Earnings Call: Q4 2016

Mar 30, 2017

Greetings, and welcome to the Celsius 4th Quarter 2016 Earnings Conference 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. John Fieldy. Thank you, Mr. Fieldy. You may begin. Thank you. Good afternoon, everyone. We appreciate you joining us today for Celsius Holdings' 4th quarter and full year 2016 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 our annual report 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, which are based upon forecast, expectations and other information available to management as of today, March 30, 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 annual filings with 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. Good afternoon, everyone, and thank you for joining us today. 2016 was an outstanding year for Celsius. Our full year revenue grew to $22,800,000 was a record high for our company, representing a 32% increase over 2015. This growth is driven by both domestic and international performance. Domestic revenue grew 59% year over year It is a blend of growth from across all of our distribution channels. Retail accounts increased 70%. Health and fitness continues to grow, growing 51% as the product continues to resonate well with health minded consumers. In addition, our Internet retail accounts grew 26%. All channels of distribution continue to grow at double digit growth rates. As we discussed during the last quarterly earnings call, the increase in sales is being driven by increased volume, not increases in product pricing. This is a strong testament to our growing brand and the strong consumer appeal of our products. With this growth, we continued our global expansion in 2016 by securing international distribution in new markets, including Finland and Singapore and a signing of a distribution agreement with AS Watsons for expansion into Hong Kong and Macau planned later this year in 2017. Our distribution in Singapore was marked by an exclusive press filled launch party with local area retailers and buyers, key distributors and partners of our distribution partner, Yost. Our guests included trainers, nutritionists and enthusiasts from our fitness community in Singapore. Our business in Sweden stabilized during the Q4 as anticipated and our distributor in that region, People's Choice, returned to more normalized ordering patterns. In addition, Celsius continues to maintain its market share and also maintains the ranking as the number one fitness beverage in Sweden. All of this momentum is laying a solid foundation for continued growth in 2017 and beyond. As you may be aware, we recently completed a strategic investment of $15,000,000 led by Hong Kong based Horizon Ventures, a private investment arm of Mr. Li Ka Shing. The investor group also included leading Asian songwriter and singer, JEM and Z Ventures, the strategic investment arm of Razer, the world's leading lifestyle brand for gamers as well as 12 additional investors. In addition, this transaction was priced 20% above market at the time of the term sheet dating back to December 20, 2016, which signifies the continued confidence in Celsius by both our existing and new financing partners, which will help us continue to grow our brand, expand distribution and reach new consumers by leveraging their networks. With this recent financing round of strategic investors participating, we believe Celsius is positioned to become a strong player, particularly in the Asia markets. And we as we leverage these strategic investor networks. Our increased volume combined reduction in our cost of goods, improvements made to our promotional allowances and the operational leverage inherent within our business drove a higher gross profit margin for the full year in 2016 to 42.7 percent gross profits, which was 180% basis point improvement compared to 40.9% in 2015. We are committed to and continue to pursue additional opportunities to expand our margins as our business continues to grow. Early in 2016, our stock was uplifted to the OTCQX markets, which is the highest tier of the OTC markets, increasing our visibility with investors, providing transparent trading and convenient access to our news and financial disclosures. This move reinforces our commitment to transparency and providing liquidity for our investors. In addition, in 2016, the company filed a Form 10 registration statement with the SEC. As the company stands today, we are a fully reporting SEC registered entity, which continues to demonstrate the company's focus on improving investor confidence and disclosures. Subsequent to year end, our former CEO, Jerry David announced that he would be retiring from the company effective March 1, 2017. He will continue to serve as a consultant to the company through the end of the year. On behalf of the Board and employees at Celsius, we want to thank Jerry for his leadership and dedication over the last five and a half years, which has culminated with a tremendous turnaround of the Celsius business and positioned us to expand upon this success both domestic and abroad. With Jerry's retirement, I have been named the Interim President and CEO with the Board conducting its due diligence on potential long term replacements for Jerry. With that said, we are confident in our team that is in place as well as our strategic direction. With the additions of industry veterans at the beginning of 2016, including Vanessa Walker, our Executive Vice President of Sales and Marketing, who has joined me on the call today and will be providing an update on our significant accomplishments in 2016 as well as an update on key drivers going forward, both in our U. S. Market and internationally. With that, I'll now turn