Monster Beverage Corporation
Q4 2008 Earnings Call Transcript

Published: 27 Feb 2009

[Operator:]

Good afternoon ladies and gentlemen. Welcome to the Hansen Natural Corporation, fourth quarter 2008 financial results conference call. During today's presentation all parties will be in a listen-only mode. Following the presentation, the conference will be opened for questions. (Operator’s Instructions) This conference call is being recorded today Thursday, February 26, 2009. I would now like to turn the conference over to Mr. Rodney Sacks, Chairman and Chief Executive Officer. Please go ahead sir.

[Rodney Sacks:]

Thank you. Good afternoon ladies and gentlemen. Thank you for attending this call. My name is Rodney Sacks. Hilton Schlosberg, our Vice Chairman and President, is with me today as is Tom Kelly, our Vice President of Finance. 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 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 management's current knowledge and expectations and of 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 herein. Please refer to our filings with the Securities and Exchange Commission, including our most recent annual report on Form 10-K filed on February 29, 2008 and our most recent quarterly reports on Form 10-Q, including the sections contained therein entitled "Risk Factors and Forward-Looking Statements" for discussion on specific risks and uncertainties that may affect our performance. We also refer listeners to our Form 10-K to be filed no later than Monday, March 2, 2009. 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 measures 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 consolidated or dense consolidated statements of income and other information attached to the earnings release dated February 26, 2009. A copy of this information is also available on our website www.hansens.com in the investor relations section. The beverage industry has continued to slowdown consistent with the slowdown in the weak US economy. The housing market declines, increasing job losses and lowering company profits all of which continue to hamper the spending power of US consumers, who we believe have cutback on impulse purchases and much of their discretionary spending. The good news is that the energy drink category continues to remain one of the few sectors in the beverage industry that continues to show year-on-year growth, rather a slower rate than previously. While this trend continues to be more marked in California, which is one of the largest energy drink markets, it is, nevertheless, a nation wide trend. We continue to believe that this trend disproportionately affects blue-collar workers who make up a large portion of our consumer base. While lower gas prices are being seen at the pumps, we have not seen any real turn-around in purchases at gas stations, which is an important sector for energy drinks. We believe that it will be sometime before the effects of the recent stimulus package can be assessed. During the last quarter we transitioned a large portion of our distributor system to Coca-Cola bottlers as well as new Anheuser-Busch distributors, which has anticipated resulted in the certain amount of disruption. I will discuss the transition in more detail later in the call. As expected, we experienced some disruption in our supply chain but the Monster Energy brand continues to grow in the excess of the growth in the energy drink category. According to the Nielsen reports for the 13-weeks through January 24, 2009, all outlets combined namely the convenience, grocery, drug, and mass excluding Wal-Mart, the energy drink category grew 8%, while Monster grew 13.6%. In actual dollar volume the energy drink category increased in sales by a total of $81.3 million to $1.099 billion for the 13-week period concerned. Of the increase $36 million was contributed by increased sales of Monster; sales of Red Bull, Rockstar and NOS increased by $5.4 million, $7.4 million, $31.5 million and $14.8 million respectively. Sales of

[Operator:]

Thank you sir. (Operator Instructions) Our first question comes from the line of Judy Hong with Goldman Sachs. Please go ahead.

[Judy Hong:]

Thanks. Hey, Rodney.

[Rodney Sacks:]

Hi.

[Judy Hong:]

Rodney, I am just trying to reconcile your sales growth in the quarter because it seems like that there are a lot of moving parts in the quarter. So, first you have the 12.8 million of deferred revenue that you got that was booked in the quarter. You also called out for 7 to 8 points of sales that benefited you in the fourth quarter of 2007 as the trade loaded up on inventory before the price increases.

[Rodney Sacks:]

Right.

[Judy Hong:]

Was there any, I think you have talked about taking back some of the inventory from your existing wholesalers in the fourth quarter with the transition. Was that part of what happened in the fourth quarter sales number?

[Rodney Sacks:]

Yes. That is a 9.7 million figure I referred to.

[Judy Hong:]

So 9.7 million that you have taken back from the existing wholesalers. So that runs against your sales in the fourth quarter.

[Rodney Sacks:]

Right.

