Monster Beverage Corporation
Q3 2013 Earnings Call Transcript

Published: 8 Nov 2013

[Operator:]

Good day, ladies and gentlemen, and welcome to the Monster Beverage Corporation's Third Quarter 2013 Financial Results Conference Call. [Operator Instructions] As a reminder, this conference is being recorded. I would like to introduce your host for today's conference, Mr. Rodney Sacks, Chairman and CEO. Mr. Sacks, please begin.

[Rodney C. Sacks:]

Good afternoon, ladies and gentlemen. Thank you for attending this call. I'm Rodney Sacks. Hilton Schlosberg, our Vice Chairman and President, is with me today; as is as Tom Kelly, our Senior 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 our current knowledge and expectations and are subject to certain risks and uncertainties, many of which are outside the control of the company, that may cause actual results to differ materially from the forward-looking statements made during this call. Please refer to our filings with the Securities and Exchange Commission, including our most recent annual report on Form 10-K filed March 1, 2013, as well as our most recent report on Form 10-Q filed August 9, 2013, 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 November 7, 2013. A copy of this information is also available on our website, www.monsterbevcorp.com in the Financial Information section. Although I do not wish to appear redundant every time that I open our quarterly conference calls, I do however, want to reiterate once again that our products are safe, based on both our and the industry's long track record and the scientific evidence supporting the safety of our ingredients. As investigations of energy drinks continue and further research on these topics and issues is undertaken, the results consistently confirm and reinforce our repeated views that our products are safe. Additionally, we believe that the strongest evidence of product safety is that many millions of energy drinks continue to be safely consumed worldwide every day. By now, nearly 10 billion Monster Energy drinks have been sold and safely consumed around the world over the past 11 years. As previously announced, the Food and Drug Administration is investigating the safety of caffeine in food products and particularly its effect, if any, on children and adolescents. An independent review panel was convened by the FDA through the Institute of Medicine to help determine if there are potential health hazards associated with the consumption of caffeine in food and dietary supplements. This panel held a public workshop during August 2013 in Washington, D.C. We're still awaiting the report of this panel. The long history of safe use of products containing caffeine in the U.S. has the remained unchanged and studies indicate that the average amount of caffeine consumed by the U.S. population has remained relatively stable, despite the entry of energy drinks into the market. As previously indicated and as stated by the FDA in 2012, available studies do not indicate any new previously unknown risks associated with caffeine consumption, although the FDA has continued to explore whether additional research on caffeine or energy drinks is needed. Many studies conducted in recent years in the U.S.A., Canada and Europe, including a very recent study, have all consistently concluded that the principal sources of caffeine for teens under 18 are coffee, soft drinks and tea and not energy drinks. To put of the level of caffeine that is contained in Monster Energy drinks in context, we remind listeners that a Starbucks 16-ounce-sized brewed coffee contains approximately 330 milligrams of caffeine, which is more than double the approximately 160 milligrams of caffeine that is contained in the same-sized Monster Energy drink. I will now briefly provide listeners with an update on certain of the current regulatory matters and litigation. For a more extensive discussion on regulatory matters and litigation, listeners are referred to our 10-Q, which will be filed in the next few days. The company continues to diligently monitor developments relating to these issues. The complaint filed by the City Attorney of San Francisco against the company was remanded to the San Francisco Superior Court. Subsequently the City Attorney filed a renewed motion to dismiss the complaint filed by the company against the City Attorney, for declaratory and injunctive relief, in the United States District Court for the Central District of California. A hearing on that motion is scheduled for December 9, 2013. In a purported class action filed against the company, alleging issues relating to Monster Energy drinks' safety and the marketing activities of the