Monster Beverage Corporation (MNST) Q4 2007 Earnings Report, Transcript and Summary

Good day everyone, thank you for joining today's Hansen Natural Corporation’s Fourth Quarter 2007 Financial Results conference call. Today's call is been recorded. For opening remarks and introductions, I would like to turn the call to the Chief Executive officer, Mr. Rodney Sacks. Please go ahead sir. Rodney C. Sacks – Chairman, Chief Executive Officer: Good afternoon ladies and gentlemen. Thank you for attending this call. To start I'd just like to record, that certain statements made in 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, regarding the expectations of management with respect to revenues and profitability. We caution these statements are qualified by their terms or important factors, many of which are outside of the control of the company, that could cause actual results and events to differ materially from the statements made herein. We also wish to record that we assure no obligation to update any forward-looking statements, thank you. As indicated in the announcement, the fourth quarter net sales was a record for us. Sales rose 63% to $247 million, and net income also jumped 103% to $45 million. I'll just go through the fourth quarter results. Net sales benefited from both strong growth in the category and continued market share gains by Monster. According to the Nielsen all outlets combined, the energy category grew some 27% in the 13 weeks end of December 29, 2007 versus year ago. And Monster continue to grow ahead of the category with sales increasing approximately 54% in the same period and picking up over 4.5 percentage share points. In the... all outlets combine to the end of January, Monster was ahead. The category... the all outlet combined category is up about 23.7%, Monster is up 52.3% with a 26% share, which is 4.9 points over the prior period. The strong performance of Java Monster in the conveyance channel has also contributed to Q4 sales growth. Within the quarter, approximately 7% to 8% of the quarterly sales were attributable to pre-buying in advance of price increases, that took effect on January 1, that is our sort of best estimates and I will go into that little more when we deal with the quarter and the first... the results for the first two months of this year. Gross margin in the three months decrease 2% from… to 51% from 53% for the comparable 2006 quarter, if you will recall the comparable 2006 quarter was unusually high, our average historically has been in that 52% range, and sometimes dropping into the 51%, we had a very high quarter in last year, and if you look at the year, the numbers are little bit more different... little bit more... we feel more normalized margins for the year we effectively 51.7% from the comparable margin of 52.3% the year before. The factors effecting gross profit margin include, the increased change of product mix, the increased change of DSD products from 84% to 89% for the quarter, versus the prior year, on a positive side. On the negative side, we had increased sales mix of Java Monster, Java Monster was approximately 13% of gross sales for the quarter, and we incurred increased costs of dairy ingredients during the year that we adopt and they started to come off in December/January will, I will refer to that also, bit late of the day, did affect our margins, and also, a slight change in the mix within Monster itself where we had a little more of the 24-ounce products and juice products which also have slightly lower margins, than the regular Monster products. We also did have some increases in raw material costs, can costs, Apple juice costs, some sugar costs, sucrose went down part of the year, and high fructose went up. So, there was a mix of cost increases, but overall there was a slight increase in costs over the year and over the quarter. Going forward, we believe that Java Monster will continue to represent a higher proportion of our sales due to the success of the brand. We've launched five new flavors, which we're pretty excited about. And so, at the end of the day, we're looking at banking dollars and not at margins, and at the end of the day we'll come back to that, but the dollars are clearly very effective to the company and are continuing to increase our share of the category. In fact, If you look at the category, we're pretty much are driving the growth in the category. In the period to… end of December, the category grew about $224 million in… all out that’s combined according to Nielsen of that $224 million Red Bull was responsible for about 87, the Monster brand was responsible for about 97, Rockstar for 18, Full Throttle for 12 and Amp for about 10. So, that does give you an indication of the fact that the category is clearly being driven by Monster and Red Bull to a lesser extend, but between the two, the two brands pretty much, it's the bulk of the whole category in the direction it's going... that is going in. We also seen some increases in raw materials, going forward we think cans might go up. Apple juice concentrates may also increase, there wasn't a significant increase last year in the category, we had bought in some supplies, but we will see some increases this year going forward. Dairy products again, which are used in the Java Monster products did increase substantially from July through November, but there was a decrease in December and January. So, we're not sure of what, that's going to... how that's going to play out for the rest of this year for us. We are also seeing certain price increases that we are implementing in some of the products within the warehouse division, all being implemented. But, I do want to say, that a lot of that will also be hopefully be offset by the increased prices for the Monster 16-ounce products. You'll remember that during… about mid-year, we did increase prices of our 24-ounce products. With effect from January 1, we increased the price of Monster by about, 6 odd percent and we increased the price of Java Monster by just over, I think it is about 11%, 12% to 13%. All of those price increase have been generally accepted. We're seeing that in the trade now, one or two of our competitors are rising their prices and following that price. Red Bull had raised their pricing a little before us as well. One or two of our competitors were slightly above us and to start within the 16-ounce category, but we're dealing that more aggressively. But, our processing is now pretty much in line with that competitor. So, as also demand… other main competitors are now bringing their prices as [inaudible]. So, we're seeing no resistance from customers or consumers. I do you want to refer to the fact that there is a one-time adjustment in connection with the transition of certain of our distribution agreements we incurred termination costs amounting to $0.2 million and $3.0 million, during the three-months ended December '07 and '06 respectively. These cost amounted to $15.3 million and $12.7 million during the 12 months period ended December 31 '07 and '06. Recognized revenue totaled $0.5 million and $0.3 million, during the... recorded by the company related to newly appointed AB distributors for the costs of terminating prior distributors in the three months ended December 31, 2007 and 2006. Recognized revenue amounted to $1.9 million and $400,000 during the 12-months ended December 31 for each of the respective years. In connection with the company's special investigation of stock option grants and granting practices, related litigation and other related matters, the company incurs special professional fees of $1.3 million of which $2.5 million was reimbursed from it's insurance careers and $3.8 million during the three months ended December 31, 2007 and 2006. These costs amounted to $9.8 million and $3.8 million during the 12-months period ended December 31, '07, and '06 respectively. Operating income for the three months increased 81% to $64.6 million from $35.7 million a year ago. Excluding the identified items described above, operating income increased 50% to $63.1 million from $42.1 million a year ago. SG&A for the quarter was $61.2 million or 25% of sales, an increase of 37% in dollar terms from