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

All right. Good morning, everyone. It's a pleasure to introduce our next speakers, John Fieldly, CEO of Celsius Holdings; and Toby David, Executive VP. Celsius is a rapidly growing brand in the energy drink category with North America sales up triple digits in Q1, and an exciting pipeline of innovative and better-for-you beverages. Now Celsius' distribution agreement with Pepsi which was announced last summer is off to a great start, helping the company double its share within the Energy segment over the last year, while the stock has meaningfully outperformed the market over the last year, up nearly 135%, so with that, I'm going to join the 2 of you, and thank you so much. Wow.

It's been exciting. About 12 months since we've been here.

I was looking back at that because I had some notes and it doubled right?

It's amazing. The brand is resonating with a broader consumer than ever before. And coming back here, the latest data as of April we've always talked about being a $1 billion brand, and the latest scan data has Celsius as of the last 52 weeks as of April 26, we've reached that $1 billion brand status at retail. So just a really exciting time for the company.

Congratulations, honestly. And what do you think have been the key drivers behind this? Just it's certainly resonating with consumers, but how much is the Pepsi relationship kind of boosted some of this talk to some of these key drivers?

Yes. Reflect on where we've been over the last 12 months, we go back to the last time we were at the Goldman Sachs Global Staples Forum. And we were growing -- we're bringing new consumers into the category. We are continuing to gain -- really grow our ACV and really build solid relationships with a lot of the key retailers in the country. We've built -- we continue to build upon that. And in October, we partnered with Pepsi, where we moved our distribution from mainly the independent Anheuser-Busch distributors to Pepsi on a national basis in North America. And that opportunity further building out our sales team and marketing team. But as of the end of the first quarter ended March 26, we had a 95% ACV. So we just achieved that. We had great resets that have taken place this year with our new partners and getting a lot of the independent accounts that we brought on has really been an exciting and just the momentum behind the brand. But that's really a lot of the key drivers was getting to that 95% ACV, which we got there a lot faster than we ever thought. Actually, internally, we were thinking it would be another 12 to 18 months before we reach that 95% ACV. So we're really excited about that.

Where are you sourcing share from? Or I mean I think you're bringing incremental consumers into the category, but just curious.

Sure. We are. We actually -- Toby and I were just talking about that. I don't know if you want to...

Yes sure. About 24% of our consumers are incremental to the category, new to the category per numerator. And then another 44% is incremental to the category because it's what the term user intensification. So in totality, you're looking at 68% of Celsius sales are incremental. So retailers love that. It's just not brand shifting. Obviously, when you look at the brands we source from, Red Bull and Monster, they're 70-plus percent of the category, so they're going to be a preponderance of it. Obviously, what's happened with Bang we've been able to capitalize on that as well. But we're able to dabble in both. We're able to source from the biggest players, and we're also bringing these new consumers to the category, which is exciting for everybody.

I think that goes to our positioning as well, right? The new age energy, I can't tell you the number of people that even ran into today at the conference here. They consume Celsius. We have replaced it with their coffee but they don't consider themselves an energy drink consumer. So when Toby mentioned like incremental to the category, that's what differentiates Celsius. It's we're truly incremental. People see us beyond an energy drink. And I think when we were here last year, we're talking about we want to be a major player in the energy category. And I think today and in the last 12 months, what we've seen is Celsius can be opportunity is to be a major player in total beverage. And that's really what we're seeing now with some of the expanded distribution with Pepsi where 10% of our Pepsi sales right now are in this food service, this untracked channel, which is quite interesting. And I know a lot of our employees, a lot of people we met today, some of the investors out there, they have Celsius with their lunch. That's outside that traditional energy drink usage occasion. So that we really when we see -- talk about Celsius now, we really see it as a total beverage opportunity.

And does that get you to thinking about your share next year when you're hopefully going to join us at this conference. Do we look at another double or I don't want to push it. How about I ask it this way. I mean, is 10 share within reach given this momentum?

Yes. I mean I think so. What's exciting, we just reported our first quarter numbers. And as of March 26, we reported that we're a 7.5 share. 30 days later, the latest data comes out, April 26, and we're at an 8 share now. So we've gained a 0.5 share point in 30 days. So and you go back in the last 12 months, we were 3.7 shares. So -- and we just gained 95% ACV, like I said. So we have 13.6 items on average scanning at retail right now, which is a major opportunity. We're seeing our velocity starting to increase, even though we gained ton of distribution and really lower-turning chains and accounts. So I think between Toby and myself, I've been with the company 12 years, Toby's been here 10. We have a lot of great team members. I think everyone's really excited on where the company is right now.