[Judy Hong:]

Okay. And then, in terms of your comment about that you are not seeing any improvement in the convenience and gas channel in the early part of this year that sounds a little bit different than what the other beverage companies have talked about, when they reported the fourth quarter results. So I am just trying to see, what you are seeing, and more specifically, in some of the premium non-carb category with respect to CNG channel, and if you are seeing actual improvement in CSP, but, maybe the consumers are holding back on some of the higher price point beverage products.

[Rodney Sacks:]

We are seeing the energy category sales increase being pretty constant in the category was increasing in the 30% range or higher than that. There is 40% range in the second quarter, 30% range and it was sort of falling off in the third quarter, into the 20s and then high teens. In the fourth quarter, it really has been pretty consistent; there was a little bounce in November. But our numbers are showing the category in convenience, for example, as being 13.5% up in the four weeks ended October 2008 went back up to 14.9 which is still way up where we had been in September – in November and in sort of going down to about 13.3 in December. And it has been even now, it is January numbers are coming in at about flat at that level about 13.3. So we are seeing the numbers still staying down there. We do not feel there has been much improvement. There may have been improvement in some of the lower priced items going out of the door in the convenience, but in the energy category, we are seeing a sort of very similar to it has been over the past few months.

[Judy Hong:]

Okay. And then in the fourth quarter, it looks like you had a pretty good expense control. The distribution costs as a percent of sales were down year-over-year, your selling expenses were also down as a percent of sales. I am just wondering if you made a conscious effort to sort of humbly down on some of these expenses and how we should think about those costs in 2009.

[Rodney Sacks:]

I think that going forward we are going to obviously try and keep our cost inline. We are mindful of the economy and we are not sure, how torpid economy will bring better come back. But one of the main issues one of the main cost we have is our sponsorship and endorsement cost and those were down for the quarter, but overall were up on the year, quite high, based on the previous year, but those we obviously did look at clearing back somewhat in the fourth quarter because they were running high. They had been budgeted high and anticipated higher sales levels and where that would be brought back. But one of the things that has throw some of the numbers out quite a bit are the UK costs. For example we maintained we have kept our payroll costs pretty much inline. But our costs of where we put under marking about TDM program costs have gone up quite substantially, not so much in the US, but because of high extensive TDM sampling program that we did institute in the UK to start helping to see the brand and basically last year the sales we just didn’t get the listings as we have explained in previous calls and then we had this sort of the uncertainty and a little bit of disruption in our distribution. There was a disruption in the changeover. There was a delay in the changeover to CEE there, which again (inaudible) because we had to retain the existing distributor for the rest of the year and obviously you got a distributor is not very motivated and knows that he is sort of on the way out. So, that was really difficult and those costs are, when you consolidate all playing quite a bit of havoc with some of the percentage numbers. But by and large, we think that those costs will come inline; sales in the first two months in Europe were pretty much inline with our budgets. So things are settling down. Again there were some delays. We started off in the UK in January. There was a bit of delays to a couple of weeks in getting everything in order to really get going in on the continent that has gone in or started in February. We have good listings and that is going. We are pretty excited by how the launch is going in the continent. And we just think that going forward now, our cost in the UK obviously will be expensive when we are going to spend as much as necessary to make sure we can cede the brand and establish the brand there. We do think it is not going to have the sort of losses we had last year, anywhere near there. We think that it is going to be much more balanced and that will help our costs get a little more into line. But by and large, we think that our cost will be pretty well contained this year and we think we will at least maintain the levels that we have in 2008.

[Judy Hong:]

Okay. And then just following up on the UK and the European launch. Would you expect to see some benefit in the first quarter with some of the pipelines filings as the launches take place in the first quarter?

[Rodney Sacks:]

