Celsius Holdings, Inc. (CELH) CEO John Fieldly on Q3 2019 Results - Earnings Call Transcript

Nov. 10, 2019 4:06 AM ETCelsius Holdings, Inc. (CELH)
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Celsius Holdings, Inc. (NASDAQ:CELH) Q3 2019 Earnings Conference Call November 7, 2019 10:00 AM ET

Company Participants

Cameron Donahue - Investor Relations

John Fieldly - President & Chief Executive Officer

Edwin Negron - Chief Financial Officer.

Gerry Khermouch - Beverage Insights

Conference Call Participants

Jeff Van Sinderen - B. Riley

Jeffrey Cohen - Ladenburg Thalmann

Anthony Vendetti - Maxim Group

Gerry Khermouch - Beverage Insights


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.

Cameron Donahue

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?

John Fieldly

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 the quarter. And excluding the $1.3 million shift in sales in 2018, revenues grew 66% for the quarter in 2019 versus the prior year on a normalized basis. Year-to-date revenue growth totaled 52% for the first nine months of 2019, which demonstrates the demand for our portfolio and our ability to execute and drive profitable growth.

Subsequent to quarter-end we completed the acquisition of Func Food Group, our Nordic distribution partner, which is not included in our third quarter results as the transaction took place on October 24 in the fourth quarter. We are extremely excited about the transaction and the upside opportunity this provides Celsius and our shareholders going forward. We welcome the Func Food team to our family. And after Edwin reviews the financial results for the quarter, I will be providing additional details on the acquisition.

Our revenue for the first nine months of 2019 totaled $51 million, which is close to outpacing our full year revenue in 2018 of $52.6 million. Clearly, we are on track for another record-setting year. We remain steadfast in our strategy to position Celsius as a global leader for health-minded consumers and in doing so continue to expand our presence, increase volume and elevate our brand.

Through our focus and drive, we are gaining brand love and acceptance from more and more consumers each and every day, as our passion for living better and living fit is motivating to all. This motivation is gaining interest from some of the largest retailers in the country, looking to update their planograms to align with today's health-minded consumer. And we anticipate Celsius will continue to gain availability heading into and through 2020.

Our pursuit towards a national distribution network now includes and totals more than 70 regional direct store delivery, DSD, partners many of which are premier beverage distributors. Expanding to a national distribution direct store delivery network is designed to increase our in-store presence, is designed to improve our execution in the trade and expand our availability and enables us to stronger inventory management in retail stores, reducing the out of stocks with our high velocity brand.

We expect to achieve majority coverage across the United States in the next 12 months, if not sooner, which is to be a best-in-class accomplishment within a highly competitive beverage industry. We are rapidly leveraging our new regional delivery distribution partners, creating significant opportunities to further build out across all markets of trade, especially in the convenience channel where we are significantly outpacing many established competitors in the sales growth metrics.

According to most recent SPINS data, third-party data in the convenience channel, shelf-stable energy and functional beverage data set for the prior 52 weeks ending September 8, 2019, shows Celsius is growing at a 41.1% growth rate versus the prior year, which is outpacing the category growth by 4.3 times with only an 11.9% ACV, which is all accumulated volume, indicating that Celsius has a long growth runway ahead as we further expand in the convenience channel and continue to outpace competitors.

We have experienced the most significant expansion in the distribution network within the independent Anheuser-Busch wholesaler network, which has increased from six distribution partners within the wholesaler network to 31 since February.

In addition, we have expanded within the MillerCoors, Pepsi and Keurig Dr. Pepper affiliated wholesalers. With the accelerated expansion, we are very excited to now have approximately 2,500 wholesale sales representatives now selling Celsius nationwide on our behalf.

In the first half of this year, we signed a distribution agreement with Big Geyser, New York's largest independent non-alcoholic beverage distributor serving the five boroughs of New York City and the counties of Nassau, Suffolk, Westchester and Putnam. Big Geyser serves more than 20,000 locations in the massive New York City metropolitan market and has been instrumental in building numerous brands.

