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

Well, good morning, and thanks, everyone, for joining us. It's our pleasure to have Celsius with us today. Toby David and -- had sent some questions along about 2 weeks ago, but I suppose you've made a little noise since then. We'll maybe get to some of the latest and greatest.

You've had another update on some of the inventory situation. Maybe can we just start with kind of how that's evolved and what we should know just in terms of how to think about third quarter and kind of the hot topic? So we'll kick right off there.

Yes. So last week, John Fieldly, our CEO and I were in Boston at a conference, and we announced that ahead of earnings that we wanted to try to be as transparent as we could with our investors in the Street that Pepsi, our largest individual customer, about 55% or more of our purchases in North America, that so far this year, if you look at our growth year-over-year, quarter-to-date, we're up about 10%. We -- our market share is up close to 1 point year-over-year. So one would assume that their purchases would line up with that growth that we've seen. Unfortunately, what's happened is not necessarily the reality of the situation, which is they purchased about $100 million to $120 million less in Q3 this year versus Q3 last year. They were holding quite a bit of product back in 2023, which was our first full year with Celsius, which, at the time, listen, we don't manage their inventory as much as we wish we could. That's up to them. And they were keeping us in stock in their first full year. But as they've begun to optimize and, listen, cash is king, they're -- if they can carry less inventory and so effectively merchandise and keep product on the shelf, which they're doing, then they've drawn down their inventory levels. And we're very comfortable with the amount that they're carrying right now, that they can still service the account. But it is impacting our Q3 numbers when their orders are not matching up with what's actually happening at the register.

They've been a great partner for you, with you. They've done a lot to really drive some distribution gains, and it sounds like this is a case of really getting to know kind of where the right run rate is and settling in. As far as a look ahead, do you have a sense of how much this kind of rips that Band-aid off and sets it at the right level? Or is there maybe a potential for any further adjustments going forward?

Yes, we're not prepared to talk about Q4, yes, because we just don't have visibility into it. I'd like to think that something of this magnitude gets you down to a lot closer to what should be a normalized inventory level for them. But we just don't have that kind of visibility yet. Our -- they have a dynamic ordering system that's relatively new for them that provides a forecast, and it doesn't really give us too much guidance into Q4 right now. So we just don't know. But I'd like to -- we'd like to hope that the bigger swings are behind us. But yes, we'll see.

And as you touched on, I think the most important part is, of course, the consumer demand and the growth that sells through. As far as the category goes, we have seen historically a robust category growth rate. It's slowed a little bit in recent months. But there's different dynamics between the sugared energy drinks and sugar-free. Can you maybe talk a little bit about how that looks and, of course, how you're positioned within that?

Yes, sure. Yes. So sugar-free is now 50% of the category, and that's certainly where the trends are. We're the strong #2 within sugar-free. We have close to 25% market share within the sugar-free portion of the category. And we'd like to think that as we continue to grow, that's really our sweet spot. We feel like we can compete with anyone, any other brand when it comes to taste within the sugar-free portion of the category. You've seen Red Bull and Monster really make strong pushes within the sugar-free, but that's great. We want consumers to turn the can around and see how much sugar some of our competitors have within them. As far as the growth rates, I believe it's year-to-date that sugar-free is down -- or excuse me, sugar is down about 4%, while the sugar-free portion of the category is up around 7%. So the trends are certainly in our favor. And once the category normalizes, which we're very confident it will, we're not seeing people leave the energy category. I think that would be much more of a concern if you're seeing people leave energy and go into coffees, teas, sodas. You're not seeing that, just a little bit of an intensification issue where people aren't purchasing with the same frequency. And they're also not coming into the category at the same pace that they were previously, which we believe is affecting us maybe more than some of the other players in the category because we do overindex within the new-to-category portion of our consumption. And I think if you just think about the way consumers behave, if they're trying to maybe not spend as much money right now when the consumer is a little bit fragile, they're going to spend less within the goods they're already purchasing, but they're probably a lot less likely to experience or purchase something new that they've never had before. So we're confident that once 2025 gets rolling that -- and the category begins to normalize, we're going to be well positioned, especially given all the space that we gained in 2024 at retail.

And so touching on that, as far as the distribution trajectory, how should we think about shelf resets? There's typically a big one in the spring. I guess, one is, what's a little bit of the mechanics, how often are retailers resetting shelfs, of course, it's going to vary by retailer. But now with a little bit different or slower category growth outlook and just some gains that you've already got under your belt, how do you think about kind of where you go from here? And part of the question, I'd say, it's interesting to think about, you in a little bit of contrast to somebody like a Red Bull or Monster where they have a couple of SKUs that are really workhorses for them. Am I right to assume that, in your case, it's quite helpful and useful to have a broader assortment because you're more likely to have a consumer find a flavor they might like versus turning away a bit in there? But how do we think about all that?

