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spk07: Good afternoon, everyone, and welcome to the Monster Beverage third quarter 2022 financial results conference call. All participants will be in a listen-only mode. Should you need assistance, please signal a conference specialist by pressing the star key followed by zero. After today's presentation, there will be an opportunity to ask questions. To ask a question, you may press star and then one. To withdraw your questions, you may press star and two. Please also note today's event is being recorded. At this time, I'd like to turn the floor over to Rodney Sachs and Hilton Schlossberg. Gentlemen, please go ahead.
spk03: 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.
spk09: 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 specific risks and uncertainties that may affect our performance. The company assumes no obligations to update any forward-looking statements, whether as a result of new information, future events, or otherwise. I would now like to hand the call over to Rodney Sachs.
spk03: Thank you, Tom. The company achieved record third-quarter net sales of $1.62 billion in the 2022 third quarter, 15.2% higher than net sales of $1.41 billion in the 2021 comparable period and 20.2% 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 prioritised 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 third quarter, the company experienced a significant increase in cost of sales relative to the comparative 2021 third quarter, primarily due to increased ingredient and other import costs, including secondary packaging materials, and increased co-packing fees, increased logistical costs, increased aluminum can costs, and geographical and product sales mix. We continue to believe that some of these increased costs we are experiencing are likely to be transitory. The depletion of our higher cost imported cans will continue over the next few quarters. However, our main promotion in the third quarter was executed with lower cost locally sourced cans in the United States and globally. We estimate that of the increasing costs of sales in the 2022 third quarter, approximately $84.2 million was comprised of approximately $40.1 million due to increased ingredient and other input costs, including secondary packaging materials and increased co-packing fees. Two, approximately $24.4 million due to increased freight rates and fuel costs, including costs relating to the importation of aluminum cans. Three, approximately $11.5 million due to increased aluminum can costs attributable to higher aluminum commodity pricing. And four, approximately $8.2 million due to geographical and product sales mix. We continue to air freight quantities of certain ingredients internationally, particularly to EMEA, Asia Pacific and Latin America at additional costs and inefficiencies to enable timely innovation launches. We continue to experience significant increases in distribution expenses, primarily the result of increased warehousing expenses as well as other logistical expenses 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 third quarter was 51.3% compared with 55.9% in the 2021 third quarter and 47.1% for the 2022 second quarter. The decrease in gross profit as a percentage of net sales for the 2022 third quarter was partially offset by pricing actions including the implementation of our general price increase in the United States effective September 1, 2022, price increases in certain international markets and reductions in promotions. Such pricing actions positively impacted gross profit margins in the 2022 third quarter. Operating expenses for the 2022 third quarter were $415.8 million compared with $344.7 million in the 2021 third quarter. As a percentage of net sales, operating expenses for the 2022 third quarter were 25.6%, compared with 24.4% in the 2021 third quarter and 24.5% in the 2019 third quarter pre-COVID. Distribution expenses for the 2022 third quarter increased to $83 million, which is an increase of 27.1%, or 5.1% of net sales, compared to 65.3 million or 4.6% of net sales in the 2021 third quarter and 3.3% of net sales in the 2019 third quarter pre-COVID. The $17.7 million increase in distribution expenses was primarily due to higher warehouse expenses of $11.7 million as a result of higher raw materials and finished product inventories in the United States and EMEA, as well as increased freight out expenses of $4.8 million as a result of higher outbound freight rates and fuel, increased volume and out-of-orbit freight. 