Monster Beverage Corporation (MNST) Q4 2011 Earnings Report, Transcript and Summary

Good day, and welcome to the Monster Beverage Corporation Fourth Quarter and Year-end 2011 Financial Results Conference Call. [Operator Instructions] As a reminder, this conference call is being recorded. I would now like to introduce the host for today's conference, Mr. Rodney Sacks, Chairman and CEO. Sir, please go ahead.

Good afternoon, ladies and gentlemen. Thank you for attending this call. I'm Rodney Sacks; Hilton Schlosberg, our Vice 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 our current knowledge and expectations and are subject to certain risks and uncertainties, many of which are outside the control of the company that may cause actual results to differ materially from the forward-looking statements made during this call. Please refer to our filings with the Securities and Exchange Commission, including our most recent Annual Report on Form 10-K filed 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 measure of gross sales and certain expenditures, which may be mentioned during the course of this call, is provided in the notes designated with asterisks in the Condensed Consolidated Statements of Income and Other Information attached to the earnings release dated February 23, 2012. A copy of this information is also available at our website, www.monsterbevcorp.com, in the Financial Information Section. We are pleased…

[Operator Instructions] We have a question from Kaumil Gajrawala with UBS.

One quick clarification. When you were going through the numbers at the beginning, did you say that it was Central and Eastern Europe that went to profitability or were you talking about total Europe?

No. Western Europe, which includes the U.K., are more established markets, and by further bulk in that area, was profitable. It's the newer markets, and a lot of them are smaller countries in Central and Eastern Europe, that aren't profitable. A lot of that, as I indicated, and also just been more difficult because of startup costs in different countries, different languages. And just have overhead structures in each of those countries, which we have to establish and that Central and Eastern Europe has been the issue.

Okay, got it. And then was there anything timing related? Sounds like in January you were up 54, that's significantly different with how the quarter was going. Anything that we should know about timing wise, that would explain that?

I'm not sure I follow that. I mean, the sales were up. The Nielsens, which were indicated with, for the last 4 weeks, were up in the high 20s. Our sales and ourselves as a company, which includes international is up 34% in January. So I'm not sure where that was...

Okay. I just misheard you towards the end of that one.

To clarify, 3 4.

3 4, got it.

Yes.

And then the final thing is how far along are you in some of the international markets where you're close to profitability? Is there a certain size in terms of revenues, a certain area all of a sudden scale starts to kick in?

I think there is a clear correlation between the size of the market and our profitability. In most of the Western European countries, we're already at a size where we are profitable in each of those countries, individually, as well as in aggregate for the region. In Central and Eastern Europe, there are certain countries in that region where we have reached a level of profitability already, even though those are much newer markets, and those are the markets that are bigger. It's just much harder to get going in small market where you may have 100,000 cases or 120,000 cases in your second year to be profitable. Where you've got a country manager, you have a sampling team, a truck and marketing people. You do need to get up to a certain scale and be -- it's just been harder in Central and Eastern Europe because the energy category in those countries is smaller and it's just taking a little longer to get up to that mass. But it is going in the right direction.

Okay. And then just my final question is with very impressive growth despite the fact that the economy had not turned around, maybe at the pace which we would have preferred. Do you feel that maybe you're starting to see a bit of a cyclical benefit, that maybe the macro-environment is getting a little bit better for your core consumer?

I think it's been very much, much less -- I mean, a lot of our core consumers are still struggling. And for example, in California, where the housing market hasn't come back yet. So we've not seen a big change that sort been -- materially, in anyway. I mean, the results of just the been -- continue to be good. The category is still growing and a lot of that we ascribe to the broadening demographic. And we've been fortunate to see growth even though we've -- obviously, we're having tough economic times, generally, in the U.S. and elsewhere. But we don't see a big change.

Your next question is from Judy Hong with Goldman Sachs.

Rodney, I think I missed your answer to Kaumil's question. But the January sales, you said up 54 or 34?

No, 34. 3 4, 34%.

34%. Okay, got it. And then maybe just -- if you can help us understand the Rehab performance. How big is that brand now as a percent of your business? And as you build out traditional SKUs, I think you were hoping that you can get into tea doors and how successful are you in that endeavor?

