Welcome to Celsius Holdings Third Quarter 2019 Earnings Conference 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 turn the conference over to your host, Cameron Donahue of Hayden IR. Thank you. You may begin.

Thank you and good morning, everyone. We appreciate you joining us today for Celsius holdings third 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'll 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 forecast, expectations and other information available to management as of today, November 7, 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 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, and welcome everyone and thank you for joining us today. Our third quarter 2019 financial results reflect the outstanding work our team is doing to drive higher volumes through deeper placements on existing and new accounts, as well as leveraging our infrastructure to improve profitability, all while demand for Celsius continues to rise. We're capitalizing on the accelerated macro industry trends for healthy, better-for-you products that are driven by the growing demand by health-minded consumers looking for healthier alternatives to conventional products. We are seeing great demand for the Celsius portfolio and are outpacing many larger more established brands, as we position ourselves as a leader in functional energy drinks, through our health and fitness routes, providing proven functional energy, differentiating ourselves from the competition. As we continue our expansion further in traditional retail, we're seeing higher velocity rates and greater consumer acceptance in each step we take, which is further increasing our optimism. Our active healthy lifestyle position is a global position with mass appeal. For the third quarter of 2019, we delivered a record $20.4 million in revenue, with double-digit revenue growth of more than 20% with a positive net income of approximately $1 million, or $0.02 per share. Our record third quarter revenue came in versus a comparable period in 2018, where we had a $1.3 million in sales lift from the second quarter of 2018 to the third quarter of 2018 in North America, as well as approximately $1.35 million in Asia sales, which only totaled $200,000 from non-China sales in 2019 due to the shift in a royalty model being initiated in the beginning of 2019. Excluding those items, we saw exceptional revenue growth of 45% for the third quarter. North America sales reached a new record of approximately $16.8 million for…

Thank you, John. For the three months ended September 30, 2019 revenue was a robust $20.4 million, which translates to an increase of $3.8 million or 23% when compared to $16.6 million for the same period last year. The 23% increase was driven by continued strong growth in North American revenue of 48%, mainly related to double-digit growth in both existing accounts and distribution expansion. This growth was partially offset by a decline in European revenue of 11% due to product availability aspects, which have since been remediated. Asian revenues reflect a change in our business model in China to a royalty and license fee arrangement. Although revenue was lower in Asia there was also a corresponding decrease in expenses, which significantly contributed to improving our profitability in the third quarter. As has been our historical trend, the overall increase in revenues was primarily due to increases in sales volume as opposed to increases in product pricing. Gross profit for the three months ended September 30, 2019 increased by $1.7 million or 26% to $8.6 million, up from $6.9 million in the year-ago quarter. The increase was driven by higher sales volume and revenue. Gross profit margin for the three months ended September 30, 2019 also reflected an improvement at 42.2% compared to 41.5% for the same period in 2018. Sales and marketing expenses for the three months ended September 30, 2019 were $4.9 million, a decrease of $3.8 million or 43% from $8.7 million in the same period in 2018. The decrease is mainly due to lower marketing expenses of $5.1 million related to the change in our business model in China, which now does not require any direct marketing investment. This decrease was partially offset by investments of $1.3 million in other marketing initiatives, trade activities and higher…

Thank you, Edwin. In Europe and subsequent to quarter end, we completed our acquisition of Func Food, our Nordic partner, who is a wellness company that markets and distributes beverages, protein bars, supplements and superfoods under the brands Celsius, FAST Sports Nutrition, CocoVi and FitFarm, which represents a comprehensive portfolio of well-being products, which promotes active and healthy lifestyles for approximately $24.2 million, which comprise of about $14.8 million in cash and $9.4 million with the assumption of outstanding restructured debt. This is an important next step in our strategy to build a global dominant brand and solidify our position in the Nordics, where Celsius has a dominant presence in Sweden, while opening new distribution platforms for the rest of Europe. At the same time, this transaction provides us with the ability to bring an entirely new, yet complementary product offering to consumers through the innovative FAST protein bar business. The acquisition which was valued significantly below our revenue multiple of approximately 1 times incremental revenue and approximately increases revenue on an annualized basis by over $25 million, provides immediate accretion and will improve our cash flows and present incremental opportunities to expand our footprint throughout Europe. This strategic acquisition provides us with additional scale and is expected to provide a meaningful increase in our top line with the expected pro forma consolidated revenue run rate of approximately $100 million, while enabling us to maintain our historical solid gross profit margins, extracting significant operational efficiencies that will allow us to reinvest for future growth. Please keep in mind that consolidated revenues will start as of October 24, and will not be included into our -- that won’t will be included in our Q4 financial results post the acquisition date. Expansion opportunities throughout Europe include many new markets, which we will…

