Good day, ladies and gentlemen, and welcome to the Monster Beverage Corporation Second Quarter 2013 Finance Results Conference Call. [Operator Instructions] As a reminder, today's conference call is being recorded. I'd now like to turn the conference over to your host, Mr. Rodney Sacks, Chairman and CEO. 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 to 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 those 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 March 1, 2013, as well as our most recent report on Form 10-Q filed May 10, 2013, 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 August 8, 2013. A copy of this information is also available on our website at monsterbevcorp.com…

[Operator Instructions] Our first question comes from Alton Stump of Longbow Research.

I just wanted to ask, I think you mentioned that Monster's sales were up 16.4%, per AC Nielsen, in the last 4 weeks of July or in the 4 weeks of July. But yet your overall growth sales were up 7.9%. Is there any reason for the disconnect? Or is it just timing of actual wholesale inventory levels? Any color that you can give us there?

The periods are slightly different. It is for the convenience channel, which is our stronger channel. I think the brand has done better in the convenience channel than in the drug and grocery channels, particularly in the quarter. We simply don't have any other explanation.

Okay. And then just one quick follow-up. On the margin of front, sort of one of your better gross margin performances in quite some time year-over-year. I mean, obviously, the lower sales overseas were part of that. But was there anything in the U.S., specifically, if you strip out the regional mix that drove those margins higher?

No, I think -- I did mention it earlier. It was a product mix. We think that the higher proportion of our sales are coming from the Ultra line and Rehab. And those product lines have better growth, lower costs and better gross margins through certainly input costs, ingredients and some other costs.

Our next question comes from Amit Sharma, BMO Capital Markets.

Rodney, can you address the fact that some of the non-Red Bull/Monster brands, if we look at the major channels, the sales and share for those brands are declining rapidly whereas Monster and Red Bull are continuing to gain share. Is there a dynamic that those trends are impacted by the noise a little bit more than Red Bull and Monster? Or anything else going on there?

I don't know. I just think that what is happening is there are -- if we look at some of the brands, even some of our SKUs are also slowing and they're being a little negative. I just think that the market is sort of dividing and you've got the major 2 brands that have got the major space. They seem to have the major variety. Red Bull has got some lift due to their new innovation there. They introduced 3 new SKUs, sort of flavor extensions. And so if you take their innovation and our innovation together, which has been the bulk of innovation in the category, I think that's sort of probably the main driver of the fact that it's those 2 brands that are driving the growth in the category.

Great. And if I may ask one more. The panel hearing that you talked about earlier in the call, are you or the industry as a whole participating in that?

Which panel hearing-- you are talking about, the IOM hearing?

Yes, the IOM hearing.

At the IOM hearing, it's really run by IOM. There are diversions, lots of views. We did have some representatives at the IOM, some medical representatives who made some points, which, we believe, countered some misconceptions or inaccurate views that may have been given by some of the speakers. Others speakers were clearly positive, and we feel comfortable based on the science on the safety of our products. And obviously, that is what we try to communicate in so far as we stood up at the meeting. But that panel has had a hearing. They're going to make some recommendations to the FDA, and then we'll hear from that and just see where that goes to.

And the American Beverage Association was also represented at the panel.

Yes, they also had medical representatives there, too, to correct certain inaccurate or incorrect statements or views.

Our next question comes from Bill Pecoriello of Consumer Edge Research.

Similar to the July question, your sales in June, your shipments had a slowdown pretty considerably versus April and May. I know there's a lot of noise month to month, but the consumer scanner data, including grocery, convenience store, all of that, in the U.S. and Europe don't show that kind of magnitude of slowdown in June. So is there anything that you could point to in terms of specific retailers or distributors that had cut back on ordering in June that would had that kind of a disconnect? Because your sales -- your shipments are almost flattish, given what you had disclosed on April and May data.

We sell from month-to-month, and I think that June selling in is probably just -- it may have been a shorter delivery days, it may have been -- for whatever the reason, our June's often have tended to be a little lower. We just don't try and ship or worry about month-to-month shipments. We did see a little bit of reduction in inventories from some of our distributor partners in Europe in this year versus last year as opposed to the particular quarter, but I'm not sure when that actually took place. But I don't have any other color on it. The sales are just how they come out.

