John Fieldly - President, Chief Executive Officer Edwin Negron - Chief Financial Officer Cameron Donahue - Hayden IR

Greetings, and welcome to the CELSIUS Holdings, Fourth Quarter and Full Year 2018 Earnings Conference Call. At this time all participants are in a listen-only mode. A brief question-and-answer session will follow the formal presentation. [Operator Instructions] As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Cameron Donahue of Hayden IR. Thank you. You may begin.

Thank you. Good afternoon, everyone. We appreciate you joining us today for CELSIUS Holdings fourth quarter and full year 2018 earnings conference call. Joining me on the call today are John Fieldly, President and Chief Executive Officer; and Edwin Negron, Chief Financial Officer. Following the prepared comments, we will open the call to your questions and then instructions will be given at that time. The company filed its Annual 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 forecasts, expectations and other information available to management as of today, March 14, 2018. 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 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. 2018 was an exceptional year for the company, as we expanded our distribution channels and increased our product availability through existing channels to gain greater visibility for a portfolio of premium fitness beverages, all while accelerating our top line revenue growth. With innovative products and compelling packaging, we are reaching more and more consumers each and every day. Our strategy in positioning CELSIUS as a global beverage leader for health-minded consumers remains our top priority. We continued our expansion further into traditional retail with great success and we positioned the company for future growth with expanded roles within our ranks. In addition, we brought on high performance individuals with diverse background and experience. Jon McKillop was promoted to Executive Vice President of North America sales; and Edwin Negron was appointed as Chief Financial Officer in July of 2018; and Matt Kahn joined the company as our Executive Vice President of Marketing in October. On top of these additions, we further transformed the organization to support our growth in all departments, which will allow us to pursue our growth initiatives and strengthen our financial performance. CELSIUS 2018 performance sets a new record for our portfolio with extraordinary gains in our efforts to increase distribution, expand availability of our products reaching more consumers and increasing our brand awareness and we continue to target health mining consumers where they live, work and play. Throughout the year we achieved a steady stream of new high profile, marquee, domestic retail and distribution partners with the addition of Target, Food Lion, Hannaford and CBS, as well as continued expansion with existing accounts such as 7-Eleven, Race Tracks, Sprouts, Harris Teeter and many others. At the same time our dedicated sales team drove a…

Thank you, John. Starting with the quarterly results, total revenue for the fourth quarter of 2018 was $14.7 million, up 62% compared to $9.1 million in the year ago quarter. By geography, North American sales were up a robust 63% year-over-year to a record $10.9 million, up 63% compared to $6.7 million in the fourth quarter of 2017. This increase was driven by growth in excess of 50% across each of our domestic channels. These results are a reflection of the continued momentum in existing accounts and the partnering with new distributors, thereby increasing our distribution network, making our products available to additional consumers. In Asia, sales also increased by an exponential 367% from $435,000 in the year ago quarter to $1.6 million in the current period. Mainly due to the investment and good traction that has been obtained in the region throughout 2018. In Europe, revenue increased 9% in the fourth quarter to $2.1 million as a direct result of new flavor launches in the region which are being well accepted by consumers. Across the board the increases in revenue were driven by higher sales volumes as opposed to increases in product pricing. Gross profit for the fourth quarter of 2018 increased by a robust 43% to $5.5 million, up from $3.8 million in the year ago quarter. In contrast, gross profit margin decreased from 41.6% in the fourth quarter of 2017 to 37.1% in the fourth quarter of 2018. The increase in gross profit dollars was mainly attributable to the increase in sales volume, while the decrease in gross profit margin was mainly attributable to increases in promotional allowances with your accounts, lower margin and sales in Asia, and increases in freight and production costs in North America. All these aspects are being addressed to maximize our profitability…

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

Good morning, everyone. Let me say first congratulations on the growth and improvement in metrics for both Q4 and the year.

Thank you, Jeff. I appreciate that. We are really at a really solid fourth quarter and 2018 was a milestone year for the company.