the $44.8 million a year ago, but decreased in percentage of sales, which was 30% in the prior year. Net income for the three months increased 103% to $45.1 million or $0.45 per diluted share from $22.2 million or $0.23 per diluted share last year. Items affecting net income include interest income in tax rate. Interest income was $3 million for the three months ended December 31, as compared to $1 million a year ago. Our effective tax rate was about 33% for the three months, the change in the tax rate was attributable to tax reductions on the section 199 of Internal Revenue Code, commencing [ph] production deduction after incorporating this deduction for the years 2005 to 2007 in our 2007 filings we received an introduction of taxes after FIN 48 adjustments of $1.9 million of approximately $3.8 million in the three months ended December 31, 2007. These strong fourth quarter results significantly added to our year-over-year performance. On the full year results, the overview, the net sales for 2007 increased 49% to $904.5 million from $605.8 million a year ago. Gross margin was 51.7% versus 52.3%, which is pretty close to each other being an average of close to 52%. Operating income increased 46% to $231 million from $158.6 million a year ago. Excluding the identified items described below operating income increased 47% to $254.1 million from $174.7 million a year ago. Net income increased 52% to $149.4 million or $1.51 per diluted share from $97.9 million or $0.99 per diluted share last year. In addition to the identified items referred to above, other items affecting net income includes interest income and expense relating to 44 [ph] penalties in the tax rate. Interest income was $8.8 million for the 12 months ended December 31, 2007 as compared to $3.7 million a year ago. A charge of $2.8 million was recorded by the company in connection with the payment to affected employees relating to Section 409A penalties that they have a willing to… related to certain stock options as a result of our prior year stock option investigation and this is... the purpose of this was to make those employees hold. Our effective tax rate was 38% for the 12 months; the change in the tax rate was attributable to the domestic production deduction as previously described. We expect our future tax rate to be approximately 38.3%, but that is a very rough figure at this point as a result of the domestic production deduction. And also I just want to point out during the year, we did have increased expenditures for stock-based compensation, largely due to a recalculation of the write-off basis for certain of the stock options that were granted by the company. In the fourth quarter, promotional allowances amounted to 12.4%, which is a reduction in the comparable quarter from last of 13.5%. On a full-year basis promotional allowances were down from 14.9% to 13.4%. These promotional allowances represent a reduction of gross sales to arrive at net sales MDF reimbursement... which comprise reimbursements to distributors and retailers, chain marking allowances for shelf space programs, invasion fees and payments to third party retailers. Decreased allowances as a percent of net sales was due to lower expenses for direct support programs between the company and its current IT distributors as compared to its prior distributor network and such decrease was partly offset by increased percentage payments to indirect convenient store customers for certain shelf programs. Distribution costs in the quarter reduced from 7% to 5.4% and in the year from 6.8% to 5.5%. Low distribution expenses were due to new co-pack as well as in areas closer to our customers, distribution centers increased cost of warehouses were more than offset by the greatest price savings. Selling expenses for the quarter totaled 16.8% versus 16.3% a year ago and on the full-year basis we were up at 16.2% versus 15.7%. The increased selling expenses were largely attributable to increased commissions and royalties, which are up 2% from 1.1% largely due to the commissions payable to AV under the AB coordination agreement and the full-year was up 0.8% to 1.6%. Sponsorships were also up, but we were more aggressive in the sponsorships and endorsements and promotion of our products and our brand. Sponsorships in the quarter were up to 3.5% from 1.4% and in the year from 1.2% to 2.8%. We just have participated in a greater number of sponsored events including riders and sporting personalities as well as actually sponsoring in some cases the actual series for example, we have just signed on all the official sponsor in the supercross series, which is now called the Monster Energy Supercross series in the U.S, which we think is a very important property for us to be associated with it [inaudible] of the whole personality and the image of the brand. We started off in that sport by sponsoring individual riders and then we went to a team in the life series and then we went to join up with the Kawasaki factory team and the senior series and in other sporting endeavors across the country including road racing on most... motorcycle road racing, the super bikes and we have taken that further because, we thought it was important that we didn't allow one of our competitors to acquire the title sponsorship of the series with… this is very much so much part of the personality and the image and the culture of the Monster brand. Consulting was up slightly in the quarter from 0.7% to 1% and in the year from 0.6% to 0.9%, just getting our products into the hands of consumers, we believe that that's good long-term planning for brand and we continue to invest in that area. Merchandise displays were up in the quarter from 1.3% to 1.6%, but down on the year from 1.9% to 1.7%. Again merchandise displays we regard is very integral and is very important part to supporting the brand at the point of sale in stores. We believe we are getting good execution from AB Distributor partners and we obviously are for that reason happy to invest in that area and in coolers [ph] etcetera. General administrative and payroll for fourth quarter was up at 5.7% from 5.2% and for the year-to-date it was down from 4.8% to 4.6%. Increased payroll includes, as I mentioned earlier, $2.8 million reserve for 409A penalties that have been or will be asset to the company's employees as well as approximately 1.8 million increase in the stock-based compensation which is a non-cash item for the… stock-based compensation for the year has increased to just over $10 million and that is as you are aware, is a non-cash item, but that's the charge that has been taken us for the year. On a division and channel basis, net sales of the DSD division for the three months ended December 31, 2007 were $224.2 million, up 72% from $130.6 million a year ago. DSD division's net sales for the 12 months ended December 31, 2007 were $809.8 million, up 58% from $514 million a year ago. Contribution margin for the DSD was 34.8% for the year or $281.6 million, an increase of 50% over the contribution of $187.8 million in 2006. In the Warehouse division, for the 12 months net sales were $94.7 million versus $91.5 million a year ago. Contribution margin was 3.9% versus 6.1%. So although sales went up slightly contribution margin due mainly to increased costs and increased promotional costs were down, primarily due to apple juice concentrate costs which was a large portion of our sales attributable to the WIC program and I'll come onto the WIC program and deal with that later. Consolidated gross sales for the quarter were... the gross sales increases were principally from Monster, Java Monster, apple juice and juice blends and juice in tetra pack. Decreases in sales were primarily attributable to reduction in lost energy sales, Joker and teas, ice teas. On a yearly basis, obviously the increases are related by Monster and Java Monster, also [inaudible] unbound, the increase in the Warehouse side was due to… attributable to increased sales primarily of apple juice and juice blends, tetra pack and in juice and Junior Juice. On the decrease side, the decrease was due to lost Joker, teas and smoothies in cans on the year basis. In terms of customer mix in the quarter, retail decreased from 11% to 8%, club store, drug chains and mass merchandises decreased from 14% to 11%. Full service distributors increased from 69% to 77% and health food distributors decreased from 2% to 1%. In the 12 months, general retailer has decreased from 12% to 8%, club stores, drug chains and mass merchandisers remained constant at 14%. Full service distributors increased from 69% to 73% and health food distributors remained constant at 2%. Moving to the balance sheet, working capital has decreased from $212 million to $187 million year-on-year. Accounts receivable were $81.5 million as of December 31, down from 90 million in September and up from $47.3 million versus the year before. Day sales outstanding were 28.7 at December 31, down from 31.2 in September and up from 21... 