Monster Beverage Corporation (MNST) Q3 2013 Earnings Report, Transcript and Summary

Good day, ladies and gentlemen, and welcome to the Monster Beverage Corporation's Third Quarter 2013 Financial Results Conference Call. [Operator Instructions] As a reminder, this conference is being recorded. I would like to introduce your host for today's conference, Mr. Rodney Sacks, Chairman and CEO. Mr. Sacks, please begin.

Good afternoon, ladies and gentlemen. Thank you for attending this call. I'm Rodney Sacks. Hilton Schlosberg, our Vice Chairman and President, is with me today; as is as 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 March 1, 2013, as well as our most recent report on Form 10-Q filed August 9, 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 November 7, 2013. A copy of this information is also available on our website, www.monsterbevcorp.com in the Financial Information section. Although I do not wish to appear redundant every time that I open our quarterly conference calls, I do however, want to reiterate once again 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. As investigations of energy drinks continue and further research on these topics and issues is undertaken, the results consistently confirm and reinforce our repeated views that our products are safe. Additionally, we believe that the strongest evidence of product safety is that many millions of energy drinks continue to be safely consumed worldwide every day. By now, nearly 10 billion Monster Energy drinks have been sold and safely consumed around the world over the past 11 years. As previously announced, the Food and Drug Administration is investigating the safety of caffeine in food products and particularly its effect, if any, on children and adolescents. An independent review panel was convened by the FDA through the Institute of Medicine to help determine if there are potential health hazards associated with the consumption of caffeine in food and dietary supplements. This panel held a public workshop during August 2013 in Washington, D.C. We're still awaiting the report of this panel. The long history of safe use of products containing caffeine in the U.S. has the remained unchanged and studies indicate that the average amount of caffeine consumed by the U.S. population has remained relatively stable, despite the entry of energy drinks into the market. As previously indicated and as stated by the FDA in 2012, available studies do not indicate any new previously unknown risks associated with caffeine consumption, although the FDA has continued to explore whether additional research on caffeine or energy drinks is needed. Many studies conducted in recent years in the U.S.A., Canada and Europe, including a very recent study, have all consistently concluded that the principal sources of caffeine for teens under 18 are coffee, soft drinks and tea and not energy drinks. To put of the level of caffeine that is contained in Monster Energy drinks in context, we remind listeners that a Starbucks 16-ounce-sized brewed coffee contains approximately 330 milligrams of caffeine, which is more than double the approximately 160 milligrams of caffeine that is contained in the same-sized Monster Energy drink. I will now briefly provide listeners with an update on certain of the current regulatory matters and litigation. For a more extensive discussion on regulatory matters and litigation, listeners are referred to our 10-Q, which will be filed in the next few days. The company continues to diligently monitor developments relating to these issues. The complaint filed by the City Attorney of San Francisco against the company was remanded to the San Francisco Superior Court. Subsequently the City Attorney filed a renewed motion to dismiss the complaint filed by the company against the City Attorney, for declaratory and injunctive relief, in the United States District Court for the Central District of California. A hearing on that motion is scheduled for December 9, 2013. In a purported class action filed against the company, alleging issues relating to Monster Energy drinks' safety and the marketing activities of the company, an amended complaint was filed against the company after the original complaint was dismissed by the court. The company moved to dismiss the amended complaint. At the hearing the court issued a tentative ruling dismissing the amended complaint. The company's currently awaiting the final judgment of the court on that motion. Following the hearing held by the U.S. Senate Commerce -- Committee on Commerce, Science and Transportation on July 31, 2013, on September 25, 2013, 4 United States senators, 3 of whom are members of the committee, addressed a letter to the company and some 16 other energy drink companies. In that letter, these 4 senators asked whether the energy drink companies would be prepared to agree to a number of commitments relating primarily to the manner in which their energy drinks are marketed. On October 28, 2013, the company responded to the senators' letter indicating numerous commitments it would be willing to make under certain circumstances. In addition, the company has forwarded to the 4 senators and to the American Beverage Association, a set of proposed U.S. model guidelines for energy drink companies. The company is hopeful that under the auspices of the ABA, all major energy drink companies will adopt these guidelines with regard to their U.S. activities. The company supports the proposed model guidelines and would agree to adopt them if all other major energy drink companies doing business in the U.S. also adopt them. In that fashion, the company believes that the concerns expressed by the senators and others would be addressed without putting the company at any material competitive disadvantage. 