Celsius Holdings, Inc.

Greetings and welcome to Celsius Holdings' third quarter earnings call. At this time, all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. If anyone should require operator assistance during the conference, please press star zero on your telephone keypad. As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Cameron Donahue, Investor Relations for Celsius. Thank you. You may begin.

Thank you. Good morning, everyone. We appreciate you joining us today for Celsius Holdings' third quarter 2020 earnings conference call. Joining the call today are John Fieldly, President and Chief Executive Officer, and Evan Negron, Chief Financial Officer. Following their prepared remarks, we'll open the call to your questions and instructions will be given at that time. The company follows Form 10Q with the SEC and issued the earnings press release pre-market today. All materials are available on the company's website at celsiusholdingsinc.com under the Investor Relations section. As a reminder, before I turn the call over to John, the audio replay will be available later today. Please also be aware that this call may contain forward-looking statements that are based on forecasts, expectations, and other information available to management as of today, November 12, 2020. These statements involve numerous risks and uncertainties, including many that are beyond the company's control. Except to the extent as required by ethical law, Celsius Holdings undertakes no obligations and disclaims any duty to update any of these forward-looking statements. We encourage you to review in full our safe harbor statements contained in today's press releases and our quarterly filings with the SEC for additional information. With that, I'd like to turn the call over to President and Chief Executive Officer John Fieldly for his prepared remarks. John?

Thank you, Cameron. Good morning, everyone, and thank you for joining us today. Our third quarter continued to see the impacts of the COVID-19 pandemic. Materially impacting several channels of trade for Celsius, including our health and fitness, vending, and food service, as well as a reduction in foot traffic and several other channels. While we did begin to see an improvement in the third quarter with capacity restrictions and reopenings in our hardest-hit channels, this remains significant, uncertain, as there potentially could be reclosings with additional cases and increase in our regions of operation and extended closures and some states and countries. The health and safety of our employees, customers, consumers and partners remains our top priority and we continue to monitor the environment and implement contingency plans to mitigate risk to our business. In addition to the COVID disruptions in our retail channels, the entire beverage industry is now being impacted by an aluminum can shortage taking place in the United States. The impact is across the board with major bottlers recently announcing a material shortfall in cans for 2021 and many smaller brands are being turned away. We have been in continual dialogue with our suppliers and while they remain certain to fulfill our base can needs for 2021, they indicated they do not expect to be able to fill our expected growth from our internal projections. While this is a significant issue, we have also found a solution. being an international company we have been able to leverage our global relationships and strategic investors and will be securing additional cans needed as needed from Europe and Asia to support our growth. While this is great news on all these incremental cans we were able to source outside of the United States we will see an increase in our cost of goods over the short-term period through 2021 which will impact our gross profit margins by a few points but we remain confident the company will be at least at a run rate in the low 40s on a gross profit basis. We are currently expecting 2021 as being impacted for the entire year until the new plants in the United States get up and running, balancing supply and demand as we head into 2022. We will continue to explore additional opportunities as they become available to shorten the duration Celsius is impacted by this canned shortage. but wanted to set an initial conservative expectation as a baseline. I assure you our team is focused on continuing to improve operational performance and the team is focused on improving efficiencies as we continue to scale and we will work to mitigate and offset this increase as much as operationally possible throughout 2021. With the only negatives for the quarter out of the way, I am extremely proud and excited with our team at Celsius and the accomplishments they've made during the quarter. The third quarter results were at an all-time record for the company, including record revenue, gross profit, gross margins, operational income, net income, earnings per share, and cash flow from operations. Overall, revenue was up over 80% to approximately $36.8 million from $20.4 million in the year-ago quarter. Domestic revenues, we saw growth of 60% to $26.9 million, up from $16.8 million in the year-ago quarter, which was driven by expansion in retail outlets, where we grew over 19,000 locations from the year-ago period, expanded our distribution through DSD, and saw organic same-store sales growth. And we saw over 100% growth in our e-commerce channels during the quarter. Our e-com revenue was driven by Amazon, where we saw an increase of over 111% to over $5.6 million for the quarter, which represented about 22% of our domestic revenue. Initial revenue increased 172% to $10 million, approximately, from $3.7 million a year ago quarter, in which we saw our Nordic revenue increase 182% to $9.5 million, also a quarterly record since the acquisition and sequential growth of approximately 10% from versus the second quarter. Consumer demand for the Celsius brand has only grown stronger through 2021. And with the most recent reported United States spins data for the 52 weeks and in October 4th, 2020, confirms that we have significantly outpaced the category across multiple channels. This includes a 43.9% growth in the convenience channel, outpacing the category by approximately 14.8 times with new store additions ramping up our ACV to approximately 16%. And in the MULO channel, our growth rate is over approximately 100% with an ACV currently at 36.5%, outpacing the category growth by 7.4. Additionally, third-party data reflects the same trends on Nielsen. As reported all channels, as of October 27, 2020, the Celsius sales were up over 61.3% for the four weeks ending The next largest growth rate in the category was Red Bull with approximately growth rates of 20.2% for the most recent four-week period. According to Stackline, which tracks energy drink sales on Amazon in the United States for the four weeks ending October 17, 2020, sales in dollars in the energy drink category by Amazon, including energy shots, grew by over 157.5% versus the same period a year ago. and Celsius Sales increased outpacing the category by 190.3% and our share increased to 13.9% of the category which puts Celsius as the third largest energy drink brand on Amazon just behind Monster Energy at a 31.2% share which grew at 156% and Red Bull which is at a 15.8% share which grew at 179% growth rate. Being the third largest brand on Amazon demonstrates Our opportunity and verify Celsius warrants additional and much better placements as we continue to scale. Through the third quarter, traffic and purchasing patterns remain disrupted and online ordering patterns, pantry purchasing, and curbside pickups became more prevalent in response to the stay-at-home orders in particular markets and consumers shifting their lifestyles. During the quarter, we continue to see impacts in several of our distribution channels, mainly our health club, vitamin specialty, and vending channels. Our health club channel, specialty channel, saw revenue decline by approximately 23% in the third quarter. This was historically represented at approximately 20% to 25% of our United States revenues, and this channel remains predominantly shut down during the quarter. We did begin to see some reopenings at a limited capacity during the quarter, but expect revenues from this channel to remain materially down in the fourth quarter. We do expect continued openings throughout 2021 and a rebound. As I discussed in the second quarter earnings call, despite these two channels essentially shut down, our consumers shifted their purchasing patterns of Celsius to other channels, which did not only replace the sales in these channels, but drove record revenues and accelerated revenue growth of over 60% in the third quarter in North America, further reinforcing the opportunity we have at Celsius. Our brand is more than just an impulse purchase. We are part of a daily lifestyle, a line for today's health-minded consumer. The Celsius consumer brings significant value to retailers, not just as an expanded age bracket and a 50% female demographic, but our consumers are recurring, regularly consuming Celsius as part of a daily lifestyle, further expanding the channels and category growth. During the quarter, we made significant process on further building out our DSD distribution networks on our pursuit for a national network to service our accounts. We secured additional distribution partners in Anheuser-Busch, PepsiCo, Couric Dr. Pepper, and Molson Miller Coors Network partners, further expanding availability to new regions. We further transitioned Target and 7-Eleven over to the wholesaler Big Geyser in New York during the third quarter and have already seen volumes more than double in those locations. The company initially announced last summer that we were building out our national DSD network, starting with our first major account, DSD partner, Big Geyser in New York City metropolitan market. We have now built our network to over 147 regional direct store delivery partners, and we anticipate our DSD network now covers approximately 75% of major metropolitan markets in the United States. One of the initial challenges we did have building out our network was really working with the retailers as you have to cover the retailer distribution and the stores in order to flip over those retailers to your distribution partners. So this is why the percentage of stores serviced by DSD is materially lower currently than our overall coverage, which is approximately 75% of metropolitan markets. Now that we have grown our overall coverage and completed full regional coverage on geographical areas, We have now seen an over 100% increase in the number of stores serviced by our DSD network from our Q2 earnings call which includes our most recently announced target DSD conversion and the 2700 Speedway store expansion we most recently announced. The company anticipates that approximately 30% of doors will be currently covered by DSD distribution which would be adding additional stores and locations throughout the back half of Q4 and into 2021. We anticipate that the accelerated transition will continue and include convenience. As such, the recently announced Speedway launched drug and grocery. Over the next two to three years, we expect approximately 70% of our retail stores to be serviced by DSD distribution and the associated benefits of doubling revenues in those accounts as we continue to transition. and our MASH channel, Celsius, saw significant growth