This conference call transcript was computer generated and almost certianly contains errors. This transcript is provided for information purposes only.EarningsCall, LLC makes no representation about the accuracy of the aforementioned transcript, and you are cautioned not to place undue reliance on the information provided by the transcript.
spk10: Good afternoon and welcome to the Monster Beverage Company's fourth quarter and full year 2021 earnings conference call. All participants will be in listen-only mode. Should you need assistance, please signal a conference specialist by pressing the star key followed by zero. After today's presentation, there will be an opportunity to ask questions. To ask a question, you may press star then one on your touch-tone phone. To withdraw from the question queue, please press star then two. Please limit yourself to one question. I would now like to turn the conference over to Rodney Sachs and Hilton Schlossberg, co-CEOs. Please go ahead.
spk04: Thanks. Good afternoon, ladies and gentlemen. Thanks for attending this call. I'm Rodney Sachs, Hilton Schlossberg, our Vice Chairman and Co-Chief Executive Officer is on the call, as is Tom Kelly, our Chief Financial Officer. Tom will now read our cautionary statement.
spk07: 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, risk factors and forward-looking statements, or discussion on specific risks and uncertainties that may affect our performance. The company assumes no obligations 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 Sachs.
spk04: Thanks, Tom. The company achieved record fourth quarter and full year net sales, with annual net sales topping the $5.5 billion mark for the first time in the company's history. Despite certain challenges in the 2021 fourth quarter, the company achieved solid results overall. We note that the comparative 2020 fourth quarter included a non-recurring tax benefit of $165.1 million, as well as reduced marketing, sponsorships, and certain other operating expenses, largely as a consequence of the COVID-19 pandemic. These items should be taken into consideration when evaluating comparative performance over the 2020 fourth quarter and full year. During the 2021 fourth quarter, the company continued to procure additional quantities of aluminum cans from suppliers in the United States and abroad in response to increased consumer demand. In addition, the company continued to experience additional global supply chain challenges, including freight inefficiencies, shortages of shipping containers, port-of-entry congestion, and delays in the receipt of certain ingredients. In the United States, the company lacked sufficient co-packing capacity to meet increased demand for certain of its products. As a result, the company was not able to fully satisfy increased demand for its products in a number of markets in the 2021 fourth quarter. During the 2021 fourth quarter, the company experienced increased aluminum can costs attributable to higher aluminum commodity pricing, as well as the costs of importing aluminum cans. In addition, the company experienced increased ingredient and other input costs, including shipping and freight, labor, trucking, fuel, co-packing fees, secondary packaging materials, increased outbound freight costs, and production inefficiencies. which resulted in increased costs of sales and increased operating costs in the 2021 fourth quarter. The company continues to address the challenges in its supply chain as it navigates through the uncertainty of the current global supply chain environment. In the fourth quarter of 2021, net sales were $1.43 billion, compared with $1.20 billion in the fourth quarter of 2020, an increase of 19.1%. Adjusting for foreign currency movements, net sales for the 2021 fourth quarter would have been up 19.3%. The comparative net sales for the 2020 fourth quarter were negatively impacted by $15.2 million related to product returns from our customers as a result of a European formulation issue with a limited number of products in Europe and a labeling issue concerning one product in Japan, which we will refer to as the 2020 product returns. Gross profit as a percentage of net sales for the 2021 fourth quarter was 53.9% compared with 57.7% in the 2020 fourth quarter. The decrease in gross profit as a percentage of net sales for the 2021 fourth quarter was primarily the result of increased freighting costs, increased aluminum can costs attributable to higher aluminum commodity pricing, geographical and product sales mix, and production inefficiencies. Operating expenses for the 2021 fourth quarter were $354.7 million, compared