Monster Beverage Corporation (MNST) Q1 2016 Earnings Report, Transcript and Summary

Good day, ladies and gentlemen, and welcome to the Monster Beverage Corporation’s First Quarter 2016 Financial Results. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session, and instructions will follow at that time. [Operator Instructions] As a reminder, this conference call is being recorded. I would now like to turn the conference to Rodney Sacks, Chairman and CEO. You may begin.

Good afternoon, ladies and gentlemen, thank you for attending this call. I’m Rodney Sacks. Hilton Schlosberg, Vice Chairman and President, is with me today, as is Tom Kelly, our Senior Vice President of Finance. Before we begin, I’d 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 & Exchange Commission, including our most recent Annual Report on Form 10-K filed February 29, 2016 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 April 29, 2016. A copy of this information is also available on our website at monsterbevcorp.com in the Financial Information section. At the outset I should mention that the release of our quarterly results and this call are almost a week earlier than normally scheduled. The reason for this change is that Hilton and I will be attending the Coca-Cola Global System Meeting that starts early next week. We will revert to our normal schedule for the second and subsequent quarters. We are continuing to make good progress in the implementation of our strategic alignment with Coca-Cola bottlers worldwide. We have successfully concluded negotiations with Coca-Cola bottlers in many countries, and are planning to launch Monster with these bottlers in most of their international markets in the near future. As previously reported we have concluded agreements with Coca-Cola Amatil, which distributes Coca-Cola products in Australia, New Zealand, Indonesia, Papua New Guinea and Fiji. We will be launching Monster in Australia on May 1 and in New Zealand on May 9 with Coca-Cola Amatil. Additionally as previously reported we have concluded agreements with BTIG the 100% owned Coca-Cola bottler that operate in a number of international markets for the distribution of Monster in certain of these markets. Further to these agreements we are planning to launch Monster on May 13 in Singapore. Our plans to launch Monster in China are continuing to move forward with the Coca-Cola System. In Shanghai we have received the required product approval and manufacturing license and are planning for production of Monster there. In Beijing, we have received the required product approval and are awaiting the manufacturing license. We have commenced the required approval process in Xiamen in Southeast China. We are full planning to launch monster in China later this year, but as previously discussed the launch could be delayed by various factors including regulatory approvals and finalization of distribution agreements. We are targeting a relaunch of Monster in India later this year following discussions with their regulatory authorities. We continue to make good progress in our discussions with FEMSA, Arca and other bottler operating in South America. We have signed a distribution agreement with the Coca-Cola bottler with Lindley, which is controlled by Arca for distribution of Monster in Peru and are planning to launch the Monster in Peru on June 2nd. We are also planning to launch or transition a number of other international markets to Coca-Cola bottlers in the insuring quarters. We continue to make good progress in the repositioning, repackaging and reformulation of many of the Coca-Cola energy brands that were required as a result of the Coca-Cola transaction. We successfully completed our acquisition of the concentrate and flavor business operated by American Fruits and Flavors for $690 million in cash on April 1, 2016. We remain excited by this acquisition, which aligns us with our principal flavor supplier and will enable us to expand and secure most of our flavors at an economical cost. The integration of the acquired business is proceeding well. Consistent with the company’s previously announced plan to return capital to shareholders in 2016, the company currently intend to commence a tender offer in May to purchase up to $2 billion in value of its common stock through a modified Dutch auction tender offer at a price range to be specified. The company will fund the tender offer with cash on hand. In the first quarter sales in the beverage industry in general and of carbonated beverages in particular continue to show weakness. However, sales of Monster product accelerated during the quarter. In the first quarter of 2015 in anticipation of the closing of the Coca-Cola transaction we transitioned approximately 84% of the targeted distribution rights in the U.S. to the Coca-Cola System. With an additional 5% transitioned in May 2015. Consequently the results of the comfortable first quarter of 2015 were impacted by the acceleration of deferred revenue of $39.8 million, distribution termination cost of $206 million and Coca-Cola transaction cost to $3.6 million. Our ensuring discussion compares our 2016 first quarter results with our 2015 first quarter results after adjustment for the acceleration of deferred revenue, distribution termination process and Coca-Cola transaction costs referred to about. In the first quarter the company achieved gross record sales of $777.5 million, up 16% from $670.4 million in the first quarter of 2015. Net sales were $680.2 million, up 15.9% from $587 million in the first quarter of 