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

Great. Good afternoon. This is Robert Ottenstein from Evercore ISI's Global Beverages and Household Products team. Really happy to have today the top management team of the premier growth story in the beverage industry globally. John Fieldly, CEO; Jarrod Langhans, CFO. And a lot of questions that we've been getting the last couple of days. So I want to just kind of jump right into it, guys.

So scanner data came out recently, and the sector overall has slowed quite a bit. And it's been kind of slowing progressively this year, and it's taking a lot of investors by surprise because investors look at energy and let's just focus on the U.S. as a growth sector. And when they don't see growth, obviously, questions come up. So love to get your read on why the energy drink sector overall has been slowing, what those factors are and what needs to happen to kind of turn the overall segment around first?

Robert, glad to be here. Thanks for having us. I'll start off with answering the question. I also turn it over to Jarrod. He's also on Zoom coming out of Portugal today. So we have some connectivity but should be a good conference and chat. I mean the category has been slowing, Robert. You're absolutely right. I mean it's -- we're watching it very closely over the last several weeks. There's a lot of forecasts as well that still anticipating good growth in the category. So we're kind of waiting for that to turn around here. We're heading into summer right now. It's the busiest beverage season that when you look at July, August, it usually best months of the year. So those are things that we're waiting on. I think the little -- we have been disappointed with the category, not seeing that category growth as we anticipated. But there seems to be a lot of factors from seeing a lot of the write-ups on weather and timing of resets and it could be also the spending patterns on consumers starting to feel the pinch on the gas pump and the rising costs. So there's a lot of variables there. I think you look at total beverage overall, and it's -- be interesting to see the reports coming out, but you're starting to see some spending deep cuts that you haven't seen overall. I think when you look at Celsius specifically, we're showing good growth as well on the scanner data. So Celsius is growing. I think if you back out Celsius out of the energy drink category, it's in a negative position on growth. So I think it's good that overall the Celsius on the reads -- the latest reads on the weekly reads, especially the 4-week read, we're at 11.5% share overall in the category. That's as of the June 2 data. When you look at a 4-week read and that's really the reads that we look at because I can get a lot of fluctuations on 1-week reads, is very difficult. So I think the 4- and 12-week read to get a much better kind of trajectory on where the company and the brands are going within the segment. But overall, it was -- it's been surprising seeing the category down as much as it is, and we're hoping for a rebound here this summer. I don't know, Jarrod, if you have any other topics to add there.

No, I'm going to agree with you, John. I think we're running our playbook and we're continuing to grow our business. There are some headwinds that we faced recently that the whole category has faced. But like we talked about last time, we have 12 markets and 15-plus share. We're 20-plus share on Amazon. We're consistent with that in our more mature club markets as well. So we continue to grow our business in a variety of areas and continue to help lead the energy category.

Great. And then kind of drilling in a little bit more on your kind of recent scanner data. That slowed a little bit. We're getting a lot of questions on the shelf resets and I think there is talk that maybe they've been delayed and that perhaps has hurt you. So I'd love to kind of get your best sense of how much of the shelf resets are in the market now today? I know it's tricky when you're dealing with customers that have thousands of stores, in some cases, it doesn't happen overnight. But your best sense of where we are with the resets. Are they taking longer than you thought they would? Are they taking longer than the retailers thought they would and maybe what's causing that and when you think you'll be finally set?

I think the resets, we're expecting normal resets as a lot of the grocery channel as early January. When you look at convenience, you're looking at historically, March and April as big reset periods, but it was delayed this year. Not getting a clear direction and the reason why, but I think it's labor when you look at it, a lot of the labor shortages out there has really impacted a lot of these shelf resets. So I think that's been a major issue on these delayed sets. But I think when you look now, you're probably right about -- we're probably coming towards the end of the resets right now. So as we're gearing up for summer. So we had the biggest reset season. We've got a lot of new additional space and better placements, kind a lot of space gains with our Celsius Essentials line, which is our 16 ounce line. We're really excited about that. And so I think we're -- you look at it now. We're well positioned to really maximize the opportunities right now. And we're -- as Jarrod mentioned, we have a lot of -- a lot of great assets, a lot of -- a great plan, a great strategy, new innovation coming out this summer that will launch, great assets we're leveraging. And we're excited. We're going to run towards Vegas. That's our mission here at Celsius right now is we're going to run our playbooks and audible and grow and bring new consumers to the category, and we're going to have our finish line in October at NACS, which we're really excited about and continue to drive this category forward in '25 and beyond.