I think that it is still too small to have a real influence on our numbers here. Again in the first two months, we still got to have pretty disruptive effect from the transitions in the US and Canada. In Canada, we just start in January and literally for the first two months of the year, we had very little in the form of promotions. And so, I think the sales in Canada were soft. But we are seeing the pickup now. Going into mid February we are starting to see the older rate coming up quite dramatically and we think that March is going to be a big month in going forward. So, but it has taken, there are all hiccups in this transition at all. We are seeing in some of the different areas in the US and so going forward, it is just very difficult to look at this quarter. I think this is going to be a transitional quarter. There is no question about it. But as things are slowly settling down, we are clearly starting to see and appreciate the benefits of the strength and the professionalism of the systems that we are in the CCE systems and the AB distributors who we have transition to. So overall, we've two and we think systems operate in many different ways, but are very strong systems. That is how we see the year going forward. We have had some weakness in Java Monster products. Monster is still doing nicely. Part of that weakness we attribute to the fact that there was the launch during last year by Starbucks of their Doubleshot plus Energy Coffee drinks in similar size cans. I really just copied out cans. There were three of them; there flavors in that, they came up with, but they have been quite aggressive. Pepsi in marketing and promoting the products and they promoted it very aggressively. And they have taken some share, you know, and our execution is probably going little backwards with the regard to Java Monster and shelf space. And the right shelf space in the right section at the expense of the Starbucks products over the past few months. So, we have seen some softness in Java. We think obviously we need to address that; we will address that as part of the transition. And we have plans to go back and aggressively address that. We believe that will come up. But that is really where trading is headed in it in the first couple of months. They are all, as I said earlier there are some identified areas of pockets where we are seeing some softness in the numbers, Monster numbers, as part of the transition. We believe that is not due to the actual area because it is not in line with the area, but it really is attributable just to the actual transition and getting the brand into the hands of new distributor, getting them to understand the brand and work the brand and be able to promote it. And obviously, we think those will turnaround quite quickly because in other areas where for whatever reason there is a million of them, the distributors brought us in those areas we are able to jump on the brand much more quickly. We have seen these starting to see some of the benefits in those areas. And if you look at the Nielsen and examine it, you will see it normally is going through in some of the areas. There is just no reason for the brand to suddenly go after them, other than it being attributable to the change out. But again, we think that by the time we get through the first quarter that will be behind us and everything will be firing on pretty much on all cylinders going forward.

[Judy Hong:]

Great, thank you.

[Operator:]

Thank you. Your next question comes from the line of (inaudible). Please go ahead.

[Unidentified Analyst:]

Hi, good afternoon.

[Rodney Sacks:]

Hi.

[Unidentified Analyst:]

So, I just wanted to identify what are the main drivers of the higher gross margins around the quarter.

[Tom Kelly:]

The main driver of the higher gross margins in the quarter were, firstly product mix of business launch, obviously slowing down of the Java Monster which gave us a higher margin. Monster product, the Monster energy shooters have a high margin than the traditional, many of the energy drink products as well. There is also the recognition of revenue through deferred revenue because there was, to terminate the distributors, there was some deferred revenue that was brought to account in the fourth quarter. And those are pretty much the factors which resulted in that higher margin. So that is sort of a more unusual situation and going forward. We do not expect that that would be at that level. It will go back more to the usual levels which were in the 52% range.

[Unidentified Analyst:]

Okay. And with Coke going to distribute the Hitman product in, I guess, in the second quarter. Would you expect to see a little bit of a step-up in margins or is that not expected to be that significant?

[Rodney Sacks:]

Again, it is just too small for us to tell. I mean, in theory, obviously from what I just said, they do have higher margins if they sell through. And the sell through starts picking up it will obviously help it, but again, it does take time to get it all of this going. It is a small brand filling the context of the whole company. But you know, there are nice margins. So that is obviously why we feel we will help the margins going forward. But as we do not want to give any further sort of indication of whether the margins will go up at this point, it is just too premature for us.

[Unidentified Analyst:]

Okay and then regarding the recently announced Pepsi-Rockstar distribution deal. I mean, do you think that will have any impact to the competitive environment impact to Monster?

[Rodney Sacks:]