[Operator Instructions] Our first question comes from Jeff Van Sinderen with B. Riley & Company. Please proceed with your question.

Good morning everyone. First, let me say congratulations on the strong metrics the Func acquisition and all the progress you're making as a brand and a company. Looks like your cash flow is about $3 million through the quarter. Can you just touch on cash generation? And would you expect to generate cash going forward? And just to clarify the cash we see on the balance sheet that is after the Func acquisition, correct?

Correct. Thank you, Jeff. Yes. Absolutely, the cash that you see there the $20.5 million that we ended up with is after the acquisition. And you're absolutely correct. We generated approximately $3.5 million of cash in Q3. And to answer your question, yes, the expectation as we continue to grow depending on our working capital needs is that we will continue to generate some cash flow. But again, it's going to depend on the investments that we make in terms of working capital.

Yeah, just a further point. Thank you Edwin as well. If you look there is a escrow portion on balance sheet as long-term. The auditors we put that earmarked the funds in escrow for the acquisition. The additional capital, when you look at the cash generated, we kept inventory fairly tight throughout the quarter as well. We actually just went into large production runs in October, November and December. We'll be running fairly heavily heading into the back half of the year, as we're seeing -- historically seeing great demand coming in Q1 and Q2. We have a lot of new retailers coming onboard as well. So we're excited about that making sure we have ample supply. So we will be putting some of that capital to work within the business in our working capital needs.

Okay. And then just to follow-up on that. You mentioned adding new retailers. Obviously, you've added a lot of retail doors and dramatically improved the shelf space and positioning in a number of retailers. On the retailers, you mentioned that are new we -- I know some of those may be tests. We've been seeing the product in some new places. Maybe you could just elaborate on that where we might start to see the product appear? What other retailers might be out there for you to get into?

Yeah. Over the last, call it late 2018, if you recall we started to do some tests in retailers in 2018 and then we announced in Q1 Target expansion as well as CVS. We currently are testing in a variety of retailers. You'll probably see us in particular retailers in given markets. We have not disclosed those. One thing we're seeing right now is, there's a lot of transformation taking place in the energy category that we talked about with consumers looking for healthy better-for-you options. Consumers react first, retailers react second, and we're getting a lot of interest as buyers right now as we speak we're in the midst of buyer season are going through really category rationalizations in their category sets looking at what they should bring in for 2020. And we are one of those top picks on those item when you look at it given our data -- our third-party data shows strong growth. We are on trend with our healthy better-for-you offerings and we have the data to validate it. So, we're really excited about the position we're at and well positioned for 2020 to really capitalize the evolution of the energy drink category.

Okay. Great. And then I know you talked a little bit about the progress you're making in building out the DSD network. Can you just touch on any, I guess, improvement you might be seeing in stock-outs given that your product seems to pretty much pull out the shelves? And as part of that, what do you think are the next key milestones in building the DSD network? And I guess when we should see -- I think you mentioned Target converting to DSD. When something like that will happen?