the call over to Vanessa Walker. Thank you. Thank you, John. As you mentioned, the company made a significant investment in early 2016 with not only the addition of myself and John McKillop, National Director of Sales for the fitness and military channels, but also with the addition of 3 Zone Directors and 2 National Account Executives prepared to take our domestic retail relationships and distribution pipelines to the next level. The impact and result of these additional human resources is a further focus to expand our distribution channels, which was a critical component to our success in 2016. Domestically in 2016, we secured national authorizations with 2 major convenience store chains for distribution in up to 8,000 stores nationwide. These key chain authorizations provide access to their major national wholesaler organization, McLean and Core Mark. McLean Company operates 21 grocery and 18 food service distribution centers, while Core Mark has 30 distribution centers located across North America. These new customers are 2 of the largest wholesalers in the nation and provide tremendous opportunity to access multiple channels and thousands of new potential stores, including the vast majority of convenience stores in the U. S. On a daily basis. Aside from new national wholesalers, we secured several new direct store delivery including Bernick's in Minnesota, Golden in Utah, S. Abraham and Sons and Nash Finch throughout the Michigan and Indiana areas and new fitness distributors, Muscle Foods, pyro, Elite Nutrition and Park Avenue. Another win within the fitness channel was an opportunity to test in over 100 Planet Fitness corporate locations. Celsius outperformed other energy brands to overtake the top spot and earn a place in cold coolers for all 300 corporate plant fitness locations with an additional opportunity to land the franchisee location, which number over 700. Aside from strides made opening distributor and wholesaler pipelines, servicing many outlets in traditional retail and fitness channels, we also secured distribution in over 550 U. S. Army and Air Force Base stores globally. Volume has been on a steady increase since the set in late October. Complementary to these new avenues of distribution, we increase the number and variety of products offered with the launch of 2 new flavors, Grape Brush and Watermelon. Both flavors were well received by customers with Watermelon reportedly moving into the top 2 fastest movers position within the fitness channel. These additional new flavors represented a material portion of overall domestic volume. In addition to securing distribution access in new international markets in 2016, we have finalized new formulations for Asia, solidified production facilities, are establishing an operational presence for increased unit sales and secured partner agencies for marketing tactics and future success. Throughout 2016, a rebranding effort was underway to reposition the brand as a healthy dual gender lifestyle drink for the masses. The new logo market package were finalized in November and new tagline Lids Fit is used to communicate our position as a pioneer and leader of fitness drinks, a new statement which capitalizes on all of the brand's unique proven attributes. Consumer packaging now clearly indicates on front of cans the features and benefits of accelerating metabolism and burning body fat while providing healthy energy. As consumers continue to focus on healthier ingredients, Celsius is now the fastest growing brand within the natural channel in the single serve energy and other functional beverage category as reported in Spin's 52 weeks ending onetwenty twotwenty 17. This fact demonstrates the progress we have made and the success of our turnaround. Expanding on the success of our original line within the natural channel of trade, we developed and launched a natural line extension to further meet consumers' changing demand. Announced 3 weeks ago, the new line has 6 flavors, is naturally caffeinated and naturally sweetened, non GMO, Kosher, Vegan certified, soy, gluten and sugar free. We expect the natural line extension to hit store shelves by April at Sprouts Farmers Market, it will also be available through KeHE Distributors LLC, one of the premium natural channel wholesalers throughout the U. S. We recently debuted the CELSIUS Natural Line Extension at the Natural Products Expo West March 9 through 11. We have laid the foundation for future growth by expanding our product offerings, broadening our channels of availability, distribution partners and routes to market and hiring talented team members to execute our strategy. Clearly, we are winning in the marketplace and are realizing the results of our efforts. We are committed to executing against this strategy again in 2017 to further expand our business. With that, I'd like to turn the call over to John to discuss our financial results. John, please go ahead. Thank you, Vanessa. Total revenue for the Q4 of 2016 was $6,300,000 compared to $4,300,000 for the corresponding period in 2015. The 47% increase was driven by 46% increase in international revenues as a result of our Swedish distribution partner, People's Choice, moving towards a more normalized ordering patterns and shipments as well as the shipment of our initial launch order to Yost located in Singapore. Domestic revenue, which also grew, was up 46% for the Q4 of 2016. This continued double digit domestic growth rate was derived from blended growth rates of a 53% growth from retail accounts, a 47% growth from health and fitness accounts and a 12% growth from Internet retailers. Gross profit for the quarter was 2.6 $1,000,000 or 41 percent of revenues compared to $1,700,000 or 39.1 percent of revenues for the corresponding period last year. This 190 basis point improvement in margin was driven by our continued focus on improving promotional allowances and our continued focus on implementing cost of good reductions. Operating expenses in the Q4 of 2016 increased $306,000 to roughly $3,000,000 up from $2,700,000 in the prior year. This increase was associated with an increase of roughly about $350,000 in general and administrative expenses, driven by higher option expense, increased administrative fees primarily from legal, which was partially offset by lower marketing expenses, driven by our shift of focus toward increased use of social media outlets and lower utilization of digital and print media during the quarter. Total other expense was $51,000 for the Q4 of 2016 compared to $58,000 the Q4 in 2015. Net loss to common shareholders for the Q4 of 2016 was 510,000 dollars or a loss of $0.01 per share compared to a net loss of $1,300,000 or $0.03 per share basic and diluted for the corresponding period last year. Operating expenses for the quarter included non cash expense, including depreciation, amortization and stock based compensation, which totaled approximately $370,000 compared to $405,000 in the prior year. Adjusted EBITDA for the quarter was a negative $140,000 compared to a negative adjusted EBITDA of $890,000 for the corresponding period in 2015. We believe that information concerning adjusted EBITDA, a non GAAP financial measure, enhances our overall understanding of our financial performance. A reconciliation of our GAAP results to this non GAAP measure was included in our earnings press release. Now moving to our 2016 annual results. Total revenue for 20 16 was a record $22,800,000 compared to $17,200,000 in 2015. This 32% increase was primarily driven by a 59% increase in domestic revenues and a 4% increase in international revenues. Domestic revenue growth for the full year was driven by double digit revenue growth across each of our distribution channels. This continued double digit domestic revenue growth was derived from blended growth rates of a 70% growth for retail accounts, where we're experiencing double digit growth rates in existing accounts as well as our continued expansion into the convenience store channel with our initial placement, which took place in 711 in early 2016. Our health and fitness accounts continue to perform well, growing 51% versus the prior year, led by strong growth from existing accounts and expansion in regional and national chains as well as a recent expansion into the Army and Air Force bases globally. In addition, our Internet retailer accounts mainly drive from Amazon continue to perform well and grew 26% versus the prior year. International revenue growth was primarily a result of our Swedish distribution partner returning to more normalized ordering patterns in the second half of twenty sixteen. Gross profit for the full year of 2016 was a record $9,700,000 or 42.7 percent of revenues compared to $7,000,000 or 40.9 percent of revenues for the corresponding period last year. The 180 basis point improvement in gross profit margin was the result of continued focus on improving promotional allowances and implementing and reducing our cost of goods. Operating expenses for the full year which increased $1,200,000 as well as investments in sales employee costs roughly around $1,500,000 and other related sales expense of $360,000 In addition, administrative expenses increased 730 dollars was mainly a result of increases in professional fees, Investor Relations, increases in human resources and travel related expenses. Total other expense for the full year 2016 decreased to $223,000 from $322,000 in the prior year as a result of lower interest expense. Net loss to common shareholders for the full year 2016 was $3,400,000 or $0.09 per share basic and diluted compared to a net loss of $2,600,000 or $0.08 per share basic and diluted for the full year in 2015. Net losses are the losses attributed to common shareholders and are inclusive of preferred dividends. For the full year ending December 31, 20162015, the net losses included preferred dividends of $366,000 $421,000 respectively. Operating expenses for the full year 20 16 included non cash expense, including depreciation, amortization and stock based compensation, which totaled approximately $2,200,000 compared to $2,000,000 in the prior year. Adjusted EBITDA for the full year of 2016 was a negative $1,200,000 compared to a negative adjusted EBITDA of $524,000 for the full year in 2015. Turning to the balance sheet. As of December 31, 2016, the company had cash and cash equivalents of $11,700,000 and working capital of $15,400,000 At this time, we believe our current cash balance with the inclusion of our recent strategic investment will sufficiently meet our needs cash needs as anticipated over the next 12 months. Cash used in operations for the full year 2016 totaled $2,400,000 compared to cash used in operations of $755,000 in 20.15. That concludes our prepared remarks. Operator, you may now open the call for questions. Thank you. Our first question comes from the line of Drew Justin of Madison Asset Management. Please proceed with your question. Hello. How are you guys? Doing well, Justin. Good, good. Yes, I have two questions. One, can you explain, I guess, the sequential slowdown in revenue growth versus the prior quarter? And then maybe some comments on long term, when the company hopes to become profitable on a GAAP basis? Okay. You, Justin. On a sequential basis, it's really timing in regards as we look also affecting seasonality of the product and also timing of shipments. We are