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spk05: Good day to everyone. My name is Devin and I will be your conference operator today. At this time, I would like to welcome everyone to the conference call. All lines have been placed on mute to prevent any background noise. After the speaker's remarks, there will be a question and answer session. If you would like to ask a question during this time, please start by pressing star followed by the number one on your telephone keypad. If you would like to withdraw your question, again, press star, and then the number one on your telephone keypad. We also ask you to please only ask one question for today's Q&A session. Mr. Rodney Sachs, you may begin your conference.
spk18: Thank you. Good afternoon, ladies and gentlemen. Thank you 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 Kelly 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 February 28, 2022, including the sections contained therein entitled Risk Factors and Forward-Looking Statements, for discussion on the specific risk 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.
spk18: Thank you, Tom. The company achieved record second quarter net sales of $1.66 billion in the 2022 second quarter. 13.2% higher than net sales of 1.46 billion in the 2021 comparable period and 16.9% higher on a foreign currency adjusted basis. Since the beginning of the COVID-19 pandemic and the subsequent increased demand for the company's energy drinks, the company prioritized ensuring product availability for its customers and consumers. This strategic direction has remained in place throughout the global supply chain challenges and disruptions, despite adversely impacting the company's profitability. The company continues to stand by its strategy to ensure product availability and solidify the continued long-term growth of the company's brands. During the 2022 second quarter, the company experienced a significant increase in cost of sales, relative to the comparative 2021 second quarter, primarily due to increased freight rates and fuel costs, including costs relating to the importation of aluminum cans, increased ingredient and other input costs, including secondary packaging materials, and increased co-packing fees, increased aluminum can costs attributable to higher aluminum commodity pricing, geographical and product sales mix, and production inefficiencies. The company estimates that of the increase in cost of sales in the 2022 second quarter of $250.3 million, approximately $164.4 million was comprised of, one, approximately $66.7 million due to increased freight rates and fuel costs, including costs relating to the importation of aluminum cans, two, approximately $45.9 million due to increased ingredient and other import costs, including secondary packaging materials and increased co-packing fees. Approximately $27.5 million due to increased aluminum can costs attributable to higher aluminum commodity pricing. Approximately $15.1 million due to geographical and product sales mix. Approximately $9.2 million due to production inefficiencies. the company continued to experience additional global supply chain challenges, including the lack of adequate shipping containers and port congestion, which resulted in shortages of certain ingredients and finished products. As a result, the company continued to air freight substantial quantities of certain ingredients internationally, particularly to EMEA, Asia Pacific, and Latin America, at additional costs and inefficiencies. Furthermore, the company experienced significant increases in distribution expenses, including increased fuel, freight, and warehousing costs, which adversely impacted operating expenses. The company continues to address the challenges in its supply chain as it navigates through the uncertainty of the current global supply chain environment. Growth profit as a percentage of net sales for the 2022 second quarter was 47.1%, compared with 57.2% in the 2021 second quarter. The decrease in gross profit as a percentage of net sales for the 2022 second quarter was partially offset by pricing actions. Operating expenses for the 2022 second quarter were $406.9 million, compared with $310.9 million in the 2021 second quarter. The comparative operating expenses for the 2021 second quarter included a $16.9 million reversal of amounts previously accrued in connection with an intellectual property claim. As a percentage of net sales, operating expenses for the 2022 second quarter were 24.6%, compared with 21.3% in the 2021 second quarter and 25.6% in the 2019 second quarter pre-COVID. Distribution expenses for the 2022 second quarter increased to $87.9 million, which is an increase of 36% or 5.3% of net sales compared to $64.6 million or 4.4% of net sales in the 2021 second quarter and 3.4% of net sales in the 2019 second quarter pre-COVID. The 2020 The $23.3 million increase in distribution expenses was primarily due to increased freight out expenses of $13.5 million as a result of higher outbound freight rates and fuel, increased volume and out-of-orbit freight, as well as higher warehouse expenses of $9.7 million as a result of higher raw material and finished product inventories in the United States and EMEA. The increase in other operating expenses was primarily due to increased payroll expenses, increased expenditures for sponsorships and endorsements, and increased expenditures for travel and entertainment. Certain of these increases were the result of the company's return to activities consistent with pre-COVID-19 levels. We have decreased our reliance on imported cans and are currently purchasing aluminum cans from local sources in both the U.S. and EMEA. We anticipate seeing a reduction in cost of sales through increased use of domestic cans as we cycle through existing inventories of imported cans over the next few quarters. We rebuilt and increased finished product inventory levels across the United States and EMEA to reduce the excessive cost of long-distance freight to satisfy demand and to return to our orbit strategy of producing in closer proximity to our customers. the costs of repositioning finished products to distribution centers are included in freight end costs. Operating income for the 2022 second quarter decreased 29.1% to $373.0 million from $526 million in the 2021 comparative quarter. Net income decreased 32.3% to $273.4 million as compared to $403.8 million in the 2021 comparable quarter. Diluted earnings per share for the 2022 second quarter decreased 32.2% to 51 cents from 75 cents in the second quarter of 2021. Through pricing actions, the company was able to achieve positive pricing appreciation in the United States and in EMEA. Due to continued cost pressures, the company is implementing a net sales price increase in the range of 6% market-wide in the United States, effective September 1, 2022. The company will also be implementing price increases in the second half of 2022 in certain international markets, some in addition to price increases or pricing actions taken earlier this year in order to mitigate inflationary cost pressures. According to the Nielsen reports, for the 13 weeks through July 23, 2022, For all outlets combined, namely convenience, grocery, drug, mass merchandisers, sales in dollars in the energy drink category, including energy shots, increased by 8.2% versus the same period a year ago. Sales of the company's energy brands, including rain, were up 6% in the 13-week period. Sales of Monster were up 7.4%. Sales of rain were down 5.6%. Sales of Noz decreased 3.9%. and sales of Full Throttle decreased 0.8%. Sales of Red Bull increased 3.8%, sales of Rockstar increased by 2.1%, and sales of Five Hour decreased 3%. VPX Bangers sales decreased 14.5%. The sales growth of the Monster brand exceeded that of Red Bull in the period. According to Nielsen, for the four weeks ended July 23, 2022, sales in dollars in the energy drink category in the convenience and gas channel including energy shots, in dollars increased 6.6% over the same period the previous year. Sales of the company's energy brands, which include rain, increased 5.6% in the four-week period in the convenience and gas channel. Sales of Monster increased by 6.4% over the same period versus the previous year. Rain sales increased 0.9%, NAS was down 1.8%, and full throttle was down 2.5%. Sales of Red Bull were up 3.9%. Rockstar was down 1.8%, and Five Hour was down 3.5%. BPX Bang's sales decreased 16.3%. According to Nielsen, for the four weeks ended July 23, 2022, the company's market share of the energy drink category in the convenience and gas channel, including energy shots, in dollars, decreased 0.4 of a point to 36.1%. Monster's share decreased from 30.6% a year ago to 30.5%. Rain's share decreased 0.1 of a share point to 2.3%. Nozzer's share decreased 0.2 of a point to 2.5%. And Full Throttle's share remained at 0.7 of a percent. Red Bull's share decreased 1 percentage point from 37.4% a year ago to 36.4%. Rockstar share was down 0.3 of a point to 3.5%, 5-hour share was lower by 0.4 of a point at 4.2%, and BPX Bank share decreased 1.6 points to 6%. According to Nielsen, for the four weeks ended July 23, 2022, sales in dollars of the coffee plus energy drink category, which includes our Java Monster line, in the convenience and gas channel, increased 4.4% over the same period the previous year. Sales of Java Monster, including Java Monster 300 and Java Monster Nitro Cold Brew, were 2.3% higher in the same period versus the previous year. Sales of Starbucks Energy were 9.4% higher. Java Monster share, including Java Monster 300 and Java Monster Nitro Cold Brew, of the coffee plus energy category, which primarily includes Java Monster, Java Monster 300, Java Monster Nitro Cold Brew, Starbucks Double Shot, and Triple Shot, Rockstar Roasted, and Bank Keto Coffee, for the four weeks ended July 23, 2022, was 50.9%, down one point, while Starbucks Energy Share was 47.7%, up 2.2 points. According to Nielsen, in all measured channels in Canada, for the 12 weeks ended June 18, 2022, the energy drink category increased 12.8% in dollars. Sales of the company's energy drink brands increased 8.5% versus a year ago. The market share of the company's energy drink brands was 40%, down 1.6 points. Monster's sales increased 10.8%, and its market share decreased 0.7 of a point to 34.8%. Nozzish's sales decreased 9.6%, and its market share decreased 0.4 of a point to 1.5%. Full Throttle's sales increased 13%, and its market share remained at 0.67%. According to Nielsen, for all outlets combined in Mexico, the energy drink category increased 21.2% for the month of June 2022. Monster's sales increased 26.9%. Monster's market share in value increased 1.3 points to 28.4%, against the comparable period the previous year. Sales of Predator increased 53.1%, and its market share increased 0.8 of a share point to 4%. 