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

Good morning, and welcome to the Celsius Holdings Transaction Investor Conference Call. [Operator Instructions] I will now hand the call over to Paul Wiseman, Investor Relations. Please go ahead.

Good morning, and thank you for joining today's webcast. With me today are John Fieldly, Chairman and CEO; Jarrod Langhans, Chief Financial Officer; and Toby David, Chief of Staff. We'll take questions following the prepared remarks. A press release related to today's conference call was issued this morning and is also available on our website, ir.celsiusholdingsinc.com. An audio replay of this webcast will also be accessible later today. Today's discussion includes forward-looking statements based on our current expectations and information. These statements involve risks and uncertainties, many beyond the company's control. Celsius Holdings disclaims any duty to update forward-looking statements, except as required by law. Please review our safe harbor statements and risk factors in today's press release and in our most recent filings with the SEC, which contain additional information and a description of risks that may result in actual results differing materially from those contemplated by our forward-looking statements. With that, I'll turn the call over to John.

Thank you, Paul. Good morning, everyone, and thank you for joining us. Today marks an important milestone for Celsius Holdings. We've announced a significant expansion of our long-term strategic partnership with PepsiCo, an agreement that strengthens our alignment, broadens our portfolio and positions us to create value for shareholders, customers and consumers over the long term. Under the terms announced today, Celsius Holdings has been named PepsiCo's Strategic Energy Drink Captain in the U.S. This role deepens our partnership, fully aligns incentives and unifies the go-to-market strategies across our Energy portfolio. Our Alani Nu brand will transition into PepsiCo's leading U.S. and Canada distribution system. This shift is expected to expand Alani Nu's geographic reach, increasing its availability across retail, and opens the brand up into new channels, particularly food service and convenience. Celsius Holdings also agreed to acquire Rockstar Energy brand in the U.S. and Canada from PepsiCo. Rockstar brings classic energy flavors and format that is complementary to our performance forward Celsius; and modern lifestyle, Alani Nu brand. As consideration for the agreements, PepsiCo has received 585 million in newly issued convertible preferred stock, raising its ownership stake in Celsius Holdings to approximately 11% on an as-converted basis and gaining an additional Board seat. The steps create near- and long-term opportunities for Celsius Holdings. First, Captaincy provides Celsius Holdings with strategic control over the allocations of the Celsius Holdings portfolio of Celsius, Alani Nu and Rockstar Energy brands and over their energy platforms, planograms, SKU prioritizations and promotional strategies, including certain priority periods. Becoming PepsiCo's U.S. strategic energy drink captain is a pivotal milestone. It strengthens our relationships, brings greater alignment and allows us to lead with a unified commercial strategy across the Celsius Holdings portfolio. We believe this role will enhance category productivity for retail customers and deepens Celsius position as a leader in modern energy. Second, Alani Nu has quickly become the fastest-growing brand in modern energy. By moving into the PepsiCo's distribution system, Alani Nu is positioned to achieve meaningful ACV expansion and accelerate its food service presence. We expect this transition will broaden Alani Nu's availability and further its appeal to young female and wellness-focused consumers. Third, adding Rockstar strengthens our portfolio and expands our consumer reach. With Celsius and Alani Nu as the growth engines and Alani Nu extending into lifestyle and wellness, Rockstar allows us to serve the large traditional segment of the energy drink category. Our approach will be disciplined: stabilizing the brand, rationalizing SKUs and building on the brand's rich heritage. Certain Pepsico employees who work on the Rockstar Energy brand will transition to Celsius Holdings, giving us unity and brand experience. Fourth, PepsiCo's alignment with the additional investment of $585 million in equity and the additional Board seat demonstrates their long commitment to Celsius. It's expanded alignment strengthens our governance and further aligns our strategies. I'll now hand it over to Jarrod to deliver remarks on the financial elements of the transaction. Jarrod?

