Monster Beverage Corporation (MNST) Q2 2011 Earnings Report, Transcript and Summary

Good day, ladies and gentlemen, and thank you for standing by. Welcome to the Hansen Natural Corporation Second Quarter 2011 Financial Results Conference Call. [Operator Instructions] This conference is being recorded today, Thursday, August 4, 2011. I would now like to turn the conference over to our host, Mr. Rodney Sacks, Chairman and CEO of Hanson Corporation. Please go ahead, sir.

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 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 management's 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 herein. Please refer to our filings with the Securities and Exchange Commission, including our most recent Annual Report on Form 10-K filed on March 1, 2011, and our most recent quarterly reports on Form 10-Q, 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 measures of gross sales and certain expenditures, which may be mentioned during the course of this call, is provided in the notes designated with asterisks in the condensed consolidated statements of income and other information attached to the earnings release dated August 4, 2011. A copy of this information is also available on our website at www.hansens.com in the Investor Relations Section. Overall, the…

[Operator Instructions] And our first question comes from the line of Kaumil Gajrawala.

Good numbers, particularly, given the economy. Could you maybe give some context on why you haven't bought back shares, particularly given the size of your cash balance now?

I think that's something that we wouldn't like to comment on. We have the program in place, and we are going -- we'll continue to review that, and we'll continue to review that going forward now. Share price moved up quite high, and we are sort of reviewing our own decisions on what we should do and when we should go into the market and particularly, with the last couple of days, we think that's something we are likely to go into, actively go into the market again shortly.

Got it. Would you consider a dividend given where you are now in terms of consistency of earnings?

It's been our practice not to pay dividends. We are looking -- we have considered it. We will be considering it again at a board meeting. But I think that our preferred route at this stage is probably going to be to look at our buyback of shares, but it's something that we will continually keep under review.

Okay. Got it. And then looking at your top line, is there -- particularly for international, are you able to break out how much of it came from new markets and rollout some new markets versus like-for-like markets year-over-year?

I think that at this stage, I don't think we'd like to break that out, because even in the results in -- we sort of generally look at sort of -- on our divisional basis but even in some of the divisions, we've got new market. So we haven't done the exercise to break it out. Obviously, what we know is that new markets, particularly Central and Eastern Europe are obviously negative on earnings and cash flow. But those are because that we are going into new markets. So as I indicated earlier, we're happy with our Western European operations now. Sales are still growing very nicely, and that is clearly the majority of our business in Europe. But the other markets are starting to get up to speed, and we just do have any risk then, so we really haven't done that analysis more accurately for the purpose of this discussion, I still want to go into it.

Got it. And then just a final question on ad expense. It picked up a bit as a percentage of sales. Obviously, rolling out into a lot of new markets and you had a lot of new products in the quarter. Is this a fair level in terms of the future markets you're rolling out in, and some of the other follow on products you're rolling out with in United States and outside?

Again, United States is more sort of stable, we're sort of more mature in the United States. A lot of these costs are -- come out of the newer markets where you would invest disproportionately as you go into market. You have to prepare with point-of-sale, you have to do all of these things as a percentage, obviously gets thrown up wrong. And because of the fact that we have been entering into a lot of new markets, it is skewed for that reason. We think that we did -- as you are aware, we've really gone into a lot of new markets in Central and Eastern Europe from the middle of last year to the middle of this year. And so we think that there would likely to be a letting up of these costs as we go forward. But again, it all depends in some ways on where we go to in new markets and at what rate. And if we slow the rate of increase in new markets, and I think it will let up, but it's something we owe -- then that's why I mentioned earlier, we are monitoring it because we don't want to obviously, not have the right equipment and assets available to our staff to go into these markets. But at the same time, it does cause us to overspend. Similar things, for example, in sampling, where you go into a new market, you're going to have a whole sampling truck and team, but yet the sales haven't come yet, and you're sort of, sometimes in advance of the sales. So we'll try and obviously, we're trying to manage that carefully but it did go high this quarter, and we're hopeful we'll be able to get it to be reduced. But again, we don't have any sort of definite plans on how to deal with it. And similar, our trade marketing staff going out, we started to go out into Europe with more guys in the field to get to the smaller stores and markets where we believe it's necessary to build our brand. And again, there's also start becoming disproportionate and then they sort of start becoming -- they'll start leveling off. So we were at a sort of the high rate during this period.