Starting in the third quarter of 2019, Big Geyser will be our -- is our preferred distribution partner servicing all 7-Elevens in the territory, which will significantly increase our distribution in the New York market. And in addition, we are in the process of transitioning Target stores over to Big Geyser in the territory, which will further increase our availability and velocities. As we build out our DSD network, we will continue to transition accounts over to this preferred route to market, which will further increase our in-store presence and velocities at retail.

Subsequent to quarter-end, we signed a national authorization with Foodbuy, a business unit of Compass Group North America and the largest foodservice procurement and supply chain solution organization in North America with over 85,000 unique customer locations.

Celsius branded drinks are now available nationwide across all Compass Group North America business units. The new channel adds incremental market opportunities for us which include hospitals, airports, college campuses, restaurants and casinos among others and further adds to our momentum in the foodservice channel.

In addition, in the vending channel, we are now available through over 400 vending suppliers, who cover over 10,000 micro markets and thousands of healthy vending units throughout the United States. The convenience channel continues to be -- represent the largest opportunity of the energy drink sales in the country, with more than $9 billion in annual sales. Industry-backed third-party data continues to validate our position, as a healthy functional fitness drink, that's resonating with today's consumer.

As stated, this third-party SPINS data at September 8, 2019, shows Celsius is growing at a 41.1% year-over-year increase for our portfolio in the convenience channel, outpacing competitors in the category. This demonstrates Celsius warrants additional shelf space and we are leveraging this data with buyers. We are currently working on planogram resets for 2020.

Most recently and earlier this year, we launched placements with premier convenience store chain, QuikTrip and look forward to further partnering in 2020. In addition, we recently expanded distribution to additional 3,300 convenience stores, where placements will start to take place throughout the third quarter and will continue through the fourth quarter with most recent expansion including Circle K in the Southeast, Myers Convenience, Flying J and Pilot, as well as additional regional chains with more to coming onboard throughout 2020.

We continue to expand our portfolio with delicious flavors. Just subsequent to quarter end, in the third quarter, we launched our newest flavor Grapefruit Melon Green Tea at the 2019 National Association of Convenience Stores shows in Atlanta on October 2 through 4. This is the largest convenience store show in the country. At the show, we received great reviews and interest as our noncarbonated green tea offerings which are attractive to new consumers entering the energy drink category looking for noncarbonated offerings.

As the energy drink category continues to evolve and gain broader appeal, it's attracting new consumers, wanting more out of their beverage and noncarbonated offerings are gaining interest from retailers, looking to attract these new consumers into the category. The addition of the new flavor highlights the continued growth of our proven functional beverages and demand for healthier energy drinks offering vitamins without sugar and calories found in traditional energy drinks.

The fruit forward noncarbonated green tea flavor is an on-trend addition to our current green tea flavors that we believe will continue to appeal to a broader base of energy drink consumers. The strengthening of our green tea as a flavor profile is a refreshing way to highlight the green tea that is already one of our key ingredients in our proprietary MetaPlus formula.

This launch came on the heels of the second quarter launch of our ninth flavor, great-tasting sparkling Fuji Apple Pear, which we launched in the fitness and vitamin specialty channels and throughout GNC with a mandatory 1,800 locations approved and authorization across all sets.

In addition, Fuji Apple Pear is now also available at select 7-Elevens and throughout Amazon and is gaining distribution throughout many retailers in the country, as well as across the fitness channel, where we gained distribution in top-tier fitness retailers nationwide including the likes of Gold's Gym 24-Hour, Crunch Fitness, Xsport Fitness, Smoothie King, Youfit, Equinox via Earthbar as well as In-Shape Fitness and many others are now selling sparkling Fuji Apple Pear, which has become one of the top-selling flavors at many locations.

