Monster Beverage Corporation

Good day, ladies and gentlemen, and welcome to the Monster Beverage Corporation second quarter 2019 financial results conference call. 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. If anyone should require assistance during the conference, please press star, then zero on your touchtone telephone. As a reminder, this conference call is being recorded. I would now like to introduce your host for today's conference, Mr. Rodney Sachs. Chairman and Chief Executive Officer. Sir, you may begin.

Good afternoon, ladies and gentlemen. Thank you for attending this call. I'm Rodney Sachs, Hilton Schlossberg. Our Vice Chairman and President is with me today, as is Tom Kelly, our Executive 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 as in the meaning of Section 27A of the Securities Act of 1933 as amended. and Section 21E of the Securities Exchange Act of 1934 is 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. 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 February 28, 2019, and our most recent quarterly report on Form 10-Q, filed on May 3, 2019, 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. An explanation of the non-GOP measure of gross sales and certain expenditures, which may be mentioned during the course of this call, is provided in the notes and designated with asterisks in the condensed consolidated statements of income and other information attached to the earnings release dated August 7, 2019. A copy of this information is also available on our website at monsterbevcorp.com in the financial information section. Consumer beverage preferences and tastes are continuing to evolve, and we are endeavoring to address them through our ongoing innovation of new products. In the second quarter of 2019, net sales were $1.1 billion, up 8.7% from $1.02 billion in the second quarter of 2018. Net sales in the second quarter were negatively impacted by approximately $25.9 million of foreign currency movements. Without these foreign currency movements, net sales for the quarter would have been up 11.2%. Gross profit as a percentage of net sales for the 2019 second quarter was 59.9% compared with 61.1% in the 2018 second quarter. For the quarter ended June 30, 2019, gross profit as a percentage of net sales was positively affected by increased sales prices of our products sold in the United States and Canada, as well as by reduced aluminum costs. Gross profit as a percentage of net sales was primarily negatively affected by geographical and product sales mix and increases in certain input costs. Distribution costs as a percentage of net sales were 3.4% for the 2019 second quarter as compared to 3.7% in the 2018 second quarter. Selling expenses as a percentage of net sales were 11.2% for the 2019 second quarter as compared to the 11.4% in the same quarter in 2018. General and administrative costs as a percentage of net sales were 10.9% for the 2019 second quarter as compared to 10.7% in the same quarter in 2018. In the quarter, payroll expenses as a percentage of net sales was 6.6% compared to 6.5% in the same period in 2018. Payroll costs increased $7.4 million, primarily due to headcount growth both domestically and internationally, as well as an increase in payroll taxes. Stock-based compensation, which is a non-cash item, was $15.6 million in the second quarter of 2019 compared to $14.9 million in the same quarter in 2018. Our effective tax rate decreased from 24.6% in the 2018 second quarter to 23.4% in the 2019 second quarter. The decrease in the effective tax rate was primarily due to the increase in profits earned by certain foreign subsidiaries in lower tax jurisdictions than the United States. Net income was $292.5 million in the 2019 second quarter, compared to net income of $270.1 million in the 2018 second quarter, an increase of 8.3%. Diluted earnings per share for the 2019 second quarter increased 11.9% to 53 cents from 48 cents in the second quarter of 2018. We continue to make good progress in the implementation of our strategic alignment with Coca-Cola bottlers globally. We transitioned the distribution of Monster Energy drinks from Big Guys' territory, which is located in the New York metro markets, to Liberty Coca-Cola in early April 2019. As of April 6, 2019, the United States was fully transitioned to Coca-Cola Network bottlers. In the second quarter of 2019, Monster Energy was launched by Coke bottlers in Azerbaijan, Paraguay and Saudi Arabia. We are planning further international launches later this year. We launched Predator, our affordable energy brand, in the second quarter of 2019 in certain markets in Europe, namely Greece, Bulgaria and Cyprus. We are planning to launch Predator in selected additional