Well, obviously we feel, that was going to be likely scenario when we went into the Coke system. The Rockstar could not obviously stay in the Coke system for too long. They needed to find a home and they had different alternatives which I am sure they investigated. They ended up with what was a reasonable system for them, which is a sort of one-stop shop result. We believe that will give them or may give them some boost in the short-term. Particularly in areas where Rockstar has had very limited or poor distribution until now, but has not been in the Coke system at all and just has not had good distribution. Obviously being in the Pepsi system there that will give, in those areas, they will see some uptick. There are other areas though that I think Pepsi is clearly weaker than the Coke system and we think that they going to suffer in those areas. Additionally, Pepsi has their own brand and it is one thing to go into a system where, what I call the AMP brand, is a much weaker brand and the bottler really could have your interest at heart and really put his heart and soul behind your brain. In the Pepsi case, it is going to be much more difficult for Rockstar because the AMP brand has been increasing in sales and getting market share. Pepsi have committed a lot of funds to marketing support and funds to the brand. They have come out with aggressive line extensions, they have just come out. We have seen another three line extensions and in fact the real competitor for Rockstar is in fact AMP. I mean, AMP is really close on the heels of Rockstar, has Rockstar in their sight. So there you are going to have a very competitive environment where it will be hard for us to speculate but we ought to probably see AMP coming out on top. And so that is going to be very competitive internally and we think that is going to cause some issues for them. By and large the Pepsi system is a strong system but we think that it is not in the long-term going to help Rockstar in the long-term. It is not going to change the position we are. We are actually quite happy that it happened sooner than later. It makes different lines clearly for our Coke partnership. The Coke distributors are clearly fully motivated and they know there is no mixed signal. They do not have to take care of another brand in their system and obviously try and do that brand justice if they can have their full devotion and attention to our brand which is by fair clearly the largest player in their portfolio. So we do believe that we are going to get the focus now and that it was in fact better for us the sooner that it happened than later and so we are not particularly concerned. We think that we will continue to grow in market share going forward with the system. We just have to settle it down. Rockstar is still going to have the rocky road of the transition ahead of them going into summer and so we think that going into the second quarter, we will have a lot of positives going for us.

[Unidentified Analyst:]

Okay, thank you.

[Rodney Sacks:]

Thank you.

[Operator:]

Thank you. Our next question comes from the line of Kaumil Gajrawala with UBS. Please go ahead.

[Kaumil Gajrawala:]

Thank you. Hi everyone.

[Rodney Sacks:]

Hi, Kaumil.

[Kaumil Gajrawala:]

In Europe you are going to expanding distribution, I think, much faster than you have in the US. Can you give us a read on how you plan to allocate investment spending in the UK? You had almost a 6-month headstart in some marketing and sponsorship investments but while you’re going through the rest of Western Europe, you are going to getting there much faster. So can you give us a read of what you are doing in terms of the sponsorships and how you are thinking about allocating spending there?

[Rodney Sacks:]

We do not think that we are going to have to have that same sort of model for the rest of Europe that we had for the UK. What we did in the UK last year was largely laid the base for what we are now doing in Europe. What we are doing in the UK and Europe this year again is largely setting the base, not only for those countries, but for any additional countries we will go into. We do have plans to expand further in Europe. We were just obviously waiting to get these countries going and fully operational and then we will look to additional countries and we believe that a lot of the spend we are having, the principal amount of the spend we are having, leaving aside the local marketing, has already been set. Most of the properties, the amount properties we signed up on, are pretty much either international or pan-European. The deal we signed which is the major deal we have signed, which is one of the biggest deals we signed for the company with Rossi who is the World Champion MotoGP racer. It is a very important deal but it carries wherever we go because if we go, we launch in Australia, he is well known there. The MotoGP is a sport we will follow there; the same thing in the rest of Europe. Many of the races are held in countries that have not ever been in. And so we can go to those countries without worrying about an additional, what I call lead marketing property, which pretty much the Rossi deal gives us and it is a great show. How do we execute against that? We will execute obviously against that in the field and in stores against the Rossi relationship. We are also continuing which we did last year. We supported the Motocross in Europe the MX1 the MX2 series. We were the winners. Our team actually won the series and we have signed up with the same team. Again, it is a European series, which will transcend into all of territories we are currently selling in and new territories that we plan to go into later in the year. In conclusion, I launch additional capital allocation to marketing or to capital to enable us to go into those countries. We have a large infrastructure. We are really setup, based in the UK and Ireland, and basically it will be a lot easier and a lot more economical for us to expand from here on into Europe.

[Kaumil Gajrawala:]

All right. I see and then can you give us some help if is there any FX impact on the quarter and are you now manufacturing locally over there?

[Rodney Sacks:]

We are manufacturing in the UK. We were doing a little bit of manufacturing here in shipping across, pretty much by and large all of our manufacturing is being done in the UK. As we go through the year, we will believe some of that manufacturing will also be done by CCE for us in the UK, and Europe was greater than UK, but for Europe.

[Kaumil Gajrawala:]

Manufacturing in the UK?

[Rodney Sacks:]

We will continue to manufacture in Europe for that market and then we think if that is a time a lot of our costs will start going down. Our costs started going down as well as even with our existing pack up as our volume start to become more regular and as we get inventory going, we can have longer runs.