with $288.4 million in the 2020 fourth quarter. As a percentage of net sales, operating expenses for the 2021 fourth quarter were 24.9%, compared with 24.1% in the 2020 fourth quarter and 28.9% in the 2019 fourth quarter pre-COVID. The increase in operating expenses was primarily due to increased outbound freight and warehouse costs, increased expenditures for sponsorships and endorsements, and increased expenditures for other marketing activities, including social media and digital marketing, and increased payroll costs. During the comparative 2024 quarter, the company decreased expenditures for sponsorship and endorsements and decreased expenditures for travel and entertainment. each largely as a consequence of the COVID-19 pandemic. The impact of the COVID-19 pandemic was less pronounced on our sales and marketing programmers during the 2021 fourth quarter. Distribution costs for the 2021 fourth quarter increased to 69.8 million, which is an increase of 48.4% or 4.9% of net sales compared to 47 million or 3.9% of net sales in the 2020 fourth quarter and 3.5% of net sales in the 2019 fourth quarter. Operating income increased 2.6% to $412.9 million from $402.3 million in the fourth quarter of 2020. We believe that a portion of the increasing costs that we experienced in the quarter and the 2021 full year are likely to be transitory. With our two new suppliers of aluminum cans in the United States operational, we will begin to decrease our reliance on the use of imported aluminum cans in the United States, although we will continue to import aluminum cans into the United States, although at a reduced level in the first half of 2022. In 2022, we expect to continue to import aluminum cans into EMEA, reducing such imports in the second half of 2022. The supply chain challenges we are experiencing are significantly increasing and the logistic costs of importing and shipping raw materials and ingredients as well as other freighting costs which are included in cost of sales. The cost of repositioning finished products to distribution centers are included in freighting costs. We are rebuilding and increasing inventories in an effort to reduce the excessive cost of trucking long distances to satisfy demand and to return to our orbit strategy of producing in proximity to our customers. Increased freight in costs, including the shipping costs of importing cans, amounted to approximately $38 million in the 2021 fourth quarter and approximately $100 million for the 2021 full year. Our out-of-orbit freight costs, which are included in distribution expenses, amounted to approximately $15 million in the 2021 fourth quarter and $54 million for the 2021 full year. Net income decreased 31.9% to $321.3 million as compared to $471.7 million in the 2020 comparable quarter. Net income for the 2024 quarter was positively impacted by the recognition of a non-recurring tax benefit of approximately $165.1 million. Net income for the comparative quarter Comparative 2020 fourth quarter, excluding the non-recurring tax benefit, the impact of the 2020 product returns associated in inventory provisions and other related costs was $328.6 million. Diluted earnings per share for the 2021 fourth quarter decreased 32.1% to $0.60 from $0.88 in the fourth quarter of 2020. Diluted earnings per share for the comparative 2020 fourth quarter decreased Excluding the non-recurring tax benefit, the impact of the 2020 product returns, associated inventory provisions, and other related costs were $0.62. According to the Nielsen reports, for the 13 weeks through February 12, 2022, for all outlets combined, namely convenience, grocery, drug, mass merchandisers, sales in dollars in the energy drink category, including energy shots, increased by 13.3% versus the same period a year ago. Sales of the company's energy brands, including Rain, were up 8.1% in the 13-week period. Sales of Monster were up 10.5%, sales of Rain were down 1.7%, sales of Noz decreased 12.5%, and sales of Full Throttle increased 12.4%. The decrease in sales of Noz at retail during the fourth quarter was as a result of shortages in the supply of concentrate for Noz. The Noz supply issues are improving. Sales of Red Bull increased 13.8%, sales of Rockstar decreased by 1.3%, and sales of Five Hour increased 2.1%. Sales of VPX Bank increased 0.4%. According to Nielsen, for the four weeks ended February 12, 2022, sales in dollars in the energy drink category in the convenience and gas channel, including energy shots in dollars, increased 7.4% over the same period the previous year. Sales of the company's energy brands, which include Rhein, increased 4% in the four-week period in the convenience and gas channel. Sales of Monster increased by 5.7% over the same period versus the previous year. Rhein's sales decreased 0.9%, Nozz's sales was down 10.8%, and Full Throttle was up 6.3%. Sales of Red Bull were up 8.3%, Rockstar was down 4.5%, and Five Hour was down 1.3%. BPX Bangs sales decreased 4%. According to Nielsen, in the four weeks ended February 12, 2022, the company's market share of the energy drink category in the convenience and gas channel, including energy shots in dollars, decreased 1.2 points to 37.2%. Monster's share decreased half a share point to 31.6%. Rain's share decreased 0.2 of a share point to 2.4%. Nozzer's share decreased 0.5%. 