In addition to the great-tasting flavor line extensions, our innovation team is working on developing offerings, targeting new verticals in adjacent categories, which will further increase the breadth of our portfolio. Our mission is to become a global leader of a branded portfolio, which is proprietary, clinically proven and are innovative in its category and offer significant health benefits.

During the third quarter, we further expanded our portfolio to include an innovative branch-chained amino acid BCAA functional beverage that fuels muscle recovery. The BCAA product line was initially launched in the fitness channel and further establishes the company as a leading innovator in the functional beverage market. Celsius BCAA Recovery drink debuted in September at the renowned 2019 Mr. Olympia before a premier demographic of athletic trainers', bodybuilders, endurance athletes and gym goers. The Mr. Olympia is the world's most prestigious fitness industry showcase event, an international bodybuilding competition that is held annually by the International Federation of Body Building & Fitness.

Our new BCAA Recovery line is an extension of our strategy to introduce innovative beverages for today's health-minded consumer, which comes in three great flavors and has been highly accepted by retail partners and initial reorders have been strong. And we anticipate this new line to add meaningful growth in 2020.

In North America, we have increased the number of retail locations where our products are available by 57% in 2019 to over 60,000 locations nationwide. Our expansion into household name retailers such as Target and CVS have greatly increased product availability, while our relationship with Kroger, the largest U.S. grocery store chain has significantly expanded to include over 1,100 locations nationwide. Kroger will initially carry between four and seven flavors of Celsius, depending on the region's location of the store. Exponential growth across all channels of trade continues to accelerate in North America.

In Europe, revenues for the third quarter were down 11%, coming in at approximately $3.4 million and slightly down to flat for the first nine months of 2019, due to timing of new flavor launches, promotional programs and timing of orders. Please keep in mind, these revenues are derived from Celsius sales to our Nordic partner and are not sales from our Nordic partner to retail locations and consumers i.e. sell-in or sell-through data. In addition, these figures are not Func Food Group acquisition, took place post quarter-end on October 24.

During the quarter, our partners saw great demand for the Celsius portfolio, with the launch of two new great flavors Peach Vibe and Frozen Berry, which have been in high demand. We are very optimistic of the team's focus, execution and plans for 2020 as they continue to expand into new channels of trade and further increase market share throughout the Nordics.

After Edwin reviews our financial results, I'll be providing additional details on the acquisition of the Func Food Group. Earlier this year, we completed the realignment of our China business operations with the signing of a royalty agreement, which has further reduced our in-country early market brand awareness investments and reduced our use of working capital, while still providing us with the opportunity to extend the reach of our products and grow revenue through a license and royalty model.

As such, higher sales with consistent gross margins and lower expenses related to China were the primary drivers of us delivering positive net income in the third quarter of this year. In addition to capturing licensing and royalty revenue by serving the enormous China market, the agreement also provides us with a vehicle to recoup $12.2 million of market investments, we made in prior years over a five-year period where our counterparty Qifeng Foods has exclusive rights to manufacture market and commercialize Celsius branded products in China.

Through this agreement, we have created a collaborative relationship that will serve the benefit for each of us, as we strive to capitalize on the considerable consumer demand in the region. Qifeng Foods has relationships and a network of distribution partners that brings our four flavors of Celsius to 63 cities and over 65,000 locations across China.

Moving to marketing and supporting our growth in North America, we launched our first national guerilla marketing tour, featuring various interactive fitness activities including outdoor classes, hosted by popular instructors from around the nation, as well as competitive activities to inspire attendees and influencers to find what motivates them to live an active lifestyle.

The Live Fit Tour officially kicked off in New York City on September 7 with a Celsius branded fitness event in Union Square. We are bringing our Celsius Live Fit Tour to 12 cities around the country, including Boston, Seattle, Portland, San Francisco, Los Angeles, San Diego, Phoenix, Dallas, Miami, Orlando, Tampa and others with a goal of inspiring and creating movement which energizes each city with approximately 300,000 samples to be distributed along the way.

