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Edited Transcript of CELH earnings conference call or presentation 14-Mar-19 2:00pm GMT

Q4 2018 Celsius Holdings Inc Earnings Call

DELRAY BEACH Mar 22, 2019 (Thomson StreetEvents) -- Edited Transcript of Celsius Holdings Inc earnings conference call or presentation Thursday, March 14, 2019 at 2:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Cameron Donahue

Hayden IR, LLC - Regional VP and Partner

* Edwin F. Negron-Carballo

Celsius Holdings, Inc. - CFO

* John Fieldly

Celsius Holdings, Inc. - CEO & Director

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Conference Call Participants

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* Anthony V. Vendetti

Maxim Group LLC, Research Division - Executive MD of Research & Senior Healthcare Analyst

* Jeffrey Scott Cohen

Ladenburg Thalmann & Co. Inc., Research Division - MD of Equity Research

* Jeffrey Wallin Van Sinderen

B. Riley FBR, Inc., Research Division - Senior Analyst

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Presentation

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Operator [1]

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Greetings, and welcome to the Celsius Holdings Fourth Quarter and Full Year 2018 Earnings Conference Call. (Operator Instructions) As a reminder, this conference is being recorded.

It is now my pleasure to introduce your host, Cameron Donahue of Hayden IR. Thank you. You may begin.

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Cameron Donahue, Hayden IR, LLC - Regional VP and Partner [2]

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Thank you. Good afternoon, everyone. We appreciate you joining us today for Celsius Holdings Fourth Quarter and Full Year 2018 Earnings Conference Call.

Joining me on the call today are John Fieldly, President and Chief Executive Officer; and Edwin Negron, Chief Financial Officer.

Following prepared comments, we will open the call to your questions and then instructions will be given at that time. The company filed its annual report 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, March 14, 2019. 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 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?

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John Fieldly, Celsius Holdings, Inc. - CEO & Director [3]

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Thank you, Cameron. Good afternoon, everyone, and thank you for joining us today. 2018 was an exceptional year for the company, as we expanded our distribution channels and increased our product availability through existing channels to gain greater visibility for our portfolio, our premium fitness beverages, all while accelerating our top line revenue growth. With innovative products and compelling packaging, we're reaching more and more consumers each and every day. Our strategy of positioning Celsius as a global beverage leader for health-minded consumers remains our top priority.

We continued our expansion further in traditional retail with great success. And we positioned the company for future growth with expanded roles within our ranks. In addition, we brought on high-performance individuals with diverse background and experience. Jon McKillop was promoted to Executive Vice President of North America sales and Edwin Negron was appointed as Chief Financial Officer in July of 2018. And Matt Kahn joined the company as our Executive Vice President of Marketing in October.

On top of these additions, we further transformed the organization to support our growth in all departments, which will allow us to pursue our growth initiatives and strengthen our financial performance.

Celsius' 2018 performance sets a new record for our portfolio with extraordinary gains in our efforts to increase distribution, expand availability of our products, reaching more consumers and increasing our brand awareness as we continue to target health-minded consumers where they live, work and play.

Throughout the year, we achieved a steady stream of new high-profile marquee domestic retail and distribution partners with the addition of Target, Food Lion, Hannafords and CVS, as well as continued expansion with existing accounts such as 7-Eleven, RaceTrac, Sprouts, Harris Teeter and many others. At the same time, our dedicated sales team drove a 62% annual growth rate in North America sales.

All channels of trade, including health and fitness, grocery, the expansion into Drug, Mass, Military, Vending and online sales drove sustained revenue growth throughout the year as we drove increased velocities in existing accounts and expanded our distribution, reaching more consumers and positioning Celsius for continued growth into 2019.

In Europe, we experienced a decrease in revenue of 17% for the year as a result of timing of promotional programs, new flavor launches and our partner's strategic reduction of inventory carrying levels. However, we are optimistic about our partner's ability to stabilize our revenues and are intrigued with our pipeline of planned innovation into 2019.

In January 2019, we launched a great new tasting flavor, Peach Vibe, which has quickly become a top-selling flavor in the region. And with a strong pipeline of planned innovation, supported by key targeted marketing programs, we are well positioned to expand and capture more market share in the region.

In Asia, revenues increased to $4.3 million for the year -- full year 2018 with expansion in Hong Kong and continued focus building consumer awareness and trial in the region. And in addition, in China, we expanded to over 47,000 locations in 63 cities with regional distribution through our partnership with Qifeng Food Technology. Our strategic investment in the region for 2018 totaled approximately $7.2 million, which established a foundation for our brand to continue to build upon.

In China, during the year, we established infrastructure, operation, sales and marketing to continue our commercialization efforts in the region.

With additional investments necessary to reach optimal commercial -- commercialization levels in China, we looked at several alternative solutions and structures to continue our expansion in the region. After extensive analysis and review, subsequent to year-end, we announced our plans to restructure our business model in China to continue to capitalize on growing demand in the region, while putting a financial structure in place that allows us to recapture more than $10 million we have invested in startup and commercialization efforts. The agreement represents a significant milestone for our partnership, which will create mutual benefits for our organizations and enable Celsius to continue to expand its commercialization efforts in China while significantly mitigating our risks and eliminating the need for additional direct investments, which will allow us to focus our working capital on North America and other emerging markets. In the region, we laid a pathway for continued growth in 2019 and beyond, and we'll provide additional details later in the call.