markets in Eastern Europe, Central Asia, the Middle East and Africa throughout the second half of 2019. In China, we completed the rollout of Monster Ultra in the second quarter and also launched Monster Manga. We have significantly expanded our shelf space for Monster with three SKUs in our targeted top 40 cities and key accounts. We continued the rollout of Monster across India and are planning additional SK launches in India later in 2019. I will now briefly discuss our arbitration with the Coca-Cola Company and litigation with Vital Pharmaceuticals Inc., VPX, the maker of Bang Energy Drinks. As we have previously disclosed, in October 2018, Monster Beverage Corporation and the Coca-Cola Company mutually agreed to submit to arbitration the issue of whether Coca-Cola is permitted to manufacture, market, sell or distribute energy drink products it had developed under the Coca-Cola brand. On June 28, 2019, the arbitration panel issued a final award in favor of Coca-Cola. Regardless of this outcome, Monster and Coca-Cola value their relationship and look forward to continuing their partnership. I've also previously addressed the lawsuit filed against BPX in September 2018 for false advertising and BPX's trademark lawsuit against Monster filed in March 2019. Both proceedings are ongoing. In one of the court filings in May 2019, we stated that sales of rain beverages from June through December 2019 were projected to exceed $235 million. Our sales of rain for June and July, while solid, as illustrated by the Nielsen numbers, were lower than our initial expectations. As with any new product launches, Sales may be affected by many factors, including authorizations, the date or dates on which listings are secured for products with major retailers, and introductions of new flavors. The company has not changed its practice with respect to projections and will not be providing projections with respect to rain or any other products. As our litigation with VPX is subjudicated, we will not be answering any questions on this matter on today's call. According to the Nielsen reports for the 13 weeks through July 27, 2019, for all outlets combined, namely convenience, grocery, drug, mass merchandisers, sales in dollars in the energy drink category, including energy shots, increased by 9.9% versus the same period a year ago. Sales of the company's energy brands, including rain, grew 5.6% in the 13-week period. Sales of Monster were down 1.4%. Sales of NAS decreased 0.67%, and sales of Full Throttle decreased 12.7%. Sales of Red Bull increased 4.6%, sales of Rockstar decreased by 14.4%, sales of Five Hour decreased 8.1%, and sales of AMP decreased 48.1%. As there were no comparable sales of our rain products last year, we have not included rain in the above statistics. According to Nielsen, in the four weeks ended July 27, 2019, sales in the convenience and gas channel, including energy shots in dollars, increased 8.1% over the same period the previous year. Sales of the company's energy brands, which include rain, grew 4.7% in the four-week period in the convenience and gas channel. Sales of Monster decreased by 3.9% over the same period versus the previous year. NAS was down 1.5%. Full Throttle was down 11.4%. Sales of Red Bull were up 3.3%. Rockstar was down 18%. Five Hour was down 10%. And Amp was down 40.9%. According to Nielsen, for the four weeks ended July 27, 2019, the company's market share of the energy drink category in the convenience and gas channel, including energy shots in dollars, decreased by 1.3 points over the same period the previous year, to 41.1%. Monster's share decreased 4.2 share points to 33.5%. Rain's share was 3.4%. Nozzer's share declined 0.3 of a share point to 3.5%, and Full Throttle's share declined 0.2 of a point to 0.7 of a percent. Red Bull's share decreased 1.6 points to 33.7%, Rockstar share was down 1.6 points to 4.9%. Five-hour share was lower by 1.1 points at 5.4%. And Amp share decreased 0.3 of a point to 0.4%. VPX Bank share was 8.1%. According to Nielsen, for the four weeks ended July 27, 2019, sales of coffee plus energy drinks which includes Cafe Monster and Espresso Monster in dollars in the convenience and gas channel, increased 9.8% over the same period the previous year. Sales of our Java Monster alone were 6.6% higher than in the same period the previous year. Sales of our other coffee plus energy drinks were 3% lower, while sales of Starbucks Energy were 18.3% higher. Our company's share of the coffee plus energy category which includes Java Monster, Cafe Monster, Espresso Monster, Starbucks Double Shot, and Rockstar Roasted, for the four weeks ended July 20, 2019, was 49.1%, down 6.5 points. Java Monster's share on its own for the four weeks