Yes. It's going to happen. We've been working with the buyers at Target as well as CVS. We actually through 2020 have received authorization. We will be flipping from a direct store delivery model versus our current warehouse model as we solidify these regions within each key market. So there is an inherent problem keeping up with a high-velocity demand as the buyer initially put us in through a warehouse fulfillment option at CVS and Target and the product is getting a lot of velocity -- higher velocity. We're working with the replenishment buyers, but what really fixes this and really get -- be able to leverage this is moving to a DSD network. We anticipate about a 40% lift in some of these outlets in some of these retail markets moving to this route to market. Now we're up to over 70. We started the year with three -- about six if you go back looking at -- in February, when we announced bringing on some Anheuser-Busch strategic distribution partners. Today, we're up to over 70 with the likes of MillerCoors. We're really going to the best DSD partners in each market to solidify these to really cover these DMAs. So New York City is our first. We have flipped over 7-Eleven to Big Geyser, and we're working on flipping Target in November over to Big Geyser. Our next market looks like it would be the Arizona market, where we have full coverage and also in the Michigan market. And we're working on the Southeast market as well in those regions. So we're making progress. We have a lot of interest. It takes time to build the DSD market. What we're doing is a major initiative. There's a lot of brands that don't even get to this point. We are confident on our ability to have a DSD network over the next 12 months due to the interest that we're receiving from some of these larger houses. What we have seen is, moving through the holidays like July -- 4th of July weekend, moving into some of these busier holidays, it's really open windows to bring new partners into their DSD networks into their distributors. So we're heading into the holiday here working very vigorously, but we'll probably -- we'll continue to make progress as we continue to move on.

Okay. Great. Thanks for taking my question and continued success.

Thank you, Jeff.

Thank you, Jeff.

[Operator Instructions] Our next question comes from Jeffrey Cohen with Ladenburg Thalmann. Please proceed with your question.

Hi, John and Edwin. How are you?

Excellent. Excellent. Thank you, Jeff.

Doing well. Thank you.

So, just follow-up with Jeff's line of questions. So on the DSD network, what percent there do you feel like you're at? I mean, is it -- does it feel like you're a third the way there to where you'd like to be over the coming year or two or halfway there?

I'll say we're about a third. We anticipate we'll need about 250 to 300 distributors to get our national coverage. We do have very methodical mapped out process on where we have holes and where we need to bring distributors onboard to flip over these regions so -- to make sure we're covering these DMAs these warehouses. So we're going to see continual progression into 2020. And the team is working really hard and everyone is focused on this.

Okay. Got it. And then a couple questions regarding Func as far as firstly, how do things look on once you close it all the $9.4 million of debt? I guess, Edwin what do you expect is the quarterly cost to carry the debt? I guess, the closing date is still scheduled for or was October 24. Is that right?

Yeah. It actually closed on October 25. And yes, looking at that I think what was it the quarterly was going to be something like $200,000 or $300,000 in terms of the interest. So, yeah, we're looking at that. We have good cash to probably service that and we have several other alternatives going down the road to then see if we can obtain some long-term financing given that we don't have any -- basically we have a very clean balance sheet and basically no debt aside from that.

Got it. And then John could you talk a little bit about the FAST portfolio? I know that you kind of pushed off on the protein snack portfolios and it sounded like it would be a while. And what I'm hearing now is that, no, it's not going to be a while. And could you walk us through time lines on that? And when we expect to see introductions in North America and what channels we'd expect to see in 2020?

Yes. I think we do see opportunity with the FAST portfolio in the protein snack bar category. We are looking for a profitable launch and being very methodical in our approach to bringing it to North America. We will be testing throughout 2020 like we start on online initiatives and through the fitness channel as we build out a consumer base and a community for the brand. As we all know, going into retail is very expensive. And we want to make sure we have built up consumer demand before we enter our retail partners. But some vitamin specialty retail partners you will likely see in 2020. But it will be more of a methodical approach making sure we maintain our EBITDA and our focus. And the Celsius portfolio is our main focus.

Yes. Okay. Got it. And then, one more question, if I may. Could you talk a little bit about any trends or recent activity from online channels, as far as what you saw from Q3 and how that may look for Q4? Thank you.