Can you speak more about what you are seeing with Target, CVS and the convenience store John. I am just wondering about sell-throughs there. I know you touched on some things in your prepared comments, maybe you touched on door account plans, adding new SKU’s, those sorts of things, what's been happening in the trends there.

Sure. Thank you, Jeff. Target has been a great success for you have been watching. We started off in 2018 with a test in five stores, our 500 stores. We have now expanded that to almost 1,200 stores in Target. Started off with two SKU’s, now we’re up to three SKU’s and hopefully soon you'll be seeing a fourth SKU. The sell through rate has been – everyone's been very pleased with the sell-through rate. Initial expectations internally – with the heated internal expectations at Target as well as our own you know we are still working through the supply chain. We are going through the warehouse, through Target, which as a result the product is selling a lot quicker than they can keep it on the shelf. So we do see some out of stocks frequently throughout the country over the last several months and our team has been working with the supply chain to make sure we have ample product on the shelf. So the good news is we are seeing up increases in turns and as we continue to build out our national distribution network, we’ll be able to use some DST partners to keep those shelves fully stocked. So the sell through at Target has been positive and we look to further expand with them into 2019. We see Target as a great partner for us. CVS has been a great account. As you recall, we started a test with them as well at 500 healthier, better for you coolers that they had as an initial test. CVS today for 2019, we further expanded. By the end of 2018 we're in over 1,000 stores with three SKU’s and we have been authorized nationwide for 2019. So we're in the process of going through the fulfillment process through their DC's to expand to all locations. So we see great success in the drug channel, especially with CVS and the other marquee banners as well which we are actively talking to. So between the mass channel at Target and the drug channel, just a lot of exponential growth there, the opportunities.

Okay, that's great to hear. And then as a follow up to that, maybe you can update us a little bit more on how things are going, adding the domestic co-packers. I think you are working on some of those or speaking to some of those, and then maybe you can just speak a little bit more about some of the advantages of adding a new distribution partners and what do you expect to gain from those relationships in 2019 and beyond?

Absolutely! Just to go back to your initial question with regards to following up on the convenience channel and that really ties in to our new distribution partners. So I’ll answer the beginning, the end part of that part of your question first. We see great opportunity with the new partners and the opportunity in the convenience channel. Keep in mind we're currently at about at 10% ACV, seeing extremely good growth rates and getting a lot of interest from other marquee banners. We further expanded in Circle K. We see great opportunities with them in 2019. Qifeng is another customer we’re working with and we see great opportunity there, and we're – just a lot of interest for this category. There's really a renaissance taking place right now in the energy category. You are seeing a lot of – and as health and wellness trends continue to take hold, you are seeing these fitness functional energy products really gaining the opportunities that it's never have been able to accomplish and there's a migration taking place for healthier alternatives in the category. Just like the Sugary Soda CSD category was affected many years ago from sparkling waters, you are seeing that in the energy category today and that's where we see great opportunities in the convenience channel. Now how we're going to leverage the convenience is through our new distribution partners. Over the last three to six months we've been able to close key contracts and solidify distribution partners throughout the country with some of the largest strategic supply partners in the United States. We’ve closed several Anheuser-Busch network partners, Keuring Dr. Pepper network partners, as well as the independent Pepsi bottlers as well and we're seeing tremendous opportunities. That is going to make sure we say stop in this channel. This channel is very competitive. We need to make sure that we have feet on the street that’s be able to keep those shelves stocked, because we are turning and we're turning at a really high growth rate. As I mentioned on the call, we're out turning a lot of the competitors of much larger brands. So by closing these additional GST network partners, it's going to not only provide additional availability, additional points of distribution in this channel, but most importantly make sure we stay stocked and maintain our position on the shelf. In regards to the co-packers, we have been adding co-packers throughout Q3 and Q4. We currently have four co-packers currently active and we have three additional co-packers that are going through our quality assurance process and supplier onboarding processes. So we feel at this stage we are ready for beverage season. We’ve increased our inventories in the first quarter, as well as coming towards the end of Q4 and we feel we will have ample supply, we're building strong partnerships with our suppliers. So we feel we are well positioned for this summer.