company, an amended complaint was filed against the company after the original complaint was dismissed by the court. The company moved to dismiss the amended complaint. At the hearing the court issued a tentative ruling dismissing the amended complaint. The company's currently awaiting the final judgment of the court on that motion. Following the hearing held by the U.S. Senate Commerce -- Committee on Commerce, Science and Transportation on July 31, 2013, on September 25, 2013, 4 United States senators, 3 of whom are members of the committee, addressed a letter to the company and some 16 other energy drink companies. In that letter, these 4 senators asked whether the energy drink companies would be prepared to agree to a number of commitments relating primarily to the manner in which their energy drinks are marketed. On October 28, 2013, the company responded to the senators' letter indicating numerous commitments it would be willing to make under certain circumstances. In addition, the company has forwarded to the 4 senators and to the American Beverage Association, a set of proposed U.S. model guidelines for energy drink companies. The company is hopeful that under the auspices of the ABA, all major energy drink companies will adopt these guidelines with regard to their U.S. activities. The company supports the proposed model guidelines and would agree to adopt them if all other major energy drink companies doing business in the U.S. also adopt them. In that fashion, the company believes that the concerns expressed by the senators and others would be addressed without putting the company at any material competitive disadvantage. The company assumes no obligation to update any statements made with respect to ongoing litigation and regulatory matters, including with respect to the foregoing disclosures, whether as to new information, future events or otherwise, other than as required by law. Given the current litigation and the pending regulatory requests, we will refrain from answering questions or commenting further on these specific subjects. We are happy, of course, to answer questions that you may have about our products in general or about the third quarter results as best we can, after we have concluded our discussion on the business. Turning to the business. While the beverage market in general in North America continues to experience softness, more specifically in CSDs, the energy drink market continues to grow, although the rate of growth still remains in single digits. However undoubtedly [ph] from the field, the energy drink market appears to be gaining momentum. Sales of our new Monster Ultra Blue energy drinks, as well as our new Muscle Monster line and our tea plus pink lemonade and energy Monster Rehab line extension, have exceeded our expectations and we are optimistic that we will be able to achieve increased sales contributions from these products in the future. In fact, Ultra Blue quickly became one of the top 5 selling Monster SKUs in the convenience and gas channel, according to the Nielsen reports for the 13 weeks through September 28, 2013. Additionally, according to the Nielsen reports for the 13 weeks through September 28, 2013, in the convenience and gas channel, Muscle Monster has become the second best-selling brand in the protein supplement sector and achieved a 20% market share. Even though ACB distribution levels are still low. We are optimistic that as we continue to achieve increased distribution levels for our Muscle Monster line, we will be able to increase our market share of the protein supplement sector. During the third quarter, our operating income was negatively affected by increased professional services costs of $6.5 million, net of insurance reimbursements, of which $5.3 million related to regulatory matters and litigation concerning the company's marketing, promotions, ingredients, labeling and safety of its Monster Energy drinks, which we believe are exceptional in nature. The net effect on earnings per share professional services costs relates to regulatory matters and related litigation is approximately $0.02 per share. The company continued to make progress in the third quarter and achieved record third quarter gross sales, up 8.6% from the third quarter of 2012, to $686.6 million with net sales up 8.9% to $590.4 million. Operating income was up 7.6% to $151.4 million. Our tax rate was marginally lower this quarter at 38.8% from 39% in the same quarter last year. Diluted earnings per share increased 13.1% from $0.47 per share in the third quarter of 2012 to $0.53 per share in the third quarter of 2013. Although we are pleased with the results, our revenues were affected by

