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

Greetings and welcome to Celsius Holdings Inc. Second Quarter 2021 Financial Results. [Operator Instructions] It is now my pleasure to introduce your host, Cameron Donahue, Investor Relations for Celsius Holdings. Thank you. You may begin.

Thank you, and good morning everyone. We appreciate you joining us today for Celsius Holdings' second quarter 2021 earnings conference call. Joining me on the call today are John Fieldly, President and Chief Executive Officer; and Edwin Negron, Chief Financial Officer. Following the prepared remarks, we'll open the call to your questions and instructions will be given at that time. The company filed its Form 10-Q with the SEC and initiated a press release today. All materials are available on the company's website celsiusholdingsinc.com under the Investor Relations section. As a reminder, before I turn the call over to John, an audio replay will be available later today. Please also be aware, this call may contain forward-looking statements which are based on forecasts, expectations and other information available to management as of August 12, 2021 These statements involve numerous risks and uncertainties, including many that are beyond the company's control. Except to the extent as required by law, Celsius Holdings undertakes no obligation and disclaims any duty to update any of these forward-looking statements. We encourage you to review in full our safe harbor statements contained in today's press release and our quarterly filings with the SEC for additional information. With that, I'd like to turn the call over to President and Chief Executive Officer, John Fieldly, for his prepared comments. John?