[Kaumil Gajrawala:]

Got it. And then last question. Red Bull had gone through a bit of a restructuring over the last 12 months or so. Have you seen any changes in their competitive behavior in the US?

[Rodney Sacks:]

Not really. We think that, in certain respects, today we are seeing a little more in some of the actions sports which were more than a quarter ago in many years. They seem to have gone into a number of additional properties in recent years and now I think some are going back a little bit to their roots. But, they are still continuing to market in the same way as they have individual properties that they create and they develop as they sort of owned their own events. And they spent quite a lot of money on that. So, we do not see that we come out with the three SKUs with a cola product, which has not been particularly successful within in a month. We understand they are going to come out with an energy shot in the next couple of months, but, which again, is probably a little bit light but will make the energy short market more comparative. And we think that the leading energy drinks in that area will affect soon star taking major share of that category and become more and more important in that category. Basically, that category will probably be more in the traditional energy categories, and how we see it in some years to come.

[Kaumil Gajrawala:]

Okay. That's good for me. Thank you.

[Operator:]

Thank you. Our next question comes from the line of Alton Stump with Longbow Research. Please go ahead.

[Alton Stump:]

Thank you, Good afternoon.

[Rodney Sacks:]

Good afternoon, Alton.

[Alton Stump:]

Two quick questions. First off, can you give us any idea on your gross sales performance in the first two months of the year? I am sorry if I missed that earlier.

[Rodney Sacks:]

The first two months of the year are really difficult to compare. Sales were soft, starting off in January, part of the year of the transition we have seen a pickup. February though has not closed yet. So we are seeing, basically, the numbers are up a little bit, but basically it is very premature for us to say this. It is very difficult to go without going to a lot of detail as to explain the numbers. And I would, in this call, like to really identify the first two months have really been transitional and is very difficult for us to give you that the direction. We think there is too much room for misinterpretation and not being able to understand the number fully for us to really go into them with you at this time because of all the changes that are going back there. There are product returns being received, there are number of issues as well as the fact that we just did not close it. So, we think, we would like to wait until the end of the quarter and then we get the full quarter numbers, which obviously we will report on. It would have been much better to handle on the direction of the company that transition and how it is settling down for you guys.

[Alton Stump:]

Okay. And then one just quick follow-up and I think you cover this twice already, so sorry about this part. Within $9.7 million that was taken back from wholesalers. Could you just explain what exactly happened there and why there was that amount taken back?

[Rodney Sacks:]

What happened is that when we have this transition, wholesalers, the distributors have a lot of inventory. They have effectively there are two options that they can follow. One is to continue to sell that inventory into the trade, and the second is to then return that inventory to us. In some cases, the agreements provided they were entitled to them and in some cases they were provided that we were entitled to accept or decline to purchase the inventory back. Where they were small amounts, we generally did not purchase it back because there is a cost, actually, it was picking it up and re-transporting it and resorting it. But the other side of the coin is that you do not want to leave too much inventory out in the trade because they start selling it. Often it has been (inaudible). They just want to cover their cost. And that structure erupting your new distributor, which we did have some up. So what was happening is our new distributors would go into an account that they would normally call hoping that they would so Monster together with the Coke together with their other products. And the store really just had a delivery from, in this case, maybe Dr. Pepper or 7UP or one of other distributors. And so it becomes disruptive because they cannot really sell because the guys got product in the stores that is being given to him at a discounted price in order to simply move it through. So in many cases, we opted for picking up the product and taking them back from the distributors to try and not to avoid the market that just has been flooded with basically low priced inventory and the market of the new distributors disrupted. And so that is really why you see that figure of that $9.7 million. It is basically the products returned back but then the effect of that is they get affected as a reduction is sales.

[Alton Stump:]

Okay. Thank you.

[Rodney Sacks:]

There will be a little bit more for the distributors that we terminated as I indicated in my remarks during the first quarter because not all of them were finalized and terminated in the fourth quarter but it will be lower. The other thing is just saying one thing about (inaudible). I just want to say that on the numbers for the first two quarters the Monster, sales numbers are up. And as I indicated earlier, what we were seeing was some weakness in the Java Monster which we need to address, but Monster itself has been performing positively and is up quite nicely.

[Alton Stump:]

Okay. Thank you, Rodney.

[Operator:]

Thank you. Your next question comes from the line of Mark Astrachan with Stifel Nicolaus. Please go ahead.

