Monster Beverage Corporation
Q4 2022 Earnings Call Transcript

Published: 28 Feb 2023

[Operator:]

Good afternoon, and welcome to the Monster Beverage Corporation Fourth Quarter and Full Year 2022 Financial Results Conference Call. All participants will be in a listen-only mode. [Operator Instructions] After today’s presentation, there will be an opportunity to ask questions. [Operator Instructions] Please also note, today’s event is being recorded. I’d now like to turn the conference over to Rodney Sacks and Hilton Schlosberg, Co-CEOs for Monster Beverage. Please go ahead.

[Rodney Sacks:]

Thank you. Good afternoon, ladies and gentlemen. Thank you for attending this call. I’m Rodney Sacks. Hilton Schlosberg, our Vice Chairman and Co-Chief Executive Officer, is on the call; as is Tom Kelly, our Chief Financial Officer. Tom Kelly will now read our cautionary statement.

[Tom Kelly:]

Before we begin, I would like to remind listeners that certain statements made during this call may constitute forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 as amended and Section 21E of the Securities Exchange Act of 1934 as amended, and are based on currently available information regarding the expectations of management with respect to revenues, profitability, future business, future events, financial performance and trends. Management cautions that these statements are based on our current knowledge and expectations and are subject to certain risks and uncertainties, many of which are outside the control of the company that may cause actual results to differ materially from the forward-looking statements made during this call. Please refer to our filings with the Securities and Exchange Commission, including our most recent annual report on Form 10-K filed on February 28, 2022, and quarterly reports on Form 10-Q, including the sections contained therein entitled, the Risk Factors and Forward-Looking Statements, for a discussion on specific risk and uncertainties that may affect our performance. The company assumes no obligations to update any forward-looking statements, whether as a result of new information, future events or otherwise. I would now like to hand the call over to Rodney Sacks.

[Rodney Sacks:]

Thank you, Tom. The company achieved record fourth quarter net sales of $1.51 billion in the 2022 fourth quarter, 6.2% higher than net sales of $1.43 billion in the 2021 comparable period and 11.9% higher on a foreign currency adjusted basis. Since the beginning of the COVID-19 pandemic and the subsequent global supply chain challenges and disruptions, the company has prioritized product availability for its consumers and customers, despite adversely impacting gross margins and operating income. The company continues to stand by its strategy to ensure product availability and solidify the continued long-term growth of the company's brands. CANarchy was acquired in February 2022 to facilitate the company's entry into the alcohol beverage sector. During 2022, CANarchy sustained margin pressures, cost of acquisition and integration, as well as certain other costs in preparation for the launch of the company's new alcohol product lines. Gross profit as a percentage of net sales for the 2022 fourth quarter was 51.8% compared with 53.9% in the comparative 2021 fourth quarter. The decrease in gross profit as a percentage of net sales for the 2022 fourth quarter as compared to the 2021 fourth quarter was primarily the result of

[Operator:]

We will now begin the question-and-answer session. [Operator Instructions] And our first question will come from Peter Grom of UBS. Please go ahead.

[Peter Grom:]

Thanks, operator, and good evening or good afternoon everyone. So, Hilton, I guess, I wanted to ask about gross margin. You mentioned in the release that you expect some of these cost pressures you’ve experience to be transitory, whereas others remain challenging. And I guess maybe just to start, is there any way to frame how much of the drag on gross margin is still a result of these imported cans? And then just looking ahead in the context of pricing, the cost backdrop you've outlined and kind of the modest sequential improvement we saw sequentially, how would you frame the margin recapture opportunity looking out to next year? Thanks.

[Hilton Schlosberg:]

Okay. Well, if you look back at what happened in the fourth quarter, we had a price increase in September 1 in the US. We had some price increases internationally during 2022 and into the fourth quarter of 2022. We are increasing pricing in many international markets on a phased basis starting in the early part of 2023. So, a lot of the increased costs that we have been absorbing should be accommodated by increased pricing. But looking forward, we all know what's happening with aluminum. It's coming down. Certain other commodities are coming down. In Europe, we see energy coming down. So overall, I think with regard to margin, we are actually in a good place. And as you saw in this quarter, we were able to move margin on a sequential basis. We do, however, have certain costs that are not going away. For example, co-packing fees have gone up. The sugar is in tight supply because of weather situations. So, there are positives as well as negatives in the system. As regards to the international cans, we don't have that significant quantity left in terms of what the impact will be on gross margin. So, I think we've just got to work through those cans. They are green and ultra-white. We'll look through them and will be good. The only issue is that we do have promotional cans from time to time. And as I've spoken on this call on a number of occasions, these cans are not promotional cans. They're just straight cans that we use in non-promotional periods. And also, it depends -- we have other obligations with our can companies. So, it's a question of sourcing cans on the most optimal place to be able to co-pack. So that may be too long an explanation, but I hope it gave you a sense of what we're seeing from the sand.

