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

Good afternoon, everyone. We're going to get started here. I'm Eric Serotta from Morgan Stanley's beverages and household products team, and I'm very pleased to welcome Celsius Holdings to Morgan Stanley's Global Consumer and Retail Conference. Before we begin, please see Morgan Stanley's research website at www.morganstanley.com/researchdisclosures for important disclosures. And if you have any questions, you could reach out to your MS sales representative. As many of you know, Celsius has been on an incredible growth trajectory. Celsius became the #3 player in the energy drink category last year and on the heels of a distribution agreement with Pepsi, which started October 1 of last year, has reached 9%, 9.5% share in Nielsen tracked channels recently. Joining us today are EVP Toby David and CFO Jarrod Langhans. Toby, Jarrod, thank you for joining us, and thanks for the product samples, keeping us caffeinated for the week. And certainly, based on the sample here, they're doing their job in terms of -- the brand is doing its job in terms of expanding occasions and demographics.

To start, looking back over the past 14 months or so with Pepsi, Celsius has gone from mid-70s ACV to about 93% today. Your market share has gone from 3.5% to 9%, 9.5%. I know it's a little higher in Circana. Your revenue is on track to more than double this year. How do you frame the growth opportunities from here in terms of distribution breadth, distribution depth, velocity, non-tracked channels, international? What's most important to your longer-term growth profile and what's changing as you scale?

Yes. So I think we have opportunity in all those areas that you mentioned. Our ACV is in a great place. Pepsi has been a great partner, really getting us in the doors. As we look out to 2024, resets will really start in January and go through May. So we see a great opportunity to get better space, more space, more SKUs on average but also more slots on average. So the IRI data doesn't really give you the kind of slots of double-facing, triple-facings, but we're looking to get multiple shelves in many instances and really have an opportunity to go broader and deeper across our footprint, on tracked channels as well as untracked channels. In untracked, you've seen where we've got about 10% of the Pepsi sales run through food service. So we think we're just scratching the surface there. We went from next to nothing to 10% of what Pepsi is delivering for us. So that's been fantastic for us this year. We see opportunity to continue to expand that, especially in the QSR arena, next year and then to add SKUs across that footprint. In a non-tracked C&G, where Pepsi can get us into a couple of hundred thousand locations, we see opportunities to get more SKUs in those locations as well. We rolled out with Pepsi on 10/1 last year, so we were kind of forced into their system, whereas this year we've been able to go kind of hand in hand and work on planograms and work on AOPs and really get into the mix there. And then there's other channels that we haven't really tapped into yet to get into. We also have a drill deep strategy. Probably back in 2020 we had 6 markets that were drilled deep. In '22, we had 18, 23 this year, and we're going to have 30 next year. So -- in those, we have kind of a 5-pillar 360 approach, where we go in, it's got 3 different tiers, there's different levels of investment. And it's the same approach we've done for the last decade, where we get in to really build brand awareness, build market share. And we can get into kind of Miami or South Florida as an example of one of those that's farther along in terms of its tenure with us working through that program. But see lots of opportunity across the board. International is probably more of a couple of years away, but definitely a lot of runway there as well.

Great. So even though you've had this incredibly strong growth profile and a very successful 2023, more recently we have seen the market share flatten out a bit on a sequential basis in that 9%, 9.5% range since early August. So obviously, a lot of moving pieces in terms of your growth and the category. So can you help us unpack why that market share has kind of been range-bound recently and when you would expect that to move higher sequentially?