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 the 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 third quarter results as best we can, after we have concluded our discussion on the business. Turning to the business. While the beverage market in general in North America continues to experience softness, more specifically in CSDs, the energy drink market continues to grow, although the rate of growth still remains in single digits. However undoubtedly [ph] from the field, the energy drink market appears to be gaining momentum. Sales of our new Monster Ultra Blue energy drinks, as well as our new Muscle Monster line and our tea plus pink lemonade and energy Monster Rehab line extension, have exceeded our expectations and we are optimistic that we will be able to achieve increased sales contributions from these products in the future. In fact, Ultra Blue quickly became one of the top 5 selling Monster SKUs in the convenience and gas channel, according to the Nielsen reports for the 13 weeks through September 28, 2013. Additionally, according to the Nielsen reports for the 13 weeks through September 28, 2013, in the convenience and gas channel, Muscle Monster has become the second best-selling brand in the protein supplement sector and achieved a 20% market share. Even though ACB distribution levels are still low. We are optimistic that as we continue to achieve increased distribution levels for our Muscle Monster line, we will be able to increase our market share of the protein supplement sector. During the third quarter, our operating income was negatively affected by increased professional services costs of $6.5 million, net of insurance reimbursements, of which $5.3 million related to regulatory matters and litigation concerning the company's marketing, promotions, ingredients, labeling and safety of its Monster Energy drinks, which we believe are exceptional in nature. The net effect on earnings per share professional services costs relates to regulatory matters and related litigation is approximately $0.02 per share. The company continued to make progress in the third quarter and achieved record third quarter gross sales, up 8.6% from the third quarter of 2012, to $686.6 million with net sales up 8.9% to $590.4 million. Operating income was up 7.6% to $151.4 million. Our tax rate was marginally lower this quarter at 38.8% from 39% in the same quarter last year. Diluted earnings per share increased 13.1% from $0.47 per share in the third quarter of 2012 to $0.53 per share in the third quarter of 2013. Although we are pleased with the results, our revenues were affected by: one, less robust growth sales for the energy category as a whole, in our principal market, the United States; two, less robust growth of the energy category overall in Europe, despite the slower growth Monster was still able to achieve 8.6% growth in dollars in that region in the third quarter, well ahead of the growth of the category overall in that region; three, sales of our new Zero Ultra and Ultra Blue energy drinks, although accretive, did result in some cannibalization generally across our existing SKUs; four, sales were positively affected by the launch of our new Ultra Blue energy drink as well as sales of our new Muscle Monster line, sales of Monster Energy products in glass bottles and the Extra Strength line were lower, as were sales of Worx energy shots; five, sales in our DSD division in North America were 10.6% higher in the third quarter and contribution margin from the DSD division during that period was up 14.2% over the comparable period last year. Sales in our warehouse division were lower as a result, primarily, of an unsuccessful promotion with a large retailer, including an extensive sampling and in-store demo program. The warehouse division incurred an operating loss of $2.2 million as compared to a small operating profit that was earned by the division in the same period last year. As discussed on 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 September 28, 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 3.1% versus the same period a year ago. Sales of Monster grew 9.3% in the 13-week period, while sales of Red Bull increased by 7.4%. Sales of Rockstar decreased by 5%, and sales of 5-Hour decreased by 9.7%. Sales of AMP were down 16%. NOS increased sales by 17.1%, and sales of Full Throttle decreased 2.2%. According to the Nielsen reports for the 5 weeks ended September 28, 2013, sales of energy drinks in the convenience and gas channel, in dollars, increased by 5.2% over the comparable period in 2012. Sales of Monster increased by 10.2% over the comparable period last year, while sales of Red Bull increased by 8.8% over the same period. Rockstar was up 3.5%, while 5-Hour was down 5.4% and AMP was down 15.1%. According to Nielsen, for the 4 weeks ended September 28 -- I think, sorry, it's 5 weeks September 28, Monster's market share of the energy drink category in the convenience and gas channel, including energy shots in dollars, increased by 1.5 points over the comparable period a year ago to 34.3%, ahead of Red Bull's share of 34.2%, Rockstar's share of 8.1%, 5-Hour's share of 9.9% and AMP's share of 2.7%. According to Nielsen, in the 13 weeks ended September 28, 2013, sales of energy plus coffee drinks, in dollars, in the convenience and gas channel increased 6.1% over the same period last year. Java Monster was 11.1% higher than in the comparable period last year, while Starbucks Double Shot energy was 1.3% higher. Sales of Java Monster continue to exceed sales of Starbucks Double Shot energy drinks in dollars. According to Nielsen, in the convenience and gas channel in Canada, for the 12 weeks ended September 21, 2013, the energy drink category grew 5%. Monster sales increased 17%. Our market share increased 3 points to 29% over the comparable period last year. Red Bull sales increased 2% and its market share decreased 1.3 points to 38.3%. Rockstar sales increased 6% and its market share increased by 0.3 points to 13.7%. According to Nielsen for all outlets combined in Mexico, the energy drink category grew 1.4% in the month of September 2013. Monster sales decreased 11.3% and our market share decreased 4.8 points to 33.7% over the comparable period last year. But still ahead of Red Bull's market share. Red Bull sales decreased 1.5% and its market share decreased by 0.9% to 32%. Boost's sales increased 20.4%, and its market share increased 2.5 points to 15.5%. Gladiator sales decreased 21.3%, and its market share decreased by 2.3 points to 7.9%. The Nielsen statistics for Mexico cover single months at a time, which is a short period that may often be materially influenced positively or negatively by