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 June 2022 compared to June 2021, Monster's retail market share in value increased in Argentina from 46.9% to 49.2%. Monster Energy continues to be the leading brand in value in Argentina. According to Nielsen, for the month of June 2022 compared to June 2021, Monster's retail market share in value increased in Brazil from 35.7% to 39.9%. Monster is now the leading energy brand in value in Brazil, marking another important milestone for our brand in South America. In Chile, Monster's retail share for the month of June 2022 decreased from 41.9% to 38.1% 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. According to Nielsen, in the 13-week period ending July 17, 2022, Monster's retail market share in value as compared to the same period the previous year grew from 25.8% to 31.6% in France, from 27.8% to 32.1% in Norway, and from 37.6% to 39.7% in Spain. According to Nielsen, in the 13-week period until the end of June 2022, Monster's retail market share in value as compared to the same period the previous year grew from 15.3% to 16% in Belgium, from 15.1% to 15.4% in Germany, from 28.9% to 29.9% in Great Britain and from 19.4% to 19.8% in Poland. Monster's retail market share in value as compared to the same period the previous year declined from 20.5% to 20% in South Africa. According to Nielsen, in the 13-week period ended June 19, 2022, Monster's retail market share in value as compared to the same period the previous year grew from 14.5% to 15.6% in Sweden. Monster's retail market share in value as compared to the same period the previous year declined from 8.5% to 6.6% in the Netherlands and from 29.3% to 28.1% in the Republic of Ireland. According to Nielsen, in the 13-week period until the end of May 2022, Monster's retail market share in value as compared to the same period the previous year grew from 15% to 17.5% in the Czech Republic and from 37.9% to 38.7% in Greece. Monster's retail market share in value as compared to the same period the previous year declined from 30.1% to 28.3% in Italy. According to Nielsen, in the 13-week period ending May 22, 2022, Monster's retail market share in value as compared to the same period the previous year grew from 25.7% to 27.5% in Denmark. According to Nielsen, in the 13-week period until the end of May 2022, Predator's retail market share in value, as compared to the same period the previous year, grew from 17.1% to 26.8% in Kenya and from 8.1% to 15.4% in Nigeria. According to IRI in Australia, Monster's market share in value for the month ending July 3, 2022 increased from 13.2% to 14.2% as compared to the same period the previous year. Mother's market share in value decreased from 11.5% to 10.2% during the same period. The market share of the company's brands in Australia for the month ending July 3, 2022 decreased from 24.7% to 24.5%. According to IRI in New Zealand, Monster's market share in value for the four weeks ended July 10, 2022 increased from 12.4% to 12.6% as compared to the same period the previous year. Live Plus' market share in value decreased from 6.9% to 6.5% and Mother's market share in value decreased from 6.3% to 5.3%. The market share of the company's brands in New Zealand for the four weeks ended July 10, 2022 2022 decreased from 25.6% to 24.5%. According to Intage in Japan, in the month ending June 2022, Monster's market share in value in the convenience store channel, as compared to the same period the previous year, grew from 50.6% to 56.7%. According to Nielsen in South Korea, in the last month ending June 2022, Monster's market sharing value in all outlets combined, as compared to the same period the previous year, decreased from 61.9% to 59.9%. 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 $649 million, 39.2% of total net sales in the 2022 second quarter compared to 546.3 million or 37.4% of total net sales in the corresponding quarter in 2021. Foreign currency exchange rates had a negative impact on net sales in US dollars by approximately 53.4 million in the 2022 second quarter. included in reported geographic sales or our sales to the company's military customers, which are delivered in the U.S. and transhipped to the military and their customers overseas. In EMEA, net sales in the 2022 second quarter increased 13.8% in dollars and increased 26.8% in local currencies over the same period in 2021. Gross profit in this region as a percentage of net sales for the second quarter increased was 26.7% compared to 39.8% in the same quarter in 2021. Gross profit in the second quarter was impacted by increased freight for imported cans, increased raw material and ingredient costs, and increased co-packing fees, higher aluminum commodity pricing, and air freight costs. In local currencies, gross profit as a percentage of net sales for the quarter was 27.1%. the company is continuing to address the controllable challenges in its supply chain in EMEA. We're also pleased that in the 2022 second quarter, Monster gained market share in Belgium, the Czech Republic, Denmark, France, Germany, Great Britain, Greece, Norway, Poland, Spain, and Sweden. In Asia Pacific, net sales in the 2022 second quarter decreased 1.1% in dollars and increased 8.2% in local currencies over the same period, in 2021. Gross profit in this region as a percentage of net sales was 40.4% versus 44.4% over the same period in 2021. In Japan, net sales in the 2022 second quarter decreased 9.6% in dollars and increased 3.3% in local currency. Sales performance for the comparable period in 2021 was largely impacted due to COVID-19 restrictions in Japan. In South Korea, net sales decreased 5.2% in dollars and increased 3.8% in local currency as compared to the same quarter in 2021. Monster remains the market leader in Japan and South Korea. In China, net sales decreased 2.1% in dollars and 1.8% in local currency as compared to the same quarter in 2021, largely impacted by COVID-related lockdowns. 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 1.3% in dollars and 7.6% in local currencies. Sales in Australia and New Zealand were negatively impacted by shipping delays of certain flavors, concentrates and ingredients. Furthermore, sales in Australia were also impacted by severe flooding in that country, in the 2022 second quarter. In Latin America, including Mexico and the Caribbean, net sales in the 2022 second quarter increased 66.7% in dollars and increased 69.7% in local currencies over the same period in 2021. Gross property in this region as a percentage of net sales was 36.4% for the 2022 second quarter versus 40.7% in the 2021 second quarter. In Brazil, net sales in the 2022 second quarter increased by 82.8% in dollars and 63.9% in local currency. Net sales in Mexico increased 49.3% in dollars and 49% in local currency in the 2022 second quarter. Net sales in Chile increased 26.1% in dollars and 45.3% in local currency in the 2022 second quarter. Net sales in Argentina increased 200.1% in dollars and 269.4% in local currency in the 2022 second quarter. I will now provide the most recent update on our litigation with Vital Pharmaceuticals Inc., which I will refer to as VPX, the maker of Bang Energy drinks. In June 2020, Monster Energy Company, which I will refer to as MEC, and Orange Bang Inc., a family-owned beverage business and the rightful owner of several trademark registrations to the Bangmarks, initiated an arbitration against VPX. MEC and Orange Bang alleged that VPX breached a 2010 settlement agreement with Orange Bang that restricted VPX's use of the Bang trademark to products that are creatine-based or marketed and sold only in nutritional channels, as well as claims that VPX infringed Orange Bang's trademark rights to the Bangmarks. In April 2022, the arbitrator issued a final award funding in favor of MEC and Orange Bank on all claims. The arbitrator awarded MEC and Orange Bank $175 million to remedy VPX's past misconduct, as well as attorneys' fees and costs, which amounted to nearly $9.3 million. The arbitrator also ordered VPX to pay MEC and Orange Bank an ongoing 5% royalty on all future sales of VPX Bank's energy drinks products. and other Bang branded products. Pursuant to the terms of the agreement between MEC and Orange Bang, the award and future royalties will be shared equally between MEC and Orange Bang. On July 1, 2022, the United States District Court for the Central District of California granted MEC and Orange Bang's motion to confirm the arbitrator's award and denied VPX's motion to vacate the arbitrator's award. MEC and Orange Bang have requested that the court enter final judgment On July 28, 2022, VPX filed a notice of appeal to the United States Court of Appeals for the Ninth Circuit. The company will not recognize the award or royalties until such time as they are realized or realizable. Yesterday, the United States Court of Appeals for the Eleventh Circuit issued a ruling affirming the decision of the United States District Court in the Southern District of Florida in which the District Court rejected VPX's claim that MEC's line of rain energy drinks infringed the trade dress of its line of bang energy drinks. MEC's lawsuit against VPX for false advertising, unfair competition, and misappropriation of trade secrets in the Central District of California is still pending, with trial scheduled to begin later this month. As this litigation and other pending proceedings with VPX are subjudicated, I will not be answering any questions on those matters on today's call. The first alcohol-based product line that we plan to launch since the acquisition of Kanoki will be a full-bodied, flavoured malt beverage that will be launched late in the 2022 fourth quarter under the brand name The Beast Unleashed. Beast Unleashed will leverage Monster's brand equity while carving out its own unique space in the beverage alcohol sector. and will be distinguishable from the many hard seltzer brands that have become so ubiquitous over the last several years. The Beast Unleashed will have a 6% alcohol content by volume and will come in four great tasting bold flavors, which are based on certain of Monster's well-known and popular flavor profiles. Beast Unleashed will be launched through beer distributors in the United States, utilizing a phased state launch approach with the goal of being national by the end of 2023 and will initially be offered in 16-ounce single-serve cans, as well as a 12-can variety pack in 12-ounce sleek cans. Our alcohol innovation pipeline is robust, with a number of additional innovative product lines currently under development. We look forward to sharing use of such additional alcohol beverage products