For the full year of 2018, revenue increased 45% to an annual record of $52.6 million. North America revenues increased 62% to $38.9 million and international revenues increased 13% to $13.7 million for the year. North America growth was driven by orders from new retail partners such as Target, CVS, all while both exceeding our internal expectations and new grocery and convenient store accounts such as Food Lion and Circle K. At the same time, we also experienced growth across, as previously mentioned, all of our existing accounts and channels, including 7-Eleven, Sunoco, RaceTrac and many others. As our base of consumers continues to widen, a macro level demand for functional healthy fitness board energy drinks continues to bring momentum and is disrupting the traditional Energy category.

Functional beverages are expected to emerge as one, if not the fastest-growing categories in the beverage industry. Specifically, functional and energy drinks are in high demand. Busier lifestyles and a focus on health and wellness are driving the need for convenient alternatives that give consumers a way to manage their well-being, while they are on the go. Consumers are increasingly seeking beverages that help them achieve their health and fitness and wellness goals. With a strong demand as a backdrop, our proven ability to onboard new distribution partners, identify new channels and optimize routes to ensure product availability have all been instrumental to our success.

Today, we have over 4 active co-packers in North America, 2 in Europe and 2 in Asia with more identified, which will continue to support our growth. As an example, additional growth, volumes in the Military channel continue to exceed expectations and are reaching a 5 million, 52-week retail sales run rate and continue to grow. The dedicated team of professionals and our fitness channel are also delivering higher volumes with further expansion in key accounts such as 24-Hour Fitness, Gold's Gym, Planet Fitness, Smoothie King and many others.

Our newest channel of focus in North America is our Vending channel, which we launched in the later part of 2017. This channel is demonstrating the significant upside potential in 2019 with expansion in more than over 10,000 locations nationwide through a dedicated team, specifically focused to grow this channel. To date, Celsius has been added to vending machines and micro-markets of refreshment solution providers, which include Accent Food, Canteen, First Class Vending, Five Star Food Service, Southern Refreshments and Celsius is available for distribution throughout the United States in the Vending channel through Vistar. We see a lot of opportunity in this channel as we reach new targets such as corporate work environments, universities and travel centers.

Specific to Celsius, our SPINS IRI data as of December 30, 2019, indicates strong momentum in the convenience channel, where Celsius is growing over 36% over the past 52 weeks when compared to the convenience channel category growth overall of 6% for the same period. We are outpacing the category growth in the convenience channel by a measure of 6.2x with only a 10.2% ACV, all accumulated volume. And we see massive opportunities as we continue to expand and further our reach in this category.

Subsequent to year-end, we added a number of marquee accounts to our North America distribution network, including new placements at over 250 DICK’S Sporting Goods stores nationwide and further expansion in CVS, Target and many of our existing national partners. In addition, we have further been building out our national distribution network with agreements from a number of new network partners associated with Anheuser-Busch InBev, Keurig Dr. Pepper, PepsiCo and MillerCoors network partners, which will further strengthen our distribution and availability into 2019.

In China, as previously mentioned, we significantly expanded our presence in 2018, with broader distribution through our existing partnership with Qifeng Foods Technology, a national wholesale distributor of food and beverages. Qifeng Food Technology was originally our partner when we initially launched in China. And since that time, they have been instrumental in our success and growth in the region. Through their expertise, relationships, network of distribution partners, Celsius is now available in over 63 cities and 47,000 locations across China. We have invested more than 10,000 -- $10 million in Asia markets to date to establish a local infrastructure that includes distribution, sales, marketing and operational logistics to support the current business and to exemplify growth in the region, which we believe has a great opportunity for the future.

Earlier this year, in January of 2019, as mentioned earlier, we signed a definitive agreement to establish a royalty licensing agreement and repayment of investment agreement with Qifeng Food Technology in order to create a risk-mitigated method of moving forward in China and continuing to capture market share. Under the agreement, Qifeng Food Technology is granted the exclusive licensing rights to manufacture, market and commercialize Celsius branded products in China. In exchange, we will receive a fixed licensing fee of $6.9 million over the next 5-year term before transitioning to a volume-based royalty fee. The initial royalty fee, which is fixed, is based on discounting initial anticipated volumes by 50%. In addition to the initial fixed royalty, Qifeng Foods Technology will repay through a capital loan, the amount invested in China, over their 5-year initial term.

We believe the strategic move creates a stronger, collaborative relationship between the 2 companies and offers such of us availability means to capitalize on the tremendous demand in the region and extract additional value for our shareholders.

The increase in North American and Asia revenues for 2018 were partially offset by 70% -- 17% decline in European revenues, as previously mentioned, despite it was primarily due to the result of timing of promotional programs, a reduction of inventory carrying values by our distribution partner. Our optimism about the opportunities in the region is reinforced by continued expansion in Norway and Finland, and new innovation being introduced in Sweden. We are continuing to pursue the addition of several new key retailers to expand our distribution in the region and anticipate our Nordic revenues to return to more normalized levels in 2019.

Now moving to a recent complaint filed in the Federal District Court in the District of Nevada by Rockstar Energy. As an organization, we continue to expand and Celsius continues to gain momentum. Other brands like Rockstar will lose shelf space as a result of our success. Today, we are gaining eye-level placements in many retailers across the country and are outselling many of the SKUs of other much larger brands. With that said, Celsius is replacing these slower-moving items from these other brands as these once dominant brands are not aligned or positioned with today's health-minded consumer. In addition, many envy our structure function claims, which are backed by science as well as our health forward functional fitness position, which is aligned with today's health-minded consumer and is disrupting the category.

On December 18, 2018, Rockstar, Inc. and Rockstar Energy owner filed a frivolous suit against Celsius. Rockstar complains and alleges false advertising, violation of trade practices and unfair competition. We find this lawsuit meritless and we will vigorously fight this unfound lawsuit.

