Celsius Holdings, Inc. (CELH) Q3 2017 Earnings Report, Transcript and Summary

Greetings, and welcome to the Celsius Holdings Incorporated Third Quarter 2017 Conference Call. [Operator Instructions]. I would now like to turn the conference over to your host, Mr. Cameron Donahue with Hayden IR. Thank you. Please begin.

Thank you. Good afternoon, everyone. We appreciate you joining us today for Celsius Holdings Third Quarter 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 have filed our quarterly report with the SEC and issued a press release 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 this call may contain forward-looking statements which are based on forecast, expectations and other information available to management as of today, November 08, 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 with the SEC 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. Thank you for joining us today. The third quarter was a highly productive and eventful quarter at Celsius. Consolidated revenue grew to a record 10.8 million growing more than 60% year over year, our financial results reflected a continued momentum in our ongoing business driven by both similar gains in domestic and international operations and importantly we're maintaining our gross profit margins in excess of 40% as we continue to focus diligently on managing and controlling costs. Our branding efforts continue to take hold pioneering our position as a lifestyle brand with mass appeal for consumption at any time of day and for those who wish to live an active and healthy lifestyle. Our tagline Live Fit, continues to resonate well with consumers and causes consumers to take action to invest in themselves and our pioneering position in the fitness drink category has a clear advantage at retail as the trade recognizes the consumers' desire to move beyond traditional sugary drinks in all categories. Retailers are seeking new ways to bring cutting-edge function to their shelves. We feel we are well positioned to capitalize on this movement which is demonstrated from consumer demands and our financial statements. Our domestic growth is being driven by demand for our products as reorders remain strong and the brand continues to build momentum as a leading proven fitness drink for the active and health-minded consumer. In addition our new trainer great formula Celsius Heat and our new natural line extension continues to be well received by customers and consumers and reorders received in the third quarter indicate these lines will contribute meaningfully to future revenue streams. On the international front our Swedish distribution partner continues to perform well and most recently in the third quarter just introduced two new flavors, dragon fruit and orange pomegranate which tastes great and were well received in the marketplace. In addition our international expansion continues in the Asia market we expanded our product placement in Hong Kong through our distribution agreement with A.S. Watson industries, a member of a A.S. Watson Group, the largest international health and beauty retailer in Asia and Europe. Through this arrangement we expanded to over 700 points of initial distribution in Hong Kong and our Hong Kong team aims to increase our market share by broadening the reach of our brand across the region. Initial consumer response and feedback has been overwhelmingly positive and signals our plans for broader product distribution throughout the region are in line with market opportunities. Most significant during the quarter was the commencement of our products in China through our partnership Qifeng Food Technology, an international wholesale distributor of food and beverages. Qifeng's network of distributors, national expertise and proven ability to execute provides us with a strong channel to increase our exposure and speed the market in a region that we believe will provide us with significant future revenue. In the quarter we executed against our plans for significant expansion in Asia to build upon our momentum and establish additional channels for growth in coming quarters. We've successfully commenced local manufacturing and entered the China market in September with our national distributor in over 30 thirty cities across 14 provinces some Tier 1 initial cities included Beijing, Guangzhou and Shenzhen with national distribution plan for the summer of 2018. I will now turn the call over Vanessa Walker, Executive Vice President of Sales and Marketing for her prepared remarks.