ended July 27, 2019, was 43.9%, down 1.3 points, while Starbucks Energy's share was 47.7%, up 3.4 points. According to Nielsen in the Convenience and Gas Channel in Canada, for the 12 weeks ended June 22, 2019, the energy drink category increased 4% in dollars. Monster's brand sales increased 9% versus a year ago. Monster's market share increased 1.3 share points to 33.6. Nasdaq's sales decreased 4%, and its market share decreased 0.1 of a share point to 2.6%. Full throttle sales decreased 17%, and its market share decreased 0.3 of a point to 1.2%. Red Bull sales increased 2%, and its market share decreased 0.6 of a point to 36.9%. Rockstar sales increased 2%, and its market share decreased 0.6 points to 16.6%. According to Nielsen, for all alcoholics combined in Mexico, the energy drink category grew 12.6% during the month of June 2019. Monster sales increased 11%. Our market share in value decreased 0.4 of a point to 28.6% against the comparable period the previous year. Sales of burn were down 33.8%. Burns market share decreased 0.6 points to 0.9%. Red Bull's sales decreased 2.9% and its market share decreased by 1.3 points to 8.2%. Viva 100's sales increased 12.5% and its market share remained the same at 38.2%. Volt's sales increased 56.2% and its market share increased 4.5 share points to 16.1% while Boost's sales increased 4.7% and its market share decreased 0.5 of a point to 7.2%. AMPA, an affordable energy brand launched in March, increased its market share to 6.2% in June 2019. 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 OXO convenience chain, which dominates the market. Sales in the OXO 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. I would like to point out that the Nielsen numbers in EMEA should only be used as a guide because the channels read by Nielsen in EMEA vary from country to country and also are reported on varying dates within the month referred to from country to country. According to Nielsen, in the 13-week period ended July 2019, Monster's retail market share in value as compared to the same period the previous year grew from 12.2% to 12.7% in Belgium, from 22.1% to 27.4% in France, from 19.5% to 20.9% in Great Britain, and from 7.2% to 7.3% in the Netherlands, from 17.8% to 24.5% in Norway, and from 30.3% to 32.5% in Spain. According to Nielsen, in the 13-week period ending June 2019, Monster's retail market sharing value, as compared to the same period the previous year, grew from 16% to 16.1% in Germany, from 11.2 to 14.3% in Poland, from 14.8 to 16.5% in South Africa, and from 12.6 to 12.8% in Sweden. According to Nielsen, in the 13-week period ending May 2019, Monster's retail market share in value, as compared to the same period the previous year, grew from 12.6% to 13.4% in the Czech Republic, from 31.8% to 34.7% in Greece, from 14.6% to 17.8% in Ireland, and from 14.3% to 18.5% in Italy. According to Nielsen, for the month of June 2019 in Chile, Monster's retail market sharing value increased from 34.2% to 37.4% compared to the same period the previous year. According to Nielsen in Brazil, Monster's retail market share for the month of June 2019 increased from 17.9% to 22.6% as compared to the same period the previous year. We launched Monster Energy in Argentina in mid-February 2018. According to Nielsen, for the month of June 2019, Monster's retail market share in value increased from 12% to 25.4% compared to the same period the previous year. According to IRI in Australia, Monster's market share in value for the four weeks ending June 30, 2019 increased from 7.7% to 9.3% as compared to the same period the previous year. Mother's market share in value increased from 14.3% to 14.5% during the same period. According to IRI in New Zealand, Monster's market share in value for the four weeks ending June 30, 2019 increased from 6% to 7.7% as compared to the same period the previous year. Live Plus market share in value decreased from 10.6% to 8.4%, and Mother's market share in value increased from 6.2% to 6.6%. According to Nielsen, in South Korea, Monster's market share in value in all outlets combined for the 13-week period ended June 30, 2019, grew from 34.8% to 38.6% as compared to the same period the previous year. According to Intage in Japan, Monster's market sharing value in the convenience store channel for the 13-week period in June 30, 2019, grew from 48.7% to 53.3% as compared to the same period in the previous year. We again point out that certain market statistics that cover single months may often be materially influenced positively and or negatively by promotions or other trading factors during those months. Net sales for the Monster Energy Drinks segment for the second quarter of 2019, which includes rain, increased 