Moving to our sales and marketing investments in 2018, we increased our investments on sales and marketing programs with targeted and proactive campaigns to support our momentum. In addition, we further strengthened our sales, marketing and operational departments, all while driving record revenues and delivering a positive net -- non-GAAP adjusted EBITDA, excluding our Asia investments.

Our team is focused on driving profitable growth and building shareholder value. Our targeted digital and social marketing platforms are nurturing an active lifestyle community to reinforce engagement and raise awareness of our brands. Simultaneously, we remain active with events and programs such as Tough Mudder, a series of competitive events for a range of athletic ability. We attended over 32 weekly events in key markets in 2018 and provided more than 153,000 samples to tens of thousands of health-minded consumers across the country where we received rave reviews and expanded our community.

In addition, we conducted over 63 targeted Guerrilla Marketing programs where we sampled and interacted with over 95,000 consumers. We also executed over 1,100 targeted demos at key retailers and attended over 66 consumer -- large consumer and trade events, including Health and Wellness Expos, Mr. Olympia, Europa Games, 7-Eleven Experience, NACS, just to name a few.

Our marketing programs for 2019 include an increase of targeted digital social media and influencer marketing campaigns as well as expanded -- expansion in sampling programs across the country in targeted markets. In addition, we have increased our consumer and trade events. We'll be partnering with Tough Mudder again in 2019, driving trial, awareness and increasing our household penetration. In addition, we have a great pipeline of planned innovative flavors and new product scheduled for 2019, creating further opportunities for synergy and efficiencies within the ranks of our sales team, allowing for our expanded portfolio to flow through our existing distribution channels and to current and new retail partner shelves adding incremental true innovation to retailers' energy and functional product sets. These new additions further our mission to create science-based proprietary and innovative offerings.

All in all, 2018 was an extremely successful year. We have laid a solid foundation for the future with a proven model for expansion and growth. And I look forward to speaking with you about additional accomplishments as they occur throughout 2019.

We are a lean organization, capitalizing on today's health and wellness trends. With our innovative portfolio of fitness forward products, which is positioned to disrupt the Energy category. Our brand is resonating with today's health-minded consumer and is gaining considerable momentum. Our future has never looked brighter.

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

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Edwin F. Negron-Carballo, Celsius Holdings, Inc. - CFO [4]

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Thank you, John. Starting with the quarterly results, total revenue for the fourth quarter of 2018 was $14.7 million, up 62% compared to $9.1 million in the year ago quarter. By geography, North American sales were up a robust 63% year-over-year to a record $10.9 million, up 63% compared to $6.7 million in the fourth quarter of 2017. This increase was driven by growth in excess of 50% across each of our domestic channels. These results are a reflection of the continued momentum in existing accounts and the partnering with new distributors, thereby increasing our distribution network, making our products available to additional consumers.

In Asia, sales also increased by an exponential 367% from $435,000 in the year ago quarter to $1.6 million in the current period, mainly due to the investment in good traction that has been obtained in the region throughout 2018.

In Europe, revenue increased 9% in the fourth quarter to $2.1 million as a direct result of new flavor launches in the region, which are being well accepted by consumers. Across the board, the increases in revenue were driven by higher sales volumes as opposed to increases in product pricing.

Gross profit for the fourth quarter of 2018 increased by a robust 43% to $5.5 million, up from $3.8 million in the year ago quarter. In contrast, gross profit margin decreased from 41.6% in the fourth quarter of 2017 to 37.1% in the fourth quarter of 2018. The increase in gross profit dollars was mainly attributable to the increase in sales volume, while the decrease in gross profit margin was mainly attributable to increases in promotional allowances with new accounts, lower margin on sales in Asia and increases in freight and production costs in North America. All these aspects are being addressed to maximize our profitability in 2019.

Selling and marketing expenses for the fourth quarter of 2018 amounted to $2.8 million. This translates to a significant decrease of $4.5 million when compared to $7.3 million in the year ago quarter. The 62% decrease was primarily due to reduction in the China marketing investment of approximately $5 million when compared to Q4 2017, which was partially offset by increased spending in other areas such as broker costs of $200,000, storage and distribution costs of an additional $200,000 and employee costs of $50,000.

General and administrative expenses for the fourth quarter of 2018 totaled $3 million compared to $1.6 million in the year ago quarter, a variance of 87%. The increase was mainly due to the stock-based compensation expense of $1.2 million or an increase of $585,000 when compared to fourth quarter of 2017, as well as an increase in administrative costs of $370,000, an increase of $305,000 pertaining to employee costs and an increase of $150,000 pertaining to research and development costs.

Net loss to common stockholders for the fourth quarter of 2018 was approximately $893,000 or $0.02 per share compared to a loss of $5.3 million or $0.12 per share for the corresponding period last year. The losses included preferred dividends of approximately $44,000 in the fourth quarter of 2018 and $92,000 for the fourth quarter of 2017.

Operating expenses for the fourth quarter of 2018 included noncash charges, such as depreciation, amortization, stock-based compensation expense and a loss on debt extinguishment for a total of $1.6 million compared to $606,000 for the fourth quarter of 2017. As such, adjusted non-GAAP EBITDA for the fourth quarter of 2018 was $785,000. Additionally, our results included $250,000 of onetime charges as well as a favorable impact of $900,000 related to the reconciliation of the investments in China. Excluding these aspects, net non-GAAP adjusted EBITDA for the fourth quarter was $135,000 or 20% of the prior year amount of $705,000. We believe this information and comparisons of adjusted EBITDA and other non-GAAP financial measures enhance the overall understanding and visibility of our true performance. To that effect, a reconciliation of our GAAP results to non-GAAP figures has been included in our earnings release.

