Status Update

Apr 21, 2020

I'm going to start jumping in here. Hello, everyone. I'm Jeff Van Sinderen, an analyst from the Discovery Group at B. Riley FBR. Pleased to welcome you to our call with Celsius Holdings Management. Before we get started, I need to tell you the following. In the normal course of its business, B. Riley FBR Capital Markets seeks to perform investment banking and other services for companies under coverage and to receive compensation in connection with such services. As such, investors should assume that B. Riley FBR intends to seek investment banking or other business relationships with any and all of the companies mentioned today. Celsius Holdings currently is or within the past 12 months was a client of B. Riley FBR. Services provided were investment banking services. B. Riley FBR or any of its affiliates has received compensation for investment banking services from Celsius Holdings Inc. In the past 12 months. B. Riley FBR or its affiliates has managed or co manage the public offering of securities for Celsius Holdings Inc. And has compensation for investment banking services from Celsius Holdings Inc. In the past 12 months. B. Riley FBR acts as a market maker and liquidity provider for Celsius Holdings, Inc. Securities. Today, we're pleased to have with us Celsius' CEO, John Fieldly. We appreciate our speakers spending time with us today. Their opinions are their own and do not necessarily reflect those of B. Riley FBR. We ask them to avoid any disclosure of confidential on public information. And with that out of the way, we will jump in. I'd like to welcome John. And considering the evolving pandemic and questions from the institutional investors who are participating on the call. The replay will be available to everyone once the call concludes. So John, could you start off by giving us an overview of how your company has transitioned to the remote workplace social distancing principles that have been instituted for companies and what you're finding has worked well and what challenges have arisen as part of that and how you're addressing those challenges? Absolutely. Thank you, Jeff, for having us today and also thank you to all our investors out there joining in on the call. What's unique to Celsius on how we're handling this situation with remote working, social distancing. We feel we are really have a competitive advantage versus what we're hearing from other companies. Given that we are located in South Florida, we have a standard hurricane SOP process involved that we follow and review quite frequently throughout the year in regards to being in Hurricane Alley down in South Florida. So we are very much able to be a remote organization and we have many of our employees working remotely at home and also involved with our sales team, we're taking additional precautions. We are supporting our retailers, distributors and partners going in at off hours, non peak hours to really help our retailers during this time. As we all know, when the pantry purchasing phase of this pandemic that we all went through took place. Retailers were extremely impacted with ad stocks across the country. So, we did support our retailers and have been working with them very closely, as really the supply chains come back to normal and you're starting to see products again and seeing shelves fully packed. So that's something within our organization, we have we feel everything went fairly smoothly. We do have a small team here at the headquarters in South Florida, but we have many of our team members remotely and just really following our hurricane SOP that we have in place. So accounting functions, transportation, marketing and sales functions are all operating fully and we didn't have to scramble to put this together. All of our servers and are on the cloud and in Cat 5 facilities. So we do, we have been very much prepared. One thing we have not been able to do is travel. So we implemented we stopped travel, domestic travel, international travel. So with our partnerships in the Nordics as well as in Asia, we've limited that, but we continue to keep communication up on a daily, weekly basis. And throughout the global organization, we've adapted very rapidly. Okay, great. So you really you're fairly well set up to handle a lot of this, it sounds like. Traditionally, your marketing spend has been based on remaining cash flow positive, but with the focus on driving growth through And how are you thinking about evolving total dollars dedicated to marketing as the U. S. Economy begins to reopen? Yes, that's when you look at what their organization has done over the last several months, weeks, we've really transformed the organization. And that's a competitive advantage you have as a small organization is really be able to pivot. As you know, we've talked about it before our Live Fit tour has been really a key point of our marketing strategy in 2019 into 2020. And it's all about activation offline, creating those emotional connections with consumers and then leveraging it online. It's all about that online, offline communication, that really drives that brand building and that community around Celsius. And that's what we've been very successful on doing. Due to the COVID-nineteen crisis, we all know that has stopped. The events have stopped, samplings have stopped. So what we've been able to do is strategically really move our dollars and our focus to online. So all our team members are working on social media, working on influencers and driving that online community. But we still want to stay focused with our Lift Fit tour and our Lift Fit strategy. But instead of offline, we're bringing it online. And we put a press release out on March 9th about some of those key initiatives and that is our Sweat with Celsius campaign where we still partner with our local gyms, our local trainers, local