Monster Beverage Corporation (MNST) Q3 2011 Earnings Report, Transcript and Summary

Good day, ladies and gentlemen, and welcome to Hansen Natural Corporation Third Quarter 2011 Financial Results Call. [Operator Instructions] As a reminder, this conference call is being recorded. And now, I'll turn the call over to Chairman and CEO, Rodney Sacks. Please begin.

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 caution 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 consolidated -- Condensed Consolidated Statements of Income and Other Information attached to the earnings release dated November 3, 2011. A copy of this information is also available on our website, www.hansens.com, in the Investor Relations Section. We…

[Operator Instructions] Our first question is from Bill Chappell of SunTrust.

This is actually Mike Swartz filling in for Bill. Yes, first question, I just wanted to touch on the selling expense, came in a lot higher than we expected and significant increase year-over-year. You touched on some of the drivers of that, but could you dig into that a little more? What was the largest driver on a year-to-year basis? And was there any kind of -- or anything pulled forward?

I'm not sure what you mean by pulled forward. I mean, interests were incurred in the correct periods. But the largest -- it just depends on when we signed contracts. When the contracts are -- when they run in, we obviously expense the amount we incur under sponsorship agreements when the contracts are due to be performed. And sometimes the contracts run year round, sometimes the contracts run over shorter periods of time. The largest driver of the increase was the increase in sponsorships and endorsements. The next largest in dollar terms was advertising, which was attributable to basically to Worx, the advertising for Worx, which obviously, last year, was very low because it hadn't really kicked in and went up during this year. If you add the math program and trade development -- allocated trade development costs together, they will probably come in between the sponsorship and advertising. So it depends how you break it down. If you allocate them separately, therefore, lower down them. But if you allocate them as a joint thing -- and that was a -- primarily attributable to those costs, which were -- the increase in those cost were primarily incurred in Europe, wherein in developing markets we have basically increased our T.D.M. program and having -- and have met teams in each of these countries. And initially, the issue is that when you start up with a single MAT team, it's a truck, with a MAT leader and a number of stuff. And you go out in the country and in these -- some of the smaller countries, you really need some presence. So you have a MAT team and the cost of being incurred to run and operate that team. But for a while, until your sales start kicking in, the cost of that MAT team becomes obviously high per case, and then starts lowering as you go forward, as it's now starting to lower in many of the countries in Western Europe, where the sales are much higher. But you start off and then you have that, sort of that, out of balance cost. And then also because of the number of countries that we've launched in, in Europe, you have MAT teams -- because of distances that really has to be in each countries. So you'll have a MAT teams in Prague. You'll have a MAT team in Slovakia. You have a MAT team in Hungary. But because they can't keep driving these trucks, even if though couple of hundred miles every day or every week, to attend different events. So you've got 3 MAT teams, for example, in those basically 3 small -- reasonably small countries. So that was the next expense. And then other expenses that were higher were merchandise display premiums, merchandise displays -- those sort of costs that we incurred.

Yes, that's great. That helps a lot. And then second question. I mean, any kind of update on the Asian expansion? I think we had anticipated hearing something sooner rather than later on that front. And when should we actually...

We are working towards launching. Probably the first market that we're going to be launching in is in Korea, and then we're planning to launch in Japan. Japan has been -- in South Korea. But Japan has been a -- was part of this -- we started planning a lot before Korea, but it's just taking a lot more planning with our distribution partner there. They're just very much more cautious about everything, about inspecting the -- every production site, every -- getting every ingredient analyzed, and say, it just -- it's a long process. But we will be getting -- moving, if we -- we're sort of moving these balls down the line again. Getting products improved, even in Korea, has been a challenge, because until now, they have not really permitted any energy drinks containing caffeine in Korea and South Korea. So we've had some relaxation on how to get products approved in Korea that still have efficacy, which we've done now and -- but there have been some hiccups. Red Bull just recently launched in Korea, got some shipments in, then had shipments placed on hold and had empty shelves and then had to have debates with the authorities about formulations and reformulations. And we have had an approval for our products, and we're now in the course of planning the actual launch. We're also looking at some other markets and are having some discussions with potential distribution partners. We did have discussions with one group, and that has eventually didn't move forward. And we are sort of making other plans and moving forward in Asia, but really, it'll be a much more visible in 2012.

Our next question is from Jeff Farmer of Jefferies. Jeffrey D. Farmer - Jefferies & Company, Inc., Research Division: I was just looking for some more color on your domestic volumes. Are you driving growth for same-store sales or distribution gains still playing a big role for you?

