Earnings Call: Q1 2017

May 11, 2017

Greetings, and welcome to the Celsius Holdings, Inc. Q1 2017 Earnings Call. At this time, all participants are in a listen only mode. A question and answer session will follow the formal presentation. As a reminder, this conference is being recorded. I would now like to turn the conference over to your host, Mr. Cameron Donahue, Partner of Hayden IR. Thank you. You may begin. Thank you, and good afternoon, everyone. We appreciate you joining us today for Celsius Holdings' Q1 2017 earnings conference call. Joining me on the call today are John Fieldly, Interim Chief Executive Officer and Chief Financial Officer and Vanessa Walker, Executive Vice President of Sales and Marketing. Following the prepared comments, we will open the call to your questions and instructions will be given at that time. We filed the quarterly reports with the OTC Markets and issued a press release today. All materials are available on the company's website atcelsius.com in 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 based on forecasts, expectations and other information available to management as of today, May 11, 2017. These statements involve numerous risks and uncertainties, including many that are beyond the company's control. Except to the extent required by applicable 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 disclosures contained in today's press release and our quarterly filings for the OTC Markets for additional information. With that, I'd like to turn the call over to John Fieldly for his prepared comments. John? Thank you, Cameron, and good afternoon, everyone, and thank you for joining us today. Our financial results reflect a solid start to our ongoing business operations in 2017. Our revenue for the Q1 was $6,000,000 a 63% increase over the Q1 of last year, driven by both solid domestic and international growth. Domestically, revenues increased 81% to a record $4,800,000 for the quarter, demonstrating strong demand for our products where we saw continued strong reorders from existing accounts and positive acceptance of the launch of our 2nd line in the product portfolio, Celsius Heat. This new trainers grade line launched in late March in Vitamin Shoppe and National Fitness Channel Distributors, major club chains and local studios. In addition, late in March, we launched a naturally sweetened and caffeinated Celsius line extension to broaden our reach in the natural channel. We are very excited about these 2 new lines, which are well positioned and are being have received great acceptance by retailers and customers. Internationally, we continue to maintain our market position as the number one fitness beverage and number 2 in energy according to Nielsen in Sweden and have continued our expansion into Finland and Singapore. With this growth, we continue our global expansion and are currently preparing for a Hong Kong launch in the Q3 of 2017 with our distribution partner, A. S. Watsons. Also during the quarter, our rebranding and repositioning took hold with the addition of adding a global Brandmark iconic C to our packaging and tagline CELSIUS Live Fit. This lifestyle rebranding is resonating well with consumers as we are pioneering our position as the leading global fitness drink designed for the active lifestyle. In addition, I'm proud to report that Celsius has received its 18th award. Celsius was named best functional drink at the recent 13th Innobell Global Beverage Congress Organization by Zenith Global and held in Frankfurt, Germany last month. We are honored to have Celsius selected as the winner among many products from around the world. This award further validates our vision and mission at Celsius. All of this momentum is laying a solid foundation for continued growth in 2017 and beyond. I am now going to turn the call over to Vanessa Walker, Executive Vice President of Sales and Marketing, to provide an update on our key growth drivers and new product launches. Thank you, John. We had a very exciting Q1. Our rebranding efforts took Kohl's and the brand experienced a surge of positive consumer and trade feedback as the new package debuted on store shelves early January. In mature retailers, the year over year reorders appear to show double digit growth and retailer scan data indicates the same momentum. The most significant aspect of the rebrand is a move to solidify Celsius' position as a fitness strength, an on trend lifestyle brand with mass appeal for consumption at any time of day for those who wish to live an active healthy lifestyle versus a quick calorie burning diet fix. The classification of diet or calorie burner or just healthy energy alone did not communicate the unique clinically proven attributes and brand benefits Celsius' proprietary formula provides. Just as tagline, Live Fit, calls consumers to take action to invest in themselves, alternate coffee, delicious that delivers, speaks to the brand's greatly improved taste profile and clinically proven ability to deliver the claims made on pack. Our pioneering of