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

Greetings, and welcome to the Celsius Holdings PepsiCo Distribution Partnership Conference Call. [Operator Instructions] As a reminder, this conference is being recorded. I would now like to turn the conference over to Cameron Donahue of Investor Relations with Celsius Holdings. Thank you. You may begin.

Thank you, and good afternoon, everyone. We decided to host the call today to discuss and provide additional details on our premarket PepsiCo distribution and investment announcement. Joining the call today are John Fieldly, President and Chief Executive Officer; and Jarrod Langhans, Chief Financial Officer. Following the prepared remarks, we'll open the call to your questions and instructions will begin at that time. The slide presentation that will accompany today's call as well as the press release announcing the PepsiCo agreement will be 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 on our website. Please also be aware that this call may contain forward-looking statements, which are based on forecasts, expectations and other information available to management as of August 1, 2022. These things 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 included in today's press release, at the beginning of our presentation and as well as our quarterly filings with the SEC for additional information. In addition, due to current quite few restrictions on upcoming August 9, 2022, second quarter earnings release and conference call, questions will be limited to the PepsiCo distribution investment agreement. Celsius will be holding the second quarter earnings call next Tuesday, August 9 at 4:30 p.m. Eastern, and we will issue a formal press release free tomorrow morning with these specific call deals. With that, I'd like to turn the call over to President and Chief Executive Officer, John Fieldly, for his prepared remarks. John?

Thank you, Cameron. Good afternoon, everyone, and thank you for joining us today. We are excited to announce the transformational partnership today as we work to become a leading beverage player across North America as well as internationally, as we now have the ability to reach more consumers, more markets, more channels across the world. Today, we will provide additional color on the transaction as we combine best-in-class distribution with our company, which has been a key driver in the significant growth seen in the energy category. Starting on Slide 3. As the world leader in food and beverage, PepsiCo holds the #2 position in beverage globally with distribution across all channels and occasions highlighted by their leading DSD network and brand-building capabilities. This agreement effective as of today, adds the fastest-growing lifestyle energy brand in the United States, Celsius to PepsiCo's growing energy portfolio, and grant Celsius access to strengthen and scale of the PepsiCo's vast distribution network. Celsius has disrupted the energy category, establishing the brand as the #1 driver responsible for 37% of the category growth bringing in over $37.5 million incremental sales to the category as previously announced in our first quarter earnings call and based on the 4 weeks ending April 17, 2022, IRI MULO plus reporting. Our best-in-class momentum, growth trajectory is expanding the energy category through our more diverse consumer where we have over a 50% female sales mix. Our proprietary formula provided proven functional benefits, including both calorie and fat burning validated through peer-reviewed clinical trials. Celsius is made with healthier ingredients such as ginger, green tea and 7 essential vitamins with no sugar, aspartames, artificial colors or flavors and a certified gluten-free non-GMO, backed by our strong innovation and portfolio expansion, Celsius is a first mover and a leading player in bringing health and wellness trends to the energy category. Turning to Slide 4. As a review of the transaction, Celsius and PepsiCo have entered into a long distribution agreement and associated investment. PepsiCo has become Celsius preferred distributor in the United States with future expansion opportunities as our preferred global distribution partner. Celsius enhances PepsiCo's existing energy drink portfolio and the attractive healthy lifestyle energy category, and PepsiCo will assist with the costs associated with the transitioning of the existing Celsius distribution agreements. In parallel with a $550 million convertible preferred stock investment made by PepsiCo and Celsius and the investment aligns incentives for both parties. And the shares underlying the investment were priced at $75 per share, approximately 7.3 million shares when -- which equates to approximately an 8.5% ownership in Celsius on an as-converted basis. The preferred shares received a 5% annual dividend paid quarterly in cash or in kind at Celsius' option. Primary proceeds be used to fund growth initiatives, capital investments and operation expenses. In addition, PepsiCo will nominate a Director to the Board of Directors at Celsius increasing our Board size currently from 8 to 9. The agreements provide a transformational opportunity to gain immediate scale and accelerate market share by securing additional best-in-class North America distribution network and global reach as well as providing the funds necessary to take Celsius to the next level. The distribution provides additional access to new consumers and usage occasions through diverse channel exposures and expansion in foodservice, independent convenience, including PepsiCo's medallions program, expansion and vending, college campuses, concessions and expansion in the military. The equity investment aligns mutual long-term interest while strengthening the balance sheet for working capital and growth investments. On a go-forward basis, the distribution agreement is expected to add significant top line scale and accelerate growth with substantial gross profit and operational margin accretion expected from leveraging PepsiCo's leading DSD network and rapid scale of our business. With that, I'd like to turn the call over to Jarrod Langhans, our Chief Financial Officer, to cover the highly strategic rationale of the agreements. Jarrod?

