Celsius | Q1-24 Earning & Call
Kinda weird quarter for Celsius with some very good & some unexpected news. Let's dissect it.
Harder takeaway here as revenues & net income are not really growing as they should this quarter - really not. But margins are much, much better than expected and this isn't a small detail. It makes a difference.
First of all, if you do not know Celsius, it's all here!
Business. Now to the matter at hands. We are talking about the third energy drink in the U.S after the two giants that are Red Bull & Monster, evolving in a growing market as it has been confirmed by many over the last weeks. A global growth to which Celsius is strongly responsible.
"Celsius alone was responsible for approximately 47% of the entire energy drink category growth year-over-year in the first quarter."
Expansion. Celsius is now selling its products overseas, a necessary step for every retail company as they want to reach the biggest possible TAM - even though most revenues still come from N.A.
Celsius integrated or will integrate Canada, UK, Ireland, France, Australia & New Zealand this year.
Pepsi Deal Renewal. I think we can officially say that the new deal with Pepsi is a win-win - although they didn't disclose much about it.
"So, the incentive program is for Pepsi. It's incentive based, right? So obviously we're going to get something for it."
Ggiving Celsius more visibility & space on their different sites as the Celsius assumes to reach "best-ever space gains by July." Useless to detail why visibility is so important for drinks as you probably noticed that you easily select something you see compared to something you don't...
"The visual impact of multiple full shelves of cold CELSIUS in convenience stores and coolers, and in the grocery shelves is a powerful in-store billboard, and showcases our portfolio."
Market Shares. Being responsible for the global energy drink growth means that the company is growing its shares and slowly eating the two giants which are Red Bull & Monster.
This comes is thanks to a strong retention to their products and the acquisition of tons of new consumers - maybe the feminin market, although this is only my interpretation.
"Our core consumers are consuming more. And then, it's about 35%, the latest data we had, is intensification of more consumption of our core or base. And then, new to category for us was 42%."
Celsius now owns 11.4% of the U.S energy drink market, in constant growth since years and the management see this trend to continue over the next ones.
Inventory. We're now hitting the tough spot and the reason for this quarter's slower revenue growth. The story is simple, Pepsi has been growing its inventories in 2023 and is now emptying them.
"The year-over-year inventory variation is attributive to elevated first quarter 2023 restocking, which we believe was meant to compensate for the fourth quarter 2022 destocking, and to prepare for a robust spring reset that were planned in 2023."
Not that the product isn't demanded. Simply that the companies are now optimizing those inventories which is a completely normal process, facilitated by the fact that Celsius optimized its delivery process, allowing them to be more flexible.
"I think that with optimizing inventories, we're getting more efficient. We're able to ship product and in less number of days. Prior, we run in 14 days. And now, in many cases, we're shipping within seven."
I do not see this as an issue & the management neither. We had tons of good news about their partnerships with Pepsi and we know that Celsius is growing market shares with a strong retention, hence a strong demand for their product.
What is important to note though is Celsius' "dependence" to Pepsi's distribution network.
"Ongoing inventory fluctuations may be expected in subsequent quarters because our largest distributor constitutes approximately 62% of our total North America business during the first quarter of 2024."
This isn't an issue as long as everything is going well but things could turn south and even when small things like this happen, it shows strongly on Celsius' earnings. And as they said, they cannot manage partner's inventories.
"We don't control the inventory levels, but we do feel that everyone is optimizing inventory levels."
It helps with this subject to know that the company is working to grow its own branded coolers but it won't replace Pepsi.
Margins. Now some good stuff. We already saw a correct growth although not as good as expected of course. But margins are as important and we had a really strong growth from both net & gross.
"Our world-class operation teams continue to drive efficiencies to reduce freight and raw material cost savings this quarter, contributing to our highest gross margin to date, at 51.2%."
I said many times that this kind of company has to grow margins to return value to shareholders.
For comparison, Monster has a net margin of 23% & a gross margin of 53% - Celsius' are respectively 21.9% & 51.2%. They are the example Celsius has to catch up with and this quarter is showing that they can, and almost did. Going over Monster's margins with a strong revenue growth would send a very powerful message to the market.
Although we need to stay realist as those margins were a combination of lots of positive factors which won't maintain indefinitely.
"We are taking a conservative approach to the remainder of the year and continue to stick with our commentary from February where we noted that gross margins in the high 40s was very achievable [...] But I would say, as we look out to Q2, Q3, Q4, we're sticking with what we said at the end of February, which was kind of that high end of the 40s, and not quite locking into the 50s yet."
We had stronger margins than expected and those might slow down later this year.
Revenues. We saw the slower growth and the margin expansion already.
There isn't much more to comment on their revenue statement. In term of balance sheet, Celsius ends the quarter with a net debt of $880M which is a pretty strong position.
I didn't find anything really worth mentionning on other statements.
Call. Some more information coming from the earning call.
Marketing. Celsius is apparently preparing itself for a much more aggressive marketing for the next quarters.
"And already this year, we've increased our sales and key accounts team by approximately 85%."
Which should again grow their acquisition of new consumers, we know those kind of products are all about the brand but we'll need those added costs to bring more revenues.
Distributors. We talked about Pepsi but we have to talk about Amazon where sales are rocketing - not in total proportion though.
"Sales on Amazon increased 30% year over year to $28 million in the first quarter, up $21.8 million in the prior period. Celsius ended the first quarter with a 20.2 share compared to Monster with a 20 share and Red Bull with a 12.3 share according to Stackline 12-week data ending March 30th 2024."
Celsius is the king of online energy drinks.
Conclusion. I honestly feel good about Celsius after this report and this call and I actually bought more shares at $74. I still assume $70 to be around fair value and my medium cost is still under $60 after those buys so I keep enough margin of safety even if growth was to slow down compared to the last years - it of course will.
But I see no reasons to be under the 25% CAGR I took as an assumption in my Investment Case linked at the beginning of this report considering all the good news we had related to the business - strong retention & attraction of new clients, growing visibility & space from distributors, growing market share etc... At least until 2026.
Celsius is still very strong and we're still on the business growth part. We didn't start talking about the return value to shareholders part. The quarter isn't perfect but it certainly is a good one & I felt comfortable buying more shares.
I do me! You guys do you!
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