Thank you, Cameron, good morning everyone, and thank you for joining us today. Our record second quarter results are representative of the momentum that the Celsius brand is achieving across the Board, with increased sales growth, SKU expansion, distribution gains, increased brand recognition, and increased organic social support are just some of the drivers supporting what we feel has been a significant step-up for the company. We believe this also provide leverage to drive further acceleration in market share gains. Total sales for the quarter totaled $65.1 million, up 117% from $30 million in the year ago quarter. Our domestic revenue increased 157% to $53.7 million, up from $20.8 million in the year ago quarter, with both of these percentage growth rates, the highest in our history. Two of the hardest-hit channels from COVID are fitness channel and vending channel each had triple-digit growth, which contributed approximately $4.9 million of incremental revenue when compared to the prior quarter. International sales growth grew 25% to $11.5 million primarily from a 23% growth in Nordic sales of $10.8 million. Even with the record second quarter and first 6 months of 2021, we are still dealing with the impacts of COVID-19, including in our International markets, increased costs in raw materials and transportation. Our fitness channel and vending channels saw tremendous growth of both a year-over-year period and sequential basis with positive trends continuing into the third quarter. Although the comparable basis from the second quarter of 2022 was the low mark for both of these channels, the growth rate and total sales for each continued to improve. Our EU, Middle East, Asia Pacific, Australia operations remained adversely affected by COVID-19 with varying restrictions and lockdowns in these markets. Overall, we have been seeing sequential improvements over the last several quarters with capacity restrictions, as well as re-openings in the hardest hit channels, but there still remains a lot of uncertainty, as there potentially could be re-closings due to new variants and cases increasing in our regions of operations, which could force extended closures in some states and countries. The health and safety of our employees and partners remains our top priority and the safety precautions have been implemented, which we have developed and adopted in line with guidance from public health authorities. The aluminum can shortage driven by COVID and impacting the entire industry remains in place, but for Celsius we believe we are well positioned from our proactive sourcing of international cans and new relationships with top can manufacturers in the U.S., which have been initiated major expansion projects and continued to anticipate the completion of this expansion in the back half of 2021 through 2022. We implemented our contingency plans around production and which imported can production started in March of 2021. We anticipate 50% of our can supply for 2021 be derived from imported and wrapped cans, which should decrease late in 2021 and through 2022. We expect a significant majority of cans will be sourced domestically in 2022, improving our margins, and at this point we believe Q1 of 2021 was the low point for margins with the back half of 2021 showing sequential improvements towards our fiscal year 2020 levels. In addition, the team is expanding warehouse distribution sites to 6 regional orbit model to drive efficiencies, implementing plans to further secure raw materials with minimum floor stock programs, blanket purchase orders, and second and third alternatives of suppliers. The teams continue to quickly adapt to new COVID environment and are focused on driving efficiencies and operational performance and believe we are -- with our significantly expanded scale, we have the opportunity to leverage this to reduce input costs as we move forward. We have also further integrated and leveraged synergistic benefits from our global operations, focusing on marketing, operations, financial integrations, implementing our strategy to build a global dominant iconic brand. The company improved our fill rates through the second quarter from the 80% level in Q1 driven by shipping delays and can shortages, gas shortages in the East Coast and the Texas freeze which impacted our co-packers and warehouses for several weeks. We ended the second quarter in June at approximately 90% fill rate, and expect to see this improve further in the back half as we continue to reach normalized levels of inventory. Turning to some additional financial highlights for the second quarter. Our domestic sales revenue topped $53.7 million, was driven by accelerated triple-digit growth in traditional channels of trade, expansion of world-class retailers and further activation and growth from our distribution partners. Our DSD, Direct Store Delivery network delivered growth of 333% and our distributor revenues when compared to the prior year. Our fitness channel as discussed, sales increased over 300% from the prior year in addition to our vending growth which saw over 250% growth rate, which together contributed that $4.9 million of incremental revenue when compared to the prior year. As of July 1, we have over 18,500 vending micro-market placements and we expect that growth to continue throughout the year as we drive additional new national distribution agreements with Performance, Food Group, contracts and additional several regional agreements. In addition, all major chains at our gym, fitness channel expanded SKUs where we further expanded our new offering, our new flavor, our Tropical Vibe and our Strawberry Guava flavor, which is now the #1 selling flavor in the fitness channel. On a mass club, channel continues to accelerate. We are now fully rolled out nationally in all 561 Costco locations. In addition in Target, we have converted approximately 95% to DSD and are also in process of launching 4-packs. On our convenience channel side in North America, which represents the largest market in the energy drink category over $10 billion in annual sales. The latest SPINS data shows an 86% year-over-year increase for Celsius product portfolio in the convenience channel compared to a 9.1% overall growth in the energy category, while Celsius is only holding 17.1% ACV, which truly shows the opportunity we have lying ahead as we continue to further expand. Through this year we have added over 19,000 convenience stores to the last 12 months with additional accounts expected anticipated as fall resets take place. This is per SPINS shelf-stable energy functional beverage convenience, 52 weeks ending July 11, 2021. Industry-backed third-party data continues to show accelerated growth metrics. We are confident that Celsius will continue to drive sales even higher as we continue to increase our ACV across channels through additional launches with nationwide retailers chains and transforming our existing distribution to our DSD service model network. Consumer demand for Celsius accelerated through the second quarter of 2021 with most recent