick-and-mortar through a DSD network?

Roughly around the...

Overall saying that but...

Yes. Roughly around the same. I mean when you look at it, very comparable margins throughout the business. So I don't -- I think our margin report, we try to have consistent margins. We're not -- we're very cognizant of driving the profitable growth and cognizant on our margins, gross profits, contributions and EBITDA. So I would say very comparable.

Got it. And what mix of the business is through e-commerce or... yes, just through e-commerce.

Yes. As of Q3 2020, roughly about 20% of our total revenue, approximately 20% was roughly around -- coming from one customer on the e-commerce channel. So -- and that's been really sizable increases over the last -- first 3 quarters of 2021 -- 2020. And into '19 as well we saw good growth there as well. So...

Okay. Great. Curious to know, I mean, know more about your international business and just kind of understand where your international exposures. What are -- I know that you have some sort of -- some unique agreements in different markets internationally and how you think about that as sort of a longer-term opportunity, or sort of a share of business or the growth in the years ahead.

Well, the same opportunity we have in North America, we have in Europe and Asia. These global trends are seismic. And you're seeing that in the category. You talked about it earlier. The energy category continues to grow, evolve, attract new consumers. And that is globally, and we see opportunities in Europe. We have our Nordic operations. We have about an 8.5% share in Sweden. We have distribution in Finland. In Norway we're growing and expanding. We see opportunities in U.K. and Germany. But we're being very methodical on our resource and expansion initiatives. Also have opportunities with e-comm partners over there to seed product. And then in Asia, we do have a licensing royalty agreement with our distributor in China, where that's 5 years minimum guaranteed royalty, and then we go to a variable rate in the future years. We see great opportunities in China as well. We're about 60,000 locations there at about over 70 cities. And then we do have distribution in Hong Kong, Malaysia. In the back half of 2019, we signed a distribution agreement with a partner down there. We're in about roughly around 2,000 locations. And then we're also looking at Singapore and the Philippines as well where we see opportunities. But really, the methodical approach that we're taking is driving positive ROI, not overinvesting. And really, we have a process for seeding markets that we've been working on. The biggest opportunity right now on hand is the North America opportunity with the growth of our distribution partners, DSD and the expansion opportunities we see in convenience.

Got it. So just to make sure I understand the licensing agreement in China, so sort of a capped number that you're TAM number or royalty that you're making through China for the next 5 years. And then after that, let's say that the brand continues to grow, it could -- I guess you could see far more profit coming from that region. Or am I thinking about that the wrong way?

Yes, you are. If there's a minimum royalty, we have it in our investment schedule, at our investment presentation. If you go to our celsiusholdingsinc.com, we have our investor presentation there. We have a whole slide on that that really lists out the minimum royalty each year, which increases every year for the first 5 years. And then after the fifth year, that's the minimum royalty going forward. It can never be lower than that. And as revenues increase as a percentage of revenue, so yes, it would be more accretive. We'll be able to -- opportunity to truly participate in the growth in the category as revenues grow and scale there over the next -- into the future. So we do get to participate in the future growth there as well as guarantee a minimum royalty over the first 5 years.

Got it. A question on, I guess, innovation outside of the energy drink space or just portfolio outside of the energy drink space, how important that is. I believe you do have some products outside of energy.

We do. I mean we have other products outside of our core Celsius product. We have our CELSIUS HEAT line, which goes after that performance energy segment. It's mainly in the gyms and health clubs, that enhanced caffeine and L-citrulline, which is a vasodilator. We also have a -- launched a BCAA Recovery line. It has tart cherry in it, magnesium, and vitamin D3 as well, comes in 3 great flavors. We also have On-the-Go Powdered sticks, which we've seen a great increase. It's available at Walmart, many other retailers. And we're seeing a lot of individuals based on social media and a lot of different platforms, mixing it with smoothies. They're making some really creative drinks with it. The other opportunity we have is in Finland, we have a fast protein snack portfolio, and actually one of the most leading protein snack portfolios in Finland. And we see opportunities to further leverage protein snack portfolio over the cell test distribution. We're looking at that. We're evaluating that. We see the opportunity there in Norway as well as Sweden. And we will be testing it through digital initiatives through dot-com and e-commerce initiatives in 2021, where we're bringing the FAST bars, which are really innovative, taste great, low sugar, high in protein, really, revolutionary to what's on the market today, to the U.S. And we're taking a methodical approach on that. Our digital team will be working on that. And we think there's going to be some -- a lot of opportunity there.