Right. And there was convenience store operator that was talking about discontinuing energy drinks. I was wondering if there was anything related to any large convenience store retailers or anything like that, that cut back on their orders in June?

I don't think so, and I think that, that comment was inaccurate. I don't think that was -- I think there was a distributor that was debating or dealing with Energy Shots...

Reseller.

A reseller, sorry, dealing with how to deal with Shots and sort of -- and I think it's not a discontinuing but it was as to whether he personally or they wanted to have an age limit for purchases of Energy Shots. But it was not addressed to energy drinks unless it was maybe one specific energy drink that has a very high caffeine level, that it may have -- there was one article that suggested that he may have put that into the category but not to the energy drinks in general.

But we've always struggled to really compare our sales with Nielsen numbers. There's always a disconnect. And sometimes, they come together, sometimes they don't.

Our next question comes from Judy Hong of Goldman Sachs.

So first, just in terms of the impact from Japan, just lapping the pipe sales last year, can you quantify how much of that was? And then just in terms of what you're seeing in Japan, kind of consumer takeaway numbers, is there any issue there just in terms of other than lapping that pipe sale? Because it looks like the international sales, Europe, you had at 13%. I mean, Canada, Mexico still seems to be up. So it seems like Japan was really a big, big factor there.

Japan was a factor because of the difference in last year to this year. That is correct. Sales were also affected somewhat by military sales outside -- export outside to overseas, basically due to the reduction in troops, and that affected sales as well internationally. I think that we wouldn't like to disclose the -- or go into the detail of sales on a country base because then that starts just becoming on every country and just becomes -- starts becoming a precedent, which we wouldn't like to break down. But it was -- and there was a difference there. We just had a very orchestrated -- the launch was very effective in Japan. The retailers were effective in getting it on the shelf very quickly, and so it really was a good launch. The brand is still doing very well in Japan. We've introduced -- launched Absolutely Zero the Khaos brand, the distribution did fall off a little bit at a lower rate of sale. The Japanese retailers really have very high rate of sales standards. And as with any line extension, it does generally sell less, particularly in our case. All our lines sell less than the Original Green. And so there has been some loss of distribution on Khaos, but we have Absolutely Zero in the market. And overall, our sales are doing nicely there, particularly Green. We've secured some vending machine distribution. And we are hoping, going through by the end of the year, our distributor has given us an assurance that they will put us into a large number of their additional vending machines that they either control or they have contracts with.

And then just taking a step back on EMEA. When you look at your performance in the U.S. markets from really an underlying consumer takeaway perspective, we've seen now data stabilize and now the latest 4 weeks showing up 16%-plus. So when you kind of look at your business in the category, the health of your business, health of the category, do you think we're at the point where some of the negative publicity that impacted negatively sort of the early 2013 performance is abating in that, that the category trends, the newer trends, in particular, actually accelerating? And then the same comments sort of on the international front because some of the category comments seems a little bit more cautious. So I'm just wondering how you're thinking about some of international markets today versus, say, 3, 6 months ago and how that plays out for the rest of the year.

Judy, just talking about the local markets, again, we had sort of initially thought that we would see the local markets sort of rebound a little earlier. But it did tend to stay in the low single-digit increases until June. We have seen the increase. So if you look at the increases, it went down to a 3.5% growth at Convenience. It went down to 3.5% in the 4 weeks to April and then to 3.2% in May. Then it's picked up to 3.6% and 6.1% in the Convenience category, and that's where our sales have also sort of followed that trend. It was down. Our increases were higher but lower in the 4 weeks in April and May, and then we picked up again in June and we picked up again. So we are seeing an increasing trend now from April to July in the Convenience channel, which is our biggest channel, as I indicated. Internationally, we don't know the reasons. We would assume that they are similar just to a lot of the noise that's been going on, plus the fact that, I think, their economies are still struggling. But there has clearly been a weakening in the category. But again, we've seen that for other reasons completely extraneous to the current noise, where the category has slowed for a while or over a period of time and then it's picked up and slowed. It's had that sort of roller coaster literally for over the last 10 or so years or more. So we're just seeing our sort of growth still strong. We're still making -- taking share in the major markets, plus many of the smaller markets. So our sort of expansion into newer markets is probably slowing a little bit. As we're focusing on the existing markets where in, we will still expand. But it certainly won't be at the rate over the past couple of years, and we think that will also -- going forward, will be positive for the company and the results internationally.

