Monster Beverage Corporation (MNST) Q2 2012 Earnings Report, Transcript and Summary

Good day, ladies and gentlemen, and welcome to the Monster Beverage Corporation Second Quarter 2012 Financial Results Call. [Operator Instructions] As a reminder, this conference call is being recorded. I would now like to introduce your host for today's conference, Mr. Rodney Sacks, Chairman and CEO. Sir, you may begin.

Thanks. Good afternoon, ladies and gentlemen. Thank you for attending this call. I'm Rodney Sacks. Hilton Schlosberg, our Vice Chairman and President is with me today. As is Tom Kelly, our Senior Vice President of Finance. Before we begin, I would like to remind listeners that certain statements made during this call may constitute forward-looking statements 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 which are based on currently available information regarding the expectations of management with respect to revenues, profitability, future business, future events, financial performance and trends. Management cautions that these statements are based on our current knowledge and expectations and are subject to certain risks and uncertainties, many of which are outside the control of the company, that may cause actual results to differ materially from the forward-looking statements made during this call. Please refer to our filings with the Securities and Exchange Commission, including our most recent annual report on Form 10-K filed on February 29, 2012, and our most recent quarterly reports on Form 10-Q, including the sections contained therein entitled, Risk Factors and Forward-looking Statements for a discussion on specific risks and uncertainties that may affect our performance. The company assumes no obligation to update any forward-looking statements, whether as a result of new information, future events or otherwise. An explanation of the non-GAAP measure of gross sales and certain expenditures, which may be mentioned during the course of this call, is provided in the notes designated with asterisks in the condensed consolidated statements of income and other information attached to the earnings release dated August 8, 2012. A copy of this information is also available on our website, at www.monsterbevcorp.com, in the Financial Information…

[Operator Instructions] Our first question comes from the line of Alton Stump with Longbow Research.

This is actually Phil Terpolilli calling in for Alton. Just a couple of quick questions. First off, with the July results. I think you said they're up 25%. Any sense of what's driving that growth, if it's more the new products you've launched over the last few years like Rehab, or if it's more of the traditional lines?

Generally, we're continuing to see growth in our original market and our original product. For example, our green product, which is the original 16-ounce Monster Energy, grew as an individual SKU grew 24.9% in the 13 weeks in convenience -- in 13 weeks to July 21. So we are continuing to see growth in our original SKUs, but obviously, we are also getting benefits from the line extensions. One of the things we need to obviously, factor in on the numbers is that the [indiscernible] division although a small proportion is flat, and that does tend to take down that number slightly.

Okay. That's helpful. Then just, I think you mentioned the gross sales number for international. So do you have a net number by chance for 2Q?

I don't think we have a net number available. Sorry.

[Operator Instructions] Our next question comes from the line of Mark Astrachan with Stifel, Nicolaus. Mark S. Astrachan - Stifel, Nicolaus & Co., Inc., Research Division: One housekeeping question. So you called out the damages in Japan and Korea, how much was that?

I don't think we are going to break that out, but we have had some challenges in shipping there. We have had different types of damage. There have some damages that are potentially reclaimable back from some of our can companies where you've had defects in cans. We've had some leakers, we've had some tab issues. We just had some general, some production issues. We also had some issues regarding just, which haven't been attributable to suppliers, but basically, just shipping -- damages during shipping, leakage which has had secondary damages. So there's just been numbers of issues and challenges in the product in going into Japan where we've launched, but we've had some high product costs. And those are the things we're obviously, learning and addressing. And with -- what we've experienced is that the obviously, the tolerance of the Japanese distributors and retailers is at a very different level to the U.S. And whilst we did appreciate that when we went in, but I mean, literally every can is inspected one by one. And if you have 3 cans which have leakers, out of 1 million cans in America, the local stores throws them away. I mean, here, there is an investigation with 200 people involved from all over the world in trying to get to the bottom of that -- very, very analytical and very precise. And that has just caused some issues. And that is one of the large issues for the slight drop in the gross margin variance. If you look at the 6-month numbers, that difference is very much smaller. And then in the case of Korea, there were some issues where we had produced products and sent in to Korea, and we believe they actually analyzed it incorrectly because they believed there was…

Mark, just going back to the original question, and the amount. I mean, the amount makes up a large portion of the 1% change in the mix, and that is the geographic mix there's -- there were high costs of shipping and inspection cost relating to Japan, so our margins on the Japanese business that we launched were very much lower. We think some of those will be ongoing, there will be some recoupment. And then ultimately, the idea is obviously for us, the intention is to produce locally, which will change that whole business model. But geographic mix, with the main portion. The damages and costs that we've talked about, there was also some allowance or some of it was reclassification of certain commissions because some of our distributors, as we're paying some commissions to, for example, Anheuser-Busch, once they take over ownership of a particular branch, they then become our customer. That particular commission is then, basically, instead of being below the line, deduction really goes into lowering gross sales to net. So those things have all had an impact on that 1% change in the gross profit. But many of them are not -- we hope, we don't think they will be ongoing and they will be rectified. As we go forward, will be more of sort of normalized more. Then, with regard to other part of your question, I think there was a deceleration, but a lot of that again, is a single month. It depends on the day in which -- the Fourth of July fell and then you're selling or to the Fourth of July, there is, I think, a day shorter in the month and measures like that. But there has been a little deceleration in the category. But the numbers are still very healthy as you can see from the numbers that we just discussed.

