Monster Beverage Corporation
Q3 2007 Earnings Call Transcript

Published: 9 Nov 2007

[Operator:]

Good day everyone and thank you for joining today's Hansen Natural Corporation’s Third Quarter 2007 Financial Results Conference Call. Today's call is being recorded. For opening remarks and introductions, I would now like to turn the call over to the Chief Executive Officer, Mr. Rodney Sacks. Please go ahead sir.

[Rodney Sacks:]

Good morning, ladies and gentlemen. Thank you for attending this call. I have Mr. Hilton Schlosberg

[Operator:]

(Operator Instructions) And we'll take our first question from Andrew Sawyer of Goldman Sachs.

[Andrew Sawyer:]

Hello guys. I was wondering

[Rodney Sacks:]

I just don't know. I don't have an exact answer for you on that. I saw that we had a slight reduction in sales in September, which I just don't have an explanation for why that happened. It picked up again. I was looking at the AB numbers and the same thing. The AB numbers had been growing from AB distributors, as we were transitioning for each month, we increased in June, July. We were up on May, June, July, and August. And then just a drop off in September and we were back up in October. Pretty much very close to the August number again. Obviously, October is traditionally a weaker month, but we will be pretty close back to that number on the AB distributors. And so, I'm looking at the category generally and I just don't have an explanation of what happened towards the end of September. I just can't throw more light on it. When I look at the actual Nielson numbers, which may just change, we're up very nicely in that. I mean we're up 51%, on the 13-week basis.

[Andrew Sawyer:]

Okay. And then, I guess, kind of shifting gears and you talked about cannibalization rates for Java Monster, any way

[Rodney Sacks:]

In many cases, we did achieve a full shelf for Java Monster in the separate door and pretty much we’re getting between two, three and in some cases up to four shelves for monster now. So we are actually getting incremental. In many cases, it's another full shelf.

[Andrew Sawyer:]

And then, just one last quick one, you talked about taking the Java Monster price increase

[Rodney Sacks:]

I think, on the Java Monster side, it's probably going to be in the order of about $3 a case, but I can't be more specific. We haven't finalized the amount.

[Andrew Sawyer:]

That's about 10%, I guess?

[Rodney Sacks:]

Yes. And Monster, we haven’t yet decided, because we have some other things in the works that are just too premature for me too discussed at this point on the cans. So we are looking at Monster, we’re going up roughly of the order of about probably 6% or 7%. But, we haven't yet finalized when we going to it and exactly what context we're going to do it. So there are some other issues that have arisen that we trying to address before we go out and be seen, what's happening with Red Bull and other competitors, we'll make a decision on that reasonably shortly, but we just haven’t finalized that yet.

[Andrew Sawyer:]

Thanks a lot, guys.

[Rodney Sacks:]

Sure.

[Operator:]

And we'll take our next question from Mark Astrachan of Stifel Nicolaus.

[Mark Astrachan:]

Good afternoon, guys. I guess, first of all, just to follow up on Andrew's question

[Rodney Sacks:]

If you look up sales for the all brands, just list of sales for quarter. I'll get to that, Mark, and I'll get back to you. [I’ll just onset] longer we're dealing with it. Just one thing I wanted correct the one figure I've given for promotional allowances reduction from [’06 to ’08 about] 13.5 down 12.4, it is actually 14.5 down to 12.4, and the year-to-date was 15.4 down to 13.8, just wanted to correct that.

[Mark Astrachan:]

Okay. Well, I guess, while you're looking for that. I can give you another question.

[Rodney Sacks:]

Okay. I've got it over here

[Mark Astrachan:]

$6 million for the previous year?

[Rodney Sacks:]

Yeah, in the quarter. These Allied product sales were lower. So if we had been projecting a 40% increase or 50% on the Allied products, so if you’ve got it in numbers that would have made about a $10 million difference.

[Mark Astrachan:]

Right. Okay.

[Rodney Sacks:]

Okay. And then, one of the major other items was in our DSD division we lost about $3 million in the quarter on teas, lemonades, and cocktails that was down, which was sale for one customer where their sales were down, we were doing sort of a special brand for them. A control brand and their sales were quite substantial as you can see from those numbers. I think the reason was probably it introduced [off and] there was sell-in. And that accounted for $3 million also negative on the warehouse division.