And our next question comes from the line of Judy Hong.

Rodney, just first on the category trends and your market share performance. I guess July being up 15% gross sales, do have a U.S. versus international number?

I have but we've not again, broken that up and I wouldn't like to do that at this point.

Okay. And then that just a U.S. market because it looks like the last couple of months, your sales in convenience store channel's been slowing a little bit. So I'm just wondering if there is any indications as to whether some of the recent trends have shown a little bit of a slowness, and whether that's attributable to the macro slowdown. And related to that from a market share perspective, the latest months, it does look like your share gains slowed pretty considerably. So if you can give us perspective on kind of what you're seeing more recently from a category, your brand perspective and your market share perspective?

The category seems to have probably slowed a couple of points from where it was in February, March. Our growth rate was probably pretty similar to what it was in February and March in the convenience category. It did pick a little bit in -- our growth picked up a little bit in April and May. But in our numbers on the Neilsen numbers that we have for the last 4 weeks in convenience, we were up 21.4%. So it is a little lower than we were up in the 2 previous, 4-week periods, but again, higher than what we were up in the previous 4 or 5 periods -- 4, 5 periods before that to the beginning of the year. So we are seeing the trends being very similar and but within a point or 2, a lot of that depends on -- we see, is promotions. As I indicated earlier, we sort of had some promotional cycles, which were I think more skewed to the second quarter or late in the second quarter in July. Last year, this year, some of the promotion will be done with a couple of our bigger customers, are taking place in August, September so it sort of moves it out of the June, July area. So that, I think, also has some effect on the numbers. But there is a slight slowing but we don't -- I think it's not at a point where we believe there's any trend indicative of that. But obviously, the economy itself is also going through a tough time at the moment. So we're seeing 16% increases in the category in the last 5 weeks in convenience. That's pretty exciting.

Okay. And then on Worx, can you quantify how much it added to your second quarter sales, just in terms of any color to what you're seeing in the marketplace now that you've gotten the distribution, and then finally, you talked about the advertising spending behind Worx being about a point addition to your SG&A or selling expenses as a percent of sales. So it sounds like it's going to moderate a little bit. Is there any way to quantify how much going forward?

This sales were -- gross sales, we're basically just under about $4 million in the quarter, which was up quite a bit on the first quarter. But it's not a high number in relation to where we are, but it's starting to become one of the -- obviously, one of the major players in that Shot category, although obviously, very, very far away from the 5-Hour numbers. But it's starting to gain some traction. Where we've got distribution and distribution has improved a little bit, and we are starting to see some bit of sales numbers coming back and repeat purchases. So we're going to continue with supporting the brand. We're going to continue with our TV advertising and change the type of adds to make it a little different. And continue to support it and merchandise it in stores, and we think that we still think that there is -- this brand has an opportunity of being a competitive brand, and being sustainable in that category.

Okay. And what's the ACV right now on that brand?

ACV on that brand? I will give you as we continue to talk, I'll find the numbers. The ACV at the moment for Worx is about 23, I'm showing in convenience and it's much, much less in grocery and drug. So it's very small. So the main positioning we've got is in the convenience channel.

Okay. And then internationally, I mean, you guys done a really great job growing in markets like Canada and Mexico and Europe. I think you said it was up 102%. Are there any markets where you're seeing some weakness. Your total international sales were up 54%. So that implies maybe some of the markets aren't really seeing as strong a growth as Canada, Mexico and Europe. So are there any markets that are seeing some weakness? And if so, why is that happening?

It's not so much markets, it's basically individual countries are up and down. There are odd countries with reasons and often, it's expandable due to the distributor or the partner or some economic conditions in the country itself, or sometimes, the actions of our competitors or sometimes in one case, one country store brand, a very, very powerful store introduced a private label at EUR 0.29. That's through the entire market into a -- out, because that's a 25% of what the cost of the main leading brands, which are Red Bull and ourselves are. So obviously, that's going to have a big effect on the whole of the marketing and the market generally in that -- in that country where it's a big player, and so, you got to deal with this. It takes time to obviously address this and then, things will stabilize and then move back up again. So we are seeing that in different markets. So -- but by and large, the markets are all responding pretty well to the brand. We have some operational issues in some countries, we've addressed them with our own staffing and basically, our partners. We had some issues in Brazil as I think I've alluded to on earlier, the summer production issues, and those are sort of starting to turn around. We're starting to get into it. But the results do follow. And sometimes, there's a lag time. So in some markets, it's taken some time to turn things around. And there are many markets, I mean, we're obviously -- or we sell this throughout the Caribbean, we sell throughout Central America, we sell into a number of other countries in South America. So Australia, so there are many markets. It's a very mixed bag, Julie, I just don't have…

