Monster Beverage Corporation
Q4 2015 Earnings Call Transcript

Published: 26 Feb 2016

[Operator:]

Good day, ladies and gentlemen, and welcome to the Monster Beverage Fourth Quarter and Year-End 2015 Financial Results Conference Call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session, and instructions will follow at that time. As a reminder, this conference call is being recorded. I would now like to introduce your host for today's conference, Mr. Rodney Sacks, Chairman and CEO. You may begin.

[Rodney Cyril Sacks:]

Good afternoon, ladies and gentlemen, thank you for attending this call. I'm Rodney Sacks. Hilton Schlosberg, Vice Chairman and President, is with me today, as is Tom Kelly, our Senior Vice President of Finance. Before we begin, I'd 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 which 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 & Exchange Commission, including our most recent Annual Report on Form 10-K filed March 2, 2015, as well as our most recent report on Form 10-Q filed November 6, 2015, including the sections contained therein entitled Risk Factors and Forward-Looking Statements for a discussion on specific risks and uncertainties that may affect our performance. The company assumes no obligation to update any forward-looking statements, whether as a result of new information, future events, or otherwise. An explanation of the non-GAAP measure of gross sales and certain expenditures, which may be mentioned during the course of this call, is provided in the notes designated with asterisks in the condensed consolidated statements of income and other information attached to the earnings release dated February 25, 2016. A copy of this information is also available on our website at monsterbevcorp.com in the Financial Information section. We are continuing to make good progress with the implementation of our strategic alignment with Coca-Cola bottlers worldwide. We have successfully concluded negotiations with Coca-Cola bottlers in many countries, and are planning to launch Monster with these bottlers in most of their international markets in the near future. We have substantially completed the transition of Monster in most of the 28 countries serviced by the Coca-Cola Hellenic Group, and are currently in the process of transitioning the remaining countries. We have successfully launched Monster in Russia, and are moving forward with plans to commence production and distribution of Monster in Nigeria, through Coca-Cola Hellenic. We've also recently successfully transitioned our Monster brand in both Spain and Portugal to Coca-Cola Iberian Partners. We are continuing to transition a number of countries in Africa to Coca-Cola bottlers. This process will continue through the remainder of 2016. We've also reached agreement with Coca-Cola İçecek for distribution of Monster within the countries which fall within their Coca-Cola territory, which includes Turkey and 10 other countries. We've reached agreement with Coca-Cola Amatil, which distributes the Coca-Cola product in Australia, New Zealand, Indonesia, Papua New Guinea, and Fiji. Finally, we having reached agreement with Big (3

[Operator:]

And our first question comes from Vivien Azer from Cowen. Your line is now open.

[Vivien Azer:]

Hi, thank you very much for taking the question. I have just one point of clarification. Hi. The $42.5 million impact, was that the global number or was that just international?

[Rodney Cyril Sacks:]

$42.5 million I believe is (34

[Hilton H. Schlosberg:]

Yes, it does.

[Rodney Cyril Sacks:]

Yeah. Relates to international.

[Vivien Azer:]

That's just international. Perfect. Thank you for that. And so my bigger picture question, clearly, the underlying health of the business is just fine, and there's a lot of moving pieces in terms of this transition, but can you help give us a sense of the timeline of when we might expect some of this destocking and distributor transition disruption to abate, please? Thank you.

[Rodney Cyril Sacks:]

I just want to clarify, that $42.5 million does include the impact of destocking. Yeah, which is then global.

[Hilton H. Schlosberg:]

Not the destocking, the buy-in.

[Rodney Cyril Sacks:]

The buy-in. Sorry. It does include the buy-in.

[Hilton H. Schlosberg:]

It does include the $11 million from that buy-in.

[Rodney Cyril Sacks:]

Yep, so I want to just clarify that. Sorry, could you repeat your follow on question?

[Vivien Azer:]

Certainly. So lots of moving pieces, underlying business remains healthy, but the disruption is clearly a little bit painful, so can you give us a sense for how you see that progressing, and then we might be through that?