Now turning to our full year results. For 2018, revenues increased significantly by 45% from $36.2 million to $52.6 million this year. The increase was a result of a strong year-over-year growth in North American sales of 62%, delivering revenue of $38.9 million. Revenues from Asia also experienced a dramatic increase of 438% year-over-year to $4.3 million. The increases in revenue in North America and Asia were partially offset by a year-over-year decrease in European revenue of 17% due to the timing of new flavor launches, the discontinuation of some flavors and normalization of inventory levels.

Gross profit for the full year increased by 37% from $15.4 million for 2017 to $21.1 million for 2018. The gross profit margins reflected a contraction from 42.7% for 2017 to 40% for 2018. The increase in gross profit dollars is primarily attributable to increases in sales volume, while the decrease in gross profit margin is mainly related to increases in freight, production costs and new account acquisition costs.

Sales and marketing expenses increased by 28% from $16.6 million for 2017 to $21.2 million for 2018. The increase is mainly due to marketing program investments, particularly in the China market, which accounted for $7.2 million of total marketing costs as well as investments in employee resources, broker costs and storage and distribution costs.

General and administrative expenses for 2018 were $10.5 million, an increase of 52% compared to $6.9 million for 2017. The increase in G&A expenses was mainly due to the stock-based compensation expense of $1.7 million, the settlement of a lawsuit with a former distributor of $1 million and increases in several other areas such as research and development costs, employee costs and professional fees.

Below the operating line, other expenses were up from $161,000 in 2017, which was mainly related to interest expense to $566,000 for 2018. For the 2018 period, interest expense amounted to $175,000. As such, the bulk of the increase in other expenses of approximately $392,000 was mainly related to a loss on the extinguishment of debt of $377,000.

The net loss available to common stockholders for 2018 was $11.4 million or a loss of $0.23 per share compared to a net loss of $8.6 million or $0.19 per share for 2017.

Operating expenses for the full year 2018 included noncash charges for depreciation, amortization, stock-based compensation and loss on debt extinguishment, totaling approximately $4.7 million compared to $2.6 million for the full year 2017. As such, adjusted EBITDA for the full year of 2018 was a negative $6.3 million. Additionally, our results included onetime expenses of $1.3 million, mainly related to the settlement of a lawsuit with a former distributor of $1 million.

Similarly, our 2018 results also reflects $7.2 million of expenses related to our net China investment. Excluding the China investment and onetime charges, we delivered a positive non-GAAP adjusted EBITDA of $2.2 million for the full year 2018.

Now turning to the balance sheet. As of December 31, 2018, the company had cash of $7.7 million and working capital of $20.2 million. This compares to $14.2 million in cash and working capital of $20.5 million as of December 31, 2017.

Changes in operating assets and liabilities utilized $5.5 million of cash, of which $1 million was related to the settlement of the lawsuit.

Late in the fourth quarter, we entered into convertible loan agreements for the issuance of an aggregate of $10 million in principal of unsecured convertible notes, due in December 2020. The principal amount of one of these loans is $5 million and replaces an existing $3.5 million credit facility netting incremental proceeds of $1.5 million. Two additional loans with principal amounts of $3 million and $2 million represent new capital. We are using the aggregate net proceeds of $6.5 million for working capital purposes in support of the ongoing expansion of our operations. The additional capital provides us with sufficient resources to execute our current '19 operating plans. We continue to believe that our current cash balance and the results of our operations will deliver sufficient liquidity to meet our anticipated cash needs during the next 12 months.

Cash used in operations for the full year of 2018 totaled $11.6 million. The use of cash in 2018 is mainly related to operational losses, driven by high levels of investments in China and marketing initiatives in North America as well as high levels of working capital required to support our incremental business model.

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

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Questions and Answers

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Operator [1]

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(Operator Instructions) Our first question comes from the line of Jeff Van Sinderen with B. Riley FBR.

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Jeffrey Wallin Van Sinderen, B. Riley FBR, Inc., Research Division - Senior Analyst [2]

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Let me say first, congratulations on the growth and improvement in metrics for both Q4 and the year.

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John Fieldly, Celsius Holdings, Inc. - CEO & Director [3]

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Thank you, Jeff, appreciate that. We really had a really solid fourth quarter and 2018 was a milestone year for the company.

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Jeffrey Wallin Van Sinderen, B. Riley FBR, Inc., Research Division - Senior Analyst [4]

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Can you speak more about what you're seeing with Target, CVS and the convenience store channel? Just wondering about the sell-throughs there. I know you touched on some things in your prepared comments. Maybe touch on door count plans, adding news SKUs, those sorts of things, what's been happening -- the trends there.

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John Fieldly, Celsius Holdings, Inc. - CEO & Director [5]

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Sure. Thank you, Jeff. Target has been a great success for you -- if you've been watching. We started off in 2018 with a test in 5 stores -- 500 stores. We've now expanded that to almost 1,200 stores in Target. Started off with 2 SKUs, now we're up to 3 SKUs and hopefully soon you'll be seeing a fourth SKU. The sell-through rate has been -- everyone has been very pleased with the sell-through rate. Initial expectations internally, we've exceeded internal expectations at Target as well as our own. We're still working through the supply chain. We are going through the warehouse through Target which has, as a result, the product is selling a lot quicker than they can keep it on the shelf. So we do see some out of stocks frequently throughout the country over the last several months. And our team has been working with the supply chain to make sure we have ample product on the shelf. So the good news is, we are seeing up -- increases in turns and as we continue to build out our national distribution network, we'll be able to use some DSD partners to keep those shelves fully stocked. So the sell-through at Target has been positive and we look to further expand with them in 2019. We see the Target as a great partner for us. CVS has been a great account. As you recall, we started a test with them as well of 500 healthier and better-for-you coolers that they had as an initial test. CVS today, for 2019, we further expanded by the end of 2018, we're in over 1,000 stores with 3 SKUs and we have been authorized nationwide for 2019. So we are in the process of going through that, the fulfillment process through their DCs to expand to all locations. So we see great success in the Drug channel, especially with CVS and the other marquee banners as well, which we are actively talking to. So between the Mass channel at Target and the Drug channel, just a lot of exponential growth there and opportunities.