Our next question comes from the line of Judy Hong with Goldman Sachs.

Judy, before we finish go on with the question, one of the previous callers had asked for net sales. I have managed to get the information. Net sales figure to customers outside the United States amounted to $124.4 million, as compared to $78.1 million in the same period last year.

Okay. My first question is really just in terms of your balance sheet, and I know you talked about this at the last conference call, and you talked about this at the shareholder meeting, but just in terms of how you guys are thinking about the use of cash and why is it taking so long to really make the decision in terms of just returning some of that cash to shareholders.

That's a question I really am not in a position to answer. It's a board issue. There are other matters that -- and factors that come into that position. Obviously, we are aware of it, and we will take action when we believe it is in the best interest of the company. Bearing in mind, other discussions and other matters that are ongoing at the moment. And it is possibly likely to change in the near future. It will take some different decision, but really, I'm just not in a position to discuss that further.

I mean, is that thought process sort of any different today than 3 months ago, just given that your stock price obviously, has come down more recently? And you talked about this being a Board decision, but you guys are on the Board. So what are some of the things that you guys are kind of looking at and are there any timeline, or are there any milestones that you have to sort of achieve before you make the decision or this isn't about the...

It's nothing of that nature. It is a Board issue. Sure, we are on the Board. But we're looking at the company and the share price is higher, or it's lower. Like any individual, we make a decision to buy or sell shares, we make a decision to buy or sell the company shares or not to sell, but in this case to buy. There are many factors that we look at, and we will review the company's position [indiscernible] in the light of some other factors that we have been engaged in with the board as well as the share price, which is just another factor. But there's no hard fast rule that we have to make or will make a decision by any particular date. We'll see how -- well, depending on how the share price reacts, we may change our position. It's something that we just retain the right to be reasonably flexible on.

Okay. And then just in terms of the broader category trends. So just looking at some of the Nielsen numbers that you cited for the 4 weeks, a bit of a deceleration. If you can just maybe talk to us about sort of what's driving that -- some deceleration for the category. And then, it looks like maybe the promotional activity has heated up a little bit recently, would you agree with that view? And if so, kind of what's happening in terms of the promotional activity?

I don't really think there is a lot of heat in the promotional activity. It is summer. There's been little -- a small drop in our average unit price over the quarter. But we don't believe that is out of the ordinary. It's on that side, Judy. As regards to the category, the category -- on the one hand, there has been a little deceleration, on the other hand, when you look at the category, the category's growth now, it's not very different to what it was last year around about this time. And what happened was the category decelerated from July to September last year. And then, started to sort of level the [indiscernible] and started to pick up again, and then been in the high teens and then sort of really peaked in May. And then, it's sort of back to those levels. But I mean, they're very respectable mid-teens growth in the category. And so, we're also creating more bigger numbers as the category continues to grow. It's continuing to create bigger numbers, and so we still thing that it's a very healthy category. We don't believe that we can read into it too much at this stage from any trends. And if you look at our own numbers going forward for July comments, it's still up, a very healthy number.

Our next question comes from the line of Kaumil Gajrawala with UBS.

I guess the first question is, that I'm following up on, what Judy was asking -- but between cash and marketable securities are pushing very close to almost $1 billion now. We think buyback, we think dividend. Outside of that, it's maybe M&A. But can give some more context on what other factors you're referring to?

Obviously, we look and keep our eyes open for any potential acquisition that we may believe, would be beneficial over the long term, and when and if it comes along, we will do that. We have the resources to make that certain acquisition, but they haven't, and therefore we have not done it. There's been no bar to doing it or no impediment other than that. We look at the use of cash, and it's there, and we realize that cash could be used for either dividend purposes or repurchase, and that we've got to make out decisions as we go along and there are various factors that -- I think that we obviously favor the repurchase, that's pretty much more would be now modus operandi for many years. But we look at it conservatively and sometimes, the share price rises and gets away, and for whatever the reason, we've decided at that point in time not to go into the market. That will change on a daily basis, just as we look at the market and the company and look at that we are acutely conscious of the size of the cash and the fact that it is returning low income back to shareholders. But again, we've been able to make sure that we been able to finance the growth of the company without any restrictions and again, we will relook at the share -- at the buyback program and once we see where the share price goes after -- into the open period. Until now we've not been able to do anything.

Got it. So it would be fair for us to infer, or at least, assume that if there was weakness in the stock price, it would be a lot more likely to buy back shares versus your last open period during the second quarter, where you didn't buy back any?

You're putting words in his mouth.

I just asked to infer. But, let's move to Japan. Some of the things you talked about relating to Japan and in particular, to the rollout. Does it sound like those are onetime items during the launch or is Japan one of those markets that perhaps costs a little bit more to service?

