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

All right. I think we'll get started. So, it's a pleasure to introduce our next speaker, John Fieldly, CEO of Celsius Holdings. We also have Toby David, Chief of Staff at Celsius joining us. Now Celsius is a rapidly growing and now mainstream brand in the energy drink category with an impressive 11.5% share of the energy drink category up 4 points year-over-year and an exciting pipeline of innovative and better-for-you beverages and powders. So, Celsius is at a pivotal point in their journey, lapping strong triple-digit growth from last year, fueled by their distribution agreement with Pepsi, which by all accounts, really has been a great success. They're also looking to further ramp their international presence and recently announced a number of new distribution agreements abroad. So, importantly, the stock continues to outperform, up an impressive 58% year-to-date following last year's incredible performance. So, thank you both for joining us today. So, I wanted to kick things off at a high level and maybe talk about the category. First, before we dive into some of the company's specific details. So, a top-of-mind concern or maybe question that I'm getting right now from investors is the energy drink category growth has decelerated recently, at least that's what we're seeing in the scanner data and certainly based on some conversations I've been having with retailers.

So curious from your viewpoint, what's been the driver of some of this deceleration?

Yes. I think an amazing introduction as well. We're excited to be here. Just one thing to add...

Keep having...

The first really brand in the last decade to break attention in the energy category, too. So just a really astonishing job on the team and the way the brand is resonating with a broader consumer. But looking at the data, there's a lot of data out there. No one is better at analyzing the data than you. But the way we see it, 2023 was pretty high comps within the category. So, we're comping 2023. So, I think you have to take that into consideration. I know that you do a lot of analysis on a 2-year stack data. So that's something to look at in perspective. In general, I think we're really bullish on the category. Mintel just came out with a recent report that anticipated an 8.8% category growth. So, they're anticipating category growth. They're anticipating that they continue for the foreseeable future. So, I think we're all needing more energy. We're seeing the category blur, and that's what's interesting about Celsius is we're bringing new consumers in. We're seeing usage occasions expand outside of that traditional need state of energy. It's becoming more of a daily lifestyle, a daily routine. So I think as we sit with Celsius, I think we're in a really good position and almost going after like total beverage now as the lines are blurring. We're really excited about the category. But just keep in mind, we're lapping that 2023, which was really big category growth rate for energy.

Yes. So just in context, yes, it's just a step down in growth but still the consumers are attracted to the category. So, you're not seeing any noticeable changes either with consumption patterns or?

Yes. Some of the data we're looking at, we're not seeing -- not really seeing anything significant at this point. We're seeing good growth, and we're going to talk about some reset opportunities this year we see that's taking place. But I think the brand is really well positioned. We're hitting -- really bringing in new consumers and some of the consumers that maybe they would have aged out of the category are seeing Celsius as a better fuel alternative. So, we're keeping them in the category. So those are some data points we're getting. I think we'll know more as we get through summer and we really -- we're really still under indexed in convenience, which is about 68% of category sales are in convenience. So, I think once these resets come, we'll look in the summer, and we'll get some more data at this point on the Celsius brand and how it's resonating.

Okay. And last year, you reported your Q1 results, which were quite good, with growth up 37% granted lapping 95% from the prior year. So as you mentioned earlier, just tough comps, but still very attractive growth. And as you come out of Q1, how are you seeing that growth continue? Just I'm thinking about whether it's in April and May, you still feel pretty good about that growth continuing?

I mean you mentioned the 37%. That's a revenue ourself sell-in to Pepsi and our other distribution partners and retailers. As we called out the earnings, there was a significant inventory reduction as far as the days on hand that Pepsi was holding. So, I think when you look at that and you also look at -- there was an artificial inventory build in Q1 of last year that we were lapping, we called out $20 million - $25 million inventory build in Q1 of 2023. That 37% figure is a little bit -- it's not quite what the sell-through is to the actual consumer. I believe we're around 70% growth on the IRI data that we look at for Q1. So, we're bullish on the brand and where we're at, some very strong data points out there that are pointing that the brands continue to resonate with current energy drink consumers as well as, as John mentioned, bringing new consumers to the category. So we're excited, as John referenced, the resets are still underway. So we're extremely bullish is our reference.

And I definitely know that, that came up a lot on the call just in terms of the sell-in or distribution from Pepsi. What I'm trying to reconcile still, as you mentioned, the spring resets. They definitely want to touch on the shelf space gains that you all are going to be getting. So as I think about that in the selling to Pepsi, are they going to be ordering more as they need to fill in all this additional space that you're going to be procuring I believe you secured some...