27.1 versus the year before. On the inventory side, inventory balances were $98.1 million, as of December 31, up from $94 million in September, and up from $77 million the year before. The increase over prior year was primarily attributable to increased raw materials and finished goods related to Java Monster. Average days in inventory was 73 days as of December 31, which was slightly above the 71 days as of September, but down from the 98 days a year ago. Accounts payable balances were $56.8 million as of December 31, up from $34.4 million versus the year before. Just to deal with the... you'll notice that, cash and cash equivalents were $12 million compared to $35 million and short-term investment was $63 million compared to $101 million. Investments increased however to $227 million. Our long-term value investments are comprised of municipal or education or other public bodies related notes with an auction reset feature. These notes carry a AAA credit rating and certain other notes that are additionally backed by the various Federal Agencies and monoline insurance companies. Liquidity of these auction rate securities is typically provided by an auction process, which allows holders to sell their notes and reset the applicable interest rate at predetermine intervals due… between 7 days and 35 days. The bulk, I think are pretty much in the 28-day range. In February, throughout this year, a large portion of the auctions for these auction rate securities around the U.S. failed. There is no assurance that these auctions on the remaining auction rate securities in our investment portfolio will succeed. The auction failures appear to be attributable to inadequate positive volume demand in the event that there is fair auction, the indenture governing these securities generally require the issue out to pay interest at default rate that is above the market rates for similar instruments. These securities with these auctions have filed, will continue to accrue interest at the predetermined default rates and be auctioned every 7 days to 35 days until the auction succeeds. The issuer holds [ph] the securities because of the higher interest rates, because less attractive to them, they mature or we are able to sell them in… to third parties and there is a safe new market that has started develop in these securities. As a result, our ability to liquidate and fully recover the carrying value of auction rate securities in the near term may be limited. Consequently, these securities have been classified as long-term investment in our consolidated financial institution statement. However we anticipate that, due to the higher rates now payable on certain of these securities for various other reasons, the issuers will take steps to refine the notes to enable them to call and repay the securities and therefore avoid the higher interest rates. If they were unable to refinance [inaudible] and call the note, we will successfully close future auctions and the [inaudible] impairment charge on these investments, but we maybe required to wait until market stabilities restore for these instruments or until the final maturity of the underlying notes to realize our investments. This is a feature that's currently now... it's going right throughout the commercial world, everybody in commerce were investing the short-term money... available monies in these notes that were AAA and still are AAA rated. From our point of view, it's fortunate that we don't need these funds for immediate operating expenses. We have some 75 million in cash or visa via available cash with companies continuing to generate profits. And so consequently, we... our working capital requirements getting forward will not require us to even get to the cash, resources, reserves we have, we do also have a line in place. But I just wanted to obviously point that out and explain that to investors and we think that it will take a couple of months and then we think that things will start rectifying themselves in the market. It is just very early days... this has only occurred a couple of weeks ago and people are just trying to sought out what and how to deal with this. But it's something that as I said that we don't do and don’t believe will affect our operating performance going forward or affect the company in anyway. Some of our previously mentioned highlights, we have continued with our international growth goals in the UK. These are on track. We have now appointed a distributor in the United Kingdom for the Off-Premise channel. We are also working with... there is a three or four main distributors to get to the On-Premise channel. We have agreement in principle with one of the main On-Premise routes to market for their own customer base, but also possibility to handle us as a distributor for... with regard to the rest of the market and that should be put in place shortly. We have started to put to together an organization of individuals of sale team and marketing team in the UK. We have offices and we are starting to make presentations to selected retail customers and starting to go out to the market. We're starting something, we have undertaken, we conclude some marketing support arrangements in Europe and the UK, principally related to the motorcycle world, which is pretty much the trademark of our brand and as you are aware and we have... we've actually signed a agreement for MotoGP, which is international with the Kawasaki factory team. We think that that... while that reaches far broader than the UK; it will set the bases and create awareness for our brand throughout Europe, which is obviously where we're going to go next. MotoGP is probably the... one of the top three sports, watched sport in... popular sport in Europe and in fact certainly is one of the most popular sports for our demographic for our product. So we think that was a great achievements and although we are… it is technically premature to have done that, you got obviously be able to show the retailers in the UK and Europe that you see [inaudible] you all going to go to the... you all going there and you tend to support your brand. So it was essential for us and we were very unfortunate to be able to conclude that arrangement. We were also in the final phase of concluding a number of other sponsorships in Supercross, Motocross, Superbike, very similar sports to what we are... we've concentrated on here. We're also going to do some music events in the UK this year and we will be concentrating largely... a larger amount of our efforts on sampling, which has always worked out well for us. So, the UK, we... by the end of the quarter we will... we believe we'll starting, we will be actually starting to sell into retail channels in the U.K., and then we're going to look to… obviously looking further as we start establishing ourselves there, we'll be looking to beyond the borders of the U.K. We've also started to sell our products in South Africa. We've opened a distributor, although it's small, it is starting to do very nicely. Initial indications are the products are moving off the shelves and which is good news for us. As previously announced we dedicating [ph] the school, we did implement the previously announced price increases, effective as of January, that has gone through, and what has happened is that obviously we'll talk about the volume. We believe, estimate that the volume was between 7% and 8%, as indicated earlier due to