Thanks, John, and good afternoon, everyone. Moving to Slide 5. Partnering with PepsiCo is a transformational opportunity to gain immediate scale and accelerate market share by securing access to a leading North American DSD network with global reach. The agreement provides material expansion across new and existing channels with the addition of significant incremental doors, coolers and ACV upside. In addition, we have significant opportunities to streamline our supply chain with aligned incentives and added focus. We also now have a long-term partner who can provide substantial international white space for global expansion. This partnership grants us access to new consumption occasions through diversified channel exposure, where we will gain meaningful penetration across channels such as foodservice, independent convenience, vending, college campuses, concessions and the military, allowing us to reach new customers and occasions by leveraging our unique product versatility that caters to all times of the day and night, unlike many of our competitors. We will also gain access to thousands of existing coolers. If it's cold, it's sold. We will benefit from portfolio optimization through this strategic alliance with a global leader in beverages as we add a rapidly growing healthy lifestyle energy brand to PepsiCo's existing energy portfolio, and we will benefit from PepsiCo's vast experience and resources as a global beverage leader while retaining our entrepreneurs identity and agility. The partnership also includes a meaningful preferred equity investment, which aligns long-term interest while strengthening our balance sheet position for working capital and growth investment. As a part of the agreement, we will work in unison as we develop and refine our joint distribution business plan, which contains clearly defined KPIs and goals to ensure alignment. As noted, we will deploy capital to support our growth plan, including coolers and vending rollouts, sales and marketing opportunities, sales force growth, fleet expansion and international expansion. Turning to Slide 6. We are very thankful for all the independent distributors that have supported Celsius over the years. If it wasn't for them, then we wouldn't be where we are today. With that said, we have had a very fragmented national DSD network represented by in excess of 250 independent regional distributors. These partnerships have been independently managed, supported and built. Upon transition, PepsiCo provides a highly efficient and cohesive route to market in North America with additional global expansion opportunities, transitioning from a significant number of independent distributors to a national partner allows our team to consolidate sales, marketing and distribution efforts with the associated cost benefits, which we expect to recognize and leverage once the transition is completed. We will provide additional clarity on operational leverage and targets as we move through the transition. Slide 7 provides specific opportunities to drive additional consumption through convenience, college campuses, vending, food service and sports arenas. PepsiCo's network is optimally positioned to drive Celsius consumption across new occasions with multiple touch points throughout the consumers day and night. Moving to Slide 8, you will find additional details on the use of proceeds from the equity investment. Driving growth, we will have additional firepower to accelerate the rollout of coolers. On average, coolers placed paid for themselves in 4 months and store sales accelerate significantly. We will invest in sales, marketing and R&D in areas such as digital, social media, sponsorships and flavor profiles. We will invest in our fleet to support our fast-growing sales force and marketing team. And the funds will help facilitate entry into new channels and geographies such as Canada and Europe. Balance sheet and working capital. This investment strengthens our balance sheet and provides for ample working capital needs. It also gives us the ability to invest ahead of growth and the optionality around other opportunities for expansion. As John previously noted, we are very excited about this partnership. We believe that the value accretion to our business and stakeholders is immense, and we look forward to the next step in the company's journey.

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

I think the first question, maybe the most important question is distribution changeovers while they -- particularly this one, I'm sure, great for the long term. The transition process very rarely goes smoothly, and your brand has a lot of momentum at the moment. What are you doing to ensure that you don't lose this momentum as you go through this period of transition?

Yes. Kaumil, it's John. Thanks for asking the question. We're being extremely strategic about this transition, and I agree a lot can go wrong, a lot has gone wrong with a variety of other brands. We're working really closely with our partners on a smooth transition. We have, as you know, Tony Guilfoyle, and as many of our team members have worked with the PepsiCo system in the past on transitions. So we have a road map that we put together. We've been monitoring extremely closely through the process. We feel like we have a good strategic plan working together. But it is -- in the past, you've seen brands have struggled, and we're going to keep an eye on it through the process.

Okay. And then on termination agreements. I think I read that you will largely be responsible for them. Do you have a rough idea on how much that's going to -- how much that's going to cost? Said another way, maybe how much of that $550 million might eat?

Yes. We do have -- actually what it will be is actually neutral to Celsius. So we're working through that process on a cash basis, it will be neutral. Likely it is going to have to be recognized in our financial statements in Q3. We're working on those numbers now. We have -- but it will be cash neutral to Celsius on a go forward.

Okay. Got it. And then final question. A little surprised to see M&A as a highlight on some of what you might do with proceeds. Given everything that you've got going on with the core business, why is now the right time to think about -- to also be thinking about M&A?