Okay, great. And then one more quick, hopefully a quick one if I could squeeze it in. Just wondering, do you feel like the Nordic area is as normalizer is normalizing now. I think the segment was a little stronger in Q4. I think you mentioned it was actually up or yield was up. So just wondering kind of what your thoughts are on that?

Yeah, we feel the Nordic business is going to turn to more normalized levels and we are down for the year 17%. A lot of that came with Q2 revenues – Q1, Q2 revenues in 2018. We just launched the new flavor in the region called Peach Buy, which has allowed us to further increase our market share and is been one of the most successful flavors in the region over the last several years. So we're very optimistic about the opportunities that we have in the market. We also have a lot of new flavor innovation coming in the market in 2019 and we feel optimistic about that.

Okay, great. Thanks for taking my questions and continued success.

Thank you, Jeff. I appreciate it.

Our next question comes from the line of Jeffrey Cohen with Ladenburg Thalmann. Please proceed with your question.

Hi John and Edward. Can you hear me okay?

Yes Jeffery.

Yes, thank you.

Good morning. So could you talk a little bit about the LA-veet deal and locations, distribution as far as graphic locations and impact that may have upon the costs of goods and some of the packaging expenses.

Could you just repeat the front end of that question briefly, I'm sorry.

The LA-veet deal for the powder cups.

Power cups, oh yeah. We in regards to the LA-veet opportunity, we see this as a great opportunity with our LA-veet on the go, really at work locations. LA-veet is really bringing CELSIUS to a new channel further expanding our at-work initiative through the vending channel. With LA-veet these are really sparkling water, healthier beverages, that LA-veet mission is to bring to the office space. So they are very much aligned with our mission as well and we see that as a great fit. We launched with our first flavor labor which was our Orange, Orange Powder product. We are working with them on additional innovation for 2019. They are vigorously placing a lot of machines throughout the country with key corporations. So it’s another opportunity for individuals to enjoy CELSIUS. So we see it as a great opportunity for us, bringing us into a new channel for incremental revenue.

Okay, got it. Can you talk about some of the anticipated marketing partnerships or the new ones that we should look for in the coming year?

Yes, we will have new partnerships coming onboard. We've been very busy as an organization over the last three, six months. Matcon has put together an extremely aggressive plan for 2019. You'll see we are partnering with Tough Mudder again and 2019 which is about to get started here in the next few weeks, really excited about that partnership. We're going to be further activation with Tough Mudder. We are also working on tying that in to key retail partners. So we are activating the trade, which is so critical at this stage of the company. You’ll see additional opportunities, additional really marking properties that we will bring to the table. In addition, we’re also integrating an influencer program, further driving that further and expanding upon that and further activating digital social activations. So it is a full encompassing marketing plan you'll see rolling out. More to come on that, as we continue to progress, but we are going to continue with our mission to continue to target consumers with a lid work and play. We want to be a part of everyone's like, looking to live a healthy, active lifestyle.

Okay, got it. And one more if I may, Edwin can you talk a little bit about margins, occur margins and maybe talk about the impact that additional co-packers may have going forward and are there any margin hits in nature from the fourth quarter they you expected to get back during 2019?

Sure, very well, thank you. Very good question. Absolutely one of the things that John and I have been evaluating sees, excuse me is a tradeoff as it relates to expanding our co-packers, because we have experienced a little bit of additional costs as it relates to some of those co-packers. But again, we want to guarantee that we have sufficient inventory levels of service you know the summer season at this point. We did have some onetime charges, not much regarding some excess and obsolescence inventory. But again we are keeping a very good eye on that and our freight costs had been made sure that in 2019 we will maximize our margins going forward.