Yes, I think there's a lot of noise in the category right now. I think in particular for us, if you look at some of our historic Q4s, you've seen that there's some seasonality at play, maybe a little bit more for us than some of our peers. I think part of that is we've done really -- our sales team has done an incredible job as far as getting large displays dropped at grocery and some of the big box stores. We merit that space. We'll drop 100, 200, sometimes up to a 1,000 cases in a massive display, and we sell through that product on a regular basis. If you don't sell through it, the managers are besides themselves because they don't have the inventory in the back to keep it, they have to move it, Pepsi has to come pick it up. So we merit that space. But during Q4, anybody who goes through a grocery store can attest, there's a little bit different dynamic when you walk in there, whether it's Halloween, Thanksgiving or with Santa Claus and reindeers decorated everywhere, there's not as much space on the floor. So I think we're impacted a little bit more than maybe some of our peers there. If you just look at Red Bull, they launched a seasonal SKU. This I think was a pear cinnamon. Anytime they do something, the market shifts a little bit. I don't think they're having incredible success with it, but it does make some noise. And then you see Alani Nu, they had 2 launches during that time period where I believe one is the Witches' Brew seasonal, so maybe a little bit of our female demographic was shifting over there for a short period of time as that's a seasonal in and out. They have the Kim Kardashian SKU that came out, Kimade. That got a big load-in, I don't think the velocity is very strong on it. But I think -- there's just a lot of noise out there. I would just caution everyone to take a look at some of our historical Q4s. There's nothing abnormal about what's going on now. We expect for Q1 and Q2 for things to shape up. We have some big expectations.

Great. And then you mentioned the spring resets and the shelf space. So this is the first time you're fully integrated with the Pepsi system into the planning process. What's the early read in terms of the percentage of your accounts that are resetting space for the spring? And what's the early read on how much incremental space that you're getting?

Yes. I mean we don't really give guidance on exactly what we're getting, where we're getting it. It's going to be different by account. We are pleased with the resets we're getting. We're going to get more space, we're going to get better space. So we're looking forward to that across the next couple of quarters as we get those resets. Working with Pepsi, there's opportunity to get into their planograms early now instead of being forced in, like I said a few minutes ago, where their Medals program, the Tier 3 and Tier 4 accounts, the accounts that they control, the inventory that they control within a lot of the C-store channels, we're able to get more SKUs and better placement in this year and be there for the full year instead of kind of get in where we can find the space. So we're looking forward to having more space, better space across the board across all our channels.

Yes. I would just add that you look at some of the innovation that we're going to be launching, [ some of ] it's in the public sphere due to some of the trade shows that we've been recently at. We just launched a 16-ounce offering of our ESSENTIALS at 7-Eleven. They asked for it early. We were planning on a January launch, we launched it last month. That's 4 SKUs that's going to be rolling out nationwide in January. We're actually going to add a fifth SKU to that assortment. We have a couple of our SKUs coming off exclusivity at 7-Eleven and Circle K that we're going to roll out nationally as well as some of our -- we have 2 Vibes, we have a noncarbonated SKU as well as a core SKU and also some variety packs we're going to be launching. And we don't launch these things out into -- like into the air, like, we actually have plans for these. These are going to find space out there. So I think we're pretty hopeful for what the resets have in store.

Great. And then turning back to the non-tracked channels. You've talked about significant opportunities on the Pepsi truck that gets you into channels that you couldn't on your own, like colleges and universities, hospitals, hotels. How do you size up the potential opportunities in some of these channels where really traditional energy drinks don't really play in a hospital cafeteria or places like that? And then how is the initial consumer pull been with some of your foodservice customer wins like a Jersey Mike's or Dunkin'?

Yes. I think that foodservice has obviously been a pretty big leap up for us this year. It was really nonexistent for us prior to the Pepsi deal. It's tough to put a number on it because it's a bit of an unknown for us. I'd say it's early stages, but to be at 10% of Pepsi's revenues with us, that's pretty significant. We got to that figure pretty quickly, and I know that outpaced where Bang had ever achieved, and Rockstar as well. So we do feel that Celsius has a bit of a different usage occasion than our peers in the category. Jersey Mike's you referenced, [ we went ] into 2,000-plus locations there. That happened about, I don't know, 6 or 8 weeks ago. The early data is encouraging there. And the hope is that could be a proof of concept as we want to go into the other QSRs that Pepsi services, whether it's like a Taco Bell, Pizza Hut, some of the other establishments. And then Dunkin' Donuts, we went into a number of their locations nationally, which I think is very interesting to go into a coffee house. They brought us in, they feel we're incremental. We only went in with 1 SKU, hopefully we get some more SKUs in there in the near future. But again, if that works out well, I think that really speaks to the expanded occasions with which Celsius offers, and maybe open stores even other retailers like a Starbucks.