Thanks, John. Good morning, everyone, and thank you for joining us with such short notice. Before John closes out our prepared remarks, I wanted to walk through some of the timing components of the transaction. We signed and closed all agreements. In addition to the Alani distribution agreement, the Captaincy agreement, the preferred share issuance and the Rockstar acquisition, we've entered into a transition services agreement as well as a manufacturing agreement at the Pepsi-owned manufacturing facilities that manufacture Rockstar product. These agreements will have different components that will be in place from 1 to 7 months. The accounting for the transition services will be like what we did with Alani and that we will pay a monthly rate while utilizing the transition services until we effectively transition off of the services being provided. Examples of such services would be working with our teams to transition key account calls, managing e-commerce and assisting with backshop support. As it relates to the manufacturing agreements, we will utilize a variety of models as we transition Rockstar into our orbit structure, so there will be some noise in the system over the next 3 to 4 months. As we are likely to get modeling questions, I'd like to note that our intention is to transition a majority of the Alani Nu DSD to the Pepsi distribution system as of December 1. As a result, we would only have 1 month of activity with Alani in the Pepsi system prior to year-end. So if we were to just look at Celsius and Alani, we wouldn't expect to see much change in Q3 relative to what we discussed on our call earlier in the month. As it relates to Q4, we will continue to have tariff pressure, as previously discussed, and I would expect to see some inventory write-offs in scrap as we do the transition into the Pepsi system resulting in some additional pressure on margins. If you look back to our comments when we moved into the Pepsi system with Celsius, you'll see that we had a similar outcome in which we increased some of our inventory reserves and write-offs as a result of the transition. Moving to Rockstar. We will only have 1 month of activity in Q3. And looking at the business as a brand separated from PepsiCo, we are looking at something like $250-plus million in annual sales to add to our portfolio, and therefore, we wouldn't recommend any significant changes to models for Q3. We will provide additional color on our Q3 earnings call in relation to Q4. Let me provide a bit more detail on the financial impact. PepsiCo's $585 million preferred stock investment increases their stake in Celsius to about 11% on an as-converted basis and allows them to nominate a representative for a second Board seat. This is a strong endorsement of our long-term strategy. The new preferred stock carries a 5% dividend consistent with their prior investment. Importantly, the structure is designed to maintain our flexibility while aligning PepsiCo's interest with our performance. From a financial standpoint, we expect this transaction to be accretive to cash EPS in the first full year. We also expect distribution to expand meaningfully as Alani Nu transitions into PepsiCo system and Rockstar Energy is integrated into our portfolio. Our balance sheet remains strong with the liquidity to support integration and continued investment in growth as well as debt reduction. Let me now turn it over to John for some closing remarks.

Thank you, Jarrod. This is an exciting next step for Celsius Holdings and PepsiCo. We step into the role of PepsiCo's U.S. energy captain, bringing new influence and alignment across the portfolio. Alani Nu will enter PepsiCo's distribution system, unlocking its next phase of growth. Rockstar broadens our consumer reach, while Celsius and Alani Nu remain the engines of modern energy growth. And PepsiCo increased investment and the second Board seat strengthens our strategic alignment for the long term. Together, this agreement currently creates a 20% share portfolio in the U.S. energy drink category, expands our reach to more consumers in more places more often and positions Celsius Holdings for sustained growth in years ahead. I want to thank our employees, our partners at PepsiCo and our shareholders for their continued support. We are excited what lies ahead. With that, Jarrod and I will take questions. Turn it back to the operator.

[Operator Instructions] Your first question comes from the line of Peter Grom with UBS.

Congrats on the news this morning. One thing I was want to get some perspective on as it relates to the transaction. Just on what being the energy drink captain for Pepsi means and what this may unlock as you look ahead? So just any broad thoughts in terms of whether having control of the entire portfolio may do in terms of improving execution, shelf space, just relative to what we've seen, I guess, over the last several years?

Yes, absolutely, Peter. Thank you. The Captaincy really allows us to have an industry strategic control over the [ play ] portfolio and planograms and the go-to-market strategies. So it really aligns the synergies that Celsius and PepsiCo have on our go-to-market strategies. And when you look at kind of within different markets, within different channels, we're able to make sure we have the best planogram and the best flavors and SKUs within those locations to drive the optimal sales performance. So really a strategically aligned SKU prioritization, promotional strategies and then priority periods as well throughout the year. So really just truly deepens the overall long-term partnership that we have within PepsiCo. And I think it really positions us for continued growth, especially with the incorporation of the Alani portfolio and then the opportunities we have with Rockstar.

