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

We're going to get started. It's a pleasure to welcome Celsius' CEO, John Fieldly; and CFO, Jarrod Langhans, to the stage. Last year, we were here, we were discussing the potential of a much broader energy platform. And today, Alani and Rockstar are integrated. The portfolio has roughly a 20% share of the U.S. energy drink category and the focus has shifted from assembling the platform to now proving what it can deliver.

So I wanted to start, kind of, at the same, sort of, high level and knowing that a year ago, the investment case was largely about the strategic opportunity by having this rebrand portfolio. After running that full portfolio through PepsiCo's route to market now for a few quarters, what would you say you understand today about the business that you didn't fully appreciate when you first expanded the partnership?

Yes. It's a really exciting time right now, just really finalizing the integration of all 3 brands. The biggest opportunity we have today is the amount of consumers we can touch with this portfolio. When you look at Alani, very female focused. It's treats in a can. It's guilt-free indulgent. You have Celsius with its fitness lifestyle position, and we have Rockstar. So we have 3 distinct brands going after 3 distinct consumers and the amount of opportunities with touch points on where we can take these brands through the Pepsi partnership and as we continue to invest in our internal teams, the white space is just massive. Alani has done an amazing job bringing new consumers into the category. And the integration on behalf of the team, it was another flawless integration. Alani is an amazing brand. We just launched Witch's Brew. Anyone out there, please try it. We have some in the cooler. It's going to be the biggest LTO in the energy history, maybe even beverage, just really excited about the opportunities we have with the Alani portfolio. And then one thing learning with the Celsius portfolio when integrating these -- this portfolio, we did some rationalization, and we've been talking with a lot of investors today about that. And we have a much stabler portfolio of core SKUs within the Celsius portfolio. That sets a really firm foundation. But going through that integration and some key learnings, we really went too deep on simplifying the Celsius portfolio for this year. But we're going to take those key learnings, and we're really excited on what's in store for '27.

Okay. Great. And I guess, where would you say that, sort of, improved execution has come about with the expanded partnership with PepsiCo and the route to market? And then where is, sort of, the added complexity maybe been greater than what you expected by now managing the 3 brands on your side?

Yes. Any time you do an integration, especially the size of -- now we have $2 billion brands within our portfolio, massive opportunities. One thing that we were able to unlock by bringing the portfolio together is this category capped into the energy category with Pepsi. So that allows us to set our own priorities and really leverage their whole sales distribution system on prioritizing around key moments with each one of these distinct brands. So we have distinct commercial plans for each brand that we'll be executing. And now that the integration is done, now it's really time to unlock that value. We're going to be able to really maximize the full potential of the energy captaincy. As an example, about 5 weeks ago, we were out in Vegas at the Pepsi AOP meeting, where we spoke with over 1,000 managers and executives and just getting everyone really excited about our priorities, our innovation, some of the big brand plans we have in place and they're excited to get started. So that's a big unlock now. And the other piece is, this is the first year the organization is going to market with a portfolio approach into the selling story. So we've already kicked off a variety of discovery meetings with some of the major retailers in the U.S., and it's been really, really positive. So innovation is planned. We got great assets to leverage, activate consumers, expand usage occasions and bring that all to life on the retail floor.

So when do you think you start to see some of the -- like that -- this going to market differently with the full 3 brand portfolio? Is it kind of early calendar '27 that you start to see expanded shelf space?

In regards to shelf space, we're in a really good place within we operate in the energy category. Not only is you're seeing pricing taken, right? So we're seeing growth on dollar, growth in pricing, you're also seeing units. So we're in a really good category. We're hearing early feedback from retailers that they'll be expanding their space again. They expanded their space last year. Energy sets are getting bigger, especially in large format, more availability in cold placements and coolers. And retailers are realizing energy drinks are being consumed in multiple occasions. So they're leaning in as the category continues to grow.

Can you just maybe -- actually, the question about the full brand portfolio being capped in, how would you say it's enabling having better or different decision-making than might have been the case historically. So now that you've got oversight of all 3 brands.