2015. Net sales in the first quarter were adversely affected by unfavorable changes in foreign currency exchange rates of approximately 12.3 million. Our original green energy drink Monster Energy Drink continues to perform well at retail. Retail sales of the Ultra line continue to show good growth in the United States during the first quarter, as did our Java Monster line. Gross profit as a percentage of net sales was 62.2%, as compared to 56.1% for the comparable 2015 first quarter. The increase in gross profit as a percentage of net sales was largely attributable to increased net sales of the Concentrate segment, which has higher gross margins than the Finished Products segment, the disposal of our non-energy brands, and the price increase on our 16-ounce Monster Energy drinks effective August 31, 2015. Distribution costs as a percentage of net sales were 3.4%, as compared to 4.4% in the same quarter last year. Selling expenses as a percentage of net sales were 10.2% compared to 10.6% in the same quarter a year ago. Sponsorship and endorsement costs, merchandise display costs, and social media expenses were all higher in the first quarter as compared to the first quarter of 2015, while commissions were lower. General and administrative costs excluding distributor terminations costs and Coca-Cola transaction cost as a percentage of net sales for the 2016 first quarter were 10.6% as compared to 10.8% for the corresponding quarter in 2015. Payroll expenses were up $1.5 million consisting of $5 million increase in payroll due partially to increased staffing in connection with our acquisition of the strategic brands and an increase in stock-based compensation, a non-cash item of $3.7 million, which were offset by a reduction of payroll taxes of $7.2 million following the exercise of certain stock options in the first quarter of 2015. Also including general and administrative costs is amortization of trademarks a non-cash item of $1.8 million attributable to our acquisition of the strategic brands. Distributor termination costs were $3.4 million in the first quarter as compared to $206 million in the 2015 first quarter. Regulatory matters and litigation concerning the advertising, marketing, promotion, ingredients, usage, safety and sale of the company’s products were $5.4 million in the 2016 first quarter as compared to $4.9 million in the 2015 first quarter. In addition, other legal costs were $2.4 million higher for the 2016 first quarter. Our effective tax rate decreased from an adjusted 38% to 35.8% in the first quarter primarily due to the domestic production deduction. On an ongoing basis, we expect that our normalized tax rate will be approximately 36%. Net income was $166.1 million, compared to net income of $110.8 million during the first quarter of last year, an increase of 49.9%. However, despite the substantial increase in the number of shares on a fully diluted basis from $173.8 million to $206.9 million following the issuance of shares to Coca-Cola, diluted earnings per share increased to $0.80 after adjusting for distributor termination expense for the first quarter from $0.64 in the 2015 comparable quarter. Gross sales to customers outside the United States were $184.4 million in the 2016 first quarter compared to $141 million in the corresponding quarter in 2015. Net sales to customers outside the United States were $149.1 million in the 2016 first quarter compared to $113 million in the corresponding quarter in 2015. As stated earlier, gross sales and net sales to customers outside of the United States were higher in local currencies by approximately $15.1 million and $12.3 million respectively, including geographic sales reported are our sales to the company’s military customers, which are delivered in the United States and transshipped to the military and their customers overseas. According to the Nielsen reports for the 13 weeks through March 2016 all outlets combined, namely convenience, grocery, drug, mass merchandisers, sales in dollars in the energy drink category including energy shots increased by 7.1% versus the same period a year ago. Sales of Monster grew 10.8% in the 13 week period, while sales of NOS increased 2.5%, and sales of Full Throttle decreased 9%. Sales of Red Bull increased 4.1%, sales of Rockstar increased by 14.2%, sales of 5-hour decreased 0.1%, and sales of AMP decreased 8.1%. According to Nielsen for the five weeks ended March 26, 2016, sales in the convenience and gas channel, including energy shots, in dollars increased 5.9% over the same period last year. Sales of Monster increased by 9.6% over the same period last year, while NOS was up 5.4% and Full Throttle sales decreased 5%. Sales of Red Bull increased by 1.3%, Rockstar was up 12.6%, 5-hour was up 1.9%, and AMP was down 4.5%. According to Nielsen for the five weeks ended March 2016, Monster’s market share of the energy drink category in the convenience and gas channel including energy shots in dollars increased by 1.2 points over the same period last year to 35.2%. NOS' share remains the same at 3.7% and Full Throttle share decreased 0.1 of a point to 1.1%. Red Bull share decreased 1.6 points to 35.1%, slightly below Monster share. Rockstar share was up 0.5 points at 7.9%. 