We're about 50% when we did the call the other week, I think about 50% are set. We think the biggest resets are still to come in -- is really in the convenience channel. That's where the biggest opportunity is. But to Toby's point, when you look at the scan data and you look at our sales -- our sell-through to Pepsi, you have to keep that into consideration. I think as long as the registers are strong, we're seeing scan data grow. We talked about on the earnings call, we ended the quarter at 11.5 share. And then on the call, we said, it's not -- you have to be careful on one week reads, right? Because one week read can be very much impacted by promotions, new flavor launches by competitors. There's a lot of variables, but it is something as maybe a potential early indicator. And what we said on the earnings call is a one-week look back at the time we released was we had a 11.8% share. So, we're seeing some good signs of continual performance on hitting record weeks. We had a record scan week when we released earnings. So -- and we just had last week, which was another record week. We -- the data came in at 12.1% share in the category, and it was another record week. So right now, we've had 2 back-to-back weeks of record sales at the register. So, demand is there, momentum's there. Convenience store resets are still going to be taking place through the end of May. We do feel they're going to be done by June. We were just at -- I have the whole team right now at Casey's, which is a major retailer in the convenience channel. One, we've historically been under-indexed with only 1 or 2 facings almost 18 months ago. So, we come and see our booth at the show. It looks really great. We actually won a supplier award as well. So, it shows that the team is working, being customer focused, not only on our peers and our distributors, but also our retailers so -- and maybe end consumer. So, we're really excited about that. But the underlying demand is strong. We can't control what our distribution partner really takes inventory up or down. We ended Q1, we think they're going to maintain the inventory on days of supply will be consistent. Now it will increase with our revenue increase -- sales increase. But it's really out of our control. So, if they bring inventories up or down, I mean, at the end of the day, it's what is consumers? I mean consumer demand is going to flow through and our revenue will catch up whatever quarter that may be. We are gaining efficiencies though. So, you have to really understand that as well. We're in the second year of this partnership with Pepsi. So, we're gaining more synergies in our supply chains, working more efficiently together. We have optimized our inventory over the last 15 months by $47 million. So that's what really good partners do is find ways to be more efficient on that as we continue to grow scale and grow together.

And Pepsi a big distributor now for you, but they don't do all of it. Remind us the percentage that they distribute of your business.

In North America, it's about 62%.

Yes. And so, the rest of it, how are your inventory levels with the rest of your distributors with a...

They're pretty much consistent -- pretty much consistent -- the other we go direct to Amazon, we go direct to a lot of the club channel. And then we have big guys are here in New York, which is a great distributor for us, do phenomenal. We're up to close to almost a 20 share in New York City, which is phenomenal, very close to be the #2 brand. Maybe this summer, we can achieve that. We're working really hard. We've got great marketing assets available, and it's exciting. But [ Jerry Rita ] and big guys are doing a phenomenal job in New York.

Jerry's definitely great. I know you guys have been strong partners and speaking in New York area. I think there's some changes going on possibly with one of the other big energy drink brands and there could be an opportunity for you in the market.

Yes, Red Bull, they terminated their longtime New York City distribution partner. They go direct in many regions of the country, so they're choosing to go direct here. So listen, Rebels an amazing company, amazing brand globally. We'll see what happens. Many a time you have noise it can cause disruption, and we're going to try to make sure it's an opportunistic situation for Celsius for sure.

I wanted to circle back on the shelf resets and -- and I think you've seen our beverage by retailer survey recently. I mean you're one of the biggest space gainers at least that's what we're hearing from the retailers. Now you mentioned, I think you have visibility or about 50% of your shelf have already been -- or you've gained.

Yes. And that's -- when you look at it, it's really the huge opportunity for us is right now as we stand as convenience. So, if you look at grocery and mass historically reset a little bit earlier. And this year, it seems like the convenience channel. We're hearing labor shortages and a variety of other details, but it seems like it were somewhat delayed on some of the resets and convenience that are coming through. But that's going to be the biggest opportunity for us. If you look at our share by category, we have about a 10% share in the convenience space. And then if you look at food and you look at mass, we're much higher. So that's how we're getting that blended rate. But 68% of energy drinks are sold in convenience store. Huge opportunity we know we resonate with a broader consumer base. We just got to get these resets really set, really build out that billboard at retail, get secondary cold replacements and really continue to partner with these retailers. We got great innovation. I talked about the Blue raspberry lemonade, super refreshing. We have a Galaxy Vibe over here that Toby has, the watermelon strawberry flavor, just really great. We kicked it off this year with some key retailers, and we've got some exciting stuff for this summer. That's going to continue to drive momentum as we go through. Last night, Jake Paul versus Mike Tyson kicked off their PR activation here at the Apollo theater. We're going to be a big part of that. That's going to get a little increase -- further increase our brand awareness, supposed to be one of the hottest events, live sporting events in the world. And our household penetration has increased over the last year. We're up to about a 29% household penetration. And you see that grow over 11%, almost double. It's just astonishing. And that really has to do with the distribution and a lot of our marketing assets and the team that's been really working hard.

Do you -- or can you give us a sense, John, of the percentage increase of space you're getting or expecting to get at retail this year? And then I'd love to hear how that compares to prior year. And if it met or exceeded your internal expectations? Do you have a way to quantify?

