Earnings Call Transcript - CELH Q2 2022

Cameron Donahue, Investor Relations

Thank you. Good afternoon, everyone. We appreciate you joining us today for Celsius Holdings Second Quarter 2022 Earnings Conference Call. Joining me on the call today are John Fieldly, President and Chief Executive Officer; and Jarrod Langhans, 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 released their earnings press release upon market close this afternoon, and all materials will be available on the company's website, celsiusholdingsinc.com, under the Investor Relations section. As a reminder, before I turn the call to John, an audio replay will be available later today and can be accessed with the same live webcast link in our conference call announcement and earnings press release. 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 August 9, 2022. These statements involve numerous risks and uncertainties, including many that are beyond the company's control. Except to the extent required by 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 statements 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 remarks.

John Fieldly, CEO

Thank you, Cameron. Good afternoon, everyone, and thank you for joining us today. Our record second quarter represented our 16th consecutive quarter of sequential growth and an 18% increase over the first quarter of 2022. According to the trailing 12 weeks IRI MULO data as of July 10, 2022, Celsius continues to be the top driver of the energy category growth, representing 34% of the category growth, which corresponds to the #1 brand driving category growth. We were also notified last Friday that the S&P announced that Celsius will be added to the S&P Mid-Cap 400 Index, graduating from the S&P Small Cap 600 Index after the close of trading today, August 9. We continue to see growth across all channels, including those not tracked, with club channel sales increasing by approximately $24.9 million for the second quarter from 2021, an additional rollout and expansion in over 175 new BJ wholesale locations that took place in the second quarter. Our vending and foodservice channels continue to see rapid expansion with over 50% growth in sales from the first quarter, with approximately $4.4 million in sales in the second quarter. Additional second quarter retailer highlights include the benefits from the Walmart expansion we discussed on our Q1 2022 earnings call. Sales increased over 700% on a year-over-year basis in accordance with SPINS 12-week data as of June 12, 2022. And in the convenience channel, sales increased overall by 227% compared to the second quarter in 2021. Celsius is now ranked the #5 brand in the convenience channel per SPINS energy ending June 12, 2022. On Monday, August 1, we announced a distribution and investment agreement with PepsiCo. This transformational partnership provides significant near-term U.S. growth acceleration with an estimated 40% increase in incremental distribution on top of our internal projected door growth over the next 12 months. We have also begun the transition with PepsiCo through our distribution and expect most of the transition to take place by the end of the fourth quarter. As part of the transition, a $550 million convertible preferred investment was made by PepsiCo in Celsius, and the investment aligns incentives for both parties. The investment is priced at $75 per share. It converts approximately 7.3 million shares, which equates to approximately 8.5% ownership in Celsius on an as-converted basis. The preferred shares receive a 5% annual dividend, paid quarterly in cash or in kind at Celsius' option. One point of clarification we want to make clear is that on the call last week, we notified and discussed that the transition was cash-neutral in regards to our distribution network. This was not inclusive of the $550 million investment by PepsiCo. In regards to the distribution settlement and transition costs, PepsiCo will assist with these charges as part of the distribution channel transition agreements, whereby the cost will be cash-neutral to Celsius. We want to officially welcome James Lee to our Board of Directors. Mr. Lee is currently the Senior Vice President Chief Strategy and Transformational Officer of PepsiCo Beverages North America, PepsiCo's largest operating sector. He is responsible for leading the PBNA's long-term strategy, business development, digital and value chain transformation, and sustainability. He has had several financial leadership and other leadership roles since he joined PepsiCo in 1998. We look forward to utilizing his significant experience in both domestic and international opportunities.

Jarrod Langhans, CFO

Thank you, John, and good afternoon, everyone. Before jumping into the results, I'll cover a quick housekeeping item. As an update to our previously disclosed SEC inquiry, we have fully responded to all follow-up questions but do not have any material updates to date on this process other than reaffirming our previous comments. Turning to our second quarter financial results. Our second quarter revenue for the 3 months ended June 30, 2022, was approximately $154 million, an increase of $88.9 million or 137% from $65.1 million for the 3 months ended June 30, 2021. Approximately 103% of this growth was as a result of increased revenue from North America where second quarter 2022 revenues were $145.4 million, an increase of $91.8 million or 171% from the 2021 quarter. The balance of the revenue for 2022 was mainly attributed to European revenue of $7.3 million, which decreased from the prior year quarter, primarily due to foreign exchange rates and timing. Asian revenues, which include royalty revenues from our China licensee, contributed an additional approximately $900,000, an increase of 43% from approximately $600,000 for the prior year quarter, which includes increases in royalties payable under our licensing agreement. Other international markets generated approximately $400,000 in revenues during the 2022 quarter, an increase of roughly $400,000 or 634% from the prior year quarter. Total increase in revenue was largely attributable to increases in sales volumes rather than increases in product pricing. The primary factors behind the increase in North American sales volume were related to continued strong triple-digit growth in traditional distribution channels combined with an increase in optimization of our products presence in world-class retailers, i.e., additional SKUs. Additionally, the continued expansion of our DSD, or direct store delivery, network resulted in significant growth in distributor revenues of over 200% when compared to the prior year quarter. Gross profit for the 3 months ended June 30, 2022, increased by approximately $31.1 million or 110% to $59.3 million from $28.2 million for the 3 months ended June 30, 2021. Gross profit margins reflected a decrease to 38.5%, 44% excluding outbound freight for the 3 months ended June 30, 2022, from 43.4% or 51.8% excluding outbound freight for the 2021 quarter. The increase in gross profit dollars is related to increases in volumes, while the decrease in gross profit margin is mainly related to higher raw material costs, primarily aluminum cans, ocean freight costs, transportation costs, and repackaging costs. As a percentage of sales, sales and marketing was 21% of revenue in the second quarter of 2022 compared to 24% in the second quarter of 2021 as we were able to leverage our accelerated growth. General and administrative expenses for the 3 months ended June 30, 2022, were approximately $14.4 million, an increase of $2.1 million or 17% from $12.3 million for the 3 months ended June 30, 2021. Net income for the 3 months ended June 30, 2022, was $9.2 million or $0.12 per share. In comparison, for the 3 months ended June 30, 2021, the company had net income of approximately $800,000 or $0.01 per share. Focusing now on liquidity and capital reserves. As of June 30, 2022, we had cash of approximately $60 million and working capital of approximately $197.9 million with no long-term debt. Cash flows provided by operating activities totaled approximately $42.3 million for the 6 months ended June 30, 2022, compared to $30.3 million net cash used in operating activities for the same period in 2021.