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 globally. We have seen a reduction in cost of sales through increased use of domestic cans as we continue to cycle through existing inventories of imported cans over the next few quarters. We have rebuilt and increased finished product inventory levels across the United States and the MEA to reduce the excessive cost of long-distance freight 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 centres are included in the freighting costs. Operating income for the 2022 third quarter decreased 6% to $417.9 million from $444.5 million in the 2021 comparative quarter. Net income decreased 4.4%, to $322.4 million as compared to $337.2 million in the 2021 comparable quarter. Diluted earnings per share for the 2022 third quarter decreased 3.9% to $0.60 from $0.63 in the third 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 implemented a net sales price increase in the range of 6% market-wide in the United States, effective September 1, 2022. In addition to price increases or pricing actions taken earlier this year in order to mitigate inflationary cost pressures, the company implemented price increases in the second half of 2022 in certain international markets and will be implementing additional price increases early in 2023 in a number of international markets. the company will continue to review further opportunities for price increases and pricing actions in order to mitigate inflationary pressures. According to the Nielsen reports, for the 13 weeks through October 22, 2022, for all outlets combined, namely convenience, grocery, drug, mass merchandisers, sales in dollars in the energy drink category, including energy shots, increased by 11.2% versus the same period a year ago. Sales of the company's energy brands, including rain, were up 11.2% in the 13-week period. Sales of Monster were up 11.2%, sales of rain were up 2.9%, sales of NAS increased 17.2%, and sales of Full Throttle increased 1.7%. Sales of Red Bull increased 6.6%, sales of Rockstar increased by 6.1%, and sales of 5-Hour decreased 1.8%. BPX Bank's sales decreased 22.6%. The company has regained market share leadership in the energy drink category in the United States for the 13 weeks ended October 2022. According to Nielsen, for the four weeks ended October 2022, sales in dollars in the energy drink category in the convenience and gas channel, including energy shots, in dollars increased 10.4% over the same period the previous year. Sales of the company's energy brands, which include rain, increased 11.8% in the four-week period in the convenience and gas channel. Sales of Monster increased by 11.4% over the same period versus the previous year. Rain sales increased 12%, NAS was up 13.9%, and Full Throttle was up 7.1%. Sales of Red Bull were up 6.2%, Rockstar was up 8.1% and Five Hour was down 2.2%. BPX Bank sales decreased 27.3%. According to Nielsen, for the four weeks ended October 22, 2022, the company's market share of the energy drink category in the convenience and gas channel, including energy shots in dollars, increased 0.5% to 36.9%. Monster's share increased from 30.8% a year ago to 31.1%. Rains' share remained at 2.4%. Nozzles' share increased 0.1 of a point to 2.5%. And Full Throttle's share remained at 0.7 of a percent. Red Bull's share decreased 1.4 points from 37.5% a year ago to 36.1%. VPX Bank's share decreased 2.5 points to 4.8%. Five Hours' share was lower by 0.5 points at 4%. Rockstar's share was down 0.1 of a point to 3.7%. Celsius's share is 2.6%. Alani New's share is 0.6 of a percent. And Ghost's share is 1.8%. According to Nielsen, for the four weeks ended October 22, 2022 sales in dollars of the coffee plus energy drink category, which includes our Java Monster line in the convenience and gas channel range, increased 11.4% over the same period the previous year. Sales of Java Monster including Java Monster 300 and Java Monster Nitro Cold Brew were 10.4% higher in the same period versus the previous year. Sales of Starbucks Energy were 17.4% 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 October 22, 2022, was 52.1%, down 0.5%, while Starbucks Energy Share was 46.9%, up 2.4%. According to Nielsen, in all measured channels in Canada, for the 12 weeks ended October 8, 2022, The energy drink category increased 15.8% in dollars. Sales of the company's energy drink brands increased 14.9% versus a year ago. The market share of the company's energy drink brands was 40.9%, down 0.3 of a point. Monster sales increased 17.3%, and its market share increased 0.5 of a point to 36.6%. Nozzles sales decreased 11.6%, and its market share decreased 0.4 of a point to 1.3%. Full throttle sales decreased 8%, and its market share decreased 0.1 of a point to 0.05%. According to Nielsen, for all outlets combined in Mexico, the energy drink category increased 26% for the month of September 2022. Monster sales increased 36.4%. Monster's market share in value increased 2.2 points to 28.6%, against the comparable period the previous year. Sales of Predator increased 94%, and its market share increased 1.5 share points to 4.4%. 