Well, I think there's opportunities there for M&A. We put that on the list as a potential use of proceeds. As we go forward, it's going to -- it allows us to be nimble. We are extremely focused on our core portfolio with Celsius taking a broader and wider and taking advantage of this partnership. But M&A is not out of the question on a go-forward basis over -- as we look over the horizon.

Our next question is come from the line of Kevin Grundy with Jefferies.

Great. I want to extend my congratulations as well. Maybe start with just the structure of the deal and why this is the right structure, including the financing component? And John, maybe just spend a moment, I think recent commentary has been that the company could self-fund its growth. It's nicely profitable and throws off free cash flow. So why the structure? And why is it the appropriate one? And then I think importantly, just maybe discuss the timing around the investments that you outlined? And what this is going to mean for the company's growth, both domestically and abroad? And then I have some follow-ups.

Okay. Excellent. Thank you, Kevin, I'll let Jarrod talk about the specific details of the arrangements. But in general, we have made comments, we have been cash flow positive. The company has been operating in a positive EBITDA. When we look at this investment for the company, we felt it was important with partnering with PepsiCo to have them take a meaningful stake in the business, have skin in the game as well. We do see a lot of opportunities on potential vertical integration and continuing to maximize the opportunities through this transition as we're getting broader distribution. And we felt the timing is right now. We're giving the changes in consumer mindset. The fitness is a megatrend. The way the product is resonating with consumers and broader consumers each and every day, we felt that it was time, especially with the partnership that was at the table, which really came to fruition around mid-June when you look at the time line there up to that point. But I think having skin in the game is important. It also increases our working capital on our balance sheet, allows us to be nimble and take advantage of opportunities. But I'll turn it over to Jarrod to talk about some of the specifics in regards to the structure of the deal.

I mean John pretty much covered it. I mean the goal was really to make sure that we are fully aligned and maximizing the potential of the distribution agreement, having skin in the game, having an investment we just felt it was important to wrap both pieces together into one, both in investment and the distribution. So that's where we were with it. There was a lot of back and forth. I think we both got to both sides and you'll have to ask them for their opinion, but I think both sides got to a comfortable place with the instrument, and we feel that if you look at all the instruments combined, it really sets us up for success going forward and making sure that we're both fully aligned as we go forward.

Just to stay with this. How quickly will the -- will the $550 million be deployed? What are the key areas that you're looking at? The growth has been fantastic through the current system with AB. What you see as sort of the major channels, I would imagine it's going to be sort of small format and convenience. But what -- how quickly is the cash going to be deployed? How should we be thinking about that? What are the key channel opportunities? And maybe you could put some guardrails around what this is going to mean for the company's growth, both in the U.S. and abroad?

Yes. So we're not going to be quick and rush into anything. As John has always preached we're looking for profitable growth. This gives us the opportunity to invest ahead of some of that growth. It also gives us the opportunity to increase some of our purchases that we're going to make over multiple years, such as coolers and vending and different things like that instead of a 5-year plan, we can get it deployed in a couple of years, which will -- those have great returns on them. It's a matter of months. So we'll deploy those types of things. Given the supply chain, it might take a few months for some of those, but we'll look to deploy the things that will drive growth and drive profits first. . In terms of stuff like M&A or if we're looking into things to improve the COGS line, vertical integration or things like that, we'll look into it, but we're not going to rush off to anything. The most important thing is really going to be making sure that we have a successful transition. So we will do some inventory building and make sure that Pepsi has the product ready when they are launching. So that's something that we'll do ahead of time. So you will see some working capital used for that. But really, it's -- having that firepower going forward. I wouldn't expect to see the $550 million depleted in like 6 or 7 months. It's going to take a while to use it, but it will be good so that we can build inventory so that we can drive growth and then have the funds available to do so.

Okay. Just to clean up Jay, before I pass it, I don't want to monopolize any more time. I'll hop back in the queue. But anything specifically you can share with investors just in terms of how you expect this to accelerate the company's top line growth, which has already been very, very good. Just some help there in terms of what this is going to mean as you guys see it with respect to distribution gains, with respect to velocity. Anything with respect to targeted market share where we were versus where you think this can now go through the Pepsi system versus what was largely the AB system, and then I'll pass it on, hop back in the queue.

Yes. Thank you, Kevin. In regards to opportunities, we anticipate over the next 12 months, about a 40% increase in expansion in distribution. There's a lot of opportunities, as we talked about from college campuses. Foodservice is a major opportunity, especially, we're seeing a lot of consumption around lunchtime, so with Celsius. So we think the foodservice portion through the PepsiCo system, could be a massive opportunity for us. And we're really excited where we're at. Right now, we need to stay focused on the transition over the next 90 to 120 days, and then we'll be set for 2023 on where we're headed.