I think there have been some distribution gains, and particularly, in sort of some of the extended product, deeper product lines, but same-store sales have also -- and sales to a point, have also increased. For example are sales per point of our very original Green Monster energy drink in the convenience channel are up 10.7% year-on-year for the same product. So we are seeing some gains in distribution and some gains in the actual selling rates of the individual products. Jeffrey D. Farmer - Jefferies & Company, Inc., Research Division: So that 10.7% number would include Monster Rehab, so it's sort of a brand extension of Monster...

No, no. I'm just giving you one SKU, Monster Green 16-ounce. Jeffrey D. Farmer - Jefferies & Company, Inc., Research Division: Got you. Okay, that's helpful. And then just following up on the distribution point. As it relates to additional white space in the country, are there pockets of low STV [ph]? Is there still a lot of distribution opportunity out there for the brand?

We think, there is. If you take the distribution metrics, we basically -- if you take it across the 3 main channels, which is convenience and gas, grocery and drug, the biggest one is convenience. But pretty much if you take all 3, our distribution level for Monster Green 16 ounce is 91%. It's 88% for local of Monster 16-ounce, then drops to 69% for Absolutely Zero, 58% for Rehab. Those are the 2 of the newer ones that have -- got production -- sorry, got distribution over the last year to 18 months. And then many of the other ones of our products are sort of -- are down at 50%. So we believe we -- if we improve our distribution as we continue to strive for that in many of the markets where distribution is obviously better than the others, we do have opportunity in the U.S. -- just continue to fill out. If you take the, basically, the convenience market, and you look at those numbers, it goes 97%, 90%, 76%, 73%. So there is a clear depth, which we believe we could improve on, on some of the supporting SKUs, which are still very good SKUs. And that's in 16 ounce. We still have a lot of, again, also distribution opportunities in products like our 24-ounce, which is pretty much the #2 or 3 best-selling product store. And the #2 -- that's at 71%, the 24-ounce Green Monster. SO we believe we do have a lot of opportunity still in the U.S.

Our next question is from Mark Astrachan of Stifel, Nicolaus. Mark S. Astrachan - Stifel, Nicolaus & Co., Inc., Research Division: I guess, couple questions. One, on the share repurchase. So that was obviously a pretty big number. Is it fair to assume that there's a bit of a shift now in strategy in terms of your cash use? Meaning that you haven't done a whole lot with it over the years, and this may now be a better option on a going-forward basis to use that cash. I mean, I guess like -- give us a bit of color in terms of what you think you're going to do with the cash going forward. If this is basically it or if there's other opportunities.

No. I mean, we just keep an open mind. We believe we've always kept an open mind and simply it’s been a factor of looking at opportunities, just considering our use of cash. We -- the amount of cash we have has continued to increase, and so we’ve just probably been highered to sort of the levels at which we've purchased shares. We may be -- may have been a little more conservative, just in the way we implemented the program historically, whereas now we probably gave more leeway to the buyers in implementing our programs. And they were able to obviously secure more. So in many cases, we did implement programs and perhaps were too tight in the way we manage them. And the amounts we bought were smaller and just -- we've just loosened it up a little bit. But I don't think there's been a fundamental change. All agree, we're still -- we'd look at opportunities, and we have the power to do so if the right opportunities came along or continue to buy shares. We’ve just felt that with the focus on Monster, and still seeing the growth we have been able to achieve, as you've seen for many years now. With Monster in the U.S., domestically and internationally, we just feel that probably we're comfortable just growing those brands. At the same time, we do look at other opportunities that we, ourselves, can develop without paying big -- premiums for them, like Peace Tea. We think that we've managed to successfully create a great brand in Peace Tea. It's not showing on the bottom line yet, but the fact is that the brand is selling nicely. It's up on last year. We are expanding the -- into a larger-size containers now, in plastic. And we…

I think that it's going to balance out. As a company, overall, our G&A really was lower as a percentage of sales than our -- than last year. So that did improve. Probably that was partially offset by some high-end G&A costs in Europe again, particularly Central and Eastern Europe where it got a little bit skewed, costs of travel and things of that nature, especially when we're establishing bands in so many small countries. We're disproportionately high. We've look at that, and there were things I can't -- obviously, I mentioned travel, because that is very high in Europe. It's hard to fly around from country to country. It's hard to travel. And those costs -- it was something we now just and took -- have obviously dealt with, with our guys out there. But those are costs that are incurring. We believe those will eventually normalize as we continue to basically fill in the European territory, and sales start growing in Central, Eastern Europe, just as they have done in Western Europe. And then it will become a smaller proportion of our G&A as we go to newer countries, obviously that once we've obviously, I think, normalize the Europe and America, because those are your 2 main basis, we think, for energy drinks.

