Celsius Holdings Q1 Conference Call Transcript

| About: Celsius Holdings, (CELH)
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Celsius Holdings, Inc. Reported A 79% Increase in Domestic Revenues For The First Quarter Of 2016. Margins Also Increased By 170 bps From 39.6% To 41.3%.

International Revenues Continue To Be Negatively Impacted By The Transition To New Ownership Of CELH's Swedish Distributor. Prior Levels Of Product Shipments Are Expected To Resume No Later Than 6/30/2016.

The First Orders For Finland Are Expected To Be Received in The Second Quarter of 2016.

Distribution in China, Expected To Roll Out Later This Year, Will Result In Exposure To An Additional 1.4 Billion Potential Consumers For The Celsius Brand In The Asian Markets.

CEO Gerry David Reiterated That Celsius Is Positioned To Realize "Significant and Explosive Growth" in 2016. Management Will Be Presenting At The B. Riley Investor Conference in Los Angeles 5/26.

Operator: Greetings and welcome to the Celsius (OTCQX:CELH) Quarter 2016 Earnings conference call. At this time, all participants are on a listen only mode. A question and answer session will follow the formal presentation. If any should require operator assistance during the conference, please press star zero on your telephone keypad. As a reminder, this conference is being recorded. I will now hand the conference over to your host, Mr. Cameron Donahue of Hayden IR. Thank you Mr. Donahue, you may begin.

Cameron: Thank you. Good afternoon everyone. We appreciate you joining us today to discuss Celsius Holdings first quarter 2016 financial results. Joining me on the call today are Gerry David, Celsius Holdings Chief Executive Officer and John Fieldly, Chief Financial Officer. Following the prepared remarks we will open the call to your questions and instructions will be given at that time. I expect most of you have reviewed our earnings material by now. I will note that we filed our quarterly reports with OTC Markets and issued a press release after the market closed today. All materials are available on the company's website at Celsius.com in the investor relations section. Before I turn the call over to Gerry, let me cover some housekeeping items.

As a reminder, the audio replay will be available later today. Please also be aware that this call may contain forward looking statements which are based upon forecasts, expectations, and other information available to management as of May 11, 2016. 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 OTC Markets for additional information. With that, I'd like to turn the call over to Gerry David, Celsius Holdings Chief Executive Officer for his prepared comments.

Gerry: Thank you Cameron. Good afternoon everyone and thank you for joining us today. Today we're reporting results for the first quarter that demonstrate the strong and diversified demand for our beverage and energy products and the results we are achieving through our marketing and distribution initiatives. We generated domestic revenue growth of nearly 80% driven by both on-line sales and through our growing network of retail outlets. We made additional in roads towards stabilizing and expanding our International business. Mid-quarter we announced that our products had been approved for distribution in two major convenience store chains with more than 8,000 stores nationwide. Product placements began in earnest during the last month of the quarter driving exponential domestic retail sales growth.

We expect incremental top-line growth in the second quarter of 2016 with a full quarter of sales from these two retailers. Stratifying domestic retail sales further excluding these two retailers, our base of other retailers also grew sales by more than 50%. This is in addition to more than a 15% growth we achieved in health clubs and more than 40% increase we achieved in on-line sales. Within our on-line sales we reached record quarterly sales with premier online retailer Amazon. As carbonated soft drinks and traditional energy drinks continue to fall out of favor, our good for you products are clearly meeting consumer's demand for healthier beverage alternatives across all domestic channels. Continuing to expand and grow our distribution network and broaden the availability of our products remain at the center of our growth strategy, both for our domestic and International business.

Gross profit margin grew by 170 basis points to 41.3% of total revenue in the first quarter of 2016. This improvement was driven by increased domestic volume delivered utilizing the operating leverage implicit in our business model. We continue to look for opportunities to expand our margins. Our domestic growth is impressive and the momentum we are gaining portends a strong upward trajectory for the future. The groundwork we are laying in the International market is also paving the way for increased product placements and future growth. During the quarter we introduced our new Sparkling Raspberry-Acai flavor to the Swedish market. The demand for this product was so strong our distribution partners sold out in less than six weeks.

We are working expeditiously to pump the distribution network with additional products supplied to meet consumer demand. Simultaneously we expect our Swedish distributor Func Food, to launch this new flavor in Finland during the second quarter of 2016 and we expect to be met with similar reception from consumers in that market. During Q1 we met with the Func Foods new CEO, formally Coca Cola's Country Manager of Finland, and their CFO, formally Coca Cola's Commercial Finance Manager for the Nordics. We have confidence in this new management and their vision for growing the Celsius brand in their markets.