seeing good growth rates as we indicated double digit growth rates. All our channels of distribution are growing versus the prior year. We are quite pleased with what we're seeing in regards to turns and shipments going out. So this is mainly the sequential growth was really affected by timing and seasonality within orders as well. As we look for profitability, as we look to move forward with the investments that we have, recent investment, we are looking to invest and continue to build upon the overall brand in Celsius. Obviously, we know that the focus our focus truly is to drive revenue. We've demonstrated back in 2015, we can operate Celsius as a profitable entity. But with the investments today, we're looking to put those investments to work very strategically to continue to build our top line revenue where we can take advantage of that Our next question comes from the line of Paul Johnson, a private investor. Please proceed with your question. Yes. I have a few questions. First question is, what is the fully diluted share count including the $13,000,000 or so warrants? Thank you, Paul. In regards to the warrants, we don't have any warrants referencing options, which are mainly employee options, I believe. And if you look at our fully diluted basis, we currently have, with the recent round of financing, we're roughly around 44,000,000 shares of common stock outstanding. We have about 9,000,000 shares of convertible preferred into common and roughly about 5,000,000 shares that are outstanding. And mainly, like I said, those are mainly employee options throughout the organization. So fully diluted shares would be roughly around $58,000,000 sorry, 58,000,000 shares. Okay, understood. Second question is, how hard would it be for a competitor whether, I don't know, a Red Bull or a Monster or anybody else to create a product that's substantially similar to your main product? Well, Paul, I'd like to answer that question in regards to we've been around for 13 years now. We have a 1st mover advantage. Nestle created a product that burned calories many years ago when Celsius first launched called Enviga, that was unsuccessful. We have made inroads and traction. Consumers have we continue to adopt new consumers to the brand. We do have 7 clinical studies that are validated and published in peer reviewed journals. We feel very confident about our within the marketplace. Okay. Well, right. You haven't really answered the question, which is how hard would it be for someone to create a similar product. I mean, obviously, a Red Bull or Monster has huge penetration. So getting the product sold wouldn't be an issue for them. It's more obviously, there's nothing particularly proprietary about the ingredients. I'm just wondering, are you seeing, for example, competition coming up from some of these other companies creating a product that's substantially similar? Not at this time in the space we operate and conduct business in, but there is competitors in different forms when you look at other products within some of the health and fitness organizations that are out there like GNCs and Vitamin Shops, but it's in a form of usually powder or a tablet. Understood. And the last question is, thank you. Why can't we accelerate the growth into China? I know that with AS Watson and having them as investors is awesome. Why can't why are we only doing Hong Kong and Macau later this year? Why can't we get into Mainland China much sooner given AS Watson has whatever it is 15,000, 20000 stores in China? That's a great question, Paul. Thank you. We have to we are as we indicated with the strategic round of financing, we are looking to leverage our investors networks, which we will. Our initial move is to focus on Hong Kong and Macau, which is a great opportunity for us where we're able to gain immediate distribution and also will allow us to continually build the brand across Asia. So we are focused on doing that in a matter of just time as we and move towards our execution plan. But right now, we are focusing in on Hong Kong and Macau with A. S. Watson with the signing of their distribution agreement, which we're looking to launch later this year. Which is very exciting. And again, I understand if you're taking it sort of piece by piece, but is sort of a goal, if all goes well, to go into Mainland China with Watson? Right now, we're just focusing on Hong Kong and Macau. Okay. Fair enough. Our next question comes from the line of John Acevedo, a private investor. Please proceed with your question. Yes. Thanks for taking my phone call. I'm a private investor. And I wanted to know what role Madame Wang is going to be playing in the next 24 months? And also, have you achieved saturation in terms of distribution domestically, for example, in all the 7 Elevens and all the ShopRite and all those main stores nationally? Okay. Thank you, John. Actually, I'm going to turn that over to Vanessa, who can talk about the sales and marketing components there. So Vanessa? Okay, great. Thank you so much. Your first question about the sales and marketing saturation of 711. 