Our next questions come from the line of Peter Grom with UBS.

Congrats from me as well. So maybe just to start, I know the international opportunity was mentioned in the release and kind of in the presentation. But can you maybe help us frame a time line around that opportunity? And any initial markets where you see the greatest opportunity initially?

Yes. When we look at the opportunity. Thank you, Peter. When you look at the opportunities we see really probably in the next 24 to 48 months opportunities to expand into the U.K. and Germany as opportunities as well as Canada and other markets in Western Europe. So we're in the early stages. We're going to continue. We're going to support strategic relationships with some of their distribution partners in the international markets. But I would say probably in the next 24 -- around 24 months into the relationship, we look to gain distribution in international markets.

Got it. That's helpful. And then maybe pivoting to kind of the cost savings and margin accretion opportunity that you outlined this morning and in the presentation. Can you maybe help us frame what substantial margin accretion looks like or kind of a broader idea around the near-term or long-term margin expectations as a result of this transaction? And how quickly do you really expect to be able to realize some of these cost savings?

Yes. I'll throw that over to Jarrod.

Yes, to be very high level today since we haven't issued our few yet. So I don't want to get too much into forward projections. But this will really simplify our business in terms of our sales and our marketing teams. Even our back shop, and we're going to go from a couple of hundred distributors to 1. So there is a lot of simplification there. It allows us to do a lot of streamlining, having the cash available as well as their supply power in terms of looking at coolers and different types of CapEx spend that they will assist us with. So we have an opportunity from utilizing their scale to having faster growth and being able to utilize our scale and streamline. So there's a number of areas that we'll be able to really benefit from with the faster sales growth and able to simplify the system. We won't need to be staffing up as much as we would have if we were managing 250-plus distributors. So there's a lot of opportunities to really have a more simple scaled approach as we move forward and also the opportunity to get that top line growth quicker.

Got it. And then last, more housekeeping before I pass it on. Is there anything within this agreement that restricts what categories or types of innovation you are able to pursue? I mean we've seen situations like this in energy drinks in the past. So just curious as whether you're now combined to energy drinks or whether you can still pursue innovation, if you wanted in other categories where Pepsi may have a greater presence?

Yes, there's opportunities in a variety of different beverage channels. Now I think most people do know that there are certain partnerships that Pepsi is in that would restrict us. And obviously, they wouldn't carry that on their truck because they are -- they already have those agreements in place. So there's some things the different areas that we look into and sticking to that kind of health and lifestyle focus. There's not -- things that we've been talking about internally we're not restricted from. But there are going to be some restrictions based on previous agreements they have, so we wouldn't be able to get those specific products onto the trucks. But to be honest, those areas aren't areas we're focused on anyway.

Our next questions come from the line of Mark Astrachan with Stifel.

A few questions that haven't been answered yet. If I'm hearing and reading correctly, it sounds like the convertible can be converted over the next 6 years, but it doesn't sound like there is a path towards PepsiCo owning more of you than what's there. So is that correct? And I guess, broadly speaking, why is not having a path to ownership or more control the right one here? And sort of related to that, is Celsius exclusive non-PepsiCo owned energy drink or is Pepsi able to own other or to distribute other non-owned brands? And kind of pulling that question all together, how do you avoid the kind of healthy tension that some others have had when they've created arrangements like this within the category?

So let's start on the instrument first there. I won't get too deep into it, but there is the opportunity for Pepsi to grow their ownership interest over time beyond what they've got. That's one. And two, there's nothing restricting them from ever coming in and having a deeper conversation with us in terms of even more. But there is the ability for them to add to that, not necessarily in a preferred nature, but they have the opportunity to add to that. Now if they want to come and talk more about preferred then they're welcome to do that as well. So from that perspective, I don't think there's any like deep restrictions for them to take a bigger stake over time.

Yes. I mean when you look at the opportunities here, we are going to be the exclusive healthy functional energy drink on the portfolio. We are talking about a solid portfolio to be the lead in their energy drink category. So as we go forward, I think there's a massive opportunity. We fit in extremely nicely to their current existing portfolio. We fill a massive gap. And the opportunity that we have ahead of us is massive. And we do think we have enough protections in the contract. We understand some of the relationships in the past. And we think the relationship going forward with the team members is extremely aligned with interest as well as an investment.

Got it. That's helpful. Maybe just to follow up on that. So the discussions potentially in the future, are there specific criteria to be met? Is there a specific time line involved in it? Or is it just kind of when each party wants to potentially have future discussions. That's one. And then just two housekeeping questions, if I could squeeze them in. One, is there a production or procurement opportunity here, meaning at some point does or can PepsiCo produce and procure raw materials for you? And then are you paying an access fee to Pepsi for access to the system?