0.5 of a point to 2.5%, and Full Throttle's share remained at 0.8%. Red Bull's share increased 0.3 of a point to 36.2%. Rockstar's share was down 0.5 of a point to 4%. Five Hours' share was lower by 0.4 of a point to 4.5%, and VPX Bang's share decreased 0.8 of a point to 7%. According to Nielsen, for the four weeks ended February 12, 2022, Sales in dollars in the coffee plus energy drink category, which includes our Java Monster line in the convenience and gas channel, increased 2.3% over the same period the previous year. Sales of Java Monster, including Java Monster 300, were 4.2% higher in the same period versus the previous year. Sales of Starbucks Energy were 0.7% higher. Java Monster's share, including Java Monster 300, of the coffee energy plus energy category, which primarily includes Java Monster, Java Monster 300, Starbucks Double Shot, and Triple Shot, Rockstar Roasted, and Bang Keto Coffee, for the four weeks ended February 12, 2021, was 53.7%, up one point, while Starbucks Energy Share was 44.1%, down 0.7 of a point. According to Nielsen, in all measure channels in Canada, for the 12 weeks ended January 29, 2022, The energy drink category increased 12.3% in dollars. Sales of the company's energy drink brands increased 10.8% versus a year ago. The market share of the company's energy drink brands was 40.8%, down 0.6 of a point. Monster's sales increased 13.9%, and its market share increased 0.5 to 36.3%. Nozzler's sales decreased 7.2%, and its market share decreased 0.3 of a point to 1.6%. Full Throttle's sales decreased 25.4% and its market share decreased 0.3 of a point to 0.5%. According to Nielsen, for all outlets combined in Mexico, the energy drink category increased 25.9% for the month of January 2022. Monster's sales increased 24.5%. Monster's market share in value decreased 0.3 of a point to 27.8% against the comparable periods the previous year. Sales of Predator increased 38.3%, and its market share increased 0.3 of a share point to 3.1%. 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. According to Nielsen, for the month of January 2022 compared to January 2021, Monster's retail market share in value increased in Argentina from 41.3% to 43.8%. Monster Energy continues to be the leading energy brand in value in Argentina. According to Nielsen, for the month of January 2022 compared to January 2021, Monster's retail market sharing value increased in Brazil from 32.2% to 37.8%. In Chile, Monster's retail share for the month of January 2022 decreased from 47.2% to 33.1% due to a shortage of shipping containers. 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 are reported on varying dates within the month referred to from country to country. In addition, the company experienced supply issues in EMEA during 2021, which impacted the Nielsen statistics in different countries. According to Nielsen, in the 13-week period ending January 29, 2022, Monster's retail market share in value, as compared to the same period the previous year, grew from 27.3% to 29.5% in Great Britain, from 7.9% to 8.1% in the Netherlands, and from 36.8% to 38.4% in Spain. Monster's retail market share in value as compared to the same period the previous year declined from 15.3% to 14.2% in Belgium, and from 31.1% to 30.3% in France. and from 20.1% to 19.3% in Poland. According to Nielsen, in the 13-week period ending January 2, 2022, Monster's retail market share in value, as compared to the same period the previous year, grew from 26.4% to 26.5% in Denmark, from 15.1% to 15.8% in Germany, and from 14.5% to 14.6% in Sweden. Monster's retail market share in value as compared to the same period the previous year declined from 27.9% to 27% in Italy, from 29.3% to 25.3% in Norway, and from 28.3% to 27.6% in the Republic of Ireland. According to Nielsen, for the 13-week period ending December 31, 2021, Monster's retail market share in value as compared to the same period the previous year declined grew from 