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Jeffrey Wallin Van Sinderen, B. Riley FBR, Inc., Research Division - Senior Analyst [6]

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Okay. That's great to hear. And then as a follow-up to that, maybe you can update us a little bit more on how things are going, adding the domestic co-packers. I think you're working on some of those or speaking to some of those. And then, maybe you can just speak a little bit more about some of the advantages of adding new distribution partners and what you expect to gain from those relationships in 2019 and beyond?

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John Fieldly, Celsius Holdings, Inc. - CEO & Director [7]

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Absolutely. Just to go back to your initial question in regards to following up on the convenience channel, and that really ties in to our new distribution partners. So I'll answer the beginning -- the end part of that -- your question first. We see great opportunity with the new partners and the opportunity in the convenience channel. Keep in mind, we're currently at about a 10% ACV, seeing extremely good growth rates and getting a lot of interest from other marquee banners. We further expanded in Circle K, we see great opportunities with them in 2019. QT is another customer we're working with. We see great opportunity there. And we've just a lot of interest for this category. There is a really a renaissance taking place right now in the Energy category. You're seeing a lot of -- as health and wellness trends continue to take hold, you're seeing these fitness functional energy products really gaining the opportunities that it never had been able to accomplish. And there's a migration taking place for healthier alternatives in the category. Just like the sugary soda CSD category was affected many years ago, from sparkling waters, you're seeing that in the Energy category today. And that's where we see great opportunities in the convenience channel. And how we're going to leverage the convenience channel is through our new distribution partners. Over the last 3 to 6 months, we've been able to close key contracts and solidify distribution partners throughout the country with some of the largest strategic supply partners in the United States. We've closed several Anheuser-Busch network partners, Keurig Dr. Pepper network partners as well as the independent Pepsi bottlers as well and we're seeing tremendous opportunities. That is going to make sure we stay stocked in this channel. This channel is very competitive. We need to make sure that we have feet on the street that's able to keep those shelves stocked because we are turning. And we're turning at a really high growth rate. And as I mentioned on the call, we're out-turning a lot of the competitors of much larger brands. So by closing these additional DSD network partners, it's going to not only provide additional availability, additional points of distribution in this channel, but most importantly, make sure we stay stocked and maintain our position on the shelf. And in regards to the co-packers, we have been adding co-packers throughout Q3 and Q4. We currently have 4 co-packers currently active and we have 3 additional co-packers that are going through our quality assurance process and supplier onboarding processes. So we feel at this stage, we are ready for beverage season. We've increased our inventories in the first quarter as well as coming towards the end of Q4 and we feel we will have ample supply. We're building strong partnerships with our suppliers. So we feel we're well positioned for this summer.

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Jeffrey Wallin Van Sinderen, B. Riley FBR, Inc., Research Division - Senior Analyst [8]

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Okay, great. And then, one more quick -- hopefully, a quick one, if I could squeeze it in. Just wondering do you feel like the Nordic area is as normalized or is normalizing now? I think the segment was a little stronger in Q4. I think you mentioned it was actually up or EU was up. So just wondering kind of what your thoughts are on that?

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John Fieldly, Celsius Holdings, Inc. - CEO & Director [9]

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Yes. We feel the Nordic business is going to turn to more normalized levels. We were down for the year 17%. A lot of that came with Q2 -- revenues -- Q1, Q2 revenues in 2018. I think, we just launched a new flavor in the region called Peach Vibe, which has allowed us to further increase our market share, and it's been one of the most successful flavors in the region over the last several years. So we're very optimistic about the opportunities that we have in the market. We also have a lot of new flavor innovation coming in the market in 2019, and we feel optimistic about that.

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Operator [10]

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Our next question comes from the line of Jeffrey Cohen with Ladenburg Thalmann.

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Jeffrey Scott Cohen, Ladenburg Thalmann & Co. Inc., Research Division - MD of Equity Research [11]

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Can you hear me okay?

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John Fieldly, Celsius Holdings, Inc. - CEO & Director [12]

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Yes, [Anthony] (sic) [Jeff].

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Edwin F. Negron-Carballo, Celsius Holdings, Inc. - CFO [13]

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Yes. Thank you.

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Jeffrey Scott Cohen, Ladenburg Thalmann & Co. Inc., Research Division - MD of Equity Research [14]

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So could you talk a little bit about the Lavit deal and locations, distribution as far as geographic locations and impact that may have upon the cost of goods and some of the packaging expenses?

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John Fieldly, Celsius Holdings, Inc. - CEO & Director [15]

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[Anthony] (sic) [Jeff], could you just repeat the front end of that question briefly, I'm sorry?

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Jeffrey Scott Cohen, Ladenburg Thalmann & Co. Inc., Research Division - MD of Equity Research [16]

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The Lavit deal for the powder cups.

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John Fieldly, Celsius Holdings, Inc. - CEO & Director [17]

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Powder cups. Oh, yes. We -- in regards to the Lavit opportunity, we see this is a great opportunity with our Lavit on-the-go really at work locations. Lavit is really bringing Celsius to a new channel, further expanding our at-work initiative through the Vending channel. But with Lavit, these are really sparkling water, healthier beverages that Lavit's mission is to bring to the office space. So they're very much aligned with our mission as well. And we see that as a great fit. We launched with our first flavor, which was our Orange, orange powder product. We're working with them on additional innovation for 2019. They are vigorously placing a lot of machines throughout the country with key corporations. So it's another opportunity for individuals to enjoy Celsius. So we see that as a great opportunity for us, bringing us into a new channel for incremental revenue.