711 is as you know or may not know 90% franchise owned. So our saturation level has not been met at 100%. In fact, we're nowhere near, but we are doing so well in 711 that over the fall, they introduced us into a healthy case study that management will be following. Additionally, they announced over the summer that we had made it into the fall set for the winter. And then this year, they announced that they would be with us again all year this year in the planogram with shelf space dedicated for Celsius. So we're doing quite well there. But as you know, in a franchise owners organization, there's many doors to knock on. So we still have coverage and gains to be made by penetrating even more of the stores. With regard to Maine, I believe that was your question was Shaw's, is that correct? Or there was another supermarkets you asked about in Maine? No, New Jersey, the ShopRite. And then of course, I mentioned the what role I asked what role Madame Wang will have in the Asian distribution. Okay. So in New Jersey, with regard to ShopRite, we have been selling well in ShopRite. We've just got an appointment in ShopRite, but we'll be able to talk about the future of 2017 as we report the Q1 in 5 weeks. But I think with regard to penetration in the New Jersey area, our team is getting up and running and we have a dedicated selling organization in the Northeast now that we mentioned in terms of staff and putting a staff in place and dedicating human resources over the past year. So we're putting our bodies in place so that we can open up more And Josh, to answer your last question your question in regards to the distribution partners throughout Asia as we look to you, we're still solidifying those at this time. So really the focus of us right now is leveraging ASWatson's network as we look to launch in Hong Kong and Macau. Thank you. We have a follow-up question from the line of Paul Johnson. Please proceed with your question. Yes. Just to follow-up on what the prior caller asked about in terms of saturation. Have we had any success getting into Costco, for example, or Walmart or any of the larger national chains? So the Walmart chain would not be a place that I would suggest that a brand at this stage in their life cycle would approach. Walmart will tell you on an appointment in beverage that we don't build brands, we sell them in volume. So the first question would be, how many years old is your brand? What percentage of ACV do you have throughout the United States? And if we brought you on tomorrow and our pipeline order was 10,000,000 cases, what percentage of your business would that represent? And they would be hesitant to bring on a brand where they would be 40% of their business or more right off the bat. So we have a ways to go before I would approach Walmart. A strategy before approaching Walmart would be to feed ourselves well in the natural channel, because the natural channel retailers, they want to know that your product does not carry at Walmart before they bring you on board. And there's a timing and sequencing there that would serve us better than approach Walmart now. Additionally, with the club channel, as we are rebranding and we repositioned and we're getting out there and we're building our brand image, we would have to be very selective as to the clubs where we could sell in bulk and meet their minimum thresholds and hurdles because the case pack is so large. So as people are coming into the brand franchise every day and finding Celsius for the first time, they may try that single serve can, but it would not be an advantageous time at this point in the brand lifecycle to attempt to sell in bulk in Costco. That would again be something for a little bit later on in the brand lifecycle. Makes sense. Thank you. Thank you, John. Our next question comes from the line of David Benson, a private investor. Please proceed with your question. Hi, you guys. Thank you for all your hard work. I have a question about your relationship with People's Choice and the Sweden, Finland market. Is there a way to leverage that relationship and the strength of your brand in Sweden and Finland in order to reach Germany and the rest of Northern Europe? Dave, thank you. Thank you for calling in. That is a great question. And we are looking at a variety of opportunities here as we look to continue to grow this brand as a global organization. As we stand here today, we have a lot of opportunities to leverage our partners' networks And that's one thing we are working towards is aligning our distribution with our partners to allow for a global expansion. So that is an opportunity for us that we are looking at. Wonderful. Can I ask a follow-up question? Sure. The Celsius heat product, I love that. Is that going to help you in the convenience chain, 711, Sunoco, etcetera? Have they shown an interest in bringing the Celsius heat product into those channels? That's a great question. I'll turn that over back over to Vanessa to talk about our new HEAT product line extension. We are very excited about HEAT. So thank you very much for bringing that up. Our initial launch plans include rolling out through the fitness and military segment as well as in the vitamin specialty segment, which has been core to our business on the original Celsius line. We are going to follow that and walk before we run. We want to see the take rates, the reorders, the preferences of flavors. Selling season for the convenience store channel is really August through December. By the time that we get to selling season for 2018 planogram sets, we should have the answers to those and we will create a selling strategy and plan to launch inconvenience where it makes sense. But our initial plans will be to cover up the fitness channel, military and vitamin specialty. Excellent. Thank you so much. Thank you. Thank you. We have no questions over the audio portion of the conference. I would now like to turn the conference back over to management for closing remarks. Thank you. 2016 was a pivotal year where we built a firm foundation to build upon our future. We will continue to build upon our core business and leverage opportunities both domestically and broad. Innovation and execution will define our future. Thank you everyone for your interest in Celsius and thank you for your time today.