[Rodney Sacks:]

If I mentioned the first two quarters obviously I was referring to the first two months, sorry. Okay. Hi Mark, sorry.

[Mark Astrachan:]

Good afternoon.

[Rodney Sacks:]

Good afternoon.

[Mark Astrachan:]

I guess just trying to reconcile some of what is going on the top line. If I back out what was going on in terms of inventory repurchase and then reflecting the amount of buying ahead of the price increases last year, I get a volume or a top line growth number somewhere in the low double digit range. I guess, one. Is that correct? And then secondly, you talked about some impact relating to disruptions due to the shift over the Coke enterprises and other Coke bottlers and you said that some markets for sales were actually negative. So, can you adjust that low double digit top line number to reflect for those markets and basically just try to give us what a normalized or run rate top line number would be for the quarter?

[Rodney Sacks:]

We cannot give you that normalized number and back that out because in many cases we did not have good information and also pretty recently from our distributors as to what was happening in the markets. We are seeing the markets. We are seeing but if you are going to the [Hansen], you will see some of the negative numbers and then you say, why are we low here, why are we down in the number mocked for example in grocery. We know that in grocery we are down because grocery is to some extent driven by promotions and over the provisional (inaudible). There were very little promotions being done. We are going to get things straightened out. I tell you, in some cases, the grocery side seems to have taken more of a hiccup for example than the convenience. But the assumption that you are making in a market, depending on how you slice and dice the numbers, I think that you are in the right region of pretty much the low double digit numbers if you take the brand and you make those sort of adjustments in the fourth quarter for the increase. But it is just hard for us at this time to actually do the exercise you are asking. We have not done it so I cannot really speak to it. I can only give you the trends of what I would call our main product line which is Monster itself and to say that year-to-date, and again, we have not closed off these amount. But it is quite decently positive into the probably north of the double digit area.

[Mark Astrachan:]

Okay, that is good. So basically, just to summarize that and if you say that the real number in the fourth quarter was somewhere in the low double digits for a revenue growth standpoint, there was an impact due to the shift disruption and therefore on a run rate basis the top line number should then be slightly better than that or at least it would have been slightly better than that, if the Coke disruption did not happen?

[Rodney Sacks:]

Possibly, I mean it is in America, it is Coke. Also, I wanted to just say it is the Coke distributors. There was also disruption in going to IB distributors who were new distributors as well. But it is just that we are focused more on the Coke side than on the [AV] because most of the transitions are into, when I call it CCE again, I do not want just limit it to CCE. I mean, there were disruptions in transitions to Coke United, Coke Consolidated, Coke Sacramento. The other it is into the whole system. It is just part of the transitioning of a brand.

[Mark Astrachan:]

Great. Okay. In terms of thinking about the benefits that you potentially will receive because of the new distribution, what sort of things do you think you can point us to that will be like tangible evidence of this? Meaning the energy channel was being pretty under-indexed in the supermarkets and club stores versus convenient stores. Do you expect to see an increase in the shelf space and sales in those markets at some point going forward?

[Rodney Sacks:]

