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Executives

Stephen Haley - CEO & Chairman

Geary W. Cotton - Chief Financial Officer

Celsius Holdings (OTCPK:CELH) Q3 2010 Earnings Call November 11, 2010 11:00 AM ET

Operator

Good morning and welcome to Celsius Holdings’ Third Quarter 2010 investor conference call. Joining me on the call today is Steve Haley, the company’s Chief Executive Officer and Geary Cotton, the Chief Financial Officer.

During the course of this conference call we will make forward-looking statements regarding future events and the future performance of the Company. We caution you that such statements reflect our best judgment based on factors currently known to us, and that you should not rely on such forward-looking statements since our actual events or results could differ materially as a result of a number of important factors. These factors include general economic and business conditions, trends, the impact of competition, technology and regulations and other risks and uncertainties discussed in the reports we file from time to time with the Securities and Exchange Commission. We assume no obligation to update any forward-looking statements or other information provided during this conference call.

In adherence to Regulation Fair Disclosure, the Company has provided information in its third quarter 2010 results press release and this publicly announced conference call. We will not provide any further guidance or updates on our performance during the quarter unless we do so in a public forum.

Stephen Haley

Thanks Christine and thank you for joining us for our Third Quarter 2010 investor conference call.

Financial results for our third quarter 2010 were released to the public yesterday in our press release. You can view a copy of the press release on our web-site at www.celsius.com in the investor section.

The quarter can best be summed up as an aggressive effort to raise the top line through heavy promotions and consumer advertising with mixed results. Scan data from the cash registers showed that consumer sales continued to increase but not at a corresponding rate of the increased marketing spend. This led to a lower net revenue number and higher loss than our plans called for.

Before getting into more of the details, let me first provide a summary of our results and offer some brief insight into the numbers. Geary will provide more details in a few minutes.

Our top line Net Revenue was $1.8 million. This is down from the $4.1 million in the second quarter. You may ask if consumer sales at the register are increasing, why would the top line decrease from the last quarter. One of the first reasons is we shipped a large pipeline order in Q2 to Wal-Mart. These large initial orders that mainly fill the supply pipeline and store shelves, lead to a high degree of lumpiness in revenue as we are adding these larger retailers. If you remember, we had the initial pipeline order for Costco in the 4th quarter of 2009. A second reason for the lower than expected top line is a pipeline order to another large retailer was delayed by the retailer until the latter part of the quarter and we were requested to only ship about half of the planned amount in September.

In addition to the variance driven by the timing of the initial pipeline orders, we ran large promotions at three of our larger retailers. These promotional discounts net against invoiced amounts, to arrive at our reported net revenue. Two of these promotions were a much more successful than planned and thus we had a large hit to net revenue. We believe these promotions were successful in driving more consumer sales but at a $1.8 million dollar hit to our top line. Our plans don’t call for this magnitude of promoting in the future.

Of the roughly 27,000 retail locations that we get scan data from we saw a 24% increase in consumer purchases this third quarter versus the prior quarter. This data does not include the military, the convenience channel, health clubs and gyms or new retailers like Target or BJ’s. It is a good increase but not what we expected with our increased marketing efforts. Also, the Nielsen/IRI data which gathers and reports on scan data show that in the top 20 nutrition aisle brands in food, drug, mass excluding Wal-Mart, for the most recent 12 week period ending October 2nd 2010, and Celsius’ growth was 121% and the fastest growing brand in the top 20. Remember, this period includes the previously mentioned aggressive promotions.

Our bottom line was also impacted by the more aggressive marketing spend. We utilized various marketing vehicles and closely tracked their weekly performance against consumer scan data. Our plans had called for a lower spend but with the extra line of credit provided by Carl DeSantis, we were more aggressive in an attempt to build our base. As I mentioned, we were successful in this regard. The long term impact of the extra spend will be seen over the upcoming quarters.

Before Geary covers more of the financial details and ramification of these activities, let me give some more highlights of the third quarter. We made considerable progress on several fronts that should not be overlooked when evaluating the quarter.

As announced by the National Advertising Division of the Better Business Bureau, after a thorough review of all our clinical research and marketing claims, the NAD decision said our science does back up our claims that drinking Celsius results in “increased metabolism,” “calorie burning,” “fat loss,” “decrease in body fat,” “greater endurance performance,” and “greater resistance to fatigue or increased energy”.” They verified that Celsius does burn over 100 calories by raising resting metabolism over a three hour period and when combined with exercise it delivers increased fat loss and other benefits such as greater endurance. Knowing that we have the science to substantiate the benefits of Celsius is not new but having the NAD’s in depth review and positive decision sets Celsius apart from many companies that do not have the scientific foundation or have not participated in a review process such as this. Also I would like to add that going through a process like this shows just how critical following the proper protocols for a study and doing so with accredited experts in their field like we have done is critical. We are proud of our science as it makes up a large part of our overall intellectual property and something that would take a large amount of time and capital to replicate.

