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

Great. Good morning, everyone. I'm Bruce Williams. I lead our beverage coverage from an investment banking standpoint here at Morgan Stanley. Very excited to be joined today by Celsius Holdings. Specifically, we have CEO, John Fieldly and CFO, Edwin Negron. The format of today's call will be a Q&A before we start, I'm required to give a brief legal disclaimer. So please bear with me here. For important disclosures, please see Morgan Stanley research disclosures website at www.morganstanley.com/research disclosures. If you have any questions, please reach out to your Morgan Stanley sales representative. So with that, guys, very excited to jump in. We're super excited to have John and Edwin join us here and will kick things off.

Excellent. Thank you, Bruce. We're excited to be here.

Thank you.

Perfect. So the first question, guys, what do you consider to be some of the largest drivers of momentum in the energy drink space? And what will be the key drivers of growth for the energy drink space moving forward?

Bruce, when you look at the overall category, what's fascinating about the category, it continues to grow. I mean if you go back over a decade, the category has continued to be of the one top drivers of growth in the beverage -- total beverage category. So we feel the company with Celsius being new age energy drinks and really coming up from the fitness locations and really driving on some of the key drivers today with mainstream consumers. We have a big opportunity that lies ahead of us. But some of the key drivers is we're all working more. We're working harder at home, at your lives, cell phones come out. Now you can't get away from work. It's 24 hours a day. We're always on. I think it's -- everyone wants more energy. We need to do more. We need to compute more. And our lives are more busier now than 10 years ago.

I would add to that as well for better or worse, the health and wellness trends that are driven by the aspects that we're living now with COVID and all these variants, that's also going to drive, I think, a lot of emphasis on health and wellness drinks like we are or functional fitness drinks.

And that's where the category is going. I mean if you go back over 5 years ago, everything was better for you. If you go back yes, 5, 6 years ago, it was better for you. It was all organic. It was -- non-GMO was very important. But the problem was consumers, we talked about it at trade shows. And everyone talked about it in the industries, Expo West and Expo East and in the industry. But consumers, it hasn't really been a leader in the category, it really take position. There are some brands that come out. People don't want to sacrifice labor. What's interesting about the Celsius portfolio and everyone touches on it where the category is going, fitness and health and wellness and better for you and now more than equal than ever before. Celsius hits on those really better for you. We had 7 essential vitamins. We got green tea, ginger, guarana but we don't sacrifice flavor. So that's a really great thing that consumers really like about the product. And then we offer functionality. So we're not just offering just energy. We're Energy 2.0, we offer enhanced thermogenic, we help encounter some body fat. We help you achieve your health and wellness drinks. But the overall category is a good place. I think it's -- if you look at what Red Bull did over the last 12 months, I mean, the execution of Red Bull hats off, but nominal operators treat them. I mean they've been able to take advantage in the trade with their self distribution models, getting higher velocities, the growth has been there. The category is going to continue to grow. We feel -- I think it was the latest data report that came out, and it showed that the category by 2025 is going to continue to grow over a 6% CAGR.

And that's what I was going to mention, John, if we want to expand the demographic, the demographics expand and I think that's also going to drive a lot of growth.

Yes. I mean the growth when number one, we're drinking more of these products, right? We're driving more energy drinks throughout the day. And then there's new consumers coming to the category. So where is this growth coming from? We're seeing more e-mails into the category for than ever before. So that's adding incremental growth. The new consumers coming in, you're GenZ, Gen centennials are consuming more energy drinks on a per-cap basis as well. So we're seeing increased velocity. You saw decreases in CSPs, the tea products I mean energy, as part of their daily lives, and that's what we're hearing. That's why Celsius is the essential energy to lift it, and that's really our mantra that we continue to drive forward. But the categories, we're in a great position and a great category to be in.

Very helpful, guys. And I think we agree you're definitely always on. With increasing competition in the space, and you touched on this a little bit, but how do you think you've positioned the brand and the product to stand out and differentiate itself relative to peers?

