Good afternoon and welcome to the Monster Beverage Company’s First Quarter 2021 Conference Call. [Operator Instructions] I would now like to turn the conference over to Mr. Rodney Sacks and Mr. Hilton Schlosberg, Co-CEOs. Please go ahead.

Thank you. Good afternoon, ladies and gentlemen. Thank you for attending this call. I am Rodney Sacks. Hilton Schlosberg, our Vice Chairman and my Co-Chief Executive Officer is on the call. As is Tom Kelly, our Chief Financial Officer. Tom Kelly will now read the cautionary announcement.

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 are based on currently available information regarding the expectations of management with respect to revenues, profitability, future business, future events, financial performance and trends as well as the future impact of the COVID-19 pandemic on the company’s business and operations. Management cautions that these statements are based on our current knowledge and expectations and are subject to certain risks and uncertainties, many of which are outside the control of the company that may cause actual results to differ materially from the forward-looking statements made during this call. Please refer to our filings with the Securities and Exchange Commission including our most recent Annual Report on Form 10-K filed on March 1, 2021, including the sections contained therein entitled Risk Factors and forward-looking statements for 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. I would now like to hand the call over to Rodney Sacks.

Thank you, Tom. The company’s top priority remains the health, safety and well-being of its employees. The company’s flavor manufacturing facilities, its co-packers, warehouses and shipment facilities have operated throughout the COVID-19 pandemic. The company’s bottlers and distributors are operating and the company’s products remain generally available to consumers. In limited countries, the operations of the company’s bottlers or distributors have, in part be negatively affected for varying periods of time. Despite the ongoing impact of the COVID-19 pandemic, the company achieved record first quarter net sales. Currently, the company does not foresee a material impact on the ability of its co-packers to manufacture and its bottlers and distributors to distribute its products as a result of the COVID-19 pandemic. The company’s supply chain remains largely intact. However, the company is experiencing shortages in its aluminum can requirements in North America and Europe given the company’s volume growth and the current supply constraints in the aluminum can industry. The company has taken steps to source quantities of aluminum cans from South America and Asia. However, logistical issues, including ocean freight and port of entry congestion, could delay such supply. Logistical issues in relation to the importation of certain other raw materials and ingredients could impact future supply. Furthermore, we are continuing to experience freight inefficiencies and like other beverage companies are incurring increased aluminum can and other costs in the current environment. In the first quarter of 2021, net sales were $1.24 billion compared to $1.06 billion in the first quarter of 2020, an increase of 17.1%. Adjusting for foreign currency movements, net sales for the 2021 first quarter would have been up 16.2%. Gross profit as a percentage of net sales for the 2021 first quarter was 57.5% and compared with 60% in this 2020 first quarter. The decrease…

41.3%, sorry.

41.3% primarily due to unfavorable country and product mix. We are also pleased that in the 2021 first quarter, Monster gained market share in Belgium, the Czech Republic, Denmark, France, Germany, Great Britain, Greece, Italy, the Netherlands, Norway, Poland, the Republic of Ireland, South Africa, Spain and Sweden. In Asia-Pacific, net sales in the 2021 first quarter increased 24.8% in dollars and 17.4% in local currencies over the same period in 2020. Gross profit in this region as a percentage of net sales, was 48.8% versus 42% over the same period in 2020. In Japan, net sales in the 2021 first quarter increased 9.2% in dollars and 4.1% in local currency. In South Korea, net sales increased 17% in dollars and 9.6% in local currency as compared to the same quarter in 2020. In China, net sales increased 59.4% in dollars in the 2021 first quarter and 48% in local currency as compared to the same quarter in 2020. In Oceana, which includes Australia, New Zealand, Tahiti, French Polynesia, New Caledonia, Papua New Guinea and Guam, net sales increased 66% in dollars and 47.8% in local currencies. Sales of the Monster brand in Oceana increased 65.6% in dollars and 48.1% in local currency as compared to the same quarter in 2020. In Latin America, including Mexico and the Caribbean, net sales in the 2021 first quarter increased 35.7% in dollars and increased 55.9% in local currencies over the same period in 2020. Gross profit in this region as a percentage of net sales was 37.9% compared to 42.5% over the same period in 2020 primarily as a result of foreign exchange rates as certain raw materials and ingredients for products in this region are purchased in U.S. dollars. In Brazil, net sales in the 2021 first quarter increased by 34%…

[Operator Instructions] The first question is from Bonnie Herzog of Goldman Sachs. Please go ahead.

Hi, everyone.

Hi, Bonnie.