reported Nielsen scan data as of July 3, 2021 showing sales of Celsius were up 193% year-over-year for the 2 weeks ending, and 195% for the 12 weeks ending with a 1.6 share of the total energy drink category over the last 4 weeks. On Amazon, Celsius is the third-largest energy drink with a 13.12% share of the energy drink category just 1.32% share behind Red Bull at a 14.44% share, and 18.13% behind Monster at a 31.25% share last 52 weeks ending July 10, 2021 Stackline, Energy Drink Category, Total U.S. And for the 4 weeks ending July 3, 2021, category sales including shots surged a 104.5% with Bang sales up 216.1%, Celsius sales were up 133.1%, Red Bull sales were up 109.4% and Monster sales were up 59.9%. According to Stackline, latest year-to-date Leaderboard Ranking, most popular search brands in the U.S., Grocery Department, Celsius is the number one fastest-growing brand while positioned at 18 overall for the reported period ending July 3, 2021. We continue to see acceleration and are now beginning to also see the additional lift from the conversion of our accounts to our national DSD network. This delivered a growth of 333% in our distribution revenues when compared to the prior year second quarter. We secured additional distribution agreements with partners in the Anheuser-Busch -- independent Anheuser-Busch network, independent PepsiCo, Keurig Dr Pepper and MillerCoors network further expanding availability to new regions as Celsius builds out its national distribution network, which now includes over 190 regional direct store delivery DSD partners distribution centers now covering approximately 90% of major metropolitan markets and 85% of total U.S. counties are now covered. We also filled one of the major gaps in our DSD network is the Mid-Atlantic region, adding additional securing initially additional 3 new distributors in that region, which were signed up in the second quarter. Transitioning to DSD continues with our retail partners with 45% of retail stores are now serviced by DSD. Key accounts converted with over 75% transitioned to DSD include Target, Walmart, RaceTrac, Kroger, Circle K, Speedway, Murphy's USA with CVS and 7-Eleven also in the process with more being transitioned in the back half of 2021 and through 2022. Our rollout of Celsius branded coolers in the second quarter, total approximately 300 and now have over 500 placed in the market through the first 6 months of 2021. We have also implemented additional comprehensive tracking tools to leverage our growth and accelerate the metrics through the retail partners. We expect additional cooler placements to the back half of this year at similar or increased numbers as we continue to see strong velocity rates and increased same-store sales. Today in the United States, our total door count now exceeds over 100,000 locations, which is a major milestone, and grew over by 20,000 doors in the beginning of 2021, with additional expansion planned throughout the rest of this year as retailers resets take place. On our co-packer front, we continue to expand our partners and scale at existing locations, improving our line time priority. Our total U.S. co-packer footprint now totals 9 active locations, which will help fuel our growth and limit our out-of-stocks and support the national massive growth opportunity that lies ahead. During the second quarter, we increased our inventory levels up to $63 million, up 27% from $36 million at the end of the first quarter to support our growth and increased warehouse distribution centers and to better service our customers and meet demand, as well as increased our inventory of raw materials. In Europe, Nordic sales increased 23% versus the prior year, helped by the growth of our Celsius portfolio and the launch of 2 new flavors of Tropical flavors. In addition, our Global Celsius EMEA packaging launched in Finland where initial results have been extremely positive and has been further rolled out to a top main retailer SOK expanding to 832 locations. The FAST portfolio experienced out of stocks during the quarter due to co-packer delays associated with COVID which has started to normalize in the back half of the quarter. Celsius sales made up for the reduction in the FAST portfolio to drive positive growth in territory. We also have initially a soft launch the FAST portfolio in the U.S. through Amazon. We continue to evaluate the timing of additional European expansion markets. We are confirmed to launch the first Amazon EU market of U.K. and Germany in the back half of 2021, and expect to launch additional EU countries through 2022 including Sweden, Spain, Italy, France and several others. In China, we maintain a licensing royalty model in the market, where our distributor covers approximately 76 cities and over 60,000 locations of distribution. Our other international markets have been impacted, both the in-country service and our buyer our co-packers supporting these countries due to COVID impacts. We anticipate that these geographies once fully opened will provide additional long-term growth opportunities. As with Europe and the United States, we see significant opportunities to capitalize on a global scale, reflecting the changes in consumer preferences for better-for-you offerings in this enormous Asian market. Now moving to the marketing. On the marketing front, we continue to activate, targeting consumers, they live, work and play building meaningful and emotional connections through robust integrated marketing programs. Specifically during the quarter, despite the COVID restrictions we sponsored targeted programs both in-person and virtual. We further expanded and integrated our experiential sampling Live Fit Tour in Florida, Texas and California and other markets as well. In addition, we further expanded our brand ambassadors influencer programs reaching more consumers in a meaningful way. In addition, on June 9, 2021, the company completed an offering which generated net proceeds to the company of approximately $67.8 million and tended use of proceeds, primarily for growth capital, including building of inventory to support our sales growth, leveraging and optimizing our warehousing, targeting -- investments in targeted marketing programs, as well as the expansion of the Celsius-branded cooler program. We have reached another inflection point and our operations and growth, one which positions Celsius for exponential sales and market share growth. With this, we have been proactive in the building that Celsius team to maximize the opportunity as well as with key partners such as Ernst & Young as our corporate auditors beginning in the third quarter of 2021. Our national DSD network is in place with our retail partners accelerating distribution, which we have only just begun to recognize the incremental growth associated with these transactions. Our team is ready and our infrastructure is in place to support the sales growth we expect on an expedited scale. I will now turn the call over to Edwin Negron-Carballo, our Chief Financial Officer for his prepared remarks. Edwin?