the fitness drink category has a clear advantage at retail as the trade is recognizing the consumer's desires to move beyond traditional, sugary or HFCS drinks in all categories. Retailers are seeking new ways to bring cutting edge function to their shelves. Directionally, the year over year sales growth at mature direct ship retail chain, e commerce and the fitness channel drove the growth Q1 last year. However, in addition to the repositioning and repackaging, there were 2 exciting introductions in the Q1. The first, the natural line extension of our flagship brand, which is naturally caffeinated and naturally sweetened and available in 6 flavors, 3 sparkling and 3 non carbonated. The natural line extension debuted at trade show Show West Expo in Anaheim, California the 1st week of March, as well as the launch of the 2nd product line in our portfolio, 16 ounce Celsius HEAT, also a dietary supplement. HEAT includes the Celsius proprietary thermogenic formula, Meta Plus Blend, which when combined with exercise is proven to accelerate metabolism, burn body fat and calories and provide energy. HEAT, however, also offers added caffeine and L citrulline, which is a vasodilator. The new Heat line is available in 3 flavors: inferno punch, blueberry pomegranate and cherry lime. We are excited with the initial orders and customer response from our national fitness channel distribution partners, major club chains and local studios. CELSIUS Heat was developed for athletic trainers, bodybuilders, military personnel and endurance athletes. It is sold outside the fitness channel in the Vitamin Shoppe retail locations and their website as well. In preparation for the seeding and selling of the 2 new product introductions, the team expanded with 2 new hires, Director of the Fitness Channel, Brian O'Lisciano, formerly of Glanbia Performance Nutrition and the Director of the Natural Channel, Paula Burke, formerly of the KIND Snacks Company. They will spearhead the launches of these new products in their respective channels. On an international front, Celsius new C logo mark and updated can graphics have been adopted by Singapore and Hong Kong and will be seen in both markets this summer. Plans are underway to work with our Swedish partner, Funk Foods, on evolving the can in the Nordic market to include the global brand market and other distinctive features in future packaging. These changes will bring together a cohesive branded appearance and positioning a fitness drink, staging CELSIUS brand for global expansion. I will now turn the call back to John to provide details on our financial results. John? Thank you, Vanessa. Total revenues for the Q1 of 2017 were $6,000,000 compared to $3,700,000 for the corresponding period in 2016. This 63% increase was driven primarily by an 81% growth in domestic sales, which was driven by blended growth rates of a 47% growth in retailer accounts, 237% growth in health and fitness accounts, where the product continues to resonate well. In addition, we saw an 88% growth in Internet retailer accounts. In addition, our international sales grew at a healthy 18% year over year. Gross profit for the quarter was 2,400,000 dollars or 39.7 percent of revenue compared to $1,500,000 or 41.3 percent of revenues for the corresponding period last year. The increase in gross profit on a dollar basis is primarily due to increases in revenue and reductions in cost of raw materials. The decrease in gross profit as a percentage of revenue is the result of a onetime charge of 235,000 associated with a write down of old packaging and fees associated with our new label changes. Excluding these onetime charges, gross profit increased 230 basis points or 2.3 percentage points to 42% compared to the prior year period. Operating expenses in the Q1 of 2017 increased $1,600,000 to $4,200,000 up from $2,700,000 in the prior year period. This increase was driven in part by an increase of 20% in sales and marketing from investments in human resources, warehousing costs and certain marketing programs. Increase in operating expense was also driven by an increase in general and administrative expenses, which included an extraordinary level of nonrecurring items during the first quarter of 2017. G and A expense for the Q1 of 2017 were 2,100,000 dollars compared to $875,000 in the Q1 of 2016. The increase in the Q1 of 2017 was driven by an increase of option expense, dollars 200,000 investments in human resources, professional fees and increases in research and development costs compared to the Q1 of 2017. In addition, the Q1 included Q1 of 2017 included onetime charges of 490,000 for CEO retirement and transition costs and $328,000 of stock based compensation for directors. The increase in general and administrative expenses was partially offset by reductions in travel expense. Total other expense was $48,000 for the Q1 of 2017 compared to $57,000 for the quarter in 2016. This modest decrease was a result of lower interest expense and lower outstanding balance. Net loss to common shareholders for the