15.2% to 15.6% in the Czech Republic, from 37.4% to 38% in Greece, and from 24.4% to 20.5% in South Africa. According to Nielsen, in the 13-week period until the end of December 2021, Predators' retail market sharing value, as compared to the same period the previous year, grew from 12.9% to 20.8% in Kenya, and from 1.9% to 14.4% in Nigeria. According to IRI in Australia, Monster's market share in value for the month ending February 6, 2022 increased from 12.2% to 12.8% as compared to the same period the previous year. Mother's market share in value decreased from 11.8% to 11% during the same period. The market share of the company's brands in Australia for the month ended February 6, 2022, decreased from 24% to 23.8%. According to IRI New Zealand, Monster's market share in value for the four weeks ended February 6, 2022, increased from 11.6% to 13.3%, as compared to the same period the previous year. Live Plus's market share in value remained the same at 7.1%, and Mother's market share in value decreased from 6.3% to 6%. The The market share of the company's brands in New Zealand for the four weeks ended February 6, 2022, increased from 25% to 26.4%. According to Intage in Japan, for the month ended January 2022, Monster's market share in value in the convenience store channel, as compared to the same period the previous year, grew from 50.8% to 56.3%. According to Nielsen, in South Korea for the month of December 2021, Monster's market sharing value in all outlets combined, as compared to the same period the previous year, grew from 56.5% to 60.2%. Monster continues to be the leading energy brand in Japan and South Korea. We again point out that certain market statistics that cover single months or four-week periods may often be materially influenced positively and or negatively by promotions or other trading factors during those periods. Net sales to customers outside the U.S. were 508.1 million, which is 35.7% of total net sales in the 2021 fourth quarter, compared to 384.8 million, or 32.2% of total net sales in the corresponding quarter in 2020. Foreign currency exchange rates had a negative impact on net sales in U.S. dollars by approximately $2.4 million in the 2021 fourth quarter. 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, net sales in the 2021 fourth quarter increased 47.5% in dollars and increased 46.1% in local currencies. over the same period in 2020. Net sales adjusted for the 2020 product returns in this region increased 41.2% in dollars and increased 39.9% in local currencies. Gross profit in this region as a percentage of net sales for the fourth quarter was 32.6% compared to 30.2% in the same quarter in 2020. Gross profit in the fourth quarter was impacted by CAN freight and raw material air freight costs. In local currencies, gross profit as a percentage of net sales for the quarter was 32.2. Gross profit as a percentage of net sales, excluding the impact of the 2020 product returns in this region, associated inventory provisions, and other related costs, was 40.1% for the 2020 fourth quarter. In 2021 fourth quarter, canned supply shortages, lack of ingredient availability, Insufficient canning capacity and a shortage of trucking availability together had an adverse impact on sales in MEA, in some cases impacting the availability of our products on shelf at retailers. However, the shortages of trucking availability were largely resolved in the latter part of the quarter. The company is continuing to address the controllable challenges in its supply chain in MEA by continuing to import cans and expanding its co-packing capacity. We are also pleased that in the 2021 fourth quarter, Monster gained market share in the Czech Republic, Denmark, Germany, Great Britain, Greece, the Netherlands, South Africa, Spain, and Sweden. In Asia Pacific, net sales in the 2021 fourth quarter increased 19.2% in dollars and increased 22.8% in local currencies over the same period in 2020. In Asia Pacific, excluding the impact of the 2020 product returns, and the labeling issue in this region in the 2020 fourth quarter, net sales in the 2021 fourth quarter increased 10.7% in dollars and 14.1% in local currency over the same period in 2020. Gross profit in this region as a percentage of net sales was 41.4% versus 34.8% over the same period in 2020. Excluding the impact of the 2020 product returns in this region, associated inventory provisions and related costs, gross profit as a percentage of net sales would have been 40.3% in 2020. In Japan, net sales in the 2021 fourth quarter increased 12.7% in dollars and 20% in local currency. Without the impact of the 2020 product