5-hour share was lower by 0.3 points at 8.3% and AMP share decreased 0.2 points to 1.8%. According to Nielsen for the five weeks ended March 26, 2016, sales of energy plus coffee drinks in dollars in the convenience and gas channel increased 20.6% over the same period last year. Java Monster was 18.4% higher than the same period last year, while Starbucks Doubleshot Energy was 25.2% higher. We’d like to mention there have been some changes in the dollar base we use to report on this category. According to Nielsen, in the convenience and gas channel in Canada, for the 12 weeks ended March 05, 2016, the energy drink category decreased 2%. Monster sales were unchanged versus a year ago, our market share increased 0.3 share point to 27.8%, Red Bull sales decreased 1%, and its market share increased 0.7 points to 37.3%. Rockstar sales decreased 9%, and its market share decreased 1.2 points to 18%. According to Nielsen for all our outlets combined in Mexico, the energy drink category grew 33.1% during the month of February 2016. Monster sales increased 8.3%, our market share decreased 5.7 points to 25% against the comparable period last year. Sales of Burn, one of our acquired strategic brands increased 4.9%, although Burn’s market share decreased 1.7 points to 6.5%. Red Bull sales increased 0.7 of a percent, and its market share decreased by 5.1 points to 15.7%. Vive 100’s market share increased 14.3 points to 34.9%, while Boost’s market share decreased 3.4 points to 11.3%. The Nielsen statistics for Mexico cover single months, which is a short period that may often be materially influenced, positively and/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 their 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. According to Nielsen in the 13 week period ended March 2016, the actual 13 week periods vary by a few weeks between different markets, Monster’s retail market share in value as compared to the same period last year grew from 12.1% to 13% in Great Britain, from 9.3% to 11% in Sweden, from 8.4% to 9.7% in Belgium, from 6.5% to 9% in Norway, from 5.7% to 7% in the Netherlands and from 18.4% to 20.9% in France. For the 13 week period ended February 2016, according to Nielson Monster’s retail market share in value as compared to the same period last year grew from 11.1% to 13.6% in Germany and decreased from 17.5% to 16.4% in South Africa although value sales were 19.3% higher according to Nielsen. We note that South Africa is one of those markets that has not transitioned to Coca-Cola bottlers. Monster’s retail market share in value for the 13 weeks ending February 2016 in Ireland increased from 7.4% to 8.7% and from 21.5% to 24.8% in Spain. According IRI Monster’s market share in Greece decreased in the 13 weeks at the end of February 2016 from 29.3% to 29.1%. I would like to point that the Nielsen and IRI numbers in EMEA should only be used as a guide, because the channels read by Nielsen and IRI in EMEA vary from country to country. According to Nielsen for the month of March 2016 in Chile Monster’s retail market share in value increase to 20.4% as compared to 15.3% last year. And in Brazil Monster’s market share for the month of March 2016 declined from 4.7% to 3.1% as compared to the same period last year. In South Korea for the month of March 2016 Monster’s retail market share in value increased from 10% to 18.7% compared to the same period last year. According to INTAGE for the month of March 2016 in the convenience and store channel in Japan, Monster’s market share grew from 33.8% to 39.9%. Net sales for the Finished Products segment in the first quarter were negatively impacted by approximately $10.3 million of foreign currency movements in the first quarter. Net sales for the Finished Products segment in the first quarter of 2016 increased 12.3% from $555.7 million to $624.3 million from a comparable period last year after adjustments for acceleration of deferred revenue. Net sales for the company’s Concentrate segment were negatively impacted by approximately $2 million of foreign currency movements in the quarter. After adjustment for such foreign currency movements net sales for the concentrated segment would have been $57.9 million for the first quarter. As a result of the Coca-Cola transaction, which closed on June 12, 2015 there were sales for the other segment during the first quarter of 2016 as compared to $31.3 million of net sales in the first quarter of 2015. In Europe, the Middle East and Africa, net sales in the first quarter increased 47.2% in dollars and 58.6% in local currencies over the same period last year. Gross profit in this region as a percentage of net sales increased from 39.4% in the same period last year to 50.2% during the 2016 first quarter. EMEA sales were negatively impacted by supply disruptions that were encountered by CCE in Great Britain Monster’s largest market in the EMEA during the quarter following the implementation of new software. Monster continue to gain momentum and increase market share in Europe in the first quarter. Overall EMEA is now operating well and we have made good strides in achieving increased distribution levels and in-store execution, including securing distribution by Coca-Cola bottlers in new countries and territories within the region. We are pleased with the launch of Ultra in Europe. We commenced distribution of Ultra in an additional eight markets in EMEA in the first quarter. Ultra will be launched in 10 additional markets in EMEA in the second quarter of 2016. In particular in Germany, France, Denmark, Belgium, Hungary, Ireland, The Netherlands, Norway, Poland and Sweden Monster achieved increased sales gains as well as increased market share. In Asia-Pacific net sales in the first quarter increased 93.5% in dollars and 97.7% in local currencies over the same period last year. Gross profit in this region as a percentage