[Mark Astrachan:]

Okay. Great. And then, in terms of thinking about your selling and promotion activity on a forward-looking basis

[Rodney Sacks:]

As I indicated earlier, we've actually achieved a reduction in our allowances, which is really the area you were addressing there. That’s the MDF and chain CMAs et cetera that we put in slotting. We believe that, going forward, we will at least be as efficient as we have or possibly be able to get some reduction even going forward even though we will be listing it for the first time a lot of the, obviously, the Java Monster into the chains. But going through the year, it may get a little bit skewed in the beginning. But if you take it over the whole of the next year, we believe we probably will be very close to, or better than, the lower numbers that we've shown in this quarter. With regard to the marketing costs

[Mark Astrachan:]

Great. And then final question

[Rodney Sacks:]

Yeah. I'll just try and find out while we are here; I will try to find out individual monthlies. I don't have them easily to hand. But we'll try and find them while we're looking, and I'll come back to that question.

[Mark Astrachan:]

Thank you, guys.

[Rodney Sacks:]

Thank you.

[Operator:]

And we'll go next to Greg Badishkanian of Citi.

[Greg Badishkanian:]

Hi. Just a few questions here

[Rodney Sacks:]

You know, Greg, we really don't know. We think that the category will expand. We are having competition. One of our competitors, Rockstar has just copied us as they’ve done in the past as well. They've introduced a Rockstar Roasted. We think that just a not a really well thought through attempt to just compete with whatever we do. But we think that that whole category will broaden into that coffee area, really that's what's going to happen. We think that that category will expand and expand consumer usage and then consumer demographic into the category. So, we think that it will, ultimately, with the extra expansion, we're coming and offering a low carb version, offering these other versions offering a chai version. We believe that will increase the category and the consumer base and percentage. But we think it will go into the double digits. It will be in the teens somewhere. Overall, it might get to the high teens of the overall sales. But, hopefully, we won't cannibalize the existing products to the extent that we probably have in the past three to four months. But we think that, ultimately, we are probably hoping to be something close to 20% of our business. The real benefit is that these products offer a morning alternative to traditional coffee to the existing cold coffee drinks. But with the energy kick to it we think that we will actually also draw on the hot coffee sector -- from the hot coffee sector. Additionally, we just believe that the whole product lineup has been very well received and will continue to grow.

[Greg Badishkanian:]

And what percentage of Java right now is sold next to energy as you sort of look at the retail? And where do you think that ultimately will be? Do you think it's going to be a vast majority sort of in that emerging category?

[Rodney Sacks:]

We think we will get the vast, going forward, we believe we’ll get the vast majority into the right door. In many accounts that door is right next to it or maybe above it or below it. And sometimes in very small stores there may only be one or two doors. But those are the minority. The majority do have a separate door and separate either next to it or may be two or three away. We believe that the vast majority of our sets going forward will end up in the right door. Whereas, at the moment, we're seeing probably the vast majority in the energy set because that's been the easy way to selling three SKUs. While having a whole offering of eight SKUs to nine SKUs or, whatever it is, of eight SKUs, seven, eight SKUs, which will take up a full shelf of nine. It won’t be able to be put into the Monster Energy, and that will force it into its own space. Particularly, with extra SKUs coming on the Monster side on the juice and heavy metal, we believe we will be able to tighten up, get extra space, but tighten it and that will force retailers to actually take the trouble and effort to go and reset their shelves. So, that they actually put the product in the right section instead of taking the lazy, easy way out which is what's happened to us in the past three to four months. And I think they also believe us now. I think everybody weren’t sure whether Monster Java would be a credible competitor to Starbucks, because literally nothing else has been able to stand up to Starbucks over the past number of years. And I think everybody in the retail side have been converted and they already do believe and see that this brand in the coffee format has serious legs, good sell-through and clearly they're now all prepared to make space in order to maximize their own profitability in their stores.

[Greg Badishkanian:]

Do you know what their margin is on yours versus Starbucks?

[Rodney Sacks:]

I don't know that figure off hand. I don’t know. But they are getting very healthy margins on our product. They're getting pretty much their full margins.

