Greetings, and welcome to Celsius Holdings Second Quarter 2018 Earnings Conference Call. [Operator Instructions] As a reminder, this conference is being recorded. I would now like to turn the conference over to your host, Mr. Cameron Donahue with Hayden IR. Thank you. You may begin.

Thank you. Good afternoon, everyone. We appreciate you joining us today for Celsius Holdings Second Quarter 2018 Earnings Conference Call. Joining me on the call today are John Fieldly, President and Chief Executive Officer; and Edwin Negron Carballo, Chief Financial Officer. Following 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 that this call may contain forward-looking statements, which are based on forecast, expectations, and other information available to management as of today, August 9, 2018. These statements involve numerous risks and uncertainties, including many that are beyond the company's control. Except to the extent as 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 President and Chief Executive Officer, John Fieldly, for his prepared comments. John?

Thank you, Cameron. Good afternoon everyone and thank you for joining us today. Before I get started, I would like to welcome Edwin Negron Carballo, our newly appointed Chief Financial Officer, who joined up last week. He brings more than 30 years of financial and operational experience to our organization. Edwin is well versed in U.S. GAAP, international financial reporting standards, having worked as a CPA for many years with significant experience in mergers and acquisitions. We are pleased to have you join our team and look forward to you applying your experience to our operations. Edwin, welcome. Now, turning to our second quarter. We further advanced our distribution and expansion strategy across all of our regions, in number of large retailers, convenience stores, and new channels of distribution were brought online, both domestically and internationally, further increasing our availability and visibility for our portfolio of premium fitness beverages. With innovative products and compelling packaging, we have reached more and more consumers each and every day. Our target sales strategies are bringing Celsius to new channels, increasing product availability and our targeted marketing strategies are introducing new customers who are embracing and enjoying our great tasting, proven fitness drinks. Our strategy of positioning Celsius as a global beverage leader for health minded consumers remains our top priority. Domestically, Celsius continues to gain great acceptance. Revenue increased nearly 30% to a record $8.5 million in the second quarter where we continue to see strong growth in existing accounts, despite a temporary production delay, which caused a significant shift of nearly $1.3 million in sales from the second quarter of 2018 to the third quarter of 2019. We managed through these timing delays and production and delivery of our product has stabilized. In addition, domestically, we were focused on ensuring we can…

Thank you, John. Total revenue for the second quarter of 2018 was $9.3 million compared to $10.2 million in the second quarter of 2017. The 9% shortfall was mainly attributable to the timing of sales, as John discussed earlier. Looking now at the results by geography. North America sales were up a robust 29% year-over-year due to growth in existing accounts and new distribution expansion. In Europe, the normalizing of inventories translated to a 78% slowdown in sales, as our customer reduced orders in the second quarter of 2018. And in Asia, sales decreased due to the timing of orders and the application of promotional discounts provided interest in the quarter. Although gross profit for the second quarter of 2018 reflected a decline of $585,000 or 13% to $4 million, our margins remain very healthy at 42.8% of revenue. This compares to $4.6 million of gross profit in Q2 2017, which also delivered healthy profitability of 44.6%. The decline in gross profit dollars was the result of lower volume, while profitability was affected by the slotting fees and other similar charges in the international markets. Selling and marketing expenses for the quarter ending June 30, 2018 were $4.1 million compared to $2.4 million for Q2 in 2017, an increase of 72%. The increase is primarily due to investments in marketing programs to continue to build our brand, and employee investments in order to have a solid infrastructure for growth. General and administrative expenses for the second quarter of 2018 were $3.1 million compared to $1.6 million for the second quarter of 2017, an increase of 93%. The increase was primarily due to a non-recurring charge of $945,000 related to the settlement of a territorial dispute with a former distributor and an increase of approximately $600,000 for recognition of option expense,…

[Operator Instructions] Our first question comes from Jeff Van Sinderen with B. Riley FBR.

