Monster Beverage Corporation (MNST) Q2 2013 Earnings Report, Transcript and Summary

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 in the Financial Information section. Once again, we reiterate that our products are safe based on both our and the industry's long track record and the scientific evidence supporting the safety of our ingredients. We estimate that about 50 billion cans of energy drinks have been sold and safely consumed worldwide over the past 25 years, including more than 9 billion Monster Energy drinks over the past 11 years. In 2012, we sold some 2 billion cans of Monster Energy drinks in approximately 90 countries. Put another way, more than 5 million cans of Monster Energy drinks are sold and safely consumed around the world everyday. In May, the Food and Drug Administration announced that in response to a trend in which caffeine is being added to a number of products, the agency would investigate the safety of caffeine in food products, particularly its effect on children and adolescents. The FDA convened a third-party review panel through the Institute of Medicine to help determine potential health hazards associated with consumption of caffeine in food and dietary supplements. The panel held hearings on Monday and Tuesday earlier this week in Washington D.C. The FDA previously stated that there is a long history of safe use of products containing caffeine in the U.S., and that the average amount of caffeine consumed by the U.S. population has not increased in spite of the entry of energy drinks into the marketplace. The FDA has also stated that available studies do not indicate any new previously unknown risks associated with caffeine consumption, though the agency continues to explore whether additional research on caffeine or energy drinks is needed. Unfortunately, inaccurate, speculative and biased articles continue to be published regarding energy drinks and, in particular, the caffeine levels therein. The simplest and most effective way of addressing these comments is to compare the caffeine levels in Monster Energy drinks from all sources to the caffeine levels in coffeehouse coffee such as, for example, Starbucks or Caribou, as this comparison is easily understood by and is meaningful to consumers. Coffee has been and continues to be extensively and safely consumed everyday in the U.S. by many tens of millions of consumers, many of whom are teenagers. In making such comparison, we believe it is appropriate to use Starbucks' 16-ounce medium-sized brewed coffee, which is the same size as a regular 16-ounce Monster Energy drink. A Starbucks 16-ounce brewed coffee contains approximately 330 milligrams of caffeine, which is more than double the approximate 160 milligrams of caffeine in the same sized Monster Energy drink. A 16-ounce Caribou brewed coffee contains between 305 milligrams and 370 milligrams of caffeine. Studies conducted in recent years confirm that the principal sources of caffeine for teens under 18 are coffee, soft drinks and tea, not energy drinks. With regards to the complaint filed by the company against the City Attorney of San Francisco and the Federal District Court in Riverside, the City Attorney has filed an application to dismiss the complaint, which the company has opposed. We expect that this application will be argued in the near future. With regard to the complaint filed by the City Attorney of San Francisco against the company in State Court in San Francisco, the company removed the case to Federal District Court in Northern California. The City Attorney has applied to remand the case back to the State Court. The company has filed its opposition to the application and is awaiting the city's reply. We expect that this application will also be argued in the near future. An purported class action complaint filed against the company regarding the labeling and/or safety of its energy drink products was dismissed, with leads to the plaintiffs to refile on limited grounds. The plaintiffs have now filed an amended complaint, which the company believes to be without merit. The company intends to vigorously defend against that claim and intends again to move for dismissal of the complaint. On July 31, 2013, the U.S. Senate Committee on Commerce, Science and Transportation held a hearing entitled Energy Drinks: Exploring Concerns About Marketing To Youth, at which the company testifies, together with representatives from 2 other energy drink companies, Red Bull and Rockstar, and certain additional witnesses. The company assumes no obligation to update any statements made with respect to ongoing litigation and regulatory matters, including with respect to the foregoing disclosures, whether as to new information, future events or otherwise, other than as required by law. Given the current litigation and pending regulatory requests, we will refrain from answering questions or commenting further on these specific subjects. We are happy, of course, to answer questions that you may have about our products in general or about