Q1 of 20 17 was $2,000,000 or a loss of $0.05 per share compared to a net loss of $1,300,000 or $0.03 per share basic or diluted for the corresponding period last year. Net loss attributable to common shareholders is inclusive of preferred dividends For the 3 months ending March 31, 2017 2016, the net losses include preferred dividends of $90,000 $86,000 respectively. Operating expenses for the quarter included noncash expense, including depreciation, amortization and stock based compensation, totaling approximately $787,000 compared to $258,000 last year. Adjusted EBITDA for the quarter, excluding onetime charges, was $322,000 a loss of $322,000 compared to a negative adjusted EBITDA of $886,000 for the corresponding period in 2016. Adjusted EBITDA for the Q1 of 2017 excluded non recurring items as discussed earlier, the $490,000 for CEO retirement and transition costs and the $235,000 for write downs and old packaging and fees associated with the new label changes. We believe information concerning adjusted EBITDA, a non GAAP financial measure, enhances overall understanding of our financial performance. A reconciliation of our GAAP results to this non GAAP measure was included in our earnings press release. Turning to the balance sheet. As of March 31, 2017, the company had cash and cash equivalents of $20,900,000 and working capital of 24,200,000 At this time, we believe our current cash balance will be sufficient to meet our anticipated cash needs over the next 12 months. Cash used in operations for the 1st 3 months of 2017 totaled $861,000 compared to 8 100 and $87,000 in the 1st 3 months of 2016. Before I turn the call over for questions, I would like to thank Tim Leisner, one of our Board members, for his service to the Board and company. Tim's last day on the Board was May 4. On behalf of the Board, management, shareholders, we thank Tim Weiser for his service over the last several years. And the interim term, to our next Annual Shareholder Meeting, I was appointed to his vacancy. On another note, we will be presenting at the upcoming 18th Annual B. Riley Company Investor Conference in Santa Monica on Wednesday, May 24. I encourage you all to attend. We look forward to meeting many of you. That concludes our prepared remarks. Operator, you may now open the call for questions. Thank you. Thank you. Our first question comes from the line of Paul Johnson, Private Investor. Please state your question. Paul, you may be on mute. I'm sorry, can you hear me now? Yes. Hi, Paul. Good afternoon. Good afternoon. Thank you. Yes. So I'm hoping if you can just help investors understand why we've had fairly sudden departures lately of key people. First, it was Jerry and now Tim Leisner. These are people who have been with the company for a long time. Tim, I think has invested a lot of money in the company. And while I appreciate you're thanking him for his help, that the elephant in the room is why would he suddenly depart so quickly? And I think you kind of need to answer those questions. The second question maybe related or maybe not has to do with the expansion to China. I think I'd add to in the last call why it's going to take so incredibly long to go to Mainland China when you have Watson as a partner because distribution is everything and we already have it. And the third thing related to that is why do we need all this cash if we're not going to be expanding into China and other areas. The sales are up big year over year, but sequentially they've been flat for the last few quarters. It's been sort of $6,000,000 $6,000,000 $6,000,000 dollars So anyway, I know those are unrelated questions, but if you want to take them 1 at a time, that would be great. Sure. Thank you, Paul. On the departures question, just starting off with Jerry. I think Jerry came to the company nearly on his 60th birthday. We all knew that this might be his last turnaround during that time. I'm not sure his retirement was a surprise to some folks. Over the last 5 years, he really built the firm's foundation for the company. We do have a solid infrastructure in place and the company couldn't be better positioned right now for the future. So that was unfortunately, it felt like it was his time. That's all I can really comment on that. In regards to the recent Board of Director change with Tim, he stepped down for personal reasons. We do have Chris Lai, who's taking his co chair role from Horizons. So we still have a great Horizons presence on the Board as well. So and that's just personal reasons unfortunately. So we'll continue to move forward with that solid with the management team that we have in place and our current Board of Directors. In regards to your comment in China, we continue to as I've mentioned on prior calls, we will continue to leverage the networks of our investors. As we mentioned earlier, we are preparing for a launch in Hong Kong with A. S. Watsons as that is our starting point, and we'll look at expanding at that point. I am not going to provide forward looking information at this point as we