Monster Beverage Corporation (MNST) Q1 2012 Earnings Report, Transcript and Summary

Good day, ladies and gentlemen, and welcome to your Monster Beverage Corporation First Quarter 2012 Financial Results Conference. [Operator Instructions] And as a reminder, today's conference is being recorded. And now I would like to introduce your host for today, Rodney Sacks, Chairman and CEO.

Good afternoon, ladies and gentlemen. Thank you for attending this call. I'm Rodney Sacks. Hilton Schlosberg, Vice Chairman and President is with me, 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 February 29, 2012, 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 May 9, 2012. A copy of this information is also available at our website, www.monsterbevcorp.com, in the Financial Information section. The beverage industry…

[Operator Instructions] And we'll take our first question from Alec Patterson from RCM.

Just a couple of quick ones. One, when you were referencing the $4.3 million loss. I just want to make sure, we're talking about essentially all geographies outside of North America and Mexico?

Not Mexico. It's all the other geographies -- it excludes Canada and Mexico.

Okay. And do you by chance, by now, have any market share data for at least Western Europe?

We do. I don't have it handy at the moment, the most current information. It hasn't come through to me. I'm expecting it later this week.

And then just lastly, Rodney, the cash keeps kind of piling up. I know you've been in the market on occasion for the stock. Have you given any further thought to other uses of cash, in terms of returns to shareholders or other uses at this point? What's kind of the thinking, dividend, et cetera, in terms of the mix of thoughts?

Alec, this is Hilton. We have been considering various options and we will proceed with our discussions in that regard.

More to come, is what you mean?

Yes.

[Operator Instructions] We'll open up our next question from Alton Stump from Longbow Research.

Did you say, Rodney, that uncontrolled sales were up 53%, is that what you said for April?

That is true -- no, no. 53% is international sales and the sales for April was $39 million, including the sales to Japan and $33 million, if you exclude the sales to Japan.

Okay. As an overall company, what were sales up, sorry, in April?

Sorry?

As an overall company sales number, what were they up in April?

It was 39%.

Okay, 39%. With that number, obviously, that's a pretty big acceleration from the growth that you saw in the first quarter. I know you mentioned that after one month can also differ, after various factors, but is there any single factor or 2 that you can point to that drove that acceleration in April?

I think again you need to take the opening sales to Japan out, and then the number is $33 million, which is a little higher than the average in the first quarter. But again, all I can really point to, all the quantifications that I gave in my remarks earlier, that it is one month and it has to be taken as one month. Really, one month doesn't make a summer.

And we'll take our next question from Marcus Astrachan of Stifel, Nicolaus.

Housekeeping. Rehab and Java Monster sales in the quarter, what were they?

I will try and get indication of those figures for you. I will come back to that.

All right. Yes, I guess, just on an overall basis, you look at across the country and it seems like you guys, the category maybe has been focusing a bit more on promotions in terms of 2 for $4. I guess, I'm just curious, how much of that do you think has contributed to this surge in overall category growth and obviously, within your business, in particular, but are you concerned that the consumer gets overly reliant on that, do you think it's actually a good thing for the category?

I don't believe it is that prevalent. There is -- there are promotions, I just don't have a feeling that it has been so extraordinarily, that's it's really even something I am been really conscious of. I'm really not in the position to quite -- really haven't really featured on our radar screen as positive, negative or anything of importance to be really looking at, and we haven't done. So I really am not in a position to really talk without speculating.

We have always done promotions, Mark. I don't see it as being more prevalent than in the past.

So you guys haven't stepped up any sort of promotions and the categories are just doing better.

I can't give you an analysis, an exact -- it's not an exact science but when I look at our average pricing, for example, in convenience of the general Monster, it's $0.02 lower, which to me it doesn't indicate any sort of major change or over-promotion at all. Going back to the -- just looking at our off-invoice numbers as well, just trying to get a better handle on that, again, comparing to the last quarter of last year, it's really very much in -- almost similar in numbers and it's lower than the third quarter of last year, which was summer. But they are lower. So there's nothing that's extraordinary. Just going back to the Rehab, your questions on Rehab and Java. These are gross numbers, I don't have net at the moment, but the gross numbers were approximately $28 million in the quarter for Java and $45 million for Rehab.

And we'll take our next question from John Faucher of JPMorgan.

Two questions here. First up and I realize this is an inexact science so, using the international numbers and the total company numbers, I backed out to sort of U.S. growth in the 30% plus range for April, does that seem correct? And then you kind of snuck in the very last sentence in the prepared remarks that you didn't buy back stock in the first quarter. Can you give us an indication in terms of why that was?

It wasn't snuck in, it was...

There was no elaboration on it. It was the very last comment and then, okay, let's go to questions.

We just didn't. And I don't think that there's anything that I really would care to discuss, but there's nothing to discuss. We just looked at it, we looked at the shape, the performance of the company and other things we are occupied with. And we just didn't -- decided to not to buy back stock in that period and didn't do so. We're sort of evaluating a number of alternatives about, with regard to what use we want to make of that cash and so we just didn't buy back stock. So there's really nothing more I can really elaborate on that.