9.6% from $929 million to $1.02 billion from the comparable period in 2018. Net sales for the Monster Energy Drinks segment in the second quarter of 2019 were negatively impacted by approximately 22.1 million of foreign currency movements. Net sales for the strategic brand segment, which includes Predator, our affordable energy brand, were 79.1 million for the second quarter as compared to 79.8 million in the same quarter in 2018. Net sales for the company's strategic brand segment in the second quarter of 2019 were negatively impacted by approximately 3.8 million of foreign currency movements. Net sales for the other segment, which includes third-party sales made by AFF, were 5.8 million in the second quarter as compared to 6.6 million in the same quarter in 2018. Net sales to customers outside the U.S. were 343.3 million, or 31% of total net sales, in the 2019 second quarter compared to 293.8 million, which is 28.9% of total net sales in the corresponding quarter in 2018. Foreign currency exchange rates had the effect of decreasing net sales in U.S. dollars by approximately 25.9 million. Included in reported geographic sales are our sales to the company's military customers, which are delivered in the U.S., and friendship to the military and their customers overseas. In EMEA, supply chain and production issues were considerably reduced versus the previous quarters, but still continued to affect performance in the second quarter. As mentioned earlier, our Nielsen growth rates and market share continues to be strong in the territory. We are continuing to manage through and reduce the supply chain and production issues. Certain of our co-packers that contributed in the part in the past to these issues are back on track. Furthermore, we have secured and are continuing to secure additional production capacity. In EMEA, net sales in the second quarter increased 10.9% in dollars and increased 21.1% in local currencies over the same period in 2018. Gross profit in this region as a percentage of net sales for the quarter was 39.5% compared to 43.8% in the same quarter in 2018. Gross profit percentage for the region was impacted by country and product mix, as well as increases in manufacturing costs. We are pleased that Monster continues to perform well and gained market share in Belgium, Czech Republic, France, Germany, Great Britain, Greece, Ireland, Italy, the Netherlands, Norway, Poland, South Africa, Spain and Sweden. In Asia Pacific, net sales in the second quarter increased 35.1% in dollars and 41.5% in local currencies over the same period in 2018. Gross profit in this region as a percentage of net sales was 43.6% versus 49% over the same period in 2018 as a result of country and product mix. In Japan, net sales in the quarter increased 33.5% in dollars and 37.8% in local currency. In South Korea, net sales increased 38.8% in dollars and 48.6% in local currency, as compared to the same quarter in 2018. In Oceania, which includes Australia, New Zealand, Tahiti, French Polynesia, New Caledonia, Papua New Guinea and Guam, net sales increased 5.1% in dollars and 13.4% in local currencies. In Latin America, including Mexico and the Caribbean, net sales in the second quarter increased 22.9% in dollars and 34.7% in local currencies over the same period in 2018. Growth profit in this region as a percentage of net sales was 43.3% versus 47.4% over the same period in 2018, largely due to increases in costs of goods affected by adverse foreign exchange rates and country mix. In Brazil, net sales in the quarter increased by 97.7% in dollars and increased 126.8% in local currency. Net sales in Chile decreased 2.4% in dollars but increased 8% in local currency in the quarter. Our new product launches in the US largely took place in the first quarter of 2019. We plan to launch a number of products in the United States later this year, namely Monster Mule, Rain Orange Dreamsicle, Rain Strawberry Sublime, and Rain Mangomatic, as well as Monster Max Mangomatic and Monster Max Red Red Extra Strength with Zero Sugar, as well as a new innovative Java Monster line extension, the details of which will be revealed at a later date. We launched Monster Pacific Punch in May, with a convenience chain customer as a first-to-market exclusive in Canada with a national launch in July 2019 and are also launching Monster Mule later in 2019 in Canada. In Mexico, we launched Monster Mangaloco in April 2019. During the second quarter of 2019, we launched Monster Pacific Punch in the Caribbean and extended our range in Puerto Rico. We also launched Predator in Trinidad in May 2019. In the second quarter of 2019, we launched Monster Mango Loco in several countries across EMEA. Monster Mango Loco is now available