I think that, while we continue to export product from here to Japan, it will probably cost a little more than other markets to service because of the precision in which they operate businesses. Right from our distributor partner, right through to the retail chains. They are very conscious of any damage issues or defect issues and they literally simply do not have the same level of tolerance as we normally have when we conduct business in the United States. And but that being said, there's a learning curve both for us, and our canners and packers and how to ship products and how to make sure that it gets there less damaged, and how to, in certain cases, to use certain packers who are a little more precise in the way they actually pack the product and their measurements. But there were a number of things that happened at the same time. And some of them where in fact actual can issues as opposed to production issues. Some were shipping issues. We believe that it will go down as we continue to get -- and this is going down already, as we get more experience in this and as we fine tune our ability to trade in those areas. The Korea issues was just not a not of a making of generally, of production as much. It was some issues just with labeling issues in Korea. We've been going through, basically, a new category, that the category only opened for energy drinks that contained taurine and the normal ingredients. And sort of even there we have to have a different source, you can't use regular caffeine. And so we're sort of, even the officials there [indiscernible] as to what their regulations are, and how do they categorize our products…

And our next question comes from the line of Alec Patterson with RCM.

Two things. First question just you went through the gross margins, puts and takes, but I just sort of wondering, what you were referring to on the raw material trend and the hedging position if we sort of backed out the geographic mix, and the damages and all those other things. Would you say that your cost of goods per case is trending flat to down this year?

It's trending flat to down in the U.S. In Europe it's been a little bit higher largely because of production issues in Europe and in our export business, because of production issues. A lot of shipping to Japan, a lot of extra inspection costs until everybody gets comfortable from the Japanese side, gets comfortable with our products, et cetera.

Okay. All right. But the underlying seems fairly favorable.

Yes. And that's why I did refer to the fact in the overall, in the North American market, which is our principal market, our actual margins are actually slightly up.

Got it. Yes, it makes sense. So, just looking into the back half of this year, you've been talking about Brazil and Korea for some time, and obviously, Japan gets in the mix here about things sort a being put on a bit of a delayed mode on the international markets. Is that affecting the way you're thinking about how things are ramping up in the expansion markets into the back half, or should we think of these things as a little deferred or not as much of an issue?

I think it's probably -- it's just a little bit deferred. In the case of Brazil, we have a small distributor, and they just have struggled to get the resources in line to basically take advantage of the market to the extent that we believe we should be able to achieve as our fair share. And so, we are addressing that issue and that is taking some time, because it's a big country, Brazil, and we obviously want to make sure that however we address it with staff, with people, with a whole different ways. Obviously we're looking to that as being a potentially large market in the future, and we are still confident we will be able to achieve that. In the case of Korea, that's just really got deferred revenue. We think Korea is an exciting market. We think it will be very positive for Monster. We think that our margins will be -- hopefully, we think will be a little better there than we are in Japan, where it's just been a lot of cost of goods shipping to Japan, inspecting products, before they get released has been very costly. And we were hoping that just as we continue to settle down, those costs will reduce. What we are all trying to achieve, and we are having some issues about trying to find the right size cans and the right production plants, but once we get that, we can overcome that. Our plan is to produce in Korea and in Japan, as much of our requirements there as possible. And that will remove a lot of these issues. So that's not really a change. It's a question of -- it's timing, we'll get there. It's going to take a bit longer. But we will get there. The expansion plans into Europe, and everywhere else are ongoing along fine and they're continuing as planned. And those are the major markets, particularly, the U.K., Spain, Germany, they're all doing very well.

That does conclude our Q&A session. I'd like to turn back over to Mr. Rodney Sacks for closing remarks.

Thanks very much. Just in closing, I'd like to sort of just relate back to the numbers where, I know we've had some issues, or looking at the issues on the growth and the category. But often, I think we get a little bit spoiled and carried away by some of the increased growth numbers that happen from time to time. But like everything else, this is a young and evolving category. And so, some of the growth rates are -- you see spikes in it and you see some drop-offs, but generally, the growth rates that we're seeing and the carry over, the past 12 to 15 months are much higher than the growth rates we saw probably the previous 15 to 24 months. So the category is still growing well. When you look at the volumes in North America in CSDs and other products, which are flat to negative, the product, the category is healthy and the brand is basically continuing to take share even though we really have a large share. So it continues to all do well for the company and the brand and this is our main markets, so we're very encouraged by that. As we've indicated, the European markets are really starting to get to a sort of level where they're actually starting to really kick in at a much better pace. The sort of -- the acceleration of sales we are seeing in the U.K. and Spain and even Germany now is really starting to show. And so we are pretty positive about our prospects going forward for those markets. And we are dealing with the operational issues and challenges we have. But in the long term, we are very, very encouraged by the fact that the Asian markets are very receptive to our brand, to the taste. So we again, believe that it is a journey but there's a good end game insight. And thank you for your support. And we are just going to continue to put our heads down and continue to hopefully, continue to deliver what we believe to be very good results as we head on in this quarter. Thank you very much.

Ladies and gentlemen, thank you for participating in today's conference. This does conclude the program, and you may all disconnect. Everyone, have a great day.