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 September 2022 compared to September 2021, Monster's retail market sharing value increased in Argentina from 47.9% to 51.7%, and in Brazil from 37.7% to 41.8%. Monster Energy continues to be the leading energy brand in value in both Argentina and Brazil. In Chile, Monster's retail share for the month of September 2022 decreased from 42.2% to 41.7%. 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 MEA 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 October 9, 2022, Monster's retail market share in value as compared to the same period the previous year grew from 13.5% to 15.5% in Belgium, from 26.6% to 31% in France, from 28.9% to 29.9% in Great Britain, from 20.7% to 31.6% in Norway, and from 36.9% to 40.3% in Spain. According to Nielsen, in the 13-week period ending September 11, 2022, Monster's retail market share in value, as compared to the same period the previous year, grew from 27.4% to 27.9% in Denmark, from 27.5% to 28.1% in the Republic of Ireland, and from 13.6% to 15.5% in Sweden. Monster's market share in value as compared to the same period the previous year declined from 7.8% to 5% in the Netherlands. According to Nielsen, in the 13-week period until the end of August 2022, Monster's retail market share in value as compared to the same period the previous year grew from 15% to 18.1% in the Czech Republic, from 15.3% to 15.6% in Germany, from 28.8% to 31.6% in Italy, and from 19.3% to 19.4% in Poland. Monster's retail market share in value as compared to the same period the previous year declined from 38.6% to 38.4% in Greece and from 20.1% to 19.6% in South Africa. According to Nielsen, in the 13-week period until the end of August 2022, Predator's retail market share in value, as compared to the same period the previous year, grew from 17.4% to 29.6% in Kenya and from 11.9% to 17% in Nigeria. According to IRI in Australia, Monster's market share in value for the four weeks ending October 16, 2022, increased from 14.2% to 14.8%. As compared to the same period the previous year, Mother's market share in value increased from 11.2% to 11.7%. According to IRI in New Zealand, Monster's market share in value for the four weeks ended October 9, 2022, increased from 12.8% to 12.9% as compared to the same period the previous year. Live Plus' market share in value decreased from 6.4% to 6%, and Mother's market share in value decreased from 6.3% to 5.9%. According to Intage in Japan, in the month ending September 2022, Monster's market share in value in the convenience store channel, as compared to the same period the previous year, grew from 53.9% to 55%. According to Nielsen in South Korea, in the month ending September 2022, Monster's market sharing value in all outlets combined, as compared to the same period the previous year, increased from 60.4% to 61.5%. 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 US was 610.6 million, 37.6% of total net sales in the 2022 third quarter compared to 527.4 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 71.3 million in the 2021 third quarter. Included in reported geographic sales are 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 third quarter increased 14.1% in dollars, and increased 30.4% in local currencies over the same period in 2021. Gross profit in this region as a percentage of net sales for the third quarter was 34.7% compared to 37.7% in the same quarter in 2021 and compared to 26.7% in the second quarter of 2022. The company is continuing to address the controllable challenges in its supply chain in EMEA. We're also pleased that in the 2022 third quarter, Monster gained market share in Belgium, the Czech Republic, Denmark, France, Germany, Great Britain, Italy, Norway, Poland, the Republic of Ireland, Spain, and Sweden. In Asia Pacific, net sales in the 2022 third quarter decreased 13.9% in dollars and decreased 1.5% in local currencies over the same period in 2021. Gross profit in this region as a percentage of net sales was 37.4% versus 43.5% over the same period in 2021. Due in part to a product supply issue with an ingredient that impacted a number of our products in Japan, but which has now been resolved, net sales in the 2022 third quarter decreased 35.8% in dollars and decreased 21.2% in local currency. Sales in the 2022 third quarter remain impacted by COVID in certain channels. In South Korea, net sales decreased 8% in dollars, but increased 4.4% in local currency as compared to the same quarter in 2021. Monster remains the market leader in Japan and in South Korea. In China, net sales decreased 6% 