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Jeffrey Scott Cohen, Ladenburg Thalmann & Co. Inc., Research Division - MD of Equity Research [18]

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Okay. Got it. And can you talk about some of the anticipated marketing partnerships? Are there new ones that we should look for in the coming year?

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John Fieldly, Celsius Holdings, Inc. - CEO & Director [19]

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Yes. We will have new partnerships coming onboard. We've been very busy as an organization over the last 3 -- 6 months. Matt Kahn has put together an extremely aggressive plan for 2019. We are -- you'll see that we're partnering with Tough Mudder again in 2019, which is about to get started here in the next few weeks. We're really excited about that partnership. We're going to do further activation with Tough Mudder. We're also working on tying that in to key retail partners. So we're activating the trade, which is so critical at this stage of the company. You'll see additional opportunities and additional really marketing properties that we'll bring to the table. In addition, we're also integrating a influencer program, further driving that further and expanding upon that and further activating digital social activations. So it is a full encompassing marketing plan, you'll see rolling out. More to come on that as we continue to progress, but we're going to continue with our mission to continue to target consumers where they live, work and play. We want to be a part of everyone's life, looking to live a healthy, active lifestyle.

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Jeffrey Scott Cohen, Ladenburg Thalmann & Co. Inc., Research Division - MD of Equity Research [20]

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Okay. Got it. And one more, if I may. Edwin, could you talk a little bit about margins -- the current margins and maybe talk about the impact that additional co-packers may have going forward? And are there any onetime margin hits in nature from the fourth quarter that you expected to get back during 2019?

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Edwin F. Negron-Carballo, Celsius Holdings, Inc. - CFO [21]

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Sure. Very well. Thank you. Very good question. Absolutely. One of the things that John and I have been evaluating -- excuse me, the trade-off as it relates to expanding our co-packers because we have experienced a little bit of additional cost as it relates to some of those co-packers. But again, we want to guarantee that we have sufficient inventory levels to service the summer season at this point. We did have some onetime charges, not much regarding some excess and obsolescence inventory. But again, we're keeping a very good eye on that and our freight costs to make sure that in 2019, we will maximize our margins going forward.

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Jeffrey Scott Cohen, Ladenburg Thalmann & Co. Inc., Research Division - MD of Equity Research [22]

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Okay. Got it. And no forward-looking guidance on any metrics for '19 at this point? Correct?

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Edwin F. Negron-Carballo, Celsius Holdings, Inc. - CFO [23]

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No. Not at this point, Jeff.

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Operator [24]

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(Operator Instructions) Our next question comes from the line of Anthony Vendetti with Maxim.

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Anthony V. Vendetti, Maxim Group LLC, Research Division - Executive MD of Research & Senior Healthcare Analyst [25]

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I just wanted to focus on -- a little bit first on the China investment and then go forward with some of the questions that I have. So on China, it looks like it was a negative $1 million. Is that because as you said this reconciliation of the investments there? Did they already pay $950,000 in the fourth quarter to recoup some of the investment you've made in China?

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Edwin F. Negron-Carballo, Celsius Holdings, Inc. - CFO [26]

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No, no. They have not. This pertains basically to the reconciliation and the [vouching] that we've been doing as it relates to the accrued expenses that we have done. But no, it has not translated into, let's call it, any cash flow.

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Anthony V. Vendetti, Maxim Group LLC, Research Division - Executive MD of Research & Senior Healthcare Analyst [27]

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Okay. I see, I see. And has the deal officially closed? Or is it still waiting final approval, signatures, all that?

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John Fieldly, Celsius Holdings, Inc. - CEO & Director [28]

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Anthony, this is John. We've executed a definitive agreement as of January 1, 2019. We're going through the final reconciliation and we'll have the loan -- capital loan finalized by the end of this month. So we have come to mutually agreed upon terms. We're looking at approximately in excess of $10 million on the capital loan to be repaid over the 5-year term, but that will be finalized by the end of this month or sooner.

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Anthony V. Vendetti, Maxim Group LLC, Research Division - Executive MD of Research & Senior Healthcare Analyst [29]

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Okay, great. And then, gross margin. Now that you're going to be out of China in terms of a direct investment there. I know there's royalty there, but should the gross margin for the rest of the business start to move back up? Or is this gross margin in the high 30s is more appropriate for 2019?

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John Fieldly, Celsius Holdings, Inc. - CEO & Director [30]

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Yes, that's a good question. As we grow in scale, we're bringing on some marquee accounts. With the marquee accounts comes slotting as well as additional promotional activity really, which is required to really, if you want to call it, set the account to make sure you're getting the off-takes and the pull-through. So on these early stages with these new marquee accounts, we are taking a lesser margin as a result of increased promotional activity. And keep in mind, slotting and promotions are a direct offset against revenue. So although our kind of run rates -- optimal run rate margins will be much higher as we continue to scale on the second year, we will have some margin contraction on these new accounts. So you're working on a blended margin. I think if you look at historically where we finished the year for 2018, we should be somewhere around that target. It seems more than achievable at this point. But also as we gain further momentum, we'll be -- as Edwin mentioned, be able to leverage these new co-packers coming onboard to drive additional efficiencies in the cost of goods. We also are receiving some freight savings heading into the new year versus what we experienced in Q4. Q4 freight rates were extremely high on a per pallet basis, but they have leveled off and actually decreased slightly. So I think as a good range is to look at the full year margin for 2018.