We have invested meaningful resources to drive International expansion particularly in Asia, where we have the potential to reach an additional 1.4 billion consumers. Our investments in marketing studies, regulatory approvals, and product development will provide us a great potential in that part of the world. Celsius products are now available to so many health-conscious consumers. Our comprehensive marketing programs are proving to be highly effective. We leveraged multiple social media platforms and celebrity endorsements to promote our products and capitalize on the health and wellness trends.

Subsequent to quarter end we renewed our partnership with multi-platinum recording artist Flo Rida by extending our licensing and endorsement agreement with the artist. Our relationship began more than two years ago when Flo Rida, lending his name and support through co-branded products, social media, guest appearances, and performances at private concerts. We are beyond pleased to have such a talented artist with such a global influence authentically demonstrate impact that our products have on his own life. Flo Rida represents our company and our brands at national sales conferences directly promoting our products with key retailers. As a result, we launched our new Sparkling Watermelon flavored beverage with Vitamin Shoppe nationwide after Flo's attendance at the National Manager's Conference. We added our Peach-Mango flavor to 152 Gold's Gym locations after Flo's attendance at their national conference and Flo's performance representing Celsius at NACS, the world's largest convenience store conference, helped solidify authorization in more than 8,000 new stores.

The results of our relationship with Flo Rida are measurable and evident. During Q1 we've strengthened our executive team with the addition of Vanessa Walker as our Executive Vice President of Sales and Marketing. Vanessa brings over twenty-two years of leadership in the beverage industry where she most recently was Executive Vice- President of Sales and Marketing at National Beverage Corp's La Croix water. During the past eight years, Vanessa led all aspects of building the La Croix brand into the #1 sparkling water in the U.S.. Her vision and leadership will provide the necessary experience to lead our sales and marketing to explosive growth.

To further support our growth, we recently named John McKillop as National Director of Sales for our fitness channel. In this role he will oversee all aspects of sales initiatives in the fitness across the U.S., initially, with global expansion. He joins our team with more than fifteen years in leading sales initiative for the non-alcoholic beverage and the consumer package good segments of some of the nation's largest brands including Pepsi, America's beverage company, Keurig, Javo Beverage, Hormark, and Glandia Performance Nutrition. John spent the last seven years in regional and national management roles at Glandia Performance Nutrition driving results in both the supplement and beverage segments within specialty, DSD distributors, and key accounts. Most recently he served as Director of Sales for the American Body Building, ABB brand at Glandia Performance Nutrition where he led the commercial effort of the organization's longest standing beverage brand in North America. Under his direction ABB brand was well positioned and trending at 2016 to have its first year of positive growth in several years.

We have tasked John with broadening our distribution efforts and increasing revenue in our health club channel, nationally. We also strengthen our corporate governance and our bench of industry expertise with our recent appointment of Hal Kravitz to our Board of Directors. Hal currently serves as the CEO of AQUAhydrate, a Southern California based performance water brand founded in cutting edge technology and science. Hal brings a wealth of knowledge to our Board with extensive experience in revenue growth, management, including business strategy and planning, pricing strategy, knowledge and insight, channel and marketing operations, and beverage category management. He spent over thirty years as an officer and leader at Coca Cola, successfully leading the integration of Glaceau into Coca Cola North America and served as the Senior Vice President of Commercial Operations for multiple brands including Powerade, Fuse, Vitamin Water, and Smart Water.

In addition to his role as Senior Vice President of Glaceau, he simultaneously served as Director of Customer Governance in Coca Cola North America's Franchise Relations Group where he worked with Coca Cola refreshments and the sixty-nine independent Coca Cola bottlers on system alignment, customer management, and go-to marketing strategy. Most recently Hal served as Managing Partner at Intercontinental Beverage Capital helping to structure the New York based Merchant Bank focused on investments within the beverage and CPG industry before becoming CEO at AQUAhydrate. I am certain his industry expertise and innovative approach to business strategy and operational excellence will serve our company well, particularly during our rapid global expansion.