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 30.7% in dollars and 41.5% in local currencies. In Latin America, including Mexico and the Caribbean, Net sales in the 2022 third quarter increased 63.8% in dollars and increased 74.7% in local currencies over the same period in 2021. Gross profit in this region as a percentage of net sales was 34.7% for the 2022 third quarter versus 41% in the 2021 third quarter. In Brazil, net sales in the 2022 third quarter increased by 139.4% in dollars and and 142.9% in local currency. Net sales in Mexico increased 17% in dollars and 18% in local currency in the 2022 third quarter. Net sales in Chile decreased 4.4% in dollars and increased 15.1% in local currency in the 2022 third quarter. Net sales in Argentina increased 97.8% in dollars and increased 166.2% in local currency in the 2022 third quarter. We'll now provide an update on our litigation with Vital Pharmaceuticals Inc., which will be referred to as VPX, the maker of Bang Energy drinks. We previously discussed the April 2022 final arbitration award, in which the arbitrator found in favor of Monster Energy Company, or MEC, and Orange Bang Inc., and against VPX on all claims. The arbitrator awarded MEC and Orange Bank $175 million to remedy VPX's past misconduct, as well as attorney's 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 Bank-branded products. Pursuant to the terms of the agreement between MEC and Orange Bank, the award and future royalties will be shared equally between MEC and Orange Bank. On September 29, 2022, the United States District Court for the Central District of California entered final judgment confirming the award. On October 28, 2022, VPX filed a notice of appeal of the district court's final judgment confirming the award. The company will not recognize the award or royalties until such time as they are realized or realizable. Additionally, on 29 September 2022, a jury in the United States District Court for the Central District of California returned a verdict awarding MEC approximately $293 million in damages on its claims against VPX for false advertising, misappropriation of trade secrets, and interference with monstrous contracts over shelf space with certain key retailers. MEC will not recognize the jury award until such time as the award is realized or realizable. On October 10, 2022, VPX, along with certain of its domestic subsidiaries and affiliates, filed for protection under Chapter 11 of the Bankruptcy Code in the Southern District of Florida. VPX initiated the bankruptcy action before the district court could decide certain remaining issues. As this litigation and other pending proceedings with VPX or Subjudica, we will not be answering any questions on those matters on today's call. Our first alcohol-based product line to leverage Monster's brand equity is scheduled to launch in the first quarter of 2023. The Beast Unleashed will be a full-bodied, flavored malt beverage with 6% alcohol by volume and will come in four bold flavors, Mean Green, White Haze, Peach Perfect, and Scary Berries. all of which are based on Monster's well-known and popular flavor profiles. Kanoki will introduce the Beast Unleashed through certain beer distributors in the United States, utilizing a phased approach launch with the goal of being national by the end of 2023. Our alcohol innovation pipeline is robust. In addition to the Beast Unleashed, we will relaunch Wild Basin Hot Salsa with new packaging and great new flavors and taste profiles. The Dale's beer family will get a refresh, including the introduction of Dale's American Light Lager, an easy-drinking lager with 4.2% alcohol by volume, 95 calories, and 2.5 carbs per 12-ounce serving. We also have several additional innovative alcohol beverage products under development and look forward to sharing use of those products at a later date. In the U.S. in September, we began shipping Monster Reserve Orange Dreamsicle to distributors for an October launch at retail. We are excited about the planned launch of our new Monster Energy Zero Sugar energy drink initially in the United States at retail in January of 2023. 