So maybe you can give us a little better understanding. In domestic, it seems that demand temporarily outstripped supply and you had about, I think, $1 million or $1.3 million I think you said in orders that shifted into Q3. Was that - how much of that I guess was because you were filling the channel for Target and CVS? And then also, can you tell us more about the sell-throughs at CVS. I think you said there was a reset there in terms of where they had the products in the stores. Also, is CVS rolling to more stores? Are they adding more flavors? So just trying to get a sense of that and then maybe just where you stand now in terms of inventory and production capacity. Do you think the stock outs are behind you now? We can start with those.

In regards to the delayed shipment of about $1.3 million, we had some temporary really production delays in regards to working with one of our largest co-packers that set us back several weeks. Unfortunately, we did have - we weren’t fully out of stock on all of our SKUs but we did have about 2.5 weeks of out of stocks on timing of shipments to certain customers throughout our channels. The accumulation of those that crossed over from the last week in the quarter to the first week of the third quarter, the total was $1.3 million, which has now shipped in the third quarter. In regards to the procurement of the product and the production, as you recall, over the last several quarters and years, we've continued to work on solidifying really our production. We are now running product at multiple co-packers. We feel that our inventory has stabilized. We have plans in place to continue to execute and we have our co-packers back online. We actually added another co-packer online in the third quarter. So we feel we have a sufficient amount of supply. We're continuing to build more inventory as we continue to move forward. But at this time point in time, we are shipping orders and we have sufficient inventory for growth. When you look at your question in regards to CVS, as you recall, we went into -- in the first quarter, early second quarter, we entered 550 open-air front checkout coolers at CVS. We have received reorders, strong reorders from CVS, and we are extremely optimistic as we continue to partner with them. As we mentioned before last call that there would be a review taking place somewhere around September for the resets coming. So based on the momentum and volume of reorders we're receiving from the CVS locations, we're very excited about the opportunity. In Target, we were authorized with three SKUs, as I stated, in 1,000 stores. So through the quarter, the second quarter, we were going through that process with reorders. The great news that we were very excited, as well as Targets, when the product hit the shelf, in regards to the reorders we are receiving. So we're very excited about the momentum there and we stated earlier in the call that we are very optimistic on gaining additional SKUs of additional placement in the back half of this year due to the initial success of the product. So we're really excited about that partnership at Target and we look forward to a very prosperous future as we move forward with that.

Okay, well, those sounds like great launches. And then maybe if we can shift a little bit to the Nordic region, if you can help us understand better what was behind the decline in the Nordic region. I know you mentioned a couple of elements there with new flavor launches and so forth. But I think you also said that in May you had a really strong month. So was trying to parse those out. Maybe just touch on the sell-throughs, how sell-throughs have been in that region and it sounds like maybe there's a disconnect between the sell-throughs and the orders you’ve received in Q2. And then maybe just give us a sense of what you're expecting in Q3 from that region.

Out of the Nordics, when we look at the Nordics, we're talking about Sweden, we're talking about Finland, and Norway as the opportunity there with our strategic distribution partner. When you look at the prior quarter, in 2017 to 2018, there was a variety of new SKU launches, which took place in that quarter recycling those. In addition, we mentioned our distribution partner is bringing investments down to more of a more manageable volume. So as a result of that, and they're going through this transition of a new packaging refresh, of a new look and feel. We are very confident that these orders will be more normalized as we move forward. We already have orders in place that are under production as we speak for the third quarter. So it was really a timing in regards to replenishment orders with our customer in the Nordics. In regards to May, I stated May was a great sales month. Speaking with our distribution partner over there, their sell-through in the month of May was very strong. They had a variety of programs where they had pallet drops in a variety of the co-op location and they were very motivated for the May momentum. So we expect this to be a timing as we move forward and get back to more normalized levels. The other positive news that's coming out of the Nordics in regards to Finland and Norway is we're getting information that we're further expansion into the co-op locations in those outlets. There's a great opportunity as resets take place in the back half of 2018, early 2019. We'll be able to gain additional national distribution with the other key accounts in the market.