Okay, got it. And no forward looking guidance on any metrics for ‘19 at this point.

No, not at this point Jeff, no.

Okay, perfect. Thanks for taking the questions. Nice quarter.

Thank you, Anthony.

[Operator Instructions]. Our next question comes from the line of Anthony Vendetti with Maxim. Please proceed with your question.

Thanks. Hey guys how are you.

Very well thanks.

I just wanted to focus on, a little bit first on the China investment and then go forward with some of the questions that I have. So on China it looks like it was a negative million. Is that because as you said it’s reconciliation of the investment there. Did they already pay $950,000 in the fourth quarter to recoup some of the investment you've made in China?

No, no they have not. This pertains basically to the reconciliation and excuse me, the vouching that we’ve been doing as it relates to the accrued expenses that we have done, but no it has not translated into, let’s call it any cash flow.

Okay, I see, I see. And has the deal officially closed or is it still waiting final approval signatures and all that.

Anthony, this is John. We had – we executed a definitive agreement as of January 1, 2019. We're going through the final reconciliation and we'll have the loan, capital loan finalized by the end of this month. So we are come to mutually agreed upon terms. We are looking at approximately in excess of $10 million on the capital loan to be repaid over the five year term, but that will be finalized by the end of this month or sooner.

Okay, great. And then gross margin, now that you are going to be out of China, you know in terms of the direct investment there. I know there is royalty there, but should the gross margin for the rest of the business start to move back up or is this gross margin in the high 30s is more appropriate for 2019.

That's a good question. As we grow in scale we're bringing on some marquee accounts. With the marquee accounts comes the slotting, as well as additional promotional activity, really which is required to really if you want to call it set, you know set the account to make sure you are getting the off-tics and the pull through. So on these early stages with the these new marquee accounts, we are taking a lesser margin as a result of increased promotional activity, and keep in mind slotting and promotions are a direct offset against revenue. So although our kind of run rates, optimal run rate margins will be much higher as we continue to scale on the second year, we will have some margin contraction on these new accounts. So you are looking at a blended margin. I think if you look at historically where we finished the year for 2018, we should be somewhere around that target. It seems more than achievable at this point. Also as we gain further momentum, we’ll be as Edwin mentioned, be able to leverage these new co-packers coming onboard to drive additional efficiencies in the cost of goods. We are also exceeding some freight savings, kind of heading into the New Year versus what we experienced in Q4. Q4 freight rates were extremely high on a per pallet basis, but they have leveled off and actually decreased slightly. So I think a good range is to look at the full year margin for 2018.

Okay, no, that's helpful John. Just in terms of inventory, it looks like that almost doubled here. Was that some of the newest SKU’s coming online or what was that?

Sure, Edward would you like to answer that.

Absolutely! Yes. Thank you. Yes, basically again we're getting ready for the summer season and that's why you see our inventory levels have increased and if you look you know prospectively, we think that that going forward is going to be the right level of inventory so we can service our accounts and avoid out of stocks. So we feel comfortable with that.

Okay, and then lastly in terms of competition, you know just based on data we've been able to gather because this is probably held. You know Bang looks like they are approximately $500 million in revenue if we can figure that out correctly. How do you look at yourselves in terms of positioning against Bang and, you know what are your strategies in 2019 to sort of counter their growth?

Yeah Anthony, that’s a great question and VPX has done a great job and they are capitalizing on these new trends. As I mentioned earlier, there is a renaissance happening in the energy category and is being disrupted today and it's happening rapidly. You can see that would – Bang’s success over the last, you know six months, last year as well. They've been gaining a tremendous amount of traction and so is CELSIUS. We see Bang as a complementary. Their target consumers is 18 to 24, ours is 24 to 36. We are more female. We have 50% female 50% male when you look at our demographics and we complement each other nicely as this new category is really evolving. And Rodney Sacks on Monster. Monster mentioned on the last earnings called about the new category being this performance energy category. And it's not just a new category, that's going to be really the new energy category overall and you are seeing these early indications of the transformation of this category, just like the CSD category was disrupted as well. So we see great opportunities and also bring our partners that are coming on board, you know further partnerships with Target and CVS, the AV Network, you know EDP and the PepsiCo partners, this is happening extremely rapidly.