returns in Japan, net sales decreased 1.2% in dollars and increased 5.2% in local currency over the same period in 2020, largely due to COVID-19 restrictions in Japan. In South Korea, net sales increased 31.3% in dollars and 35.5% in local currency as compared to the same quarter in 2020. Monster remains the market leader in Japan and South Korea. In China, net sales increased 22.6% in dollars and 17.6% in local currency as compared to the same quarter in 2020. we are re-evaluating the optimal product range for China going forward. We remain optimistic about the prospects for the Monster brand in China. In Oceania, which includes Australia, New Zealand, Tahiti, French Polynesia, New Caledonia, Papua New Guinea, and Guam, net sales increased 7.5% in dollars and 4.8% in local currencies due to timing of sales into bottlers. In Latin America, which includes Mexico and the Caribbean, Net sales in the 2021 fourth quarter increased 17% in dollars and increased 21.6% in local currencies over the same period in 2020. Gross profit in this region as a percentage of net sales was 38.6% for both the 2021 and 2020 fourth quarters. In Brazil, net sales in the 2021 fourth quarter increased by 36.9% in dollars and 39.6% in local currency. Net sales in Chile increased 6% in dollars and 9% in local currency in the 2021 fourth quarter. Net sales in Argentina increased 30.7% in dollars and 66.7% in local currency in the 2021 fourth quarter. There are a number of pending proceedings with VPX, but they are subjudicated. We will not be answering any questions on this matter on today's call. In the United States, we launched our new True North Pure Energy Salsa line in e-commerce and selected natural channels in the third quarter. In early 2022, we launched the SIT line nationally into mainstream channels with our Coca-Cola bottlers. In October 2021, we commenced the launch of our new reserve line of Monster Energy drinks in two flavors, watermelon and white pineapple. We have launched multiple innovation SKUs two new 12-ounce flavors, as well as new package configurations in the 2022 first quarter. This month, we launched four new flavor extensions in 16-ounce cans to the retail trade, namely Ultra Peachy Keen, Juice Monster Aussie Style Lemonade, Rehab Watermelon, and Rainbow Sherbet. In January 2022, we launched additional multi-pack options, such as four-pack Ultra Watermelon, four-pack Rain White Gummy Bear, two Ultra variety packages in a 12-pack format. Additionally, we have launched 12-ounce six-packs of Monster Energy, Zero Ultra, our new Peachy Keen Ultra, Java Monster Mean Bean, and Java Monster Locomoka. Ultra Peachy Keen is also launching in a 12-ounce option along with our Ultra Watermelon. In addition, Java Monster Nitra Cold Brew is scheduled to launch in the 2022 second quarter. with two lower-calorie SKUs, Sweet Black and Latte. In the 2022 first quarter in Canada, we are planning to launch nine new innovations, including the transition into a 355ml 8-pack for Monster Energy, Zero Ultra and Ultra Paradise. In January 2022, we launched Ultra Gold in a 473ml single can and 4-pack. We also launched Ultra Watermelon in a 4-pack and Ultra Paradise in in a 710 ml can. We are in the process of launching a 4-pack Rain Razzleberry as well as introducing Rain White Gummy Bear in a 473 ml can. In the 2021 fourth quarter, we launched Monster Energy Mango Loco in Uruguay and Ecuador as well as Monster Ultra Watermelon and Predator Gold Strike in Trinidad. In Honduras, we expanded our Fury package offerings with a 355 ml returnable glass bottle. We are planning a national launch of Monster Pacific Punch, Monster Dragon Tea Peach, Rain Orange Dreamsicle, and Rain Mango Magic in Brazil in the first half of 2022. Additional 2022 first quarter LATAM innovations include Monster Zero Sugar in Ecuador, Pipeline Punch in Central America and Trinidad, Monster Mango Loco in Peru and Colombia, and VR46 The Doctor in Argentina. In Chile, we are launching Rain Melon Mania, Rain Lemonheads, and Rain Orange Dreamsicle. In Mexico, we will introduce our second predator flavor with Predator Mean Green. In the 2021 fourth quarter in New Zealand, we launched Monster Ultra Fiesta Manga. In the 2022 first quarter, we launched Monster Ultra Gold and Mother Kiwi Sublime in Australia and are planning to launch Super Fuel Tropical Thunder in New Zealand. In EMEA, in the fourth quarter of 2021, we launched Monster Green, Monster Nitro, and Monster Assault in a number of countries. We also launched Ultra Watermelon, Gold and Paradise, and Juiced Monarch, Mangaloka, and Pacific Punch in a number of countries during the 2021 fourth