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 opportunities 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. We are planning to launch Monster Tour Water in the United States in still and sparkling variants in 19.2 ounce cans in the first half of 2023. Monster Tour Water is a pure unflavored water product. In the first half of 2023, we are also planning to launch Rainstorm, in four flavors in 12-ounce slim cans to compete directly with certain competitive new entrants in the energy drink category in the United States. In Puerto Rico, during July, we introduced our first 16-ounce 12-pack ultra-variety packs, and in August, we launched Monster Reserve Watermelon and Reserve White Pineapple. In Mexico, we expanded our juice portfolio and launched Monster Juice Monarch in August. We launched Monster Dragon Tea Lemon in August in Honduras and El Salvador and in September in Guatemala. In Australia, during the month of July, we expanded our mother portfolio and launched Mother Lava Guava. In EMEA, in the third quarter of 2022, we launched Monster Assault and Monster Reserve White Pineapple in a number of countries. In certain countries, we also launched Juiced Monarch. Juice Chaotic, Ultra Rosa and Ultra Watermelon during the 2022 third quarter. During the 2022 third quarter, we also launched additional SKUs of Burn, Predator and Rain in certain countries. We are excited about the planned launch at retail of our new Monster Energy Lewis Hamilton Zero Sugar Energy Drink, initially in select EMEA markets late in the fourth quarter of 2022 and followed by an additional 20 markets in the first quarter of 2023. During the third quarter of 2022, we launched Predator in Kazakhstan, Malaysia, and Jordan, and we continued the national rollout of Predator in India. We are planning to introduce the Predator brand in additional countries in APAC in the last quarter of 2022 and the first half of 2023. We also launched Monster Super Cola in a can in Japan in August, and Monster Rehab Tea Plus Lemonade in October. We estimate October 2022 sales, including Kanoki, to be approximately 6.5% higher than in October 2021 and 5% higher than in October 2021, excluding Kanoki. On a foreign currency adjusted basis, including Kanoki, October 2022 sales would have been approximately 12.9% higher than the comparable October 2021 sales, and 11.4% higher than October 2021, excluding Kanoki. October 2022 had the same number of selling days as October 2021. The company had sufficient can capacity and co-manufacturing filling capacity across all regions to address demand for October. We would like to remind listeners that we took a general price increase in the United States effective September 1, 2022. 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, promotions in retail stores, distributor incentives, as well as shifts in the timing of production. In some instances, our bottlers are responsible for production and determine their own production schedules. This affects the dates on which we invoice such bottlers. Furthermore, our bottling and distribution partners maintain inventory levels according to their own internal requirements which they may alter from time to time 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. Turning briefly to share repurchases, during the 2022 third quarter, the company purchased approximately 3.1 million shares of common stock, and as of November 3, 2022, Approximately $182.8 million remained available for repurchase under the June 2022 repurchase program. The Board of Directors also authorized a new share repurchase program for the repurchase of up to an additional $500 million of the company's outstanding common stock. In conclusion, I would like to summarize some recent positive points. Consumer demand remains solid, even with the pricing actions that have been taken in 2022. 2. The company has increased its raw material and finished product inventories to better service its customers and ensure availability of its products. Our AFF flavour facility in Ireland is now providing a large number of flavours to our EMEA region, enabling better service levels and lower landed costs to our EMEA region. We are pleased with the new additions to the Monster Energy portfolio. Five, we are particularly excited for the launch of Monster Energy Zero Sugar in January 2023 in the United States. As I mentioned previously, Monster Zero Sugar is an analogue of our original unique Monster Energy Green flavour. Six, we are planning to launch rain total body fuel high performance energy drinks in additional international markets and countries. We are also 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. We are enthusiastic for the planned launch of the Beast Unleashed, our first flavored malt beverage alcohol product, and for the opportunities that the Kanaki acquisition presents. We are also enthusiastic for the planned launches of the Monster Tour Water and Rainstorm Lines in the first half of 2023 in the United States. 10. We believe that we will be able to address many of the challenges we have experienced in our supply chain. Eleven, we consider that certain of the increased costs that we have experienced in the quarter may well be transitory. For example, the LME price for aluminum has reduced materially from its recent March highs, and we are beginning to see a reduction in 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.