Okay. So nothing in terms of whether there was legal issue or a valuation issue or anything like that?

No.

Okay. And then the first question was sort of U.S. 30% plus in April, does that sound about right?

It's probably in that region but that is a very -- just I'm sitting here without all the facts in front of me that's probably [indiscernible] that region.

Understandable. Okay, great.

And we'll take our next question from Judy Hong from Goldman Sachs.

Rodney, on Rehab, so you're going to start to lap the launch last year, so I just curious what you're kind of seeing on that brand, first, from ACB perspective. It looks like it's running around 84%, 85% based on our data versus the core Monster Green kind of 95% plus. So when do you think you can sort of get to the core Monster ACB for Rehab and do you sense that you are actually attracting new users into the category and with other new SKUs that you've launched more recently? What sort of traction are you getting from additional shelf spaces, additional doors and some of the stores?

Judy, the Rehab numbers, our distribution that I got for Rehab in convenience is up to about 81%. It's sort of been sticking at that level for the last quarter. Absolutely Zero, which we introduced before Rehab is about the 78% mark. So there is opportunity to expand it but, again, it's not the core so it actually becomes a little harder to, for whatever reason, to get it above those levels. So that's really where we are. So we do have an opportunity to, obviously, still increase but it may -- I'm looking at the graph and it sort of is flattening a little bit. So it is probably just a little harder to get that sort of 90% distribution level for your third and fourth and fifth SKU, when you do have quite have a selection. So obviously, it depends on sometimes there just isn't enough shelf space allocated. In the biggest stores, you've got 3 shelves or 4 shelves, I'm sure you can get a lot of -- in it. It's a lot easier. In some small stores, we they -- 1 or 2 shelves, the guys are going to make a choice because we have a big, basically, portfolio in the Monster range and I'm just seeing that it's sort of at that 80%, 81% level in the 3 months. Obviously, we're going to look to try and increase it. But that is where it is at.

Okay and then, internationally, so in April you said Japan's expansion added about 6 points to your sales growth. It sounds like that's a pretty big number for one market. So can you kind of frame for us, I mean, is Japan, just given the size of category of a pretty big market that you needed to see that sort of step up in terms of expansion? Can you just give us some flavor of why that number was pretty big?

I think the reason is that the distribution partner and as in line with traditional -- Japanese tradition, they are very precise in their analyses of the market, what is the potential. There is -- we're producing the products here so there's a long lead time to produce and ship it and have it examined, and checked and inspected and they're very, very -- it's a very pedantic, very slow exercise. So there was a large opening order placed in order to ensure that sufficient inventory was on hand in Japan and available, with back-up inventory, et cetera. The other thing is that, in Japan, they are very efficient. Literally we sold, yesterday, for the first day, and we literally have 90% distribution in almost all of the convenience chains there, literally within the first day. That's something that, in the most efficient markets otherwise, we don't achieve in even 6 months. And so they really had a large opening inventory. Obviously, so the issue is how far till it'll turn to repeat orders and go forward. So the market here is a -- not a large market, but it is a nice market and we believe that it's capable of growing into a large market. And obviously we are excited about the Japanese market and the launch. But that is especially why we refer to these figures because it's an unusual position for us to have this level of opening orders, even in a market that size. The opening was very much larger that we would've ordinarily put into a similar-sized market.

And lastly, I missed your answer to Tom's question about the buyback, so did you say that you didn't buy back in the quarter, was there any legal constraints in terms of your -- the ability to buy back...

No. we don't have any legal or other constraints. It was simply a question of us evaluating, looking at a number of other alternatives, evaluating -- we really just end up -- make the decision to actually go ahead with the buyback.

And we'll go with our next question from Kaumil Gajrawala from UBS.

If I can also ask about the cash balance for a minute, you got about over $800 million on your balance sheet, you are generating about $350 million a year. I know you're not ready to make an announcement but in the past you said that the dividends were -- in the past being about 3 years ago, dividends were out of the question. Given where you are now and how you see the next couple of years putting themselves out, and also a reluctance maybe to do a buyback, can you talk about how you're thinking about dividends?

I mentioned earlier, Kaumil, that the board is considering a number of alternatives and those discussions are progressing.

I think that there have been no change in our basic philosophy. It doesn't mean we would rule out a dividend forever but certainly it's not on our radar at the moment. I think what's more likely is, ultimately, is to use that cash to buy back shares or for other purposes which we are. We're just looking at other options before we commit to a buyback -- a new buyback program.

Okay, got it. And then you talked a bit about some new efficiencies, some streamlining. Can you talk maybe specifically about the U.S. and where profitability has been trending in the U.S. because with the big rollout is international, it's been a little harder to see how things have been progressing in the United States so could you maybe give some context on that?