Yes. Thank you, Jeff. Actually online activity is listed to where we launched in New York City and now has gone to Hollywood and then we're out in LA markets and now we're in San Diego. We're seeing a lot of activity just within the Google Analytics, as well as what's taking place on online at walmart.com and amazon.com as well as others. So Amazon sales have been extremely strong. They have continued to be extremely strong over the last really, call it, three to four years. We always had a good presence. We have a high continuity rate, which is great. And we actually are even aligning further with an internal team to further expand our digital and online presence, with all of our retail partners now moving to digital offerings. When you look at shopping apps, that's a untapped channel for us. We're going to go and go after that in 2020, to really leverage these new mediums of how consumers are shopping and purchasing products. So we're really excited about what we're seeing on online. It remains a great channel for us. And it's exciting times for the company. I think that shows you as well, is what we're building within a consumer base and a community. And as the brand continues to get further strength and more awareness and a further household penetration, it's great to see those numbers continue to increase each and every week. So we're excited about that.

Fantastic. Okay. Great quarter. That does it for me. Thanks for taking the questions.

Thank you, Jeff. Thank you.

Our next question is from Anthony Vendetti with Maxim Group. Please proceed with your question.

So, yes, so just on Func Foods just, the acquisition closed on the 25. I think if we took out the Celsius revenue, the annual revenue for Func Foods last year was around $24 million, $25 million if I'm correct. I'm just wondering what the run rate is now on a quarterly basis. And should we expect that to start to grow here in the fourth quarter?

Yes. Thank you, Anthony. Yes, that is correct. We will start to see that grow in the fourth quarter. I mentioned the two new launches that we had, which was our Peach Vibe and Frozen Berry, was flawless execution, getting a lot of demand. So much demand that they actually sold out of the initial runs of both those flavors. So good momentum on the ground. Right now, they are heading into the holiday season, which is traditionally a slower time in retail where you have a lot of novelties on the retail floors. So it will be in line with historical trends that the Func Food organization has had, but we will start to see the consolidated revenue. They saw about -- right around a 20% lift last quarter. So that was really great to see that in the Celsius portfolio and there's a lot of opportunities to further grow of new channels of trade. Up until this point, it really only focused on the hypermarkets very little distribution and convenience. We know the energy drink category performs extremely well in the convenience channel. We are testing right now in Norway at 7-Eleven and that will be really the first entry into 7-Eleven in the Nordics, so really excited about that opportunity. And then they just expanded into Finland -- one of the main retailers in Finland in the energy category. So really excited about initial feedback and the acceptance of Peach Vibe has been really phenomenal. So you're looking at about a $25 million increase conservatively for -- at the consolidated level as it is today. And then I do -- we do feel there is additional opportunity for further growth. We're not really providing forward guidance on what that growth is, but there is upside potential that is embedded in the numbers.

Okay, great. And then, just a follow-up on international sales. I know, there was -- as you change the China model to the royalty model that impacted international sales. If you stripped out that piece of the business and just looked at the remainder of international sales, how would you gauge that in general?

Well, Asia was about $2.7 million last year. So if you strip that out, then you're talking about -- in this year we generated about $630,000 in Asia. And then we had some other sales of about $160,000. So all in all, I mean, we're growing from that perspective, if you back out the China impact.

Okay, okay. But that -- backing up the China impact, that remains a small business, but the opportunity particularly with Func Foods is significant to grow that internationally, right?

Yes. I think, we see a lot of opportunity with Func Food. There's no question about it. In Asia, there's still opportunities in Asia. We do have our team in Hong Kong. It has been going through -- the retail market there has been troubling, just due to the environment they're operating in. We do feel there is opportunities there to continue to grow. And then we did launch in Malaysia. And currently, really through the quarter we were gaining distribution through over 2,000 7-Elevens, so initially getting seeded in that market. So there is very much slow opportunities for international growth, very focused and disciplined. And North America is as well as the team's main focus, because of the opportunity we have here. When you take out some of the onetime charges, you look at a normalized growth rate North America is growing at a 67% growth rate. And if you just look at North America's sales over the last four quarters, we're starting to see quarter-over-quarter revenue growth. So really great fundamentals and great growth rates we're seeing, within each channel.