spk07: Ladies and gentlemen, we will now begin the question and answer session. To ask a question, you may press star and then 1 on your touch-tone telephones. If you are using a speakerphone, we do ask that you please pick up your handset prior to pressing the keys to ensure the best sound quality. To withdraw your questions, you may press star and 2. In the interest of time, we do ask that you please limit yourselves to a single question. At this time, we'll pause momentarily to assemble the roster. Our first question today comes from Andrea Teixeira from J.P. Morgan. Please go ahead with your question.
spk01: Thank you, operator, and good afternoon. I was hoping if you can comment on the October performance excluding effects in the low double digits, and not to take, you know, the merit of it, but just understanding if there is some signs of retailers that may have decided to take inventory down or seen some elasticity or the timing of pricing, and was this performance pretty much consistent across all channels?
spk02: So, Alexander, as we look at where we are on the weekly volume trends, we're really not concerned because the trends that we look at are the Nielsen trends and the depletions. So far, volumes seem to be holding up, and we're satisfied with the performance of the price increase. And as you also know, we reduced our promotions as we went through 2022. So at this time, we are continuing to evaluate performance. It looks as if the price increase is in fact sticking. I'm looking at numbers. I'm looking at it on my screen now, the total industry and the various participants in the industry. Volumes seem to be holding up. So I think that's the only comment that I'd like to make at this time.
spk07: Our next question comes from Dara Mosenian from Morgan Stanley. Please go ahead with your question.
spk10: And Hilton, maybe to follow up on that, can you just talk about what you're seeing internationally in terms of energy category growth? There have obviously been some broader concerns across CPG around macro impacts and weaker consumer spending, and if you could see that impact the consumer broadly and particularly in the energy categories. So an update on what you're seeing in terms of the category internationally would be helpful.
spk02: Yeah, so Dara, I think as we look at the category internationally, MEA really still looks pretty strong. You know, remember at the end of the day, we're selling an affordable luxury. So EMEA, and there are lots of concerns and costs in the MEA, you know, gas prices and not necessarily petrol prices, but, you know, energy costs are ramping up significantly in the MEA. We've seen lots of other costs hitting us, but at the end of the day, the consumer still seems to be spending, not at the rate they were spending in 2021, but they still seem to be spending on our products anyway. So we've seen growth in EMEA. As I look at other parts of the world, Japan had an issue with an ingredient that Rodney spoke about in his narrative earlier, And the rest of the MEA, the rest of Asia Pacific, I'm sorry, seems also to be, you know, to continuing with growth, although not at the same rate as 2021. And, you know, we're monitoring the situation. But right now, you know, volumes still seem to be healthy.
spk03: The only thing I would add is that we're seeing still a little bit of the effects of COVID in places like China and Japan.
spk10: And Japan, that's correct.
spk03: A little bit of the volume there. But again, we think that's more COVID-related and that eventually is going to work its way through and then we think things will start to improve again there.
spk07: Our next question comes from Bonnie Herzog from Goldman Sachs. Please go ahead with your question.
spk00: All right, thank you. Hi, everyone. Can you guys give us a sense of how much of your volume growth in the quarter was a result of pre-buying ahead of your price increase, or did you really limit that? And then on your margins, could you give us a sense of how much of the expensive inventory is left and if it will be fully worked through by the end of this year? And then thinking about next year, and I'm well aware you don't guide, but is there any reason to think your gross margins can't, you know, get back to the mid-50% range, you know, early next year, possibly Q1, especially given the pricing? You've already put in the market. You just mentioned it's sticking, and you did, you know, just announce some future pricing in international markets. So how should we think about the gross margin recovery? Thanks.