Your next question comes from the line of Kevin Grundy with BNP Paribas.

Great. Congratulations on the deal. Could you maybe comment on the deal structure, which I think, in some ways, maybe to many is a bit reminiscent of the Coke and Monster deal from over a decade ago. So maybe just comment on why this was the right structure? Comment why perhaps just a distribution deal more similar to what you have currently with Celsius and the Pepsi system, why taking on the Rockstar brand, which has struggled for a very long time, as you guys know, as part of the consideration, why that was appropriate?

Yes. No, absolutely. I think what this does is really lands on a few things. And when you look at the overall thesis and the agreements and I talked about the Captaincy before is an important aspect. The additional investment within the organization and the additional enhancement of the Board seat just further [indiscernible] aligned Celsius strategically with PepsiCo, provides us a unified front and better collaboration as we continue to move forward. Now I think it's a really good model. Somewhat similar, you could say, to Monster and Coke, and it seems to be a proven model for them as well. And we're really excited about the future together. The more we can further collaborate, better execution, better prioritization. The category continues to grow and scale. We see great opportunities that this category will not -- is not planned to slow down at all. And with our modern portfolio and the enhancements of it with Rockstar coming on the portfolio, we're able to offer it to a much broader consumer base and really optimize our planograms going forward to capture the greatest share and dollars in revenue.

I'll jump in on kind of the structure. From a -- the way it was structured is we will be moving a lot into the Pepsi distribution system to join Celsius and Rockstar for a full portfolio. As a part of that, Pepsi will fund the termination fees of the -- moving out of the current distribution system and into their distribution system. We will be acquiring the Rockstar brand in the U.S. and Canada. We've already talked about kind of the captains concept. And then we also have some other ancillary things like transition service agreements and things like that. In terms of that, what Pepsi is getting is that we are going to extend the preferred As to mirror what we call in the preferred Bs. So the preferred Bs will be $585 million of value through preferred convertible shares. And then the preferred As remain what they were. So you'll have a strike price on the preferred as at $25, a strike price on the preferred Bs at $51.75, and they'll have the same features that the preferred As had back when we set them up in '22 with the 6-year automatic convert and then the 7-year conversion feature as well.

Your next question comes from the line of Robert Moskow with TD Cowen.

Congratulations. I wanted to know the retail data for Rockstar indicates $600 million in retail sales. You described $250 million to your P&L. Can you help us explain the difference between those 2? Is there going to be some rationalization for Rockstar?

Yes. We will -- absolutely, a great question, Robert. We do anticipate some rationalization within the portfolio. There's a big opportunity there. We're going to continue to optimize. And so we anticipated that into our numbers as we're anticipating that SKU rationalization to take place as we're entering in and going through resets for 2026.

Yes. So it's -- there's -- you got to remember where we are on the cycle. So there's the retailer, there's the distributor and then there's the brand. And just like if you look at Celsius last year, I think the scanner data was something like $2.7 billion, and we were around $1.4 billion. So there is going to be somewhat of a delta. The $250-plus million is kind of a pro forma number that we came up with. It's not exact because it's pulling the number out of the Pepsi system and then saying roughly what do we think we'll get net of promos and contra revenue and things like that. So it was a ballpark number. That's why we kind of just called out roughly $250-plus million.

Okay. And just one quick follow-up. What can you do to mitigate any kind of friction or noise during this transition away from the current distribution network and into yours? Normally, there's some -- either risk of inventory loading or loss of sales.

Yes. I mean, Robert, we worked with our partners, mainly the ABI distributors, they're great partners, great executors and we have a good working relationships with all of our customers and distribution partners, and they supported the transition of Celsius into the network, and we expect the same. And we have our SOPs, our processes and our oversight with all of our team members that have experience doing this. And we're going to continue to work through this extremely diligently to mitigate any impact on that, and we have controls in place and oversight to try to limit that as much as possible.

Your next question comes from the line of Kaumil Gajrawala with Jefferies.

Congratulations. Just the first question is making sure I understand what sort of captaincy means. Does that also mean exclusivity?