[Rodney Cyril Sacks:]

Okay. We are clearly having a choppy time just getting everything implemented and in line. There are a lot of moving pieces all over the world. And we believe that pretty much we should be done with a lot of the transitions by – we hope, by the end of the second quarter or at a position where we've at least negotiated the transitions, and are starting to implement them. That's been part of the uncertainty. Now that uncertainty will start being removed. We believe that the actual results will start flowing through once we've transitioned markets, and that does take some time. But we think that will be – we'll start seeing the impact of that through the second half of the year. But – so we really just believe it's been pretty much a year of transition for us from when we originally closed the transaction, and we are, as we've indicated throughout the call, at an advanced stage of our discussions with really the principal Coca-Cola bottlers around the world. So we do anticipate we will start seeing some really rapid advances in that regard.

[Vivien Azer:]

Thank you very much.

[Operator:]

And our next question comes from the line of Bill Chappell with SunTrust. Your line is now open.

[William B. Chappell:]

Thanks. Quickly, two things. One, can you give us a little more behind the thought process on the size of the share repurchase? Why not more? Why this? And then, also on the AFF acquisition yesterday, can you give us a little idea, I'm just trying to understand, should we just bake in that whole $90 million of operating income that you'll receive or is there some since they were a supplier, do you not get all of that? I mean, how do we model that going forward?

[Hilton H. Schlosberg:]

Bill, maybe I can answer that. Hi.

[William B. Chappell:]

Good afternoon.

[Hilton H. Schlosberg:]

On your first question, I think you know that we are conservative folk when it comes to borrowing, and we took a decision, and the board took a decision that we would rather maintain a cash-positive situation, hence the amount of the buyback. So the results of the buyback will mean that we will not have to go into borrowings. So that's the answer to your first question. The answer to your second question is the $87 million operating income that we discussed is the operating income in 2015. Some of the customers may, in fact, choose not to continue with the company. But we account for 87% of the company's business. And the business that we place with AFF is indeed profitable to them. So as you model, I think a good chunk of that $87 million could be taken into enhancing operating income for the consolidated organization. But as results of the other 13%, it's really too premature to say. But the number will be determined in due course.

[Operator:]

And our next question comes from the line of Mark Astrachan with Stifel. Your line is now open.

[Mark S. Astrachan:]

Hey, good afternoon, guys. So the 9.5% gross sales in January, just want to clarify. So that includes the new Coke Concentrate acquired business, but also laps the old business, which includes the Warehouse business. Is that correct?

[Rodney Cyril Sacks:]

That is correct.

[Mark S. Astrachan:]

Great. And then secondly, just trying to understand again the supply-demand reported versus, and demand metrics here, I don't get it. I mean, I understand there's moving parts here, but last quarter you killed numbers versus expectations. The June quarter was almost flat. This quarter, again, a miss relative to people's expectations. I get you don't give guidance. But, I guess, is there anything that you can help us sort of understand that makes us believe that the end demand per what we see in the scanner data in the U.S., what we hear from distributors outside of the U.S., is still consistent with how you believe your end demand is actually looking? And, obviously, then reconcile that with what you reported from a top line standpoint in the quarter.

[Rodney Cyril Sacks:]

I think that you've got to look at the – and that's a very good indicator, that's why we spent time on the call dealing with the Nielsen numbers, and we've actually also referred to some of the sales-out numbers from our distributors because that is more indicative of your ongoing and sort of more stable demand for our product. So Nielsen are just – as you know is pure scanned data, and therefore, that's the demand that's happening. And then your demand from retailers, unless there is a big promotion, that is also less choppy than our demand. Our demands are really – clearly, our demand for our products from our customers is choppy and that choppiness has been exacerbated during the last probably 12 months or so. But because of all these announcements, because of the changes, different bottlers or distributors have different policies in holding inventory. Some bolt up extra inventory because they would just – I think anticipate it being canceled, and having their own minds, that somehow that would give them a longer period to sell, or different opportunities to sell, and then you've got to deal with that inventory situation. And there were a lot of independent – there were independent bottlers, and that's part of the issues, and there was no consistent pattern. And that really is what has happened. And so, obviously, we can only report our revenues as they are and as they come into us, and we try and match them as well. And so, we believe that the – literally if you're looking to the trends, the more important trends are not our reports over the last three quarters or four quarters, but it is the Nielsen numbers which are showing consistent numbers, and showing good growth both in the U.S. and internationally. And that's what keeps us excited and makes us comfortable that as to the direction of our brand, and our brand is continuing to grow. And so as soon as we are able to actually get through all these transitions, get rid of the uncertainties, we will see long term growth that we think a healthy growth for the brand and for the company.