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Anthony V. Vendetti, Maxim Group LLC, Research Division - Executive MD of Research & Senior Healthcare Analyst [31]

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Okay. Now that's helpful, John. Just in terms of inventory, it looks like that almost doubled here. Was that some of the new SKUs coming online or what was that?

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John Fieldly, Celsius Holdings, Inc. - CEO & Director [32]

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Sure. Edwin, would you like to answer that?

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Edwin F. Negron-Carballo, Celsius Holdings, Inc. - CFO [33]

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Absolutely. Yes. Thank you. Yes, it's basically -- again, we're getting ready for the summer season and that's why you see inventory levels have increased. And if you look prospectively, we think that, that going forward is going to be the right level of inventory, so we can service our accounts and avoid out of stocks. So we feel comfortable with that.

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Anthony V. Vendetti, Maxim Group LLC, Research Division - Executive MD of Research & Senior Healthcare Analyst [34]

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Okay. And then lastly, in terms of competition, just based on data we've been able to gather, because this probably held -- Bang, looks like they're approximately $500 million in revenue if we can figure that out correctly. How do you look at yourselves in terms of positioning against Bang? And what are your strategies in 2019 to sort of counter their growth?

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John Fieldly, Celsius Holdings, Inc. - CEO & Director [35]

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Yes, Anthony, that's a great question. And VPX has done a great job. And they are capitalizing on these new trends. As I mentioned earlier, there's a renaissance happening in the Energy category and it's being disrupted today, and it's happening rapidly. You can see that with Bang's success over the last 6 months. Last year as well, they've been gaining a tremendous amount of traction and so is Celsius. We see Bang as a complementary. Their Target consumer is 18 to 24, ours is 24 to 36. We are more female. We have 50% female, 50% male. When you look at our demographics and we complement each other nicely as this new category is really evolving. And Rodney Sacks on Monster, Monster mentioned on the last earnings call, about the new category, being this performance energy category. And it's not just a new category. That's going to be really the new Energy category overall. And you're seeing these early indications of the transformation of this category, just like the CSD category was disrupted as well. So we see great opportunities and also bringing our partners that are coming onboard, further partnerships with Target and CVS, the AV Network, PEP -- and the PepsiCo (inaudible). This is happening extremely rapidly.

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Anthony V. Vendetti, Maxim Group LLC, Research Division - Executive MD of Research & Senior Healthcare Analyst [36]

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As you -- John [alluded], let me just follow-up on the network. So you're signing up some of these independent distributors that are part of Anheuser-Busch, Keurig Dr. Pepper. I'm just curious what do you see as the synergies there or the benefit of being part of those networks? Is it more than just having those distributors? What additional benefit is it that they're part of these larger companies?

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John Fieldly, Celsius Holdings, Inc. - CEO & Director [37]

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Yes. It's critical in our business, in the beverage business. We built up to this point, we've been very reliant on the wholesale network and direct to retail leveraging, really the supply chains of our customers. Unfortunately, as an example, on Target, we've seen out of stocks considerably because the product is moving so quickly. By leveraging these DSD partnerships, these individuals are in the store each and every week. Sometimes multiple times in a given week. Not only will we have proper shelf tags, merchandising and POS, we'll also maintain our presence and make sure we're in stock. I will tell you going through the warehouse, we see a lot of inconsistencies, price tags aren't up; when we're on promotion, the deal tags aren't up. So we'll be able to gain and leverage really, it's the power of the people that you get from the DSD market and then also -- they also go into many other local areas -- independents in their region. So not only are we picking the people power, we're also picking up additional distribution within those communities.

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Anthony V. Vendetti, Maxim Group LLC, Research Division - Executive MD of Research & Senior Healthcare Analyst [38]

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So the additional touch points per week is not critical, but much more important as you move forward to try to make sure that everything setup correctly, like you said, I didn't realize that lot of times things, if you're not there often enough, they're not tagged right or it's the wrong promotion and all that, so having these networks that are more frequent touch points makes a difference?

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John Fieldly, Celsius Holdings, Inc. - CEO & Director [39]

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That is correct.

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Anthony V. Vendetti, Maxim Group LLC, Research Division - Executive MD of Research & Senior Healthcare Analyst [40]

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Okay, great. Appreciate it.

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John Fieldly, Celsius Holdings, Inc. - CEO & Director [41]

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Thank you.

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Edwin F. Negron-Carballo, Celsius Holdings, Inc. - CFO [42]

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Thank you.

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Operator [43]

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Our next question comes from the line of [Paul Johnson], a private investor.

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Unidentified Participant, [44]

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Wanted to understand -- you mentioned CVS and Target. Can you tell us a little bit about the Delhaize Group, Food Lion and Hannaford, first of all, how they've done?

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John Fieldly, Celsius Holdings, Inc. - CEO & Director [45]

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Yes. Sure. Thank you, Paul for calling in. The Delhaize Group, it's going well. We're in Food Lion, we have -- we are getting orders, we're growing with them. There's a lot of further opportunity to scale within Food Lion. We're also running some programs and coming up in the second quarter to continue to support that. And we have some trade marketing programs scheduled as well. So we think it's met our internal expectations and we are working further to optimize the Food Lion opportunity, which is a massive opportunity. Our goal is to really get cold availability in these locations. Right now, we're in the dry shelf, so in the aisle. So we're looking for additional placements within the store to gain additional off-take. Hannafords has gone very well. That is supported by our distributor of Polar in the region. Sales are moving very well, increasing. We've stated before at several conferences in regards to our historical growth rate -- if you look at our [spins] data as well, we're growing about 30%, 36% organically. So we're seeing those type of growth rates at Hannafords as well. We do have an individual on the ground there. We're setting up displays and you'll see more activation with them in 2019. So we feel the Delhaize partnership is going well. And there's a lot of opportunity. We're just in infancy stages of that. Really capturing the share of that account.