Thank you, John. First, I wanted to cover the June 9 public offering led by UBS and Jefferies. The company issued and sold 1,133,953 shares of common stock, approximately a 1.7% dilution, and the selling stockholders sold 6,257,455 shares in the aggregate of common stock in the offering at a price of $62.50. The offering generated net proceeds for the company of $67.8 million with net proceeds for selling stockholders of $375 million. The company did not receive any proceeds from the sale of shares by the selling stockholders. The company intends to use the proceeds for general corporate purposes, such as working capital financing, expanding our Celsius branded cooler program, and expanding our warehouses and distribution model to reduce miles on cans and better service our distributors. Now turning to the second quarter results. Our second quarter revenue for the 3 months ended June 30, 2021 was approximately $65.1 million, a robust increase of $35.1 million which translated into a significant growth of 117% from $30 million for the 3 month ended June 30, 2020. Approximately 94% of this growth was a result of increased revenues in North America where 2021 second quarter revenues were $53.6 million, a considerable increase of $32.8 million or an impressive 157% increase from the 2020 quarter. The balance of the increase was largely attributable to a 23% growth in European revenues, to $10.8 million in the 2021 quarter from $8.8 million in the prior year quarter. Asian revenues, which primarily consist of royalty revenues from our China licensee for the 3 months ended June 30, 2021 were $619,000, an increase of 89.9% from $326,000 for the prior year quarter. This increase was provided for in our licensing agreement. Other international markets generated $62,000 in revenue during the 3 months ended June 30, 2021, a decrease of $45,000 from $107,000 for the prior year quarter, mainly related to an operational restructuring in the Middle East. The total increase in revenue was mainly related to increases in sales volume as opposed to increases in product pricing. The primary factors behind the increase in North American sales volume were related to continued strong triple-digit growth in traditional distribution channels, combined with an increase in an optimization of our presence in world-class retailers. Additionally, the continued expansion of our DSD network resulted in significant growth in distributor revenues when compared to the prior year quarter. We also achieved triple-digit growth in our fitness and vending channels in the 2021 quarter, which contributed considerable incremental revenue when compared to the prior year quarter during which time many fitness facilities were closed due to the COVID-19 pandemic. Furthermore, we estimate that the strengthening of the Europe accounted for approximately 2.3% of the increase in European revenue in the 2021 quarter from the prior year quarter. Gross profit for Q2 increased by approximately $15.2 million or 117% to $28.2 million, from $13 million for the 3 months ended June 30, 2020. Gross profit margins reflected a nominal increase to 43.4% for the 3 months ended June 30, 2021, from 43.3% for the 2020 quarter. Excluding freight, as some of our competitors do not include this as cost of goods sold, our adjusted gross profit for the second quarter would translate to 51.8% compared to 50.5% in the second quarter of 2020. The increase in gross profit dollars is mainly related to increases in volume, while the nominal increase in gross profit margins is mainly related to lower processing costs and repackaging costs. We estimate that the increase in gross profit dollars of approximately $15.2 million from 2020 quarter to the 2021 quarter reflected $14.4 million related to volume increases, as well as favorable cost impact of approximately $25,000 and favorable currency impact of $796,000. Sales and marketing expenses for the 3 months ended June 30, 2021 were $15.5 million, an increase of $7.6 million or 96.2% from $7.9 million for the 3 months ended June 30, 2020. This increase was mainly attributable to additional marketing investment activities, which resulted in an increase of $4.2 million when compared to the prior year quarter. Additionally, employee costs increased by $900,000 from the year ago quarter as we continue to invest in this area in order to have the proper infrastructure to support our growth. Additionally, we're now incurring in travel and business expenses as we are able to resume our in-person marketing events and selling activities. Similarly, we experienced increases in other sales expenses in the amount of $795,000 mainly related to trade marketing activities to support our ongoing DSD network expansion. Lastly, storage and distribution expenses, as well as broker costs accounted for the remainder of the increase in this