Our next question is from Alton Stump of Longbow Research.

If you could just talk about the profitability situation in overseas, in Europe mainly. As looking at the next year, have you any plans for the region, as a whole, as -- if we'll see any meaningful profitability show up?

I just didn't -- I just couldn't hear the last part of your question. Sorry, you weren't very clear.

Sure. If you think that the region of Europe will be profitable next year or not.

If you take Europe, as a whole, I'd don't know. Because we aren’t -- they're really at very, very immature, early stages in some of these countries. We have a number of a reasonably large countries that we're about to launch, and we may well be able to pick up some volumes and leverage the overhead we have already established across those volumes. And hopefully, we -- the issues we face in Austria and Switzerland will start sort of disappearing as we continue to slowly get out, spending in line more and our sales go up. So I hope that Europe, as a whole, will possibly be positive and contribute. I think we're more comfortable with Western Europe continuing to improve their profitability and their contribution, but I'm not sure exactly what effect Eastern Europe will have. And one of those reasons is we're not sure exactly which country we'll be launching in and when that will affect those numbers ultimately. We are going through our planning now for launching in different countries, newer countries in Eastern Europe, and a lot of that will be taken once we finalized those results. I just can't give you a more definite answer on that.

Okay, that's helpful. And then just one quick follow-up on the metal can cost front. Any ideas, at this point, as to whether we'll see any meaningful cost decline for cans next year?

We may -- this is Hilton, Alton. We may -- we're evaluating the aluminum situation, and we'll decide when it will make sense to cover or not to cover this year. We've recovered a portion in the early part of the year and left ourselves open, which actually proved to be quite beneficial to the company. What happens in 2012, I don't know. But at current aluminum levels, we should show some improvement in 2012 on 2011, assuming we do decide to cover at these levels.

Our next question is from John Faucher of JPMorgan. John A. Faucher - JP Morgan Chase & Co, Research Division: Coke and CCE, you talked a little bit about some trade down with an energy, I think more on Western Europe, particularly maybe volume moving out of the small can businesses into the larger can businesses, which obviously would help you guys. Can you talk a little bit about whether you're seeing any of that, and sort of what plans you have in place to take advantage if we continue to see some trade down like that in Europe?

I'm not sure I understand the trade down term you're using, John. But one of the reasons you're seeing some switching in Europe to the larger can size is because we're actually selling more. We're becoming a more -- a larger portion of the energy drink business landscape. Now Red Bull has some -- some business have gone in countries to some of the larger sizes as well. Rockstar is doing some business there. There often are some local brands, where they may be in a mixture between 25 and 50. Most of the private-label products are -- or are in 25, 250 ml, 25 cc, where they are very, very cheap. The biggest challenge we have in Europe is the private-label brand, which are sort of taking the share of the bottom end part of the market. And the retailers there are pretty powerful, so they really do promote their own store brands. But the switch to larger sizes is really, I think, being fueled by our own products and the Rockstar there and a little bit in the U.K. by Relentless. John A. Faucher - JP Morgan Chase & Co, Research Division: Okay. So you don't see it as any sort of economic issue. You see it similar to what we saw in the U.S., let's say, 4 or 5 years ago, when consumers just simply started making that choice to go to brands that came in larger cans?

Larger cans and -- there are 2 reasons for that. It's not just because there's a larger can. I think what we've done is, I think, what you do with a larger can is provide consumers with the -- with value, with premium products. So they don't necessarily go into the cheap products. So you're giving them a premium product, which makes them feels good about the purchase, but you're giving them better value, which is I -- we think, an advantage. But also, what we've been able to do is we are expanding our product line. It's not as broad, for example, in Europe as in the U.S. But we're also giving consumers a bigger choice, and that's something they really never had before. And that, I think, is also fueling some of the switch to our product and to the larger sized. So we just don't offer our product in a smaller size. So if somebody wants a juice-based energy drink, which they've really not had the opportunity to have until now, they have to buy the larger size because that's all that's really available.