And then just one more for me. I China, I think you said you're now in about 25,000 doors, which is great. You’ve increased the door count a lot there. Can you give us a sense of how the sell-throughs are trending there? Maybe what you expect in terms of the trajectory of your business there in the near term?

Absolutely. In regard to China, and you look at the quarter, the second quarter, we had a considerable amount of product that shipped in March. So in addition to that, our team anticipated the resets taking place earlier in the second quarter than they did post-Chinese New Year. A lot of the retail resets were taking place on key accounts further back towards the back end of the quarter. And as a result of that, we lost several, really several weeks of sell-through opportunity. But at the end of the quarter, as you mentioned and stated on the call, we were in over 25,000 locations and 11,000 key accounts, which is really key to our success there. We are in some monumental accounts. The sell through has been extremely positive in these accounts when we're seeing the initial take rates, which we've been in there about four to really several weeks now. So we are getting reorders. We have a reorder in July that we produced and have sold to our master distributor, and we're gearing up for another order to come in for August any day now. So the product is turning and we're gaining more feedback, more ground data to understand further how Celsius is performing. But we are getting great placement in the stores and we're seeing some great execution by our distribution partners.

Our next question comes from Jeff Cohen with Ladenburg Thalmann.

So I just had a couple questions. I think I'd like to start with any trends within the fitness energy drink segment, including flavors? I know that you had introduced a coconut one because coconut water had become so popular. Are you seeing any other trends similar to that one?

We had a variety of great momentum in the second quarter with our flavors and one of the big interests in our flavor, which was one of our new flavors, was the kiwi guava. We got excellent feedback, excellent distribution from our distribution partners. It was really embraced by the fitness channel as well and we got a substantial off take in regards to that product turning and we expect that kiwi guava flavor to gain additional authorizations in our key accounts as we continue to move forward for the next planogram reset. When you look at, as you mentioned, our coconut, which is our powder product, we just launched it in July, as well as our cranberry lemon, which is a great flavor. It really is an excellent product. Everyone loves it and that is just now rolling in through really the fitness channel.

And then also, I think you mentioned that you had expanded into about 300 Planet Fitness locations. Did that include the HEAT line and your original line or are you aiming more towards one or the other?

When you look at our HEAT line, our HEAT line initially launched in the fitness channel and we look at the distribution of the heat line currently. It is mainly in the fitness channel and we do have SKUs authorized nationally at 7-11 where we have about 25% ACV distribution throughout the nation today. Our teams are focused on expanding that because we do have national authorization with those two SKUs. But specifically speaking to Planet Fitness, you're going to see a combination of our original line as well as our Celsius HEAT line in those Planet Fitness locations, as well as through all the fitness channels. You'll see a combination of our core line as well as the Celsius heat, and both lines are performing extremely well in that fitness channel.

I also was wondering if you could talk a tiny bit about the vending micro-market initiative. Could you add a little more color on that?

Absolutely. The vending micro-market opportunity is extremely exciting for us. When we look at how Celsius goes to market, we're targeting consumers where they live, work, and play. And this is full encompassing. So the micro-market, we have a dedicated team focused on the opportunity and really, addition to micro-markets, it's healthy vending as well as colleges and universities as well. And the micro-markets, which we started to roll into that channel in the second quarter, which is really at work locations, we're seeing an extremely high off-tick in regards to the number of sales running through on a weekly basis out of these micro-markets. It is a great opportunity for us. So you're going to see us at your at-work location. You'll see us at your health club. You'll see us in your vitamin specialty store. You'll see us in your drug channel. You'll see us in your mass channel and you'll also be able to purchase this online. So we're available for consumers. We're going to continue to expand that distribution. That is a major focus, which aligns nicely with our marketing strategies, as well that continue to target consumers where they live, work, and play.

I wanted to ask one more related to your online presence. I remember last quarter, you had started the Ambassador program, and I guess you said you had about 300 with more onboarding by the minute. I'm curious, can you track clicks from your Ambassador's posts to your website? And if so, are you seeing any additional volumes from those clicks?