at a later date. We're excited about the planned launch of our new Monster Energy Zero Sugar energy drink in the 2022 fourth quarter, Initially in the United States, Monster Energy Zero Sugar was specifically developed as an indistinguishable zero sugar analog of our original unique Monster Energy Green flavor. We are excited about the opportunity that this product will provide to our Monster consumers who have come to enjoy the unique taste profile of our original Monster Green flavor, which remains our leading flavor. In April of 2022, we launched Pure North Energy Salsas in sleek 355 ml cans in three flavors, cucumber, lime, black cherry, and grapefruit lemonade in Canada. At the end of June 2022, we expanded our core Monster Energy portfolio in Canada by launching Monster Reserve in two flavors, watermelon and white pineapple, both in 473 ml cans. In Latin America, we introduced several new energy drinks in our Monster Energy, Predator and Fury product lines in certain Latin American countries in the 2022 second quarter. In April 2022 in New Zealand, we launched Live Plus Watermelon, our fourth Live Plus flavor. In EMEA in the second quarter of 2022, we launched Monster Nitro and Monster Assault in a number of countries. In certain countries, we also launched Juiced Monarch and Chaotic during the 2022 second quarter. During the 2022 second quarter, we also launched additional SKUs of Burn, Relentless, Nalu and Rain in certain countries. During the second quarter of 2022, we launched Predator in Turkey and we continued the national rollout of Predator in India and Vietnam in June, expanding the brand to East India and North Vietnam. We also launched Predator in Cambodia in July 2022. We are planning to introduce the Predator brand in several additional countries in APAC in the second half of 2022. In Japan, we launched Monster Super Fuel Killer Kiwi and Monster Energy Ultra Sunrise in China. We estimate July 2022 sales, including Kanaki, to be approximately 12.9% higher than in July 2021 and 11.2% higher than in July 2021, excluding Kanoki. On a foreign currency adjusted basis, excluding Kanoki, July 2022 sales would have been approximately 16.6% higher than the comparable July 2021 sales. July 2022 has had one less selling day compared to July 2021. The company had sufficient can capacity and co-manufacturing capacity facilitate capacity across all regions to address demand for July. 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, 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 would like to summarize some recent positive points. One, the company is increasing its raw material and finished product inventories to better service its customers and ensure availability of its products. Two, our AFF flavor facility in Ireland is now providing a large number of flavors to our EMEA region, enabling better service levels and lower landed costs to our EMEA region. Three, we are pleased with the new additions to the Monster Energy portfolio. Four, we are planning to continue additional launches of our rain total body fuel high-performance energy drinks in additional international countries. Five, 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 an additional number of international countries. Six, we are enthusiastic for the planned launch of the Beast Unleashed, our first flavoured malt beverage alcohol product, and for the opportunities that the Kanaki acquisition presents. Seven, we believe that we will be able to address many of the challenges we have experienced in our supply chain. Eight, we consider that certain of the increased costs we have experienced in the quarter may well be transitory. For example, the current cost of aluminum has reduced materially from its recent March highs, and we are beginning to see a reduction in fuel and freight costs, as well as reductions in the costs of shipping containers and ocean freight. I would like to now open the floor to questions about the quarter. Thank you.
spk05: At this time, I would like to remind everyone, in order to ask a question, please press star and then the number one on your telephone keypad. Our first question will come from the line of Bonnie Herzog with Goldman Sachs. All right.
spk16: Okay, thank you. I guess, you know, a question on gross margins. I simply don't understand really why they were this bad in a quarter. I guess I was under the impression that you were already buying a fair amount of your aluminum cans behind the U.S. and therefore should have been less reliant on the importation of cans, I guess at least in the U.S. So I thought that was the plan. However, I do see your inventory levels in the quarter went even higher and are almost three times the level they were last year. So I guess help us understand that and just trying to think through, is this really the right way to manage the business? And then Hilton, you mentioned these pressures are transitory. or was in the release, but I guess they're not really feeling like it. So when do you guys expect to be 100% buying in the U.S. and EMEA for your supply and really no longer importing aluminum cans?
spk02: Sure. Bonnie, thank you for that question. I think a lot of people probably may want to ask the same question, so thanks for addressing it early on. You know, we've always taken a stance that our objective is is to support our customers and our consumers. We went through hard times in 20 and 21 when we did not have enough capacity to service our customers and our consumers. We had bartenders screaming, we had retailers screaming, and at the time, we made a very conscious effort that we were gonna import cans at expensive costs, not in terms of the actual cost of the can, but the cost of importing the cans, the container costs, the demurrage, which you guys called the merge, just everything relating to the importation of aluminum cans. So that was an absolute conscious decision. As cans started arriving late in 2021, EMEA was the most affected. I think we've had a number of discussions about how EMEA was affected, and a substantial number of those cans went into EMEA and have been consumed over a period of time. It's difficult with our business because we have promotions from time to time. For example, we've got the Apex Legends promotions now, and the cans that come in are not promotional cans. So they're used in production when there's market and market demand. In EMEA, we stopped importing cans. We thought we'd still have to import cans during 2022. We stopped that, and there's no longer importation of cans into EMEA in 2022. In 2021, we've had dribs and drabs coming in in the US, and we will soon be out of those cans as soon as we get over this Apex Legends promotion. But in the US, the percentage of imported cans in our furnish is very low compared to what it was in the second quarter in EMEA. So I hope that answers your question. We did it as a conscious effort to support and to supply customers because we're in this business for the long term. You know, we're not in this business for the second quarter of 2022. We're in this business for the long term, and it's important to us to ensure that our customers and our consumers continue to have faith in the company's supply of energy products.
spk03: Is there anything else that I didn't answer that I should have answered, Bonnie?
spk16: But I guess for me, it still begs the question as you're making this conscious decision to keep or have a bigger supply of cans and have elevated inventory, how do we think about that as I assume you're gonna work down that inventory now, is that starting to happen or will happen in Q3 and Q4? And I assume it's very elevated costs. So do we think about these pressures on your gross margin quite frankly, you know, very much continuing Q3 and Q4. Is that right?
spk02: Yeah. Okay, great question. You know, as we look at the future, I mean, you know that in cost of sales, fuel is coming down. We know that. We know that freight is coming down. You know, we're in that every day of our lives. We know that ocean freight is coming down. We know that we've been able now to really diminish the amount of of materials that we're having to air freight to keep the wheels moving with product that's coming out of the U.S. with concentrates. We know that AFF is producing and up and running in Ireland. We know that the percentage of aluminum cans is coming down. We know that aluminum costs are coming down. Aluminum reached a peak. See if I can find it just very quickly. The maximum level of aluminum, including the Midwest premium, was 1.8073 on March 7th. We buy where we're not hedged. The portion that's not hedged is bought at M-1. So the April cans would be based on March pricing. And we know that aluminum today, including the Midwest premium, is 136, so it's come down from a peak of 181 to 136. So we know that's a fact, right? We also know that we built up inventories, which we had to because those inventories we were talking about in 21 were just not sustainable. They were just not sustainable. So we built up inventories and we're now able to avoid a lot of the shipping, the freight that's been out of orbit. So you add all of that together, and we don't give forecasts, and I don't want to start giving forecasts, but it's very clear that 2022, the second quarter, as in fact we had anticipated, would probably be our worst quarter in terms of margin. But I just want to stress again that we are in business for the long term, and we're supporting business. our customers, and our business in the long term.
spk05: Your next question comes from the line of Andrea Tisera with J.P. Morgan.
spk04: Hi, good afternoon. Thank you. On the same topic, and I try to do the phasing of the cost pressures and the pricing, would you say pricing both domestic and international would be like that, mid-single digits, and could probably cover about a third of these $250 million that you quoted. And then you have, of course, and I appreciate the breakdown that you gave, you can phase out some of these higher costs for aluminum, also the $67 million that you said to bring cans imported. So would you end up to about, from the $250 to about $100 to $150 million in pressures into the fourth quarter? I want to check that. And then On the Monster Zero Sugar, congrats on that. Should we think like we obviously have seen Coke Zero Sugar recruit new consumers into the category? Are you thinking how incremental that could be against Ultra? I'm assuming, as Rodney said, it attracts the need state for the typical Monster consumer because of the taste profile and also because of the packaging. I'm assuming more masculine and more into the core consumer. Is that fair? Do you have new shelves coming in? How much support do you believe you can give to the lounge? Thank you.