One of our key initiatives is to increase availability for Celsius in the cold-drink/immediate consumption channel. We’ve had great success getting the warm, four packs into national distribution but need an easier way for consumers to try a cold Celsius. To gain the national distribution we utilized the larger retailers own warehousing systems. The refrigerated doors or cold vaults in most stores, however; are serviced by local DSD or Direct Store Distributors. We are actively adding these local distributors to service these locations in the stores. We are now in full swing with the Coast network of distributors on the west coast and we are already seeing success in bringing on smaller regional chains as well as additional cold space in accounts where Celsius is already in the nutrition or diet aisles in four packs. In accounts where we have both the 4 pack and cold singles we see strong growth. The cold singles make it easier for a consumer to try a few to determine their favorite flavors.

I should also point out that we have gained many authorizations for smaller convenience chains around the country where we will continue to utilize larger convenience wholesalers such as McLane. This is especially important for areas where we have not put together a contiguous network of distributors like the Polar network in the northeast or the Coast Network out west. Many of these regional chains have a hundred to three hundred locations and they are the dominate chain in their respective areas. While we are getting the authorizations lined up now, the actual resetting of their stores will be early next year so we shouldn’t see much impact on sales until the first quarter of 2011.

In addition to the cold door initiative, we are aggressively working to get Celsius into more gyms and health clubs. While our overall volume will probably always be greater in the larger food and beverage retailers, the healthier characteristics and pre-exercise benefits of Celsius makes gyms and health clubs one of the best places to drive trial. We do sampling at many large and small events but believe the best way to get a loyal Celsius customer is to have them try a can before they exercise. We’ve known for a long time that if someone tries Celsius and can understand what it is and does, they will buy it. The feedback that we get says the fastest way for someone to understand its benefits is to drink one before their workout or before their favorite activity. This also helps reduce skepticism. We’ve given out thousands of samples and the feedback was positive in regard to taste but the prospective consumer couldn’t really tell if they were burning calories. They may feel extra energy from the rise in metabolism but this only led them to think of Celsius as more of an energy drink. Albeit, a healthier one. We have the multiple clinical studies that help prove Celsius burns calories along with many other benefits but nothing can prove the benefits more than someone doing their own personal study by seeing how it improves their own exercise or workout.

To help get Celsius into more gyms and the like, we engaged Europa as our distributor for this channel of trade. Europa is the country’s largest distributor for this channel and we are excited to be working with them.

Getting more consumers to try Celsius before their favorite exercise is even more important now that the sports drink market is starting to segment. For example, Pepsi has renamed Gatorade as the G-Series with now specific products targeted at pre-workout, during workout and post workout. This emerging pre-exercise category is one that is receiving a lot of marketing dollars and we believe that this category will be the fastest growing segment of the sports nutrition beverage market. We also believe we have a great head start and our ability to make powerful function claims as well as being able to feel the benefits from just one can gives us a unique advantage. We look forward to competing with others in this growing category based on which product leads to the best results and performance.

We have been asked whether or not we are leaving behind the market of consumers looking for weight loss since obesity is such a large problem here in the US as well as around the world. Our answer is no. Hopefully, you’ve seen the increasing number of real Celsius customers who have very real and exciting results from drinking Celsius. In the last four weeks we have been on each of the major television news networks who have done three to five minute news segments interviewing these Celsius customers and highlighting their exciting results. The key here is all of them used Celsius as an important part of the transformation. Also key was exercise and a better diet. There certainly is a portion of the potential weight loss market that is looking for a magic potion, drink or pill. One that they drink or take and expect the pounds to just melt away. We believe that this is a fickle market and one that goes from product fad to product fad hoping for results. Now we certainly have great stories from people who have lost weight because they switched from some high calorie sugary drink to Celsius and because they are not getting the calories of the other one and they are burning more than they take in with Celsius, it led to weight loss. We are excited about this. But we believe using the drink occasion of pre-exercise to introduce Celsius will let them see and feel the results even faster than only waiting to see if they lost weight. And even more important is if you are drinking Celsius to lose weight, doing so before even very light exercise, like a short walk, will lead to faster results.

So we are excited about where the market is heading and believe that Celsius, and the real results that it delivers, position us to be a leader.

To further our ability to exploit the growing fitness wave and the more recent sports drink market segmentation, we are launching more products all based on the proven MetaPlus technology. While they were not part of our third quarter sales, we have now launched two new flavors. The new Strawberry Kiwi and Lemon Iced Tea have received fantastic reviews so far and we believe will soon be in the top four if not top two or three. Both are non-carbonated and available now on our website, Celsius.com. They will start showing up on some retailer shelves over the course of the quarter and into next year. Remember for some of the larger retailers it could take months before a new product gets into their plan-o-grams.