The U.S. has been pretty constant. Our margins have been reasonably stable and we've been able to generally keep ourselves within a pretty close range. We've continued to obviously invest in the brand as we continue to increase and roll out new products so some of the new product investments may have possibly gone to offset some of the savings and efficiencies we would have on some of the older brands. I'm not sure how else to answer your question other than to really say it's been consistent, it's remained profitable and I don't see much of a change in either the gross margins or operating margins. There are differences in quarters because of timing and because of particular programs when we sometimes front load a promotion or higher as a percentage in a first quarter where your sales are lower and lower in the summer. But other than those there are no major swings that have really been -- have had any real significance -- the swings have really come from, obviously, the investments and the launches, from time to time overseas, and issues we've had with that and so we've been -- and those are continuing, starting to settle down and starting to get in more into a growth mode and a profitable mode, as I indicated for -- with regard for the Western Europe, which is our main area outside of the U.S. arm, excluding Canada and Mexico, they have been -- we've had business there for some time and they're both been profitable for a number of years.

And we'll take our next question from Bill Chappell from SunTrust.

Just a little color on a couple of things, one, and maybe I missed it, you talked about the Mexican market being down year-over-year, can you maybe give us a full color on that?

The actual energy drink market in Mexico, again, on the Mexican numbers, we get our Nielsen and compare it, really it's one month, month-to-month. So this month, it was March this year versus March last year. And again, those numbers tend to jump around a little bit depending on whether there are promotions by either the largest player and competitor to us, which is either Red Bull or ourselves. The market is very largely influenced by the OXXO chain. They have a very significant percentage share of the market and, again, by just doing a promotion whether it's Red Bull or us, in OXXO really skews that market, literally can push it up or down. And they did have some tax issues. They introduce a tax on energy drinks that have a little bit of a dampening effect as to how you deal with it, we sort of reformulated our product and that was last year and we sort of did see sort of a reasonably good increase in our sales. So this was just -- the category is just sort of it's been up and down like this in the last few months. So it's down 5%, roughly, and we have actually increased share although our actual sales levels are marginally down. But again I think it can change from month-to-month quite dramatically depending on whether we implement a promotional program with OXXO. It has a very big influence on those numbers. So the key for us is really more of the market share-ish information and we think that the category will ultimately start to grow or show growth again later in the year.

And since we're talking about other countries such as Japan, is there a way now as you're getting into the quantified -- what the potential is, I mean, is it bigger than Mexico, is it more like a Canada, I mean, how should we look at that in terms of the opportunities?

You really can't compare it. Apples and pears, in other parts of the world, with a whole different buying philosophy, and a different sortie [ph]. The category at the moment is thought to be about 2.5 million cases, maybe a little bigger, maybe 3 million cases, and it has been growing. But that's what I would define as the Western or modern energy category. There has always been an energy type category in Japan, a traditional energy, for many, many decades. They're usually little vials, 2.5 ounces, small glass bottles or other containers, flat containers and that's been around for a long time. That category is probably as big as a 50 million case category. The question is how long will it take for the Japanese consumer to be partially converted from traditional energy to modern energy, and then how many new consumers, who are not in the traditional energy category. Now can you actually -- by having different products, different flavors, we believe that will help stimulate attention to the category and bring in new consumers in Japan. And then there is a big market and we believe that can grow but we're in the area of guessing at the moment because we -- we only have those facts, roughly but we think that there is a lot of potential but it's going to take time to grow into that potential and then see what we can do. But those are the 2 sources we would hope to draw from in order to increase the base energy category and we hope to obviously then participate in that quite -- at a high sort of share. So we're hopeful for it, but if we really don't have statistics that I can give you that are reliable. It's absolutely different to Canada and Mexico. Just the -- those markets are very much closer to the U.S. there. The beverage consumption patterns are closer to the U.S. whereas in Japan, I think is a much more traditional and a very different market.

And Hilton, did you give a tax rate for the full year?

We gave the tax rate for the quarter.

Can you give us an idea for the full year?

We're going to take that question under advisement. We -- this quarter was affected by the establishment of the full federation allowance against the fair taxation of foreign subsidiary. At this time, we expect that the tax rate probably will be comparable to the previous year but I'll have to take that under advisement.

And that does allow all the time we have for questions today. I would now like to turn the conference back to Rodney for any concluding remarks. Please go ahead.

Thanks, once again. We all are pretty gratified by the performance of the category and our company, particularly, the Monster brand in this first quarter. We've given you the indication of our sales in April, so we're positive going forward. And we're also very excited about the Rehab line. Again just to repeat, even the Peace Tea line has really started to come into its own and we think that also can develop into a very nice brand for the company going forward. So just keep our heads down, we carry on trading, we're also hopeful for Europe, also starting to perform very nicely and, hopefully, we'll be in a position to report continuing good results when we report on the next quarter. Thank you very much for your attendance and speak to you soon.

Okay, ladies and gentlemen, this does conclude your conference. You may now disconnect and have a great day.