the planned price increases. This translates to about $21.5 million and the importance to this is also to describe our sales for 2008, the first couple of two months. Our new product pipeline, we obviously are focusing on our five new flavors of Java Monster, mix that we launched in December, mix which is the juice based product similar to chaos and MIT [ph] and also, our product which is Heavy Metal, which we launched in a 32 ounce cans only at this time. We are obviously also looking at possible line extensions and additional products going down the line, but these are things I don't want to go into more at this stage. On the Hansen Natural side, we all are continuing to... with the roll out and of the new sparkling beverages in 10.5 ounce sleek cans, which we are, we think have got a great future. It's a slow ball and we will continue to do so, and focus on those products. The WIC contracts... we are… terminates in July, we are in fact negotiating with the government, with the state to... for a slightly earlier termination. That contract at the moment because of the increased apple juice cost has been in fact incurring losses for us, and so we would like to obviously terminate that contract at an earlier date. Going forward, we understand that WIC won't be granting the same sort of exclusive contracts, they will be granting a nice piece of contracts, and that may also change the mix of products that are eligible for WIC-to-WIC participants to include more fruit products, fresh fruits and vegetable products, which will in fact slightly reduce the available $1.2 [ph] that's been allocated to WIC participants for juice products. So, we anticipate going forward that we will be to participate in the WIC programs whether they are going to be lead to fund. But ourselves, obviously, we anticipate we'll be lower from WIC. We do not believe however that that will have material effect on our results, because A, there will be substantial rebates although the dollar value of the sales growth on WIC are high, the net sales arising from WIC are very much lower and being very marginal, they've served a purpose, they've made our brand much more familiar to a broader base of consumers, which is one of our principle mottos in going into the WIC program, which we think has been achieved. But going forward, we believe that the effect of us simply participating and the non-exclusive WIC program will not, while it may reduce gross sales, it won't really affect the bottom line very much at all. The Monster's cannibalization issue obviously, we have referred to it on a number of occasions, we did experience, we believe we've experienced cannibalization on our Monster brand with Java Monster, we are continuing now to get resets for our Java Monster products, either full shows in some cases two shows, and otherwise but good shows space in the coffee door, particularly with the introduction of the additional Java products that’s going to make it much more difficult for salesmen and still close to actually simply take the easy route out and cut them into our Monster space. There are too many of them now, so they really do deserve their own space and we believe we will be more successful in securing, separate space which we believe will minimize the cannibalization going forward. If one looks at the Nielsen numbers, generally what has happened is, the Nielsen numbers are showing a 52% increase for the 13-weeks to the end of December, [inaudible] 52.5 for the 13-weeks ended January as opposed to a category growth of 26, and 24. What happened is that, a portion of that has obviously come from Java Monster, which has cannibalized our existing sales, but Monster on its own excluding Java Monster is still growing at or slightly above the industry average, despite the cannibalization and excluding Java. So again, if you look at some of the leading individual SKUs, Monster itself as an individual SKU, just the single 16-ounce, has continued to grow at slightly… at/or slightly above the category whereas the leading brand or the leading products fledge of products of our competitors have in fact grown at lower than the category. If you take Rockstar, they grew at minus... the leading product was actually negative... sorry, grew only 2.5... sorry, grew a negative 2.5%, Red Bull is difficult to tell, because [inaudible] and they introduced 12 of 16, Full Throttle’s flagship brand was down 15%, Amp was down 0.5% which is flat and against that we were up 25% on our flagship brand, we think that’s an important indicator of the strength of the brand, because despite the substantial line extensions, despite the extensions of the whole Java, introduction of whole Java Monster launch, we're still getting growth equal to the category growth for our 16-ounce flagship product. Sales going forward, we normally give sales information regarding the first month of... we haven't yet finished the month of February, because we're a day away, we also don't often know our sales numbers until we actually... can actually get a better handle on deliveries. But I thought that in the light of the fact that we did have... we believe it's our estimate that we had about 21.5 million volume in December, that is important to look at what the results are coming through January or February, and to give you the results for February even though they are very rougher than… more estimated than normal. Sales for January and February are up about 33% on last year. If one then takes into account... during the two months... and the reason is the two months is that, I think some of the volumes actually will have translated not only into January, but also into February. So, and that is why didn't just look at the comparison for January, because that would... I think, so or tend to indicate too high an increase in sales, which because I think some of it's clearly going to February. So if we take it into February, the increase is about 52% year-on-year for the company, as 90% roughly of the sales of Monster, that is pretty much in line with the numbers we've been seeing out of Nielsen, which is sell through the retail price. So that's outselling, so that sort of, does sort of... get the numbers to sort of hang together the company seems to be continuing to increase its Monster sales basically through the year-end and through the New year at just about the 50% level, which is very encouraging for us, because there has been a slight fall off in percentage wise in the energy category over the past six months, just a gradual sort of fall off as the category continues to grow and larger in size and mature. And in that regard, I just wanted want to also relate the fact that, stress again that obviously we believe we bank dollars and not percentages, but if you look at the energy category in the all outlets combined the actual dollar increase a year ago was about a $147 million in the 13-week period ended December last year. In the first quarter of this year it was up to 151, I just did have the figures handy for the second quarter. The third quarter increased to $191 million, and the fourth quarter increased by $224 million in dollars, I referred to that figure earlier in this call. So the category is continuing to grow in real dollars terms. What's also very important is that there are… more so for this category than other beverages are the unmeasured channels, the unmeasured channels are the small mum and pop's, the dairies, the non-China accounts, the club stores, and some of the drugs at Wal-Mart and Sams, which don't report in. So these are only very rough indicators, we really do try and give to you is giving you some pointers, but we really do caution that investors should not pay over importance or give over importance to… too much importance to the Nielsen numbers. They are only indicators and they also don't cover the whole category. So far for the New Year we are very encouraged, we are very encouraged with the category still growing and we are encouraged with Monster's performance and its ability to maintain its share of market and continue to grow market share, and generally we are pretty bullish for the company. I would like to now open the floor to questions. Question and Answer