in 31 EMEA markets. We continue to launch different Monster line extensions and our strategic brands in several countries across EMEA markets. Monster Pipeline Punch was launched in South Africa in the second quarter of 2019 and will be launched in a further six markets in the second half of 2019. We also launched Espresso Monster and Espresso Monster Vanilla in France, Norway, and Sweden. We are planning to expand the rollout of our Espresso Monster line in Europe, and we anticipate that Espresso Monster will be available in 29 countries in MEA by the end of 2019. We are planning to launch Monster in Israel in the fourth quarter of 2019. We are also planning to launch Predator, our affordable energy brand, in additional markets in EMEA and Predator should be available in 19 EMEA countries by the end of 2019. We launched Pipeline Punch in Japan in May for a limited period. We also launched Mango Loco in Hong Kong, Macau and Taiwan and Ultra White in Malaysia and Vietnam in the second quarter. We plan to launch a number of products in Asia Pacific later this year, including a full country launch of Pipeline Punch in Japan in the spring of 2020. Turning to the balance sheet, cash and cash equivalents amounted to $888.3 million at June 30, 2019 compared to $637.5 million at December 31, 2018. Short-term investments were $358 million at June 30, 2019 compared to $320.7 million at December 31, 2018. Net accounts receivable increased to $688.2 million at June 30, 2019 from $484.6 million at December 31, 2018. Days outstanding for accounts receivable were 48.5 days at June 30, 2019 compared to 41.4 days at December 31, 2018. Inventories increased to $299.5 million at June 30, 2019 from $277.7 million at December 31, 2018. Average days of inventory were 60.9 days at June 30, 2019 compared to 67 days at December 31, 2018. We estimate July 2019 growth sales to be approximately 16.1% higher than in July 2018. On a foreign currency adjusted basis, July 2019 growth sales would have been approximately 17.4% higher than comparable July 2018 growth sales. There was one more selling day in July 2019 than in July 2018. In this regard, 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, distributor incentives as well as shifts in the timing of production, in some instances where our bottlers are responsible for production and unilaterally determine their production schedules, which affects the dates on which we invoice such bottlers as well as inventory levels maintained by our distribution partners which they alter unilaterally for their own business reasons. We reiterate that sales over a short period, such as a single month or even two months, should not necessarily be imputed to or regarded as indicative of results for a full quarter or any future period. During the 2019 second quarter, no shares were repurchased under the previously authorized share repurchase programs. As of August 7, 2019, Approximately $520.6 million remained available for repurchase under our previously authorized repurchase programs. In conclusion, I'd like to summarize some recent positive points. Retail sales statistics from many countries around the world demonstrate that the energy category is continuing to grow and that Monster is generally growing ahead of the category in line with earlier periods. The new additions to the Monster family continue to add to the company's sales. We are excited about the prospects for our brands and our new product launches. We are encouraged by the prospects for our Rain Total Body Fuel high-performance energy drinks and note that Rain launched at Walmart last week. We are pleased with our performance in our international markets and reiterate the growth potential for us in China and India. We are continuing with our plans to launch Monster energy drinks with Coca-Cola bottlers in certain new markets. We are proceeding with our plans for future launches of our affordable energy brands internationally. We are also proceeding with our plans for the launch of rain total body fuel, high-performance energy drinks in certain countries outside of the USA. I would like to open the floor to questions about the quarter. Thank you.

Thank you. Ladies and gentlemen, if you have a question at this time, please press the star then the number one key on your touchtone telephone. We do ask that participants limit themselves to only one question. If your question has been answered or you wish to remove yourself from the queue, please press the pound key. Again, that's star then one to ask a question. To prevent any background noise, we ask that you please place your line on mute once your question has been stated. Our first question comes from Caroline Levy with Macquarie. Your line is open.