of net sales increased from 31.2% in the same period last year to 45.2% during the 2016 first quarter. In Japan, net sales in the quarter increased 63.4%, 62.5% in local currency as compared to the same quarter last year. We continue to experience strong performance in Japan. In South Korea net sales increased 283.4% or 312.6% in local currency as compared to the same quarter last year. In Mexico, Central America and South America net sales for the first quarter decreased 3.2% in dollars and increased 9.2% in local currencies over the same period last year. Gross profit in this region as a percentage of net sales increased from 39.8% in the same period last year to 41.1% during the 2016 first quarter. Net sales decreased in Brazil largely due to the overall difficult economic and market conditions together with the ongoing uncertainties for our distributor relating to the Coca-Cola transaction. In Mexico net sales decreased impart due to customer destocking during the quarter and delivery disruptions during the month of March. However, as reported by Nielsen Monster sales at retail in Mexico grew during the quarter. In Chile net sales in the quarter increased 52.3% in dollars and 74.9% in local currency as compared to the same quarter last year. As previously mentioned we are moving ahead with planning for local production in India and anticipate reentering the market in India later in 2016. As mentioned earlier we are optimistic that we will be able to finalize agreements with Coca-Cola bottlers in numerous countries in the near future. We are also continuing to evaluate production opportunities for Coca-Cola bottlers both in the U.S. and internationally, which we believe will yield cost reductions. Turning to the balance sheet, cash and cash equivalents amounted to $2.5 billion at March 31, 2016 prior to the close of the AAF conception compared to $2.2 billion at December 31, 2015. Short-term investments were $508.2 million compared to $744.6 million at December 31, 2015. Long-term investments decreased to $7.4 million from $15.3 million at December 31, 2015. Days outstanding for accounts receivables were 48.7 days at March 31, 2016, and 43.2 days at December 31, 2015 compared to 46.4 days at March 31, 2015. Inventories increased to $165.9 million from $156.1 million at December 31, 2015. Average days of inventory was 58.1 days at March 31, 2016, which was higher than the 58 days of inventory at December 31, 2015 and lower than the 69.1 days at March 31, 2015. During the 2016 first quarter, we launched our new Gronk energy drink and Salted Caramel Java Monster initial consumer response has been positive. We are planning to launch Mutant, an exciting new beverage that will be positioned as the refreshment energize in the third quarter of 2016. For competitive reasons we intend to provide further information on this new beverage at the stockholder meeting on June 14. As previously disclosed we also have additional new products plan for later this year. As this call is a week earlier than usual we can only provide the estimate for April 2016 gross sales. Based on gross sales through April 28, 2016 we estimated April 2016 gross sales in dollars will be approximately 15% higher than in April 2015. In local currencies we estimate April 2016 gross sales will be approximately 16% higher than in April 2015. We note that April 2015 sales included the old Warehouse segment and Peace Tea and April 2016 includes the Concentrate segment. We caution again that sales 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, timing of new product launches and the timing of price increases and 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 conclusion, I’d like to summarize some recent positive points. Our acquisition of AAF is exciting and represents an important milestone for the company through the ownership of the proprietary formulas for our principal product. This transaction will be accretive to the company’s earnings from the closing of the transaction on April 1, 2016. Consistent with the company’s previously announced plan to return capital to shareholders in 2016 the company currently intends to commence a tender offer in May to purchase up to $2 billion in value of its common stock through a modified Dutch auction tender offer at price range to be specified. The company will fund the tender offer with cash on hand, while Hilton and I may participate in the offer for asset diversification reasons we will continue to earn a substantial majority of our current holdings following any successful tender offer. North American and international gross margins remained healthy and continue to improve. The U.S. Nielsen market statistics and equivalent market statistics from many countries around the world show that the energy category is continuing to grow, and that Monster is generally growing ahead of the category. The new additions to the Monster family continue to gain momentum and add to the company’s sales. We are excited about the prospects for our new Mutant beverage, which we are planning to launch in the third quarter. We are particularly pleased with our performance in our international markets. We have successfully transitioned a number of international countries to Coca-Cola bottlers and we have reached an advanced stage to transition many more markets to Coca-Cola bottlers from the second quarter of 2016. I’d like to open the floor to questions about the quarter and the year please note that we will not be taking any questions with respect to the tender offer on this call. Thank you.