sales in the OXXO convenience chain, which dominates the market. Sales in the OXXO convenience chain, in turn, can be materially influenced by promotions that may be undertaken in that chain by one or more energy drink brands during a particular month. Consequently, such activities could have a significant impact on the monthly Nielsen statistics for Mexico. By way of illustration, according to Nielsen, for all outlets combined in Mexico, the energy drink category grew 15.5% in the month of August 2013. Monster sales increased 27.1% and our market share increased 3.6 points to 39.4% over the comparable period last year, while Red Bull sales decreased 1.9% and its market share decreased by 5.5 points to 30.7%. This should be contrasted with the Nielsen results I've just reported above for the month of September in Mexico. Net sales for the company's DSD segment increased 9.8% to $566.8 million for the 3 months ended September 30, 2013, from $516.3 million in the same period in 2012 and contribution margin increased 14.6% to $194.9 million from $170.1 million in the same period in 2012. Net sales for the company's Warehouse segment decreased 7.9% to $23.7 million for the 3 months ended September 30, 2013, compared with $25.7 million for the same period in 2012, and contribution margin decreased to a contribution loss of $2.2 million this quarter from a contribution margin of $0.04 million in the same quarter last year. Gross sales to customers outside the United States in the third quarter of 2013 amounted to $151.6 million compared to $144.7 million in the same quarter in 2012. Included in such sales are 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 third quarter, in dollars, were 8.6% higher than in the same period last year. Monster continues to gain momentum in that region and is growing in excess of the growth in 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. According to Nielsen report, and for some markets Information Resources Inc., reports for the 13 weeks to the end of August 2013 -- and this is what I want to point out that the actual dates of the 4-week periods vary by a few days between different markets as reported to us. Monster's market share in value in its European markets and South Africa increased from 8.6% to 10%. We are continuing with our expansion strategy in international markets. We launched Monster Energy in Croatia during the quarter. Although we had hoped to be able to commence sales in India during the quarter, we only received the required regulatory approvals for India, subsequent to the quarter end. Sales of Monster Energy drinks commenced in India during October. We are planning to launch Monster in a few different countries in Asia, Central and Eastern Europe and Africa later this year and early next year. Sales of the Monster Energy brand internationally, including in Japan, in particular, continue to grow satisfactorily. The weaker yen continued to negatively affect our gross sales in U.S. dollars, as well as our margins in Japan during the quarter. While sales to our Japanese distributor in the third quarter of 2013 were lower in dollars than in the comparable quarter last year, we have been advised that case sales, as well as sales out, from our Japanese distributed to retailers were higher in the quarter than in the comparable period last year. Plans for production in Japan and Korea are proceeding satisfactorily. Test production runs have now taken place in both Korea and Japan. And we are on track to commence full commercial production in Japan within the next few months. We also are moving ahead with our plans to produce Monster Energy drinks in India. Sales in Chile are progressing well. In Brazil, our new distributor, Ambev, continued to secure increased distribution levels from month-to-month. Indeed, sales by Ambev to its customers also continued to improve from month-to-month and we are advised that record sales were achieved by Ambev during October. We caution that sales in the 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, as well as changes in production schedules and deliveries, and should not necessarily be imputed to or regarded as indicative of results for the quarter or any future period. According to the Nielsen report for the 13 weeks through September 28, 2013, in the convenience and gas channel, sales of Peace Tea were 5% lower than in the same period last year. Sales in the category were also lower by 1.7%. We continue to believe that Peace Tea brand has good growth potential and are planning to add a juice cocktail to the line, and we are evaluating the launch of ice coffees in glass bottles under the Peace Tea brand as well. In the warehouse division, sales of Hubert's Lemonades in glass bottles for the 9 months through September 30, 2013, are significantly above sales in the previous comparable 9-month period. The Hubert's brand continues to gain market and consumer acceptance. Gross profit margins achieved in the third quarter of 2013 were 52.1% versus 50.5% 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 our Ultra line and the Rehab Pink Lemonade line, which have a higher gross margins than most of our other 16-ounce products due to lower costs of goods, as well as a reduction in certain import costs and compensation for past product damages in respect to shipments to Asia. 