[Operator Instructions] Our first question comes from Mark Astrachan from Stifel Nicolaus.

Hi, good mornings guys… good afternoon, guys. Rodney C. Sacks – Chairman, Chief Executive Officer: Hi Mark.

I guess first place to start is from an SG&A standpoint; you talked about your higher selling and sponsorship expenses. How should we think about that on an ongoing basis? Is this going to run though 2008, is that more of a step-up on a quarter-by-quarter basis. I guess just a little additional color there in terms of your spending and promotion ideas going forward. Rodney C. Sacks – Chairman, Chief Executive Officer: I think there was a step up Mark on the year numbers. I think the quarter was probably out of line with the historical quarter or going forward. It is just when some of the accounts or some of the charges hit or fall to the through the bottom line. But going forward on an annual basis, we believe that we probably will stay in line with what we've done for '07, ’08 will be pretty much in line. Some of the costs of doing business, there is a lot of competition. Lot of our competitors are just blindly following us into a number of these categories and offering higher amounts to athletes and to events to try and secure them and that has put up the cost of doing business in some of these categories. And we've just got to step up to it. And, so we believe going forward sponsorships just knowing what our plans are… are going to probably be more in line with last year.

Got it okay. Rodney C. Sacks – Chairman, Chief Executive Officer: That is the main thing. Again, going forward with sampling will probably be very, which is another reasonably high cost item which will be pretty much in line and merchandise displays we think will probably come down slightly.

Okay, great. And then shifting over to the shelves space. I guess, my question is you are in the process of resetting some of these shelves to give Java incremental space. One, where are we in that process? And then two is, when it is completed which I guess that has to be sometime March, April time frame, what kind of incremental space like as a percent of new space is incremental versus what you have. So if you were going to add 10% or 15%. I mean, what is that absolute number? Rodney C. Sacks – Chairman, Chief Executive Officer: It is very difficult because at the moment what happened is in the case of Java we have no space, historically additional space. So we get a shelf in the coffee door that is if we probably got, in most accounts if you take all of the different products in convenience we probably got three to four shelves. So we are going to get an additional shelf, so that's an addition 20%. But its in a different door where velocity may be different, although the velocity so far on the Java Monster products has been comfortable to all of our other… to other supporting products in the Monster line, in fact it has exceed some of the juice product on a [inaudible] basis. So that will be we believe will be incremental and that's, there will be some change in which we will get two shelves, there will be some change in which we get a half or three quarters of a shelf. But on average we're probably more likely to be getting closer to one shelf in the coffee door. In regard to the Monster door itself, in that door we generally have been able to negotiate again larger space, because we are clearly under spaced in relation to our competitors. We have at the moment similar space to Rockstar, but we sell more than double their sales. So, ultimately we are getting additional space and they are being received. I don't have enough to give you a percentage, but certainly we will be getting between a half and a full shelf extra for our general Monster products generally as a rule. So overall, we think that we probably will get 25% to 30% more space is a pretty good estimate, but again that’s a very much a thumb suck and its not something that we've been able to accurately determine or haven't accurately determined.

Okay. The 25% to 30% incrementally are you... Rodney C. Sacks – Chairman, Chief Executive Officer: [inaudible] between the two rates.

Are you to be paying incremental plotting fees for that? Rodney C. Sacks – Chairman, Chief Executive Officer: Yes, we will. We pay CMAs, we do try pay for the incremental space. In some cases it is on a straight proportionate basis, in some cases in order to incentivize the store to actually give you an additional space you may will play a slightly higher rate across the whole… across all the show that you have, then you obviously… obviously becomes a determination as to where that the incremental shelf space is really incremental or not, it may, again, reduce your, increase your actual allowance percentage for a case, but you hopefully will sell more cases again it goes back to the question of percentage versus actual dollars, because we believe that the increased shelf space will translate into increased sales which will more than offset that cost, but it may not be as effective, the last dollar you spend may not be as effective as the first dollar. But again, its a question, it's done on a chain-by-chain basis and it's… the chains, just look at these things very differently.

Okay. So, that is a positive though? Rodney C. Sacks – Chairman, Chief Executive Officer: Yeah, we believe so, and that's why we will continue to grab that additional visibility and additional shelf space, yes.

Okay, great. And then, from a gross margins standpoint, can you talk a bit about... you touched on the outlook a little bit, but I guess there are things that we're hearing it terms of what you could potentially be doing, like you cut your freight cost a bit, there may be some outsourcing of production elsewhere, can you talk a bit about what kind of impact do you think you have there, be able to cut cost or do you think that what we saw in the quarter maybe be a more likely number going forward? Rodney C. Sacks – Chairman, Chief Executive Officer: Yeah. We think that the amount in the quarter is probably more likely to be, more representative going forward, but that will be offset partly by the increased prices that we've been able to get, but again you've also got a change in the product mix and a slight change may be in raw material cost increases which include our Juice products, includes cans etcetera. By and large we would be quite satisfied that we could maintain a gross margin in the 51% range, but we are not sure where it will be. I just don't have a bit a handle on that and it really would be very much a guess work for us to think that we can improve it, but obviously we would hope to do so, but we think that that's probably a gain, we are on it… that is pretty much being, with all those factors being able to maintain gross margins closer to the average for the year, last year and maintain them going forward in that 51% range.

Great, thank you. Rodney C. Sacks – Chairman, Chief Executive Officer: Thanks.

Our next question will come from Dara Mohsenian from JP Morgan.

Good afternoon, guys. Rodney C. Sacks – Chairman, Chief Executive Officer: Good afternoon. Hi.

I just want to get a bit more clarity on Java, can you give us a sense for where it's tracking as a percentage of Monster sales so far in 2008 and what level do you think you can eventually get there? Rodney C. Sacks – Chairman, Chief Executive Officer: In the… as I indicated early, in the fourth quarter it was about 13% of sales. In the first two months… I doubt whether we've got our monthly figure, I don't have that figure handy. I will try and get that figure for you, I'll come back to you on that number.