Rehab in -- this is January, I'm trying to get you some figures. In January, Rehab is -- January and February, Rehab has been about between 5% and 6%, that's just the original Rehab. Between 5% and 6% of our sales. And we're rolling off the Red and the Green Tea Rehab and the others, and so that is a little bit distorted in January and February because a lot of that is part 4. But in the quarter, the fourth quarter, Rehab's sales were about -- gross sales, I don't have a net number, Judy, gross sales were about $47 million. So that, you can see is quite a big number, it's -- of our total net sales, were about -- I'm sorry, that's gross. Our total gross sales in the quarter was about -- adjusted, it was about -- in that division was about $467 million. So the company is $467 million. So you can see -- which is 10% of our sales. And if you go to the -- and in the convenience and gas -- basically in the convenience and gas channel, if you take our leading Green product, which is the main product, our sales that were -- the retail sales, $118 million for the 13 weeks ending January 21. Rehab, it -- growing up to about $23.5 million. If you bear that in mind Absolutely Zero is off to another year -- being in the market for 1 3/4 year, that's $27.4 million and our low carb is about $39 million. So those are the -- sort of the -- that's sort of positioning of it our mix.

And your success in terms of getting additional -- in your entry into tea door, which we have now [ without ] additional SKUs. Are you able to get more shelf spaces and get into tea door now?

Get into? We're right in the middle of getting sets, resets, and not able to -- we're getting immediate acceptance for all of our additional SKUs. But I'm not aware of exactly how, what proportion of our sales are going into the energy door or actually being successful in transitioning into the tea door. It's premature for me, both.

Okay. And then just in terms of your G&A expenses in the quarter, just to the sequential step up. I think in Q3, if you take out the options expense, it's just up by about $3 million just quarter-to-quarter. So is that just adding more people in some of the international markets? What drove that sequential pickup in terms of the actual dollar increase in G&A?

I think one of the things that was up was stock-based compensation. And then we are also up with additional people. I mean, as we've continued to expand the rollout into -- and planning for -- our launches took place earlier this month. The launch that is coming up quite quickly in Korea. In Japan, we've led to take on additional staff, and so we are gearing to do the same thing in South America. So we certainly have had an increase in staffing and we have taken on a new Senior Vice President, Don Blaustein, who was previously President of Heineken to head up our international operations in Asia and South America regions, and Lat-Am regions. He's come on board. But he won't have affected these figures because he's come on board only in the last few weeks. But we are obviously, looking to step up our personnel to basically be able to handle the increased expansion, the bigger volume that we're now dealing with as we continue to move forward.

And our next question comes from Bill Chappell with SunTrust.

Just a couple of quick questions around gross margin, kind of looking at a pretty strong gross margin in the fourth quarter. Trying to understand if that's more mix or if that's the benefit of the hedges and how we should look at that if that's kind of the base we should look at going forward into 2012?

I think that's more of a mix issue. I think the Rehab is continuing to increase as a proportion and the margins on the Rehab brand are better than some of the juice products, the coffee product, some of the bigger can sizes. So I think that is primarily a mix result.

Okay. And then looking to 2012. I know you said that commodities shouldn't be a negative for gross margin, how about the entry into a lot of the Asian, Eastern Europe countries in the first half. Should they have any material impact on that gross margin or should be at least flat look ahead?

I think that, as we've indicated, the overseas business, generally, gross margins are not as good as we've been achieving in the North American markets. So as we continue to grow sales in those markets, we're obviously trying to improve our efficiencies and our cost. But the gross margins are, as a general rule, not -- there are some exceptions, but as a general rule, will be less. But again, the impact that those additional markets will have on the company, we believe will be small. The issue, which we don't know a lot about is as we continue to expand, again, is what will happen to cost like the bigger cost that we have, our apple juice and sugar, which are quite big components, as we've indicated -- as indicated earlier. We've largely covered our aluminum can side. But we do have -- we've got a reasonable proportion of our juice and sugar cost all uncovered. So those may go up as we see the year. But we don't think that the increase -- there'll be an increase but we don't think it'll be material.