We are also now producing our new 2.5 oz Celsius shot. It has a full serving of MetaPlus and the flavor is Calypso Punch. This will be a great product for someone that wants the full benefits of Celsius but not looking for a full ready to drink version to enjoy. The shot should be available from our website late November and will start moving through the supply chain in December. Announced just this week, we will also launch our new Stevia based ready to drink Celsius that will be an Apple Orchard Blend flavor and targeted specifically to the health food channel. This product will also start to ship late in the 4th quarter.

You can see we continue to make progress and we are excited about it. Still the fact remains, sales are not at the levels we expected and we believe we will need additional capital for growth. We have engaged Zenith International to help us identify and evaluate the best alternatives. We are only in the initial stages of the process and our objective is to close a deal sometime in the first quarter of 2011.

As I now turn it over to Geary for more of the details of the numbers, I hope you get a feel for why we are optimistic about our future. Consumer sales at the register are increasing. Our science has been validated and we continue to strengthen our product line. We’re expanding our distribution both in channel breadth as well as geographic depth. We still have a lot of work to do but real progress is being made.

I’ll now turn it over to Geary for more of financial specifics and afterward he and I will open it up to your questions.

Geary?

Geary Cotton

Thank you Steve.

Net Revenue for the three months ended September 30, 2010 increased 32% to $1.8 million from $1.3 million for the comparable quarter in 2009. The quarter this year included a charge to revenue of $1.8 million dollars compared to $232,000 last year related to discounts, coupons, slotting allowances and promotions. This is an increase of over one and a half million dollars. As Steve mentioned, the company strategically determined to be very aggressive with the promotions in the third quarter. The details of the $1.8 million dollars of promotions include:

$450,000 in temporary price reductions

$870,000 in consumer coupons

$380,000 in slotting fees and

$100,000 for other discounts and allowances

If you compare invoiced revenue this year versus last year the amount is $3.5 million against $1.5 million or an increase of 133%.

Total case equivalents for the three months ended September 30, 2010 increased to 155,000 vs. 64,000 for the same period last year, an increase of 142%.

Sequentially, from the second quarter, net revenue was down from the $4.1 million of which $1.4 million was a pipeline fill. Pipeline fill in the third quarter was approximately $560,000.

Gross profit was 2% in the third quarter of 2010 as compared to 43% for the same period in 2009. Because of the large promotions this year, a more accurate view of the actual cost of goods should be compared to invoiced sales. The third quarter 2010 cost of goods was 50% of invoiced sales compared to 49% for the third quarter of 2009.

Sales and Marketing expenses increased substantially to $4.2 million in the third quarter versus $2.6 million in the same quarter a year ago. Expense increases as compared to the same quarter last year were:

Consumer Advertising = $1.0 million

Product Sampling = 500,000

General and administrative expenses increased from $624,000 for the third period in 2009 to 722,000 in the third quarter of 2010, an increase of $148,000. This was due to an increase in professional fees of $115,000, increase of one time employee severance related expenses of $135,000 offset by a decrease in option expense of $84,000.

Net loss for the third quarter of 2010 was $5 million or 27 cents a share versus $2.7 million or 36 cents a share in the third quarter of 2009.

As was mentioned earlier, the company has not met its internal operating plan requiring the company to seek additional capital. We have engaged Zenith International to lay out our strategic capital opportunities. Zenith International is one of the top advisors in the beverage industry and assisted many companies in accomplishing what we are trying to do.

At the outset of the year, when we completed the capital raise our goal was to get to cash flow positive by the first quarter of 2011. We believe now, that we are about a year out from where we originally anticipated and additional capital requirements are in the $5 to $10 million range, depending on our anticipated marketing spend.

We, as management are still very optimistic about the Celsius brand and I look forward to keeping you informed of our progress.

I will now turn it back to Steve for closing remarks.

Stephen Haley

Thanks Geary.

Let me once again say that we remain excited about the potential for the company, the Celsius brand and the MetaPlus technology. It is taking more time and capital than we planned but so many of the elements of the original vision continue to get better and stronger. The official review of our studies is a big plus for us and the new products built on the MetaPlus formula look like winners. The fitness wave is huge and growing and the pre-exercise segment looks to offer substantial growth. We are very well positioned here and excited about exploiting our head start in the emerging category. If you haven’t been to our website recently please do so. There are many more customer success stories and more insight into the pre-exercise category and positioning.

We see that it will take additional capital to continue to grow the brand and we are committed to finding a strategic partner for not only the required growth capital but hopefully extra value-add in the marketplace. The team and I are committed to working together to grow the Celsius brand and company as well as this exciting new category.

With that, we’ll open it up for questions. Operator do we have any questions in the queue?

Question-and-Answer Session

[Q&A]

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