Along with the tour, we will be stopping at various retailers, distributors, local events, fitness partners like Planet Fitness Gold's Gym, 24-Hour and others, and this program overlays over our distribution and is designed to build consumer awareness and activate the trade and retail partners in key markets through various media platforms.

We also remain very active with Tough Mudder, a series of competitive events with a range of athletic ability. Through this relationship, we are in the process of samplings to more than 200,000 health-minded consumers in 23 cities across the country, reaching new markets and new communities. In addition, we are conducting targeted marketing guerilla campaigns in key markets and interacting with consumers where they live, work and play, all through a variety of media platforms.

We remain committed to our strategy of expanding our distribution network through high quality distribution partnerships and going deeper and broader with existing accounts and leveraging our infrastructure to optimize returns and profitability. I look forward to speaking with you again when we report our results for the full year of 2019.

I will now turn the call over to Edwin Negron-Carballo, our Chief Financial Officer for his prepared remarks. Edwin?

Edwin Negron

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 broker commissions and storage and distribution costs in order to support our higher business volume.

General and administrative expenses for the three months ended September 30, 2019 were $2.2 million, a decrease of $93,000 or 4% when compared to $2.3 million for the three months ended September 30, 2018. The decrease was primarily due to lower stock option expense of $253,000 and a decrease in other administrative expenses of $33,000, which were partially offset by increases in expenses related to the acquisition of our Nordics distributor of $145,000 and increases in other general and administrative expenses amounting to $48,000 when compared to the same period last year.

Total other expenses amounted to $543,000 for the three months ended September 30, 2019, up from $43,000 for the three months ended September 30, 2018. The increase is primarily the result of interest expense of $109,000 and the amortization of discounts on notes payable of $528,000, which was partially offset by interest income related to the receivable from our China distributor of $96,000.

The net result for the three months ended September 30, 2019 was net income to common shareholders of $961,000 or $0.02 per basic share based on a weighted average of 59,307,404 shares outstanding and after adding back interest expense on convertible notes of $105,000, an amortization on discount on notes payable of $528,000, a dilutive net income available to common shareholders of $1.6 million or $0.03 per share based on a weighted average of 62,532,510 shares outstanding, which includes the dilutive impact of stock options of 992,693 shares and the dilutive effect of the convertible notes of 2,232,412 shares.

In comparison for the three months ended September 30, 2018 the company reported a net loss of $4.2 million inclusive of a preferred stock dividend of $44,000 or a loss of $0.08 per basic and dilutive shares based on a weighted average of 51,098,575 shares outstanding. The year-over-year increase in share count was primarily the result of the conversion of preferred stock to common stock at the end of 2018 and the capital raise and the conversion of notes payable to common stock in the current year.

Adjusted EBITDA for the third quarter of 2019 was $2.4 million compared to a loss of $2.9 million in the third quarter of 2018, a significant improvement over last year. Our calculation of adjusted EBITDA for the three months ended September 30, 2019 includes favorable adjustments for depreciation and amortization of $549,000, net interest expense of $12,500, stock-based compensation expense of $900,000 and the impact of a translation loss on the note receivables from China of $1,900.

Additionally for the third quarter of 2019 our net non-GAAP adjusted EBITDA amounted to $2.6 million, which also compares favorably to the 2018 results of $2.2 million, which excluded the impact of the investments in Asia of $5 million. We believe this information and comparisons of adjusted EBITDA and other non-GAAP financial measures enhance the overall understanding and visibility of our true business performance. To that effect a reconciliation of our GAAP results to non-GAAP figures have been included in our earnings release.

Now turning to our year-to-date results. For the first nine months of 2019, revenues increased 35% to $51 million, up from $37.9 million in the first nine months of 2018. The increase was the result of a strong year-over-year growth in North American sales of 52%, which similar to the quarter was driven by double-digit growth in existing accounts and distribution expansion.

In Europe, the revenue increase of 7% was driven in large part by the launch of new flavors, which have been very well accepted in the market. Increases in North America and in Europe were partially offset by a decline in Asian revenues related to the change in our business model.