Thank you. Our first question comes from line of Kevin Grundy with Jefferies. Your line is now open.

Thanks, good morning, guys.

Good morning.

I want to start with China given the importance of your launch in that market, can you talk a little bit about building upon the timing of that around the brand positioning, the investment that’s going to be required for trial there to raise brand awareness that would be helpful. Thank you.

To give most of the information that you are asking would be giving future estimates and indications and even more difficulty in a market that we are just going into. We are -- all I would like to say about China is that we are planning to enter China in a similar way to which we have entered other markets. We look at building distribution on a store-by-store basis, we are going into the market with one SKU which is Monster green primarily our main product. As I indicated in the call, we are still looking to finalize negotiations with our distribution partners on the distributions agreements and those negotiations have been taking -- have taken some time. We are progressing with registrations. So we are in a new country it’s -- we are looking at -- obviously we don’t have a lot of experience there because we’ve not been there. And so to say more than that I don’t know we are looking to continue later this year, but there could be some delays in getting the registrations, but we are continuing to focus on China and I just don’t believe that there is more at this point that we will be able to say. Obviously, we will need to make investments in the market, which we will do as appropriate to establish the brand, but it’s a slow traditional build for us going into China.

Can I ask a follow-up?

Yes.

Thank you. Just switching gears to the U.S. some of the Nielson data has slowed a bit broadly for the category and some of this may have been that we’ve cycled the pricing that Red Bull has taken and you want to cycle that into the fall, but can you talk a little bit about some of the slowing that we are seeing broadly in the category in the U.S. whether that’s concerning at all or whether you think it’s a bit of blip and then what is our expectations broadly for the category for the balance of the year? Thank you.

The category, might be seeing a slowing slightly, but obviously it’s still growing at a good positive rate, you have got to look at the category in the context of beverages generally, I think the point you made is one of the important points is that part of that category’s growth is that we are cycling on price increases now and if you look at the growth and it’s largely is influenced -- the category growth largely gets influenced by the growth that obviously Red Bull enough contribute to the category as the major participants in the country. And you have seen a slowing in the Red Bull numbers and that really has probably a large influence on that category. So we don’t see much difference, we are positive about the category, but obviously we can’t tell where the category will grow, what sort of innovation will come from our competitors, we have innovations as I have indicated coming. It is going to come later in the year, but we do have quite a robust innovation pipeline.

And our next question comes from Judy Hong from Goldman Sachs. Your line is now open.

Thank you, good morning.

Good morning, Judy.

Good morning, Judy.

