Greetings and welcome to the Celsius Holdings First Quarter 2019 Earnings Call. At this time, all participants are in a listen-only mode. A 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 with Hayden IR. Thank you. Mr. Donahue, you may begin.

Thank you and good morning everyone. We appreciate you joining us today for Celsius Holdings first quarter 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 remarks, we will open the call to your questions and instructions will be given at that time. The company filed its Form 10-Q 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, May 9, 2019. 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 obligation 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 morning everyone and thank you for joining us today. 2019 is off to a strong start as we execute our strategy of positioning Celsius as a global beverage leader for health-minded consumers. In the quarter, we made significant progress on important drivers of growth for our business, launching with new customers as well as major national expansion with both Target and CVS, increased distribution and kicked off new marketing programs aimed at building our brand awareness. This progress in conjunction with the accomplishments and achievements in 2018 fueled a 41% increase in North America revenues. Another important accomplishment on the international distribution front this quarter was the finalization of our China royalty agreement, which will allow us to recoup our $12.2 million investment and which positions Celsius to further grow our market share in this important market at a risk-adjusted basis. This quarter, we have once again demonstrated our ability to enter new channels, on board new distribution partners and optimize our routes ensuring product availability. Top line performance in the first quarter was driven by continued expansion in North America. In this geography, we announced new high-profile launches and expansions with leading national retailers, including Target, CVS, Rite Aid, Food Lion and DICK'S Sporting Goods. In addition, we made further progress in the fitness, military and vending channels in North America. National rollouts with both Target and CVS are a direct outcome of the accelerating market demand for our portfolio. After a successful test where we saw strong sell-through, Target has now increased the number of flavors to 3 SKUs, Sparkling Watermelon, Kiwi Guava and Orange as well as non-carbonated Green Tea Peach Mango to over 1,200 of their 1,800 domestic locations. And in April, we will be expanding to over 1,500 locations. Our national…

Thank you, John. For the three months ended March 31, 2019, revenue was approximately $14.5 million. A considerable increase of $2.4 million or 20% from $12.1 million for the same period last year. The revenue increase of 20% was basically attributable to continuous strong growth of 41% in North American revenues driven by double-digit expansion in existing accounts as well as new distribution. European sales achieved a solid 20% growth, mainly as a result of the launch of new flavors that have been very well accepted in the market. Asian revenues reflect a change in business model and therefore show a considerable reduction of approximately $1.3 million when compared to the prior year results for the 3 months ended March 31, 2019. The total increase in revenues from 2018 to 2019 was mainly related to increases in sales volume as opposed to increases in product pricing. Excluding the China results, revenue from continuing operations reflected an increase of 35% during the first quarter of 2019. For the first three months ended March 31, 2019, gross profit increased by approximately $960,000 or 20% from $4.8 million in 2018 to $5.7 million for the first quarter of 2019. Gross profit margins remain in line at 39.5% for the 3 months ended March 31, 2019 when compared to the same period in 2018. The increase in gross profit dollars is mainly related to increases in sales volume as opposed to increases in product pricing. Sales and marketing expenses for the 3 months ended March 31, 2019 were approximately $3.6 million, a decrease of approximately $2 million or 36% from $5.6 million in the same period in 2018. The decrease is mainly due to the change in business model in China, which does not required direct marketing investments. The actual reduction in marketing investments…

[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 and congratulations on the strong results. John, I wonder if you can speak a little bit more about what your new distributor in New York area can mean for your business in that region. And maybe you could update us on the latest trends in business at Target and CVS? I know you had really successful roll out there. And then any other major customer that you feel is worth highlighting?

Sure. Thank you, Jeff. In regards to the Big Geyser announcement, we're very excited about that opportunity in the New York City metropolitan area. Big Geyser has been instrumental on building brands from vitaminwater by several others in the area. Just really a great team there, dedicated team, and focus and aggressive. They have a very focused sales organization. And we've actually started to kick off -- next week is the official kick off with them. We're really excited. I mean, the challenge we had in New York, we've had limited distribution except outside of the vitamin specialty and health clubs. And although we have authorization in 7-11 and CVS and Target, due to the other DSD brands, we are really having a difficult time keeping product on the shelf, given our ability to use the -- really the only route to market in that region is through the wholesalers and/or through the warehouse of those existing retailers. So we're expecting a great opportunity. Edwin and I were up in New York. We do spend some time up there speaking with investors and I will tell you that everyone is aware of Celsius, Barry's Bootcamp, Equinox, 24 Hour, Gold's Gym and -- want to buy the product and look forward to having it more available throughout the city, so perfect demographic for us as well and we're really excited about that. In regards to Target, I did make some comments on Target and CVS during the prepared remarks. Target is going very well. We have been expanded into 1,500 stores starting in really towards the end of April, May. So we've now expanded. If you recall, we started off with 500 store test and moved to 1,200 and now we're expanding even further, with 1,500. Now I know, last quarter…

Okay. Good to hear. And then could you update us on the co-packer picture. What you have set up there? And I guess how the revised set-up should benefit you during the peak selling season?