And our next question comes from the line of Imran Ali. Imran Ali - Jefferies & Company, Inc.: This is Imran Ali for Jeff Farmer. I think most of my questions were addressed. But I just have a quick follow-ups. Just regarding your International sales, could you remind us what drove the $30 million or roughly $30 million sequential jump in international sales in the second quarter of 2010, and a similar $30 million jump this year?

What you're getting in 2010, what you're getting there is just the -- is a lot of it's seasonal, which is more dramatic in Europe and then also in new markets that we launched going into spring and April because those are the better times to go into those markets. Also, again, you get a market like Canada, which is very cold in winter. So you do get quite a big, what we call, bell curve going into the summer, which is far greater than you would get in the tempered markets in the Western states in the U.S., et cetera. Imran Ali - Jefferies & Company, Inc.: Okay. I got you. And then sort seeing on the international expansion part. I think you mentioned earlier that you're planning on launching in Asia in the second half of this year. And I was just wondering, can you talk a little bit about which countries you're focusing on first as a priority and second to that -- I'm sorry go ahead.

I think that it's probably premature for a number of reasons, including competitive ones for us to get into some of the markets. But we are looking, probably initially a little more in some of the Northern Asian countries. We're really are in pretty advanced negotiations, and with distribution partners in those countries. And it's just premature for me at this stage to actually go to disclose either the identities of the countries or the proposed partners. But hopefully I think that we're hopeful that by the next conference call, by the end of the third quarter, we would have already signed up some of those countries where we're very advanced with them and we'll be ready to launch. We're also in the process of going through the regulatory issues now to have our products approved and passed for sale in those countries. And some within there also takes quite a bit of time. So we're in the throes of all of that at the moment with planning. As I previously indicated, we have appointed a senior person to head up our Asia region, and who's based in Hong Kong. And he's been active full-time in securing these representations and distributors. So we are, we're pretty confident that we will be going ahead in Asia. We will be able to announce it hopefully on the next call.

And our last question comes from the line of Bill Chappell.

You talk a little bit about I think in your remarks that you saw, 5-hour Energy growth slowing, and I just didn't know what we should read into that? Do you see the Shot market kind of plateauing in the U.S. and has that kind of altered your plans for Worx or is it just the comment of -- you think you're gaining some market share and maybe that market share has peaked?

No. I think that by and large -- there maybe many reasons. I think shots were perhaps tried by many of the traditional energy drink, consumers who had energy drinks for many, many years. And probably went to shots for a while, maybe that come back to the energy drinks. I think that -- but there is a slightly, we believe there is a different consumer that is the principal consumer of energy shots, as opposed to energy drinks. But I think there is, again, there is a sort of a limitation on how many people are going to try or be regular energy shot users, and I think there is a more finite universe. I think one of the other things is that as the category grows bigger, as 5-hour grows bigger, they are trading off bigger numbers. So obviously, just from the law of returns, they're going to see the very large increases they were experiencing this time last year, and it's going to reduce substantially, just by virtue of the share numbers. So while the dollars, the percentage increases are dropping off quite substantially, the dollar sales are probably still pretty healthy, and it's showing growth in that category. But I'm just trying to put it in perspective, because we're obviously putting it together. The category, we're looking at the percentage numbers, and I thought that it was appropriate to -- in looking at their number versus the more mature and established energy drink numbers to try and put it in perspective. Because their sales increases going from the end of last year, beginning of the year, were in the 70s and 60%. And what we've seen is a gradual drop off into the 50s, the 40s, the 30s and the last 5-week period, touched 29. But the market is a large-sized market. There is room for a good competitor, there is room at a size for a good competitor that would be, which we believe would be important to us, and would be contribute to healthy volume and sales and bottom line to us if we could establish ourselves as a credible competitor. And we believe there is a good opportunity to do so. There are -- the margins are good, and so we believe there is still good and valid reasons for us to persist in trying to find the formula that will work to be a credible competitor in that category, as we say, which is I think, is slightly different consumer to the mainstream energy consumer, and we believe that we'll obviously then, be accretive to us in the long-term. So we are going to persist with our brand in that category.