Okay. And just, to follow-up John. Just on -- you've launched some new flavors, some new brands and so forth. Are there any in your portfolio -- as you're launching some of these new flavors, they're saying "Hey! You know what this is a flavor that maybe we discontinue. And focus on the flavors that are working." And then, just as a follow-up. Is there any, marketing campaigns new ones planned for the remainder of this year or the first quarter or next year?

Excellent, yeah, you're always looking at, flavor SKU rationalization. There is certain flavors within the portfolio, obviously that are turning at a lower velocity rate than others. Right now our number one flavor, on a per point basis is, Kiwi Guava. That flavor is performing extremely well. We do have Cola -- we have flavors like Cola which is more of a traditional flavor that's been out there for some time. It does have -- what's great about some of our flavors and some of our relationships with our co-packers, we can conduct smaller runs. And with our online offerings through Amazon, walmart.com and several other offerings, as long as we're meeting the velocity rates to really provide reorders and able to turn the product, due to these other avenues and alternative channels -- we have such a great following behind the Cola product that there's a -- it does really great. It tastes great. Maybe it's not for everyone on the flavor profile. But we do have a specific fan base for that product. So, when you look at a lower velocity item that would be one of the flavors. But at this point we're not looking to discontinue any flavors, just because we are meeting all the hurdle rates and demands for the products. So, when you look at other areas we're focused on, we want to be innovative within each category. We want to bring in -- continue to bring innovative flavors out. And we will be on-trend, with our fruit forward position. And as for marketing programs, we have a slew of marketing activities planned for 2020, which we're really excited about. I think you initially saw that with the Live Fit Tour really interactive, experiential sampling. And what we do at Tough Mudder. We're also looking at other properties. Another thing is, is currently further building out our community with the social digital media, influencers and really getting that to a 360 integration with consumers in retail. And a big initiative for us is trade marketing, which -- now that we have DSD partners coming onboard. I don't know if anyone has been to any of the Krogers in Texas and other markets. But we are getting 100 case stack displays. We're looking to really build experiential displays in 2020, further driving awareness and trial.

Okay, great. Thank you. I appreciate John.

Thank you.

Our next question is from Gerry Khermouch with Beverage Insights. Please proceed with your question.

Hi John, I joined the call a little bit late because KDP ran late. So if you covered this, my apologies. But HEAT, seems to line up pretty well with the fitness energy leader Bang. And I'm just kind of wondering, what role you envision for that particular sublines?

Excellent, thank you, Gerry, the HEAT portfolio -- we had some experience -- really some very tough competition heading into really the second quarter this year. As you know REIGN launched with the BOGO and Bang with VPX was also doing heavy discounts. So we do see the HEAT portfolio as a major player in the performance energy category. We're getting interest from many retailers there. And it is definitely a major -- going to be a major contributor in our portfolio going forward as well. So there has been a lot of competition in that 16-ounce category. And we expect that the competitive set to continue to be very competitive, heading into 2020. But we do have -- with our differentiated offering. We do feel there's a great place for the Celsius HEAT in our portfolio and in retail buyer shelf space.

Okay, thanks.

Thank you, Gerry.

Thanks.

We have reached the end of the question-and-answer session. At this time, I'd like to turn the call back to, John Fieldly for closing comments.

Thank you, Rob. Thank you everyone. On behalf of the company, we'd like to thank everyone for their continued interest. Our third quarter results demonstrates our products are gaining considerable momentum as we're capitalizing on today's health and wellness trends, and the change is taking place in the energy category. Our active healthy lifestyle position is a global position with mass appeal. We're building upon our core and leveraging opportunities and deploying best practices. We have a winning portfolio and strategy. And a large rapidly growing market that consumers want. And our mission is to bring Celsius to more consumers, profitably. I'm very proud of our dedicated team, as without them our tremendous achievements and significant opportunities we see ahead would not be possible. In addition, I thank all of our investors, for their continued support and confidence in our team. 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.