And our next question is from Caroline Levy with CLSA.

This is a Michael Lavery on behalf of Caroline. Just looking at the International business. Could you talk a little bit about how, where you are now compared to where you hope to be, and I know you mentioned expanding into Poland. But you've had a lot of quarters with a long list of countries that you've started into. And so what's left? I know you've got some moves in Asia coming, but are you getting a good read just compared to where you expect to be? Is it just a question of those markets maturing more now and developing or -- what's the right way to think about the trajectory there?

So if we take Europe -- generally, Western Europe, we pretty much have full distribution. We think that we're looking at making, relooking at the Italian market. We think there's lot of opportunity. I think we're underrepresented in the Italian market. We have opportunity there. Some of the markets are starting to grow very nicely. We think we have a lot of growth left in markets like Spain, Germany and the U.K. where the brand is doing very, very nicely and in France, for that matter. Those are pretty big markets. In Central and Eastern Europe, we are looking at some additional markets which are quite large. Poland is probably the second largest market in Central and Eastern Europe. And in fact if you exclude Russia, it's the largest market, but certainly just after Russia. And that is a very big market in relation to some of the other smaller markets that we have gone into. Hungary was a nice market but they imposed a tax on energy drinks and anything with sugar. And that really has completely disrupted that market. So that is part of the sort of challenges we had this year. And the fall off in the fourth quarter was largely attributable to -- in sales in that area was attributable to that issue. But the Czech market is doing very nicely. So there are markets that are doing very nicely and will continue to grow. We think that we do have some expansion there. The Asian markets, we are looking at some pretty nice sized market in Korea and Japan. There are a couple of the smaller ones, that I indicated, which will be our smaller markets. And we're continuing to expand. We believe, that we have a lot of upside and the Brazilian market, particularly in the other markets in South America where we're at -- we're pretty far advanced in having our products approved through -- meeting the regulatory requirements and in having planning -- launches planned. We've already started trade in Colombia very nicely and we're looking at Peru, Ecuador, Chile, and Argentina. So we believe those will also come on stream in the foreseeable future. And each of these markets just basically have their own maturity as you get to a certain size in the market, you're able to actually profitably support the infrastructure we need in these markets. The way we do business going into markets with a lot of support for sampling and for those sort of local marketing activities. And so once we get over the initial hump, the markets start becoming more profitable quite quickly and you know we've just paid our dues in a lot of the Central and Eastern European markets and we are hopeful that we will continue to get better results in those countries this year.

Well, that's very helpful, thanks. And one last one, I'm sorry if I might have missed you say that, I just didn't catch it. But how are you tracking quarter-to-date on shipments so far? Because I know you've got a funny comparison with last year. What does that look like through the first few weeks, first half of the quarter?

Well, we have indicated the figure was, in January, was 34% higher.

And that's on a shipment basis?

That's on a shipment basis, correct. And we're still in the middle of Feb. It's moving in the right and it's on a good trajectory but it's very early in the month.

That's the Q&A portion for the conference. I'll like turn the call back over to Rodney Sacks, Chairman and CEO for closing comments.

Thank you very much. Thanks very much. I know that our conference call seems to have interfered with the CAGNY conference. But thanks very much for taking the time to attend the call. We're pretty excited by the results that we've continued to be able to achieve with the brand, the continued expansion of the brand, increase of sales and profitability in the U.S. and North American markets. And the overseas markets have taken a little bit of time to get going but they are starting to put into place now. We are seeing some really nice increases in market share and results coming out of Western Europe. And so we are pretty encouraged by that factor. You just got to have a bit of patience. Things don't happen in a day. But we really are excited, going forward, by the gross sales that we've achieved in January. And I'll repeat that we are very, very encouraged by our Rehab brand. The whole line is going very well. It's been very well received by buyers and customers, as well as the consumer feedback we've heard is very, very positive for that line. So we're looking forward to having a good year this year and thank you for your support. Thank you.

Ladies and gentlemen, thank you for your participation in the Monster Beverage Corporation Fourth Quarter and Year-end 2011 Financial Results Conference Call. This does conclude the program. And you may now disconnect. Thank you and have a wonderful day.