spk02: Okay, so those were two questions, no one. I'll start with the first one. So, you know, we don't give guidance. And, you know, what I've tried to do on this call is give some direction. You know, that's what we are seeing. That's what we are seeing. coming down. It's not going to happen overnight because there are costs in the system that will take their time to work through. In principle, since we don't give guidance, I've given some general direction which I hope you'll find helpful and the other analysts will find helpful in analyzing where we go from here. But, you know, I just want to repeat yet again that we're in this business for the long term. We're in this business to support our customers. And, yes, maybe we did take a hiccup in gross margin in the second quarter of 2022, but there have been a lot of other cost pressures, including imported cans, imported cans being one of them. But at least we were able to bring our industries back to a situation where where we're able to service customers and we're able to service consumers. Look, it will be a terrible situation when our price goes up in September 1 and we don't have sufficient inventories to satisfy demand. I mean, that would just be the end. So we've done our very best to stay on track and to work within a very, very difficult supply chain environment.
spk18: Perhaps I could address the second part on the actual zero sugar. You know, I think that we've had zero sugar products. We have the full ultra line. We have low carb and absolutely zero. But none of them have been really an analog of our original Monster Green. The original Monster Green flavor, which we've had now for over 20 years, is still our leading product pretty much in every country around the world. consumers do want a choice, and as consumers, I think, get a little older, they do start looking for a zero-sugar, sugar-free alternative, but would obviously like to stay in the same franchise with the same product, with the same personality. It's in a black can with a sort of green claw, and so we feel there is a way to, A, increase the franchise to bring additional consumers who really want that original monster flavor but in a zero sugar and also to retain and broaden our existing consumer base. As we bring younger consumers in, they tend to not be as worried or concerned about the sugar content. As you get a little older, I think sugar content does become an issue. There are also, in many countries around the world, they've started to tax products with sugar have label requirements. So we think that by having and offering our original green monster in a sugar-free, zero-sugar version with a very similar can, it's distinguishable but very similar with, as I said, it still has the same personality and image, we believe we will further entrench our consumer base and expand it for many years to come. So we think this is a very important development and an important way we can continue to solidify and make Monster and keep it unique because the Monster flavor is its own unique flavor that is so popular and we would like to continue to expand on it and build on it. So the plans are to obviously roll this out after the U.S. very extensively.
spk05: This is the conference operator. We ask to please only ask one question in today's Q&A. Your next question comes from Mark Astrochan.
spk10: Yeah. Hey, afternoon, guys. I guess I'm going to ask one question in two parts, but I swear it's related. So the first one, Hilton, I mean, obviously, I get everybody gets what you're saying about guidance, what you're saying about cost pressures. I just think it would be immensely helpful based on just the commentary that I've been getting from folks or feedback from your shareholders, if you could at least just directionally confirm the gross margins should get better from here. And if you could give some sort of magnitude around it, I think that'd be helpful. But the related and more serious question is, you know, you have a lot of volatility historically in gross margins. And I've asked this question before, but I'm curious given... the current environment, how you think about whether, you know, you want to do more with the Coke system from a procurement standpoint, potentially manufacturing through their Coke hackers in the U S or their bottlers in the U S. And has there been any sort of change in how you might be thinking about that given obviously what's happened over the last call it 12 months where you would have less to worry about, I suppose, if you were working with them more closely.
spk02: Yeah. So, um, you know, Um, with regard to your first point, I think I've already answered that. I believe that, uh, the second quarter is, is probably, you know, we probably going to see, uh, the lowest margin, um, in, in, in, in the year. Um, and, uh, you know, as regards, um, you know, um, better direction than that, you know, Mark, we just, you know, you know, we, we just don't do it. We not, we, you know, we, we just don't give guidance. So that's the first point. And then on the second, the second point is, um, We're really not sure, and we've had discussions with our distribution partner on a number of issues, and we're not sure that further engagement with them on any of these topics would be positive in terms of lowering costs of sales, but we are continuing to have those discussions, and if it makes sense, then We definitely will. I don't want to disclose too much, but one of our partners in Europe that is actually part of the Coca-Cola system did not fare better in procuring cans than we were able to. So I just want to put all of this in perspective that it's not necessarily a panacea.
spk05: Your next question comes from Peter Grom with UBS.
spk09: Hey, good afternoon, everyone. I hope you're doing well. I guess I'll ask about top line, I guess. So, Rodney Hilton, I guess I just wanted to ask about Bang. Like, what are you seeing there in terms of shelf space and kind of what do you expect as they kind of transition distributors and I guess, do you see a potential opportunity for you to capture some of that incremental shelf space?
spk02: Generally, in transitions, there's always upheavals. Transitions never happen cleanly overnight. There's always upheavals. Remember that Bang is in a lot of the Pepsi shelf space and a lot of the Pepsi coolers. Despite that, you guys have seen their shares decrease over the last 24 months or so. So I don't want to say any more than that. I'm not sure if Rodney wants to say any more, but I would say that obviously we continue to grab as much shelf space as we can. We contract for a lot of our own shelf space, and we work with the Coke bottlers. And then Bang, on the other hand, would work with the Pepsi space and with the Pepsi coolers.
spk18: Yeah, just to build slightly, I mean, if Bang transitions out of the Pepsi coolers, you're obviously all aware of the announcement that Celsius, who's been trying to secure and has been securing additional shelf space, will go into the Pepsi system. So there will be A lot of fighting going on. There's the Ghost brand lining you to a lesser degree and C4. So you've got all of these sort of, you know, performance brands basically fighting for some more shelf space. And, you know, obviously we will do the same. So there will be a lot of transition going on. And we believe that, you know, we're obviously focused on that as well. and our own brands and increasing our own shelf space.
spk05: Your next question comes from Kumail Rajwala from Credit Suisse.
spk08: Hi, guys. One of the things we've been watching carefully about the impact on inflation on the consumer with gas prices and stuff, it doesn't seem like we've seen a slowdown at all. I'm curious what you're observing and maybe if you've done any testing in markets like maybe Midland, Texas or Phoenix or some of those markets where inflation is much higher than it has been nationally, if you're perhaps seeing different trends.
spk02: So what I'd like to comment on is one retailer, and we're not going to mention who they are, in terms of their own schematics and their own structures went early on the price increase. They rolled out early and not only with us but with the competition as well and they have seen no reduction in sales based on that action. So what we are seeing anecdotally is continuation of the growth in the category Um, yes, it has slowed somewhat, but look in Europe where the category is a lot older, the growth has been escalating there faster than in, in, in, in the U S. So, um, we've seen that. And now we've seen the other, uh, you know, concern may be abating. Everyone is asking questions about gas prices and what gas prices affect the consumption of energy drinks. And, uh, Frankly, you know, we said at the time that when we've seen high gas prices in the past, you know, they hadn't affected the sale of energy drinks. And we've seen gas prices now coming down, you know, slowly but surely they're coming down. So I think that that maybe answers your question as well.
spk05: And our final question for today's Q&A will come from Charlie Higgs with Redburn.
spk13: Hi, Hilton Rodney. Thanks for the question. I was wondering if you could talk a bit about the price increases you've put through in your international markets and what the response is there. And then maybe if you could just touch on the scope of the price increases you're planning for in age 222. Maybe just some information on what countries and what products would be very useful, please.
spk02: Yeah, there's a range of countries that we took prices in the first half of 2022, either directly in price increases or through a reduction in promotions. And we've seen an uplift, in fact, in a quarter already, of the impact of those price increases. As regards the second six months, there's really a list of countries, and I don't think we've got the time today to go through them now, but there's a list of countries where we will be taking further price increases where we can. For example, in France, if you've had one price increase in a year, you cannot go with a second price increase. So there's a range of different countries where we will be taking price increases. Brazil, we took price increases earlier this year. Chile, we took a price increase earlier this year. We've been doing this on a consistent basis, not to profiteer from inflation, but really to mitigate the whole cost in the system, as you guys will appreciate.
spk11: Thank you.
spk18: On behalf of Monster, I would like to thank everyone for their continued interest in the company. We continue to believe in the company and our growth strategy. and remain committed to continuing to 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 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.