Yes. I mean when you report, you're an allied brand, and you were dealing with a distribution partner that had a vested interest in one of their own brands. So there's always prioritization challenges you would have on managing your brands. And -- so this now as a category accountants, we manage the full energy category. So now having Rockstar, Alani and Celsius, we're able to not compete against these brands independently, but actually use this portfolio as leverage. Alani right now, which is Brew, extremely popular. Retailers want it. We're able to use that now managing the portfolio to bring the other brands along and opportunities that you might not have to get that secondary placement and third placement. So it's really taking the value and the opportunity of the brand and really making sure you're maximizing every lever. And that's our go-to-market strategy for '27. We're going to market with a total portfolio. We have prioritizations from our own people when we're investing in merchandisers and territory managers, but then also working very closely with Pepsi so we can have improve the execution. We also are doing suggested orders. So our sales team can place orders on behalf of the Pepsi sales rep. So we're working much closer together, and that's only going to get improved -- continue to improve in '27.

Okay. And then can you just remind us how to think about, sort of, the mechanics of accountability. When the strategy is yours, but the physical execution sits within the Pepsi distribution system?

Yes. I guess when you think about it, any distribution, right, there's always going to be challenges and opportunities. And I think when we really think about it internally, it's the opportunities, right? So distributors are going to drive efficiencies, they have a lot to sell. A sales rep within Pepsi has hundreds of SKUs, right? So how do you make sure your stands out? How do you make sure that you have that opportunity for that sales rep? How do you create that selling opportunity? That's where the territory managers come in, the merchandisers and then most importantly, the wiring and programming at the key account level. So getting the key account level strategy and commercial plans, validated and executed and aligned with the key accounts, getting that sold through and aligned with the distribution partner will get you to show up. And that's where it matters. You have a 1.5 seconds for a consumer to purchase a product. You have to disrupt the path to purchase. The energy category is extremely, extremely competitive. We know this, right? We have to get secondary placements, third placements, disrupt that path to purchase. We need to bring these brands to life at retail. So the wiring is very, very important. That's why the category captaincy is important and continually focusing on improving execution, improving the placements at retail and getting the product cold.

Okay. Coming out of the second quarter print, I think an area that investors have been focused on is the trajectory of the Celsius brand itself specifically. So you've been clear, you just mentioned already, the SKU rationalization went deeper than it should have in hindsight, but the remaining assortment is becoming more productive, but we're not yet, I think, where the total brand has returned to growth. So what more needs to happen to get there?

Yes. I mean commercial plans for '27 are fairly locked. We have an LTO strategy. Spritz Vibe is another winter Spritz that's coming out in the fourth quarter. But that LTO is not going to put enough sales on innovation to cycle last year's innovation -- that permanent innovation, which was in place. So there's weakness on the Celsius portfolio. We've seen that down anywhere between 5% to 10% on the scans on IRI data. The rationalization slowly starts to fall off towards the back half of the year and into the first quarter and first half of '27. But we're seeing really strong performance within the core SKUs that we're focusing on prioritizing. As an example of some of the SKUs are Cherry Cola, Grape, tropical vibes. Some of these really great velocity SKUs. You're seeing the ACVs gain as the teams are focusing and prioritizing a really strong base portfolio. So Celsius will be down as we're finalizing and exiting the year, we're hoping to get it back to growth at the end, but it's going to have a really firm stable base of SKUs that we're going to build on for 2027, where we had permanent innovation on our core or Vibes lines. And also, we'll be launching a new subline in the 16-ounce space, which we're really excited about. We're going to be announcing that at NACS coming up next week or next month, which is really the Super Bowl of the energy drink category. It is a fun time if anyone can ever -- wants to go. You'll see a lot of great new innovation within the energy category there.

Okay. indiscernible] sort of getting through this period, we cycle it and then the stable base to grow from in the innovation and activity.

That's correct.

Great. And then also, I just wanted to just clarify also, is some of this recovery relying on the time of retailer shelf resets or anything with in-market execution, would you say?

We're completely focused on getting Celsius back to growth. The innovation will slowly start to roll out in the first half of the year as retailers are resetting, but we're also making strategic investments behind the Celsius portfolio. We just partnered with GameDay. We've been activating college campuses across the country. And now we're leaning in on college football more than ever before. We're getting a lot of great feedback from retailers where we're going to be able to bring this property to life. So innovation is going to be a key driver for '27, but also leveraging these tentpole programs and wiring that we're wiring in through the key accounts is going to also drive additional velocity growth and loyalty.