Peter Grom, Analyst

Congrats on another strong result. So I know it's really only been a week here, but would just love to get some perspective on whether you have some updated thoughts on the Pepsi distribution agreement. Have you begun to wrap your head around kind of a long-term revenue opportunity and how we should be really thinking about the benefits of top line growth looking out to 2023?

John Fieldly, CEO

Yes. Thank you, Peter. The team did a great job with the results, and we are starting to work through that process. Based on our analysis, we are looking at the opportunity, and we're also looking at the results from our relationship with Bang on the increase of points of distribution and GDP. We anticipate an expansion into these alternative channels or to unreported as well in regards to foodservice and independent convenience, which we see as a huge opportunity for the brand to expand. We anticipate about a 40% increase in distribution by the end of solidifying this relationship over the first 12 months, and it could be a significant upside from that number.

Kaumil Gajrawala, Analyst

Can we talk about the club channel a little bit? You mentioned — you provided a good amount of figures on your success in the club. How much of that was kind of first-time fill-in versus kind of continuation? Obviously, BJ's seems to be a bit new. Can you maybe just talk about what we should expect from this channel going forward now that you seem to be in quite a few more stores?

John Fieldly, CEO

Yes. Kaumil, good question. The club channel has been really surprising to us. We first started expanding in that channel significantly in the fourth quarter with the national rollout at Costco, and then in the first quarter of this year, we expanded into Sam's Club. When you're looking at the second quarter, you're looking at mostly reorders from those customers. Now those 175 stores from BJ's are new. But in general, you're looking at the majority of reorders that are flowing through those clubs. The volume coming through those clubs is really exciting because it shows the opportunity. We are not seeing any slowdowns in alternative channels as well. So it was really incremental to our overall sales.

Kevin Grundy, Analyst

I wanted to pivot to the international business. A two-part question. The first one, just sort of near term and cleanup. Jarrod, I think you mentioned the results in Europe. Some of it was timing-related. Certainly, the stronger dollar played a part. Should we expect to see that reverse? If it's such a smaller part of the business, but I think it's sort of enough to move the needle a bit versus expectations in the quarter. Maybe just comment on some of the near-term dynamics.

John Fieldly, CEO

Yes. And on the international opportunity, we see massive potential. The same health and wellness trends that we see in North America are global trends. The fitness and wellness trend is a megatrend that's really taking hold in all regions of the globe. We're focused as a company on completing our North American transition with as little disruption as possible. When you look at Nordics revenue, it totaled about $7.3 million, a decrease from the prior quarter, primarily due to foreign exchange rates and the timing of orders, as well as the supply chain delays in the market. Revenue from other markets totaled about $1.3 million. We are ready, and the product is on the shelf. We expect to see good results for the rest of the year. Overall, our focus is to build our brand awareness in these markets and ensure a solid presence as we expand our distribution. The PepsiCo partnership is expected to significantly assist us in this regard, leveraging their existing supply chain and distribution network.

Jeffrey Cohen, Analyst

Congrats on the news last week, and congrats on the S&P upgrade. Just a couple of questions from our side. So any commentary specifically on the rollout of the On-The-Go sticks as far as early learnings? And I'm assuming the On-The-Go sticks are also part of the deal with Pepsi as well.

John Fieldly, CEO

The powdered product is going to be something we're managing internally. That's not part of the PepsiCo arrangement. We are seeing great interest in our powdered products. They contribute to good gross margins, and we're looking to expand their distribution across the market.

Jarrod Langhans, CFO

We do see an opportunity to really expand the distribution across the retail market. It's a product that can be transported easily, so we'll be able to roll it straight into the distribution centers of various retailers.

John Fieldly, CEO

The transition with Pepsi should provide significant operational efficiencies, and we expect that this partnership will yield strong returns in terms of both market presence and sales growth.