[Operator:]

The next question comes from Chris Carey of Wells Fargo Securities. Please go ahead.

[Chris Carey:]

Hi everyone. So, I just wanted to follow-up on that, but then ask question. So, Hilton, would you expect sequential gross margin improvement from here on steady clip just given pricing and some improvement in commodities or overall cost inflation. I appreciate there are other inflationary factors. But would you expect to continue to sequentially improve from here? So that's just a follow-up. But then from a US perspective, I think one of the things that's coming up tonight is, you had mid-single-digit pricing to high-single-digit pricing in the US in September and yet US sales were 6%. So, can you talk to any -- was there any pull forward of demand because of the pricing actions? Were there any promotions in the quarter behind the pricing? Maybe can you just help reconcile the revenue growth in the quarter in the US, which is basically in line with the pricing that you're taking? So, thanks for that follow-up on gross margins in the US comment.

[Hilton Schlosberg:]

Okay. Chris, to answer your first question, we don't give guidance. And I actually gave quite a robust explanation of what we see the runway for margins. So, I just really don't want to estimate it because we really don't give guidance. But I think I gave you a good sense of where we are, probably too much, but that is where it is. In respect of the price increase in the US in September, we actually limited the bottlers to the extent of how much they could buy in. So, I don't think that there was -- in fact, we don't think there was any much pull forward from Q3. I think it was just a question of the market stabilizing. As you know, with when price increases are put into effect, there's always a little bit of a bump as you go into more steady waters. And everything we know and that we've heard is the price really -- the price increase is actually sticking. So, we had a little bit more promotional allowances in the fourth quarter, and you'll see that in the K is released, but that's really consistent with bleeding in a price increase to a market in the consumer goods industry.

[Rodney Sacks:]

I think the only other thing I would like to just -- maybe just to add on that is that towards the end of the fourth quarter, I think we were not alone. I think there was a number of companies felt some softness in the consumer pool in -- primarily in December. But that was -- and that happened. And then we think we've seen an uptick again in January as we've indicated from our January numbers and you can see from the Nielsen numbers. So, it probably was a little bit of a combination of just an initial hesitancy from consumers to the price increase and then ultimately just some consumer softness, but that seems to have remedies itself in the first quarter now?

[Operator:]

The next question comes from Andrea Teixeira of JPMorgan.

[Drew Levine:]

Hi. Thank you. This is Drew Levine on for Andrea. Thank you for taking our questions. So, Ron, I want to continue on that point on the sort of rebound in January, and it also seemed like there was an acceleration for both Monster and the category on a three-year stack or three year CAGR basis. So just wondering what you're sort of attributing that underlying strength in consumption too, do you think it's the new product launches, increased interest in the category, gas prices coming down? So, any thoughts around that would be helpful. Thank you.

[Rodney Sacks:]

I think it's a combination of those things. I think we have got gas prices coming down. I think we have seen sort of now sort of increase in convenience. I remember, last year. Convenience was always ahead of the grocery and mass channels. And last year has sort of reversed, and convenience was a little slow. That seems to be coming back a little bit. And we just think that, again, pricing has sort of settled down a bit. But you can see across the whole category, there has been an increase in the Nielsen numbers across the category for most people and our competitors. So, we're just are seeing just a little bit of resurgence of confidence again.

[Hilton Schlosberg:]

Yes, the other thing I think you should do is have a look at the -- when we announced third quarter results, we spoke about the October sales. And if you look at the October sales, it's not inconsistent with the quarter. And I'll talk about the fourth quarter of 2022, sorry.

[Operator:]

The next question comes from Mark Astrachan of Stifel. Please go ahead.

[Mark Astrachan:]

Yes, thanks, and good afternoon. So hopefully, you're doing all right there, Rodney.

[Rodney Sacks:]

Yes, I’m fine. Just sort of remnants of a cough for the last couple of weeks.

[Mark Astrachan:]

All right. That's good. Two questions for you. One sort of related to the recent line of questioning. So, inventories were up again sequentially. How do we think about the improvement there? And does that kind of lead into flow-through of improvement in gross margin through 2023? And maybe more bigger picture, how do you think about the relative affordability of Monster and energy drinks broadly in the US after the price increase? It seems like you think that other beverage categories. Pricing has been steady riser over the last decade plus, so the gap has sort of narrowed. You took a little bit of pricing, but not nearly as much on a cumulative basis. Is there opportunity here to become more price rationale from an energy category standpoint as you kind of move forward?