I wanted – hello. I wanted to ask you guys about the shortages of cans you’re experiencing. Could you give us a sense of how big of a driver that was of your gross margin contraction in the quarter? I mean was it the bulk of that, for instance? And I’m curious to hear if the situation has deteriorated further in April and May? And then finally, when do you expect the shortage situation to improve or maybe stabilize? I mean, I guess, trying to understand if we all should assume this will be a pretty big issue for the remainder of the year? Thanks.

Okay. So maybe I can get that, Bonnie. So what happened when we set our can requirements with our can companies about a year ago, we estimated that our sales would be 10% to 12% or up this year. In fact, as you can see, they are substantially above that. So whatever we contracted for, we’ve got. What happened with our sales in January and February, ourselves were doing okay. And then in March, they have spiked up. And as Rodney quoted, in April, they are spiked up yet again. So what we’ve done is we’ve procured additional cans from South America and from Asia that will start coming in late in the second quarter. We also have new can companies that are opening their doors later this year, and we will be drawing cans from those companies as well. So to answer your question about the first quarter, yes, there was an impact. And the big impact, as we mentioned, in the release and on this call is that the bigger impact was these freight in costs where we were drawing product, for example, from Canada, and we were shipping product from various locations to our distribution center that impacted cost of sales. We also had – we broke our orbits. In other words, we’ve always tried to manufacture and sell within regions to avoid excessive shipping costs. We had to break that this year to satisfy consumer demand and so that was another factor that impinged on the results. But the margin was impacted by – not only by those freight costs, but – excuse me, as we mentioned by the promotional allowances that were higher in the second quarter across the board. And also, from our geographical sales mix, because as you know, we sold a significantly higher percentage of product overseas than we did in the U.S. So it’s the same story that we’ve experienced and we’ve spoken to shareholders, the more we sell overseas, the lower is our gross margin percentage. But again, I must caution shareholders that we bank dollars, we don’t bank gross profit percentages. And in taking the decisions we took in the first quarter, it was important to do so to satisfy demand. We knew the profitability would be higher, but the percentage may, in fact, be lower, which it was.

The next question is from Laurent Grandet of Guggenheim. Please go ahead.

Yes. Good evening everyone. And actually, I want to dig a bit more in what you’re just saying in terms of gross margin. So you mentioned freight, so I understand that’s the number one. The aluminum cans, you mentioned also, I mean, promotional activity. So if we were to put some numbers, it’s freight, 50% of the impact. I mean aluminum can and now maybe 30% and promotional activity, 20%. I’d like to basically understand this a bit better. If you can, give us an idea here, that would be great? Thank you.

So Laurent, we spoke about the first quarter. In the first quarter, the impact of the aluminum can costs were not a major factor. And as you know, and everyone else on the call probably knows as well that we have suffered significant and will set a significant increases in aluminum costs going forward. So for example, it’s no secret, but if you look back on a year ago, aluminum costs are up 83.6%, including the Midwest premium in the U.S., and they are up 71%, 71.1% in Europe. So as we go forward, we may not have some of the cost impacts on gross margin, but we certainly will have impacts on aluminum in the second and subsequent quarters. So for me to talk more about the first quarter, we don’t actually give the numbers out that you’re asking for. But what I can say is that I don’t expect the margins to improve going forward this year. I expect that we will not – that our margins will not improve as we go into the second, third. Possibly the fourth quarter, I think things will be better. That’s my analysis. But certainly in the second and third quarter, we will continue to suffer gross margin percentage in our stress gross margin percentage erosion.

The next question is from Chris Carey of Wells Fargo Securities. Please go ahead.

Hi everyone.

Hi, Chris.

So obviously, a big – hey, so obviously, a big number quarter to-date. And I guess the question is, with the aluminum supply shortages that you have, are you going to run into some issues with the ability to fill that demand? And could that prevent you from doing some things that might help with your gross margin, which sounds like they could improve by Q4, like taking any pricing in the business?

So that’s obviously something that we’re very aware about on pricing. I know what some of our competitors, some of the big beverage companies have spoken about with regard to pricing. But I’m not sure that we would take – move ourselves. Last time we went ahead and did it irrespective of Red Bull’s strategy with regard to pricing. They – I think this time around, we’re examining what they will be doing. Remember, they are importing a substantial amount of their cans and product from overseas. So we will be watching that. But there are other ways to take price up, for example, we can reassess, which we are doing, structure of promotional allowances to move margins in a more positive direction. But again, we don’t want to disturb the business that is doing very well. Our share is – we’re happy with where the business is going. We’re happy with our share, and we know when to disturb what we already have. So we bring in cans from abroad, as I said, we’re getting new cans in the system later on in the year. And as far as we’re concerned, we will continue to examine the opportunity to take price. And if necessary, as I’ve said, we’re looking at on our promotional allowances as well.