So broadly speaking it seems like your international sales growth has accelerated in Q1 versus Q4 and I was just hoping to get a little bit more color just in terms of how much is this really lapping some of the inventory issues that you have had and are we now mostly behind some of that issues? How much are you getting growth in some of the transition market and as you look over the next six months markets like Australia where you are transitioning to Amatil and then you got Nigeria and some of the newer markets you are entering just your expectation in terms of how quickly you can see growth accelerating just broadly from an international perspective?

Again, like everything in life everybody would like things to happen instantaneously, but it takes time and as we transition we are starting to see once you have had an opportunity to settle down with the particular bottler in that market we all starting to see good progress. But again is also depends on the commitment of a bottler and each bottler has his own priorities, his own commitments and it is varied, but if you look at the trend Judy, which is clearly from what we have given the indication on each of the countries on our market share. The trend generally is continuing to be positive and we are continuing to take market share.

I would say look at the German numbers Judy that we spoke about on the call and also South Korea. Those are two markets that have been transitioned to the Coca-Cola System. Those may give some indications but the other markets that we have not seen that amount of growth and those are some of the Hellenic markets. So as Rodney said it does differ from country to country. So those are two good indications here.

So we just think generally it’s positive and as we go forward obviously we do look work our way through the choppiness and the transition issues that we had in the past.

Thank you. And our next question come from Mark Astrachan from Stifel. Your line is open.

Hey, good morning, guys.

Hi, Mark. Good morning.

Good morning.

I wanted to ask about the Concentrate business. So it still seems to be a little bit weaker I think than it was originally trending going into the deal close. I guess I’m curious if you were to try to parse it out sort of differently maybe there is some questions have been asked about it in the past. How much of the under performance has been driven by some of the larger brands like Relentless in particular, but also like Burn in terms of what has happened from relaunches, repositionings, potential reductions in shelf space in favorable Monster and the like. In other words is there a way to sort of think about it split up by the bigger brands and maybe even comment on some of those smaller brands that could be getting discontinued?

I think it’s a mix bag. I actually have done full analysis of these strategic brand. Like you we also need to understand what the position is with regard to those brand. Some of it is relating to weakness in the brand themselves that we are addressing in various ways. Some of that of course is a foreign currency and there is another factor in that in certain countries we have been unable to structure ourselves in a way that we could actually self concentrate and what we do in certain countries is we get a royalty from the Coca-Cola Company, which equates to effectively what we would have done had we sell the Concentrate. The struction is sitting up various countries to accommodate the Concentrate business. So there is a whole lot of factors that one has to take into account in evaluating the Concentrate business. But largely there is some weakness, but you are not seeing in these numbers the full extent of the Concentrate business because of some of these adjustments that have to take place.

I think that one other thing we did mentioned previously that we did find that in some of the cases the investment in the strategic brands prior to and during the transition had been trimmed and cut back and that did affect sale. So we did see a reduction in sales in those countries as a result we believe of that. So what we’ve had to do is not only just go in and blindly obviously reinvest in marketing, but we’ve had to relook at how we repositioning these brands and at the same time get the repositioning done both in repackaging, in designs, in flavors and then obviously then recreate marketing plans to fit those the new positioning that we have looked at four of these brands particularly the Burn brand and Relentless are two of the large brands that did have some weakness. We’ve also in many ways repositioned NOS a little bit in the U.S. although we haven’t changed packaging, we all are going to modernize that packaging and that’s still coming through now. So this is a long process because there were many brands in many countries and laid on top of our own staffing and our own business obviously at Monster it takes a long-term to get a lot of these reposition done. So we think that’s partially the reason for it and yes, it has been weaker than we had estimated but we are -- we have been doing the repositioning, we have doing some focusing, we are starting to see some strong signs and we do believe that that will continue to be positive. Some of the other brands although smaller again it’s a mix big you can’t put it into one category because in some cases the brands are smaller and may go away, but in other cases some of the smaller brands are very good, very strong brands and we are actually looking to long-term growth from those brands, but again it’s going to be a positioning and a build. It’s not going to happen overnight. But there are some really good brands that we see in the mix that we do believe we will see growth from going forward.

Does that answer your question? So it’s a kind of mixture of volume decreases in certain brands that are being addressed and other factors that...