continue to move forward. But at this time, we are focused on a successful launch in the Q3 in Hong Kong with A. S. Watsons, and then we'll take it from there at that point. In regards to the private placement, which took place, we're going to we're using that to fund our global expansion as well as product innovation as well as our working capital needs. So a portion of that, those funds that were raised through the private placement will be utilized for these expansion initiatives in Singapore as well as Hong Kong and also allocated to some of the product innovation that we just most recently came out with Celsius Heat and our natural lines and also future innovation. Okay. Yes, I know you did answer the question. Thank you. I guess the only other question was just why those given how well things seems to be doing in all the various retail channels, particularly domestically, why have the sales and I know there's some seasonality, but why have the sales been sort of flat for the last three quarters? Yes. We continue to show great growth domestically. So when you look at our domestic front you look at the numbers we reported domestically, we continue to show great results domestically over double digit growth rates. And I might add that domestically, when you look at some quarter over quarter growth, which was mentioned last time on our prior call, domestically, we've grown on a quarter over quarter basis 37% when you look at 4th quarter domestic to Q1 results. So we are growing domestically. What is impacting the numbers is mainly our international revenues, which is coming mainly from our Swedish distribution partner. Over the last several quarters, as we reported, they've had some contraction on their inventory levels. We are seeing good results there. We expect good consistent ordering patterns going forward. But that has really impacted our overall top line revenue number as we look at our quarterly growth over the last several quarters. So when you look at just exclusively the domestic revenues, I think you get a broader picture of much better results on a quarter over quarter basis and year over year basis. Fair enough. Thank you. Just one more question about any news on possible NASDAQ uplifting? Not at this time except what we disclosed before. We continue to pursue. We have submitted our application as has been disclosed prior, and we'll continue to move through the process. At this point in time, that's all I have. Very good. Thank you. Thank you, Paul. Thank you. Our next question comes from the line of David Benson, Private Investor. Please state your question. Hello, Vanessa and John, it's David. Hi, David. Hi, David. So you've taken some significant time to prepare the Hong Kong launch. And I'm assuming a portion of that has gone into a sales and marketing strategy, in particular, a digital strategy. Do you feel like you have the digital piece and the advertising piece in place? And is that different from the United States? Could you describe that a little? Sure. I'll steal that question. With regard to Hong Kong, I happen to be heading there on Saturday morning 30 in the morning, I'm wheels up on my way to Hong Kong. We do have agencies in Hong Kong, and we have people on the ground in Hong Kong who are looking after the launch, as well we are partnering with our connections at Horizon who are helping us with press public relations and other trade and marketing events on a localized level that would speak more towards specifically the Hong Kong trade and press. So we do have a plan in place. We have a Hong Kong launch plan. We have an agency in place. We are localizing those events and we are creating digital awareness. Next week when I arrive, we'll be confirming and solidifying some of those plans, which will be then put into motion, as a teaser in effect, but the launch itself should be forthcoming in the beginning of Q3. So, we still have a bit of ways to go. However, we have creative plans and we do have excellent partners and we feel confident that we will have a nice launch. Great. And a follow-up question. Assuming the launch in Hong Kong goes well, would you then launch in China in total or would you do something like launch in and I'm going to mispronounce this, Guangzhou, which is just north of Hong Kong, which of course is highly populated. Have you laid any groundwork for how you would proceed in China proper based on what happens in Hong Kong? Well, China as a whole is an interesting place in terms of the launch. As you know, they go to business province by province. However, we have not made plans as of yet to discuss launch plans or timing for China. I'll turn that over to John. Yes. Thank you. And thank you, David, for your question. At this point in time, we're really just focused on executing Hong Kong. At this point, we have to pace ourselves as we continue to move forward. We are looking forward to following, as I mentioned before, our investors' networks. But at this point in time, the team is extremely focused on this Hong Kong launch, which