Yes. Listen, I think that -- I'll start with the end of that. They have their power SKUs, both Red Bull and Monster. They're super SKUs, we call them. And listen, it'd be great to have a super SKU because it really makes things a little bit more efficient from an operational standpoint. But with today's consumer, I mean, they came in -- they created the category, right, Red Bull and Monster. And I think it's a different time now where consumers are looking for something a little bit different, and that's what we're bringing, different fruit-forward flavors. And you nailed that we want people to find out 1 or 2 flavors that they really enjoy, and that's typically what you see. As far as the way that the resets look, you nailed it. Throughout the year, you have the spring resets, which occurred a few months ago for 2024. You'll see some cut-ins occasionally, and maybe you do an exclusive with a 7-Eleven or a Circle K, and they'll let you bring an additional SKU or something like that or some innovation. But right now, a lot of our meetings are for 2025, very positive meetings with retailers thus far. One of the positives of Celsius is because we're so strong at bringing that new to category, that's what's important to retailers. They don't -- retailers don't want to see that brand shift because that's just trading $1 from, call it, a Red Bull and Monster back into Celsius. And that's not really a new dollar to the store because we're bringing in a different consumer and a new consumer that's very valuable to them. So we feel that our dollar actually carries more than some of our peers out there. Plus our basket ring is so strong that when we meet with retailers, even when velocity can be a little bit challenged at times and we're working to pick that up because we got so much distribution gains, it sure is just going to take a little bit of time, we still are having excellent meetings with retailers for 2025. So not prepared to issue any guidance as far as space or anything like that, but very positive meetings thus far. As far as the category, listen, energy has been really the jewel of beverage for years now. And I'd hate to think that because of a 3- or 4-month slowdown that that's going to change since I think the whole -- or multiple categories are challenged right now. I know the hydration just had a nice couple-month run, but if we had spoken 4 months ago, that was a challenged category, right? So I think most categories are challenged right now. I'd like to think that at a minimum, energy retains the space that we've had this year into next year, and that there's still an opportunity to maybe grab space from some other categories that are performing worse than energy. Plus, energy is one of the higher-margin beverages within these stores. So I wouldn't be surprised to see energy continue to get more space within the retail footprint.

Yes. That's helpful. And then as far as market share and how to think about some of the headroom there, depending on the channel or the data provider, you're kind of around 11%, maybe between 11% and 12% now. What would you think of as kind of the headroom? How do you kind of benchmark or find kind of ways to understand where it might go? And how should investors think about what that opportunity looks like?

Yes. We're very careful about not issuing guidance as far as market share. But what we do talk about is look at Amazon, where so many people purchase off Amazon, and we're #1 or #2 typically, us and Monster will trade spots. So typically, we're the #1 within -- over the last 18 months within Amazon. We think that's over a 20% share. I feel like that's a good barometer for what our capabilities are. And what's beautiful about Amazon, it's not space-oriented. Whereas you go into a convenience store, you might see 4 or 5 shelves of Red Bull, 4 or 5 shelves of Monster and 2 shelves or 1 shelf of Celsius. All things are equal within Amazon, and that's why we play so well there. And then we've cited over time some of our stronger markets in the U.S. and South Florida are close to mid-20s market share, #2 player within energy in South Florida; New York City, close to 20% market share. Several other markets around the country, they are upper teens, 15 up to upper teens. So these are major markets that we're talking about. So I feel like those are good indicators of where the brand is capable, at least in the midterm. And then long term, I think we'd like to think we can get even higher than that. I think, right now, it's more of a challenging time within the category. You mentioned sitting somewhere between 11% and 12% share, depending on what data point we're looking at. There's -- we've been relatively flat for the last 3.5, 4 months, but the category has been pretty stagnant. So it's been difficult to really make headwind and grow during this time period. But we're confident that, again, once the category normalizes, we're well situated to -- we're confident, I'll put it that way. We're very confident about the opportunity next year.

Nice. Well, I'll add quick plug, too. We've -- you've seen we do our team survey where you over-index in the high teens with what we consider to be a leading share indicator. So yes, we see how there's runway ahead, and that's always nice to kind of have a vision for sort of where it could go. Maybe turning internationally. You've now launched, I believe it was right at the beginning of this year in Canada and kind of mid-late second quarter in the U.K. and Ireland. A few more to come in France, Australia, New Zealand. Can you just maybe give an update on some of the progress there, some of the approach and how to think about what might be ahead there?