As John, let me just follow up on the network. So you are signing up some of these independent distributors that are part of Anheuser-Busch, Keuring Dr. Pepper. I’m just curious is – what do you see as the synergies there or the benefit of being part of those networks? Is it more than just having those distributors? What additional benefit is it that they're part of these larger companies.

Yeah, it's critical in our business and the beverage business. You know we’ve built up to this point. We've been very reliant on the wholesale network and direct to retail leveraging, really the supply chains of our customers. You know unfortunately as an example on Target where a lot of – you know we've seen out of stocks considerably, because the product is moving so quickly, by levering these DST partnerships these individuals are in the store each and every week, sometimes multiple times in a given week. Not only will we have proper shelf tags, merchandising and POS, we’ll also maintain our presence and make sure we're in stock. I will tell you going through the warehouse, we see a lot of inconsistencies; price tags are not, when we are on promotion the deal tags are not. So we’ll be able to gain and leverage really is the power of the people that you get from the DSD market, and then also they also go into many other local areas, independence in their region. So not only are we picking up the people power, we're also picking up additional distribution within those communities.

So it’s the additional touch points per week, it’s not critical but much more important as you move forward to try to make sure that everything is set up correctly. Like you said, I didn’t realize that a lot of times things, if you're not there often enough they are not tagged right or just the wrong promotion and all that. So having these networks there that are more frequent touch points makes a difference.

That is correct.

Okay, great. Thank you very much, I appreciate it.

Thank you.

Thank you.

Our next question comes from a line of Paul Johnson a Private Investor. Please proceed with your question.

Yes, good morning and congratulations on the year. I wanted to understand, you mentioned CVS and Target. Can you talk a little bit about the Delhaize Group, Food Lion and Hannaford first of all, how they’ve done?

Yeah, sure. Thank you Paul for calling in. The Delhaize Group is going well, whereas in Food Lion we are getting orders, we are growing with them. There is a lot of further opportunity to scale within Food Lion. We are also running some programs and coming up in the second quarter to continue to support that and we have some trade marketing programs scheduled as well. So we think it's met our internal expectations and we are working further to optimize the Food Lion opportunity, which is a massive opportunity. Our goal is to really get cold availability in these locations. Right now we're in the dry shelf, in the aisle. So we are looking for additional placements within the store to gain additional optic. Hannaford's has gone very well. That is supported by our distributor Polar [ph] in the region. Sales are moving very well, increasing. We stated before at several conferences in regards to our historical growth rate and looking at our SPINS data as well, we are growing about 30%, 36% organically. So we are seeing those types of growth rates and Hannaford's as well. We do have an individual on the ground there, we are setting up displays and you'll see more activation with them in 2019. So we feel that the Delhaize partnership is going well and there's a lot of opportunity. We are just in the infancy stages of that you know really and capturing the share of that account.

Great, and regarding the strong relationship with CVS, does that sort of preclude us from also getting some meaningful penetration of Walgreens?

No, I believe it helps us. If anything, it helps us. So it does not preclude us at all.

Okay, and regarding just more about the competitive threat, obviously there's nothing. I mean even though the recipe for the CELSIUS strength is complicated, there is as nothing proprietary about the ingredients certainly. What precludes some of the larger competitors essentially knocking us off?