influencers, but we're having them do that on our Instagram through live workouts. They're noon every Monday, Wednesday Friday at noon, Eastern Time, 9 pm Pacific Time, where we give them a platform and we continue to build that. It's all about during these times helping our small businesses and our local partners. So we're embracing them and that's some initiatives that we have quickly pivoted and started conducting those type of activities online. Also, we did online partnerships with Barry's Boot Camp, which is a big fan and a big chain and a big supporter of Celsius. We implemented a partnership with them where we're also incorporated in their workouts with their influencers and really supporting the community. But instead of offline, it's online. So those are some key initiatives that we've been able to pivot on. As we come out of this, we are going to pivot back. We are already talking about strategic demos, targeting gyms that are reopening. We're hearing in Georgia, the fitness community, the gyms channel will be reopening. There's going to be some opportunities there. Also leveraging outdoor workouts that we did as we did in Union Square, New York City and across the country in key markets in 2019, we're going to bring that back. So, we have plans in place. We're able, capable, and ready, once we get the all clear and get to the other side of this, which seems like it's happening sooner than later. A couple other key initiatives we're doing is still as partnering with our retailers. So as we supported them through demos and in store activation, we're now moving really we need to pivot and we need to continue to get in front of the new traffic patterns as well. So we all know everyone's shopping online, we're doing store pickups, we're doing a variety of different things. So we've quickly moved to pivot and get in front of the new traffic patterns, of the new pattern of consumers to create that activation just in a different way. So getting very creative and the team has done an amazing job. Okay, great. And then just as a follow-up to that, John, on the Live Fit tour, are there obviously, that sort of got put on hold. But what are the other plans for later in the year as the lockdown ease or as things open up to, I guess, sort of go back to the type of tour events that you did last year, for example? Yes. No, we're going to be back. We're going to be back in a big way. A lot of our events, the Olympia, a lot of the trade show, key trade shows for us were canceled or postponed. It looks they've all been postponed in the later back half of the year. So we are gearing up and we are positioning for a very active back half, which we're all excited about. So we have plans in place. Obviously, they'll get adapted and adjusted as things as we come out of this and the timing and sequencing of those can change. But we are very much well positioned to get back into it, continue our offline activation, in store activation and continue to build that community and that personal touch and that experiential marketing that the team is extremely great at. Okay, terrific. And then moving to your supply chain, what impact have you had from co packers, distribution, inventory replenishment? Are there any raw materials in short supply? And then what initiatives do you have in place to mitigate potential supply interruption? Yes, we actually, in December, we started increased inventories and as we said on our earnings call, we are running at over 120 days on hand. We strategically did that because we had resets that were planned in the first, really March April timeframe on a lot of major retailers. We've gained additional authorizations in the convenience channel and each one of our retail partners in drug, mass and grocery are all taking additional flavors. So we were planning for that. We had an increase in inventory. Then when we started to hear more about the impact around the globe of the COVID-nineteen in January, we immediately went and further instituted blanket purchase orders for a greater period of time and started to we doubled down on inventory, further increasing our inventory levels due to some of the challenges we saw in other markets where co packers were shut down. Also now you're seeing it with meat packers and butchers being shut down, really affecting the supply chain. Due to the capital we had on the balance sheet, we felt it was better to be additional security and inventory levels due to the severe impact of what happens at retail if a company runs out of stock. So we further increased inventories in January and then we also received notice of several retailers pushing resets from that March, April timeframe into May June timeframe. So all the resets, majority of them, they get pushed out about 2 months. So that has left us in a really good position on inventory with those blanketed purchase orders and then the increased inventory levels that we had heading into the year. So we have heard a lot of stories about other brands being affected within supply chain. Also, we have been affected at several co packers in regards to really purchase orders and productions getting pushed and delayed for 3 weeks, 4 weeks, a lot of challenges throughout the Copac system that a lot of brands are affected. As we know, during that pantry loading time, many larger brands, much larger than Celsius came in and placed additional purchase orders with co packers. So it kind of flows down line. We have purchasing power over many other brands, but then there's brands that are larger than Celsius that have purchasing power over Celsius and line time. So everything runs down through the supply chain. So we were affected and it was good that we planned accordingly and initially went and implemented those extending purchase orders, putting them in for raw materials, increasing production on the early phase and we had the