And how -- I guess, should we on the outside evaluate the recovery in the brand? Like what are the data points that you think would be the best leading indicators? And like what are you watching most closely to say that this is working.

Sure, you want to talk?

Yes, you talked about -- I mean, scans obviously, is a key thing. Most of our investors are watching them on a weekly basis. But we look at them as well also not just from a percentage but gross dollars. So how the gross dollars been trending? Are they stabilized, which we've seen stability for a number of months. We also are looking at kind of productivity. So if you look at, kind of, dollars per point of distribution, we mentioned in our Q2 earnings call that from Q1 to Q2, we're up 16%, even with 7% loss in points of distribution. So we're seeing the productivity go. If you look at just the singles, which is about 70-plus percent of our business, of the remaining SKUs, those are in double-digit growth. So the remaining SKUs are working. They are resonating with the consumer as we get everything set and going. Those are kind of the, call it, third-party data things you can review. If you go beyond that, we look at a number of displays, inventory on display, so NOD, IOD is very important for us, like John said, it's about getting in that path to purchase. So we need to keep that up and keep growing the different merchandising and the different setups that we're doing. ESP and GameDay will be helpful with that with getting displays across the U.S. and all the big retailers and even some of the convenience locations. And then it's the coolers, how many coolers are we able to add. We've been adding a lot of permanent fixtures this year. That's caused a little bit of delay on some of the space gains that we've had, and we've talked about that back in our Q2 call as well, where because it's more labor-intensive and we're getting, kind of, permanent space, it takes a little longer to get that set as opposed to just getting another 6 inches on the shelf. So those are the key things we're watching and monitoring and as we go through the year, and then obviously, you've got the innovation productivity as we, kind of, end the year and go into 2027.

Yes, I think it's -- when you look at -- you get all those key indicators and then you have what's happening macro within the category, right. I talk about pricing opportunities, unit growth, more consumers coming into the category than ever before. And you look at a Celsius and Alani, it's incremental, right? We're bringing new consumers into the category. And I think that's really a differentiator when you're going to these buying desks with buyers, right? They're looking for us to bring innovation. They're looking for us to bring some of our marketing initiatives and some of the unique things we do to bring these brands to life at retail. If they're looking to sell bigger basket rings, right? We hear that a lot with the convenience channel. They want to do more food pairings. What brands to pair with food on a meal than a Celsius and Alani. Some of the really great flavor profiles to have there. We know those occasions are expanding. Also, the other opportunity we have is revenue management. We've been investing in revenue management apartment. We are really excited about really going to market with this revenue management strategy in regards to pricing, promotional strategies, pack size, and this will really be the first time we're really maximizing the value of the portfolio. These brands -- commercial plans were designed individually. They weren't designed as a portfolio. So this is the first time we're actually going to be putting that to work, and that's going to unlock value.

Okay. Great. Just sticking with the innovation topic for a moment. You said you're moving back towards permanent flavor innovation for Celsius in '27, whereas like the LTOs and optimizing the lineup were more of the focus this year. How is the innovation process changing? So you don't end up again with a long tail of low ACV products?

Well, that is now corrected this year because the tail is -- there's -- the tail is cut. So what you're going to do is, kind of, continue to rationalize the lower moving SKUs and refresh. That's what you do every year. This year in '26, when you look at what the strategy was, it was to simplify the Celsius portfolio, increase the faster-moving SKUs, bring those ACVs up higher to have more consistency across the country. We cut too deep that we know, and we didn't have permanent innovation coming in. So now when you look at the tail, there isn't really not a tail. So now you're able to continue. You have a really good base. Now you're going to build upon that and definitely taking the key learnings, you have to replace our SKUs, you have to bring new innovation back. And that was a flaw in the commercial plan this year.

Okay. Let's shift to Alani. So different point in its development, where the question is more how to maintain momentum as the brand becomes much larger. Distribution, velocity innovation are all really strong. So the initial PepsiCo expansion, sort of, matures, how would you describe the next phase of growth for the brand?