I'll be there to give you the high five. But so in the interim, so it's sounding like -- I don't know your 85%, 90% or so done on the shelf sets. They took longer than expected. Would it be your best sense that in the next month or two as the shelf sets are fully in, as the consumer sees it, as your marketing plans kick on that the scanner data will kind of reaccelerate up for you guys?

I mean that's the plan. We got -- the shelves are set for the year. There'll be midyear cut-ins as well. I think there's further opportunities. A lot of retailers do some midyear resets, hopefully get the category to continue to change to more of a growth mode as we enter into summer, leverage those assets. I think we're at 11.5% share nationally in the last 4-week read, were up 35%. If you look at the weekly scan data, like total scans of [indiscernible] we were running around in January about $40 billion a week. And the most recent last several weeks have been right around $50 million, so an increase of $10 million a week is pretty impressive on the scans. And yes, we want to go higher and grow from there, but it's a good baseline to build upon. And I think the portfolio, when you look at it, the better-for-you proposition, the functionality, the fitness lifestyle, and some of the great flavor profiles with our core line, fruit forward and our Vibe line and the Essentials. We've got a really great portfolio for today's consumer, looking for better-for-you essential energy and our Live Fit mantra is broadening -- resonate with a broader audience than ever before. I just got a picture out yesterday of a gentleman who's 103 years old, he drinks Celsius today and his longevity is because -- he says it's because of Celsius, keeping him living fit. It's just phenomenal seeing some stories like that coming in. But it's interesting there. The product does resonate with a broader consumer. Jarrod mentioned over 12 markets, above a 15% share. So this portfolio plays in energy, and it plays in at the top level in several key markets within the U.S. So it's going to take time and opportunities there. And we just got to -- as Jarrod mentioned, you got to continue to execute against our playbook pivot, what's working, why is it working, continue to find opportunities, continue to bring new consumers into the category. And I think retailers will continue to expand the energy sets because it is one of the only categories really growing at all of beverage when you look at LRB.

Absolutely. Let's kind of talk kind of strategically a little bit. And again, just staying on the U.S. market. So unlike some of your competitors, you don't rely on kind of that core hero SKU. You've got different kind of brand families, if you will. So I'd love to kind of just understand better how you kind of stand back and segment the market and what -- how you do that and how the different product lines meet different consumer occasions or different demographics and particularly how incremental they appear to be and any early reads on Essentials?