quarter. Monster Super Fuel Mean Green, Watermelon, and Sub-Zero were launched in two countries in the fourth quarter of 2021. During the 2021 fourth quarter and 2022 first quarter, We also launched our strategic brands Innovation and Predator in additional countries. In particular, we launched our Predator Spicy Ginger and Tropical in South Africa. During the fourth quarter of 2021, we launched Monster Rossi in Japan in October and the Predator brand in Vietnam in November 2021. We are planning to introduce the Predator brand in several additional countries in APAC in the course of 2022. We are planning to launch a number of additional products or product lines in our domestic and international markets later this year. On February 17, 2022, we completed our acquisition of Kanaki Craft Brewery Collective, a craft beer and hot seltzer company for $330 million in cash, subject to adjustments. The transaction brings the Cigar City, High Lie IPA and Florida Man IPI, Oscar Blues, Dales, Pal Al and Wild Basin Hot Seltzer, Deep Ellum, Dallas Blonde, and Deep Ellum IPA, Perim Brewing, Black Ale, Squatters, Hop Rising, Double IPA, and Juicy IPA, and Wasage, Apricot, Heffenweizen brands to our beverage portfolio. The transaction does not include Kanaki standalone restaurants. Our organizational structure for our existing energy beverage business will remain unchanged. Kanaki will function independently. retaining its own organizational structure and team. We are enthusiastic about the opportunities that this acquisition presents to us in the alcohol space and through their distribution network. We estimate January 2022 sales to be approximately 20.2% higher than in January 2021. On a foreign currency adjusted basis, January 2022 sales would have been approximately 23% higher than than the comparable January 2021 sales. January 2022 had one more selling day than January 2021. Although we see some improvement, the company has continued to experience supply chain challenges in January, which adversely impacted sales. 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, distributing 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, should not necessarily be imputed to or regarded as indicative of results for a full quarter or any future period. If the COVID-19 pandemic and related unfavorable economic conditions continue in certain regions, our new product innovation launches in those regions could be delayed. In conclusion, I'd like to summarize some recent positive points. Currently, the company's flavor manufacturing facilities Its co-packers, warehouses, and shipment facilities, and bottlers and distributors are all operating. The company continues to address the challenges in its supply chain as it navigates through the uncertainty of the current global supply chain environment. We are continuing to experience increased costs in our operations, some of which may be transitory, and we have and are in the process of implementing reductions in promotions and other pricing actions in the United States as and EMEA to mitigate against such increased costs. Our AFF flavour facility in Ireland is operational and is providing flavours to our EMEA region and will improve service levels in EMEA. We are pleased with the new additions to the Monster Energy portfolio. We are planning to continue additional launches of our rain total body fuel high performance energy drinks in additional international countries. We are pleased with the rollout of Predator and Fury our affordable energy drink portfolio internationally. We are proceeding with plans to launch our affordable energy brands in a number of international countries. Our supply chain challenges are improving. We are enthusiastic about the opportunities that Kenaki presents. I would like to now open the floor to questions about the quarter and the year. Thank you.
spk10: We will now begin the question and answer session. To ask a question, you may press star then one on your touchtone phone. If you're using a speakerphone, please pick up your handset before pressing the keys. To withdraw from the question queue, please press star then two. Please limit yourself to one question. The first question is from Camille Gajarawala from Credit Suisse. Please go ahead.
spk08: Thank you, operator. Hey, everybody. You talked a lot about improved supply and the things you're doing to increase supply. Your margins obviously were down quite a bit, I think 540 basis points. Can you speak maybe more to margins as opposed to just availability of product and how we should be thinking about that within the context of some of the changes that are being made for 2022?