The next question is from Andrea Teixeira of JPMorgan. Please go ahead.

Hi, thank you, and good afternoon. On the True North Organic Energy launch, should we assume that the impact will be mostly concentrated in the second half, and particularly in 2022? And does that mean you have decided to remain in non-alcohol segment and you’re not launching a hard seltzer for now? And then hit on the gross margin, and I appreciate your commentary maybe perhaps we should assume that it may get worse before it gets better, given the freight and aluminum have actually been sequentially worse? Thank you.

Perhaps I’ll take the part of it, and Hilton can take part of it. On True North, we are, as I indicated, we are going to have limited sales just going into and seeding the market this year. The full launch and rollout will take place early in – from the beginning or early in 2022. So it will – we think it will have an impact in 2022, and we will have much less of an impact this year.

Okay. Andrea, you were talking about margins. As I said, I don’t think margins will get better in the second and the third quarter, margin percentages, but with robust sales which is obviously something that we’re looking at in terms of our own forecasting, although we don’t give guidance, we must look at the bottom line, and we must not necessarily look at percentages. Because what we have to do as part of our everyday function is to satisfy the demand of our customers because the last thing we want to do is to have our bottlers on the line without inventory, our consumers gravitating to other products. And we have to maintain the status quo. The company is doing really well on the top line. And we, hopefully, will continue to do so.

Yes. Just – and then just to complete your question with regard to the alcoholic CELSIUS side. I don’t think you can assume that we are going into it or not going into it. Don’t make that assumption. We’ve addressed the nonalcoholic sell some market. We’ve decided a strategy, and we’ve developed products. And align, and we are going to launch that line. As regards to alcoholic sensing, we are still looking at the market. I think if you have been watching the market, I’m sure the analysts have been. I think you’ve seen quite a lot of – a fortune of new products being launched, many – in cases from the same companies, just different variants. Throwing them against the wall and seeing what’s going to stick. What you’ve also seen in the last 3 months, what we’ve noticed is quite a falloff in the rate of increase in the category. And as the category is maturing, so the increase is also tempering. So we are involved in looking at that category in developing products and as I think I’ve said in the last call, we simply don’t want to launch a product. That’s me-too and that follows everyone else. It’s just no point in that and taking the time and effort and detracting from our focus on our core energy brands and portfolio, where we get a better return and have, obviously, it’s much easier for us to get meaningful sales. But we are continuing to monitor the alcoholic energy seltzer category. And we may well do something in that. But how we do it and what we do it is still not being determined and still not – we don’t have a firm direction. So, all I can really say is just that we are addressing it, but we shouldn’t assume that we are definitely going to go ahead or definitely not going to go ahead or how.

The next question is from Mark Astrachan of Stifel. Please go ahead.

Yes. Hey, thanks, and good afternoon everyone. I guess, don’t kill me I am going to ask a bunch of it for follow-up questions here so helping restrain yourself for a second.

Sure.

I guess on – are can shortages impacting your U.S. market share, if not, or if they are, could you maybe just talk about kind of what you’re seeing in the U.S. also, could you clarify on the gross margin you’re talking about relative to 1Q levels for 2Q and 3Q? Or are you talking about – you’re not giving us any sort of color on 2Q and 3Q relative to 1Q? And then back to the other question on pricing and then related to promotional allowances. So your capacity constrained, at least for the time being, what’s the harm in taking price to constrain the demand and then also, you’re suggesting then the promotional allowances after 1Q will lessen in 2Q, 3Q kind of for the same effect?

Okay. So where do you want me to start? So I think it is fair to say that out of stocks have impacted share. I don’t know how big that impact is. And I’m not going to because honestly, we don’t know. But what we do know is that Red Bulls on-premise has moved into the measured channels. There is no question about that. I think we underestimated the impact of their on-premise business moving into major channels. However, our share is doing nicely. Our sales are growing very nicely. And frankly, we are selling everything that we can make. And what you guys are not seeing or not addressing is things like Amazon. We spoke about the Stackline data and our other unmeasured channels, for example, the Home Depots and the Lowe’s and the home improvement stores and all those other parts of the business that are very strong for us are continuing to grow and continue to gain share in those particular channels. So overall, I think we are satisfied with where we are, as I said earlier. And we’re anticipating that as soon as we they can start coming to the U.S., and we start being in a more orderly situation that we will continue to grow again as we anticipate. So that was one question. Your second question was on margins. And I think I said that I expect my personal view, and this is not guidance, but I expect margins to get worse in the second and third quarter before they get better. So that’s my answer to that. Mark, just remind me, what are your other questions?

Pricing and promotional allowances relative to capacity constraints.