Thank you, John. The third quarter was a significant quarter of double digit growth within the fitness channel where the tactical launch of our Celsius Heat line was executed to plan through broader distribution within the channel's key fitness distributors and major club chains throughout the U.S. The Phase 1 launch flawlessly executed by our newly formed fitness channel national sales team bolstered by the addition of a new hire, an industry veteran assigned to the West Coast. Q3 Phase 2 launch of Heat for existing fitness customers included an offering of two new SKUs, strawberry dragon fruit and tangerine grapefruit. The second phase drove broader penetration as the acceptance of these two new SKUs brings availability and most fitness channel pulled equipment to five flavors of Heat. Phase 2 also began initial shipments into the military AVs and MCX [ph] the Marine Corps exchange. Military buyers were excited to see the new line given the success of the original line which has exceeded goals and expectations within the military points of distribution. Also in the third quarter the Phase 2 launch opened Heat availability for the traditional retail channels and subsequent routes to market with offering to direct store delivery or DST customers who service these convenience stores. Our DST partners in key states such as Texas, California, the Twin Cities, Nebraska and Florida committed to bringing on the Heat line with shipments beginning at the tail end of the third quarter. Retailer GNC also placed initial orders for the original SKUs as the Vitamin Shoppe chain brought in the two newest flavors alongside the three initial they authorized in the second quarter. Also for the Celsius Heat brand and the original line Celsius debuted a new trade show booth including the C logo to brand fan that one of the bodybuilding's biggest annual draw Mr. Olympia in Las Vegas. Flo Rida was on hand and to celebrate his birthday with Celsius fans at our booth and also to kick off the newly unveiled proven campaign. The proven campaign is a nod to Celsius' clinically proven benefits and also the initial phase of the campaign Flo Rida, a multi-platinum recording artist who has proven in his own right. This marks the first Celsius Heat specific advertising campaign which integrates Flo Rida's physical prowess and the brand's proven thermogenic pre workout benefits. Flo Rida will further collaborate with the company as Chief Ambassador of the newly created Heat Elite program. They Heat Elite program will be comprised of a group of winners who will be representative of this trainer's grade version of Celsius. The program will feature these hand selected influencers with content which drives awareness through authentic and credible brand building. The first of several outdoor advertisements with Flo Rida's likeness and image of the new Heat can and the tagline proven will appear together on billboards which have launched in Miami and Dallas. New doors existing door velocity growth, new flavors, great taste and innovation for the new Celsius Heat are all driving new growth within the company third quarter. Aside from the significant gains in the fitness channel and presentations to the C-Store channel to e-commerce platform continues to be an impressive growth driver of the brand which will again sees double digit increases in the third quarter. New.com business began as the naturals line also debuted on Amazon in the quarter creating first time availability for those natural lifestylers desiring the brand. Walmart.com began with an initial order in the third quarter and Celsius Heat debuted on bodybuilding.com, a site which is a go to for fitness enthusiast who look to the site as an endorsement establishing credibility for our new product line. The Celsius team grew in the third quarter with strategically placed new hires in Minneapolis, Greater Chicago and Brooklyn bringing sales expertise from the likes of Nestle, Coca-Cola and WTRMLN WTR. Aside from conducting many national sales roadshows designed to educate all employees, brokers and distributors in key regions the team attended several major consumer and events in the third quarter. In addition to attending the fan based Olympia show in Vegas the team also attended the Expo East Show in Baltimore, the natural show growing in popularity with over 25,000 attendees was the first for the Celsius team. We debuted the natural line to East Coast retailers and distributors alike. Also debuting at the show strawberries and cream and orange pomegranate which round out the line to three carbonated and three non-carbonated SKUs on the natural line. Customer channels broadened in the third quarter with initial shipments for Vistar the nation's largest vending distributor commencing. Office Depot, a new customer began pulling product from Vistar in the third quarter making Celsius available through the Office Depot online to any entity ordering a delivery for their workplace Vending micro markets added additional revenue in Q3 as the brand successfully passed an initial test in glass front events [ph] in Southern California. Aside from the cold single serve availability and sales revenue that vending wins can provide the brand ambassador teams conducted more than 150 demonstrations in stores and more at events and sites targeting consumers who wish to live fit in the third quarter. Another exciting consumer experiential event series [ph] with Celsius' participate and sponsorship in the Tough Mudder event obstacle course races. Celsius' participation spanned 11 cities and created brand awareness sampling an average of 10,000 consumers per event. Latest 52 week ending 10/8/17 for the category shelf stable and subcategory other functional beverages for the Mullo Channel [ph] which is food, drug, math club and [Technical Difficulty] percent dollar growth for brand Celsius. For convenience same time frame [indiscernible] reports a 60% dollar growth. Within the natural channel which does show some same store sales given retailers which carry the original line last year do report in a 91% dollar growth was also reported. That's it for the sales and marketing update. I will now turn the call back to John to provide details on our financial results. John?