Yes. That's what gives us a really unique position when you look at the differentiation. Celsius is one of the only products in the category that's backed by science. We have over 6 clinical studies conducted and published and peer-reviewed by sports nutrition journals. We have done in Oklahoma at University by Jeff Stout, who is world renounced Sports Nutrition Scientist, product has been reviewed by AMED, got a class action lawsuits in 2010 in California on the structure function claims the company made on the product. So the product and the claims and the functionality is truly one of the only proven functional energy drinks on the market today. And when I talk about that Energy 2.0 the energy to the future, I mean that's what Celsius delivers on and it's efficacious. It works. The product is back. It's extremely difficult to replicate. It can be done, but it's going to take a lot of -- you have to go through the science process. Actually, when Celsius launched, Coke and Nestle created in Vega, which was a negative calorie soda back in the day. Unfortunately, that was shut down by the FTC per my understanding. But we have a very unique position. There's other products on the market that are coming. Competition is always going to come. I mean, the beverage industry, the barriers to entry are extremely low. The barriers to stay are extremely high. So that's what -- even over a decade in the making, it's -- we built it in the gyms and health clubs and as health and wellness trends continue to scale, we continue to gain more momentum and traction.

Yes. And I think other aspects, I'll talk about differentiation is our core kind of ingredients, green tea, guarana, ginger that kind of thing, that again, are very well aligned with all the health and wellness springs that we're seeing. I think that's a key differentiation as well as we continue to position the brand in that perspective.

And then one other thing we hear is a lot of especially individuals that are new to the consumer or older demographics entering the category for the first time what they -- what we hear about Celsius is the way the product is built and the product is built with over 7 essential vitamins, as I mentioned, the founders did it extremely well. Because one thing we hear, you got no crash and no jitters. So some of these other energy drink products, you consume them. You hit -- you go high and then all of a sudden, you crash, you get jitters or nerves, your feeling like anxiety. Some of these things are not a great experience. One thing we hear on Celsius, and that's why we have such a high continuity rate, as people really enjoy the product, it's a nice sustained energy without the crash. So -- and it's the way the product is built, it's the way the green tea, the caffeine, some of the other vitamins we have in the product that are able to offer a really good experience for the consumers when they consume the product.

And how do you think about the Celsius sales growth algorithm moving forward, you have same-store sales growth. Do you have new points of distribution, e-commerce innovation. Can you walk us through how you think about the algorithm moving forward?

Yes, absolutely. In our third quarter, we reported our total ACV, which is all cumulated distribution. So that's kind of like the number of stores we're in percentage, right, it's about 34%. So about 34% of the total stores, latest MULO data showed us that we were in reporting stores. So lots of opportunity to continue to scale there on new distribution, which is one of the big growth drivers, which we're working hard on. We have one of the greatest NACS shows in company history in October. And if you are not familiar with NACS, it's one of the largest convenience stores shows in the country. And what's interesting about Celsius, what we're doing here is we're backdooring energy drink category, which is in convenience. So we built the brand in the gyms and health clubs, grocery, mass, drug, Amazon, #2 energy drink on Amazon. We have about 18% share, and now we're getting into convenience as we activate this DSD network. So those are some key drivers. So you got new distribution in. Number 2 is expanding and optimizing our existing distribution. I think there's a lot of opportunity there, just we want 3 placements in each store or cold, more on shelf and a secondary display, that's really activating our DSD, getting better in-store placements. We've got coolers we're looking to place, we've already placed over 900. We had a variety of coolers to be placed over the next several months and into 2022. And then the big driver is the innovation pipeline. So we've got some great flavors. I'm drinking a new flavor here. It's a strawberry-guava, phenomenal. We initially launched it in the gyms and health clubs, and now it's rolling out into other stores, mainstream retail, product taste phenomenal. The team has done a great job on it. Everyone has a Fuji Apple Pear, that's done extremely well as well. Great flavor combinations, innovative to the category. And then we launched our vibe line, which is a sub line, we were able to really drive some great excitement, some really great branding behind it. We did a tropical Vibe most recently, part of that vibe, a peach vibe. And then this summer, we have another vibe coming, which we're really excited about. So combination, innovation, optimization of existing stores and then new distribution.

And to me, that's the key, John, in terms of optimizing the retailers. We see through the DSD network when you get that specialized call it white glove type of execution, that really boosts sales when you have better positioning, when you have more SKUs like John mentioned, when you have cold product, when you have a cooler closer to the checkout. All those things exponentially drive or promote additional sales or incremental sales, and we're seeing that.

That's great, guys. And just staying on the distribution point, you've publicly announced the 80% long-term target for DSD distribution. Can you talk a little bit about that strategy, the implementation and how you settled out that 80% number as the right target number?