the second quarter results as best we can after we have concluded our discussion on the business. Turning to the business. In the second quarter of 2013, the beverage market in general continued to experience softness. In particular, the 2 major soft drink companies in the U.S., in connection with their respective quarterly reports, reported lower CSD volumes in the U.S. in the second quarter of 2013 than in the same quarter of 2012. The reduction in the growth rate of the energy drink market in the U.S. that I alluded to in my previous conference call on May 8, 2013, continued through the second quarter of 2013, we believe, in part, due to the ongoing negative publicity that continues to question the safety of energy drinks and/or their ingredients and/or suggests limitations on their ingredients, including caffeine and/or the levels thereof and/or minimum age restrictions for consumers. The growth in energy drink market also continued to slow during the second quarter in certain international markets, particularly Europe. The successful launch of Monster Zero Ultra in the third quarter of 2012, while contributing to the increase in sales of the company, resulted in some cannibalization generally across existing SKUs. According to the Nielsen report for the 13 weeks through June 29, 2013, in the convenience and gas channel, Zero Ultra has become our second best-selling SKU after our Original Monster Green. During the second quarter, our operating income was negatively affected by distributed termination costs of approximately $2 million. Such costs were expensed in full in the quarter. The amounts that will be received from our new distributors for those areas will be approximately equal to such termination costs inclusive of the costs that were incurred in the first quarter. However, all such amounts are required to be accounted for as deferred revenue and may only be recognized as revenue ratably over the anticipated life of the respective distribution agreements, which is generally 20 years. On a cash flow basis, however, those transactions will be neutral to the company. During the quarter, we incurred foreign currency transaction losses of $3.6 million primarily related operations in Australia, Japan and South Africa. Additionally, during the quarter, we incurred increased professional service costs of $5 million, net of insurance reimbursements, of which $4.2 million related to regulatory matters and litigation concerning the company's marketing promotions, ingredients, labeling and safety of Monster Energy Drinks, which we believe are extraordinary in nature. The net effect of distributed termination payments, foreign exchange losses and professional service costs related to regulatory matters and related to litigation on the operating income of the company amounts to approximately $9.8 million. The company continued to make progress in the second quarter and achieved record second quarter gross sales, up 6.6% from the second quarter of 2012 to $723.9 million, with net sales up 6.5% to $630.9 million. Operating income was up 5.7% to $179.4 million, and our tax rate was higher this quarter at 39.3% from 35.3% in the same quarter last year. Diluted earnings per share increased 4.6% from $0.59 per share in the second quarter of 2012 to $0.62 per share in the second quarter of 2013. Although we are pleased with the results, our revenues were affected by less robust growth rates for the energy category as a whole and Monster Energy, in particular, in our principal market, the United States, as well as in Canada and Mexico in the second quarter; less robust growth of the energy category overall in Europe, the Middle East and Africa. Despite the slower growth, Monster was still able to achieved 13% growth in dollars in that region in the second quarter, well ahead of the growth of the category overall in that region. Sales of our new Monster Zero Ultra, although accretive, did result in some cannibalization generally across our existing SKUs. Sales were positively affected by the launch of our new Ultra Blue energy drink in March 2013. Sales of Monster products in glass bottles and the extra strength line were lower, as were sales of Worx energy shots; sales in our Warehouse division, which were higher principally due to increased sales of Hubert's Lemonades. As discussed in our previous conference calls, we will be reporting on Nielsen's extended sample of outlets, which includes Wal-Mart; dollar stores, such as Family Dollar, Dollar General and Fred's; DeCA military stores; and club stores, namely Sam's and BJ's but excluding Costco. According to the Nielsen report for the 13 weeks through July 27, 2013, for all outlets combined, namely convenience, grocery, drug and mass merchandisers, on the expanded basis I just described, sales in dollars in the energy drink category, including Shots, increased by 2.7% versus the same period a year ago. Sales of Monster grew 10.1% in the 13-week period, while sales of Red Bull increased by 6.7%. Sales of Rockstar decreased by 