Well, Alani, it's really exciting what's going on. The brand is extremely hot. What we're also seeing, as it's going and expanding into convenience, you're seeing more males consume the product, some of the flavor profiles are so unique. What gives us the opportunity with Alani is the LTO strategy. You get the test. And then once it's validated, you can bring that back in as a core SKU. So this year, we put in 3 SKUs into the core of Alani. So we have 6 core SKUs. Next year, we're going to bring in more. And we'll continue to build upon that base as well as testing continue to grow the LTO strategy, which has been really meaningful for the portfolio. But over time, those LTOs will have -- they will grow, but the base is growing on Alani because you're increasing that daily consumption. You're seeing these SKUs will start to grow at 98 ACV. You're going to go into additional foodservice. You're going to go on additional college, universities and really leverage the breadth of the PepsiCo distribution networks. And that's a lot of white space opportunity in '27 where Alani can go.

Okay. I think Alani takeaway has been much stronger than reported net sales growth for a few reasons. Could you maybe talk about that a bit and give us an update on when you expect that gap to narrow?

Yes.

I can jump on that. We can parse it into, kind of, 3 or 4 pieces. One of them is you've got non-RTD kind of program they were running that was low or no margin. And so we discontinued that. So that was discontinued in Q1. So as we roll over Q1, you'll see that, kind of, easing and that was just different things that they had added as a part of the nutrition program that we didn't feel we needed anymore. There are a number of things that we capped like -- we still kept pre-workout. We still kept On-the-Go sticks and things like that, but there was a number of other things we discontinued. The other piece -- and we do have a bridge that we have issued each quarter. There's another piece there is the Canadian business. It's growing at a different rate than the U.S.-based business. So if you pull that out because a lot of people are trying to measure the scanner data versus the reported data, and then, kind of, the [indiscernible]. There's another piece, it's the captaincy amortization. So we -- as a part of the Rockstar purchase and also gaining the captaincy, there was an asset that we put on the books that's actually amortized into revenues. And so that piece will be -- it's straight lined. So it will be, kind of, year-over-year. It will be the same. So you won't have that as an outlier. It will just be consistent across the board for the next 16, 17 years. And then the last piece is really the mix in the DSD. And so they were -- the Alani brand was heavier mixed into non-DSD in the prior year, and it's mixing into more DSD as we get the captaincy and go into the Pepsi system. A big part of the growth is convenience, which is DSD based. And then the other piece is, historically, the LTOs would just get directly sent in to retail. And in order to get more breadth and depth, we were able to use the DSD system. So you've seen what happens with the ACVs of, like, which is Brew and how much depth we can get across the U.S. with that. So that's all causing a bit of a mix impact. As we look out to next year, it's about 60% right now. So it's, kind of, stabilized around that. As we go, kind of, through resets, you'll see it, kind of, be more of an apples-to-apples comparison. So you won't see as much of the flux. If you, kind of, remove everything besides RTD Energy, it was about 39% versus 56%. So a little bigger, but once you, kind of, got rid of, like, non-RTD and some of that stuff, the gap got tighter. The other thing that I'll support is as we implement the true portfolio RGM programs, that will tighten things up a bit, too, because right now, you're seeing some promotions and some build backs and things that are running through. We'll be able to get those running through at a much more efficient rate.

Okay. Great. And I think there's also a sizable gap between growth and net revenue at a total company level. I think it's also largely driven by Alani, but it's a similar question, if you can just, kind of, walk through the ongoing dynamics that you use over time.

Yes. From GAAP versus non-GAAP, there's timing differences that can happen across the board. So you've got the scanner data, you've got the depletions, which are coming from our DSD partner into the retail outlet or our shipping product to the direct businesses that we do business with. And so there could be some timing versus orders, right? So we get paid based on delivering product to the Pepsi warehouse or based on delivering product to the -- call it, the Costco warehouse. And then they obviously hit the scanner. So there's -- sometimes, there's timing gaps there based on when the orders were, when the depletions took place. So you'll see some of that across the board. As we continue to scale, that should tighten because our business is going to get bigger and bigger and you won't be able to have those, kind of, disparities in order to make sure we're getting service properly. So you'll start to see it smooth out. But as we're loading Alani in and trying to bring a $1 billion-plus business on where we already had a $1 billion-plus business, and then get Rockstar into the system. We also did some rationalization intentionally on Rockstar. Rockstar has been trending along with way back in August, what we, kind of, expected for its sales this year. So that's -- you're going to see some of those nuances. But as we continue to get some time under our belt, you'll see that start to tighten.