Great. And that kind of the HEAT product, I believe you and I have spoken about this a few years -- a couple of years back about it sort of, I guess I would say it competitively aligns with like a Reign or a Bang. And it -- was there -- were you a bit reluctant to get too competitive with that product? And how do you pull back on that product? And is there going to be a time where maybe that will become a greater emphasis in the portfolio?

Yes. Our CELSIUS HEAT product tastes great. The same MetaPlus formula in the product, has the same thermogenic benefits with enhanced caffeine and L-citrulline, goes head to head with the 300-milligram really caffeine category, that performance energy category like Reign, C4 and Bang. Mainly, our focus has been in the gyms and health clubs really going after that segment. There is, as we all know, a performance energy segment that that product could play in. Timing and sequencing is extremely key right now. Our core Celsius has a great velocity rate. It is turning extremely well. We need to stay very focused with the team right now on further expanding the distribution and gaining our fair share of the energy category. Then we'll come back with the CELSIUS HEAT and the CELSIUS BCAA Recovery line, which we feel has a great opportunity as well. We have started to test that in some retailers. We're seeing good results. There could be further opportunities there. But it's timing and sequencing, especially in the stage, we're in a rapid growth, as you mentioned some of the recent data points there. So we're focused right now. We're focused to win, and we'll continue to expand and build out the category.

Great. Actually, we've got some questions, 2 questions that came in asking about, would you ever consider going into the hard seltzer space? And do you have -- do you think you have the right brand equity for that? And could you -- how would you go about it? Will you be willing to partner with another company for that?

It's definitely something that has come up in our innovation meetings, for sure. I mean that category has been expanding. A lot of competitors are going in that space. At this point, we are -- that is not an area of interest that we're moving into. Do we have a brand that could expand in that category? Presumably. Is it the right time? We don't think it's a good time at this moment. We could eventually, down the road, bring a healthy seltzer to market. But we've got to stay focused right now, and we'll continue to evaluate opportunities. But good question. It is definitely a growing category with a lot of players jumping in.

Got it. The -- yes, those are all prepared questions and inbounds that I have. I know that you'd mentioned some of the sort of the key account wins, I'm not sure if you can -- if you're willing to speak about that, but I found that that was very interesting earlier and how your performance has been in some of those key accounts.

Yes, key accounts have gone really well. Due to COVID, the expansion opportunity we had in convenience obviously was delayed, so we've been really focused on optimizing our key accounts. And some of the wins we've had is in Kroger. If you've been down in Texas, some great displays, in-store execution, great cooler placements. Down in south Florida in Publix, we've had some great team members down there where we've been able to get CELSIUS cold placement in store. And the velocity level has really, really improved. It's gone extremely well and just shows you these case studies as we replicate those around the country and the opportunities we have, giving Celsius the right opportunity, the right placement in the store, we will turn better than the leading brands. So we're getting more validation on that, more validation points on that. And that's what it is. I mean we're going to continue to push on this, some increasing key accounts that did happen like Speedway, 2,700 stores in convenience. We had 2 flavors authorized and the main vault made it through the innovation door. They have an innovation process on their new accounts so when you enter them. We're looking to get more flavors lifted on the next cut in, so we're excited about that. But those are -- I mean we've had some regional wins along the way. But bulk of the expansion initiatives that has been delayed, and we've been focused on the key accounts and growing those. And that's what -- a lot of that volume that you're seeing is all driven from these grocery, mass and drug. And we're excited to go after the 70% of the energy drink sales that are in that convenience channel.

Great. Any -- that's all I have. Any parting messages to offer?

Yes. No. It's -- we're releasing earnings on Thursday. I encourage everyone to join us on our earnings call. We have the press release out. You can get it at celsiusinc.com in the Press Release section. I encourage everyone to join. We appreciate your time and interest. Go grab a CELSIUS, make it a great afternoon.

Sounds good. All right. Thanks, John.

Thank you.

And thanks, everyone, for joining.