[Operator:]

And our next question comes from the line of John Faucher with JPMorgan. Your line is now open.

[John A. Faucher:]

Yes, thank you. Good afternoon.

[Rodney Cyril Sacks:]

Good afternoon.

[John A. Faucher:]

I want to talk a little bit about the Concentrate revenues, and Hilton, you talked about this before that the numbers that we got in the filings were pro forma numbers, but it seems as though the Concentrate numbers continue to come in a little bit lower than – well, not a little bit this quarter, a lot lower than what I would have anticipated there. Is there – is that FX? Is that volume? Is that inventory adjustments at the bottlers as you look to transition to this new model? Is there something going on in terms of the Concentrate revenues versus the pro forma numbers that we got in the filings? Thank you.

[Hilton H. Schlosberg:]

Well, some of it was indeed forex, as we highlighted that number on the call. Some of it was that some of the international distributors – international bottlers were, in fact, overstocked as we went into the transaction really to ensure that they would not miss a beat with regard to production. So, some of it is that. Some of it is indeed the fact that some of the KO brands have been falling off in market share, and that is something that we are addressing. We spoke earlier that we're repositioning a number of their brands – or a number of our brands. We're repackaging them, and we have a number of marketing initiatives going with regard to those brands. So a lot of it is a lot of all of that. But, in essence, I think we remain satisfied with the acquisition of the strategic brands, and we remain satisfied with the profitability that those strategic brands are generating to us relative to the purchase consideration that we paid.

[Rodney Cyril Sacks:]

Yeah. And we are starting to see positively – also I think there was a little bit of a drop-off in morale from the bottlers for some of those brands in some of the areas. And they hadn't seen sort of the levels of investment or a clear direction or positioning for those brands. We are taking steps to deal with that now and to address those issues. We've changed some of the marketing and the focus and the positioning of the brands and these things does take time to turn this around in different regions of the world. But we are doing that, and we've got into it now. We're introducing some new flavors. And as Hilton indicated, our packaging has changed on some of them and we're continuing to make changes. But most important, we've actually decided on some strategic positioning for the brands. And again, those are being changed. I mean in many cases, one of the higher costs we had was, for example, advertising. There was an advertising campaign that we committed in order to, in the best interest of the brands, we continue to be responsible for it. It was committed before we took over. But ultimately, we don't believe that that was really beneficial for the brand, and it's not a direction we're going on, so we've changed those directions. So these are the changes that we are making, and long-term, we believe we will stabilize and continue to grow these brands, but in slightly different ways.

[Hilton H. Schlosberg:]

I think I also may have mentioned it, and if I didn't, I should say that some of those brands also did not benefit from the same level of marketing contribution that they had in the past. So they definitely, as we moved through the transition, there was a reduction in marketing expenditure on those brands.

[Operator:]

And our next question comes from the line of Nik Modi with RBC Capital Markets. Your line is now open.

[Nik Modi:]

Yes, thanks. Just two questions from me. On the acquisition, does this flavor supplier, are they dealing with some of these new breakthrough products that you've been discussing, the three to four new products? Just wanted to get some clarity on that. And then the bigger picture question is when you think philosophically about how you launch into a market, should we think about it in a similar template on how you handle the U.S. in terms of kind of SKU by SKU, flavor by flavor, or do you think you'll go with a much broader SKU set as you enter some of these global markets? Thanks.