Gross profit increased by $5.6 million or 36% to $21.2 million in the first nine months of 2019, compared to $15.6 million for the first nine months of 2018. Gross profit margin increased by 38 basis points to 41.6% for the first nine months of 2019 compared to 41.2% in the year-ago period. The increase in gross profit dollars is primarily attributable to increases in sales volume.

Sales and marketing expenses decreased by 24% to $14.1 million for the first nine months of 2019, compared to $18.4 million for the first nine months of 2018. The decrease is primarily due to the reduction in marketing expenditures in China as a result of the change in our business model in that country, which no longer requires direct marketing investments.

This reduction basically amounted to $8.1 million. Excluding the China impact and on a more comparable basis marketing spend was up $3.8 million, mainly related to increases in marketing investments of $506,000 support to our distributors and investment in trade activities of $1.8 million, higher broker commissions of $350,000, investments in selling and marketing employees of $350,000, and higher storage and distribution costs of $1.1 million. These increases are related to higher business volume during the nine months ended September 30, 2019 compared to the same period last year.

General and administrative expenses for the first nine months of 2019 were $7.2 million, a slight decrease of 2.4% compared to $7.4 million for the year-ago period. The decrease was primarily due to the inclusion of an accrual of $945,000 in the prior year that pertained to the settlement of a territorial dispute with a former distributor.

Excluding this impact, general and administrative expenses increased by $764,000, primarily as a result of a $250,000 increase in stock option expense, $145,000 related to the acquisition of our Nordics distributor as well as investments in employee costs to support our continued growth and increases in professional fees, insurance and other similar administrative costs, which translated to a total increase of $361,000 in these areas when compared to the nine-month period ended in September 30, 2018.

Below the operating line, other income was $11.3 million for the first nine months of 2019 compared to other expense of $123,000 in the prior year period, basically as a result of the note receivable from our China distributor that was signed at the beginning of this year. Under the terms of this agreement, we will obtain the net investment we had previously made in China.

As a result of the above, for the nine months ended September 30, 2019 net income to common shareholders was $11.1 million, or $0.19 per basic share, based on a weighted average of 58,023,685 shares outstanding and after adding back the interest expense on convertible notes of $348,000 and amortization on discount on notes payable of $707,000, a dilutive net income available to common shareholders of $12.2 million or $0.20 per share, based on a weighted average of 62,050,032 shares outstanding, which includes the dilutive impact of the stock options of 1,223,700 shares and the dilutive effect of the convertible notes of 2,802,647 shares.

In comparison, for the nine months ended September 30, 2018, we had a net loss of approximately $10.4 million and after giving effect to the preferred stock dividends of approximately $169,000, a net loss available to common shareholders of $10.5 million, or a loss of $0.21 per basic and diluted shares based on a weighted average of 49,675,624 shares outstanding.

Adjusted EBITDA for the first nine months of 2019 was $3.3 million, which compares to an adjusted EBITDA loss of $7.1 million in the year-ago period, also a considerable improvement over prior year results. Our calculation of adjusted EBITDA for the nine months ended September 30, 2019, includes favorable adjustments for depreciation and amortization of $770,000, net interest expense of $72,000, stock-based compensation of $3.3 million, and the gain on the note receivable from China net of translation gain and losses, which amounted to $12.1 million as of the end of the quarter.

Additionally, our net non-GAAP adjusted EBITDA for the nine months ended September 30, 2019, amounted to $3.4 million, which also compares favorably to the 2018 results of $2.1 million, which excluded the impact of the investments in Asia of $8 million. As of September 30, 2019 we had cash of $20.5 million compared to $7.7 million as of December 31, 2018.

We had working capital of $37.9 million as of September 30, 2019, compared to $19.6 million as of December 31, 2018. Cash used in operations for the nine months ended September 30, 2019 was $966,000 compared to $9 million for the first nine months of 2018.