I would just add to that, John cited on the earnings call that -- and it's the first time we've released any data like this. But in the South Florida market, which is a top 10 energy market in the country, we're about 22% market share in South Florida. So a mature market, where we still view there's plenty of upside left, especially in the Miami area. We'd always cited Amazon, we're at 19% in Amazon. So when you look at like those -- Amazon is obviously a big national player. But to be 22% in South Florida, really, I think, indicates where some of the runway is for this brand.

And it's like some of the new markets that Pepsi brought us to. I mean, like Buffalo, New York, we're a strong double-digit player right now, and that's really a new market for us. We never really marketed there. So we're seeing a lot of great opportunities in certain regions of the country that are popping up that we didn't really have that presence or distribution availability. So the brand is resonating. We were saying it's a broad consumer base, it's resonating with the next generation of energy and people that are traditionally aging out. We'll keep them in the category with something better for you. And a big push this year, a lot of brands are pushing the no sugar. So that's allowing consumers to really think about their energy drink and what they're consuming, and we think that could be further opportunities for brands like Celsius.

Yes. And speaking of that, I think what is most impressive about your performance is you've done this with just stepped up competition. I mean with the success you've had, I think, is certainly attracting more players into this new age fitness performance energy drink category. So how do you think about that? How worried are you? And how do you defend sort of the shares.

Yes. Listen, we're hyper paranoid at Celsius. Yes. So I think that's really key. Competition is fierce. It's a growing category. The category has been growing at double digits. There's -- we think there's a long runway of growth ahead in the energy category. And there's always going to be competition. And it's -- right now, we're the third -- #3 brand in the category. So we have a ways to get to #2, and we have a lot of people coming after us, below us. So it's a little bit of an uncomfortable position to be in #3, we're glad we made it. We're growing from there. But listen, we can only control what we can control, and we keep the teams extremely focused on what we need to do to really leverage our playbook and execute against our plans, our annual operating plans. And you got to outmaneuver and how to execute. And that's what I tell the teams all the time. We never be complacent. Category is evolving, consumers are evolving. We need to make sure we stay up with the trends of today as the trends today will be gone tomorrow. So it's constantly reinventing yourself, I think, is really critical as a company. And we've done that and bringing in new consumers. We're connecting with new consumer segments within the consumers as well. We started to get into over the last year, MMA. So we've been partnering with a variety of MMA fighters and really going further expanding as our ACV and our availability has increased, we've had to reach out a little bit further into additional consumer segments, and it's worked out well.

And speaking of that and as you try and touch new consumers, your innovation pipeline, frame it for us in terms of how it compares to last year. I know you've come out with some new flavors as this one is, green apple, cherry...

Yes. I brought green apple, cherry, because I think this is a great example of some of the highlighting of the innovation that we had and this was a partnership with 7-Eleven. It's one of the fastest-growing SKUs they have in 7-Eleven and growth to the category. And it just shows you like the innovation team at Celsius really on the forefront. They did a great job. It's a great flavor profile. We partnered with 7-Eleven. We do extremely well at 7-Eleven, built a variety a ton of brand awareness around it. And we also have a lemon lime out there in the hall. We have a lemon lime flavor where we partnered with Walmart on the launch -- an earlier launch, done really well. It's allowed us to really ignite. Walmart, which is one of the largest energy drink retailers in sales in the category. So lots of opportunities all around. We've got great flavor innovation for this summer. We already have our plans in place for '24 as well, some really good new innovation. More to come on that. But it's been exciting. A lot of new innovation out there. You got to stay fresh. You got to stay relevant. And we need to partner with our retailers as well.

No, that makes sense. What about any -- you tell me, but in terms of what your plans are for '24, but is it further flavor profile? Or is it package innovation? Do you foresee some of that in the future?

Yes, absolutely. I think next year, we're going to really stay focused on our core portfolio. So you're going to see some really great innovative flavors coming out of our pipeline and our fruit forward line. And then also, we have our 16-ounce opportunity that we have with our Celsius HEAT line. We're going to further innovate there. We think there's opportunities there. And then we're also looking at -- always looking at where the category is going, what opportunities are adjacent to the category we're looking at. Right now, the main focus is timing and sequencing and really considering that we just got to a 95% ACV, we're going to stay focused over the next 12 months and really drive this portfolio forward.

Okay. And the spring shelf resets just occurred. Talk about how much incremental shelf or cooler space that you got during the resets. Have you quantified that? Or how does that compare also to the entire energy drink category?