Thank you, Vanessa. Total revenues for the third quarter of 2017 was record 10.8 million compared to 6.7 million for the corresponding period 2016, this 62% increase was driven by a 73% growth in international revenues namely from our Swedish distribution partner and Asia distribution partners. Domestic sales increase of 54% was driven by a blended growth rate of a 47% growth in retail accounts mainly derived from existing growth in existing reach out and additionally we had a growth of 67% in our health and fitness accounts and a 59% growth in our Internet retailer accounts. Consistent with prior quarters the increase in total revenue was mainly primarily attributable to increase in sales volume as opposed to increases in product pricing. Gross profit for the quarter was 4.7 million compared to 2.9 million for the corresponding period [Technical Difficulty] were 43.3% of revenues for the quarter, increasing gross profit was primarily due to increases in revenue. Operating expenses in the third quarter of 2017 increased 3.4 million to 6.3 million up from 2.8 million in the prior year period. This increase was primarily driven by $3 million increase investment in sales and marketing for the third quarter of 2017. The majority of which was a result of investments in Asia and increases in investments in the U.S. market associated with marketing programs, investments in human resources increases in warehousing costs. Operating expenses were also higher during the quarter due to increases in general and administrative expenses as an absolute dollar basis, as a percentage of revenue gross G&A expenses were lower year-over-year at 14.5% for the third quarter of 2017 compared to 16.2% for the third quarter of 2016. The 478,000 year-over-year increase with G&A on a dollar basis was primarily driven by increases in option expense, 294,000 investments in human resources of 83,000 and increases in research and development cost roughly around $79,000 compared to the prior third quarter 2016. Total other expense decreased to 37,000 for the third quarter of 2017 compared to 58,000 for the third quarter of 2016, this decrease was due to lower interest expense and lower outstanding debt balance. Net loss to common shareholders for the third quarter of 2017 was 1.7 million or $0.04 per share compared to a net loss to common shareholders of $93,000 or about $0.00 per share for the corresponding period last year. Net income and net loss attributed to common shareholders is inclusive of preferred dividends for the three months ending September 30, 2017 and 2016 the net numbers include preferred dividends of approximately 92,000 and 103,000 respectively. Operating expenses for the quarter include non-cash expense including depreciation, amortization and stock based compensations totaling approximately 734,000 compared to 472,000 last year. Adjusted EBITDA for the quarter was a negative 980,000 compared to positive 378,000 for the corresponding period of 2016. For comparative purposes adjusting for the investments in the Asia related markets adjusted EBITDA was a positive 1.1 million or an increase of 711,000 over the same period last year. We believe this information concerning adjusted EBITDA and non-GAAP financial measure enhances our overall understanding in our financial performance. A reconciliation of our GAAP results to this non-GAAP measure was included in our earnings press release. Now turning to our year to date results, for the nine months ending 2017 revenues increased 64% to 27 million as a result of blended growth rates of a 60% growth in international revenues and a 66% growth in domestic sales. Our domestic sales increase as a result of a 42% growth in retail accounts and 136% growth in health and fitness and 86% growth in our Internet retailer accounts. Gross profit for the first nine months of 2017 increased 62% to 11.6 million or roughly 43% gross profit margins as compared to 7.2 million or 43.4% of revenues for the year ago period. Operating expenses for the first nine months of 2017 increased 4.9% to 14.5 million up from 9.6 million in the prior year period. This increase was driven by $2.6 million increase in sales and marketing and a $2.3 million increase in general and administrative expenses. Total other expenses for the first nine months of 2017 was 122,000 compared to 171,000 in the first nine months of 2016, a decrease of 49,000 as a result of lower interest expense and a lower outstanding debt balance. The company's net loss attributed to common shareholders for the first nine months of 2017 was a loss of 3.3 million or negative $0.08 per share basic and diluted to compared to a net loss of 2.9 million or a negative $0.08 per share basic and diluted for the comparable period in 2016. Operating expenses for the period includes non-cash expense including appreciation, amortization and stock based compensation which totals approximately 2.4 million compared to 1.8 million last year. Adjusted EBITDA for the first nine months of 2017 was a loss of 175,000 [Technical Difficulty] for Asia expansion compared to $1.1 million loss in a year ago period adjusting for investments in Asia launched related expenses for comparative purposes are adjusted EBITDA of 2.4 million for an increase of 3.5 million over the comparable period last year. Now turning to the balance sheet, as of 2017 the company had cash and cash equivalents of 19.4 million and working capital of 24.9. 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 first nine months of 2017 totaled 3.3 million compared to 2.3 million in the first nine months of 2016. One final note we probably open the call up for questions is that we will be presenting at several upcoming investment conferences throughout the end of the year which include the Maxim Group's Innovative Leaders and Beverage Conference being held November 9, the LD Micro conference being held December 6 and the Sixth Annual Ross Utah Active and Healthy Lifestyle Leisure Corporate access events [ph] being held December 7th and 8th. Any investors planning to attend those events we look forward to speaking and seeing you at the events. That concludes our prepared remarks. Operator you may now open the call for questions. Thank you.