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 of Monster Energy, excluding those products sold from the United States, were also higher in the third quarter of 2013 than in the comparable quarter of 2012. We have covered a significant portion of our anticipated requirements for aluminum cans in 2013, and a large part of 2014, as well as a significant portion of our anticipated requirements for apple juice and sugar over the same period. We do not believe that at current levels, increases in costs of any raw materials will have a material negative effect on our margins. Distribution expenses as a percentage of net sales in the third quarter were 4.6% versus 4.4% 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 12% versus 11.6% in the comparable period in 2012. Sponsorships and endorsement costs were higher as well as the cost of merchandise displays. Cost of premiums were lower during the quarter. Cost of trade development programs to supplement our distribution partner sales were also marginally higher during the quarter. The increase in general and administrative expenses was primarily attributable to increased professional services costs for legal, accounting and other professional costs and which I commented on, earlier on this call. Operating income was negatively affected by combined operating losses of $5.2 million for the quarter ended September 30, 2013, from our operations in Europe, the Middle East, Africa, Australia, South America and Asia, which was higher than the operating losses of $2.5 million, which were incurred last year in the same period last year, primarily due to a non routine indirect tax-related provision. On a trading basis, the operating losses this quarter were comparable with the operating losses incurred during the same quarter last year. Operating income for the DSD division was $194.9 million for the quarter ended September 30, which was higher than operating income of $117.1 million, which was earned by the DSD division during the same period last year. Operating losses incurred in the warehouse division amounted to $2.2 million as compared to an operating profit of $0.04 million in the same quarter last year. Our effective tax rate in the 2013 third quarter was 38.8% compared to 39% in the 2012 third quarter. Turning to the balance sheet, cash and cash equivalents amounted to $287 million compared to $222.5 million at December 31, 2012. Short-term investments were $315.6 million compared to $97 million at December 31, 2012. Long-term investments comprised entirely of auction rate securities decreased from $21 million at December 31, 2012, to $9.7 million at September 30, 2013. Accounts receivables increased to $339.2 million from $236 million at December 31, 2012. Days outstanding for receivables consistent with the above treatment were 44.7 days at September 30, 2013, and 41.3 days at September 30, 2012, compared to 42.8 days at June 30, 2013. Days outstanding for receivables are expected to increase due to the different terms generally granted to customers internationally in accordance with local practices in their respective countries. Inventories increased to $247.4 million from $203.1 million at December 31, 2012. Average days of inventory was 78.7 days at September 30, 2013, which was higher than the 65 days of inventory at September 30, 2012, and higher than the 71.3 days at June 30, 2013. Gross sales in October 2013 were approximately 9.3% higher than in October 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. To date, no shares have been purchased under our April 2013 repurchase plan. I'd like to turn to our recent announcement concerning Mark Hall. Mark has been involved in the beverage industry for more than a quarter of a century and has been with the company since 1997 as President of the Monster division. Mark has been an important part of the company but expressed a desire to become less involved in the day-to-day activities and also wished to take some time off for personal reasons until the end of the year. Mark has built a good team around him and has been focusing more on the positioning of the Monster Energy and Peace Tea brands, innovation and product development and spent less time on day-to-day management. Mark's new role as Chief Brand Officer for Monster Energy as of January 2014, formalizes his current role and is a win-win situation for both Mark and the company. Mark will continue to be responsible for the positioning of the Monster Energy and Peace Tea brands, innovation and product development. Mark will also serve on the Board of Directors of the company. In October, the company launched a new Monster Ultra Red line extension, and is in the process of launching a new strawberry Muscle Monster energy shake. The company's planning to launch a further line extension of its Muscle Monster line at the beginning of 2014. In conclusion, I would like to summarize some recent positive points. One, North American gross margins remain healthy. Our 2013 third quarter gross margins for North America were higher than in the comparable quarter in 2012. 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. Ultra Red, which was launched recently and strawberry Muscle Monster, which is in the process of being launched are both receiving good reception from both retailers, as well as from consumers. Turning to international markets, we are satisfied with the performance of our international expansion and investments, particularly in the United Kingdom, Spain, Germany, South Africa, Japan, Brazil and Chile. According to Nielsen, and/or for some markets IRI, the 4-week period -- for the 4-week period ending at the end of August 2013 -- again the actual dates, I pointed out, for the 4-week period vary by a few days between different markets. Monster's market share in value in Great Britain, Spain and France as compared to the same period last year grew from 9.2% to 10.4% in Great Britain from 15.2% to 20.7% in Spain and from 18% to 21.3% in South Africa. In addition, Monster's market shares in Germany and France grew from 7.4% to 8.6% in Germany and from 14.9% to 17.1% in France. In the 4 weeks to the end of September 2013, Monster's market share in Great Britain increased further to 11.4%. In Spain, increased further to 24.9% and in South Africa, increased further to 23.5%. I would like to point out that the Nielsen and IRI numbers in Europe should only be used as a guide, because the channels read by Nielsen and IRI in Europe vary from country to country. Sales of Monster in Japan are continuing to increase and remain encouraging. According to our distributor in Japan, Monster has now achieved a 31% market share of the energy drink market in Japan. Seven, we are excited as we have finally managed to obtain a regulatory approval for the sale of Monster in India. We view India as an exciting future growth opportunity for Monster, particularly over the long term. Eight, as advised by Ambev, sales out by them to retailers in October reached the highest level since they commenced distribution of the Monster brand in Brazil at the beginning of this year. I'd like to open the floor to questions about the quarter. Thank you.