Yes. I mean we take the 80% because ideally, most of our -- a good portion of our distribution will be serviced by DSD. That's traditional retail. But there is a portion of it that will not -- that potentially will not be, and that's going to be potentially the health and fitness channel and then also some specific retailers for their own internal supply chain requirements. But in general, we are fully supportive of DSD. We're working on flipping all of our accounts over as many as we can as quickly as we can. It's a lot of timing and sequencing. It sounds easy. It's very difficult, and you need a lot of help from the retailers to convert that over. So we're doing regions. CBS, we've done great progress with them. We've still got a lot of reasons to flip over, but that's been taking place all through 2021. We've been slowly moving and migrating regions over to DSD. Target has been about 95% converted, Walmart has been converted. We're working on 7-Elevens as well. So a lot of the 7-Eleven regions. And it's retailer by retailer. And as Edward mentioned, once we do that, and we're able to really see the power of the DSD and get that optimized, which takes several months to get that optimized. It's not like looking a switch, but once we get it optimized with the DSD, we can really see the velocities increase.

Yes. I mean just to add to that, again, a little bit of perspective just it's important to visualize this, even from a back office, call it, financial support we need to establish the distributors, we need to look at credit limits. All these things and then like John mentioned in make sure that there will be inventory that's in the retailer then make sure that, that is diminished and then you probably supply the inventory to the distributor, get their sales force trained on our product. I mean, it's a journey. It's a path that needs to follow. It's not like we are going to switch like John will say.

Yes. And if you look, I mean, our distributors have been up about just in total, about over 300% growth rates. So we saw that in Q2 and Q3. So lots of opportunities. I mean it's -- the teams are doing a great job. We've been hiring, and that's really -- it's a lot of people power to really activate these markets and we've hired probably about 60 people over the last 60 days. We've got another 60 job openings right now. We're trying to hire really good individuals. The good news is we're finding really good talent to join our team. So we're continuing to grow there. And that's going to help us better manage. Our -- it's -- no one's going to build our brand except for us. So it's important that we own our brand, we educate -- everyone speaking about, you have to educate about your brand and the opportunity. And once they see the opportunity, it starts to gain momentum within the house. And we have some of these distributors who are up substantially. Our team goes in, we do blitzes. We've been able to educate and they start to see the opportunity that Celsius has. And like anyone, they go after the dollar, right? So whatever brand sells doing. And as long as we continue to sell, I think we'll continue to win.

And guys, we talked a lot about the flavor innovation that's taking place. Are there any other adjacencies that you find particularly interesting. There's clearly been a lot of news around the hard seltzer space. I know you publicly stated that you have no interest in getting into that space, but are there any other subsectors of beverage that you view as particularly interesting for the company to explore?

Yes. I mean we're constantly looking at opportunities. Right now, it's very critical we stay focused on the core opportunity, which is our core line. So we're extremely focused on that. I think that's important. We don't get distraction. We've got an amazing opportunity here with Celsius. We're going to continue to drive that through. But we are looking at exploring opportunities for the next phase of growth as well. And when you look at our core portfolio, we've already created sublines that we have the opportunity once we succeed and continue to drive out that core portfolio, we'll be able to bring in our Celsius heat, which is mainly in the finish channel today. It's a 16-ounce can. Its performance energy is over 300 milligrams of caffeine, it's got L-citrulline, taste phenomenal. That's a great opportunity for us. Then the other opportunity is we have a Celsius BCAA subline recovery line has a lower caffeine, it's got tartaric, it's got electrolytes in it and also has immunity boost as well. So subline, we do have those coming that have been organically created internally. We're also looking at hydration opportunities, protein opportunities. We do our -- have our fast protein snack portfolio, which is currently being sold on Amazon. That is -- although it's a small base, it's done fairly well. We continue to nurture that. But we're being very methodical on our approach and resource allocation. So we're putting all of our resources mainly behind our core portfolio to drive that up. And as we continue to scale, we continue to evaluate, and we'll be able to come up -- bring these other lines to Mainstreet retail at the right time as timing and sequencing is key. And then opportunities come up, we'll evaluate them as they present themselves. And our main focus is to drive shareholder value. And if it's going to be accretive to earnings and accretive to the profits, we'll take a look at it and evaluate it. But it's very important that we don't distract the opportunity we have here for the core portfolio.