capital to do it. Quarter, So if you're trying to keep inventories tight in the Q1, it's going to be very it was extremely challenging for many brands. But we feel we're well positioned right now with everything that's going on and we haven't heard of any cancellations on resets. Everything is just postponed, maybe 4 to 6 weeks that we're hearing. And many of the retailers are still very excited about updating their sets, getting them more in line for today's health line consumer. They're bringing on more sports nutrition drinks and Celsius is a favorite and is gaining a lot of interest there. So it's we feel we're well positioned. Okay, great. And so just to clarify, even though there were some slowdowns or push outs, I guess, or order delays with co packers generally in the marketplace, you guys had enough inventory to service the market. Is that a fair way to put it? Yes, that's very, very much so. That is correct. We did not have any order disruptions. We did not have any supply chain issues. Really, when you look at what happened in March, you did see a lot of challenges with trucking. So trucking rates did increase due to the high demand of trucking in March. And so we were impacted a little bit on freight. But in regards to any out of stocks or anything along those lines, we were not affected at all. And also, we've been able to as we've grown in scale, we've increased the number of co packers. So we're not relying on just one co packer anymore as we were in 2018. And then in 2019, we expanded to additional co packers. And in 2020, we're now running at over 5 active co packers. So we're even if an order is pushed, we're able to flex through our current co packer network, which has been beneficial for us. Okay, good. And then I wanted to turn to any update you can give us on the rollout with Walmart. You recently announced over 1500 stores there. And is the approximate 50% that were expected to be serviced by DSD, have those come on as planned? Yes, they have. The rollout has been great through the DSD channel. DSD route to market, we're seeing we're authorized with 2 flavors in the 1500 stores, but the DSD stores that are being serviced the stores that are being serviced by DSD or direct store delivery, we're seeing many more additional flavors being on shelf. In addition, we're also seeing cold placements. So, as an example, in the neighborhood Walmart neighborhood markets, many of them we are in the cold cooler even though we're not authorized. So going back to that DSD, getting these retailers flipped over to that preferred channel, you just pick up additional volume and additional points of disruption in the outlet. So we are very pleased on the initial rollout, very much so and the buyer is pleased that we're also looking at adding additional flavors on the next reset. So, it just goes back to what we've done time and time again at Celsius. We enter a store, we prove ourselves, we continue to expand and continue to grow. The numbers that are coming out on Mueller data are extremely strong. The SPINS data and IRI data is strong. We most just recently received the updated SPINS data 52 weeks ending March 22, twenty of this year and we're up over 111% in the Muuto channel and just really strong growth in correlation. So the off takes there, it's very exciting. And the direct store Walmarts, we've had somewhat of a challenge keeping the product on shelf just going through the warehouses just like we've had challenges at Target and some CVSs as well, which we're working on flipping those over to DSD. We've talked about that. And those should be flipping over key markets, most likely in the May June timeframe is what we're looking at now. Okay, good. And then overall, how have the DSDs been impacted by COVID-nineteen? It sounds like, I mean, there's maybe a little disruption with some of them. Has that had a material impact on your business? I guess, what are you hearing from your DSDs regarding their evolving state of operation during COVID? Yes, the DSP partners have been affected. In regards to Celsius, the bulk of our DSD partners service independence and small format convenience locations. So they have been affected. The DST business convenience traffic is down, so that's affecting the volume that's coming out of those channels. The grocery, mass and online channels are doing well and picking up for the difference. But the DSD partners have been challenged just due to our case because we're in this activation mode with our DSD partners about ready to flip on more grocery, more mass, more drug. So the bulk of the distribution for Celsius is those small convenience, small format locations. But all in all, they are seeing the same in general to their business. The convenience channel is down, mass is up, drug is up and they're seeing a lot of activity in the grocery channel due to the pantry loading that took place. Okay. When you started so we started to touch on the channels and I think that's especially relevant with 1 enormous household name beverage company announcing results today and highlighting that company's exposure to restaurants, bars, kind of the away from home places, movie theaters and other venues, that are closed due to COVID-nineteen. One of the key differentiators that we've always highlighted has been the broad array of channels Celsius has been successful on. Can you walk us through what you're seeing? I guess, how those just maybe give us a little bit more on the channels, maybe touch on the exposure that you do not have that an enormous beverage company would have, especially if they have a large stone business? Yes, absolutely. I mean, you look at Coca Cola and the multiple channels they're in, immediate impulse, the convenience, you know, the stadiums, the fountain drinks, the restaurants, on premise. It's just there's a lot of volume that is no longer available. It's