The progress we are making is evidenced by our expanded distribution, increased domestic sales and celebrity, industry, and consumer accolades. We are gaining momentum in an expansive global market with enormous potential to reach literally billions of more consumers. For those of you that may be interested, we will be presenting to and meeting with investors at the upcoming B. Riley & Company 17th Annual Investor Conference in Los Angeles on May 26th. If you're unable to attend in person, our presentation will be broadcast live via the Internet. A direct link to the broadcast will be posted to the investor relations section of our company website.

With that I'd like to turn the call over to John to discuss our financial results. John, please go ahead.

John: Thank you Gerry. Total revenue for the first quarter of 2016 was $3.7 million compared to $4.7 million for the corresponding period in 2015. The year-over-year decrease was driven in large part by a material reduction from our Swedish distribution partner who has been impacted by the recent acquisition and transition to new ownership and management team. As Gerry indicated, based on our recent meetings with the new management team we expect revenues to move towards a more normalized level by the second quarter of 2016.

This decrease in the first quarter of 2016 was partially offset by a 79% growth in domestic sales. This strong domestic growth was driven largely by the strengthening in our domestic retail accounts which grew 103%, primarily from the recent expansion in the convenience store channel as well as continued double-digit growth from existing accounts. In addition, domestic sales were also bolstered by solid double-digit growth in sales in our health and fitness channel and Internet retailers. Gross profits from the quarter were $1.5 million or 41.3% of revenues. Compared to $1.8 million or 39.6% of revenues in the corresponding period last year.

This margin improvement was driven primarily by increased domestic volume utilizing the operating leverage in our business model. We remain focus on improving and at maintaining gross profit margins. Operating expenses in the first quarter of 2016 increased $1.2 million to $2.7 million, up from $1.5 million in the prior year period. This increase was associated with an $890,000 increase in sales and marketing expenses, from investments in marketing programs and human resources and a $313,000 increase in general and administrative expenses from increase stock-based compensation, investments in human resources, increased travel, professional fees, and other office- related expenses.

Total other expenses for the first quarter of 2016 was $57,000 compared to $132,000 in the same period last year. This decrease was a result of lower interest expense on a lower outstanding debt balance. The the net loss for the first quarter of 2016 was $1.3 million or minus 0.03 cents per basic diluted share compared to net income of $213,000 or 0.01 cent per basic and diluted share with the corresponding prior period. Operating expenses for the quarter included non-cash expense including depreciation, amortization, stock-based compensation, which totaled approximately $258,000 compared to $181,000 last year.

Adjusted EBITDA for the quarter was a loss of $886,000 compared to a positive adjusted EBITDA of $559,000 for the corresponding period in 2015. We believe information concerning adjusted EBITDA, a non-GAAP financial measure, enhances overall understanding of our financial performance. A reconciliation of our GAAP results to this non-GAAP measure was included in our earnings press release. Now turning to the balance sheet for just a moment. As of March 31, 2016 the company had working capital of $12.2 million and cash of $9.2 million. At this time we believe our current cash balance will be sufficient to meet our anticipated cash needs for the next 12 months.

Cash used in operations during the first quarter of 2016 was $887,000 compared to cash provided by operations of $801,000 in the prior year. That concludes our prepared remarks. Operator you may now open the call for questions. Thank you.

Operator: Thank you. We will now be conducting a question and answers session. If you'd like to ask a question please press * 1 on your telephone keypad. A confirmation tone will indicate your line is in the question queue. You may press * 2 if you'd like to remove your question from the queue. For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star keys. Our first question is from Luke Trembly, a private investor. Please go ahead.

Luke: Hello, first off I'd like to say Mr. David excellent amazing job at everything that's been going on. I'm an investor over 10 years and I did feel some of those, that pain I would say it was six or eight years ago but my question is just if you could just touch on the accumulated deficit which is over $52 million. I still remember probably about eight or nine years ago where we could see expansion in Internet sales and there was a lot of excitement but I think there was a point where that fell, hopefully that's not going to happen to any of the contracts that we've gotten but I was just wondering if you could touch on, if it was not I understand the momentum and you had to continue with marketing expenses and everything else but I was just wondering if there was any thought of trying to just break even or even just show a touch of profit and cutting back some of that market just to of course maybe get that $52 million down a little bit.

Gerry: Well thank you very much for your question. I appreciate your support for the last 10 years. You know, we, as part of the turnaround back four years ago it was obvious that we had a lot of work to do for about a three year period and if you remember in Q4 of 2014 and Q1 of 2015, we did show a profit. We demonstrated that we could run this company in a profitable mode and actually Q2 of 2015 was cash-flow positive. It was critical that we got to that point to demonstrate we could run this business and get it to a profitable state. We made a conscious decision though that we needed to accelerate our growth at a faster pace which required an investment.