spk05: This concludes Monster Beverage second quarter 2022 conference call. Thank you for attending today's presentation. You may now disconnect. Good day to everyone. My name is Devin, and I will be your conference operator today. At this time, I would like to welcome everyone to the conference call. All lines have been placed on mute to prevent any background noise. After the speaker's remarks, there will be a question and answer session. If you would like to ask a question during this time, please start by pressing star, followed by the number one on your telephone keypad. If you would like to withdraw your question, again, press star, and then the number one on your telephone keypad. We also ask you to please only ask one question for today's Q&A session. Mr. Ronnie Sachs, you may begin your conference.
spk18: Thank you. Good afternoon, ladies and gentlemen. Thank you 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 Kelly 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 February 28, 2022, including the sections contained therein entitled risk factors and forward-looking statements for discussion on the specific risk 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 Sacks.
spk18: Rodney Sacks Thank you. Tom, the company achieved record second quarter net sales of 1.66 billion in the 2022 second quarter, 13.2% higher than net sales of 1.46 billion in the 2021 comparable period, and 16.9% higher on a foreign currency adjusted basis. Since the beginning of the COVID-19 pandemic and the subsequent increased demand for the company's energy drinks, the company prioritized ensuring product availability for its customers and consumers. This strategic direction has remained in place throughout the global supply chain challenges and disruptions, despite adversely impacting the company's profitability. The company continues to stand by its strategy to ensure product availability and solidify the continued long-term growth of the company's brands. During the 2022 second quarter, the company experienced a significant increase in cost of sales relative to the comparative 2021 second quarter, primarily due to increased freight rates and fuel costs, including costs relating to the importation of aluminum cans, increased ingredient and other input costs, including secondary packaging materials and increased co-packing fees, increased aluminum can costs attributable to higher aluminum commodity pricing, geographical and product sales mix, and production inefficiencies. The company estimates that of the increase in cost of sales in the 2022 second quarter of $250.3 million, approximately $164.4 million was comprised of one, approximately $66.7 million due to increased freight rates and fuel costs, including costs relating to the importation of aluminum cans. Two, approximately $45.9 million due to increased ingredient and other import costs, including secondary packaging materials and increased co-packing fees. Three, approximately $27.5 million due to increased aluminum can costs attributable to higher aluminum commodity pricing. Four, approximately $15.1 million due to geographical and product sales mix, and five, approximately 9.2 million, due to production inefficiencies. The company continued to experience additional global supply chain challenges, including the lack of adequate shipping containers and port congestion, which resulted in shortages of certain ingredients and finished products. As a result, the company continued to air freight substantial quantities of certain ingredients internationally, particularly to EMEA, Asia Pacific, and Latin America, at additional costs and inefficiencies. Furthermore, the company experienced significant increases in distribution expenses, including increased fuel, freight, and warehousing costs, which adversely impacted operating expenses. The company continues to address the challenges in its supply chain, as it navigates through the uncertainty of the current global supply chain environment. Gross profit as a percentage of net sales for the 2022 second quarter was 47.1%, compared with 57.2% in the 2021 second quarter. The decrease in gross profit as a percentage of net sales for the 2022 second quarter was partially offset by pricing actions. Operating expenses for the 2022 second quarter were $406.9 million compared with $310.9 million in the 2021 second quarter. The comparative operating expenses for the 2021 second quarter included a $16.9 million reversal of amounts previously accrued in connection with an intellectual property claim. As a percentage of net sales, operating expenses for the 2022 second quarter were 24.6%, compared with 21.3% in the 2021 second quarter and 25.6% in the 2019 second quarter pre-COVID. Distribution expenses for the 2022 second quarter increased to $87.9 million, which is an increase of 36% or 5.3% of net sales compared to $64.6 million or 4.4% of net sales in the 2021 second quarter. and 3.4% of net sales in the 2019 second quarter pre-COVID. The $23.3 million increase in distribution expenses was primarily due to increased freight out expenses of $13.5 million as a result of higher outbound freight rates and fuel, increased volume and out-of-orbit freight, as well as higher warehouse expenses of $9.7 million as a result of higher raw material and finished product inventories in the United States and EMEA. The increase in other operating expenses was primarily due to increased payroll expenses, increased expenditures for sponsorships and endorsements, and increased expenditures for travel and entertainment. Certain of these increases were the result of the company's return to activities consistent with pre-COVID-19 levels. We have decreased our reliance on imported cans, and are currently purchasing aluminum cans from local sources in both the US and EMEA. We anticipate seeing a reduction in cost of sales through increased use of domestic cans as we cycle through existing inventories of imported cans over the next few quarters. We rebuilt and increased finished product inventory levels across the United States and EMEA to reduce the excessive cost of long-distance freight to satisfy demand and to return to our orbit strategy of producing in closer proximity to our customers. The costs of repositioning finished products to distribution centers are included in freight end costs. Operating income for the 2022 second quarter decreased 29.1% to $373.0 million from $526 million in the 2021 comparative quarter. Net income decreased 32.3% to $273.4 million as compared to $403.8 million in the 2021 comparable quarter. Diluted earnings per share for the 2022 second quarter decreased 32.2% to 51 cents from 75 cents in the second quarter of 2021. Through pricing actions, the company was able to achieve positive pricing appreciation in the United States and in EMEA. Due to continued cost pressures, the company is implementing a net sales price increase in the range of 6% market-wide in the United States effective September 1, 2022. The company will also be implementing price increases in the second half of 2022 in certain international markets, some in addition to price increases or pricing actions taken earlier this year in order to mitigate inflationary cost pressures. According to the Nielsen reports, for the 13 weeks through July 23, 2022, for all outlets combined, namely convenience, grocery, drug, mass merchandisers, sales in dollars in the energy drink category, including energy shots, increased by 8.2% versus the same period a year ago. Sales of the company's energy brands, including Rain, were up 6% in the 13-week period. Sales of Monster were up 7.4%, sales of Rain were down 5.6%, sales of Nozz decreased 3.9%, and sales of Full Throttle decreased 0.8%. Sales of Red Bull increased 3.8%, sales of Rockstar increased by 2.1%, and sales of Five Hour decreased 3%. VPX bangers sales decreased 14.5%. The sales growth of the Monster brand exceeded that of Red Bull in the period. According to Nielsen, for the four weeks ended July 23, 2022, sales in dollars in the energy drink category in the convenience and gas channel, including energy shots, in dollars increased 6.6% over the same period the previous year. Sales of the company's energy brands, which include rain, increased 5.6% in the four-week period, in the convenience and gas channel. Sales of Monster increased by 6.4% over the same period versus the previous year. Range sales increased 0.9 of a percent. NAS was down 1.8% and Full Throttle was down 2.5%. Sales of Red Bull were up 3.9%. Rockstar was down 1.8% and Five Hour was down 3.5%. BPX Bangs sales decreased 16.3%. According to Nielsen, For the four weeks ended July 23, 2022, the company's market share of the energy drink category in the convenience and gas channel, including energy shots in dollars, decreased 0.4 of a point to 36.1%. Monster's share decreased from 30.6% a year ago to 30.5%. Rain's share decreased 0.1 of a share point to 2.3%. Nozzer's share decreased 0.2 of a point to 2.5%. and Full Throttle share remained at 0.7 of a percent. Red Bull share decreased one percentage point from 37.4% a year ago to 36.4%. Rockstar share was down 0.3 of a point to 3.5%. Five Hour share was lower by 0.4 of a point at 4.2%, and BPX Bank share decreased 1.6 points to 6%. According to Nielsen, for the four weeks ended July 23, 2022, Sales in dollars of the coffee plus energy drink category, which includes our Java Monster line, in the convenience and gas channel, increased 4.4% over the same period the previous year. Sales of Java Monster, including Java Monster 300 and Java Monster Nitro Cold Brew, were 2.3% higher in the same period versus the previous year. Sales of Starbucks Energy were 9.4% higher. Java Monster Share, including Java Monster 300, and Java Monster Nitro Cold Brew of the Coffee Plus Energy category, which primarily includes Java Monster, Java Monster 300, Java Monster Nitro Cold Brew, Starbucks Double Shot, and Triple Shot, Rockstar Roasted, and Bank Keto Coffee, for the four weeks ended July 23, 2022, was 50.9%, down one point, while Starbucks Energy Share was 47.7%, up 2.2 points. According to Nielsen, in all measure channels in Canada, for the 12 weeks ended June 18, 2022, the energy drink category increased 12.8% in dollars. Sales of the company's energy drink brands increased 8.5% versus a year ago. The market share of the company's energy drink brands was 40%, down 1.6 points. Monster's sales increased 10.8%, and its market share decreased 0.7 of a point to 34.8%. Nose's sales decreased 9.6% and its market share decreased 0.4 of a point to 1.5%. Full Throttle's sales increased 13% and its market share remained at 0.6 of a percent. According to Nielsen, for all outlets combined in Mexico, the energy drink category increased 21.2% for the month of June 2022. Monster's sales increased 26.9%. Monster's market share in value increased 1.3 points to 28.4%, against the comparable period the previous year. Sales of Predator increased 53.1%, and its market share increased 0.8 of a share point to 4%. 