Our next question comes from Bill Chappell of SunTrust.

Rodney and Hilton, I understand it's pretty noble not to blame weather, but it seems like every beverage company on the planet at some point has now blamed weather in the most recent quarters. So can you tell us, was there any impact or was this really just category trends slowing down in Europe and U.S., which also happened to have adverse weather conditions?

Well, we don't have weather in our vocabulary. You know that. I think that weather does play a part in every beverage. But we really don't know what effect it has. We don't measure it. We don't -- and that's why sometimes when weather is up, we don't say, "Well, we did great because of weather. We did badly because of weather." We generally tend to try and manage the business outside of the weather issues. I mean, we just don't do it and address it like that. Summer became late in Europe, but now summer is fine. I mean, we don't know. And it's hot in Texas, but it's not as hot in California. I'm sitting here with a sweater on. I don't know. It's just not a factor. The same as seasonality. I think seasonality does play a role. But again, it sort of -- and we make mention of it, as we have historically, but because there is difference in winter and summer consumption. But again, those aren't as major for us, we think, in the energy category.

Okay. It was worth a shot. A follow-up just on some of the onetime charges and maybe looking at like the legal expenses. Would you expect kind of a similar rate for the next couple of quarters? Or can you give any kind of color of how we should look at that?

I think that -- we're not sure. We think that some of the regulatory issues sort of didn't -- not so much came to a head, but we needed to address a number of issues back to the FDA, and which we did. We dealt with -- anticipated the hearings at the Senate and the IOM. And so there were a number of issues that we addressed for the first time in preparing for it. And I think going forward, we won't have that same degree of preparation, which means we're at that same degree perhaps of intense litigation in that side. But then there is other litigation continuing to go on, different litigation, different forums, and it all depends on what level they reach. And also the timing of that litigation because if you get into discovery periods, you then will start to have a ramp. There's no discovery at that point in time obviously, then there aren't a lot of costs. So it's difficult to say what the costs will be. I think we will see a reasonable level of costs being incurred in the foreseeable future till these matters settle down and we get to start going in one direction.

Our next question comes from Mark Astrachan from Stifel. Mark S. Astrachan - Stifel, Nicolaus & Co., Inc., Research Division: So I'm going to try to come at this discrepancy between scanner data and reported results in a different way. Do you have any idea what channel inventories looks like? Based on stuff that we've looked at, it seems like there's been now 5 straight quarters of pretty substantial destocking. I mean, do you get a sense that the distributors, retailers are running leaner than they have over the last couple of years?

I don't know. I know that, as I've said in Europe, they discussed it with us. And so they communicated to us, some of our larger distributors there. So we obviously knew that there is a destocking going on we were aware. But I don't know. I haven't had anything communicated to me. And I presume -- I plainly presume that our senior sales people who deal with our distributors would have communicated to me if they'd known about-- or they felt it was material. But they may just not know. So I'm making assumptions, which I shouldn't actually. I just don't know. Mark S. Astrachan - Stifel, Nicolaus & Co., Inc., Research Division: Okay. Well, I guess just operationally, if you guys are looking at scanner data and you see what you see and you're reporting something different, then how do you get comfortable with the business that you're running that the demand is what it's going to be going forward then?

Well, I think the scanner data, we run our business according to the scanner data. I mean, the scanner data covers certain channels. It doesn't cover the whole market. It is also an extrapolation. There's differences in timing because we are not going direct to the market. We're going to our distributor, then our distributor's going to the retailers, putting it on the shelves. There is a delayed function between those 2, the 3 tier. And we deal with our sales on a daily basis and see ourselves come in and manage ourselves according to our sales. We have projections. They sometimes are accurate, sometimes less accurate, and manage ourselves according to what we sell. It's our sell out. We can't control anything else other than see what the scanner data comes in at, and then you try to reconcile it. And we do try our best. Sometimes we're behind the scanner data, and sometimes we're ahead.