Yes. No, absolutely. I think the way we're building out the portfolio is working really well. We're trying to reach a broader consumer as we gain this additional distribution and availability and how do we bring more consumers into energy and also grow the portfolios. And when you look at our core line, which is more fruit forward, it has a Better For You -- really leverages that Better For You healthy halo more than -- if you look at our Vibe line, I got Cosmic Vibe and you have a Tropical Vibe I'm drinking today. There's -- it's almost experience in every sip, right? So it's a little bit more of an emotional connection with consumers and all underlying about that Live Fit mantra central energy with a fitness lifestyle, but plays a little bit differently on the tone. So the Vibe line more experiential, more outgoing one could say, has a different -- maybe a little bit more aggressive personality versus our core line, which is more fruit-forward and better for you vibe. And then you look at another expansion we did, we just launched a Blue Raspberry lemonade at 7-Eleven, just kicked off this year, really great success, great flavor. It's a fizz free line, so we have 3 Fizz Free flavors right now. Also have a Fizz free variety pack coming out. We have a Raspberry Acai or Peach Mango Green Tea and then we have a Blue Raspberry lemonade, so really great flavors that's going to expand -- potentially expand the opportunity as well. No one's really been too successful with the Fizz Free opportunities, but we do see a really loyal following. And we think there's a big opportunity, especially going after consumers looking for cold coffees and those type of opportunities to grab some share there and bring consumers in that just really don't like energy drinks because of the carbonation. So we think that's a play there. And then in the Essentials line, when you look at -- when you look at the energy category and 70% of sales are in convenience, a big chunk of those is a 16-ounce offering and that was really lacking in our portfolio, trying to compete with some of the 16-ounce with a successful line has been challenging. So we did -- in the past, we had a Celsius HEAT line that was mainly really targeted at fitness. We did broader it. Came out with the Celsius Essential line with the essential aminos and it's great flavors, and it's been working. We launched it initially at 7-Eleven. It's going in Circle K and a variety of other retailers and allows us to have that offering that the consumers are looking for 16-ounce. They want a little bit more liquid and more fluid in their purchase, and that allows us to compete in that segment. And it's been incremental. So I'm sure there's some crossover, but what the data we're getting from Intel and numerator is showing not a lot of cannibalization. So it's truly incremental to the portfolio. We think it allows us to compete in that performance energy new age arena within 16-ounce sugar-free and it's differentiated as well. So a little bit more aggressive as well on the tone and personal brand persona when you think about the Celsius Essential, is that 16-ounce, it's more chrome. It's got more of an aggressive feel and tone but the flavors are lights out as always. We take pride in our flavors. We want to be the world's most refreshing drink and that's something we spend a lot of time on, and we're going to continue to drive that home. And we think that's the -- at the end of the day, consumers want better for you. They want zero sugar plays. They want essential vitamins. But most importantly, they don't want to sacrifice flavor or taste and that's where we try to win.

Yes. I know it's super early days on Essentials and so this may not be a fair question, but I'm just asking it because I've gotten it so many times from investors. And that is -- are there any metrics that you can point to like repeat purchase or incremental information in terms of the demographics or anything like that, that gives you an early sense of confidence on incrementality and the success. And again, I apologize, it's super early, and you really don't get a good answer on a lot of that stuff for a couple of years. But this is a question that I keep getting. So I just -- I've got to pass it on.

No, no, please absolutely. I think those are the questions we're asking constantly internally as well. The longest retailer that the line has been in is 7-Eleven. So -- but it's only been there really -- you're looking at it almost like 5 months. So still really early, it's rolling out to a broader distribution base. So I think we have a lot to learn. It is targeted for that 18 to 24 male consumer versus historically our 50-50 mix with our other portfolio. So that's where it's targeting. It looks like we are hitting that consumer based on the initial survey data we have gotten back. But I think it's really -- you've got to have -- we got to get through summer. I think you got to get broader distribution on the portfolio as well. Now it's gaining more of a broader distribution and see how it performs also on a regional basis. It's really geared for that convenience. It has -- it is available at Walmart and just about every retailer in the country now. So we've got a lot to learn. We're watching the data closely. I don't have any additional specifics on that. Jarrod, I don't know if you want to add any color on there?

No. I mean, like you said, it's based on the incremental data we've seen so far. It's showing that it's additive to the product.

Great, great. So kind of tangential to what we've just been discussing -- a lot of the data and research we've done, numerator data suggests that almost 80% or so of your growth comes from consumers who are new to the energy drink category. So one, I'm wondering if that's what your data suggests. And in terms of those incremental drinkers, does it tend to be kind of different demographics, maybe a little bit more affluent or different age groups. And then the other thing that I'm picking up, and it's a lot of anecdotal data, John, is that you're sourcing maybe a little bit more from coffee than some of the energy drinks. And in general, we hear that energy is sourcing from coffee, but maybe it's a little bit even more for you and certainly, a lot of young women, almost every time when I take the commuter train and I see a young woman drink in a Celsius, I start -- I ask them, "Hey, what was your path to get there?" And very often, it's starting off with coffee and then maybe they try another energy drink, but they settle on Celsius. So love to get a sense of your role in terms of expanding the category, where that's coming from? And is it kind of more coming from coffee now than perhaps in the past?