Yes, one thing we're monitoring very closely. Our inventories are up, probably about the highest they've been. That's strategically done to make sure that we can fill the pipe orders and support these new customers coming on board. This is -- right around this time last year is when we started to see a really big pickup as well heading into beverage season. So, we are preparing for that as well. We have solidified our relationships, we had several Refresco in the office, not only a couple of months ago, they were here again. We're building a really strong relationship with Refresco. We do have 4 co-packers that are active. We feel, at this stage, we have an ample supply of product we're going to be able to deliver for 2019 and we're building out our co-packer network for 2020 and beyond.

Okay, great. And then, anything else you can give us on the Nordic region. The European region, obviously, saw a good turnaround there, which is better than we're expecting. And then maybe just touch on outside the Nordic region, any plans or any strategy that you can offer on other parts of Europe?

Sure. Thank you. Regards the Nordics, they did had a really good first quarter, as we mentioned. They had a new launch with a flavor called Peach Vibe, which was really successful. It seems to be the overall downturn we saw in 2017 and 2018 has stabilized. We're working with them really closely to continue to make sure we stabilize that Nordic operations and protect our that revenue that's there. So we're working with them closely. We're really focused at this point on North American expansion. There's opportunities throughout Europe, but with the limited resources we have -- as I mentioned, we're a really lean team. There's so much opportunity right now in North America with the expansions that's going place. We are very much focused on North America. We do have -- through our Nordic partner, there is activities and store expansion going on, taking place in Finland and Norway. But outside of that, at this point, we are really focused on North America. China, we talked about really the change in the business model to a royalty-based model. So that does free up additional resources as well and capital. And during the first quarter, we added over $800,000 positive adjusted EBITDA for the quarter. So we are very excited about that, going back truly driving profitable top line revenue growth.

Yes. It's great to see the improvement in EBITDA as well. Thanks for taking my questions. I'll take the rest offline. Continue to success.

Thank you, Jeff. Appreciate it.

Thank you.

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

Hi, guys. Thanks for taking the questions. John could you talk about the powder packs out there now. How many flavors are out there and what's your current distribution channels on those?

Thank you, Jeff. Yes -- we've been experimenting with a variety of new flavors. We actually have a new flavors in the pipeline for our powder products as well. We're going through testing through our innovation meetings and innovation team. We do have two flavors that we launched in late 2018. The cranberry lemon and a coconut which is really great flavors. Main distribution outside of the orange and the wild berry is it's mainly in the health vitamin specialty channel as well as health clubs, and it's been doing very well. We got some -- Matt and his team has some very interesting marketing programs around that, further integrating it into smoothies, that's being a big opportunity with us. It actually is doing very well at Smoothie King as well. So we're working with them in conjunction on getting the brand out there more because there's a lot more to do with our powder products; they're great on the go; great flavor. And we do have plans for that on the [indiscernible], but we're very much focused on the RTDs where the big opportunity right now on the RTD is driving about 85% of our revenue is the overall arching focus and then also bringing in those powder products as additional points of disruption.

Okay. I got it. And can you talk a little bit about international and how we should think about on your modeling for international for the year, ex-China. I know that this quarter was very solid. Q2 is a super easy comp off last year's $0.77 million for the second quarter. How should we kind of think about modeling the full year on the international side?

Yes, I think on a full year on the international side, I think you have to break it out by China and then Europe. Obviously, the China will be more in line with the royalty model, as we continue to ramp volumes as we progress through the launch cycle, as we continue to expand in China. Europe, we've stated prior and within our European market really about stabilization within the region and we anticipate that move to more normalized levels as we stated in the past. We do have a strong presence with ACV there. We don't see a tremendous amount of expansion at this point. We're using all of our capital resources for North America, so more of a stabilization.

Okay, got it. And then a couple of housekeeping items. The jump in shares from Q4 to Q1, share counts up to 57.1 million, what was that from?

That was mainly associated with the conversion of the preferred shares at the end of 2018. I'll let Edwin -- move the call over to Edwin.

Yes, correct. Yes, basically related to, as John just mentioned, conversion of preferred stock to common stock to the tune of about 6 million shares. So that was basically of the main jump there.

Okay, I got it...

That was Carl DeSantis preferred shares. So now that really cleans up the cap table on the balance sheet. There is no more preferred stock on the balance sheet. So that fairly cleans up that component.