When we're quantifying it is we haven't really specific gave the exact quantification. But what we're seeing, we're looking at as an example. Let's look at Publix, right? So in the food channel, historically, we've been still in the HBC set. That's health and beauty. And due to sales, demand, the way the brand is resonating, now we're starting to migrate over to the beverage aisle. So at Publix now, we're in the beverage aisle, which allows us access to those cold checkout coolers, which are super important. We're doing the same at Kroger. If you go to Kroger, a lot of their banners were in beverage, and we're also in HBC. So, it's really disrupting that path to purchase is what the teams are working on. We've quadrupled the size of the sales team, quadrupled the size of our key accounts team. Specifically quantifying, we were talking about this in one of the meetings earlier, it's not counting the number of items reported in IRI or Nielsen because I think we're right around 20 average items right around 20%. If you look at Monster or Red Bull it's like 28% to 30%. We could add 1 or 2 facings on average or items per store on average, but we can really significantly impact the retailer with improved shelf placement, moving, as we always say out of the gutter, get to the bull's eye zone, building out that billboard, getting those secondary placements. And we really talked about quantifying those specific numbers by channel.

Yes, we haven't given out a percentage, but you mentioned the 50% just for clarity, that 50% of the way through. John's referenced previously that this was the year we expected to get our biggest gains ever. Circle K is the second largest convenience chain in the country. I think they have like 13 divisions. And we just went into probably half of those divisions last year. If you -- Florida -- Circle K Florida, we do exceptionally well in Florida. It's our home state. We have 20-plus share in multiple markets in Florida. And if you go into our Circle K in many of their locations, we only have on shelf. It's down in the bottom row of the gutter, as John referenced, and they haven't had the reset yet. But we certainly -- like in a place like that, a Circle K in Florida, we married a lot more space, better locations. So, there are situations like that around the country where we anticipate having significant gains, better location, and that's going to drive not only more sales, but more trial, which brings in new consumers once you get that better location.

Dollar General, I mean if you just look at it as an example, Dollar General, you added a few more items, but last year, we were warm right. So going from a warm shelf, now gaining cold placements. I mean, technically, that's -- even though you didn't double your shelf space, you gained additional placements in the store to cold checkout, cold coolers, which just further increases the opportunity for disrupting that path to purchase. So I mean that's almost doubling your availability when you go from the warm shelf to the cold shelf and Dollar General. And we did the same in Maverik, doubled our space at Maverik. A lot of retailers are leaning in with us, which is really exciting. And if you look at the scan data, if you look at where Celsius is driving growth, Celsius is driving about 47% of the category growth. So, if you're a retailer, definitely looking at -- if you're looking at the data, you need to add more Celsius to your sets. So that puts us in a really big position. And we're seeing a lot of the retailers leading.

Maybe I'll shift gears a little bit because that's helpful and I agree. I couldn't agree more, especially in the convenience channel to drive trial price increases, right? So last year, Red Bull took one, which I think was unexpected from a lot of us. And then most recently, Monster did announce that they are going to move on pricing and they're going to implement their price increase in Q4. So I'd love to hear your thoughts on that. I don't know if you're prepared to talk about whether or not you consider following or how you think about pricing?

We're constantly analyzing the market it's -- we don't want to be a drag on the market. That's for sure. We do see opportunities as we go forward. I think your timing and sequencing has to be really critical. We have -- we're in the middle of the largest resets in company history. We're looking at promotional strategies. We also just launched a new line called Celsius Essentials. So that's a 16-ounce offering, which is -- we'll be launching inconvenience. That's a 16-ounce offering that's coming into convenience. And we are doing some promotional strategies to get trial, and it has been incremental to us. I mean we think there's a big opportunity in the Channel 4 of the Celsius Essentials in a 16-ounce pack. There is a segment of the energy drink category that really sees value in that larger can. This allows us to compete at that level. Pricing and promotional architectures are extremely critical, not only in totality, but also by channel and also pack mix. So, keep that in mind. We are a 10 share in the energy drink category under indexed in our overall sales mix. We do really well in grocery and mass and variety packs have been a larger mix of our portfolio, potentially than Monster has when you're looking at a cost per ounce. And historically, that goes for a lower ounce cost per ounce. So, these are just some mix, the portfolio mix, where we are in our life cycle, percentage of sales by channel. So, I think that will really evolve. Hopefully, it evolves after the resets, but things we're looking at. I'm not going to announce a price increase today. So -- but things we look at and where there's pricing opportunity, team is very disciplined to take advantage of it and find leverage through our system and continue to drive a healthy P&L.

You mentioned Celsius Essentials. So I believe it's been incremental to your overall portfolio. But I'd be curious to understand how much it has potentially cannibalized some of the core brands?

So we've been ecstatic about the performance and the incrementality of Essentials. We launched it in 7-Eleven in Q4 last year. They were really excited to bring it on. We have gotten quite a bit of data points out of the 7-Eleven launch and incrementality. It is a new consumer to different consumers, as John referenced earlier. Their people just want more volume, a 16-ounce can in their hand. So, it's different branding as far as the packaging, and we're -- we feel it's got a ton of runway ahead of it. So, we've been excited about the incrementality. The cannibalization, I mean, that was a big thing for us. We wanted to make sure that we weren't putting a product on the shelf that people will just pivot from one of our core lines into that. We were looking to design a product that would resonate with a different consumer.