spk02: Okay, so that was quite a long question, Bonnie. Let's start at the very beginning. You spoke about these more expensive imported cans that we have in the system that we brought in to satisfy demand. If you look at cost of sales in the quarter, what we talk about is not a significant number, but will be worked through as we work through normal inventory And we're anticipating it will be worked through over probably the next, I would say, three quarters. So that is something that we will work through in the ordinary course. The cans of mainly of green and white that we sell in the ordinary course, we sell them every day. And the comment on this quarter was that we had a major promotion with Apex Legends. And it's silly to... produce promotional cans overseas because you don't know when they'll arrive, if they'll arrive on time, if they'll arrive late. So we stick to our core skews for our international cans. And you're right, we have had a price increase in the U.S. and we've had price increases internationally. We're having more price increases in 2023. as we enunciated on the discussion earlier. So prices are going up, and prices are going up in response to inflationary costs that we've seen. As you know, inflation is rampant. But on the other hand, there are some good things that are coming out. We've seen freight rates coming down. There was a lot of capital expenditure put into new equipment. and containers, so we've seen freight rates coming down. Fuel is where fuel is. It's very difficult to say what's going to happen with gas prices and diesel and fuel. Aluminum is coming down, but aluminum is one of those elusive commodities in our business because part of our aluminum is hedged, part is bought on M-1, so you don't see a perfect improvement in aluminum prices when you look at a specific quarter. We're seeing increases in commodities, we're seeing horrific increases in energy costs in Europe, and there's a bunch of costs that are continuing to compromise progress, but all in all, we believe that the price increases that we are putting into place should be able to be tolerated by the consumer and help mitigate some of the increased costs we've seen.
spk03: The only thing I would perhaps add on that is that, I mean, we all know that the inflation is continuing. I mean, you saw the increase in interest rates today again. So inflation both in the U.S. and in Europe is high. And if we continue to see inflation at those rates, I mean, we will review our margins. We'll review. review pricing, as I'm sure all other consumer product companies have done and will continue to do. And so we will review whether, you know, going into next year, whether in fact pricing needs or is justified in looking at an increase at that time, you know, in order to keep our margins reasonable. You know, if we need to do that, we will review it. So just to let you know, we're open to it. But at this stage, we have the current increase, and we'll see how things go. But I think the whole world is going through is going to continue for some time to face a lot of inflation. And so whatever we say will be reviewed on a timely basis once we see where we are at the beginning of the year.
spk02: And our next question... So the other comment... Sorry, I just wanted to respond to another comment that Bonnie made about buy-ins. We restricted... Our customers, obviously, the distributors in buying in, we didn't give them carte blanche. They were allowed to buy in a modest amount. And as we look at the numbers for the quarter, we believe that whatever was purchased was probably sold in the quarter. That's the numbers we've seen.
spk07: And our next question comes from Kevin Grundy from Jefferies. Please go ahead with your question.
spk08: Great. Thanks. Good afternoon, guys. Just a quick two-parter, if you'd indulge me. Number one, if you could just confirm that your understanding is still that Red Bull is going to follow the magnitude of the price increase that you took. It's lagging a little bit in the Nielsen data. If you could just confirm that. My broader question is just on the recent distribution changes from some of your competitors with Celsius going into the Pepsi system, bank coming out, you know, very common for that to create opportunity for incumbents like you guys in Red Bull in this instance. Can you just comment on your observations with respect to the state of those transitions and how much of that disruption, particularly around bank, do you think is contributing positively to your market share performance and how sticky that is? Thanks.
spk02: Okay, Ronnie, do you want to start that one, or do you want me to... Yeah, I'll sort of start that one.
spk03: I think that, you know, the Celsius transition will be interesting, but, you know, it's not all a panacea. There's no magic in it. We think that they will then find, you know, increased distribution and increased number of outlets. I think that the discipline that a system like Pepsi will clearly introduce... will also be a little bit negative on the flexibility that they've been able to achieve or been able to enjoy through the beer distribution network. So you get pluses and minuses. And as you can see from the numbers, their strength continues to be in the grocery and large format store channel. When you look at their numbers and sales per point in the convenience channel, it's not as high. So we don't believe that's going to have a major difference. There are a number of other brands that are all sort of getting some traction at a smaller level. I don't know what effect they're going to have, but overall, I think that We're getting a lot of attraction from the innovation and from execution and focus, and I think that will continue.