We think we are all getting additional shelf space and we think other energy drinks are as well. But we know that the Coke system is strong in the convenience or in the grocery channel. They have, for example, two checkout counters that we have never been able to really get into until now in any meaningful way. So we believe that is a positive. We believe there are non-traditional channels that Coke go to that the previous distributors and peer distributors also do not go to. We believe that the Coke organization together with the support from the IB yard, but the Coke organization is just generally stronger in grocery. So we think there will be an increased focus and emphasis on that execution, on promotions, on size decks. When other Coke products are on promotion, we believe there will be a benefit for Monster. We also think that what we can get from the Coke system, because of the depth of their army out there, is better execution in stores. So, where we have got listings, that have secured shelf space. In many cases we have the shelf space in theory, but in the practice and then in the real world, it has been a tougher battle out there and we have not always got what we have paid for a boat. We think that we have a much higher prospect of getting it done with Coke and when that execution goes, out they are much more disciplined and where in those stores frequently enough to protect that space. So we think that the dips and the quality of dips of the distributions will improve. I mean, even today alter many years, as we have been in the energy category and worked on main product is now up to for example 93% distribution in convenience. The measuring drop offs you were 82 for Lo-Carb and 56 for 24-ounce, Khaos use a 69 and Mad of 59. So, you look into that area and there is a lot f room for increase depth of distribution. Our 4 packs distribution is down at very low its better obviously in grocery, but very low in convenience. Even on Java Monster our best item is up 62%. So there is a lot of room. I mean, the new items are in the 30% range. So the new items and everything else really have been given what we think is a (inaudible) shorter at yet and so we do believe that those are the things that will start benefiting the brand as we go forward. There will be a lot of great news that we could not get before; where we think that the Coke distributors will be able to take the brand and whether that campuses and sports arenas, some of the them, while we are going to have to sharing the cost of securing the size, but others we think will become part of the deal and part of the things like vending. There's a lot of opportunities that we have not had before because vending for example, is not something that is very (inaudible) hardly any bending through the beer cans. So that [I normally] do that. So those are opportunities that we think that will open up for us and the challenge is being able to work with the system. We are very excited. We think that they are going to be behind the brand. I was down in Atlanta on Tuesday and gave a presentation to their global meeting of the full CCE System. I think there is a commitment from them. I think the fact they ratchet it up has been time to really get to their team throughout the world, to get to now understand the brand, to know what it is, what it stands for. It shows that there is a commitment by them to make the brand happen, to make things happen for us. So those are sort of basic pretty much the reasons we have seen. We, for being optimistic, have been able to get better execution out of the system. But on the other hand, it is a very big system and it is a challenge to work through the layers of people in the system and at the branches.

[Rodney Sacks:]

We have just taken on a Senior Executive, who was an ex-CCE executive, Steve Megan, to basically head-up our relationship with Coke and to be available in Atlanta full-time to work with the Coke, not any CCE, but the other Coke bottlers and to make sure that we are able to communicate with each other, that we get things done that we want and need done from them. What they need from us is taking care of because that is the challenge. It is a very big organization and it is a challenge to work your way through it. So we are all taking steps to try and make sure that this relationship really does benefit both of us and that we both end up benefiting from what we think the increase distribution and sales. We are hopeful we will get through the relationship.

[Mark Astrachan:]

Okay, great. And then finally, on the share repurchase. You got about $50 million left under the authorization. What are your thoughts on that going forward and then for Hilton, I guess, in terms of amount of shares outstanding? I am assuming it was down because of options.

[Rodney Sacks:]

I think the amount outstanding is closer to $100 million available under the program. It is still active, and we will obviously look to continuing to implement it. We will see how we go as we go through the year. We are going through pretty difficult times at the moment not knowing where, what direction anything is going into. So, we want to cautious but on the share is held-up pretty nicely, but we are clearly going to look to, continuing to execute that program as an appropriate time. Hilton, perhaps could address the share issue, share number if you could.

[Hilton Schlosberg:]

Well, the number of shares has come down from 2007, and that is principally because of the share repurchase scheme and also the analysis that is being done instead of Black-Scholes model for option.

[Mark Astrachan:]

Perfect, thanks guys.

[Rodney Sacks:]

Thank you, Mark.

[Operator:]

Thank you. Our next question comes from the line of Scott Van Winkle with Canaccord Adams. Please go ahead.

[Scott Van Winkle:]

Hey Rodney, a couple of questions. You mentioned in the January and February in the transition period. I am wondering, do you know what percentage of your distributors that were displaced by the new Coke and Anheuser distribution have already put inventory back to you or returned product and how much of that hangs over into January and February? Give a rough idea that are half three quarters, a quarter that type of thing?

[Rodney Sacks:]

It could be a little bit gift on our part, but I would say we probably have closer to two thirds of the way through.

[Scott Van Winkle:]

And you have fairly easy comparison on a volume basis year-over-year because of the buying ahead of the price increase last year in January and February. So, when you talk about being difficult to kind of lead through the numbers and you mentioned Java is the inventory coming back a primary reason?

[Rodney Sacks:]

No, there are issues in different markets and we just have to deal with it individually and we just have not done that. We have not actually gone and tried to analyze each and every market and attribute the reason in each and every market.

[Scott Van Winkle:]

And you mentioned that in Canada you accrued for some of the termination payments that probably came in January and February when you reached agreement. Do you also accrue for inventory returns that you anticipate might come back in January and February?

[Rodney Sacks:]

We have accrued for inventory returns, yes. But there may still be some additional ones, but we did do an accrual for inventory, yes.