big pack sizes, it's take home, home delivery sector is really where a lot of the drivers are. And what's interesting about and really when you look at where we are in our journey, being born in vitamin specialty gyms and health clubs, we've made our migration into mainstream retail through the grocery channel, through the drug channel, through the mass channel, and really just recently gaining more momentum and convenience. And that's where we see a lot of opportunity on new distribution. So when you look at how we are affected versus much larger organizations where they have business, great business in multiple different channels trade. We are very much concentrated on the grocery, mass and online sales. Yes, fitness is closed. So we saw an impact in revenue there, but that was offset with the online purchases. And yes, the convenience channel has seen a 50% decrease in traffic, but that you're seeing a lot of purchasing. And we feel new consumers picking up Celsius and exploring other brands as they're looking for experiences at home. I think one additional thing that is unique versus many things unique, but one in particular, when you look at Celsius versus maybe like a Monster or a Red Bull, it's a lot of the energy drink category is driven by impulse purchase as well. So and the convenience control 70% of the category. So there's a lot of when these businesses close, it's really affecting many larger brands because Celsius has that health and wellness position, that LiveFit position and consumers really see Celsius as part of their daily regimen, we're not as we continue to grow and scale, we will get more impulse purchases. As we move further in the convenience channel, we're going to be more of an impulse purchase. But as we've gone through our journey, we're really part of everyone's routine, we're part of your daily routine. You take it before your workout, you take it before you're accomplishing your goals. Many everyone's working from home. They're teaching their children. They're doing things. We have to stay active as well. It's a great stress reliever. So we're seeing Celsius being used in consumption levels that it's very clear we are not an impulse purchase. Our core consumers, we're part of their daily lifestyle, which is, that's coming out clear in the data, which is great to see. It shows the strength of the brand and the strength of the community. So in a way, the fact that you have a generally low ACV in the convenience store channels is actually sort of a benefit to you right now because you don't have as much exposure there and people that are buying your product, they're buying it through mass and buying it online and they're buying it through grocery. So you're really less impacted than the companies that do have high exposure and convenience in some of the other impulse channels. Yes. That's exactly right. You're absolutely right. And it's just the way the distribution and the volume and the stage of the company. We're getting a lot of interest from convenience, convenience retail that are updating their set to modernize their energy sets for today's consumer, talking about performance energy, they're talking about continuing to capture the overall category growth, which still is very strong. When you look at estimates for the year and estimates out to 2024 and Celsius is part of those discussions. So the convenience channel is coming on. It's coming on in a big way as we continue to move forward. But due to the timing of this and the timing of the resets and we are limited on exposure in that channel. Even though when you look at the recent data as of March 22 this year, the latest SPINS data coming out, Celsius is up 49% in the category. So, which even though we have roughly around a 12% 12.6% ECB, we're up 49% on a year over year basis within that channel. So seeing great conversion, great momentum in the channel and lots of opportunity that we're going to capitalize on. Okay. Good to hear. So early days there and a long runway. There's been significant documentation from the scientific community that the diabetic and overweight population has been exponentially impacted from COVID-nineteen. One of the main drivers you've consistently stated is the global trend towards health and wellness and your brand main slogan of Live Fit along with the scientific documentation of the proven peer reviewed benefits of drinking Celsius. How do you feel that has impacted your sales initially as well as the longer term drivers? I think that's what's some of the key drivers. I mean, it's not just North America. Those are global health and wellness trends you're talking about. You're seeing every category being affected. It's not just energy. Look at a protein meat category with Impossible Meats. Look at clothing without at leisurewear, now a huge category. If every category is affected, everyone wants to live fit, everyone wants to live a healthy active lifestyle. We feel we are well positioned for that, better for you energy in the category. We have proven innovation. We bring additional functionality, proven functionality as you mentioned with accelerating metabolism and burning body fat and we taste phenomenal. You don't get any crashes on the product. So we feel that is one of the keys to our success here as we continue to grow and grow broader, right? So as we get into further into the convenience channel, you're going further mass than we've ever been before. And the correlation and the spins data and anecdotal information we're getting on the off ticks at existing accounts shows that it's Celsius is a brand consumers want and which makes us very exciting to be in the position we're in as an organization. Absolutely. And I wanted to turn to international for a moment. It seems like roughly I guess it was roughly a month ago, it looked like Sweden was maybe going to shut down