We have very passionate fans of the brand. We have on boarded over 300 and more as we're speaking. We are seeing more social engagement. We do have some additional software we use to be able to track the engagement that's out there, not only on our sites, but other third party sites as well. And we're seeing increases in the overall engagement. So this program is really a great opportunity for us to really continue to attract our core fans, to really spread Celsius. People are very vocal. They're excited. It is a great product. It's an experiential product and this platform allows them to get additional benefits for being a fan of the brand. So we're really excited about that and it's all incremental.

Our next question comes from Anthony Vendetti with Maxim Group.

I was just wondering, John, if you could just go a little bit more into what the situation with the Nordic distribution partner. Just trying to understand if it was partly timing or other factors there and the same with China. That one seems like it's more timing.

The Nordic partner, when you look at the overall revenues, I think you get a clear picture. When you look at the quarterly run rate on revenues in 2017, they had large revenue orders in Q2 and Q3 with some of the new flavors that they brought onboard and it's taking some time for those flavors to cycle through and get inventories down to more normalized levels. So that's one thing they are focused on, our partners are focused on improving their working capital. So they are bringing investments down to really a more manageable just-in-time system, which we've been working with them and that's something we've been working on for some time now, really bringing on those two additional co-packers. So we've been working on a variety of different synergies on trying to be able to provide them orders in a more timely manner so that it improves their working capital needs. We have received orders for the third quarter. We have produced orders for July. We have orders in August and September. Actually, we have an order in-house for October as well. So it is moving towards more normalized levels as they work through that inventory. Plus, they had a repackaging and a refresh that they were going through really cycling down some of their inventory levels. When you look at China, you are correct, it is truly a timing issue there in regards to the recognition of revenue because when we produce the product, just like in the Nordics and just like in China, we're selling full production runs to our master distributor. So a lot of those orders in China took place late in the quarter, and as a result of those resets really taking place later in the quarter that affected the sell-through. And as a result, we did not get reorders in the quarter, but we do have orders in-house for July and we should be getting another order momentarily for August production as well.

You have two co-packers that are back online, which should enable better just-in-time inventory; correct?

Well, that's in the Nordics. We have two co-packers in the Nordics, one in Holland and one in Germany that we had, we brought online for some time, and we're really working with our partner to streamline a lot of that inventory and the flow of that inventory as well. And then they're bringing down their inventory levels for additional working capital.

That's what I meant. I flipped back to the Nordic. Okay, and then I don't know if you provided an update on 7-11. But if you could just talk about how that rollout is going?

Absolutely. I mentioned on the call, 7-11 is a great opportunity for us. We are focused on 7-11. We are right around on really our core line, we're right around a 50% ACV at 7-11. We are coming through the national wholesaler network at McLane, but we've been able to maintain our position. We're seeing increases each and every month on the increase in really ACV as we go forward, as well as the volume per outlet. So we're really optimistic and very excited about that partnership. It continues to forget this relationship. We are attending a lot of the FOA franchise association meetings to gain additional distribution. It is a continual work in process because 7-11 is a franchise owned really retailer. So we have to go door by door in order to sell additional distribution. So we're doing a variety of different tactics to continue to grow within 7-11. We're in about 50% of our core line, 25% with our Celsius HEAT line, and a tremendous amount of opportunity as we continue to grow and increase our ACV. And that's just going to take time. It's going to take effort and we're focused on it. With these stores continuing to perform well and sales increasing a monthly, quarterly basis as we continue to build the brand base, these other retailers are going to - the other stores will come online. Very optimistic about that and they are a great partner for us.

Vending machines; I know that that's a relatively new opportunity for you. But can you talk about the traction there?

The traction there has been very successful. We currently have two team members that are truly focused on this initiative. We are in -- I'll have updated numbers on the next call. In the third quarter, I can provide further detailed numbers on our update, how many hypermarkets, micro-markets we are in, as well as additional vending machines. But initially throughout the quarter, we feel confident we gained in excess of about 1,000 vending machines and micro-market locations. So those at work and healthy vending machines. And the opportunity is exponential out there. There is a great opportunity for us and the turns we're seeing at these at work locations and in these healthy vending machines is extremely positive.