Yes, sure. As you mentioned, Canada, we launched in January of this year. We jumped out to close to a 5 share within just a few months, which is pretty remarkable. I believe we're the number -- already the #4 brand in Canada just in a short period of time. So very confident with our Pepsi distribution, our partner up in Canada that there's some strong opportunity up there. And then you mentioned U.K. and Ireland, but U.K. is one of the largest energy drink markets in the world. That's really -- I think that's an important one because if we can show success there, then I think the investment community will probably pay a lot of attention to that. Because when you look at the valuation of Celsius, even when we were at our peak just a few months ago, I don't think people are really incorporating international into that. International is only about 5% of our sales right now, whereas Monster is roughly about 40%. So plenty of opportunity that we're going to have a methodical approach. We're not going to over-invest. If we start to see success in some of these markets, then we can pour some more fuel on the fire to hopefully get some of those gains. But initial reads out of the U.K. have been very positive. We went into the U.K. and Ireland with Suntory as our partner. They have a very strong route to market across all channels, but also fitness, which is really the core of our business, not necessarily from an ROI perspective, but from a branding perspective and then really give that healthy halo that we like to incorporate in our messaging to consumers. So we've gone into Tesco now, not all Tescos, but a good number of them. And the initial reads are very positive. I was just seeing some data a few days ago, very positive reads out of Tesco thus far. And then as you mentioned, in the next couple of months, you'll see us entering into Australia and New Zealand. And then you'll probably hear in the next -- pretty soon some more announcements coming.

And you touched on the gym and fitness branding piece of that. Is that the initial approach, say, in the U.K., then let the Tescos and some of the others to come? Is it a little bit phased in terms of building that brand identity in connection with the sort of a core consumer first?

Yes. It depends by market. So you take Canada and because of the proximity to the U.S., we went pretty much nationwide relatively quickly. Because of again the proximity of the marketing, there's a lot of bleed over from the U.S. into Canada. Whereas in many of the markets that we're going to be investing in, fitness is the early investment. But relatively quickly, we choose to have maybe a core partner, that retailer that we partner with, like Tesco, for example, in the U.K. And part of the reason for that is if you try to go too wide and go into too many retailers at once, you have to create pull-through off the shelf at all retailers or else you're going to get delisted pretty quickly. So it's part of the strategy of, okay, if you only have one retailer that you're going into, and even though Tesco is such a big one, you can concentrate all of your marketing resources to drive people there, plus you get those retailers to really lean in because they have some exclusivity. So they'll give you more placements, better placements, better proximity within the store, better merchandising. And they'll lean in more and really help guide you to success. And then you have a selling story to start going into more retail. So that's, generally speaking, the part of the strategy when we -- I don't want to give away the secret sauce, but that's generally speaking what the strategy is in markets that we're entering.

No, that makes sense. Back to the U.S., you just mentioned merchandising. How does the promotional environment look? Is it -- it's a category that's historically had much higher than other categories levels of promotions. Are you seeing any extra intensity? Is some of the slowness driving any change in pricing approach or maybe irrational promotions? And how do we think about just that piece of where the U.S. market is?

Yes. You're seeing a lot of our peers are very aggressive right now within the promotional environment. There's a lot of data points out there. I see some that cite Nielsen that seems to indicate that we're over-promotional, but that's just not the case. The way that Nielsen, which we don't use Nielsen, we use Circana, but it's been explained to me, the way that they track promotional environment, it doesn't mean just discounting. You might be off-shelf display, and that counts as a promotion. And we're -- we over-index in off-shelf displays by quite a bit. We're on par with Monster and Red Bull as far as display activity. So some of the data points, we just don't feel are very indicative of what reality is. So they're -- while technically correct, we don't promote deeper than our peers. We're actually probably below most of our peers from a promotional standpoint. And especially in the last 3 or 4 months, you're seeing a lot of BOGOs, which you do not -- it's very rare for us to run BOGOs. You're seeing a lot -- we're even seeing Monster run BOGOs with their Reign and Bang brands. But then also, we've even seen some of their core brands on BOGO, which -- it's just an interesting environment right now, and you can't BOGO forever. So we're getting a little bit promotionally more motivated this quarter, trying some different tactics just given the tightness of the consumer right now. But it's always, as you mentioned, the category is overly promotional. I mean, it's 26 weeks a year on promotion. And sometimes, you have to be on promotion at some retailers just to get those off-shelf displays. So for us, maybe you go on promotion and the depth of the promotion isn't too deep. Maybe, instead of running a 2 for 4, you're running a 2 for 4.50 or something like that just to make sure you're getting some off-shelf displays. So there's a lot of different tactics. But yes, the categories, you're seeing a lot of discounting by some of the players out there.