Great. So shifting gears, so anecdotally and looking at the panel data, Celsius clearly is a different demographic profile than traditional energy drinks. Can you just give us a quick snapshot as to the demographic -- your demographic -- your brand's demographics versus traditional energy brands? And then, more importantly, how are those demographics changing as the brand is scaling from 3% share to 9%, 10% share? And how do you look at that in terms of implications for your long-term growth?

It's -- I mean we're -- our demographic is much broader than the energy category. So we almost look at it as a full beverage play, so the entire beverage category. We've got the -- we're aging down, so kind of the 18- to 24-year-olds are coming in and consuming our products. 75% to 80% of our growth has been incremental to the brand. So we're expanding the pie for the energy category. But we've got all ages we're seeing come into the category. Historically, it's been kind of that 25 to 45 range. But like I said, we're aging down, but we're also aging up and all over the place. So we -- the way we target is more communities. So we've got our drill deep strategy. We've got 30 different markets. And then within those markets, we look at a variety of communities. Obviously we go to our core fitness, but we're looking at that 18- to 24-year-old demographic. And then there's a variety of other communities that we're targeting, whether it's with our MLS partnership or with our F1 partnership, et cetera. But it's a pretty wide range of demographics that we're seeing. We're also 50-50 male/female. So a lot of females we're bringing them into the category from an incremental perspective. Is there anything else?

I think you nailed it.

So GLP-1 drugs, the Ozempics and Wegovys, have been a hot topic in the food and beverage industry. The work that we've done actually highlighted that energy drink consumption could actually rise among GLP patients who are more fatigued and the side effects. How are you guys thinking about that opportunity? I know Celsius sort of started with the whole calorie burning, negative calorie thermogenic positioning. It's certainly evolved into much more of a lifestyle positioning, but how are you thinking of it in terms of opportunities there and positioning for the...

Yes. I don't think we'll go back to the future to the calorie burning days of the company, we're going to stick with where we're at today. But I would say that I would agree with you. I think it's an opportunity for Celsius. Anybody who's -- whether you take it or if you know somebody who's taking the Ozempics of the world, you're taking in less calories, therefore you have less energy to -- that you're producing. Therefore, one would think that the energy category would be a benefactor of that. I think Celsius might be the biggest benefactor when you look at the perception of our brand is we're rooted in fitness. The people that are taking that are trying to lose weight. We have kind of a healthy halo around our brand. I certainly think that if it's going to benefit anyone, that Celsius could be that benefactor.

Great. And then in terms of competitive dynamics, I think it's fair to say that most energy brands over the past 12 to 18 months have benefited to varying degrees from Bang's decline. Celsius arguably disproportionately benefited as Bang was coming out of the Pepsi coolers while you were going in. How are you thinking about the risk from here to your growth if Monster is successful in revitalizing the Bang brand?

I would say that we -- I would agree, we're the biggest benefactor of the shelf space, not necessarily the consumer of Bang. We were the -- Monster and Red Bull, they have plenty of space. The retailers weren't looking to allocate the Bang space to them. And we were the next man up. We're the third biggest in the category. So we ended up being able to take advantage of that from a shelf space standpoint. With them coming back, we're not giving up, we're not ceding that space to them. We've proven our worth. I think it's -- pretty obviously, we're probably going to expand our shelf space, not lose any from them. I don't know that we're -- the Bang consumer is a unique consumer. It is interesting that Monster and Bang had their issues. Part of that was because Bang was stealing share from Monster. They created Reign to combat Bang and now all 3 are on the same truck. I don't know how big Bang gets. I mean it's a solid brand. If it gets up to a 4 or 5 share, where are they taking that from? I certainly think that there's some cannibalization that could be happening within the Monster portfolio. And I also think C4 and Ghost might be at risk a little bit there. If we had any consumers shift over to us, I don't think we're losing them. We feel like we're in a really strong position when it comes to Bang.

And then turning to the international side. John has said 2023 is all about planning. 2024, you're starting to roll out with Pepsi in a handful of markets. You talked about Canada in the first quarter and then sort of a broader rollout in 2025 and beyond. So how are you thinking about sort of the midterm market share targets as you enter these markets? And what broad level of share do you need to make it worth it? And what should we expect in terms of incremental investment as you're entering these markets?