[Operator Instructions]. Thank you. Our first question comes from the line of Jeff Van Sinderen with B. Riley. Please proceed.

Maybe you can speak a little bit more about China, the launch there if you would I guess how you're thinking about that, how you're approaching that in the early days and any more you could give us on the reaction to products so far, any early learnings there and then also if there's anything else to add on the Hong Kong extensions?

Sure. Thank you, Jeff. It's been a long time coming to finally get to this point where we have products in China. It's a very exciting time for us. We have worked on commencing production locally. We've sourced to actually two facilities now that are qualified to produce product and the initial shipments started taking place in late September. So we are very confident in Qifeng Foods and our partnership with them with their experienced team that truly knows the market. They come from a variety -- their team members are very experienced from Johnson & Johnson to Nestle, to Pepsi, from Red Bull and really have expertise in the marketplace we are leveraging. It's very exciting seeing product now in shelves in Beijing and Guangzhou and Shenzhen a variety of other cities. It is a little bit too early for us just initially launching with a full launch schedule for the summer of 2018. So at this point we're seeing initial feedback in some of the marketing activities were we are conducting a variety of sampling activities and local events as well as some tactical social media marketing and sponsorships to support the initial launch but I will tell you that the initial feedback has been extremely positive with the product and in regards to Hong Kong we do have a team in place, we have a team of five currently that is overseeing the operations. We're now in park and shop in 7-Eleven over about 700 locations and growing, it does take time as we continue to scale and build a mass and a consumer base but initial feedback is extremely positive in both cities and we really have really good partners we couldn't be able to do this without our partners in Hong Kong led by A.S. Watson and their organization being one of the largest water distributors in country and then in China with Qifeng Foods and their network of distributors underneath them. So at this point it's a little bit premature but we are very excited on the initial feedback we are receiving.

And then maybe you could speak a little bit more to the latest trends you're seeing in Sweden it sounds like that continues to grow well and then maybe how you're thinking about geographic expansion to other parts I mean into Europe that sort of thing.