Our next question is from Judy Hong of Goldman Sachs.

Rodney, I know the month-to-month sales trends can be pretty volatile. But just the 31% growth that you saw in October, if there's any color just in terms of U.S. versus international, or any timing factor that you could call out at this point?

No. I think international is still continuing to perform pretty nicely, in line with the last quarter where they -- their results were -- we believe in sales were very good. We obviously had the cost issues in Eastern Europe, but on a sales level they’ve continuing -- we're continuing to see the same trends. And overall, the -- just the market was decent in the U.S. But again, either upwards or sometimes when it's a little lower, we caution it's a single month. It just depends on where -- when buying comes in, when deliveries are made, when holiday's fall. There are many factors, and we don't have that color. It's -- for us, the fact that it's 5% above or 6% above the average for the third quarter is not sufficiently noticeable to make -- to us, to really see that it's attributable to any one or more specific things that we can put our finger on. It's just generally across the board -- good volume. Things like Rehab are continuing to get traction. That part of the business, which I referred to in my earlier part on my call, is clearly getting a lot of good traction. And so we're very -- obviously, we're positive about the line extensions that we're going to start introducing into the fourth quarter and going forward.

And then just in terms of Java Monster, you talked about the improvement that you're seeing on that brand. And if I look at the Nielsen, that I clearly show that the brands now back to growing, I don't know, 20%-plus kind of level. We've been -- the c-stores that we track. So can you maybe help us understand some of the things that you've sort of tweaked around with that's driving that improvement? Is there more ACB growth opportunities there? Maybe just a little bit more update on the Java trends?

I think there actually is some distribution opportunities. It's a question of finding the right position for Java Monster. We think that some of our strategy going forward with regard to where we placed the Rehab line, which is really a key line, will perhaps give us some extra weight to put both the Java Monster line and the tea line maybe in the juice, tea, coffee door as opposed to the energy doors, which give us, we hope, increased shelf space. And -- but we know -- we just think that there'd be no -- for it has been a better focus on coffee. It's sort of probably lost a little bit of focus. We've introduced some new SKUs. We changed some flavors. We know we've struggled a little bit with our original one. We just -- we had sort of a -- originally it was named Big Black, and then we changed it to Original. And so it sort of didn't really have a real sexy appeal for our consumer, so we actually reformulated that and relaunched it and sort of replaced it with the Kona Blend. We changed the flavor, and we think we actually made quite a lot of improvement in the flavor for that one. We changed the flavor of our Light product. We also think that has made a big difference. In Vanilla, instead of just being Light, it's Vanilla Light. And we think that's -- and that started to do quite nicely when we look at some of the individual SKUs. So those are 2 of the main things on the flavor in the actual product side. And we've also sort of focused -- we have sort of appointed a separate brand manager, and she's really focused on this product line. This is now her baby. So we think that it's just getting a little more TLC from her, which is, again, motivating the individual, divisional teams and sales guys to obviously look after and not forget about the brand. And everybody gets excited with the main lines and the new launches, and sometimes you get lost in the wash. So we think that's really contributing to the brand, and we'll support her. We think it's a good niche, and we think it'll continue to grow and be a part of our -- the Monster lineup.

Ladies and gentlemen, this concludes the Q&A portion of today's conference. I'd like to turn the call over to Mr. Rodney Sacks for any closing remarks.

Thanks very much. As you can see from the results of my earlier remarks, we really think that the company is continuing to perform very nicely. The brand is continuing to grow. I mean, we've actually -- for the first time, actually achieved a 30% market share in the convenience channel, which is for Monster as a brand, which is the first time ever, we've got to the 30% level. So we're doing very nicely. Particularly, Great Britain is really doing very, very well in Europe. And so, all in all, we just are -- we're positive about the continued momentum for the brand. As again, also, as I've indicated, as you must have heard number of times in my remarks, we are very happy with the results for Rehab. We think that's opening a whole new demographic fold and broadening the consumer demographic for Monster, being non-carbonated, being more of a chuggable, sort of drinkable product. And we -- so we're very hopeful for the line extensions, which we believe will bring a whole lot of key consumers into the energy category and continue to broaden our appeal. So until the, probably the interim update, which we're going to have in mid-December, I'd like to thank you for your support. And we'll fill you in on any further updates at that meeting. Thank you very much.

Ladies and gentlemen, thank you for your participation in today's conference. This concludes the program. You may now disconnect, and have a wonderful day.