7.2%, and sales of 5-Hour decreased by 11.6%. Sales of AMP were down 15.4%. NOS increased sales by 16.5%, and sales of Full Throttle were down 2.9%. According to the Nielsen report for the 4 weeks ended July 27, 2013, sales of energy drinks in the convenience and gas channel, in dollars, increased by 6.1% over the comparable 4-week period in 2012. Sales of Monster increased by 16.4% over the comparable period last year, while sales of Red Bull increased by 8.7% over the same period. Rockstar was down 7.9%, while 5-Hour was down 8.9%. According to Nielsen, for the 4 weeks ended July 27, 2013, Monster's market share of the energy drink category in the convenience and gas channel, including energy shots, in dollars, increased by 3.1 points over the comparable period a year ago to 34% against Red Bull's share of 35.4%, Rockstar's share of 7.7%, 5-Hour's share of 9.8% and AMP's of 2.6%. According to Nielsen, in the 13 weeks ended July 27, 2013, sales of energy plus coffee drinks, in dollars, in the convenience and gas channel increased 5.8% over the same period last year. Java Monster was 15.6% higher than in the comparable period last year, while Starbucks Double Shot energy was down 1.9%. Sales of Java Monster continue to exceed sales of Starbucks Double Shot energy drinks in dollars. According to Nielsen, in the convenience and gas channels in Canada, for the 12 weeks ended June 29, 2013, the energy drink category grew 3%. Monster sales increased 1%. Our market share is 24.4%, which is 0.5 of a point lower than in the comparable period last year. Red Bull sales increased 7% and its market share increased 1.3 points to 37.9%. Rockstar sales increased 10% and its market share increased 1.1 points to 17.1%. According to Nielsen, in the convenience and gas channel in Canada, for the 4 weeks ended June 29, 2013, sales of energy drinks grew 3%. Over this period, sales of Red Bull decreased 1% and sales of Monster increased 5%, while sales of Rockstar increased 25%. According to Nielsen, for all outlets combined in Mexico, the energy drink category grew 5.5% in the month of June 2013. Monster sales increased 11.5% and our market share increased 2.2 points to 40.6% over the comparable period last year, while Red Bull sales increased 0.6% and its market share decreased by 1.6% to 33.4%. Boost's sales increased 19.8%, and its market share increased 1.6 points to 13.3%. Gladiator sales decreased 12.9%, and its share decreased by 1.7 points to 8%. Net sales for the company's DSD segment increased 5.8% to $601 million for the 3 months ended June 30, 2013, from $568 million in the same period in 2012 and contribution margin increased to $215 million from $195.8 million in the same period in 2012. Net sales for the company's Warehouse segment increased 21.7% to $29.9 million for the 3 months ended June 30, 2013, compared to $24.6 million for the same period in 2012, but contribution margin decreased to $1.1 million this quarter from $1.6 million in the same quarter last year. For the 3 months ended June 30, 2013, gross sales to retail grocery, specialty chains and wholesalers represented 2.9% of gross sales, down from 4.1% in 2012. Gross sales to club stores, drug chains and mass merchandisers represented 10.7% of sales, up from 9.1% in 2012. Gross sales to full-service distributors represented 62.2% of sales, the same as in 2012. Gross sales internationally were 22.2%, marginally down from 22.6% in the same period in 2012 although were higher in actual revenues. Others sales were 2% for both the 3 months ended June 30, 2013, and 2012. Gross sales to customers outside the United States in the second quarter of 2013 amounted to $160.4 million compared to $153.4 million in the same quarter in 2012. Included in such sales were sales to the company's military customers, which are delivered in the United States and transshipped to the military and their customers overseas. Net sales in Europe, the Middle East and Africa in the second quarter of 2013, in dollars, were 13% higher than in the same period last year. In local currencies, net sales were 16% higher. Monster continues to gain momentum in that region and is growing in excess of the growth of the category. In particular, in each of the U.K., Spain, Germany and South Africa, which are our largest markets in that region, Monster achieved further market share gains. We are continuing with our expansion strategy in international markets. We launched Monster Energy in Romania and Albania in April 2013. We planned to commence sales in India but are still awaiting certain regulatory approvals before we are able to do so. We are planning to launch Monster in additional countries in Central and Eastern Europe later this year. In the Warehouse division -- sorry, excuse me, sales of the Monster Energy brand internationally, including in Japan, continue to meet expectations. However, net sales to our Japanese distributor in the 2013 second quarter was significantly lower than net sales in the comparable quarter last year, largely due to the launch of