Sure. In regards to Sweden we are seeing really strong growth, the market continues to grow Celsius is growing with the market, sales are up according to Nielsen as of October on a 52 week they are up almost 20%. In two new flavors were well received by the consumers. We have a very strong presence in Sweden that is transitioning over into Finland where we launched last year and the feedback is very positive. As we look forward on European expansion we look to leverage our partnership with our master distributor with Qifeng Food and leverage the awareness and true culture that is really adaptive to Celsius brand and we will look to leverage that as we continue to grow over the years throughout Europe. As you know we started production in two facilities in our second facility we turned on in early 2017 so now we are producing with two locally sourced facilities one in Germany and one in the Netherlands so the scalability is readily available and easy to go to market.

And then in the health and fitness channel you experienced rapid growth there. Maybe you can give us a little more in terms of what triggered that growth to -- it sounds like Heat is doing relatively well, any other comments on Heat would be helpful too.

Sure, absolutely. The health and fitness channel is truly nucleus for brand. We continue to see great growth in the health and fitness channel coming from a variety of different channels from the gyms, to specialty which is really is truly the nucleus which came out into retail opportunity as the product becomes more mainstream and readily available. The growth continues organically in our core line as well as the Heat line, where our trainer grade formula has been well received and the brand equity has truly transferred over and the most recently in regards to Heat and Vanessa chime in as well here in regards to the most recent excitement of bringing Heat into the convenience channel as well as. Vanessa would you like to make some comments in regards to the what we're seeing with the Heat and core line fitness channel?

Sure. With regard to the fitness channel growth, one of the pillars of the growth thus far has been the strengthening of the distribution network into the fitness channel. As that distribution networks begin to become stronger, more stable we think the mergers and acquisitions between Europa and One Star [ph] two of our largest partners, as that begin to grow and flourish they're taking us with them. The distribution strength has you know doubled in size and capacity basically into the channel. So as John mentioned as we rolled out the [indiscernible] we borrowed the brand equity in the new iconic C which was created this year for the original brand on package in January of 2017 and so subsequently is adorning the thing, the back of the same thing [ph], and so the equity transferred over and so we gained a lot of trial from people who are already within the franchise and new to the franchise who began to see the brand as a larger brand with more cooler space and for the brand got larger and looked like a larger more formidable player within the fitness channel and as part of our launch plan Phase 1 as I mentioned on my part of the call was to watch [indiscernible] and fitness channel and take it to military and the vitamin shop and Phase 2 throughout the third quarter was to present it to convenience store, retailers and distribution partners for sale in the convenience channel and those presentations have been going on throughout the third quarter and in the third quarter it was met with it was warmly received based on the success of the original brand in the convenience channel.

[Operator Instructions]. Our next question comes from the line of Richard Hillard [ph], Private Investor. Please proceed.

I've been a stockholder for well over eight years and is -- Celsius at the [indiscernible] store here in Pinehurst, North Carolina. Can you tell me if there is much discounting needed you expand in all these new markets? Thank you so much.

Thank you Richard and thank you for being a supporter and I will tell you in regards to the discounting that's one thing the management team here has been very focused on and I think that is demonstrated by our ability and maintain and improve our gross profit margin over the last several quarters and years, that's truly a focus of the organization is to continue to build and scale and maintain costs. In regards to entering new markets there will be certain markets that require slotting or certain retailers that require traditional slotting and we do offer periodic promotions and promotional schedules but we are very cognisant as a management team to continue to build this business and maintain our gross profit margins.

Thank you. We have reached the end of our Q&A session. I'd like to hand the floor back over to management for closing remarks.

Thank you. Our third quarter results demonstrates the excitement and demand for our products. We look forward to building upon our financial results as we execute against our strategic plans. Celsius is now a global company and well positioned to capitalize on today's global trends. Our healthy active lifestyle position is a global position with mass appeal. Our initial seeds have been placed and we're building upon our core business and leveraging opportunities and deploying best practices both domestically and abroad. I'm very proud of our dedicated team and I thank our investors for their continued support. Thank you everyone for your interest in Celsius and have a great day.

Thank you. This concludes today's teleconference. You may disconnect your lines at this time and thank you for your participation.