spk06: Well, you know, Camille, I think that we've been through and listed the supply chain challenges, and I'm not sure it's worthwhile repeating what we said earlier, but what we did mention on the call and gave some numbers was that certain of those costs in the supply chain are expected to be transitory, and that is For example, to satisfy demand, we opened up what we regarded as orbits, where we manufactured and distributed within specific geographies. And to satisfy demand, we had to open up those orbits. And the cost of that was pretty exceptional, and we detailed that, I think, on this call. Also, You know, to import cans from abroad is a very expensive exercise, as you can imagine. And that we see kind of mitigating in 2022. We have two new suppliers coming on stream, and in fact, they are on stream. So we will be reducing our dependence on imported cans, certainly in the U.S., and then we'll buy some cans not to the same degree as we did in the first half, and the second half, we believe, will be self-sufficient with cans in the U.S. And the MEA will continue to import cans, but they will kind of tail off in the second half of the year. So there are some of these costs that are transitory. Some of the costs may stick. You know, there's been costs across the board, and we had a big shock this morning, as no doubt you guys did as well, with aluminum costs. where aluminum plus the Midwest index went up to $1.97 a pound, as opposed to what we were paying in last year of just kind of half of that. So there are a lot of costs that are coming to us, the costs that we can mitigate, the costs that we may not be able to mitigate. Now, will aluminum stay at this level? I don't think anyone knows. Overall, I think we are navigating well through these supply chain challenges, and we're doing the very best we can to ensure that our customers receive product because at the end of the day, as I've always said to this audience, we bank dollars, we don't bank margins, and we have enough profitability in the system to be able to do what we've been doing and make a profit effectively. Unfortunately, the result is that the GP percentage does come down, but we expect that this will not last forever and that margins will be back to some degree as we move forward.
spk10: The next question is from Chris Carey of Wells Fargo. Please go ahead.
spk05: Hi. Good evening, everyone. Thank you for the question. Hi. I just wanted to follow up on that line. If I look at, not to be so short-sighted in a way, but where the street is modeling your gross margins, it's slightly up for 2022. But if I hear you right, you have aluminum inflation still coming through. You're still going to be sourcing cans from other places. So you have freight costs, pricing, as you noted at the annual investor day will, will be a positive to the story, but maybe not enough to offset this, this inflation. And so, you know, I just want to make sure I'm hearing, you know, right. That the top line of course remains a very good story here, but you know, that, that gross margins, you know, should remain under pressure in 2022 and then really building into 2023 as, as these costs are a bit transitory. And then if I could just on the, The quarter-to-date number, is that mostly international versus the U.S., just given the disconnect to the Nielsen sales? So thanks so much for that perspective.
spk06: Well, let's go back to your second question. That number, the U.S. is very close to that number for January. So we have a lot of unmeasured channels in our system, and Nielsen is not always a good indicator of our sales to our distributors. So let's go, if we can, let's take a step back and look at your, you know, and address your first question. So, you know, aluminum jumped up today significantly. It's been moving up. I gave you the number as of today. As of yesterday, it was 10 cents a pound less than that. So, you know, with this war and everything else going on in the world, I can't say for certain, and I don't think anyone can tell you what aluminum is going to do and, you know, what it's going to be. And obviously with most of our products being packaged in aluminum cans, that is a significant item. Looking back at some of your other comments, I mentioned that, or we mentioned at least on the script, that we have sufficient cans now, so we're able to start working towards closing off and going back to the orbits, which means that freighting costs should significantly increase. When? I can't say for certain, but it's going to happen. Other costs in the system are being controlled. Looking forward, I think that we will continue to have a difficult 2022. Will the margin stay at the level that we talked about on this call? I don't know. Honestly, a lot depends on what happens with aluminum. So the rest of the stuff is coming under control. I mentioned that we were importing less cans into the U.S. than we did in 2020. That will have a positive impact on margins. From the second half of the year, we believe we'll be totally self-sufficient with cans in the U.S., so that's a positive factor. And then in EMEA, we will be importing cans in the first half with a significant reduction in the second half. So there's a lot of good things in the cost story, but unfortunately, it is what it is. On the sales side and price increases, we spoke about that. On previous calls, as you know, we have a play that we're running. Irrespective, really, I think of what Red Bull's doing, we've come to the conclusion that we're going to run our own play. We know what we want to do, and we... We're working on reducing promotional answers. You've seen prices go up already in the trade, and you've seen them going up in Nielsen. So that is something that is happening as well. What else do I want to say? So we spoke about prices went up through reductions in promotional answers in the quarter that we look at, although to a very modest degree. And as we go through 2022, you'll see price increases in our business accelerating.
spk10: The next question is from Andrea Teixeira of J.P. Morgan. Please go ahead.
spk09: Hi, how are you? I just want to perhaps elaborate more on what you said, Hilton, on the pricing front. Are you saying that we should be able to see pricing be on what was fast-food by third-party manufacturing at some point in 2022? And then regarding that, are you seeing any impact from the gas stations given that gas prices are going up, or this is not a concern for affordability at this point?