Yes. I know I love that story by the way. I always talk to consumers when I see a can of Celsius. My first question to them is what other energy drinks did you drink before Celsius? And then I usually get a really bad look because I've basically told them that they're an energy drink consumer. And then -- because they basically -- they see Celsius as part of their daily life or daily routine and don't really see it as an energy drink. So I think -- it's interesting. I think we're bringing in consumers that prior wouldn't enter because of the aggressive tone. That's one thing we're very keen on. We don't have an aggressive tone within our persona and mantra. And when you look at like traditional energy, it's pretty aggressive historically on the advertising and the tones of some of these brands. So coffee, I think is definitely we're sourcing from coffee that some of the data shows that. It's a great -- those are new to category consumers as well. And then I think some of the data that's showing new to category, there's people entering the category for the first time. So ideally, the energy category has always taken like you mentioned, taking coffee consumers. I think that's the initial kind of question on a survey that everyone gets. But a lot of folks that is 18 to 24 college students are really big on, Pepsi has helped us just expand really broadly into the college and universities as well, which is a really exciting especially as the students will be getting back to campus here shortly on their break. But yes, I mean, coffee, I think you're seeing also increased consumption on existing users of Celsius. So when you look at our consumers, there's more availability. We're getting more impulse purchases now as we continue to build more cold availability. So I think that's key as well. But it's also consumers that haven't drink -- they don't drink soda, right? And they see us as a healthier alternative than some of the soda category as well.

Great. So I want to kind of ask you a little bit about how do you think about balancing volume growth in the -- sticking to the U.S. volume growth versus pricing, right? Red Bull took a kind of mid-single-digit price increase in November. And they've been able to keep it, most of it. They're not growing a hell of a lot anymore, but they've been able to keep it. The other side is the category has gotten weaker. So Monster's talking about doing something later in the year, we'll see if that happens. But you can kind of continue on your current sort of trajectory or you could think about raising price. And in that -- and it's tricky, right? Because you've got younger consumers that may not have a lot of disposable income and then you've got others that have more, and it's different everywhere. So do you feel that -- is this a category and a product where you can do differentiated pricing by ZIP Code, is that feasible? Is that desirable? And how are you thinking? And obviously, you're not going to tell us what you're going to do, but how are you thinking about what you may do in the second half of the year kind of the pros and cons about doing a price increase within the context of your overall strategy?

Great question, Robert. I don't think we'll fully answer that question. Are we doing a price increase, yes or no. But I'll let Jarrod kick off the beginning of the question, I'll jump in as well.

Yes. I mean, I guess, at the beginning of the question, haven't like some of the fast food or on-the-go food kind of restaurants, gotten in trouble for talking about optimizing by geography and ZIP code and stuff like that? I don't necessarily think we'll be able to do that. I know that there's going to be different venues that you might see different pricing. And a lot of that has to do more of is it a single serve in cold or are you buying a warm 12 pack off the shelf, right, which is just different user occasions. So people are willing to pay more to get a cold drink now that they can indulge in immediately or go to a fast food location and grab something now on the go. So I think you're going to still see that. But I don't know that -- I mean maybe the top 2 guys are farther along than we are. But I'd say we're not in a position where we're able to dive in and say, by ZIP code, we're going to take this pricing. So if you're in this location, you'll get this, this location, you'll get that. And then some of that will play in. Ultimately, the price is being set by the CG location or by the retailer or the grocer, et cetera. So from our perspective, we just control what we charge into our distributor who then -- the price is really set at the grocery level or the retail level.

Yes. I mean, Robert, I think when you look at the pricing opportunity, I think there's a variety of different levers that can be used, pricing promotional strategies also pricing within slotting. And there's a variety of different channel strategies, packaging strategies. We have a great opportunity at Celsius. We do really well with variety packs, probably seen those in a lot of retailers there. So there's a variety, as Jarrod mentioned, cold, 12 packs, 4 packs, variety pack strategies that you can also have levers there on pricing strategies. And also, I think when you look at the consumers as well, and the positioning of the Celsius portfolio, we always say we want to be -- we're a premium offering in the category. So we do think there's opportunities for Celsius. The brand is does have -- drive value. It also offers something differentiated in the category. So when we look at that, we do see value within Celsius, and there's opportunities. As we see fit, we're going to take pricing where there's opportunities. We have there's cost increasing from oil and transportation and those things we keep a close eye on, and we're going to do what's best for the portfolio and best for the business as we continue to navigate the markets that are in front of us. And I think we're good positioned to show margin accretion in Q1. So Jarrod said on the earnings call, upper 40s on gross profit. So we're keeping an eye on that. We need that to continue to drive the business. And there's additional leverage opportunities as we continue to scale and grow that we work to take advantage of as well.