[Rodney Cyril Sacks:]

Just perhaps dealing with the SKU set, there isn't a one-formula-fits-all. In some countries, we'll launch with two or three flavors, but not a massive array of 10 flavors. In other countries, we'll do one or two flavors. And then obviously try and seed up our principal Green Monster, that's the flagship, that's where all our marketing around the world goes to, and get that on the shelf. And then basically expand from there as quickly or as slowly as we need in order to make sure that we're able to get our products on the shelf and they're able to sustain a satisfactory sell rate. And so that is (47

[Hilton H. Schlosberg:]

And then the second question – or the first question I think was is this flavor company involved in developing new flavors for us for new products? And the answer is yes. The other point I wanted to make earlier to Bill Chappell, and I'm just going to make it on the call, is that we spoke about the total net revenues of $168 million approximately from AFF. Please remember that as we go forward, a significant part of that will flow through in cost of sales and gross margin rather than in additional revenues, because on a consolidated basis, we will not reporting those sales as sales. They'll come into our financials as a reduction in cost.

[Operator:]

This concludes Q&A for today. I would now like to turn the call back over to Mr. Sacks.

[Rodney Cyril Sacks:]

Thank you very much. One of the things I would like to perhaps just stress on the call is I think there've been one or two questions that were just posed to us as to why we did the transaction now and timing and we have other things. But I just wanted to say that this was an acquisition and the strategy behind buying and getting ownership of our own flavors was something we considered very important and valuable as far back as a decade ago. And we have made approaches repeatedly, we have spent time trying to negotiate. And really it came about last year that I think the owner was approaching getting I think close to his 80th birthday, and for the first time after an approach, they decided that they were receptive, the family, to an approach. And obviously, we took the opportunity when we could. It wasn't just spur-of-the-moment. This was something we've been wanting to do for a very long time. And then, there has been some other suggestion asked whether this is – people if we could expect more acquisitions along this line. We don't think so. We're not going to say, give you an emphatic no on anything. But certainly that is not our intention to get into the flavor business or concentrate business. We're not intending to expand it. This clearly was a very strategic acquisition for a supplier of almost all of our products. And for us, we're able to lock up pretty much most of these revenues, or our revenues, as we sell. As we go forward, every additional case of Monster we sell, that will be additional margin that we will able to basically drop to our bottom line. So we see this as a very low risk and a very strategic acquisition. It's based in California, it's easy to manage. It's not a massive staff. It's not a very capital intensive business. It has a very low capital base, a very low working capital requirement. It was also strategic we felt to enable our flavor supplier to grow internationally with us. As a private company, they had faced some challenges in many countries and actually having the resources and the expertise to have their flavors get through the regulatory process in these countries and be able to import ingredients, and particularly ingredients and supply them in country. And not being an international base, but yet their flavors were obviously very, very important and key for us. So we believe that by aligning ourselves with them, we will be able to facilitate and help them through, on the regulatory side. We have quite a deep bench of staff here who understand regulatory issues and legal issues, or in the regulatory area. We also obviously, as it's important for us, as we expand into many more countries and many more distant places, we want to really have the opportunity to put our best foot forward and have these key flavors come from this supplier and not have to resort to alternative suppliers. But that being said, obviously we do also still intend to continue to work with our existing suppliers, because we want everybody to – we want to obviously ensure that we're still able to get cutting edge technology, cutting edge flavors, have everybody stay competitive whether it's on the AFF side or our independent suppliers side. And so for all those reasons we do believe this transaction to be very, very important for us going forward. Thanks, everybody, for your continued interest in the company. We continue to obviously believe in the company and our growth strategy and are committed to continuing to develop and to differentiate our brands and to expand the company, both at home and abroad and in particular, to expand distribution of our products, including the strategic brands, through the Coca-Cola bottler system internationally. We are particularly excited by the new opportunities that we have going forward with our robust portfolio, together with our newly acquired strategic brands. Thank you very much for your attendance.

[Operator:]

Ladies and gentlemen, thank you for participating in today's conference. This does conclude the program, and you may all disconnect. Everyone, have a great day.