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Unidentified Participant, [46]

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Great. And regarding the strong relationship with CVS, does that sort of preclude us from also getting some meaningful penetration at Walgreens?

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John Fieldly, Celsius Holdings, Inc. - CEO & Director [47]

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No. I believe it helps us. If anything, it helps us. So it does not preclude us at all.

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Unidentified Participant, [48]

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Okay. And regarding just more about the competitive threat, obviously, there's nothing, I mean even though the recipe for the Celsius drinks is complicated, there's nothing proprietary about the ingredients certainly. What precludes some of the larger competitors essentially knocking us off?

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John Fieldly, Celsius Holdings, Inc. - CEO & Director [49]

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It's -- that is a good question. We don't have a patent. It is a trade secret. It's been a trade secret from the beginning. Our founders originally went down that path as a trade secret not to disclose the formula. It can be reformulated based on -- I'm sure, scientists can reformulate the product. We do have a competitive advantage with our position and the fan base and the consumers that we have built and the momentum behind us. But just like any product -- and a lot of other brands, it could be replicated, it's very difficult. The one thing that makes us very unique is we have the science over 6 clinical studies published in peer reviewed sports nutrition journals. In addition, the product -- the company has already been reviewed by the NAD and a class action lawsuit on our structure function claims has taken place in 2010 where the company prevailed. So we have a lot of additional -- really value and additional science behind the product. It would be very hard to replicate. Keep in mind Coca-Cola and Nestle created Enviga back in 2009 and were shut down because they did not really do the proper research, they didn't have the proper studies behind the product. So we feel we're in a very good position to continue to capitalize on the market today and really capitalize our share and really the renaissance in the Energy category, targeting those health-minded consumers.

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Unidentified Participant, [50]

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Okay, that's helpful. And just in terms of, you talked a little bit about the margins in a similar way on the cash burn. I know you, Edwin, had said that you don't expect to have additional cash needs for 2019, but I think you had said that last year and you did do the offering. You did raise money by the shareholders. So are we fairly confident that for 2019, there won't be further dilution?

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Edwin F. Negron-Carballo, Celsius Holdings, Inc. - CFO [51]

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Yes. Thank you. Yes. Our current plan reflects that we will have sufficient funding or cash flow from our operations. But nevertheless, we always have Plan A, Plan B, Plan C where we've identified areas where we can generate more cash as it relates to perhaps reducing a little bit of our working capital in some cost-savings areas as well. So I think we're well positioned to have sufficient cash flow for the next 12 months to operate the business.

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John Fieldly, Celsius Holdings, Inc. - CEO & Director [52]

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And I'll just add, Paul, as well. I mean, when you look at 2017 ex the Asia investment, 2017, we generated $2.6 million, almost $2.7 million in positive cash -- positive EBITDA, adjusted EBITDA, when you back out those Asian investments. And in 2018, on a full year, we're looking at about $2.2 million in positive adjusted EBITDA. So we're very focused as an organization on driving profitable growth. So as Edwin mentioned, we do have levers that we can pull in the event we have some timing, but at this point, we do have sufficient capital to run this business profitably today.

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Unidentified Participant, [53]

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Got it. And just one other question, which may be a little bit random, but because you speak to lot of analysts and shareholders, John, any sort of speculation as to why there's such an incredibly high short interest level? I know the float is small, but any theories on that because it's a little perplexing?

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John Fieldly, Celsius Holdings, Inc. - CEO & Director [54]

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Yes. I agree with you, Paul. Unfortunately, I have no control over that. From what we can tell, we have spoken with NASDAQ representatives, trying to identify maybe who the investor is, but it's hard to understand that. We don't understand that, but what we can say is that it seems like the short interest has been there when we first were really brought on the Russell 2000 and 3000. So -- and it's kind of hovered in a range. So maybe it has to do with index funds that are on the other side of the 2000 and 3000, but that's all we really know at this point. And we're really focused on driving results. There is a great opportunity in front of us and we're executing as an organization.

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Operator [55]

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(Operator Instructions) It appears we have no further questions at this time. I would now like to turn the floor back over to management for closing comments.

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John Fieldly, Celsius Holdings, Inc. - CEO & Director [56]

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Thank you. On behalf of the company, we'd like to thank everyone for their continued interest. Our fourth quarter and annual results demonstrates our products are gaining considerable momentum. As we are capitalizing on today's health and wellness trends, our active healthy lifestyle position is a global position with mass appeal. We are building upon our core business and leveraging opportunities and deploying best practices. 2018 proved we have a winning product and a very large market that consumers love. Our mission is to get Celsius to more consumers profitably. I'm very proud of our dedicated team. As without them, our tremendous achievements in 2018 and significant opportunities we see in the coming year would not be possible. In addition, I'd like to thank our investors for their continued support and confidence in our team.

On a final note, our management team will be presenting at 3 upcoming investor conferences, the first being the ROTH Capital Conference on March 17 and 18 in Southern California. In addition, we'll be at the B. Riley FBR Conference in Hollywood, California on May 22 and 23. And the company will attend the Jefferies Consumer Conference in Nantucket through June 17 through the 19. We look forward to seeing many of you at these upcoming conferences. Thank you, everyone, for your interest in Celsius, and have a great day.

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Operator [57]

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Ladies and gentlemen, this does conclude today's teleconference. You may disconnect your lines at this time. Thank you for your participation, and have a wonderful day.