Good. Let's go international. So last time I was in Toronto, a month or so ago, I went into Circle K and asked how Celsius is doing, and they were saying is just flying off the shelf. But the interesting thing was that it was actually not in the cooler yet. I mean there's a little -- maybe there are 3 or 4 SKUs in the cooler, but it's actually flying off the floor and hadn't fully got into the cooler yet. So a lot of good anecdotal stuff on Canada. Again, I know it's really early days, but John and Jarrod, are there any kind of numbers that you can give us that support the very strong anecdotal data that I've been getting from my trade visits, albeit just in Toronto in terms of how the brand is doing in Canada?

Yes. Well, we already -- last week, and we're a little bit unsuccessful with our Ferrari partnership with F1. They unfortunately didn't make the podium and perform as well as they did in Monaco. But so we're a little bit disappointed there with the Ferrari finish. But a great team, and they're going to have a good finish the rest of the year. When you look at Canada, we're actually pretty surprised out of the gate. I forgot the read, the 4-week read we had, but believe it was at the end of the -- it was really at the end of the quarter. We're a little around a 5.5% share. That was -- it was pretty impressive. And that was only after really a few short months having gaining distribution. So I think Canada exceeded our expectations. There's a -- there's a lot of opportunities there, especially as we work through summer and I think it gets us -- it really shows the brand scales. And when you look at the opportunities in Sweden, right around a 14% share, we continue to see growth in Finland, and those are some of the markets that we've been pretty established in over the last several years. And we got this new opportunities and new markets that we're headed into. And it's exciting. It's exciting. Jarrod was up there not too long ago as well.

And as you look at the U.K. entrants, again, I know very early days. What are you seeing in the U.K. now?

Jarrod, do you want to take the...

Yes. I mean U.K. and Ireland is early days. So it's really about kind of fitness and health locations first and starting to build brand awareness. We've actually seen some pretty good brand awareness in places like the U.K. and Australia already. Australia, we're not even in, and there's some pretty good brand awareness over there. So the brand is carrying a bit. We do have some global assets with some of our influencers and F1 and global assets like that. So from an awareness perspective, we're seeing that grow. But really, it's kind of a fast seating kind of process, where it's about timing and sequencing. So we're not looking to go big bang and just blast it everywhere. It's about getting there, build it the way we've built the product in the U.S., get it in the gyms, get into fitness locations, get in the health location, start building the brand awareness and then build into the retail locations and then go bigger from there once you got that nice good roll in. So we're kind of right in the middle of that. I think as we get to the back half of the year, that's where we'll really see the success of the U.K. But early days, we're doing very well and meeting or exceeding expectations of both us and our distribution partner.

Great, great. And when you think kind of long term, on the international strategy, how are you -- are you kind of like saying, "All right, these are the markets where it looks the most interesting, and this is the best partner for us given their route to market and their current portfolio." And how are you thinking about it? And do you think 5 years from now, you could have 5, 6 different partners you're going to have somebody different in, let's say, Brazil than in Australia, all depending on sort of who the local players are. Is that how you're thinking about it? So it could really be multiple routes to market over time?

Yes, definitely. I mean if you look in the different markets, inherently, there are different distributors to begin with, right? So the distributors that are really big across APAC or EMEA, or LatAm, they're different. And so inherently, it's really for us, it's about finding the right partner. And we're agnostic about who that is. We just want to make sure we get in with a good partner that we're going to grow together and profit together and share in our ability to really grow this brand and expand it internationally.