through our recently announced exclusive launch of Kiwi Guava Lime flavor of on-the-go stick powders into over 2,700 Walmart locations. In addition to the Walmart launch of the new flavor, the company expanded our on-the-go sticks into Publix, over 1,200 locations with five flavors, and expanded our flavor offerings throughout Europa, who services the Gym Channel as well as Vitamin Shop and HEB in Texas. We also expect to transition the remaining 50% of Walmart stores to DSD in the beginning of 2021. We transitioned, as stated, 1,200 Target stores to DSD through September and October, with additional plans and regions to transition throughout the back half of 2020 and through 2021. Target is a great case study for Celsius, as we have steadily grown our initial two SKUs and a 200-store test to national availability with five flavors, serviced now by DSD, The company also participated in an NCAP program, which to support the transition in August and September, which was very successful. In the convenience channel during the third quarter, we announced the expansions as stated in Speedway to over 2,700 locations, which are now serviced by DSD, and grew our ACV in the convenience channel in North America to approximately 16%. We also expanded and brought on ExtraMark, Come & Go, and union-specific stores. In the retail space, our total U.S. door count now exceeds 79,000 locations nationally, which is up from more than 19,000 locations or 32% growth from the 60,000 locations we announced in the Q3 of 2019 on our earnings call. We expect the number to grow even further in the coming quarters as retailers execute planogram resets, which were delayed in the summer months this year. In Europe, we continue to capture incremental benefits and synergies from full integration of Funk Food, a Nordic wellness company, into our operations. The business was immediately accretive to earnings and an important step in our strategy to build out a global dynamic brand. As in the United States, our Europe operations were impacted by COVID and saw decreases in the fast protein snack portfolio continue through the third quarter as consumers shifted habits to confectionary products, but we do see the protein category continuing to rebound in the fourth quarter and expected to continue to rebound into 2021. These decreases were more than offset by the sales increases of Celsius in the region, which we continue to see great opportunity and momentum. Some of our operational highlights in Sweden, we had a great successful launch of a new flavor, great tasting strawberry marshmallow, which we launched in August and September. And we also kicked off in the back half of the third quarter, a limited edition blueberry frost, which is great tasting and was well received by consumers and retailers in the country. In Finland, we saw a great, very strong campaign in Kesko, one of the country's leading hypermarkets, where we saw over 65% growth versus in the prior year quarter. And the team launched a great tasting indulgence bar in August, which has been very well received by consumers. As with Europe and the United States, China and APAC were impacted as well by COVID-19. Recovery continues, and we saw momentum gain in the summer months. In China, we maintain a licensing royalty model on the market where distributors cover approximately 76 cities and now cover approximately 60,000 points of distribution at the end of the third quarter. And in Malaysia, we maintain a direct relationship with a local distributor where we maintain approximately 2,000 7-11s with plans to re-enter the fitness channel specialty and gyms and additional retailers as the recovery continues. As with Europe and the United States, We see great opportunity to capitalize on the changes in consumer preferences for better-for-you offerings, and we see tremendous opportunities in the enormous market of Asia. On a marketing front, we continue to innovate, target new and existing consumers where they live, work, and play to prioritize meaningful and emotional connections through robust marketing programs that drive live, integrated programs, competitive activities, even while consumers are at home. Specifically during the quarter, despite COVID-19 restrictions, we sponsored over 25 Events, both in-person and virtual, sampled thousands of cans and hands during the quarters in our key markets. We also supported our first responders with thousands of donations to doctors, nurses, police, army, firefighters, and also supported the California fires. In addition, we started our Live Fit Tour in the Florida market where we reached out and sampled and activated gyms and also created experiential outdoor activities throughout the quarter. and as plans to further expand throughout Q4. In addition, we further leverage our Sweat with Celsius Instagram live workout programs and further leverage our brand ambassadors and influencers where we connected meaningfully with more consumers. In addition, we continue to partner with our core retailers and most recently, we partnered in a college program where we have distributed over 100,000 on-the-go sticks to college students through the Walmart back-to-school college program. Our brand is resonating with an expanded consumer base, distribution platform, and retail locations. With the tailwinds and overall increased focus on health and wellness, and specifically in the energy category where functional energy is recognized throughout the industry as the driver of future growth and shelf space with retailers, we remain focused on driving profitable growth in an industry that is rapidly changing. We're growing exponentially and adapting quickly, outpacing our competitors and grabbing market share. Thank you, John.