There was -- it looks like a $1 million legal settlement with a former distributor. Can you just refresh our memory on what that was about and is that completely resolved now?

We did have a legal dispute, territorial dispute with a distributor that we had ongoing in the LA Court System for some time. It was last year it was filed. We've gone through the process. With time, effort, we moved through settlement to move forward. We have great opportunities in our business to continue to grow and that settlement is behind us and we are focused on growing the business.

[Operator Instructions] Our next question comes from Richard Tilay [ph], a private investor. Please proceed with your question.

Good afternoon, gentlemen. My name is Richard Tilay [ph], I'm a stockholder for 11 years, having bought my first Celsius stock in June of 2007. Now, I buy my Celsius product at the Harris Teeter store in Southern Pines, North Carolina. So my comments can only be related to what products they carry. The first is the Celsius can that has a black top. My flavors I like are watermelon and grape. They also carry the HEAT product and finally, they carry other products with an aluminum top. Can you tell me why there's such a drastic difference in the taste between the black top Celsius and the aluminum top Celsius can? I'm anxious to hear what you have to say because there is a dramatic difference in taste.

First off, I truly appreciate your long-term commitment as a shareholder to this company and I can assure you the management team and employers are working very hard and diligently each and every day. To answer your question at Harris Teeter, the black top cans in our core line are sparkling, are all of our sparkling flavors. It's a differentiation to our products. The aluminum tops [ph], cans on our core line is our non-carb, which is a Raspberry Acai and a Peach Mango Green Tea. So those are our two tea flavors in the core line. We also have, in Harris Teeter, our naturally sweetened lime, the naturally caffeinated lime, which is sweetened with stevia and erythritol. So there will be some flavor profile differences from our core line to our natural line that contain -- that naturally sweetened line that contains the stevia and erythritol. But I will assure you, our natural line, which has just entered Harris Teeter, is doing extremely well in the natural channel and Sprouts and Fresh Market. And we are seeing a lot of demand for that product as well.

Our next question comes from Diane Negi [ph], a private investor.

Yes, I'm a long-term investor as well and my first question is how do you see the tariffs affecting the bottom line for the coming quarters?

I appreciate you joining the call and thank you for your long-term support. In regards to the tariffs in China, I touched on that briefly on the call. And one thing that sets us apart, which is very different than a lot of other companies that are importing into China. We are not importing into China. We are actually producing locally. So it's local production, locally sourced raw materials. We have a local team and we have an entity structure where we have a local company that's registered in Beijing. So we are not affected by the tariffs today because we are not importing products into China.

The other question I have is a practical one. I'm wondering you don't seek cheaper quarters. The quarters you are in right now are pretty expensive and I think that would help the bottom line if you were to seek more reasonable rent.

Our goal has been to continue to grow this business as effectively and efficiently as we can as a management team, and I can assure you, each and every one of our employees are dedicated to that, driving topline revenue growth, improving gross profit, and ultimately improving the bottom line. We are very diligent on all of our expenditures where we gained additional quotes and we pushed vendors and suppliers to gain the best price for Celsius. As we continue to grow in scale, we will be able to gain additional efficiencies throughout our supply chain and throughout our marketing and SG&A expenses. And we continue to focus on that. ON a year to date basis, taking out one-time charges and the investments that were made in Asia, we are at a close to breakeven and reinvesting those dollars into marketing with considerable investments in North America, where we're seeing strong topline revenue growth. I hope that answers your question on that. We're very diligent on controlling and monitoring expenses.

Ladies and gentlemen, we have reached the end of the question and answer session. At this time, I would like to turn the call back to management for closing comments.

Thank you. Our underlying second quarter results demonstrates our products are gaining considerable momentum, s we are capitalizing on today's health and wellness trends. Our active healthy lifestyle position is a global position with mass appeal. We are building up on our core business and leveraging opportunities and deploying best practices. 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.

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