We could have continued to grow slower and grow organically but in this business, in the beverage business, so much is driven by volume. You know, a reduction in cost of goods, getting to a much higher profit later on and getting to that what we call momentum stage and the way to get their quicker, we made a conscious decision back towards the end of Q2 of last year was to invest. By investing we increased our marketing expense significantly. We also started to embark on our efforts to get regulatory and marketing research done for the Asian markets and this is all, again, coming after our strategic investors came in which opened the door to Asia for us and allowed us to gain access to that market in a more readily fashion.

So, the last two quarters of 2015 we had increased our investment significantly and moving into Q1 of this year if you remember some of the press releases we made, especially here domestically, we had brought in, we had gone to what we call a drill-deep approach when we were trying to turn the business around early on. We brought all of our marketing, laser targeted in the specific cities and six regions and six areas and that allowed us to turn the business, get us to maximize on our spend that we're making on marketing, and getting us to a point where we did become profitable, but then the decision was made, like I said we invested, but on Q1 of this year we announced we were broadening out.

Now, the timing was right to go away from what we called the drill-deep approach and expand those markets in the traditional regions in the country and we brought in five Senior-type Regional Managers with an average of 22 years in the beverage industry to come in and help drive our DSD development in those regions, to drive new retailers in those regions. We moved a person into a National Account Executive role which was instrumental in helping us gain 7-Eleven as well as Sunoco and some other accounts. This is again all part of investing at this point in time and what we anticipated is the investments we made not only domestically we're seeing the results now and we're expecting very positive results from this investment domestically. To put it in perspective, our orders, now that we're getting even on a monthly basis, last order we got recently from Amazon, one of the orders was larger than what we did in an entire year four years ago. Okay, on-line.

Everything is now starting to come together. The International markets are poised in Asia. You know, as we've gone through all of this due diligence and hard work and marketing research so I really believe we're at a point in time right now in bringing in Vanessa Walker and bringing up people like that to our team is really getting us positioned to meet significant growth and explosive growth ... I feel very confident at this point that we're on track but thank you so much for the question.

Luke: All right, thank you Mr. David.

Operator: Thank you. As a reminder ladies and gentlemen it is * 1 if you would like to ask a question. We do have another question from Luke Trembly. Please go ahead.

Luke: Sorry, just that, I know it's hard to say because I believe in the growth in the company but if you, let's say $51 million in this type of beverage industry, how many years would you think let's say to get rid of that deficit? Would it take six to seven years? Would it take ten years based on previous companies with this type of deficit?

Gerry: It's really hard for me to predict something like that. Clearly we're going to move as fast as we can to a profitable business. Obviously, if you're shareholders you know, you go back four years ago the stock is trading at $0.28 cents. Now it's at $2.50 today. Our goal is, and we've moved to OTCQX recently and our goal is to continue to gain more shareholder value for the shareholders so that's something that I can't, it's very, very hard to predict. All I can tell you is from my experience at turning businesses around where we're at today, we're at the real cusp here of having potential explosive growth on the International side and we're seeing some real potential and strong growth right now in the domestic side but it's hard for me to really predict something like that. I wouldn't want to give you a prediction on that at this point.

Luke: Thanks so much. Appreciate that.

Gerry: Thank you Luke. Appreciate it.

Operator: Thank you. We have no further questions at this time. I would like to turn the conference back over to Mr. David for any closing remarks.

Gerry: Well, first of all I appreciate all of you on the call today. You know, fixing our domestic business was really job one four years ago. We have to be successful here in the U.S. to be successful globally. Our business model, our infrastructure and branding, it really had to be completely re-done going over the past four years. Our Q1 domestic results really, in my mind, solidify that we've really achieved our domestic turn around. Right now we are on the cusp of solidifying our current International distribution and embarking on aggressive International expansion now reaching an additional potential of 1.4 billion consumers just in the Asian markets alone. We are very positive on our future and we truly appreciate your continued support and I want to thank all of you for joining us today. Thank you.

Operator: Thank you. Ladies and gentlemen this does conclude today's teleconference. You may disconnect your lines at this time and thank you for your participation.

You may listen to the complete audio version of this conference call by following this link: celsius.com/celsius-holdings-inc-investor-call-may-11-2016/

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