we're very excited about. Great. Thank you. Thank you. Thank you. Our next question comes from the line of Drew Justman with Madison Asset Management. Please state your question. Hello. Thanks for taking my call. I guess I'd like to follow-up on some of the China questions. I haven't heard much of an update about Madame Wang and her distribution within China over the past couple of conference calls. Is there an update there? Has something changed? No, we continue as I mentioned before on the last call, I mean, we're really focused in on Hong Kong at this point and we're going to continue to move through the networks as we move forward. Our main focus at this point is really focusing in on that launch, that Hong Kong Macau launch. We're still working on continue to move forward with Singapore as well. So at this point in time, I'm not going to provide any forward looking information at this point in time. As information comes readily available, we'll put that out to the public. But at this point in time, we're really focusing on Hong Kong. Okay. I guess I'm confused why it was mentioned on prior conference calls then or in the Wall Street transcript. Madam Wang and the huge distribution opportunity in China was highlighted. So but now the company is not going to doesn't want to discuss that? We'll have to double check those transcripts. We are working. We've had talks with Madam Wang and we still continue to move forward, but we don't have any tangible information to disclose at this time. We continue to leverage the networks, but there is I don't have an update at this time. Okay, understood. The placement into 711 really did a nice job of kind of taking sales to another level higher. Without getting into specifics, is there expectation on the part of management that the Hong Kong launch can do a similar leg higher? I think with regard to Hong Kong, I believe that it will have a fantastic positive effect for the overall region and the sales of the company and the international sales of the company. And I believe with our contacts, as John mentioned, through our distribution partner, AS Watson, we'll be able to access the many key retail chains through their relationships. So we are anticipating that we will have a successful launch and that the product will I believe your question was, are we anticipating that it will do for us what 711 did for us in the United States? We don't know the answer to that, but we are planning for success. Understood. I just have a few more questions, if you don't mind. I'm a little surprised to hear Sweden mentioned being a little bit weak again. I thought maybe that was in the rearview mirror, but sounds like they've kind of brought down some of their inventories. Are there plans to for them to restock? Or is this kind of the going run rate now for Sweden? Thank you. It's really a timing of orders. We continue to maintain the number 2 position in energy and number 1 in fitness according to Nielsen. They actually based on the last report, they increased their market share and continue to perform very well in the region. So we expect them to continue to move towards a normalized ordering pattern. They have they came a little bit below our expectations in Q1, but we anticipate that to continue on as it has in prior years. Okay. Two quick questions from me then. Any update on Whole Foods? And I think the product was changed, so it could get placed in there. Is that still on track? The Whole Foods has been a target retail account for us and obviously it's the Holy Grail of the natural channel being a key anchor. As we set our sights in creating the natural line extension, we hope that we will deliver the ability to access new consumers, future consumers through the natural channel and anchor the Whole Foods chain nationwide. So we're pitching them and we will continue to set our sights on the buyer and the selling cycle and try to sell that in. As part of our overall strategy to tackle the natural channel with the new natural line extension. Okay. Thank you. Last question for me. Is any general timeline on when the permanent CEO might be named? Thank you, Drew. Just to give an update on that, the Board is currently reviewing their candidates. They're coming towards the more of the late routes. I don't have exact timing on that, but I know it's most likely to be in the near future. Okay, great. Thank you for taking my questions. I appreciate it. Have a nice day. Thank you, Julie. Thank you. Thank you. There are no further questions. That does conclude our question and answer session. At this time, I will now turn it back to Mr. John Fieldly for closing comments. Thank you. We are very encouraged by the Q1 2017 results. We continue to build a firm foundation for our future. We will continue to build upon our core business and leverage opportunities both domestically and abroad. Thank you everyone for your interest today in Celsius and have a good day. This concludes today's conference. Thank you for your participation. You may disconnect your lines at this time.