[Greg Badishkanian:]

Okay. And so higher than the Starbucks you think maybe?

[Rodney Sacks:]

I just don't know the Starbucks. I know that they have full modules. I don't know what Starbucks has been able to achieve with them generally.

[Greg Badishkanian:]

Yeah.

[Rodney Sacks:]

I just don't have that information.

[Greg Badishkanian:]

All right. Absolutely. And do you have any early read on the Red Bull 16-ounce can? I think it is 3.49 to 3.60 price point that's being sold at the market?

[Rodney Sacks:]

I don't think they're achieving that. I think it’s coming into the market at 3.79.

[Greg Badishkanian:]

It is. Okay.

[Rodney Sacks:]

Yeah. And which is way above our 24-ounce pricing. So we think that that's not going to be a big issue. Again, we think what's happened is, if you look at the Red Bull numbers, they have kept up with the category, so they have stopped the erosion in the percentage share. But when you look at the actual product mix, they’ve really transferred product sales from their 8-ounce to their 16 to their 12 in order to keep up their market share. And when you look at that, overall, I think that the 16-ounce is probably only going to cannibalize more than the 12. But the result is I think that they’re going to find that 8-ounce is probably going to become the smaller packet. And it is almost going to go away. And I think they going to [talk forth], they carry on and introduce 16 permanently, they will probably find is our guess that they will end up with 12 and 16 and eight will go away, which hurts them on their own margin. But they've obviously been trying to fight continuing loss in market share over the past of couple years and this is what they are trying. But I think that 16 is not going to help them other than reduce their own margins and costs. Just going into the numbers on the sales from one of the earlier questions, this October versus last year, I'm looking for this October. Last year October was marginally ahead of September. And then it dropped off on a gross basis to about 44 from about 52 dropped off to 44 in November and about 38, nearly 39 in December whereas on the numbers that we have, we've basically gone up from September to October. Our October number is about 10%, 11% higher than September. So, just to give you some idea.

[Greg Badishkanian:]

Great. Thanks.

[Rodney Sacks:]

All right. Thank you.

[Operator:]

And we'll take our next question from Steve Colbert of Canaccord Adams.

[Steve Colbert:]

Hi, guys. Good afternoon.

[Rodney Sacks:]

Good afternoon. Hi.

[Steve Colbert:]

Looking at sales for the quarter, how should we look at the sequential drop off in growth? I know you just touched on it a little, but September was soft. Can you quantify how soft it was year-over-year versus what you saw in July, I guess?

[Rodney Sacks:]

September, I don't have it for the whole company for the month. I don’t have it. I have it percentage wise versus the year before. I know that in September, Monster was about -- July -- August was off about 3% from -- the increase was about 3% lower in August than July and then in September was about 4% lower than in August on a prior year basis.

[Steve Colbert:]

Okay.

[Rodney Sacks:]

And then what has happened is, then in October, it's come back about 10% higher.

[Steve Colbert:]

And I know you touched on it, but you really can't kind of pin anything on what's driving the re-acceleration?

[Rodney Sacks:]

No. I think a lot of it may just have been timing. I don't know whether it was orders coming in for Labor Day, that they pulled back orders and then put the orders in after deliveries. I know we did struggle with some deliveries. We couldn’t get out. We had more orders for Java Monster than we could deliver. That was a material number that we had to reverse out. There was a little bit of a couple of other products deliveries we just didn't get out at the end of the month. So we probably had a slightly higher. When we book our sales, we close over month end and then we actually go back in and check the deliveries to see, to verify which products were actually delivered to customers before we book them. And so normally we end up for the month and then you end up with a reversal depending on how much of the products that have shipped had actually been received. And I know that in September it was just higher than usual. But again, that was a smaller portion. The main portion was, in fact, I believe the Java Monster that we just weren’t able to get out at the end. There were a couple of manufacturing issues. We shipped the [light] things a few days and in any case we just couldn’t keep up with the orders. So, we ended up with quite a bit of a reversal there. And I just don't have another explanation because I just don't have one. I mean, I haven't been able to get to something that I have been able to put my finger on and say that it is.