Thank you. And our next question comes from Bill Chappell from SunTrust. Your line is open.

Thanks, good morning. Rodney can you talk a little bit about Mexico from kind of the numbers you were reeling off I couldn’t tell if they were just some short-term turbulence or can you give a little more color, what’s going on there?

There were obviously some challenges in March as we indicated, that is a market that has not transitioned so there is obviously some uncertainty relating to the market. The market we have still grown just short of 10% and so the brand has continually grown quarter-to-quarter, but there is the emergence of a low cost brand Vive 100 in the market that have been very aggressive and they have really expanded the market and that’s why when we look at the market we say our market share has decreased, but is it of a very much increased market and may be a little bit different. And then we had a debate earlier as to does Vive 100 really put into category or do well we really in the premium category and Vive 100 is in a lower price category are they really different and should we be splitting them. And as we think we have traditionally put them into the one category, but that really what’s happens. So if you look at the underlying market bearing the uncertainties et cetera it is still growing and obviously one of the issues is ForEx and affordability, but we are still growing. So we are comfortable with end market, we think it’s a good market and we think that in the future we will continue to see pretty good growth from there.

So since you like numbers, let me quote the number enough for Vive 100, there 340 ml PET which is their leading product in pesos sells for 10 pesos. Our product, a 473ml U.S. product that sold in Mexico sells for 30 pesos to 32 pesos. So that’s the comparison in pricing. It’s a very, very aggressive competitor and we don’t want to go down and we will not go down to that type of pricing for Monster.

Thank you. And our next question comes from John Faucher with JP Morgan. Your line is open.

Thank you. Just want to follow-up on the last couple of questions. You’ve talked about sort of preaching patients in terms of getting these bottler deals done totally understand that. Can you tell us what goes into the negotiations, it sounds like some of these sort of brand shifts what the underlying support levels are the transition may be out of some of the Coke Concentrate brands into the Monster brand and how you manage that transition? It sounds like that’s part of the negotiations and so is that why this is taking longer? And so I guess sort of a little bit of color in terms of kind of what you need to nail down with the bottlers as you do these deals? Thanks.

I think you put into two different buckets, the one bucket is although we are trying to get us have ourselves the hope further that we will become more integrated into the Coca-Cola System. We are still nevertheless an independent publicly traded company and as a result it’s been important for us to continue to negotiate agreements on terms that we believe will put us in a position where we can take protect ourselves and our brand if things -- the relationships didn’t go as planned. And so the contract that we have agreed to with the company as a principle and obviously now you take that to the individual bottlers they have their own lawyers, they have their own local laws and they have their own view of license, very respectfully many of them are not used to signing a contract of this nature, which is more akin to a finished product distribution agreement as oppose to a manufacturing concentrate bottler agreement, which puts a lot more discretion and decisions in the hands of the bottler whereas we tend to keep or want to keep most of those decisions about global marketing, about some of the local marketing and a number of things. The other thing is that we obviously got to be very cautious that we don’t get into a situation, we have a large line of products for example and we don’t want to be in a position that if the bottler decide he wants to take one skew or three skews and not the rest that we are kept out of the market for the rest of the SKUs. So there are bones of contention that keep going up and down between the legal agreements and we’re getting through them, but it’s in many case that it’s really a question of literally educating a bottler in a country with their lawyers about why our agreement is in the form that why we need the protections? Then the other obviously is -- the other bucket is just goes back to the old life money, how do you share the value chain that’s available in the country and it’s just arm wrestling between us and the bottlers as to how do we get to a fair value share and in some cases we are at odds with the bottlers on what we believe we want out of the value share and we’re not going to compromise the value share and take less in order to simply try and get deals done. Because you want to move quickly I mean what we going to negotiate is going to stay with us for 20 or 30 years or whatever long the agreement are. So we really do want to have a fair relationship and a fair share of the value chain bearing in mind that we spend and do a lot more than it’s normally done by Coca-Cola Company in a bottler relationship when they split whatever the split is when they split their value chain the bottler picks up a lot more of the obligations. In our case we do and we don’t want to be in a position where we split the chain and we end up with still the lion share of the marketing and other expenses, which aren’t fairly shared. So it’s been in the negotiation and we just -- we’re getting through them one-by-one and I think that’s really the color I have got I don’t know Hilton if you would like to add to it?