and I know you have a substantial business there, but they didn't lock down. And as a result, their economy has not been hit as hard as some others. And I guess, I'm just wondering what impact you've seen on your international business, maybe touch on the integration of Funk Foods, that acquisition and any high level update of China sales, which you transition to a royalty model and repayment of invested capital a year ago? Yes. The acquisition has gone great. Like we said before, the acquisition has been years in the making. We worked very closely with our partner before. So you are correct, Sweden has took a different approach than many other countries. They are still instituting social distancing. They still have the same pantry loading that we saw in North America. And they're seeing some of the effects. The government is just not taking more of a harsher stance, I guess you could say, versus other countries and what we're seeing in North America. So, initially, the acquisition has gone well, the partnership has gone well. They are we're seeing really the Q1 was a great quarter together. We had good execution. We launched a tropical flamingo flavor that was well received, great execution. We increased market share in the Q1 there as a consolidated company in the market, and we also are off to a great start in April. We launched a new flavor called City Pulse and got good execution and good marketing and correlation, and it's gone well. With every CPG company and every company pulling guidance for the back half of the year, we feel currently where we stand as an organization, the numbers look good. The growth looks good that we're seeing. So Finland has been affected. They have been in more of a lockdown, seeing decreases in protein bar purchases, which they do have that protein fast portfolio of great tasting innovative bars. That has been impacted, as well as Celsius has been impacted in Finland, although that's been fairly immaterial given the bulk of the revenue is from that, it's coming out of Sweden. So, but so far the relationship has gone well. We're getting we're leveraging the cross functional teams on marketing as well and working well together. So that relationship will continue to grow. We're looking at other opportunities throughout Europe as well, exploring the UK momentarily as well as further looking into Germany as immediate opportunities once we get to the other side and talking with some partners there. When we look at China, we do have the licensing royalty model in China that is guaranteed. So those are guaranteed royalty payments. They saw heavy load in Celsius into key retailers before the Chinese New Year in December, early January. And then with the closures and the controls that were put in, retail has been affected. So right now everything is getting back to normal and you're starting to see a lot of heavy promotions. To get consumers back into retail. And we feel that's going to be the same thing that happens in North America. We feel that you're going to see some heavy promotions in June July, which we're already talking to many retailers. Retailers are going to get they need to get consumers back into retail. So you're going to see a lot of interesting promotions and enticing consumers to get out and get into retail now that everyone is getting somewhat accustomed to this at pickup and home delivery. So, that's what you're starting to see now in China. I do think we're going to get the same key learnings here in North America and we already are talking to buyers about that to be part of those key programs as we embrace our retail partnerships as well. So Okay, good. On your year end earnings call, you stated that Q1 2020 would be a record for the company both overall, which would incorporate the additional revenue from a full quarter of the Nordic acquisition, but also for North America on a standalone basis. Are you comfortable reaffirming the guidance with all the COVID-nineteen impacts we've seen in the retail environment from the Q1? Yes, yes, we are. We still are going to produce a record Q1 and also in North America, a record Q1 as well. So we had good momentum heading into exiting the Q4 and heading into Q1. And we saw strong reorder rates all the way through Q1 and into Q2 in April. Who knows what happens as we continue to transport forward, but we continue to see strong through Q1, we saw continue to see strong demand for Celsius. Okay, great. With signs of the pandemic may have peaked in the U. S, how are you thinking about the gradual reopening of hit? Yes, I think it's going to happen. I hope so. I hope so. We're watching it, monitoring it very closely. I think what you're going to see is really key regions of the country are going to be operating at different points. So we're really going to as an organization and as business owners and all businesses are going to have to stay very nimble through the process and be ready to react as we continue to evolve out of this. In some markets, they're going to move faster than others, and that's where we'll be able to take advantage of that. So like I said, Georgia looks to be opening now with some of their events, some of their gyms and health clubs. And so there's some opportunities there that we could foster. So we're going to have to we really need to stay focused on key markets. And when it's ready, we'll go ahead and continue to reactivate. But we're still so which is key all the way through this. Okay. And then just so which is key all the way through this. Okay, great. Well, I think we've got a pretty good sense of how you guys stand. And so I think we'll wrap it up there. John, we appreciate you taking the time with us today and we look forward to hearing what you guys have to say when you report earnings in a couple of weeks. Excellent. Thank you. Thank you everyone for joining us. Thank you everyone.