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 June 2022 compared to June 2021, Monster's retail market share in value increased in Argentina from 46.9% to 49.2%. Monster Energy continues to be the leading brand in value in Argentina. According to Nielsen, for the month of June 2022 compared to June 2021, Monster's retail market share in value increased in Brazil from 35.7% to 39.9%. Monster is now the leading energy brand in value in Brazil, marking another important milestone for our brand in South America. In Chile, Monster's retail share for the month of June 2022 decreased from 41.9% to 38.1% 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. According to Nielsen, in the 13-week period ending July 17, 2022, Monster's retail market share in value, as compared to the same period the previous year, grew from 25.8% to 31.6% in France, from 27.8% to 32.1% in Norway, and from 37.6% to 39.7% in Spain. According to Nielsen, in the 13-week period until the end of June 2022, Monster's retail market share in value as compared to the same period the previous year grew from 15.3% to 16% in Belgium, from 15.1% to 15.4% in Germany, from 28.9% to 29.9% in Great Britain, and from 19.4% to 19.8% in Poland. Monster's retail market share in value as compared to the same period the previous year declined from 20.5% to 20% in South Africa. According to Nielsen, in the 13-week period ended June 19, 2022, Monster's retail market share in values compared to the same period the previous year grew from 14.5% to 15.6% in Sweden. Monster's retail market share in values compared to the same period the previous year declined from 8.5% to 6.6% in the Netherlands, and from 29.3% to 28.1% in the Republic of Ireland. According to Nielsen, in the 13-week period until the end of May 2022, Monster's retail market share in value as compared to the same period the previous year grew from 15% to 17.5% in the Czech Republic and from 37.9% to 38.7% in Greece. Monster's retail market share in value as compared to the same period the previous year declined from 30.1% to 28.3% in Italy. According to Nielsen, in the 13-week period ending May 22, 2022, Monster's retail market share in value as compared to the same period the previous year grew from 25.7% to 27.5% in Denmark. According to Nielsen, in the 13-week period until the end of May 2022, Predator's retail market share in value as compared to the same period the previous year grew from 17.1% to 26.8% in Kenya and from 8.1% to 15.4% in Nigeria. According to IRI in Australia, Monster's market share in value for the month ending July 3, 2022, increased from 13.2% to 14.2% as compared to the same period the previous year. Mother's market share in value decreased from 11.5% to 10.2% during the same period. The market share of the company's brands in Australia for the month end of July 3, 2022 decreased from 24.7% to 24.5%. According to IRI in New Zealand, Monster's market share in value for the four weeks end of July 10, 2022 increased from 12.4% to 12.6% as compared to the same period the previous year. LivePlus' market share in value decreased from 6.9% to 6.5% and Mother's market share in value decreased from 6.3% to 5.3%. The market share of the company's brands in New Zealand for the four weeks ended July 10, 2022 decreased from 25.6% to 24.5%. According to Intage in Japan, in the month ending June 2022, Monster's market share in value in the convenience store channel, as compared to the same period the previous year, grew from 50.6% to 56.7%. According to Nielsen, in South Korea in the last month ending June 2022, Monster's market share in value in all outlets combined as compared to the same period the previous year decreased from 61.9% to 59.9%. 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 649 million, 39.2% of total net sales in the 2022 second quarter, compared to 546.3 million, or 37.4% of total net sales in the corresponding quarter in 2021. Foreign currency exchange rates had a negative impact on net sales in U.S. dollars by approximately 53.4 million in the 2022 second quarter. Included in reported geographic sales are our sales to the company's military customers, which are delivered in the U.S. and transshipped to the military and their customers overseas. In EMEA, net sales in the 2022 second quarter increased 13.8% in dollars and increased 26.8% in local currencies over the same period in 2021. Gross profit in this region as a percentage of net sales for the second quarter was 26.7% compared to 39.8% in the same quarter in 2021. Gross profit in the second quarter was impacted by increased freight for imported cans, increased raw material and ingredient costs, and increased co-packing fees, higher aluminum commodity pricing, and air freight costs. In local currencies, gross profit as a percentage of net sales for the quarter was 27.1%. the company is continuing to address the controllable challenges in its supply chain in EMEA. We're also pleased that in the 2022 second quarter, Monster gained market share in Belgium, the Czech Republic, Denmark, France, Germany, Great Britain, Greece, Norway, Poland, Spain, and Sweden. In Asia Pacific, net sales in the 2022 second quarter decreased 1.1% in dollars and increased 8.2% in local currencies over the same period, in 2021. Gross profit in this region as a percentage of net sales was 40.4% versus 44.4% over the same period in 2021. In Japan, net sales in the 2022 second quarter decreased 9.6% in dollars and increased 3.3% in local currency. Sales performance for the comparable period in 2021 was largely impacted due to COVID-19 restrictions in Japan. In South Korea, net sales decreased 5.2% in dollars and increased 3.8% in local currency as compared to the same quarter in 2021. Monster remains the market leader in Japan and South Korea. In China, net sales decreased 2.1% in dollars and 1.8% in local currency as compared to the same quarter in 2021, largely impacted by COVID-related lockdowns. 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 1.3% in dollars and 7.6% in local currencies. Sales in Australia and New Zealand were negatively impacted by shipping delays of certain flavors, concentrates and ingredients. Furthermore, sales in Australia were also impacted by severe flooding in that country, in the 2022 second quarter. In Latin America, including Mexico and the Caribbean, net sales in the 2022 second quarter increased 66.7% in dollars and increased 69.7% in local currencies over the same period in 2021. Gross property in this region as a percentage of net sales was 36.4% for the 2022 second quarter versus 40.7% in the 2021 second quarter. In Brazil, net sales in the 2022 second quarter increased by 82.8% in dollars and 63.9% in local currency. Net sales in Mexico increased 49.3% in dollars and 49% in local currency in the 2022 second quarter. Net sales in Chile increased 26.1% in dollars and 45.3% in local currency in the 2022 second quarter. Net sales in Argentina increased 200.1% in dollars and 269.4% in local currency in the 2022 second quarter. I will now provide the most recent update on our litigation with Vital Pharmaceuticals Inc., which I will refer to as VPX, the maker of Bang Energy drinks. In June 2020, Monster Energy Company, which I will refer to as MEC, and Orange Bang Inc., a family-owned beverage business and the rightful owner of several trademark registrations to the Bangmarks, initiated an arbitration against VPX. MEC and Orange Bang alleged that VPX breached a 2010 settlement agreement with Orange Bang that restricted VPX's use of the Bang trademark to products that are creatine-based or marketed and sold only in nutritional channels, as well as claims that VPX infringed Orange Bang's trademark rights to the Bangmarks. In April 2022, the arbitrator issued a final award funding in favor of MEC and Orange Bank on all claims. The arbitrator awarded MEC and Orange Bank $175 million to remedy VPX's past misconduct, as well as attorneys' fees and costs, which amounted to nearly $9.3 million. The arbitrator also ordered VPX to pay MEC and Orange Bank an ongoing 5% royalty on all future sales of VPX Bank's energy drinks and other Bang-branded products. Pursuant to the terms of the agreement between MEC and Orange Bang, the award and future royalties will be shared equally between MEC and Orange Bang. On July 1, 2022, the United States District Court for the Central District of California granted MEC and Orange Bang's motion to confirm the arbitrator's award and denied VPX's motion to vacate the arbitrator's award. MEC and Orange Bang have requested that the court enter final judgment On July 28, 2022, VPX filed a notice of appeal to the United States Court of Appeals for the Ninth Circuit. The company will not recognize the award or royalties until such time as they are realized or realizable. Yesterday, the United States Court of Appeals for the Eleventh Circuit issued a ruling affirming the decision of the United States District Court in the Southern District of Florida in which the District Court rejected VPX's claim that MEC's line of rain energy drinks infringed the trade dress of its line of bang energy drinks. MEC's lawsuit against VPX for false advertising, unfair competition, and misappropriation of trade secrets in the Central District of California is still pending, with trial scheduled to begin later this month. As this litigation and other pending proceedings with VPX are subjudicated, I will not be answering any questions on those matters on today's call. The first alcohol-based product line that we plan to launch since the acquisition of Kanoki will be a full-bodied, flavoured malt beverage that will be launched late in the 2022 fourth quarter under the brand name The Beast Unleashed. Beast Unleashed will leverage Monster's brand equity while carving out its own unique space in the beverage alcohol sector. and will be distinguishable from the many hard seltzer brands that have become so ubiquitous over the last several years. The Beast Unleashed will have a 6% alcohol content by volume and will come in four great tasting bold flavors, which are based on certain of Monster's well-known and popular flavor profiles. Beast Unleashed will be launched through beer distributors in the United States, utilizing a phased state launch approach with the goal of being national by the end of 2023 and will initially be offered in 16-ounce single-serve cans, as well as a 12-can variety pack in 12-ounce sleek cans. Our alcohol innovation pipeline is robust, with a number of additional innovative product lines currently under development. We look forward to sharing news of such