the Monster Energy brand in Japan in the second quarter of 2012. In addition, the weaker yen continued to negatively affect our gross sales in U.S. dollars, as well as our margins in Japan during the quarter. We are proceeding with our plans to commence local production in Japan and Korea. Plans for production in India are also progressing satisfactorily. Sales in Brazil continue to increase, particularly due to increased distribution achieve by Ambev. Sales in Chile were also positive during the quarter. We are planning for launch Monster Energy in certain additional countries in Asia later this year or early in 2014. Sales of Peace Tea ready-to-drink iced tea has continued to increase moderately. Consumer response to our Peace Tea 8.4-ounce cans in 12-packs and 64-ounce multi-serve PET plastic bottles was less enthusiastic than anticipated. Sales of Peace Tea in the convenience and gas channel in the 13 weeks through July 6, 2013, were 1.6% higher than in the same period last year, ahead of the category, which was down 0.2%. We are continuing to sell Worx Energy, although sales levels have decreased substantially. In the Warehouse division, sales of Hubert's Lemonades in glass bottles made good progress, although sales of soda were lower. Gross profit margins achieved in the second quarter of 2013 were 53.3% versus 51.8% in the comparable quarter in 2012. The increase in gross profit as a percentage of net sales was partially attributable to changes in product sales mix, particularly the higher percentage of sales represented by Ultra Zero, Ultra Blue and Rehab Pink Lemonade lines, which have higher gross margins than most of our other 16-ounce products due to lower costs of goods, as well as a reduction in certain input costs. Gross margins achieved in the quarter in North America in 2013 were higher than in the comparable quarter last year. Gross margins achieved for international sales, other than those sold from the United States, was slightly lower in the second quarter of 2013 than in the comparable quarter of 2012, primarily due to certain adjustments relating to South Africa. As previously indicated, we have covered a significant portion of our anticipated requirements for aluminum cans in 2013, as well as a significant portion of our anticipated requirements for apple juice and sugar. While we were able to achieve some reduction in certain input costs in the second quarter of 2012, we did experience limited increases in the costs of certain other raw materials during the quarter. We expect to continue to experience limited increases during the remainder of the year. We do not believe that at current levels, increases in the cost of raw materials will have a material negative effect on our margins. I just wanted to point out something. I think I misspoke when I talked about the gross margins for international. I think gross margins for international overall were slightly higher in the second quarter, but gross margins in Europe, the EMEA division, were slightly lower. I just have to give you that correction. Distribution expenses as a percentage of net sales in the second quarter were 4.5% versus 4.1% in the comparable quarter in 2012 due primarily to increased freight and warehouse expenses in Europe and South Africa. Selling expenses as a percentage of net sales were 11.6%, the same as in the comparable period in 2012. Sponsorships and endorsement costs were lower although cost at point of sale, merchandise displays and premiums were higher during the quarter. Cost of trade development programs to supplement other distribution partner sales as a percentage of net sales were also marginally higher during the quarter. Advertising cost was lower as we did not participate in an advertising campaign in Japan during this quarter that was similar to the campaign last year when we launched Monster in Japan. The increase in general and administrative expenses was primarily attributable to increased payroll expenses and, in particular, increased professional service costs for legal accounting and other professional costs. These costs, net of insurance reimbursements were $5 million higher than in the comparable quarter of 2012. Operating income was negatively affected by a combined operating loss of $1.8 million for the quarter ended July 30, 2013, from our operations in Europe, the Middle East, Africa, Australia, South America and Asia, which was lower than the operating losses of $2.6 million, which were incurred by us during the same period last year, and lower than the operating losses of $2.1 million incurred in the first quarter of 2013. Our effective tax rate in the 2013 second quarter was 39.3% compared to 35.3% in 2012 second quarter. The increase in the 2013 second quarter effective tax rate was primarily the result of a decrease in the domestic production deduction, as well as the release of $1.8 million of unrecognized tax benefits during the 2012 second quarter. Turning to the balance sheet. Cash and cash equivalents amounted to $283.8 million compared to $222.5 million at December 31, 2012. Short-term investments were $148.2 million compared to $97 million at December 31, 2012. Long-term investments comprised entirely of auction rate securities decreased from $21.4 million at December 31, 2012, to $12 million at June 30, 2013. The trade account receivables are now presented on a gross basis as are promotional allowances owed to those customers that the company does not allow net settlement, such as our full-service distributors. We continue to present that portion of the promotional allowances owed to those customers that the company allows net settlement on a net basis. Accounts receivables increased to $342.2 million from $236 million at December 31, 2012. Days outstanding for receivables consistent with the above treatment were 42.8 days at June 30, 2013, and 39.2 days at December 31, 2012, compared to 40.7 days at June 30, 2012. Days outstanding for receivables are expected to increase due to the different terms generally launched to customers internationally in accordance with local practices in their respective countries. Inventories increased to $233 million from $203 million at December 31, 2012. Average days of inventory was 71.3 days at June 30, 2013, which is lower than the 80 days of inventory at December 31, 2012, and higher than the 62.7 days at June 30, 2012. At June 30, 2013, the company had auction rate securities with a face value of $19.7 million, $27.8 million at December 31, 2012, with an amortized cost basis of $17.8 million. Gross sales in July 2013 were approximately 7.9% higher than in July 2012. We caution again that sales in a single month and over a short period are often disproportionately impacted by various factors, such as, for example, selling days, days of the week in which holidays fall and the timing of promotions in retail stores, and should not necessarily be imputed to or regarded as indicative of results for the full quarter or any future period. In April 2013, the Board of Directors of the company authorized a new share repurchase program for the repurchase of up to $200 million of the company's outstanding common stock. To date, no shares have been purchased under the April 2013 repurchase plan. As previously reported in March, the company launched a new Monster Ultra Blue line extension, as well as a Kona Cappuccino line extension to the Java Monster line. Additionally in March, the company launched a new line of 3 energy shakes called Muscle Monster, as well as a new Tea + Pink Lemonade + Energy Monster Rehab line extension. In conclusion, I would like to summarize some recent positive points: one, North American gross margins remain healthy. Our 2013 second quarter gross margins for North America were higher than in the comparable quarter in 2012 and in the first quarter of 2013. Two, the U.S. Nielsen market statistics show that Monster Energy's growth is still outpacing the growth of the category as a whole on an increasing basis, particularly over the last 4 weeks. Three, the new product line extensions that have been launched are receiving good reception for both the trade, as well as from consumers. Four, turning to international markets, we are satisfied with the performance of our international expansion and the investments, particularly in the United Kingdom, Spain, Germany, South Africa, Japan and Brazil. Even though the growth of the energy drink category in Europe, which has been in existence for over 25 years, has slowed, according to Nielsen, the Monster brand achieved solid growth of 28% in that region during the second quarter of 2013. I would like to point out that the Nielsen numbers in Europe should only be used as a guide because the channels read by Nielsen in Europe vary from country to country and, for example, in countries that -- there are many countries that are dominated by mom and pops, which aren't read by Nielsen. According to Nielsen for the 4 weeks ended July 14, 2013, Monster's market share in Great Britain, Spain and France as compared to the same period last year grew from 9.1% to 10.2% in Great Britain from 13.8% to 22.3% in Spain and from 15.6% to 18.5% in France. In the 4 weeks to the end of May 2013, Monster's market share in Germany and South Africa grew from 7.0% to 8.6% in Germany and from 15.4% to 18% in South Africa. Seven, sales of Monster in Japan remain encouraging. Eight, although the energy category as a whole has struggled in Korea, sales of Monster Energy have been satisfactory since their launch. Nine, although we have incurred some delays in getting regulatory approval for the sale of Monster Energy in India, we believe that we will be able to secure such approval in the near future. We view India as an exciting future growth opportunity for Monster. 10, the sales in Brazil through our new distribution partner, Ambev, continue to be robust. 11, sales of Hubert's Lemonade are exceeding our expectations. I'd like to open the floor to questions about the quarter. Thank you.

[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.