[Steve Colbert:]

Okay. Fair enough. Obviously, the Nielsen numbers, everything still looks pretty strong. How do you view the consumer environment? How discretionary do you think energy drinks are?

[Rodney Sacks:]

We think that they are. We think they're just becoming more and more acceptable. They are becoming the soft drink of the future. We think that they're performing. We think that consumers are drinking the products regularly as part of their regular beverage selection now. It's not as though it’s a treat selection or they I'll do it once or they are going to go out and party and do it with something. We believe that this is from our read into the markets and the feedback people are just regular consumers. The same as if you have a regular coffee consumer. They drink one cup of coffee every morning. People are drinking one cup of Monster in the morning or they are drinking one can in the afternoon. It's just becoming a regular part of their traditional beverage selection, their regular diet. So we see that the category continuing to solidify, continuing to strengthen. That the use occasions continuing to segment out. And there will be use occasions for the morning, for lunchtime, for the evening, for mixing. We just continue to see that. We really do see it continuing to grow. We do see, obviously, a slight deceleration in percentage wise when you look at the dollar numbers. They're continuing to be very, very strong. I mean this whole sector is continuing to grow enormously in dollars now. It’s becoming a real big sector. When you look at all the other new age sectors, this sector is starting to completely outgrow that.

[Steve Colbert:]

Okay. Fair enough. And then if you can just talk a bit more about the opportunity in England? How big do you think the market is over there? What's the rollout going to look like?

[Rodney Sacks:]

We think that the market is a big market. We think that traditionally the market is the biggest, what I'd call real energy product is Red Bull. A very heavy product there that had for many years, that was traditionally not an energy drink, but it was pretty much a glucose based drink called Lucozade and it was used as a, sort of mix it and dilute. It’s a ready-to-drink [cold]. They’ve put an enormous amount. It is Glaxo SmithKline who owned it. They’ve put a tremendous amount of effort behind the brand. It sold primarily in glass bottles or plastic. They positioned it as just a sort of a sports pick-me-up. And it’s slightly different positioning, but they have a lot of business. So if you look at the whole category, we believe the category is probably of the order of about £400 million to £500 million. That’s probably between $800 million -- or $750 million to $1 billion at retail. And so we think it's a big category. For a country of 50 million people, that's a pretty high per capita consumption. And what we see is that that is a great market. It's really been unchallenged. The competitors that were there haven't made inroads. And we just see that there is a great opportunity. And once we obviously establish ourselves, they will go into other markets. We see Germany particularly as a high consumption market. There are a little bit of some lower priced brands, local brands that have done quite well there. So the pricing in some cases, there is a price stratification in Germany between Red Bull and the local brands. But there are also some strong markets elsewhere in Europe. And the whole European market is pretty much, as big as the American market. So, we see a lot of growth opportunity, but, again, it will take time and effort to get there and to do it right. But we obviously are determined to do that. And we see that as a main focus for the next couple of years for us.

[Steve Colbert:]

Okay. And then final question for me

[Rodney Sacks:]

On the share repurchase, again, we do have an intention to look at that. We basically do have an existing plan in place. We are going to evaluate an increase in that plan. And to go ahead, obviously, there was quite a substantial run up in the share price over the past couple of months. We will look at the repurchase program based in the light of current share prices from time to time. And our belief is that, again, we need to get a Board consensus on it because we're having a Board meeting late this week. But certainly from our point of view at management, we believe that we should go ahead and instigate a share repurchase program. But that will be subject to the formal approval of the Board, which we’ll need to go though with them. And then, obviously if that is so, we will announce it.

[Steve Colbert:]

Okay. Great. That's it for me. Thanks, guys.

[Rodney Sacks:]

Thank you.

[Operator:]

And we'll be taking our final question of today from Alton Stump of Longbow Research

[Alton Stump:]

Thank you. Hello, Rodney.

[Rodney Sacks:]

Hi. Hi, Alton.

[Alton Stump:]

Just had a quick question, not to get too specific, but on the cost front, you mentioned early on that there was some increased shelf space programs as well as invasion fees. Could you try to ballpark that number for me? What impact it was year-over-year and in the third quarter?

[Rodney Sacks:]

The Invasion fees that we paid in the quarter were about $3.8 million versus $1.3 million in the prior period.