additional alcohol beverage products at a later date. We're excited about the planned launch of our new Monster Energy Zero sugar energy drink in the 2022 fourth quarter, Initially in the United States, Monster Energy Zero Sugar was specifically developed as an indistinguishable zero sugar analog of our original unique Monster Energy Green flavor. We are excited about the opportunity that this product will provide to our Monster consumers who have come to enjoy the unique taste profile of our original Monster Green flavor, which remains our leading flavor. In April of 2022, we launched Pure North Energy Salsas in sleek 355 ml cans in three flavors, cucumber, lime, black cherry, and grapefruit lemonade in Canada. At the end of June 2022, we expanded our core Monster Energy portfolio in Canada by launching Monster Reserve in two flavors, watermelon and white pineapple, both in 473 ml cans. In Latin America, we introduced several new energy drinks in our Monster Energy, Predator and Fury product lines in certain Latin American countries in the 2022 second quarter. In April 2022 in New Zealand, we launched Live Plus Watermelon, our fourth Live Plus flavor. In EMEA in the second quarter of 2022, we launched Monster Nitro and Monster Assault in a number of countries. In certain countries, we also launched Juiced Monarch and Chaotic during the 2022 second quarter. During the 2022 second quarter, we also launched additional SKUs of Burn, Relentless, Nalu and Rain in certain countries. During the second quarter of 2022, we launched Predator in Turkey and we continued the national rollout of Predator in India and Vietnam in June, expanding the brand to East India and North Vietnam. We also launched Predator in Cambodia in July 2022. We are planning to introduce the Predator brand in several additional countries in APAC in the second half of 2022. In Japan, we launched Monster Super Fuel Killer Kiwi and Monster Energy Ultra Sunrise in China. We estimate July 2022 sales, including Kanaki, to be approximately 12.9% higher than in July 2021 and 11.2% higher than in July 2021, excluding Kanoki. On a foreign currency adjusted basis, excluding Kanoki, July 2022 sales would have been approximately 16.6% higher than the comparable July 2021 sales. July 2022 has had one less selling day compared to July 2021. The company had sufficient can capacity and co-manufacturing capacity facilitate capacity across all regions to address demand for July. 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, 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 would like to summarize some recent positive points. One, the company is increasing its raw material and finished product inventories to better service its customers and ensure availability of its products. Two, our AFF flavor facility in Ireland is now providing a large number of flavors to our EMEA region, enabling better service levels and lower landed costs to our EMEA region. Three, we are pleased with the new additions to the Monster Energy portfolio. Four, we are planning to continue additional launches of our rain total body fuel high-performance energy drinks in additional international countries. Five, 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 an additional number of international countries. Six, we are enthusiastic for the planned launch of the Beast Unleashed, our first flavoured malt beverage alcohol product, and for the opportunities that the Kanaki acquisition presents. Seven, we believe that we will be able to address many of the challenges we have experienced in our supply chain. Eight, we consider that certain of the increased costs we have experienced in the quarter may well be transitory. For example, the current cost of aluminum has reduced materially from its recent March highs, and we are beginning to see a reduction in fuel and freight costs, as well as reductions in the costs of shipping containers and ocean freight. I would like to now open the floor to questions about the quarter. Thank you.
spk05: At this time, I would like to remind everyone, in order to ask a question, please press star and then the number one on your telephone keypad. Our first question will come from the line of Bonnie Herzog with Goldman Sachs. All right.
spk16: Okay, thank you. I guess, you know, a question on gross margins. I simply don't understand really why they were this bad in a quarter. I guess I was under the impression that you were already buying a fair amount of your aluminum cancel line in the U.S. and therefore should have been less reliant on the importation of cans, I guess at least in the U.S. So I thought that was the plan. However, I do see your inventory levels in the quarter went even higher and are almost three times the level they were last year. So I guess help us understand that and just trying to think through, is this really the right way to manage the business? And then Hilton, you mentioned these pressures are transitory. or was in the release, but I guess they're not really feeling like it. So when do you guys expect to be 100% buying in the U.S. and EMEA for your supply and really no longer importing aluminum cans?
spk02: Sure. Bonnie, thank you for that question. I think a lot of people probably may want to ask the same question, so thanks for addressing it early on. You know, we've always taken a stance that objective is to support our customers and our consumers. We went through hard times in 20 and 21 when we did not have enough capacity to service our customers and our consumers. We had bartenders screaming, we had retailers screaming, and at the time we made a very conscious effort that we were going to import cans at expensive costs, not in terms of the actual cost of the can, but the cost of importing the cans, the container costs, the demurrage, which you guys call demurrage, just everything relating to the importation of aluminum cans. So that was an absolute conscious decision. As cans started arriving late in 2021, EMEA was the most affected. I think we've had a number of discussions about how EMEA was affected. and a substantial number of those cans went into EMEA and have been consumed over a period of time. It's difficult with our business because we have promotions from time to time. For example, we've got the Apex Legends promotions now, and the cans that come in are not promotional cans. So they're used in production when there's market and market demand. In EMEA, we stopped importing cans. We thought we'd still have to import cans during 2022. We stopped that, and there's no longer importation of cans into EMEA in 2022. In 2021, we've had dribs and drabs coming in in the U.S., and we will soon be out of those cans soon. as soon as we get over this Apex Legends promotion. But in the U.S., the percentage of imported cans in our furnish is very low compared to what it was in the second quarter in EMEA. So I hope that answers your question. We did it as a conscious effort to support and to supply customers because we're in this business for the long term. We're not in this business... for the second quarter of 2022. We're in this business for the long term, and it's important to us to ensure that our customers and our consumers continue to have faith in the company's supply of energy products.
spk03: Is there anything else that I didn't answer that I should have answered, Bonnie?
spk16: But I guess for me, it still begs the question as you're making this conscious decision to keep or have a bigger supply of cans and have elevated inventory, how do we think about that as I assume you're gonna work down that inventory now, is that starting to happen or will happen in Q3 and Q4? And I assume it's very elevated costs. So do we think about these pressures on your gross margin quite frankly, you know, very much continuing Q3 and Q4. Is that right?
spk02: Yeah. Okay, great question. You know, as we look at the future, I mean, you know that in cost of sales, fuel is coming down. We know that. We know that freight is coming down. You know, we're in that every day of our lives. We know that ocean freight is coming down. We know that we've been able now to really diminish the amount of of materials that we're having to air freight to keep the wheels moving with product that's coming out of the U.S. with concentrates. We know that AFF is producing and up and running in Ireland. We know that the percentage of aluminum cans is coming down. We know that aluminum costs are coming down. Aluminum reached a peak. See if I can find it just very quickly. The maximum level of aluminum, including the Midwest premium, was 1.8073 on March 7th. We buy where we're not hedged. The portion that's not hedged is bought at M-1. So the April cans would be based on March pricing. And we know that aluminum today, including the Midwest premium, is 136, so it's come down from a peak of 181 to 136. So we know that's a fact, right? We also know that we built up inventories, which we had to because those inventories we were talking about in 21 were just not sustainable. They were just not sustainable. So we built up inventories and we're now able to avoid a lot of the shipping, the freight that's been out of orbit. So you add all of that together. And, you know, we don't give forecasts. I don't want to start giving forecasts. But it's very clear that 2022, the second quarter, as in fact we had anticipated, would probably be our worst quarter in terms of margin. But I just want to stress again that we are in business for the long term and we're supporting business. our customers, and our business in the long term.
spk05: Your next question comes from the line of Andrea Tisera with J.P. Morgan.
spk04: Hi, good afternoon. Thank you. On the same topic, and I try to do the phasing of the cost pressures and the pricing, we just say pricing both domestic and international would be like that, mid-single digits. and could probably cover about a third of these $250 million that you quoted. And then you have, of course, and I appreciate the breakdown that you gave, you can phase out some of these higher costs for aluminum, also the $67 million that you said to bring cans imported. So would you end up to about, from the $250 to about $100 to $150 million in pressures into the fourth quarter? I want to check that. And then On the Monster Zero Sugar, congrats on that. Should we think like we obviously have seen Coke Zero Sugar recruit new consumers into the category? Are you thinking how incremental that could be against Ultra? I'm assuming, as Rodney said, it attracts the need state for the typical Monster consumer because of the taste profile and also because of the packaging. I'm assuming more masculine and more into the core consumer. Is that fair? Do you have new shelves coming in? How much support do you believe you can give to the lounge? Thank you.