[Hilton Schlosberg:]

Well, let's talk about the first question, Mark, about inventories. As you know, when we went out of 2021, our inventories were just too low. We were unable to service our customers without major upheavals and without major costs. So, we -- there was no question that the inventories had to move and move significantly up because bearing in mind where our sales are. But as we are, we believe that we have sufficient inventories, which is important for us to be able to service our customers. Are we working on getting those inventories down? Yes. And these inventories will optimize themselves in due course. So, I wouldn't be concerned. Our products have a two-year shelf life, and it's important that we maintain sufficient inventories to service our customers. And then on that second question you asked about pricing, if you know and look, for example, at a Mountain Dew at Walmart, a 20-ounce Mountain Dew Walmart, their price is $2.18. And Monster is $2.28, so we -- I think as you look at the energy category and you kind of balance the pricing of 20-ounce sodas and energy drinks. Remember that we now -- and just twisting over to convenience, we sell more -- energy drink sell more at convenience than carbonated soft drinks. So, there is a balance. And I think we have struck a very good balance. With regard to going forward, we have a price increase planned for 24-ounce, which we believe has got opportunity, and we're taking price in 24-ounce up beginning of April. So that will happen. And we'll continue to monitor the opportunities for price increases in the US, as we see margins and as we see the carbonated soft drink category, and it's a whole bundle of issues that lead us to move in the direction of whether to take price.

[Operator:]

The next question comes from Filippo Falorni of Citi. Please go ahead.

[Filippo Falorni:]

Hey. Good afternoon, guys.

[Rodney Sacks:]

Hi.

[Filippo Falorni:]

Can you talk about your expectations for your innovation pipeline in 2023, particularly on a relative basis over the last couple of years, given it seems like you have a pretty substantial pipeline this year, both in alcoholic beverage and your core energy drinks? Thank you.

[Rodney Sacks:]

The fact is that I think that we've actually got a really broad base of innovation, I think that it has sort of improved over the last few years, and I think we're sort of getting it right. I think that will be positive for the brand. We also are being able to secure a little more shelf space across the different channels, which is helping us with innovation, because in some cases, we didn't get shelf spaces in some of the years past, and it was sort of difficult to actually get the innovation to achieve the benefits that we had hoped for. We think that this year, we will be able to achieve those benefits. We have rationalized some of the SKUs. And we think that we'll be able to get a good selection of our innovation on shelf, particularly the new energy Zero Sugar and also the new Reign subline, which will going to go up against other competitors in the 12-ounce category. And there has been some additional shelf space, not only in the energy category, but also in the sort of wellness category. So, I think in some places, we'll also be able to place the Reign Storm sort of line in that area as well. So overall, we think there will be a good contribution going forward from innovation, which is exciting. And so far, initial response to things like our Ultra Strawberry Dreamsicle has been really positive from consumers and bottlers to the Zero Sugar and others. So, we are pretty optimistic and upbeat about innovation this year. Also, we were introducing a lot of multipacks to try and increase the take home, particularly in places like grocery. So again, we haven't described them that much on this call, but there's a whole skew of multipack and variety packs that we're doing in a multipack, which we think will be positive for the brand this year for sales.

[Operator:]

The next question comes from Steve Powers of Deutsche Bank. Please go ahead.

[Steve Powers:]

Hey. Thanks, and good evening. Just I guess a couple of cleanups on the gross margin topic. The first one is, Rodney, I think at the start of the call, you bridged to a $60 million increase in COGS. I just wanted to clarify what that was. I think if I'm not mistaken, COGS is up like $70 million-plus. So just exactly what those numbers were and what they weren't, number one? Number two, I don't know if you can comment on the mix of cans in the fourth quarter, old higher cost cans versus current cost cans and if that was materially different than what you had seen in the third quarter? And then three, the Latin America gross margin, you called out, sales growth there is fantastic, but the gross margin has been progressively under pressure and was down, I think, 10-plus points in the fourth quarter. Just the drivers there and if you think you've got the ability to turn that gross margin progress around in Latin America? Thank you.

[Hilton Schlosberg:]

I think, Steve, we spoke about that about margins earlier on the call. Margins on a sequential basis were actually up. So, I'm really not sure what you're referring to. And the first question that we answered spoke -- I spoke quite heavily about the progression of gross margins and the pluses and the minuses. So maybe I'm missing something, but I think we did discuss margin earlier on the call. And with regard to the $60 million that we spoke about in the release, that was only -- the $60 million was comprised of $39.6 million due to increased ingredients in other input costs and 12.5 due to geographical product sales mix and 7.9 due to increased logistical costs. And the rest of the increase in cost of sales was normal increases as you would expect to -- in a normal business environment. Those are the kind of the exceptional ones that we called out.

[Operator:]

This concludes our question-and-answer session. I would like to turn the conference back over to Mr. Rodney Sacks for any closing remarks.

[Rodney Sacks:]

Thanks. On behalf of the company, I'd like to thank everyone for their continued interest. We continue to believe in the company and our growth strategy and remain committed to continuing to innovate, develop and differentiate our brands and to expand the company both at home and abroad and in particular, capitalizing on our relationship with the Coca-Cola bottling system. We believe that we are well positioned in the beverage industry and continue to be optimistic about the future of our company. We hope that you remain safe and healthy. Thank you very much for your attendance.

[Operator:]

The conference has now concluded. Thank you for attending today's presentation, and you may now disconnect.