[Operator:]

[Operator Instructions] Our first question comes from the line of Mark Astrachan with Stifel.

[Mark S. Astrachan:]

So international, just want to try to understand a little bit more sort of puts and takes there. Maybe you talked a bit about Japan could give us a sense of what the FX impact was there. Maybe talk about some of the sell-in in India how much potentially that impacted it in the October number? And just sort of, give some thoughts in general about sort of how you see it, especially as you look at the number in the quarter and you had a pretty material acceleration on a 2-year basis. So long question but should we think about this as a new run rate, is there a timing issue, I mean inventories, anything you can give that may give us a little bit more color on the international would be helpful.

[Rodney C. Sacks:]

With regard to India, let me just start there. When we started sales, we had originally shipped product to India well before I think it was either the end of last year or the first quarter of this year. And we had shipped that in anticipation of getting regulatory approval and then we ended up with some delays in getting that approval. So it wasn't a buildup of inventory in this quarter for India. With regard to Japan, what we have seen was some reduction in inventory levels being held by our distributor during the quarter. And I think as they are getting more comfortable with the brand and the sector, which is something they really didn't have any experience with, their stock holdings are going low and that is why we refer to the fact that while our sales were low, actually their sales out were higher in Japan. A similar situation has sort of arisen with respect to Brazil in the quarter. On a ForEx level, I will try and get you the impact later on in the call. I don't have it handy. Is there anything else you'd like to ask, Mark?

[Mark S. Astrachan:]

Sure, how about that share repurchase, anything coming down the pike there with all the cash that is now building?

[Rodney C. Sacks:]

We look at market conditions as they develop and look to implementing the share repurchase as we go forward. We will raise it again with the board at a meeting tomorrow and then we'll see how we go through the end of the year.

[Mark S. Astrachan:]

Okay, and then just related to the first question. Can you quantify the amount of de-stocking in Japan and Brazil as you're looking for the FX piece?

[Rodney C. Sacks:]

I -- do you have the -- I really at this stage, at this time, I just don't have that figure -- those figures handy. Other than to say that, our sales into our distributors in both those areas were considerably lower than the sales out.

[Operator:]

Our next question comes from the line of Amit Sharma with BMO Capital.

[Amit Sharma:]

Can you just, Ron, you talked about the ABA guidelines and the senators letter. Is it fair to assume that if you do adhere for these guidelines and this overall energy drinks category, agree to these guidelines, some of the regulatory headwinds that you've seen as indicative [indiscernible] will ease up?

[Rodney C. Sacks:]

Well, we can't speculate as to whether what we have suggested would be completely satisfactory to senators or regulators. We've just, from our assessment of the questions that we've got and the request for commitment that we have from the senators, we believe this goes a pretty far way to dealing with them. There are some issues that we have still and don't believe we should agree to and won't voluntarily to agree to. And they may remain still contentious, outstanding contentious issues. But we do believe that pretty much by and large, we think that this will resolve, or certainly alleviate to a large measure, some of those headwinds.

[Amit Sharma:]

The other question was around profitability. You talked about some onetime sort of losses in the warehouse. Are those -- should that be considered onetime that will alleviate in the next quarter? Or you continue to expect a negative margin piece in the warehouse division?

[Rodney C. Sacks:]

No, we think that, that won't repeat itself. We think that, that will right itself next quarter.

[Amit Sharma:]

Okay. And my final question is, as we look at your market share position in [indiscernible] in Europe, especially Western Europe and countries, should we start to sort of assume that margin profile in these countries could start to get better and, perhaps, positive margins in these market?

[Rodney C. Sacks:]

You are very unclear. But if -- what you're talking about is our margins in Europe, we are taking steps to improve our margin through production in a number of additional countries in Europe. For technical reasons some of the production that we had planned to implement during the year, we weren't comfortable with the quality of the products running off -- coming off the lines and so we weren't able to implement some of those, those plans. But we are planning to produce at additional production plants in Southern Europe, which will alleviate a lot of the freight and damages cost and other cost in health margins. We are also planning -- we are quite advanced in production and planning production in South Africa, which will remove the freight from Europe to South Africa and also, reduce damages in transit and also improve our margins there as well. This also will apply in Japan where we are progressing as quickly as we can to implement production. And we also are [indiscernible] finally, we are also at an advanced stage of discussions and moving forward with production plans for additional production plants in Brazil, which we believe will also, because of they are complicated tax laws, will also help us achieve improved margins in Brazil. So we are hoping that in 2014, we will actually start to see some improved margins coming.

[Operator:]

Our next question comes from the line of Bill Chappell from SunTrust.

[William B. Chappell:]

Just on the Monster Muscle, can you maybe quantify I think you'd said ACB is pretty low. Where we stand there? And where next few months or few quarters?

[Rodney C. Sacks:]

The ACB level that Nielsen has indicated for Muscle Monster is about 38% ACB.