Yes. From my perspective, yes, things that obviously be synergistic that have the same rights to market, those kind of things is something like John and I, if we see that type of opportunity with good margins, obviously, we're going to be evaluating.

And guys, you just commented on focusing on the core. Can you maybe touch on just how supply chain headwinds or cost inflation has affected the company. And we obviously saw that come through a little bit in margins on the latest earnings release. But any color on that front, I think, would be helpful for folks.

Yes.

Yes, absolutely. Yes. It's -- we're almost like a perfect storm as it relates to we had impacts on the margins related to the rates, even some of these containers that we have to utilize to bring over significant increase in cost, storage cost, that kind of thing. We also had some pressure in terms of reworks and things of that nature. We're also establishing which we think in the long term is going to drive a lot of efficiencies and synergies in the business is the 6 orbit model. So we've had to redeploy inventory. We've had to build inventory and move it around, get it in the right location so that it's closer to our co-packers, it's closer to our clients, our distribution and that should then subsequently drive a lot of synergies and improvement in our margins going forward.

Yes. And I think when you look at the third quarter, we bought cans, we had a can demos that took place here. So we made a cognizant decision on the cards that we were dealt to buy international cans. And at the time, I think the company did the best thing for the overall business. We secured cans, not only in Europe, but Asia and the Nordics and the challenges we have now is we have to prepay for a lot of cans. Unfortunately we didn't have relationships. But we needed cans, otherwise, we'd be out of business. And I think you're seeing a lot of the revenues that were generated and the opportunities we had to grab additional market share and the need to demand was really a great strategy for the company to purchase those products versus relying solely on the U.S. production, which mainly included wrap cans, which would have further deteriorated margins. But when you look at that, we've identified in the third quarter, about 7% of our gross profit is really, I want to call it transitory of which 3%, as Edward mentioned, associated with rate. So that's the inefficiencies with our supply chain. We feel by optimizing the supply chain with our 6 Orbit model, we'll be able to reduce freight by approximately 3%. And then the importation of the cans and the high cost of those cans, we have identified about 4% of our cost of goods impact in the quarter was associated with those cans. Now we will have to cycle through these cans. We have about 600 containers floating somewhere in the Pacific hopefully will wash a shore one day. These cans were ordered back in February. So they've been slowly washing in short, but we're going to have to cycle through these. So we said on our call, we're looking at probably until midyear 2022 until we cycle through some of these cans. The good news is -- well, the bad news is, I guess, for the Spike Seltzer business that you talked about, the good news is we didn't get into that, which I think is a positive because you go back about 8 months, who would have thought that the Spike Seltzer business going to slow the way it did and what's taking place there. So there has been cans that have come available in the U.S., and that's great because of the supply chain constraints we've experienced with these cans. We were able to buy cans on spot rates. So we bought cans in the U.S. as well. But it's -- we are able to secure U.S. cans going forward in 2022. So we will not be relying on these international cans once we cycle through unless things change in the current environment and if we have to buy international cans, we have great relationships now with international suppliers. So we'll be able to work there.

Yes. The only other thing to keep in mind that we always want to provide some perspective is that our cost of goods sold includes freight out. So if you normalize that to give you a better perspective of the true performance when you benchmark us with other competitors, we're probably closer to 50% on a pro forma basis. So again, I just want to give some perspective on that because cost of goods sold is somewhat inflated because we are including freight out as part.

And I think that's where you're going to see -- and we talk about that 3%. We've gone from 2 warehouses where we're shipping across the country, 2 warehouses to 6. So you're really shortening that transit time. Now we are experiencing about a 20% increase in overall freight costs, but in general, that was absorbed as well in the course. We do have some inflation that's kicking in. But that 7% is what we identified, we think will be optimized as we continue to go forward. But the next several quarters will be impacted.

And how do you guys think about price in this environment? Any comments you could make on kind of a pricing strategy perspective?

Yes. I mean, a lot of discussion around pricing. I mean, everyone's taking price, some are just not saying we're taking frontline pricing. Everyone is optimizing their promotional strategies, you can see that I was at a Chevron the other day, and you can see the promotions that Red Bull was running. It was running for $2.12 ounce for 550, Monster was doing $2 for 475, that used to be $2, there will be a $4 buy. So everyone's going up like $0.50, it seems like a lot on the promotions on 2 can deals. So basically, everyone is going up about $0.25 a can. It seems like we've been working on our promotional strategies. Just like Red Bull and Monster, we haven't taken frontline pricing. But there is differences. I mean, in general, you can increase price without taking frontline pricing. So I mean there's things that are taking place. But we're going to continue to evaluate. We do our pricing strategies in place, and we're monitoring that closely.