Okay. I just got a question from an important investor asking about Pepsi inventory issues and how much that has played into your reported results and what that may -- what kind of impact that may have in the second half of the year?

Yes. So we talked about it last quarter, some background. If we look at days on hand kind of -- the way we look at days on hand is we measure it by looking at the kind of the current weekly depletions versus total inventory, right? So as we're growing, if the days on hand stay the same, and actually be higher year-over-year, right, because it's based on current depletions. With that said, we did talk about Pepsi did take their inventory up last year in turn, they took their days on hand up last year. We were new into their system. We're growing fast. We continue to grow well. But they're also one of the largest and best supply chain and distributors in the world. So you wouldn't expect them to carry an excess amount of inventory forever. So we did talk about last quarter, they did start optimizing and they did, and it impacted our net revenues. And as we look at things today, it's been pretty steady lately, but they did continue to optimize in the quarter. There's probably somewhere in the neighborhood of $20 million to $30 million of optimization that they did during the quarter. With that said, depletions continue to grow and really looking at last week, we saw the depletions, depletions out of the Pepsi system. Grew mid-single digits versus Q1 -- or sorry, mid-teens versus Q1. So we're still seeing good growth and good depletions out of there. They've just optimized their business. We've had a lot of conversations across supply chains and all indications are that we're in a good place now. So I think we're kind of at that point where they fully optimize their business, and we're in good shape. Now we're still in the middle of the 100 days of summer. So we've got 3 weeks left in the quarter. So that doesn't mean they're not going to pull an extra million cases out as we continue to grow and really drive this business. So it's not a perfect amount. But based on kind of the days on hand and depletions and where we are today, we think we're in a good place really to end -- to go through the first half of the year. So back half of the year, I would say, is probably less of an issue when we're looking at comps. First half of the year, I think they'll probably finish off their optimization based off our discussions and then we'll move forward. Now with that said, there is opportunities for us to really further leverage our business and from a margin perspective to benefit each other. And that's really right now, we're going to both mixing centers and DCs within the Pepsi system. Obviously, if we go straight to a DC, there's going to be opportunity for margin improvement on both ends. Because if you're going to do a mixing center, you're going from the plan into the mixing center and then from the mixing center of the distribution center as opposed to going straight into the distribution center. And the caveat to that is the distribution centers carry less inventory from a days on hand perspective. So there could be a little bit of noise, but that would be nominal as we look over the next few years. So I think we're kind of at that point where we're in good shape with them. And as we go forward, it won't be the noise that we've seen prior.

Great. This kind of a high-class problem. You guys got a great business model, you can grow and generate a lot of cash at the same time. So love to get your thoughts, whether it's this year, next year, about use of cash, more M&A or share buyback. And related to share buyback, your stock is very volatile. It jumps around a hell of a lot on the short-term scanner data, which may or may not reflect the underlying fundamentals. So as -- for example, what about using share buyback to kind of smooth out the stock. So when the market is taking you down on scanner data that isn't really reflective of the business, you could offset that with a buyback. So love to get your thoughts on that.

Yes. We're always looking -- great opportunities. Those are things we're talking about. I think we're sitting in a really good cash position right now. And I think as we look for opportunities, it's good to have that cash position. We're generating good cash flows as well. Those are opportunities, we look at potential M&A but really want to keep the teams focused at this point. So immediately, that's not something of urgency, but if right opportunity comes along, we do have that capital. But it's got to be something really special that really aligns with our organization and it would have to be an easy bolt-on, but not something we're really actively pursuing at the moment. But when you look at share buybacks, those are strategies we spoke and talked about internally as well. I think right now, we feel we're in a good cash position. And if you look at Monsters or peer, we look up to, they're sitting at about 1/3 of cash when you look at it, the positioning, they have about 3x more cash. So we seem in a pretty good level right now. But as we move forward, those are things we're talking about internally at the board level, for sure.

Great. Well, I think that's a super way to wrap things up. Thank you so much for joining us. This has been great. And congratulations on all the success so far.

Thank you, Robert. Thanks for having us.

Thank you, Robert. Thanks, everyone.