Our next question comes from Dara Mohsenian of Morgan Stanley.

Hilton, can you comment on now much improvement you're expecting for international profitability in the back half of the year as you continue to build scale? And given some of the onetime costs from last year, should we expect a significant margin improvement in the back half?

Okay. You know we don't give forecasts, and we don't give guidance and we don't give projections. So you know I cannot give that answer.

Okay. Well, I was just wondering more kind of conceptually how do you think about the margin performance going forward.

I don't see why margins should differ -- gross margins should differ to any degree going forward other than with foreign exchange rates. But I don't give projections, and we don't give guidance. So I think that's what we do.

The only thing I would point out is that we have the FX loss, which is an exceptional item. But you also have -- our revenues do get affected by foreign exchange rates and when we convert that. For example, obviously, in Japan, in South Africa, where the rand depreciated quite a bit against the dollar over the last year, we've seen a drop in revenues. And that also affects our ability. Obviously, it affects our margins in those countries, where some of our expenses are full dollar-based or we just have less margins. So going forward, that's the only thing that might affect our margins is really more related to foreign currencies that we can really look at. But other than that, I agree with Hilton, it should be the same as we go.

We spoke about local production, and we're very far advanced in production in Japan. But we don't believe that's going to do much this year. Certainly next year, but not this year. So I just would rather just end this discussion because we just don't give guidance.

Our next question comes from Caroline Levy of CLSA. Caroline S. Levy - Credit Agricole Securities (USA) Inc., Research Division: Rodney and Hilton, a couple of questions on Japan. Just I guess, you've answered on the timing of the production. You probably have it up and running by the end of the year, so the benefit is next year. Is that right?

Correct. We had a new can manufactured for us because of the size we use, which has now been done, and we're now getting change parts fitted to our line. And we'd get there by the end of the year. That's our schedule. Caroline S. Levy - Credit Agricole Securities (USA) Inc., Research Division: Okay. So just to follow up on that, and then one more. But Japan, the impact on gross margin, was there any benefit from selling less in Japan to your gross margin? And then the final bit, could you just help us understand what you think Ultra's appeal is to consumers? It's obviously hugely successful. What niche is it filling? Because I don't truly understand what makes someone think of that versus a base Monster.

I think the -- let me start with the second question first. The base Monster has its own unique flavor, which sort of whatever -- for want of a better description, call it an energy drink flavor or profile and taste. The juice drinks tended to go away from that and had more of a juice feeling. The Ultra line has much more of a soft drink easy-to-drink flavor that is light. It's not as filling. And for whatever reason, we were able to come up with a flavor profile that clearly has appealed across a lot of categories and not simply to the diet drinker. Because it has 0 calories, it obviously appealed to the diet drinker directly square on, just as Absolutely Zero did as distinct from, for example, even our low carb, which had 10 calories per serving. But then again, our low carb had the Monster profile. So this is a completely different set of profiles, which is just lighter and more drinkable and probably more on a soft drink vein than the traditional energy drinks.

And then, Caroline, I'll give you an answer to your first question. The margins were actually lower this year than last year, and one of the big factors, of course, was foreign exchange in Japan.

And now I'd like to turn the conference back over to Mr. Rodney Sacks for any closing remarks.

On behalf of Monster, I would like to thank everyone for their continued support of the company. We remain confident in the safety of our product and our growth strategy and are committed to developing and differentiating our brands and expanding the Monster brand, both domestically and internationally. Again, we reiterate that our products are safe and are properly labeled. The caffeine content in Monster Energy is approximately 10 milligrams per ounce, which is less than 1/2 the milligrams per ounce of caffeine contained in coffeehouse-brewed coffee. Thank you very much.

Ladies and gentlemen, this does conclude today's conference. You may all disconnect, and have a wonderful day.