In terms of long-term expectations, where do you think the brand can get to? Rodney C. Sacks – Chairman, Chief Executive Officer: We really don't know, it's a very unusual brand, its obviously flying and it's primary focus, our primary focus for the brand is to obviously go after the company statement which has been unchallenged by Starbucks and we think there is opportunity there to, A, take some share from Starbucks and, B, to increase the actual sales of that carrier by offering these different products in different formats and in different functions, but it also has the energy attribute to it, which we believe will take some of the energy sold from the energy category. We believe there will be some cannibalization, but we are hoping that it will come from the energy category as a whole as opposed to primarily from Monster where we think... what we had experienced in the past six months. But going forward, we do believe that... we're quite excited about the growth. There is a continued growth and strength we are seeing in that category and we think that it could possibly come up to the 20% range. But that is very much a guess. We don't like giving a direction going forward. We don't normally give any estimates because of the fact that it is such a guess and it's very much... we are into uncharged waters here, we really don't know. But based on the first year-to-date numbers, it's heading into the high-teens, and it could either stay around there or get up even high, as I said, towards that 20% mark. But it's probably going to be in the high-teens to the 20% mark, it is our best estimate at this time.

Okay. That's helpful. And do you still have production constrains on Java at this point? Rodney C. Sacks – Chairman, Chief Executive Officer: There are some constrains, but they have largely... we are largely being met on our production requirements now. And as we have gone through some of the winter months there was a sort of a... we think that the winter months did affect Java perhaps a bit more seasonally that traditional Monster beverages. We're all going to build a little bit of inventories, so that we can make sure that we... to try and obviously avoid any shortage in the summer as it that ramps up. So we can try many Java production in that way. There should be some additional production coming on stream towards midyear. So we do believe that production constrains won't be a problem.

Okay. Thanks a lot. Rodney C. Sacks – Chairman, Chief Executive Officer: Thank you.

We will move now to Jacqueline Rider with Lazard Capital Markets.

Good afternoon. Rodney C. Sacks – Chairman, Chief Executive Officer: Good afternoon, hi

I was wondering the price increases that you put in place for 11, how quickly were those adopted across all of your channels? I mean, this every store that sells Monster has the price increases on 11 or was there some rolling period? Rodney C. Sacks – Chairman, Chief Executive Officer: We didn't see that price translating on the retail prices straightaway. They seem to have held pretty close to the previous pricing. So we're not sure how much they all going to go up at all. They may not go up very much at all. There may be very... stick to where they are, because I think I have mentioned in previous calls that on our products, the retailers are generally earning substantially better margins than they are earning on competitive product, including Red Bull, for example, in the energy category and Starbucks in the coffee category. Our products do deliver more margin percentage wise and dollar wise to retailers. So they were able already take advantage of the fact that the elasticity of the product was such that consumer demand didn't fall off even though we had originally targeted a 199 to 209 pricing for Monster. They were able to take that up to averages of 219, 229 to setting out, without seeing any fall off in demand and so they are really were making additional margins north of 40%. So we haven't seen that been translated, but so far as our costings to customers that has obviously been put into effect.

Okay. So how quickly were you... you were benefiting from the price increase as of when? Rodney C. Sacks – Chairman, Chief Executive Officer: We will start benefiting from the beginning of the year subject to the volume which obviously gave us a slight depression in sales in the first two months. The one cause of customer that didn't go up, I think more quickly, is probably the club stores and then possibly the grocery channel, which is not the biggest channel for us, but they would have probably translated the pricing into the shelf space, onto the shelves a little more quick, they will do that more quickly than we think the convenience channel.

Okay, great. And then, are you hedging any of these commodity cost? Rodney C. Sacks – Chairman, Chief Executive Officer: We haven't. We're looking at it. But we haven't at this stage.

But at this point, you've noticed, I mean you have seen that dairy prices have fallen of the cliff in March. So, how often do you buy milk? Rodney C. Sacks – Chairman, Chief Executive Officer: It's done, its priced regularly, literally monthly for us.

Okay. Rodney C. Sacks – Chairman, Chief Executive Officer: And so, last year we had a price increase in Java. It did squeeze our margins, we did had some relief in December-January. It will come down now which is… which was good that we didn't hedge. But it may go up again, it is pretty volatile dairy process depending on demand, depending on weather and a whole lot of other factors.

Yeah, okay. And then how much of the pull in of sales, the 20… I lost the number, $21.5 million that you're talking about came into the fourth quarter. How much of that do you estimate was Java versus your traditional [inaudible]? Rodney C. Sacks – Chairman, Chief Executive Officer: We think it was mainly the traditional products, because Java was very difficult to tell, what the value was because that was a new product, we need to compare it against. And then there were some shortages because of deliveries and some production issues in November, the Java Monster sales November were much lower than in October, and we believe that then there was a, they were orders waiting for delivery which were brought in December. So, we just, very little of that is attributable to Java.

I find that curious in that your margins were so depressed even though you are bringing in… pulling in and sales of our 16-ounce Monster, I would have expected you to have more Java being sold. Rodney C. Sacks – Chairman, Chief Executive Officer: There was more Java. But what I'm saying to you is that I don't... we don't know what percentage of the Java was attributable in that month, was attributable to the price increase, because when we look at January and February, the Java Monster numbers have been pretty healthy. And we don't have any [inaudible] Java was only introduced midyear.

Okay. Rodney C. Sacks – Chairman, Chief Executive Officer: And then, we also had the other disrupting feature that in November, the Java Monster sales was substantially lower because for certain production reasons, we weren't able to, we had a whole product on hold for a period of time, longer than normal which resulted in, not being able to meet certain deliveries. So, those deliveries, those orders were placed and we obviously didn't start to deliver them in December. And so there was some pent-up demand in December from November.

All right that is fair. And then on your tax rate that you've mentioned, the 38.3%, which is your best guess for next year, should we just flat line that across the year, or should we kind of put more of that… what should we do taxes for 2008? Rodney C. Sacks – Chairman, Chief Executive Officer: I think it is flat line, that’s probably the safest way.

And then last question, in the U.K., do you expect to have a lot...how much product or how many… is there a number you can give us on how much shelf space or how many stores you are going to get into? Rodney C. Sacks – Chairman, Chief Executive Officer: Absolutely called. I mean it is really...it's at a very early stage, we think that the category in the U.K. is about 300, and probably nearly 400 million cans, which is about a pound a can, that's about 40 million. It's about $400 million to $500 million and then if you take [inaudible] you got about $800 million to $900 million, just short of $1 billion category in the U.K., and obviously we think that there is a weaker than… secure a decent percentage of that, but, you know it's very premature we're… at the beginning we don't know exactly how the brand will be accepted, we don't know how quickly we'll get the listing. So, we really don't have any idea, we know that, we feel good about the fact that we will get listings in the… all the major gas stations and in the major grocery chains and the major liquid [ph] club stores, the wholesalers like Bookers and Bestway and we think that we all making a strong push in the on-premise there, which is a… in England, the on-premise for Red Bull percentage appears to be substantially higher than the percentage in other countries. And so, we're obviously focusing as well on the on-premise, but we really don't have an idea at this time of what the numbers will be like.