You know, that is a good question. We don't have a patent, it is a trade secret. It’s been a trade secret from the beginning. You know our founders originally went down that path as a trade secret not to disclose the formula. You know it can be reformulated based on you know – I’m sure scientists can reformulate the product. We do have a competitive advantage with our position and the fan base and the consumers that we have built and the momentum behind us, but we're just like any products and a lot of other brands, you know it could be replicated. It’s very difficult. The one thing that makes us very unique is we have the science, over six clinical studies published in peer reviewed sports nutrition journals, and in addition the product, the company has already been reviewed by the NAD and a class action lawsuit on our structure function claims has taken place in 2010 where the company prevailed. So we have a lot of additional really value and additional science behind the product that would be very hard to replicate. Keep in mind Coca-Cola and Nestle created Enviga back in 2009 and were shut down because they did not really do the proper research, they didn't have the proper studies beyond the product. So we feel we are very – in a very good position to continue to capitalize on the market today and really capitalize our share and be really the renaissance in the energy category, targeting those health-mining consumers.

Okay, that's helpful, thank you. And just in terms of you talked a little bit about the margins in a similar way on the cash burn. I know you Edwin said that you don't expect to have additional cash needs for 2019, but I think you had said that last year and you did do the offering; you did raise money by the shareholders. So are we fairly confident that for 2019 there won’t be further dilution.

Yes, thank. Yes, our current plans reflect that we will have sufficient funding or cash flow from our operations. But nevertheless you know we always have your plan A, plan B, plan C where we can identify you know areas where we can generate more cash as it relates to perhaps you know reducing a little bit of our working capital and some cost savings areas as well. So I think we are well positioned to have sufficient cash flow for the next 12 months to operate the business.

And I’ll just add Paul as well. I mean when you look at 2017, ex the Asia investment. In 2017 we generate $2.6 million, almost $2.7 million in positive EBITDA, adjusted EBITDA when you back out those Asian investments, and then 2018 on a full year you are looking at about $2.2 million in positive adjusted EBITDA. So we are very focused as an organization on driving profitable growth. So as Edward mentioned we do have levers that we can pull in the event we have some timing, but you know at this point we do have sufficient capital to run this business profitably today.

Got it. And just one other question which may be a little bit random, but because you speak to a lot of analysts and shareholders John, any sort of speculation as to why there is such an incredibly high short interest level. I know the float is small, but any theories on that, because it’s a little perplexing.

Yeah, I agree with you Paul. Unfortunately I have no control over that. From what we can tell, we have spoken with NASDAQ representatives trying to identify you know maybe who the investor is, but you know it's hard to understand that. We don't understand that, but what we can say is that it seems like the short interest has been there when we first were really brought on the Russell 2000 and 3000, and it's kind of hovered in a range. So maybe it has to do with the index funds that are on the other side of the 2000 and 3000. But that’s all we really know at this point and we are really focused on driving results. There is a great opportunity in front of us and we are executing as an organization.

I appreciate that. Thank you so much.

Thank you.

Thanks Paul.

[Operator Instructions]. Thank you. It appears we have no further questions at this time. I would now like to turn the floor back over to management for closing comments.

Thank you. On behalf of the company, we'd like to thank everyone for their continued interest. Our fourth quarter and annual results demonstrates our products are gaining considerable momentum. As 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 upon our core business and leveraging opportunities and deploying best practices. 2018 proved we have a winning product and a very large market that consumers love. Our mission is to get CELSIUS to more consumers profitably. I am very proud of our dedicated team, as without them our tremendous achievements in 2018 and significant opportunities we see in the coming year would not be possible. In addition, I’d like to thank our investors for their continued support and confidence in our team. On a final note, our management team will be presenting at three upcoming Investor conferences: The first being the ROTH Capital Conference on March 17 and 18 in Southern California. In addition we’ll be at the B. Riley FBR Conference in Hollywood, California on May 22 and 23. And the company will attend the Jeffries Consumer conference in Nantucket through June 17 through the 19. We look forward to seeing many of you at these upcoming conferences. Thank you everyone for your interest in CELSIUS and have a great day!

Ladies and gentlemen, this does conclude today’s teleconference. You may disconnect your lines at this time. Thank you for your participation and have a wonderful day!