spk02: So let me go back to Kevin's question on Red Bull. You know, Kevin, obviously we can't comment on what they do and what they don't do, but our understanding is they impose the price increase, and what we're seeing anecdotally is we're not seeing that price increase reflected in many cases at retail. to the extent that the increase was supposed to have gone up. We, on the other hand, we've seen our prices move up strongly at retail.
spk07: And our next question comes from Mark Astroshan from Stiefel. Please go ahead with your question.
spk05: Yeah, thanks and afternoon, guys. I guess just following up on the last question and kind of thinking about shelf placement. So your overall placement has improved. I think you're still a little bit below where you were a couple of years ago given some of the supply chain challenges. At the same time, you've got lots of innovation, probably more than I think most can remember in at least the last 10 years going into 23. So how do you think about your shelf space on a go-forward basis? Are you putting innovation... In place of existing products, are you expanding your footprint on the shelf? And then if you think about the performance and functional category, Celsius, C4, Gust, et cetera, are you seeing placement in the existing energy coolers, or is that going into new coolers or different places within the existing coolers to a certain extent? Thanks.
spk02: Let me start off, Mark. Our sales team... as an objective because this is the time where we do our shelf plans and our shelf negotiations. And our sales team, both on the convenience side and on the large store side, are very active in achieving additional shelf space for our brands because we do feel that they are underspaced and they do deserve further space relative to what's happening in the market for example in convenience we sell more than single serve sparkling beverages so as a category the energy category really requires more space relative to their fair share and as such our brand which is growing and we mentioned that we've overtaken Red Bull as a company with all the various brands that make up the company. Our mission is to increase our shelf space in retail. I think we have to.
spk03: I think the other point that's what's happening now is you've got this emergence of quite a few new brands who are getting distribution through the beer distribution network taking the place of where Celsius is. So you've got quite a few brands now putting pressure on the retailers to give additional space. There isn't additional space in the existing energy door. And what we've been trying for a few years is to obviously try and see where our own performance energy and other sort of allied energy brands are able to create a second door, additional shelving separate. And I think that is going to continue. I think that this emergence of a lot of new products in the convenience category in particular will result in an expansion of space. So hopefully we believe we will be able to get additional space in the traditional door for our innovation and our energy products, as well as space for our additional brands and our performance products like rain and rainstorms. together with a lot of the other performance or clean energy products in additional doors. So we think that will actually happen and will improve this year. But that's always the challenge. You've always got to try and – you've got a certain amount of fixed shelves and you've got to try and increase your space.
spk02: Yeah, but remember the category is growing, Mark. Correct. And that in itself is – that's a factor for the retailer – The space that they allocate to energy generates them really good returns, really good revenue. And space is something that we always strive for, including putting our own coolers in retailers. So that's a big push for us and always has been.
spk07: Our next question comes from Peter Galbo from Bank of America. Please go ahead with your question.
spk06: Hey, guys. Good afternoon. Thanks for taking the question. I'll be pretty quick. Just to clarify, Hilton, your fourth quarter gross margins, you're going to be lapping, I guess, the promo benefit from 3Q, but should we still expect a sequential improvement in the gross margin, or is that promo benefit you saw in the third quarter enough that you'd be actually down quarter on quarter into 4Q? Thanks very much.
spk02: Yeah, the difficulty, Peter, is that we don't give guidance. So it's hard to give guidance because we don't give it. But let me just leave you with a thought when you talk about gross margins, that the price increase was effective September 1. So we basically had one month of a price increase. We will have three months of a price increase in December. While we may have additional costs, we'll still have that benefit of the price increase for the full quarter.
spk07: And at this time, we will conclude today's question and answer session. I would like to turn the conference call back over to Mr. Sachs for any closing remarks.
spk03: Thank you. On behalf of Monster, I'd like to thank everyone for their continued interest in the company. We continue to believe in the company and our growth strategy and remain committed to continue 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 remain safe and healthy. Thank you very much for your attendance.
spk07: Ladies and gentlemen, the conference has now concluded. We do thank you for joining today's presentation. You may now disconnect your lines.
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