No, I think that’s absolutely right. One of the big issues the legal stuff can be negotiated and it is but it’s got to be a fair agreement in terms -- on commercial terms for us and a fair agreement for the bottler and often the bottler feels he is entitled to more and we as a brand owner have substantial expenses, have substantial marketing expenses and we have to ensure that after those marketing expenses we do a good deal for our shareholders. So it is a bit of a hedging, but as you can see from the agreements that have been finalized we’re moving forward and we’ll move forward in due course with some of the other bottlers or we won’t. And if it’s not there are other distribution partners that we’ll be working with.

Yes I agree.

Thank you. And our last question comes from Caroline levy from CLSA. Your line is open.

Thanks so much, good morning. My question relates to margins which were just outstanding in the quarter 840 basis points improvement I believe and as you move into the next four quarters I believe you’ll get about a 250 basis points left from the benefit of the acquisition. So I just want to…

So it’s your estimate.

Yeah I just want to be sure that within the margin expansion we did see there were no unusual items in the first quarter and obviously there is the benefit of the acquisition which will continue I think through most of the second quarter. But if there are any moving parts you can elaborate on little bit more on margins or is this the new status quo the…

We spoke about the price increase number one; number two, we’ve got the Concentrate business has now kicked in it wasn’t in the first quarter of last year. So those are two factors that influenced margin in this quarter. There is product mix, which has also influenced margin so apart from those I’m not aware of anything unusual apart from those that influenced margin in the quarter.

And I'm wondering if you could…

And in going forward yes we will have the benefit of the AFF transaction.

Yeah just because I think the strategic is the million dollar question on the company is do you think overtime international margins get pretty close to domestic and I mean we could talk in 5 or 10 year increments I guess is there a reason why international structurally would always be below the U.S.?

Well pricing differs from country to country obviously and we have very good pricing in the U.S. and in some countries internationally we don’t benefit from the same pricing structures. So what we’ve done we don’t give projections as you know, we don’t give guidance, but what we’ve done in this quarter is we’ve actually given you the margins in the international territories in aggregate so you can see the trends in margin in EMEA and the trends in Asia Pacific and Central and South America.

I think I’d like to just add is that if you look at international margins I think we should expect them to be lower than U.S. because of pricing and in many of those cases our cost of goods seems to be higher, we’re producing out of the U.S. particularly for the -- in the immediate future when volumes really get to the levels of the U.S. we’ll see some reduction but even then I think we should expect cost of goods to be higher internationally. The other thing is that we go through the -- in looking at the mix it’s a mix bag Caroline because even internationally we’ve obviously got Concentrate business, which has got traditionally the higher margins, but as Monster and we think that ultimately the growth in the long-term for the company is that the Monster brand will grow while again we think we will get growth from the new brand there is some nice brands in the strategic group that will continue to grow as well. If you looked -- if we looked at it we think that ultimately the larger growth will come from Monster and then as Monster there will be a -- because they’re international there will be some slight reduction in overall margin, but you want to take the mix…

Because it’s a finished goods margin.

Correct. And that’s [indiscernible]. So again I just want to bear that in mind so there I am conscious like a I think just a straight line and then take the incremental margin we should get from AAF and should be applied going forward. So while we do expect there to be an improvement in some immediate factors that one should take into account.

And we don’t give predictions.

Thank you and I'm showing no further questions. I would now like to turn the call back to Rodney Sacks for any further remarks.

On behalf of Monster I’d like to thank everyone for their continued interest in the company. We continue to believe in the company and our growth strategy and remain committed to continuing to develop and differentiate our brands and to expand the company both at home and abroad and in particular to expand distribution of our products through the Coca-Cola bottler system internationally. We are also particularly excited by the new opportunities that we have going forward with a robust portfolio of energy drink product throughout the world comprised of our Monster energy brand together with the strategic brands. Thank you very much for your attendance.

Ladies and gentlemen thank you for participating in today’s conference. This concludes today’s program. You may all disconnect, everyone have a great day.