Got it. And Edwin, so you've got the 12.27 on the gain for Q1. So, we shouldn't see any further gains from the note or we should see some positive interest on that going forward, is that right. How should we are modeled that over the balance of this year and going forward?

Correct, correct. Yes. We booked a gain now, which is a biggest portion, obviously, as it relates to booking the note receivable. And then going forward, as John mentioned, we're going to have royalty revenue and then some interest income in the range, I would say, of about $90,000 in that range. Keep it in mind that it's denominated in local currency in China local currency. So there's going to be some variations or translation effects, but we expect that the interest would be in the range of $90,000 to $95,000 on a quarterly basis.

Got it. Okay and then lastly for me, could you are talking a little bit about the margins out there. I know that you said that they're being driven mainly from volumes, so how should we look going forward? Should we see some improvement, modest improvement, as volumes increase, is that a good way to think about it?

Sure. Yes. We're looking to have some improvement in margins. As John mentioned, we are partnering with co-packers and leveraging that. So also when we see those benefits flow through. The fact is well that -- some volume increases are expected as well. We are hoping to be in that same range, 39% to low-40s going forward.

And I think just to jump in there as well, some of the improvements that we're making, that is more of a long term, that's the long term. In the short term, as Edwin mentioned, I mean we're probably going to be right around that range. We do have these new customers coming on board, especially these new DSD partners where we have launch plans and initiatives to gain immediate shelf space for the product. So we are doing a little bit heavier promotions in the beginning of these relationships to make sure that we're able to get the product shelf appropriately as well as incentive, and those run through the top line revenue number, therefore affecting our gross profit margin. But we are very much focused on improving margins and driving those levers for, again, further efficiencies on an optimal run rate, but we're probably be on the lower end of those ranges as we're going through this growth cycle with some new accounts and distribution coming on board.

Okay. Perfect. Great quarter, guys. Thanks for the update.

Thank you, Jeffrey.

Thank you.

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

Thanks. Good morning, guys. How are you?

Good Morning.

Good morning.

Okay. So just a couple of questions on China. So the volume at least in the first quarter, if you want to also give the sales. What was the unit volume, was that up or down versus first quarter '18?

We haven't really spoken about unit volumes, Anthony, in the past, but overall volume, as Edwin mentioned, revenues were up as a basis of volume, so volumes were up very much in line with overall pricing. We're running at the same overall discounts and allowances as we had in Q1 in the prior year. So the revenue growth we are driving is really driven by -- is the overall volume that you're seeing, especially in North America. The decrease in revenue that you're seeing on a consolidated basis is really to $1.3 million from China that we recognized in 2018 Q1 versus this year we're only recognizing the royalty component.

Got it. Okay. And then on the Geyser contract, obviously, that's a big contract. You mentioned John that that's starting. Can you talk a little bit about the cadence of the roll out. Obviously 20,000 locations is a huge opportunity, but how do you expect that roll out to play out in 2019?

We have several key employees that are going to be working specifically with Big Geyser in the region. Our first phase of roll out is really to go after the key accounts. So that's going to be the grocery channel, where we already have authorizations, the drug channel, and 7-11. There is a lot of 7-11s throughout the city, so that's going to be a major focus for us to gain that shelf presence in those key accounts. And then from that point, we will backfill the other accounts as well as independents represent a large portion of that number as well. So, it's a combination. It's going to be a journey. Overnight we are not authorized in 20,000 locations. So we're tackling the key accounts first and then we'll be moving through the rest of the account list very strategically, doing route rights, leveraging really empowering and motivating their sales team to further drive Celsius and gain us that shelves presence.

Just as a follow up on that. John, I've heard the Geyser that they are a pretty tough negotiator. Is it safe to say that the gross margin on that is going to be a little bit less than your corporate gross margin but worth it based on the potential sales volume.

We anticipate our margin to be very much consistent with other distributors. Our overall net margin that we have there, they actually called us through the process. So this is a very mutual benefit, mutual relationship and a really good partnership. So I think we're going to see -- you're not going to see margin deterioration because of Big Geyser by any means. This is a really good opportunity for both companies and we see a great opportunities that lie ahead.

Okay, excellent. Thanks very much. I'll get back in the queue.

Thanks very much, Anthony.

Thank you.

[Operator Instructions]. Our next question comes from the line of Aaron Grey with Alliance Global Partners. Please proceed with your question.

Hey, guys. Thanks for the questions and congrats on the continued top line momentum.

Thank you, Aaron.

Thank you, Aaron.

So, first, I just want to dig a little bit deeper in terms of your market share. Given your ACV still pretty low, can you just give us some color in terms of what your in-store market share is for those stores that you've been in for 12 months. And then, again, how much adding the number of SKUs that a store has can really help to boost that market share? Thank you.