Okay. I think pricing, I said to you, we’re continuing to evaluate. And we’re doing this on a honestly, on a daily basis. We would like Red Bull to lead, but if they don’t lead, we will make a decision as to where we should or shouldn’t go with regard to pricing. With regard to promotional allowances, that is correct. We will – we are putting back promotional allowances, and you should see – we should see some impact in future quarters.

Next question is from Dara Mohsenian of Morgan Stanley. Please go ahead.

Hey, guys. So just one quick clarity question and then one broader question, just – it does sound like there is a little bit of demand impact from the lack of full supply on the aluminum side. Are you expecting that to be a significant issue in Q2 before it gets better and you get some of this incremental supply in, just trying to understand that in the short-term? And then just a broader question, we’ve obviously seen an acceleration in U.S. energy category growth the last few quarters after the initial weakness for a few months post-COVID. Can you just review what you think the key factors have been behind that acceleration in U.S. category growth? How sustainable they are going forward as we sort of look to that cycling that higher category growth in the back half of the year? Thanks.

So maybe I’ll just take the first one, and then we will get Rodney to take the second one. So Dara, if you look at April sales, for example, and you take out – you strip out what happened in 2020. And you can see that there was a very big impact in sales in the second quarter and a very positive impact. So it is presenting challenges to the supply chain team, and we are doing everything we can to ensure that we’re able to keep as much as possible in stock. In fact, we’re focusing on the SKUs that are generating the significant part of our volumes at the expense of SKUs that are not performing as well. So that’s really where we’re at with regard to the second quarter. We will be getting cans in. If these port issues resolve themselves, and we will – we’re trying as best as we can to get back in stock as soon as possible.

Yes. Just to – just add – just one thing. The uncertainty that we’ve got is, obviously, for cans that we’re importing, we are also incurring freight costs above the aluminum cost or can price. So that’s why those costs will go up the shorter term. As the additional plants in the U.S. come on stream, we will get back to a more normalized pricing structure for cans and get the additional volume. So it’s a little difficult now to predict exactly where we’re going to go on a month-to-month or quarter-to-quarter basis, but we think it will normalize, as Hilton said, towards the fourth quarter. With regard to the increased category, I think we’re already in a world of just unknowns. The category had a really steep hit rewards in late March, early April last year. Different in different parts of the world, when a lot of the bottlers literally took their staff and people teams out of the markets. But it has come back and the growth has come back really, really nicely. And so one of the things that we were – which were sort of unusual, we found that the growth was generally, historically has always been led by the convenience channel at a higher rate than the mainstream grocery and drug channels. And that sort of reversed itself with COVID. So again, you’re looking at factors that are just not normal. What we have seen, as you can see from the last 4 weeks numbers, we quoted in Nielsen from convenience, that started to pick up again quite nicely. So again, we’re in a very uncertain period because of what happened last year and your comps on last year. But even if you look at the 2-year stack sort of set of numbers, you’re getting some healthy growth back, where the category had slowed a little bit towards the end of ‘19, the growth was – they were still growing a bit slower. So we think that we will see continued growth regardless of how we come out of COVID and how our people come back into the markets. And we are hopeful for that. But again, it’s – we just can’t predict that at this stage. Our numbers are good. The numbers are strong. And Red Bull’s numbers have been strong again, a little bit, we think, skewed by the switch from on-premise to off-premise, but continue to grow. And obviously, we are the main players in the category. And so, the category growth is driven by our – respectively, by our two brands respective sales. So I think it all goes well for us, but we just don’t have any – I can’t give you any further color on it because we would be guessing, I think we all are.

Yes. So the only thing I would add to that is that I always look at the first quarter of 2020 because that was kind of a pure quarter for us. COVID started kind of late in the quarter, where our sales were already in-house. And so the first quarter for us was really 2020 was really kind of a normal quarter. And if you look back to that first quarter, and I always do. First quarter net sales in 2020 over 2019 rose 12.3%. So even as we entered into COVID, our sales were strong.

This concludes our question-and-answer session. I would like to turn the conference back over to Mr. Sacks and Mr. Schlosberg for closing remarks.

Thanks very much. 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 it’s remain committed to continuing to innovate, develop and differentiate our brands and to expand the company both at home and abroad, and in particular, expand distribution of our products through the Coca-Cola bottling system internationally. We believe that we will be able to navigate through the challenges ahead as a result of the COVID-19 pandemic and hope that this unfortunate situation will resolve itself in the near future. We believe that we are well positioned in the energy drink category and continue to be optimistic about our total portfolio of energy drink brands. We hope that you will all stay safe and healthy. Thank you very much for your attendance.

The conference has now concluded. Thank you for attending today’s presentation. You may now disconnect.