[Operator Instructions] Our first question comes from the line of Mark Astrachan with Stifel. Mark S. Astrachan - Stifel, Nicolaus & Co., Inc., Research Division: So international, just want to try to understand a little bit more sort of puts and takes there. Maybe you talked a bit about Japan could give us a sense of what the FX impact was there. Maybe talk about some of the sell-in in India how much potentially that impacted it in the October number? And just sort of, give some thoughts in general about sort of how you see it, especially as you look at the number in the quarter and you had a pretty material acceleration on a 2-year basis. So long question but should we think about this as a new run rate, is there a timing issue, I mean inventories, anything you can give that may give us a little bit more color on the international would be helpful.

With regard to India, let me just start there. When we started sales, we had originally shipped product to India well before I think it was either the end of last year or the first quarter of this year. And we had shipped that in anticipation of getting regulatory approval and then we ended up with some delays in getting that approval. So it wasn't a buildup of inventory in this quarter for India. With regard to Japan, what we have seen was some reduction in inventory levels being held by our distributor during the quarter. And I think as they are getting more comfortable with the brand and the sector, which is something they really didn't have any experience with, their stock holdings are going low and that is why we refer to the fact that while our sales were low, actually their sales out were higher in Japan. A similar situation has sort of arisen with respect to Brazil in the quarter. On a ForEx level, I will try and get you the impact later on in the call. I don't have it handy. Is there anything else you'd like to ask, Mark? Mark S. Astrachan - Stifel, Nicolaus & Co., Inc., Research Division: Sure, how about that share repurchase, anything coming down the pike there with all the cash that is now building?