area of $1.7 million from the 2020 quarter. As a percentage of revenue, sales and marketing expenses amounted to 23.9% in the second quarter of 2021 compared to 26.2% in the second quarter of 2020. General and administrative expenses for the 3 months ended June 30, 2021 were $9.1 million, an increase of $5.2 million or 133% from $3.9 million for the 3 months ended June 30, 2020. This increase was primarily attributable to stock option expense, which amounted to $4 million for the 3 months ended June 30, 2021, or an increase of $2.8 million, which accounts for 51.9% of the total increase in this area when compared to the prior year quarter. Management deems it very important to motivate employees by providing them ownership in the business in order to promote overperformance. Additionally employee cost for the 3 months ended June 30, 2021, reflect an increase of $670,000 or 61%, as investments in this area are also required to properly support our higher business volume and the commercial and operational areas of the business. Additionally, travel and other similar expenses are now being incurred. Administrative expenses amounted to $2.7 million or an increase of $1.4 million or 107.7% when compared to the prior year quarter. This variance is mainly related to an increase in bad debt reserve of $650,000 to properly cover any potential realization exposures. We also experienced increases in audit costs, legal expenses, insurance costs and office rent, which accounted for the majority of the remaining fluctuation of $750,000. Depreciation and amortization increased by approximately $124,000 when compared to the prior year quarter. Lastly, all other administrative expenses, which were mainly composed of research, development, and quality control testing, increased by $200,000 when compared to the second quarter of 2020. Total net other income for the 3 months ended June 30, 2021, amounted to $361,500 which reflects an increase of $51,500 when compared to the total other income of $310,000 for the 3 months ended June 30, 2020. The total other net income of $361,500 is composed of foreign currency exchange gains of $178,000, miscellaneous other non-operational income of $108,000, interest income of $77,000 related to the note receivable from our China licensee, which were partially offset by miscellaneous interest expense of $1,400 pertaining to financial leases. The note receivable requires repayment by our licensee over 5-year period. The note receivable is due from the licensee in accordance with his terms, even if the independent license arrangement is terminated. As a result of the above, the net income for the 3 months ended June 30, 2021 was $3.9 million or $0.05 per share on a weighted average of 73.2 million shares outstanding and dilutive earnings of $0.05 per share based on a fully diluted weighted average of 77.2 million shares outstanding. In comparison, for the 3 months ended June 30, 2020, the company had net income of approximately $1.6 million or $0.02 per share based on a weighted average of 69.4 million shares outstanding and a dilutive earnings per share of $0.02 based on a fully dilutive weighted average of 71.5 million shares outstanding. Focusing now on liquidity and capital resources. As of June 30, 2021, and December 31, 2020, we had cash of 83.8 and $43.2 million respectively and working capital of 151 and $66.2 million respectively with no long-term debt. Cash flows used by operating activities totaled $30.3 million for the 6 months ended June 30, 2021, representing a $26.1 million increase from net cash used in operating activities of $4.3 million for the 6 months ended June 30, 2020. The use of cash was mainly related to increase in our inventory levels in order to properly service demand for our products. Our net inventory increased $45.4 million from Q4 2020 to $63.8 million in Q2 of 2021. Excluding this significant increase in inventory, cash flow from operations would have totaled $15.1 million. I also wanted to cover a few additional metrics we believe provide a good perspective of our operational performance using Q2 business volume as a basis. Our DSOs or daily sales outstanding were approximately 45 days. Our inventory days on hand were approximately 155 days and our payable -- our days payable outstanding were approximately 31 days. Given our growth, these are very good working capital metrics. Lastly, adjusted EBITDA for the second quarter was $7.9 million or 12.2% of revenues. We believe this information of adjusted EBITDA and other non-GAAP financial measures enhance the overall understanding and visibility of our true business performance. To that effect, a reconciliation of our GAAP results to non-GAAP figures has been included in our earnings press release. This concludes our prepared remarks. Operator, you may now open the call for questions. Thank you.