[Alton Stump:]

Great. Thank you. And then, on the shelf space program

[Rodney Sacks:]

That was up from about five to just over eight in the quarter.

[Alton Stump:]

That's great. Thank you. And then, just one other question

[Rodney Sacks:]

You say you’ve seen more growth in the convenience?

[Alton Stump:]

Right so.

[Rodney Sacks:]

Yeah. There is. It’s just a question of, I think, that the grocery chains are just haven’t yet really completely embraced the energy category as a substantial incremental value to them whereas I believe the convenience and gas have in fact done so. And I believe that the grocery chains haven’t allocated the same amount of space proportionally that perhaps they should have done, whereas the convenience, just because they have been in it much longer have done so. And they have seen more profit. So when you look at the grocery increase, grocery is only up 22.5% year-on-year as a category. Although, obviously, we feel we’ve done very well there, because we’ve actually upped 53.7% in grocery, which is quite interesting because you’ve got really good execution coming out of Coke with Full Throttle, they are only up 7.3. That sort of made earlier inroads because it isn’t a channel that they’re more familiar with, but the year-on-year is only up 7.3, and the same thing with Rockstar, that’s up 37. And even the sort of revitalized, call it, Amp is only up 49.6 in that channel, which is the hunting ground for Pepsi. That’s their one of the main channel for sales of beverages. So we’ve actually exceeded the growth in that category. But the category as such still is still very small proportion of convenience. And as you say, the overall growth in convenience is still outstripping them. But I just think it’s a question of embracing it and consumers embracing it. And it will grow. It’s just going to take more time.

[Alton Stump:]

Okay. Great. That’s all I have. Thanks, Rodney.

[Rodney Sacks:]

Thank you.

[Operator:]

And Mr. Sacks, I’d like to turn the call back over to you, sir, for any additional or closing remarks.

[Rodney Sacks:]

Okay. Thanks very much. So gentlemen, again, thank you very much. I know there have been a number of issues that we’ve had to deal with and we are trying to deal with in this call and as we go forward in the category, there is some unusual things that have happened. We’re all very excited. We do believe that we’ve got a category that is still growing very much more than any other category particularly with the size of it in the beverage field, because we believe that it will continue to grow. And we believe that the expansion of this category into this coffee area is an extremely exciting number for us. We think that that will help expand the category. We also believe that our juice offerings in the Rumba line will expand the category. So going forward, we are pretty excited for the prospects for the fourth quarter and for next year as a whole for the company. We need to address some other issues. We realize that on-premise to try and see how that grows and see what we can do to speed that up to the extent that we can. We need to minimize cannibalization. We think that will rectify itself when we get more identified shelf space going forward into the New Year. And we also need to address these issues of the Allied Products and we have some plans. We've just introduced a new whole line of products in a slim can, in a 11-ounce, 10.5-ounce slim can which are less than 100 calories. There is a dark line, there's a green tea line in it. We believe that going forward next year, we are already positioned very well in that healthier alternative category as well. I know it's sort of dwarfed at the moment by the Monster product, but in the long term we believe that’s a very solid and viable category. Half the beverage category is still carbonated and we believe we have a very credible [player] that pretty much everybody’s looking for is the solution to get a healthier better position. So, we believe we do have that in that Hansen line. So we are quite excited going forward with our products. We are still very excited about as I’ve said I want to reinforce that the relationship with Anheuser-Busch is a very strong relationship. We are very happy with the relationship. We understand that they are happy with the relationship as well. We just got to deal with operational issues as we go forward because that happens in life and that we'll get through them all. We are going to also take steps to try and address some of, perhaps, the smaller independents and some of the dry area issues that we've encountered in transitioning into AB system and we have some plans in place to try and get to them to also improve our general availability and sales of our products. So overall, we are excited. We do believe it has been a good result. We're getting some of the other issues and stock option issues behind us. Hopefully, that will stop distracting management and we can put our heads down and go forward with the business. So, thank you very much for your support. And we'll report back at the end of the year on the fourth quarter in due course. Thank you.

[Operator:]

And that does conclude today's conference call. Thank you for your participation. You may disconnect at this time.