spk02: Okay, so those were two questions, no one. I'll start with the first one. So, you know, we don't give guidance. And, you know, what I've tried to do on this call is give some direction. You know, that's what we are seeing. That's what we are seeing. coming down. It's not going to happen overnight because there are costs in the system that will take their time to work through. In principle, since we don't give guidance, I've given some general direction which I hope you'll find helpful and the other analysts will find helpful in analyzing where we go from here. But I just want to repeat yet again that we're in this business for the long term. We're in this business to support our customers. And yes, maybe we did take a hiccup in gross margin in the second quarter of 2022, but there have been a lot of other cost pressures, including imported cans, imported cans being one of them. But at least we were able to bring our inventories back to a situation where where we're able to service customers and we're able to service consumers. Look, it will be a terrible situation when our price goes up in September 1 and we don't have sufficient inventories to satisfy demand. I mean, that would just be the end. So we've done our very best to stay on track and to work within a very, very difficult supply chain environment.
spk18: Perhaps I could address the second part on the actual zero sugar. You know, I think that we've had zero sugar products. We have the full ultra line. We have low carb and absolutely zero. But none of them have been really an analog of our original Monster Green. The original Monster Green flavor, which we've had now for over 20 years, is still our leading product pretty much in every country around the world. consumers do want a choice. And as consumers, I think, get a little older, they do start looking for a zero-sugar, sugar-free alternative. But we'd obviously like to stay in the same franchise with the same product, with the same personality. It's in a black can with a sort of green claw. And so we feel there is a way to, A, increase the franchise to bring additional consumers who really want that original monster flavor but in a zero sugar and also to retain and broaden our existing consumer base as we bring younger consumers in they tend to you know not be as worried or concerned about the sugar content as you get a little older I think sugar content does become an issue there are also in many countries around the world they've started to tax products with sugar and have label requirements. So we think that by having and offering our original green monster in a sugar-free, zero-sugar version with a very similar can, it's distinguishable, but very similar with, as I said, it still has the same personality and image, we believe we will further entrench our consumer base and expand it for many years to come. So we think this is a very important and an important way we can continue to solidify and make Monster and keep it unique because the Monster flavor is its own unique flavor that is so popular and we would like to continue to expand on it and build on it. So the plans are to obviously roll this out after the U.S. very extensively.
spk05: This is the conference operator. We ask to please only ask one question in today's Q&A. Your next question comes from Mark Astrochan.
spk10: Yeah. Hey, afternoon, guys. I guess I'm going to ask one question in two parts, but I swear it's related. So the first one, Hilton, I mean, obviously, I get everybody gets what you're saying about guidance, what you're saying about cost pressures. I just think it would be immensely helpful based on just the commentary that I've been getting from folks or feedback from your shareholders, if you could at least just directionally confirm the gross margins should get better from here. And if you could give some sort of magnitude around it, I think that'd be helpful. But the related and more serious question is, you know, you have a lot of volatility historically in gross margins. And I've asked this question before, but I'm curious given... the current environment, how you think about whether you want to do more with the Coke system from a procurement standpoint, potentially manufacturing through their Coke hackers in the U.S. or their bottlers in the U.S. And has there been any sort of change in how you might be thinking about that, given obviously what's happened over the last, call it 12 months, where you would have less to worry about, I suppose, if you were working with them more closely?
spk02: Yes. So, you know, Um, with regard to your first point, I think I've already answered that. I believe that, uh, the second quarter is, is probably, you know, we probably going to see, uh, the lowest margin, um, in, in, in, in the year. Um, and, uh, you know, as regards, um, you know, um, better direction than that, you know, Mark, we just, you know, you know, we, we just don't do it. We not, we, you know, we, we just don't give guidance. So that's the first point. And then on the second, the second point is, um, We're really not sure and we've had discussions with our distribution partner on a number of issues and we're not sure that further engagement with them on any of these topics would be positive but positive in terms of lowering costs of sales but we are continuing to have those discussions and if it makes sense then We definitely will. I don't want to disclose too much, but one of our partners in Europe that is actually part of the Coca-Cola system did not fare better in procuring cans than we were able to. So I just want to put all of this in perspective that it's not necessarily a panacea.
spk05: Your next question comes from Peter Grom with UBS.
spk09: Hey, good afternoon, everyone. I hope you're doing well. I guess I'll ask about top line, I guess. So, Rodney Hilton, I guess I just wanted to ask about Bang. Like, what are you seeing there in terms of shelf space and kind of what do you expect as they kind of transition distributors and I guess, do you see a potential opportunity for you to capture some of that incremental shelf space?
spk02: Generally, in transitions, there's always upheavals. Transitions never happen cleanly overnight. There's always upheavals. Remember that Bang is in a lot of the Pepsi shelf space and a lot of the Pepsi coolers, and despite that, you guys have seen their shares decrease over the last 24 months or so. So I don't want to say any more than that. I'm not sure if Rodney wants to say any more, but I would say that obviously we continue to grab as much shelf space as we can. We contract for a lot of our own shelf space, and we work with the Coke bottlers. And then Bang, on the other hand, would work with the Pepsi space and with the Pepsi coolers.
spk18: Yeah, just to build slightly, I mean, if Bang transitions out of the Pepsi coolers, you're obviously all aware of the announcement that Celsius, who's been trying to secure and has been securing additional shelf space, will go into the Pepsi system. So there will be A lot of fighting going on. There's the Ghost brand aligning you to a lesser degree and C4. So you've got all of these sort of, you know, performance brands basically fighting for some more shelf space. And, you know, obviously we will do the same. So there will be a lot of transition going on. And we believe that, you know, we're obviously focused on that as well. and our own brands and increasing our own shelf space.
spk05: Your next question comes from Kumail Rajwala from Credit Suisse.
spk08: Hi, guys. One of the things we've been watching carefully about the impact on inflation on the consumer as with gas prices and stuff, it doesn't seem like we've seen a slowdown at all. I'm curious what you're observing and maybe if you've done any testing in markets like maybe Midland, Texas or Phoenix or some of those markets where inflation is much higher than it has been nationally, if you're perhaps seeing different trends.
spk02: So what I'd like to comment on is one retailer, and we're not going to mention who they are, in terms of their own schematics and their own structures went early on the price increase. They rolled out early and not only with us but with the competition as well and they have seen no reduction in sales based on that action. So what we are seeing anecdotally is continuation of the growth in the category Um, yes, it has slowed somewhat, but look in Europe where the category is a lot older, the growth has been escalating there faster than in, in, in, in the U S. So, um, we've seen that. And now we've seen the other, uh, you know, concern may be abating. Everyone is asking questions about gas prices and gas prices affect the consumption of energy drinks. And, uh, Frankly, you know, we said at the time that when we've seen high gas prices in the past, you know, they hadn't affected the sale of energy drinks. And we've seen gas prices now coming down, you know, slowly but surely they're coming down. So I think that that maybe answers your question as well.
spk05: And our final question for today's Q&A will come from Charlie Higgs with Redburn.
spk13: Hi, Hilton Rodney. Thanks for the question. I was wondering if you could talk a bit about the price increases you've put through in your international markets and what the response is there. And then maybe if you could just touch on the scope of the price increases you're planning for in age 222. Maybe just some information on what countries and what products would be very useful, please.
spk02: Yeah, there's a range of countries that we took prices in the first half of 2022, either directly in price increases or through a reduction in promotions. And we've seen an uplift, in fact, in a quarter already, of the impact of those price increases. As regards the second six months, there's really a list of countries, and I don't think we've got the time today to go through them now, but there's a list of countries where we will be taking further price increases where we can. For example, in France, if you've had one price increase in a year, you cannot go with a second price increase. So there's a range of different countries where we will be taking price increases. Brazil, we took price increases earlier this year. Chile, we took a price increase earlier this year. We've been doing this on a consistent basis, not to profiteer from inflation, but really to mitigate the whole cost in the system, as you guys will appreciate.
spk11: Thank you.
spk18: On behalf of Monster, I would like to thank everyone for their continued interest in the company. We continue to believe in the company and our growth strategy. and remain committed to continuing to 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 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.
spk05: This concludes Monster Beverage second quarter 2022 conference call. Thank you for attending today's presentation. You may now disconnect.
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