Well, that makes sense. So you have very strong margins already, especially for a company that's been growing as much as yours has. How should we think about what the upside from there might be? And is somebody like a Monster kind of the right way to think about a benchmark?

Yes. I think -- okay. So short term like Q3, there's going to be a lot of noise because when you have a certain anticipation on revenue coming in, you base your entire margin structure off what your budget is, then all of a sudden, your largest customer purchases about $120 million less than you would anticipate, it's going to create some noise in the short term. But in the -- it's still short term, like Q4, maybe a little bit of noise there, but it should be gone, and we should be back to our framework that people have seen. Last quarter, Q2, I think we came in around 52% gross profit. Something important to remember, when you compare or comp us off Monster, they don't include outbound freight and -- as part of their gross margin. So that's like a 4% difference. So we've historically said that we thought we comped well versus Monster, and that was back probably 4 or 5 years ago when they were in the upper 50s. So let's say they're at 59%. That would be us around 55% because of that outbound freight component. And then on the sales and marketing side, right now, we come in quite a bit higher than Monster they've had. And they've got about a 20-year head start on us as far as being a lead player in the category. So we're at 21% to 23% sales and marketing typically. Over time, I would expect that to come down with leverage and some other elements. But yes, I think Monster is a great comp. A lot of people -- I will add, a lot of people will talk about Monster's big delta between their North American business and their international business. They're extremely high margin in North America and maybe a little bit more challenged internationally, where they still do great business. We think we have a great opportunity to close the gap and not necessarily have that delta from U.S. business to international because we're not forced into any relationship with a distribution partner. We're able to choose whoever is the best partner for us. Now Pepsi is our preferred international distribution partner, but we're -- that we're still allowed to work with other partners if it makes more sense from a P&L perspective. And you've seen us do that with Suntory in a number of markets thus far.

And you touched on the Monster comparison. For anybody maybe curious, they do record outbound freight. They just have it in SG&A. So they don't just wipe it away. But no, so then interesting just thinking about how innovation plays a role as well. You've got the essentials line that launched recently, a little bit different package size. What role does innovation play? How should we think about what might be ahead? And part of the question would also be as far as how you think about the brand, kind of where do you think the -- its limits are, how far might it go in terms of any adjacencies? Or is that something that's under consideration, a little bit like the way Gatorade has obviously branched into different things? What's the thinking on that?

Yes. Listen, as far as U.S. growth, that's going to come from 3 areas. It's going to come from TDP expansion, velocity and innovation. So innovation is something that we're keenly paying attention to. We launched Essentials really this year. It's done well for us up to this point. We're going after an incremental consumer. We don't expect it -- for it to initially have the same velocity as our core brands. It's going to take time. But we're also looking at other areas, whether it's within energy or some adjacent categories, as you mentioned. I think it's also important, though, when you have someone with the muscle of a Pepsi that you want to be able to leverage that system, right? And you need them to buy in to whatever you're going to launch. So we really are trying to identify white space opportunities within the Pepsi portfolio. Then we can get them to lean in on any type of innovation that we're going to look at. But innovation is certainly an area that we're paying attention to.

And the Pepsi partnership piece of that is a great reminder and interesting. Does your relationship with them have any explicit limitations on what kind of stuff you can launch?

They -- I don't know what we've publicly disclosed as far as that. They do have some partnerships that would preclude maybe certain areas that we could get into. But I don't think it's really blocking us from anything that we're -- we would be looking to get into.

And maybe just one last one looking at -- thinking about foodservice, which can come in lots of forms. Obviously, restaurants is typically what comes to mind first. But I think in how you might approach going to market there, that could be everything from universities to maybe even vending and whatever else. What does the foodservice opportunity look like? And how much of that have you kind of tackled already versus what might lie ahead?

Yes. So, so far, on a quarterly basis, it's usually around roughly 12% of our Pepsi sales are within foodservice. You nailed that vending is a big portion of that. College, universities, hospitals, hotels, restaurants, we're still we feel like in the early innings as far as the opportunity there. I don't know what that -- what the right percentage mix is because, ultimately, we want to grow our total business with Pepsi. So if we accomplish what we believe we will within convenience, that's going to grow the total piece of the pie. So I don't think there's any right percentage number, but I do -- we think there's plenty of room left for revenue growth within foodservice. And we know that our -- that Celsius pairs better with meals. That's something that's really a differentiator than some of our competitors have that more traditional energy taste. You don't really see people drinking those products with food, whereas you'll see people subbing out a soft drink with an orange Celsius or something like that.

Great color. Appreciate you being here and giving us your time, and thanks for joining us here as well.

Yes. Appreciate it.