Great. And clearly a lot to focus on from a top line growth perspective and innovation perspective and from a supply chain perspective. But could you comment briefly on how the company thinks about M&A, whether it be new geographies, categories or otherwise?

Yes. Like kind of you said before, I mean, Edwin and I are going to look at when opportunities if it's accretive to our shareholders, we're not actively looking at the moment. But if there's a bolt-on that makes sense and that fits in with our synergies, we're able to have an accretive transaction that we can further leverage to drive shareholder value, we'll take and evaluate it. But I still go back with the comment that it's important that the company really stays focused right now. We were dealing -- we just talked about the massive opportunities, the new distribution that needs to come online, further building out our key accounts team or distribution management team, the value creation by having a national distribution network and being able to optimize that and manage that does open up a ton of opportunities down the road once it's optimized to bring on other brands that benefit from the same route to market. So there's a ton of value creation, that's created just by the DSD.

Yes. I mean just to add to that, yes, I fully agree with John, I mean, the opportunity here is in the U.S. now. As it relates to the international markets, for instance, then my perspective has always been identify good partners, massive distributors, where you went more than in U.S. dollars, you don't have significant footprint in the countries. You don't have any other risk collecting receivables, inventories, that kind of thing. And subsequently, when they build a brand, hopefully, you get a good market share there. And you look at perhaps adding that or bolting that on. But to me, that's the model to file international expansion. But clearly, the emphasis or the focus is here in the U.S.

Great. And can you guys provide a brief update on the Amazon relationship. I know you had the recent launch in Amazon Europe? And can you maybe just couple that with general commentary on the company's geographic focus moving forward? There is 2 questions in 1 there.

No, no. Amazon is phenomenal. I mean it's -- that's what I think makes us really excited here. I mean Edwin and I talked about a lot on Amazon. I mean we had a 18% share in Amazon in the U.S., the #2 energy drink being sold. I mean, just recently surpassed Red Bull. So I mean that's phenomenal, given that there's equal playing field. If you consider Amazon as the general population that consumers have to take like $25, $30 to buy a warm 12 pack to take it home to drink it as part of a daily lifestyle or daily routine. That's a loyal consumer that does that. So that excites us about the major opportunity. And then if you look at the Nielsen scan data where we're sitting at a 2 share, and as you mentioned, a lot of runway ahead on new doors, optimization of existing doors. It's just exciting to see where we're at here and the opportunity that lies when you look at what's taking place, that has taken place over the years on Amazon. So -- but on Amazon, they're growing internationally as well and due to the success in the U.S. and Edwin mentioned internationally, due to the success in the U.S., we're able to talk to some interesting larger potential partners going forward. So this is going to continue to grow. We see just launched in the U.K. and Germany through Amazon. We do have Celsius available now. We also have our protein snack portfolio available online as well, and we're looking at other markets. So that's just the initial rollout. We're continuing to monitor that. We'll see how that continues to go. But I think the international has a huge opportunity, especially in Europe and in Asia as well. We just launched recently in South Korea, last year in Malaysia, lots of opportunity, obviously, impacted by COVID and things, but we've seen healthy wellness trends in Europe, in the U.S. and Asia. These are global trends that Celsius is really resonating with. Its healthy, better for you, it's functional, health and wellness fitness and lifestyle position is a broad position.

Yes. The only thing I would add again is with Amazon and especially international like John mentioned in the U.K. and Germany, it's very much in line which with our asset-light model, again, small footprint. So something that we're also very excited about.

Great. And I know we're -- I think we're a minute over here, guys. So any parting thoughts you'd like to share?

No, I really appreciate everyone's time. I think it's exciting to look at our third quarter results. The company is performing extremely well. We have an extremely dedicated team, really excited about the future. The category is under disruption, and we'll continue to push Celsius forward here. So go out and grab a Celsius near you.

I'll echo that. We really appreciate the time, and thanks a lot for sharing these thoughts. With that, we'll conclude this section here. Thanks again.

Thank you for the opportunity.

Thank you for the opportunity.

Take care.