We look at market conditions as they develop and look to implementing the share repurchase as we go forward. We will raise it again with the board at a meeting tomorrow and then we'll see how we go through the end of the year. Mark S. Astrachan - Stifel, Nicolaus & Co., Inc., Research Division: Okay, and then just related to the first question. Can you quantify the amount of de-stocking in Japan and Brazil as you're looking for the FX piece?

I -- do you have the -- I really at this stage, at this time, I just don't have that figure -- those figures handy. Other than to say that, our sales into our distributors in both those areas were considerably lower than the sales out.

Our next question comes from the line of Amit Sharma with BMO Capital.

Can you just, Ron, you talked about the ABA guidelines and the senators letter. Is it fair to assume that if you do adhere for these guidelines and this overall energy drinks category, agree to these guidelines, some of the regulatory headwinds that you've seen as indicative [indiscernible] will ease up?

Well, we can't speculate as to whether what we have suggested would be completely satisfactory to senators or regulators. We've just, from our assessment of the questions that we've got and the request for commitment that we have from the senators, we believe this goes a pretty far way to dealing with them. There are some issues that we have still and don't believe we should agree to and won't voluntarily to agree to. And they may remain still contentious, outstanding contentious issues. But we do believe that pretty much by and large, we think that this will resolve, or certainly alleviate to a large measure, some of those headwinds.

The other question was around profitability. You talked about some onetime sort of losses in the warehouse. Are those -- should that be considered onetime that will alleviate in the next quarter? Or you continue to expect a negative margin piece in the warehouse division?

No, we think that, that won't repeat itself. We think that, that will right itself next quarter.

Okay. And my final question is, as we look at your market share position in [indiscernible] in Europe, especially Western Europe and countries, should we start to sort of assume that margin profile in these countries could start to get better and, perhaps, positive margins in these market?

You are very unclear. But if -- what you're talking about is our margins in Europe, we are taking steps to improve our margin through production in a number of additional countries in Europe. For technical reasons some of the production that we had planned to implement during the year, we weren't comfortable with the quality of the products running off -- coming off the lines and so we weren't able to implement some of those, those plans. But we are planning to produce at additional production plants in Southern Europe, which will alleviate a lot of the freight and damages cost and other cost in health margins. We are also planning -- we are quite advanced in production and planning production in South Africa, which will remove the freight from Europe to South Africa and also, reduce damages in transit and also improve our margins there as well. This also will apply in Japan where we are progressing as quickly as we can to implement production. And we also are [indiscernible] finally, we are also at an advanced stage of discussions and moving forward with production plans for additional production plants in Brazil, which we believe will also, because of they are complicated tax laws, will also help us achieve improved margins in Brazil. So we are hoping that in 2014, we will actually start to see some improved margins coming.