Alright. Thank you very much. Rodney C. Sacks – Chairman, Chief Executive Officer: Thank you.

From UBS you have a question with Sunil Jayawalla [ph].

Thank you. Hi, Rodney. Rodney C. Sacks – Chairman, Chief Executive Officer: Hi, how are you doing?

May be first if you could just help with what volumes look like in the fourth quarter? Rodney C. Sacks – Chairman, Chief Executive Officer: Yes. I'll just find it now. Sorry, I'll hopefully will get this…

Okay. No problem, may be we can move on, I'll just ask you quickly if you want to give an update on Canada? Rodney C. Sacks – Chairman, Chief Executive Officer: Canada has done very nicely. Our sales more than doubled. We are getting additional product SKUs into Canada and we're very satisfied with the relationship with Pepsi there that certainly has helped us step up and compete with the other brands and we are already pretty close to being the number two in the country. So, that's going very well for us. In Mexico again, it's been a challenge in getting to some of the outlying areas of the sub-distributors, it's a very undeveloped sort of system and… but we all, we believe we are the number two in that market and sales are doing very nicely in Mexico as well. I've got the volume numbers, volume in the fourth quarter; unit case volume was 25.657 million cases compared to 17.454 million in the previous quarter. On an annual basis for the year, the total cases was 98.453 versus 72.74, average price per case in the quarter was $9.61 versus $8.67 a year ago and average price for the year per case was 9.19 versus 8.33.

Great, thank you. Rodney C. Sacks – Chairman, Chief Executive Officer: Sure.

And then quickly, can you just give us an update on the transition to AB Distributors, there were some issues like as the AB folks getting into the non-alcoholic accounts, I was wondering if you could give an update or talk about how that's progressed? Rodney C. Sacks – Chairman, Chief Executive Officer: We're already just dealing with that on a market-by-market basis. It is being addressed; we are working with individual AB Distributors. Some of the distributors who are more… see the lot more or able to do more that some are more competitive than others, but it certainly is improving, looking at our numbers on our AB Distributor… portion of our distributor network, sales are increasing in most of their markets and there are one or two anomalies, we are addressing them but they are starting to move up, we had some weak markets in the transition. But, I don't want to go into… to describe the actual markets, but there were one or two weak markets and they actually all turning around, we are starting to make some progress.

Would you say that in the AB markets you are growing faster than the non-AB markets or would you say--. Rodney C. Sacks – Chairman, Chief Executive Officer: I can't say, I think it is an unfair comparison because many of the AB markets were slightly more under developed markets and so, when you look at real percentages, you probably will see that they've grown in percentage terms more but I'm not sure that’s a result purely of being AB versus non-AB. I mean there is no doubt that the AB distributors are professionals, they are good and that certainly helped contribute to the increase. But it's also been helped by the fact that in many of the cases they were handed territories that were underdeveloped with a lot more heavy lifting. But the fact the opportunity was, it's lot easier to take 7% or 8% or 9% market where we are nationally at 24% and turn that to 16% to 18% than it is to take a 22% market and 23% and turn that to 25%, 26%.

I see. Okay great. That's all I have. Thank you. Rodney C. Sacks – Chairman, Chief Executive Officer: Thank you.

Next we will hear from Andrew Sawyer with Goldman Sachs.

Hi Rodney, I was wondering if you could elaborate a bit on any perspective you are getting from retailers on the price increase. Are you seeing any delistings in any clubs or mass outlet like Costco for instance or anything like that? Rodney C. Sacks – Chairman, Chief Executive Officer: No. We are not, we have explained the reasons, we haven't had a price increase for... since we launched Monster seven years or six years ago and we haven't had that we think the retailers have understood our issues and we have been able to work through that with the retailers and that's, it has been well received and understood by them.

On the dealing back front, you said you are dealing back a bit more, is that... how much of the price increases that eating back up, can you give us a sense? Rodney C. Sacks – Chairman, Chief Executive Officer: I think my comment in that regard was in fact addressed to one of our competitors. One of the competitors always had their frontline pricing $2 a case above ours.

Okay. Rodney C. Sacks – Chairman, Chief Executive Officer: They were dealing back more aggressively on their product in order to bring it into line effectively more effectively with ours, and some of our competitors, we think what I would say was we think they will not deal as deeply now because we moved our pricing to their frontline pricing and certain of our other competitors have moved their pricing up. So, generally the pricing has moved up and even Red Bull’s [inaudible] also moved up may be not the same again, but they've all moved up.

And then just shifting gears on Rockstar, we're seeing that brand start to turnover. Do you have any... can you give us a sense on what do think is going there, it seems like they've lost some distribution can you just kind of elaborate and how much of that you think you are picking up? Rodney C. Sacks – Chairman, Chief Executive Officer: I'm not sure it's a question of loss of distribution, I think they lost some distributors on the East, I think Coke… consolidated decided to drop Rockstar, they have gone to an independent network there. I think that's a brand though has just slowed in and of itself. I think there has been a lot of push behind the brand, a lot of effort by CCE but we think that the brand is just slow, they have not done things that are original. They had really just done whatever we've done and copied us. So, we came out with Java Monster and they just followed us blindly with the exact... three products in similar color cans and just did the same thing. We think that their products aren't as good as ours and we think we'll beat them in the market on the products. But that's what really happened. And I think that the consumer is seeing that there isn't any originality coming from them and any innovation. And even in their supports now, there is a mix message going out I mean they were a brand that was marketed in a very different way to ours and market position but they seem to be seeing our success and just simply blindly following us now saying going into our sort of sports and our category in just simply basically paying some cases we believe pretty stupid money for trying to get athletes in the in our sports and to try and make a dent there, we think that sends a mixed message to their consumers, because their consumer dose know what their brand stands for. So, we think that's been partly responsible for the fact that there has been a slight fall off in [inaudible] and they haven been able to really maintain this share despite increasing… introducing a number of new SKUs and a lot of effort from CCE as their distributor.