[Operator Instructions] Our first question comes from the line of Kaumil Gajrawala with Credit Suisse.

A couple of questions. I guess, first, there is meant to be quite a significant amount of, I guess, catch-up shelf resets this fall, after some delays and those sorts of things. Obviously, you've gained quite a bit of distribution. You have some momentum. Should we be expecting that to accelerate into those resets? Or do you think you've maybe captured a reasonable amount of what you would have captured at a reset, anyways we should just expect things to kind of continue along its current path?

This is John. When we look at resets, we added about 20,000 stores through the first 6 months of the year, reaching 100,000 doors is a major milestone for the company. What we're seeing, Coke Energy is getting listed out there right now and our team has been extremely aggressive potentially getting some of that space for us in the back half of this year as retailers are doing some mid-year cut-ins. So that we saw in the resets are a little bit unique given with COVID in 2020. There is some different timing on resets. So we are seeing shelf sets get -- gaining additional distribution. We expect to gain additional distribution in Q3. Also the activation of the DSD network, really going after small format independents is a huge opportunity for us as we continue to activate this DSD network. So we anticipate stores to continue to grow. We'll see at the same rate, but early indications are we will continue to grow doors throughout the year and then as we anticipate larger resets happening in 2022.

Got it. And then if I could ask about Europe. You mentioned that you are planning on launching an Amazon Europe in a series of markets. Can you maybe just add a little bit more detail on maybe the market size, what your expectations are for contribution in those launches, that sort of thing?

Yes, we've been talking about it for some time. We're obviously doing extremely well on Amazon in North America and working with the European partners and divisions over there. We're looking for really in Q3 to launch in the U.K. and Germany and other markets. Early indication, it is the overall size of the energy drink market on Amazon is not as large as the U.S. We do anticipate incremental revenue, but most importantly it gives us additional exposure as we expand into these markets. So think of it as air cover per se as we entered the U.K. and Germany and opportunity as we look for partners in retail as well as distributors. So lots of opportunity as we look to further expand throughout Europe, but in regards to significant dollars to top line, we'll see how it prevails, but we anticipate it to be incremental.

Okay, great. And maybe a final question on margins. It sounds like you have quite a bit of confidence in getting your gross margins back up to where they were. But I guess was just under 47% last year. Is that what you are indicating when you're saying we will sequentially get better to get back to that 40 -- I guess 46.6%? Or was that maybe longer range? Is that kind of a year -- because the figure for what you intend to exit the year, what do you think you'll get the full year to?

Yes, we feel in the back half of 2021 of this year, we're going to see sequential growth anticipated in the margins, as we've seen in Q1 and in Q2. There's a lot of variables out there, freight costs as well and in extremely volatile as well as we will be cycling through some imported cans and raw materials. So that will put some pressure on our margins in Q2 and potentially into Q4. We do anticipate more U.S. can manufacturing to be utilized towards the back half of 2021 and into 2022. And Edwin, I don't know if you want to add any additional color on that?

Yes. Yes, I agree, there's a lot of variables and the other one that I always like to emphasize is the parity between the U.S. dollar and the euro. And the dollar is strengthening. So I think that's also going to come into play as well. Again so difficult to kind of predict where we're going to land, but I always want to make sure that that's also taken into consideration.

Yes. No. Good point. But we do anticipate the Q2 results at around 43% gross profit to anticipate being the floor as we continue to move forward.

Our next question comes from the line of Sean King with UBS.

How are you thinking about pricing in the energy drink category? And I guess, just maybe your ability to take pricing given some of the consumer loyalty metrics that you've seen?

Yes, I mean consumer loyalty has been extremely high for us. That's more of a competitive advantage we have is our loyal fan base. In regards to pricing, we do think there's opportunities on pricing as we continue to grow in scale. When we look at pricing right now, we're really watching what the other players in the category are doing and also same with Monster and many players really watching our promotional allocations, allowances and plans as we go forward to mitigate the overall front line price increase.

Great. If I could squeeze one more in. I just was curious just to how to understand the mechanics of the shift to DSD. And if that does have a drag on margins going forward?

Yes. No, it's a great question. I mean there is somewhat of a transition. We are getting a top line dollars and we're giving up margin to move to our DSD network, but there's a lot of synergistic benefits that you receive on transitioning. So what we're seeing is it's really potentially margin-neutral. And also where we see opportunities as we grow further scale to really, really leverage some of those efficiencies on a larger scale operations as we continue to grow to further increase our margin. So at this point, as we make the transition, it has been fairly neutral.

Yes, the way I would look at it as well is, from my perspective is, kind of short-term versus long-term or mid-term, initially, there may be an impact to contraction, but as John mentioned, then with the synergies and the other benefits will definitely be able to make that up.

[Operator Instructions] Our next question comes from the line of Jeffrey Cohen with Ladenburg Thalmann.

Just a bit of a follow-up on a couple of Kaumil's questions as far as the big 5 plus in Western Europe, you're going to launch out on EU Amazon. Are there any plans for other channels to happen in the short to mid-term as far as the gym channels or retail?