Yes. So if you look at Monster, about 35%, 37% of their revenues is international. It did take them a little bit of time to ramp up. The world is a different place today than it was 20 years ago. So there's different things you can do to build brand awareness and to get things moving a little quicker, with digital media, social media, all those kind of things that didn't necessarily exist back then or at the scale they're at now. So we see an opportunity to get in and build brand awareness fairly quickly. We will be methodical about it. So if you look at the Pepsi system, it's a little different than the Coke system. Pepsi uses a lot of partners across the world. So -- there's a lot of big partners though. You've got partners that cover 10 to 20 countries. So really, it's working with those partners, building launch plans, building a really kind of a playbook and then rolling out. And so we're talking in '24, we'll roll out in a handful of markets. We'll really get aligned with each of those partners and make sure as we roll out into the -- in '25 and '26 at a faster pace that we've really got the right playbook and the right strategy in place. So we're not looking to do a shotgun approach. We're looking to make sure that it's really about doing the right timing and sequencing. We don't see a rush to get out and into those markets. So the investments we make will be modest, but they're not going to be really impactful over the next couple of years. And so we'll see where we go with that. But we do have an opportunity with, call it, the core half a dozen or so partners that Pepsi has to be a pretty sizable rollout over the next 3 to 5 years.

And then turning back to the U.S., looking at pricing. Last year you guys were pretty restrained on pricing. You talked about, well, you're just getting into some new accounts, you're not going to come back with a price increase 3 months later. More recently we've seen Red Bull move on pricing, to certainly some people's surprise. It looks like it went in. We'll see how long -- we'll see if it sticks and what the promotional response has been. But how are you thinking about price opportunities from here?

I think it will be interesting to see, we're 5 weeks in. So let's give it a couple of months to see if it sticks. It's definitely an opportunity. If you look at the CPG market in general, there's typically annual price increases that go through. The energy category has been a little different. So let's see, maybe we've got a trend where 2 years in a row there's some pricing that goes through. I think them being the super-premium brand, it will be interesting to see what the consumer does and what kind of price elasticity we have there. But I think that's something that will give us opportunity in 2024.

And then if I look back to this stage a year ago, one of the surprises to me has been the strength in your velocity at the same time that you've massively increased distribution. Pretty unusual in the CPG space to see that, after an initial dip, that it really accelerated as strongly as it did. How do you explain that or what do you think drove that acceleration in velocity as you got into the second and third quarter of this year? And how are you looking at velocity growth in 2024 and beyond?

Yes. I mean I'd like to think that it was a great management team that led that velocity gains, but that's probably not the case. Listen, we've got a great marketing team, a great sales organization that was able to wire into the Pepsi system in a really fantastic way where we didn't see any disruption. From a merchandising standpoint, Pepsi is best-in-class, keeping us in-stock, inventory levels, getting us incremental placements, whether it's helping on the displays or end caps, getting into the Pepsi coolers was really beneficial for us like when you go to a Walmart near the checkout. But our marketing team has done a fantastic job. We kind of have a little bit more of a unique methods that we use. We are very heavy on the influencer side, very heavy on the digital side. We have great partnerships around the country with different -- with MLS as Jarrod cited earlier, F1 with Ferrari. So we've really implemented kind of the strategies that you've seen us leverage in some of our original core markets that we focus on. In South Florida, we've talked about our market share there. We have a 24% market share. We passed Monster. We're the #2 energy in one of the largest energy drink markets in the country. So it's about taking the playbook that we've developed over the years that has worked there in South Florida, in Boston, New York, Dallas, and L.A., in markets like that where we really significantly over-index in market share versus our national average. And we're trying to replicate that around the country. So this year -- or last year we expanded to 18 what we call drill deep markets. This year it was 23, next year it will be 30. And we're confident that this -- that our tactics travel. Those are all very different markets that I just cited. Buffalo is not even one of our drill deep markets and our market share there, which we haven't given out is it's remarkably high. And I mean I couldn't think of a market any different than South Florida. And I think it just showcases that our brand is able to travel and hits different demos and different regions.

Great. So let's shift gears and talk a bit about margins. First, more shorter term 2024. So Jarrod, you called out on the third quarter call that after the substantial gross margin improvement that you had this year that there wasn't -- not to expect you to really squeeze a lot of incremental margin improvement out in 2024. Can you talk a little bit more broadly about the puts and takes for gross margins in 2024 and where the potential upside or downside levers are?