Yes. Thank you, Aaron. You are correct. Our overall market share ACV at this stage is low. It's on the lower end, single digits in any of the channels that we look at today. And keep in mind, we're on a journey. Celsius was born in the diet nutrition, sports nutrition, coming from vitamins specialty, and really just started this journey really 3 years ago with the initial placements at 7-11 with 2 SKUs. And so we're just now moving out into really new channels for Celsius. If you look at the drug channel is something new for 2019, the mass merchants is new for 2019. So we don't have those type of data points at this phase. Where we do have data points is coming from the SPINS data in regards to the convenience channel where we see that ACV. Last time we reported the ACV number was at the end of the year and we're at a 10.3 ACV. So we have increased the ACV in that convenience channel to 10.8 and we also are sustaining and seeing those increased year-over-year growth rates in the high-30%, 38%, 39% growth rate. So those are really good indicators about how the product is turning. And when you go back and you look at that billboard effect, as you mentioned, adding additional flavors, how does that impact the overall off take of the product. We've been able to -- through a variety of data analytics and also monitoring sell-through in key accounts, by adding an additional SKU of Celsius, going from 2 to 3 not only adds one-third, it actually will almost double sales as you add that billboard. So we noticed several accounts where we're authorized with two, moving that to a four level -- 4 SKUs, we actually quadruple sales in those accounts. So we are very much focused on gaining additional placements in these key accounts. And that's where the DSD strategy comes in, building this national DSD network is very key. That will allow us to gain additional shelf presence and really fight for that shelf space that Celsius warrants and we need to demand. So it's early in the stage to really get a true indicator on the household penetration, which is low and the market share in each one. We are at the early phases, but we are seeing great early indicators as we continue through our journey. Thank you, Aaron. For your question. We really appreciate...

That's really helpful. And just one more if I could. Could you just talk about the overall competitive dynamics and how those are evolving. We've seen some of your competitors come out with new products. I think Dr. Pepper came out with a zero calorie energy. We also seen Amazon come out with their own brand of energy drink, which is obviously a big channel for you guys. So can you just talk a little about how the competitive dynamics have been evolving and how that's been helping with your conversations or impact any conversations you've been having with potential retailers to put your products in?

Absolutely, Aaron. That's a great question. And that's truly what's been opening the door for Celsius. When you look at what's happening in the overall category and not only in the energy category, but in really all categories in food and beverage, we just saw -- we're seeing innovation really leading the way the category is going. And energy, people are looking for better for you healthier alternatives and that is allowing Celsius to get placed and gain that placement with our healthy functional position and really our fitness forward position has allowed us to open doors. Competition has been continuing to increase. As you mentioned, Amazon's coming out with products, we have Monster Reign has launched a fitness forward product, we have Bang, that's a company that's out there, doing very well, hasn't been able to gain a considerable amount of shelf space, we have C4. There's a lot of other players out there really going after this space. But Celsius have this authenticity really coming in being born and steeped in science, born in the diet nutrition, sports nutrition channel which is allowing us to take this journey and allowing the placements. Retailers today are more open than they ever been to shelf Celsius. And the reason is because this category is evolving, it's growing. The subcategory is emerging with a performance energy, fitness energy category, which is opening the doors for Celsius like CELSIUS HEAT to compete as well. So it's very exciting time in the category for the opportunities here and we are capitalizing on all these trends which is gaining additional shelf space and also bringing us to key DSD partners that are going to further bring Celsius to retails and further gain our presence in distribution with partners like Big Geyser, independent Anheuser-Busch, Pepsi and Keurig Dr. Pepper partner. So just a really exciting time.

Great to hear and best of luck. Thanks for the questions.

Thank you very much, Aaron.

That is all the time we have for questions. I'd like to hand the call back to management for closing comments.

Thank you, everyone. On behalf of the company, I'd like to thank everyone for their continued interest. Our first quarter results demonstrates our products are getting considerable momentum. Our active healthy lifestyle position is a global position with mass appeal. We are building upon our, leveraging opportunities and deploying best practices. We have a winning product in a large market that consumers love. Our mission is to get Celsius to more consumers profitably. I'm proud of our dedicated sales team. As with them, our tremendous achievements and significant opportunities we see ahead would not be possible. In addition, I'd like to thank our investors for their continued support and confidence in our team. One final note, our management team will be presenting at 2 upcoming investor conferences, first being the B. Riley FBR Conference in Hollywood, California, May 22 and 23, and the Jefferies Consumer Conference in Nantucket on June 17 through June 19. We will also be hosting our Annual Shareholder Meeting on May 16 in Boca Raton. And we look forward to seeing many of you at these upcoming events. Thank you everyone for your interest in Celsius and have a great day.

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