Our next question comes from the line of Bill Chappell from SunTrust.

Just on the Monster Muscle, can you maybe quantify I think you'd said ACB is pretty low. Where we stand there? And where next few months or few quarters?

The ACB level that Nielsen has indicated for Muscle Monster is about 38% ACB.

And can that get to 50%, 60%, 70%?

Well, it should get to 80%, 80-plus like most of our other energy drink brands. And then obviously, what you might get in -- within the range, you might get a variation of ACB levels from the bestsellers to the least. We have 3, we're introducing strawberry Muscle Monster and we are planning to introduce another variant at the beginning of 2014. So we believe that we will be able to certainly get our better selling products in that -- in the range up to that 80-plus level. But it's a question of time and when we get listings and get into the new sets in spring.

Okay, and then is this something that's planned to take international?

Sorry at this point, we're just looking at the U.S. market. We're also evaluating the Canadian market. But due to cost of goods at this time, we aren't looking at any of the other markets yet.

Got it. Sorry, last -- only one question. In Europe, just trying to make sure I understood like CCE on a call a few weeks ago said Monster sales were up around 25%, and then I think you said Europe for you was up 8% to 9%. Is that just weakness in non-CCE channels or is there some disconnect I'm missing?

We take it across all countries. And as we indicated, I gave you some of our bigger countries. Basically, we have increased rates, but a lot of the central and eastern countries have been -- their actual category is down and we haven't seen those sort of increases. And so when you balance it across the whole of Europe, it's come down more but also I think there is some issue in CCE. They did, we think, reduce inventories. But I don't have a figure for that. There was some reduction in their inventory holdings, which again also translate into a difference between our sell in and their sell out. And I think there was a production, they delayed production at the end of the quarter. Just because in some of -- in many of their markets, they run production and then charge out the products and then record a sell, once they run the product produced, and then it gets delivered and they moved their production that was scheduled at the end of September, they moved that into the beginning of October. So that, I think it may have had some impact as well.

And our last question will come from the line of Alton Stump with Northcoast Research.

Just wanted to ask -- just to clarify from a question about India. In the October sales number of up, what was it, 9.1, was there any impact in that just a current month or the October month from India?

No. Once again, because we really just started getting regulatory approval, they were using some of their current inventory they had on hand and we're now starting to produce new fresh inventory for them. So India really had no effect. Just want to go back -- in Japan the foreign exchange difference is about $2 million. Also just wanted to mention that, just in case you guys have looked at the some of the inventory buildup, that's possibly due to the fact that we started delivering some of the Ultra Red during the quarter. Although we launched it in the October, there was some sales in the quarter of Ultra Red, we were building up inventory. Also, we had Ultra Blue inventory, which is from the launch in March, which we didn't have last year. And we also have a Call of Duty promotion, both in the U.S. and in many of our international markets, and so there was some buildup of inventory in anticipation of deliveries for that promotion, which will take place later in the quarter, it will take place starting now, I think and going through to the end of the year.

Okay, if I could, one quick follow-up, Rodney or no?

Want to have a follow-up?

Yes. I'd like to ask a follow-up if I could. Just, as you look at the category, it'll only be up low-single digits in the third quarter I guess the comps were easier, is there still any impact, do you think, just from the perception of all the headline news risks? I think you've mentioned that on the last couple of conference calls, is that still out there, is it still and impact in the category do you think?

We think that there's still some impact, but we think that it is being -- it is lessening as time goes on because things are -- this started over year ago. The amount of articles and comments and has become sort of lessened. So we do believe there has been lesser of an impact and eventually, we believe it will get -- it eventually will be eliminated and go away. But at the moment, we think there is still some there on the category, generally. All right. Ladies and gentlemen, on behalf of Monster, I'd like to thank everyone for their continued support for the company. We remain confident in the safety of our products and our growth strategy, both domestically and internationally. Thank you very much for your attendance.

Ladies and gentlemen, thank you for participating in today's conference. This does conclude the program and you may all disconnect. Everyone, have a great day.