Yes. I think some of that's -- we want to make sure we don't set expectations that people are going to get over their skis, right? So we want to make sure that we have the ability to really continue this investment and this growth of the business. And we don't want to make decisions based off of consensus. So there is opportunity to slowly turn the screws a little bit and to drive some margin. But we're in growth mode right now. So it's not where we want to buckle down and really start leveraging everything through the business because we see a lot of upside on growth and market share gains and those kind of things. So that's really the core focus. We've done -- or our operations team has done a great job on building out our orbit model and really reducing freight costs. They've done a great job on getting raw material costs back in line after you saw the spike across 2020, 2021, 2022. We were able to flush out the international cans, which were very costly. So we've got long established relationships now with our co-packers. So as we continue to grow in scale, there's opportunities across the board from a procurement perspective, from a manufacturing perspective, continued freight opportunities with the orbit model and getting miles off the road. There's also opportunity with our promo calendar and getting more bang for every dollar we put into promo. So we see opportunity across gross margin, but right now we're not ready to draw a line in the sand and say, we're going to expand it by x amount.

Okay. And then longer term, you've previously talked about a goal of getting to Monster-like gross margins. When you compare your margins on an apples-to-apples basis with the -- accounting for the freight accounting difference, you're basically there in terms of Monster's total company gross margins but still a pretty substantial gap if you look at Monster's kind of high 60s U.S. margins. So what are the biggest areas where you could potentially close that gap from here? They're obviously 3.5, 4x your size even in the U.S., so -- and scale matters. So how much of that gap can you close? And what are the areas where you think you can make a difference?

Yes. I mean they set the standard, right, for where we should be able to get to, and we use them as a goal. And so we believe we can get there. It will take time. As we scale up, like I said, there's opportunities across procurement, there's opportunities in working with our manufacturing partners with capacity utilization, with longer runs and those kind of things as we grow and as we scale up across the U.S. So we think there's definitely opportunity, the opportunity within the promos, like I said. So there's opportunities across the board as we scale up. And then as the growth moderates, that's kind of where we'll start to look to really fine-tune things and see some leverage come through the system.

Great. And then looking at channels and this sort of ties back to margins. You guys have always had a strong presence in club, a strong presence in -- I don't want to say always in club -- but in the -- over the past 2 years or so, had a strong presence in e-com. What are you looking at in terms of the potential for growth in those channels from here? The growth has remained really robust as you've built out brick-and-mortar, particularly C-stores. And then how do you look at those channels versus grocery and C-stores from a profitability standpoint? Clearly, lower prices, but I assume lower cost to serve as well?

Let me jump on the profitability one and then you can jump in on the growth. It's a little bit different model, so in club and Amazon you're not doing that white glove service. So I think club is 18 packs, full pallets into the DCs of Costco and Sam's Club and then forklift the pallet onto the floor. So the -- kind of that cost isn't there in terms of getting cans on the shelf. So there's a little bit of savings there. And in turn, they do want a little bit that they get to keep. And so at the end of the day, I'd say the margin profile from a gross margin perspective is consistent from channel to channel. But a large part of that is because of how the cost structure is set up, and it's the same thing with Amazon, where it's direct from our warehouses into their DCs. So there's a little bit of savings you get because you don't need the white glove treatment, and in turn you share some of that extra margin.

Yes. I would just add that we're #1 on Amazon within the energy category, have been ahead of Red Bull for a few quarters now, just surpassed Monster in Q3. Still feel there's plenty of runway left there as well as in club, Costco. We haven't really given out any specific data, but what we have said is we're one of the top-selling beverages at Costco, not just within energy, but in total beverage. So we really performed well there. Sam's Club, I think we're still in the middle innings. We'd like to see if we can gap that up and maybe hopefully get close at some point to where that Costco numbers are at. There's definitely room for growth in both of those. One thing that I think will be interesting to see is as our brand awareness grows in some of, call it, some of our under-indexed markets around the country, as we increase that brand awareness, people, they'll trial your product in the convenience stores. And then what ends up happening, and per Amazon, they'll tell you, they want you to get further distribution in these markets, because as people are exposed to your product, they'll try it in convenience and then they'll go buy the bulk packs at Amazon. And I know the same thing occurs at both Costco and Sam's. So we're still in our relative infancy as far as brand awareness, well behind where Red Bull and Monster is. And I think that speaks to where the opportunity actually lies. If we had massive brand awareness like some of the other brands out there that I won't name, but aren't getting pulled off the shelf, that would be a problem. But the fact is there's many markets around the country where we are still in our infancy, which just means we have tremendous opportunity for growth left.