Okay. And just switching gears. I think last quarter, and I forgot the exact number you gave but I mean, initial sales in the month of April were a little bit lower than what you ended up reporting for the full quarter. I can't remember if that was timing of promotions or just timing of shipments. And were your promotions more weighted towards June or May? I'm just trying to put that in perspective.

As we've indicated, we're giving you the raw numbers as they come out. We always, and we always say this, you guys have got to understand that, that becomes, because people all ask for that update, but it's a 1-month number. That number is affected by the number of days you happen to be shipping and delivering that month. It's affected by public holidays in the dates on which they fall. Now with the Fourth of July, on what day. Where do you get the Memorial Day. Where did that fall? Those are where the people order for that. Those are important factors. Where you do promotions. If you're doing a promotion in May instead of April, April and May and as we said now July or August, those have quite a big impact when you do promotions with big customers. We have some very big convenience chains. We do promotions with you, we've got 7-Eleven, Gustav [ph] which is Circle K. They're all extensive chains, there's Wal-Mart, the club stores. And depending on your promotional calendar, these things do get swayed. So we always caution and we continue and I did say in this call to caution that the one month numbers are really very, very difficult to get a read on it and you should not read into that, into a one month. In the quarter, you're going to find very substantial jumps from month-to-month in where we come out at the end of the quarter, and there's no trend that one month is higher or lower, that's the second month in the quarter can be low, and then the third month higher or vice versa. There's just no pattern to it.

Okay. And then just final question on cost, I assume where you'd be running through your hedges on both apple juice and sugar as we near in -- gets close to year end. I mean kind of update on what you're looking at in 2012 in terms of are you starting to hedge or lacking cost there? Or do we need price increases to kind of offset that as we move into next year?

We pull[ph] those results, and we are looking at our costs for 2012 as we would in the ordinary of course. It's quite interesting that apple contract prices seem to be coming off somewhat, but we still have significant inventories in our facilities. And the sugar, we are actually -- have already taken the position on sugar for the early part of 2012. Aluminum, we're watching and you've probably seen what's happened with aluminum, and will probably come off even more in the days and weeks ahead, and we'll evaluate what we should be doing with aluminum. But as we've always said on our calls, the extent of increases that we've seen, and some of the increases resulted in aluminum have been substantial in dollars per pound terms. But in our business, because of the high margins that we have on our energy products, the impact is not that significant, as it would be in an ordinary beverage company.

So just to clarify, I mean is there a chance going 2012 that your input cost could be flat to actually down year-over-year?

I'm not prepared to speculate on that now. It's just too early even to comment, and we don't give guidance.

I would now like to turn the call back over to Mr. Sacks for any closing remarks. Please continue, sir.

Thanks. In closing, I would just like to reiterate the fact that -- and point to the fact that the actual growth in the energy category in -- particularly in the convenience category, is still in the mid-to upper teens. So it still is very, very encouraging. Particularly, in the uncertain times where we're facing at the moment in the last few weeks as we've all -- have seen and become aware of. So we are fortunate to be in an industry that is continuing to grow, and we are even more fortunate in that we believe we're continuing to grow ahead of that industry. So the same applies in Europe. We are continuing to grow, and we are continuing to establish a strong beachhead for our brand in Europe. It's starting to gain traction and establish itself, and so we are very positive for the rest of the year, for the company and for the category. And thank you for your support. We have to see what happens. We had a very rocky day today on the stock market, everybody, so we'll have to see what -- and we all go forward as the economy and the world economies actually do. I mean we're in very uncharted waters now, but we are positive that we're in a good position financially from a cash flow point of view and we're strong. So obviously, we're going to manage ourselves through this. Thank you very much for your support and we'll report back to you at the end of the next quarter. Thanks very much.

Ladies and gentlemen, this concludes the Hansen Natural Corporation's Second Quarter 2011 Financial Results Conference Call. Thank you for your participation. You may now disconnect.