Yes. Yes. So as of March 26, what we cited during the earnings call, we were up to 13.6% SKUs per location in the MULO+C data, which is all grocery and convenience. I believe that was up from about 8 SKUs roughly from the year prior. Really a lot of that growth would come from convenience, where historically we had -- that was our last channel that we entered. You were looking at -- last year, we probably had 3 or 4 SKUs and a lot of convenience stores around the country. And we're nearing double digits now. But that 13.6% figure that was as of March 26 and the 4-week data. So that's during high season of the reset. So I think there's still some meat on the bone, so to speak, that by June -- late June, you probably have a good perspective of how the resets went. We felt like we had a great selling story going into the selling season last fall. Obviously, with what was going on with Bang, that was helpful for us, and we capitalize on that with our very aggressive sales organization that was able to capitalize on that. The story that we're already speaking of, the incrementality to -- for retailers, they love it. We were able to get some really nice placements.

I think the biggest win is in convenience, right? So if you look at -- this brand was built in fitness. So we've built in the chains, Gold's Gym, 24-Hour, Vitamin Shoppe. And for a variety of -- because of the brand's DNA, we were really able to penetrate convenience. Now we have 7-Eleven in the early days, but we built it in mass drug and now club. And then really like the front tier for Celsius was really the convenience channel. And if you go back, most recently, we gained 37 share points of ACV. So that I think on the last resets, that's really the amazing opportunity and we're at a 93% ACV right now at the end of the first quarter. That allows us to play on the playing field and energy. 70% of energy drinks are sold in convenience and gas. And now we have a presence there. To Toby's point, there's opportunities to gain further items in each location and better placements, but we're in. And so that's what gets us excited at especially finalizing the last resets. I think that's the biggest win that the company has had right now.

I mean, given how attractive this category is the growth, the profitability, retailers are allocating more space. Where do you think some of that space is being sourced from? And then are they allocating -- some retailers, I think, are allocating, I don't know, better-for-you energy drink space, which you are hopefully capitalizing on as well.

Yes. I asked that question a lot to a lot of the buyers and retailers because you're right. There is more space being allocated to energy. The category continues to grow. We hear, especially coming out of NACS last year, I asked that question a lot as well. And it seems to be a lot of the teas, juices and waters was getting consolidated at that point to allow that additional energy door. There's a lot of fragmentation. Obviously, a lot of the lead players in energy want to fragment the energy door to protect their shelf space and precious real estate. So they'll try to talk about new age, talk about better for you and that puts you either in the gutter, in the nosebleed section and it doesn't allow for the bull's-eye placement, which is the optimal placement. So when we talk about it, we talk about total energy. We were -- our sales weren't, our velocities weren't to be placed in energy and in that main door of the cooler. So that's what we go after. We try not to be pigeonholed to these other adjacent categories that are subpar in the door. And we've been -- the teams -- our key accounts team has done an amazing job. Really getting -- moving us out of the gutters or out of the nosebleed section into the bulls-eye areas we call it internally so.

Switching gears a little bit to pricing. You've put in some pricing over the last 12 to 18 months. Remind us of how much and maybe when that was implemented? And then do you have plans for incremental pricing this year? I'm thinking about it to with what the other the big guys have done?

Yes. I mean we took like on an average around a 6% price increase last year. And we're constantly evaluating pricing and opportunities that are out there. I think there's more opportunity to take price. But just due to the macroeconomic conditions and working with retailers there might be further opportunities to gain leverage working with our suppliers and our supply chain versus taking frontline pricing. At this time, I think we're a little bit cautious on the current environment. We're going through the processes. We have a pricing committee that meets every month. We talk about the pricing in the category. It seems to be a lot more promotions potentially happening now. So will that whole 6% take place? No, because you're going to deal down and average in. But the -- the whole category pretty much took price, but now you're starting to see some deals come in. We're watching that closely as well. I think there's just a lot of uncertainty right now with the category on how much pricing consumers can take and also retailers as well.

Yes, that was going to be my next question is promos because hearing from many companies. Certainly, well, it depends on which one, but some level of promotions will step up, especially over the summer. And I think in energy, you're already starting to see some. Do you have plans also then to promote to in line with what you're seeing from some of the others?

Yes. I think we're getting questions now from retailers. Retailers are asking for more promotion. I think somewhat they're seeing traffic. We're hearing some traffic slowing down. So they want more promotions to help bring consumers and entice them to come into their stores. So promotions are going to be key, especially this summer. Internally -- when you look at the summer, summer beverage season, right? That's a huge opportunity, call it, the 100 days of summer as we all get ready for it. And so there's going to be promotions because there's going to be a lot -- you need to promote in order to get off-shelf placements. And I think the team has done a really good job on that. Not to say it's going to impact gross profit margins or anything, but we -- about 24 weeks a year is really promotional activities traditionally in the energy category. So you have to be able to promote in the category to stay relevant. So we plan to do that.

In the context of that, you mentioned gross margins. You expect mid-40% range this year. But I think some pressure in the first half as you fully integrate into new distribution system. Can you help quantify the pressure you're expecting in the first half on your margins? And then any kind of incremental efficiencies in the back half of the year?