[William B. Chappell:]

And can that get to 50%, 60%, 70%?

[Rodney C. Sacks:]

Well, it should get to 80%, 80-plus like most of our other energy drink brands. And then obviously, what you might get in -- within the range, you might get a variation of ACB levels from the bestsellers to the least. We have 3, we're introducing strawberry Muscle Monster and we are planning to introduce another variant at the beginning of 2014. So we believe that we will be able to certainly get our better selling products in that -- in the range up to that 80-plus level. But it's a question of time and when we get listings and get into the new sets in spring.

[William B. Chappell:]

Okay, and then is this something that's planned to take international?

[Rodney C. Sacks:]

Sorry at this point, we're just looking at the U.S. market. We're also evaluating the Canadian market. But due to cost of goods at this time, we aren't looking at any of the other markets yet.

[William B. Chappell:]

Got it. Sorry, last -- only one question. In Europe, just trying to make sure I understood like CCE on a call a few weeks ago said Monster sales were up around 25%, and then I think you said Europe for you was up 8% to 9%. Is that just weakness in non-CCE channels or is there some disconnect I'm missing?

[Rodney C. Sacks:]

We take it across all countries. And as we indicated, I gave you some of our bigger countries. Basically, we have increased rates, but a lot of the central and eastern countries have been -- their actual category is down and we haven't seen those sort of increases. And so when you balance it across the whole of Europe, it's come down more but also I think there is some issue in CCE. They did, we think, reduce inventories. But I don't have a figure for that. There was some reduction in their inventory holdings, which again also translate into a difference between our sell in and their sell out. And I think there was a production, they delayed production at the end of the quarter. Just because in some of -- in many of their markets, they run production and then charge out the products and then record a sell, once they run the product produced, and then it gets delivered and they moved their production that was scheduled at the end of September, they moved that into the beginning of October. So that, I think it may have had some impact as well.

[Operator:]

And our last question will come from the line of Alton Stump with Northcoast Research.

[Alton K. Stump:]

Just wanted to ask -- just to clarify from a question about India. In the October sales number of up, what was it, 9.1, was there any impact in that just a current month or the October month from India?

[Rodney C. Sacks:]

No. Once again, because we really just started getting regulatory approval, they were using some of their current inventory they had on hand and we're now starting to produce new fresh inventory for them. So India really had no effect. Just want to go back -- in Japan the foreign exchange difference is about $2 million. Also just wanted to mention that, just in case you guys have looked at the some of the inventory buildup, that's possibly due to the fact that we started delivering some of the Ultra Red during the quarter. Although we launched it in the October, there was some sales in the quarter of Ultra Red, we were building up inventory. Also, we had Ultra Blue inventory, which is from the launch in March, which we didn't have last year. And we also have a Call of Duty promotion, both in the U.S. and in many of our international markets, and so there was some buildup of inventory in anticipation of deliveries for that promotion, which will take place later in the quarter, it will take place starting now, I think and going through to the end of the year.

[Alton K. Stump:]

Okay, if I could, one quick follow-up, Rodney or no?

[Rodney C. Sacks:]

Want to have a follow-up?

[Alton K. Stump:]

Yes. I'd like to ask a follow-up if I could. Just, as you look at the category, it'll only be up low-single digits in the third quarter I guess the comps were easier, is there still any impact, do you think, just from the perception of all the headline news risks? I think you've mentioned that on the last couple of conference calls, is that still out there, is it still and impact in the category do you think?

[Rodney C. Sacks:]

We think that there's still some impact, but we think that it is being -- it is lessening as time goes on because things are -- this started over year ago. The amount of articles and comments and has become sort of lessened. So we do believe there has been lesser of an impact and eventually, we believe it will get -- it eventually will be eliminated and go away. But at the moment, we think there is still some there on the category, generally. All right. Ladies and gentlemen, on behalf of Monster, I'd like to thank everyone for their continued support for the company. We remain confident in the safety of our products and our growth strategy, both domestically and internationally. 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.