I will now turn the call back to John to provide some additional details on the Func Food’s acquisition.

John Fieldly

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 strategically expand through key distribution partners and retail partners. We see great opportunities to leverage our existing relationships with A.S. Watson, who owns several large retail chains throughout Europe.

As an example in Germany, A.S. Watson owns Rossmann, the largest -- the second largest drugstore chain in Germany with over 3,800 locations. In addition, the team has ongoing discussions with several other new markets, but our focus is to drive profitable growth by leveraging existing partnerships and relationships throughout Europe.

In the U.S. we see opportunities to leverage the innovative FAST Snack Bars portfolio and are in the process of establishing a manufacturer partnership to initially launch brand in the fitness channel throughout in 2020. We have already received great interest from our retailers and partners about the brand.

We have great confidence in the Func Food management team, as over the last 12 months they have demonstrated their ability to capitalize on market opportunities, and have established effective marketing tactics which are driving market share and growth. Over the last 24 months, the team has been strafed with working capital demands by being over-leveraged, which has put significant pressure on the business.

This acquisition provides the necessary capital for the team to focus on market opportunities, growth and operational efficiencies to capitalize on the growing demands of the Celsius and FAST portfolio. The division will be led by Robin Lybeck our Managing Director of Europe. The existing CEO of Func Food Group has over 15 years of background in various sales and leadership roles and management roles in the beverage industry, with such companies as Coca-Cola and Carlsberg.

In addition, the management team will include Thorsten Brandt, a Marketing Director of Southeast Europe, who has a strong marketing background from Coca-Cola and has served as the Head of Energy & Functional Beverages for Western Europe at Coke and has been with the company for over three years. In addition, our finance team will be led by Jussi Koskela who has been with Func Food and has prior working relationships and experience with OP, which is the largest financial institution bank in Finland.

Through this acquisition, we are gaining critical access to expand in European markets with a well-established operationally infrastructure and unique marketing platform. In addition, it provides us with the ability to bring an entirely new yet complementary product offering to consumers with the FAST Protein Snack portfolio. This transaction puts Celsius in two of the fastest-growing categories in food and beverage, the energy category and the growing Protein Snack category with two complementary brands.

In addition, the acquisition solidifies our position in the Nordics and provides additional scale and meaningful increases in our top line revenue, which enables us to maintain our historical gross profit margins and extract significant operational efficiencies that will allow us to continue to reinvest for growth.

That concludes our prepared remarks. Operator, you may now open the call for questions. Thank you.

Question-and-Answer Session


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

Jeff Van Sinderen

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?

Edwin Negron

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.

John Fieldly

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.

Jeff Van Sinderen

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?

John Fieldly

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.

Jeff Van Sinderen

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?

John Fieldly

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.

Jeff Van Sinderen

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

John Fieldly

Thank you, Jeff.

Edwin Negron

Thank you, Jeff.


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

Jeffrey Cohen

Hi, John and Edwin. How are you?

John Fieldly

Excellent. Excellent. Thank you, Jeff.

Edwin Negron

Doing well. Thank you.

Jeffrey Cohen

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?

John Fieldly

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.

Jeffrey Cohen

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?

Edwin Negron

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.

Jeffrey Cohen

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?

John Fieldly

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.

Jeffrey Cohen

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.

John Fieldly

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.

Jeffrey Cohen

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

John Fieldly

Thank you, Jeff. Thank you.


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

Anthony Vendetti

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?

John Fieldly

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.

Anthony Vendetti

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?

Edwin Negron

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.

Anthony Vendetti

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?

John Fieldly

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.

Anthony Vendetti

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?

John Fieldly

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.

Anthony Vendetti

Okay, great. Thank you. I appreciate John.

John Fieldly

Thank you.


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

Gerry Khermouch

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?

John Fieldly

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.

Gerry Khermouch

Okay, thanks.

John Fieldly

Thank you, Gerry.

Gerry Khermouch



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.

John Fieldly

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.

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