And then look, the energy category has always been dynamic and competitive. Celsius' growth is certainly attracted a lot of new entries into the whole clean energy, performance energy, whatever -- however you exactly want to call it. So what do you think differentiates Celsius from the competitors out there, whether it's Ghost, Alani, C4, and are you looking at these brands through the lens of competition for market share or more through potential to grow the overall category?

Yes. I mean, those are all like very solid brands. We respect the entrepreneurs out there that have grown those businesses. I think we're quite a bit different than each of the ones you named. We have a much broader demographic. I think each one of those -- I don't want to say they're niche, because I feel like that might be a slight and that's not the way it's intended. I think they just have a narrow demo -- a narrower demo than we have. Each of those plays -- not each of them, I don't think Alani really plays in fitness very well -- but Ghost and C4, I mean those have done nice within the fitness channel. That's really where we grew up. We continue to heavily invest within the fitness channel because that's where our roots lie. That's where we gain our authenticity and credibility, when people see their trainers or people that are heavily into fitness consuming our product, creates a spillover effect that shows that this brand is actually a better-for-you product. So yes, I would just say we have a broader demo. I think they're good for the category. We're trying to take share from everybody. We're incremental to the category. We are bringing new consumers in at a higher rate than any other brand. But at the end of the day, if we're going to compete with the Red Bulls and the Monsters, we want to capture as many consumers as possible. I think the other piece is, retailers are apt to give opportunities in newer brands and give them space. So that's -- typically presents a little bit of a challenge when you're going through negotiations, because there's only a limited space. The good news is the category is growing, and the retailers are giving energy more space to the detriment of CSDs, dairy, teas, coffee and a whole host of others. So the other good piece is if they fail, some of these smaller brands, that's opportunity for us to capture that space.

Great. Then could you talk a bit more about your innovation strategy and the pipeline both for 2024 and how you're thinking about innovation over the medium term? Red Bull, obviously, has a very different portfolio strategy than Monster. How you think about Celsius in terms of that spectrum?

Yes, I kind of spoke about it a little bit earlier. We have quite a bit of innovation that's coming out in 2024. One of the big things we did this year is we bifurcated our lines. We took our core SKUs with the fruit on the package and we separated that from our Vibe lines. And we went to retailers and said, each one of those has a different -- slightly different demographic. It's exactly same formula, just different flavor profiles and the way that we market the brands. But bifurcating it, what we're going for is trying to get theoretically a full shelf of each one of those. And that allowed for us to go to the retailers and ask for additional space for each one of those lines. We introduced the ESSENTIALS 16-ounce line at 7-Eleven last month. That's going to roll out nationwide. So it's part of the portfolio, the hope is you get 2 shelves of the Vibe and the Core line, you start building out hopefully to a full shelf of the ESSENTIALS line over time. And then as we look at innovation, typically both Jarrod and I sit on the innovation team. We're highly caffeinated, trying samples all the time. And we look at different opportunities. Primarily through, in the energy category, I think there's some other levers we can pull there within energy. But then also, like what categories have that big TAM where if you come in and you make even a medium-sized impact, it can be significant from a revenue standpoint. So we look at all these things. But right now, our primary focus is continuing to grow this core portfolio. We feel like this is a unicorn. We don't feel like 10 share is nearly good enough. And that's why we cite the Amazon data, why we cite the South Florida data, because we truly believe that's what the potential of this brand is. But over time, we're going to build out that portfolio. We just -- we only have a limited amount of bandwidth, and we want to make sure not to distract the team.

Great. Well, I think that's a great point to end on. I'll keep everyone on schedule here. Thank you, Toby. Thanks, Jarrod.

Appreciate it. Thank you.

Thank you.