Then, just two other quick ones. On the UK, it doesn't sound like the launch you are going to have a couple or more months. Could you give us a sense for how much the start up cost are going to be in the first couple of quarters of the year before you give any revenue? Rodney C. Sacks – Chairman, Chief Executive Officer: I think the start up, in the fourth quarter were approximately $35000 that we have incurred, as going forward we will incur some more cost but pretty shortly those costs are going to start to be offset by margin on sale. At this stage we've obviously not had the sales, we’ve had all the expenses and we hope that by… by certainly by mid year which will start being contributing and hopefully we believe we will be able to break even or make it us more profit by the end of the year. But we will have to see what the sales velocities are as we get listings as they come through during the year.

And just quickly can you give quick update on on-premise any successor like there, just how you are doing in getting listings against Red Bull and what is the outlook is for that into 2008? Rodney C. Sacks – Chairman, Chief Executive Officer: We're quite confident about the on-premise, but it is going to be a slow ball. Red Bull has taken a pretty aggressive defensive stance to the two unexpected foray into the on-premise. They’ve gone in and tried to secure longer-term contracts, they've upped the NT [ph] on contracts. But we all having success, it is just too premature for me to relate some of them to you guys, we were at the point where we have signed or about to sign some decent contracts, very nice contracts, but we think that it would be wrong to send that message in advance, it's just not from a competitive point of view wouldn't be appropriate. So, but it's a slow ball, we've also changed our own formula and how we are dealing with it and how we working with AB, we are working two things, we are evolving the systems and you know it is working but its a slow ball than its… to get into, it is not going to be with [inaudible] short period obviously Red Bull are going to surrender it easily. So, but we all… we are confident that we all going start making gains in that area. And they will come and I do hope that by the time we have our next call in May we will able to share a lot more success in the on-premise side with you.

Thank you very much guys. Rodney C. Sacks – Chairman, Chief Executive Officer: Thank you.

Next will go to Alton Stump from Longbow Research.

Thank you good afternoon Rodney. Rodney C. Sacks – Chairman, Chief Executive Officer: Good afternoon.

I had two quick questions, first off, in looking at the fourth quarter sales number again, even if you need to be strip out the buyer hit, it looks like an awfully solid number that you showed stronger growth in the last two months versus the number that you gave for October which of courses you had a benefit from a pull back of volumes from the 3Q, I was trying maybe get some color is that essentially in your estimate mostly due to Java selling better than expected or is there something else going on that is driving that? Rodney C. Sacks – Chairman, Chief Executive Officer: No. I think the Monster business itself is doing well. I mean Monster itself… if you look at the convenience of some of the channels that we've looked at, where we take the Java Monster numbers out of it. Monster itself is growing at or slightly above the category growth. And that's despite the fact that, obviously we are seeing some cannibalization of Monster products into Java Monster because that we put on to the same shelf. So we're seeing growth still coming clearly from Monster itself.

Okay. Thank you. And then I guess just a two-part question in terms of price increase on Java. First off, if you could maybe give an estimate if you can as to how much of that total $21.5 million in 4Q might have been for Java? And then also where you think gross margins could potentially go? Rodney C. Sacks – Chairman, Chief Executive Officer: We have allocated very little to Java Monster in that calculation.

Okay. All right. And then in terms of the gross margins of Java, could you may be give us a ballpark estimate as to where you think margins might go after the price increase, which… if you've gone through successfully? Rodney C. Sacks – Chairman, Chief Executive Officer: Java Monster has started off being in the sort of numbers, we are in the low 40s and because of the increase in dairy, they sort of dipped below that. With the price increase, we believe that we will get it into the mid-to-upper 40s, going forward again, but very much dependent on the dairy. The dairy component is a high component in the Java Monster products. They are... they do reduce fresh milk, fresh cream etcetera, and for that reason it is a high component cost. So depending on what happens with dairy prices, we may find in the next couple of months, you may find it, it in fact improves and goes closer to 50, but then we do believe that, again, it was stated forever and we think dairy prices will fluctuate and when it comes down, it will be in the mid 40s. And that's about... if we can maintain those sort of margins as an average for this product we would be very satisfied, meanings that, that will certainly be very... it will contribute to the overall profitability very handsomely of the company. But again, it does put a little pressure on your overall gross margin.

Okay, great. Thank you. Rodney C. Sacks – Chairman, Chief Executive Officer: Thanks.

And it appears that’s all the time we have for questions. I'd like to turn the conference back over to Mr. Sacks for closing remarks. Rodney C. Sacks – Chairman, Chief Executive Officer: Thank you. Once again, I wanted to thank everybody for attending the call. I think that we all see some challenging times; the economy has clearly slowed down. And then I think food traffic has slowed down in convenience channels, particularly. However, that may be one of the reasons we... that we suspect. But don't know that we have seen a little fall off in percentage sales increases in the energy category, which are still growing at healthy rates, but there has been this gradual drop off and that might be attributable not so much for the category material, but even to the economy or a mix of the two. But this is in line with other consumer retailers, probably… we probably will feel a little less than them. But obviously we think we're not immune to it. But overall, despite this we are continuing to see really good growth in the brand, we are still growing at north of 50%, which is very, very exciting for us, very amount that we already are such a big part of the category and as you can see from the numbers that I alluded to earlier in real dollar terms, we are actually leading the category growth. We are, the category growth. And so we are looking forward to an exciting 2008, we think that the products we introduced in the fourth quarter, that's the five Java products plus the two Monster products or both… all going to be incremental both lines, we think that we are going to continue to also innovate and that we will probably be launching something, I can't give you that for certainty, but all I could, we will be increasing, launching additional Monster products this year and we are all very encouraged by the fact that we have been able despite the current economics talk and discussion and slowdown that we been able to continue increase ourselves north of 50%. So we are very bullish for the year and obviously we are excited, we think that we will also start to make inroads into the on-premise and overseas and they… we are just going to be patient, they will come and they will… we want to do them right. And we believe that in the long-term those markets are going to be very important for us, both locally and internationally for the growth of the brand and the company. So again we thank for your attendance and look forward to talking with you again when you release our first quarter results. Thank you.

Again that does conclude our conference. We do thank you for joining us.