spk06: So, you know, you've seen the convenience in gas numbers in Nielsen. They are somewhat lower than the rest of the market of recent, but we've been through higher gas prices before, and they haven't really impacted sales. But we are seeing, if you look at the Nielsen, you'll see that the numbers in convenience and gas in the energy category are reducing. So whether they'll stay at that level, I don't know, but we have been through this before, and we haven't seen a slowdown in
spk04: in sales in the energy in the convenience and gas market and then looking at pricing a little bit of a pick up in the last week if you look at the last week's numbers again that's a very short period but we are seeing a pick up in convenience with the price increase effective price increase it still is translating so we'll see how that extends out
spk06: It's a one-week number, sure. With regard to pricing, we spoke about what we were doing to increase pricing. We're running our play. 24-ounce is going up April 1 in low double-digit numbers, so that'll be a nice percentage in 24-ounce. The rest, we're working on, as you know, with our revenue growth management department, working on taking promotional allowances down to achieve the same result as a price increase. But we continue to monitor whether we need to take a general price increase or not. And if we have to, we will. And in particular, with regard to metal, and we don't know where metal is going, but with regard to metal, if it becomes a permanent situation, yes, then we'll probably have to reconsider and you know, decide what else could be done on the pricing front, but we're not rooting out a general price increase.
spk10: The next question is from Kevin Grundy of Jefferies. Please go ahead.
spk00: Great. Thanks. Good afternoon, guys. I wanted to come back to your strategy in alcohol. So now, you know, with the Canarchy deal closed, Do you think the company has the right product portfolio distribution and capabilities at this point in time to deliver against your ambitions? You've been talking about this for the better part of two years, and now with this deal closed, do you think you have everything that you need to deliver? And I guess specifically, just to kind of drill down a little bit, do you think that you need more in terms of capabilities with respect to spirits, both consumer capabilities, a broader wholesaler distribution network? And if the answer to that is yes, how do you intend to sort of address that? And is larger scale M&A a possibility? Thanks.
spk04: I think that, you know, The Kanaki acquisition is not the complete answer to everything. They are craft brands. They have a distribution network. They have some Salsa brands. We do have a good infrastructure in staff there, and we're going to use that to build on. We are going to look at taking the distribution system, refining it a little bit, We're looking at addressing their products and taking steps to invigorate their sales and looking at our own products that we've been developing that we have discussed previously and taking and deciding where to and how to launch those through the Canarchy system. And we will separately address the possible M&A of additional brands, whether in the malt side, the beer side, or the spirit side. Those are things that are opportunities, but again, we're looking at the whole business now and reviewing it, but it's the platform that is really good for us, and I think that's the function it's going to serve for us. We are going to obviously have to address issues and other matters in getting that fully implemented. It's not just a perfect system that we've taken over. But it's a good base for us and we're going to build on it and we're very confident and we're very pleased with having closed that acquisition which will give us the springboard from here on.
spk10: The next question is from Vivian Azar of Cowen. Please go ahead.
spk02: Hi, good evening. Thank you for the question. I was wondering if you could just offer some better detail on your supply chain in Russia and the Ukraine. And if you could quantify your exposure to those two countries, please. Thank you.
spk06: Yeah, well, um, those countries, including, um, Belarus, um, and Kazakhstan, which really work within that region account for, uh, about 10% of our sales in, um, our EMEA sales. So, uh, we have a, you know, um, we have a nice business in Russia, um, which, um, You know, we have to see what happens there. And we have, you know, reasonable business in Ukraine. We have staff and we have people in those countries. And it's really concerning as to, you know, we don't know what will happen. And it's really concerning, frankly.
spk10: This concludes our question and answer session. I would like to turn the conference back over to Rodney Fax and Hilton Schlossberg for closing remarks.
spk04: Thank you. On behalf of the company, 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 continue to innovate, 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 bottling system internationally. We believe that we are well positioned in the beverage industry and continue to be optimistic about the future of our company. We hope that you will stay safe and healthy. Thank you very much for your attendance.
spk10: The conference is now concluded. Thank you for attending today's presentation. You may now disconnect.
Disclaimer