[Scott Van Winkle:]

And the last question. You talked about margin improvements as you get volume in the UK and Europe. Is the ultimate margin structure going to be similar over there that is here in the US?

[Rodney Sacks:]

No.

[Scott Van Winkle:]

Can you expand on that at all?

[Rodney Sacks:]

Firstly, I do not think we talked about margin improvement. I think we said that here the margins were likely to be inline. And secondly, in Europe I think they are probably going to be a little less income based on our cost of goods and there will be quite a change in that cost of goods as we secure additional packing with the CCE Group. There will be a lot of cross-board costs of freight and costs for getting movement and we are arguing that will disappear. Cost of production will be a little lower. So that is going to be the sort of change over as we go through the Europe because we are redoing one of the plants at the moment and re-equipping it. And when that gets up and running later in the year that is when we start. We hope to be able to start manufacturing some of our products. They still will not be able to manufacture all of our products but there is a certain amount and then they will be able to work with us. But, the margins we think in Europe at this point, our best estimate, is that European margins are probably lower than the US margins.

[Scott Van Winkle:]

And I think I missed some of your comments about the hydration product. I heard the good results in Southern California. Did you mention what your plans are after the success you have had thus far in?

[Rodney Sacks:]

We are doing a test with the IB distributors in Florida, starting round about now, in a couple of weeks' time. It has not started yet. It is about to start. We do have some independent distributors in other places, Midwest, and we are looking at the best brand. We are looking at to consider exactly what system we should put it in. We have got a listing for the product in [Sands] and we are seeing how that is going to start selling through. We are looking at the possible opportunity of whether that should be more aligned to the bad system or independence and there we have not yet come up with a final decision and have not had final discussions with the Board on that. So that is why I say it is still pretty much up in the air. But we are looking at it, and over the next couple of months have to be in a position to start making decisions and going in one direction or the other.

[Scott Van Winkle:]

And lastly, just a follow-up to earlier question about cost. You talked about dialing back some of the sponsorship activity in the back half of the year. If I remember correctly, part of that was seasonal; you had some spending in the first half of the year around some events. Do we see that pickup sequentially in the first half of this year, and kind of follow the same pattern or was the dialing back that we saw in the back half just going to continue here in the first half of this year?

[Rodney Sacks:]

No, I think that we have sort of looked at our spending and we have tried to get the spending sort of a little more spread over the year. But again, there are some events at the early part of this year. For example, one of the big properties we do is the Motocross where we sponsor the series plus we have riders and the MotoCross Show which has a different time scale to Europe. So that is sort of probably SKU towards the first half of the year. But generally we have set our budgets for 2009 and trying to be pretty much inline with 2008 and but probably a little smoother. There will probably be a little bit higher in the early months. But we think that we will be able to hopefully be able to manage a little more. In the case of last year, we sort of reached out and we actually pulled back some of the spending as we went through the year. So you saw a drop. For that reason we think it will be more balanced this year going forward.

[Scott Van Winkle:]

Thank you.

[Rodney Sacks:]

Thanks.

[Operator:]

Thank you. Ladies and gentlemen, that will conclude the question-and-answer session. Mr. Sacks I will turn it back over to you for closing comments.

[Rodney Sacks:]

Thank you very much. Once again, I would like to thank all of the analysts for their support. We are going through this quarter, it is a transitional quarter which makes it, we understand, a little (inaudible) for you to guide to through your own analysis but unfortunately it is the nature of the beast. It is transitional and that is where you should be going through. But we all very hopeful about it. We do have very positive attitude from the bottle distributors that we have transitioned to as well as from the Coke, the whole Coke system, to work with us and we do believe that they will put all the efforts behind the brand to help to make it a success. And we believe that this decision was the right decision for our brand particularly on the long-term basis. We think we have a good home just looking at the different product offerings in the Coke system. We think that the match up was the right match up for us. And so long-term we are very excited. We think that this will really help give us a good start now in Europe and give the brand a solid base to work from. So we look forward to starting to expand and throughout the world and to grow the brand and to truly become a global brand. We think we have that potential. And we are going to obviously. We are doing our best to achieve it. So, once again, thank you for your support and we hope to be able to report some good progress to you when we release our first quarter results on the transition and on the European launch. Thank you very much.

[Operator:]

Ladies and gentlemen, that will conclude today's teleconference. We do thank you again for your participation. And at this time you may disconnect.