Good day, and welcome to the Monster Beverage Corporation Third Quarter 2020 Conference Call. [Operator Instructions]. I would like to turn the conference over to Mr. Rodney Sacks, Chairman and CEO. Please go ahead.

Good afternoon, ladies and gentlemen. Thank you for attending this call. I'm Rodney Sacks. Hilton Schlosberg, our Vice Chairman and President, is on the call; as is Tom Kelly, our Executive Vice President of Finance. Tom Kelly will now read the cautionary announcement.

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 operation. 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, 2020, and our most recent quarterly report on Form 10-Q filed on August 6, 2020, 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 obligations 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 and designated with asterisks in the condensed consolidated statements of income and other information attached to the earnings release dated November 5, 2020. A copy of this information is also available on our website: www.monsterbevcorp.com, in the Financial Information section. I would now like to hand the call over to Rodney Sacks.

Thank you, Tom. Let me begin by saying that our thoughts and prayers are with all of those who have been impacted by the COVID-19 pandemic. Despite the ongoing impact of the COVID-19 pandemic, we achieved record third quarter net sales and the highest quarterly net sales in the company's history. While our performance in EMEA was solid in the third quarter, EMEA remained adversely affected by the COVID-19 pandemic. Since mid-March 2020, we have seen a shift in consumer channel preferences and package configurations, including an increase in at-home consumption and a decrease in food service on-premise consumption. Our sales in the 2020 second quarter were initially adversely affected as a result of a decrease in foot traffic in the convenience and gas channel, which is our largest channel, but improved sequentially from the latter half of the 2020 second quarter and throughout the 2020 third quarter. Now e-commerce, club store, mass merchandiser and grocery related business continued to increase in the quarter, while our food service on-premise business, which is a small channel for the company, remained challenged. Currently, we do not foresee a material impact on the ability of our co-packers to manufacture, and our bottlers and distributors to distribute our products as a result of the COVID-19 pandemic. In addition, we are not experiencing significant raw material or finished product shortages, and our supply chain remains intact. We are continually addressing our aluminum can requirements, given our volume growth and the current supply constraints in the aluminum can industry. With certain countries, particularly in EMEA, returning to lockdowns and other restrictions, consumer demand could be impacted, and we are unsure of what impact this may have, if any, on our future performance. Monster Energy Cares, our philanthropic arm, continues to be actively engaged in a number…

Rod, it's the Southern District of Florida.

Of Florida, sorry, of Florida. I beg your pardon. As this litigation and other pending proceedings with VPX are sub judice, we will not be answering any questions on this matter on today's call. In the United States, we launched Reign Total Body Fuel, Lilikoi Lychee in August 2020. And in early October, we launched Ultra Watermelon, Juice Monster Papillon and Juice Monster Khaotic to the retail trade. In Canada, during the third quarter of 2020, Ultra Rosa was launched in July, followed by the launch of Reign Energy in August in 4 flavors. In El Salvador, we launched Fury Gold Strike as our first entry in the country in the affordable energy category during July, which is performing well. In August 2020, we launched Ultra Paradise in Brazil in our largest LATAM market. Additionally, in September 2020 in Brazil, we launched Reign Total Body Fuel in 2 flavors. June 2020, we launched Ultra Paradise in Argentina and in August 2020, we launched Ultra Paradise in Chile. As markets eased restrictions after lockdowns, we were able to introduce a number of new products across EMEA in the third quarter. Unfortunately, a number of EMEA markets, including some of our largest markets, have recently reintroduced lockdowns, which may adversely impact these and future product introductions. Juice Monster Pacific Punch was launched in Norway and Poland in September 2020 and is now available in 12 markets across EMEA. Juice Monster Pipeline Punch was launched in the Czech Republic and Slovakia in August 2020 and is now available in 23 markets across EMEA. We are planning to launch Juice Monster Pacific Punch in an additional 5 markets later in 2020. Juice Monster Mango Loco was launched in Namibia in July 2020 and Mozambique and Mayotte in August 2020 and is now available in…

[Operator Instructions]. And our first question today will come from Dara Mohsenian with Morgan Stanley.

So we've seen category growth come back at pretty healthy levels looking at the U.S. and Europe. You mentioned the sequential improvement within Q2. Obviously, October seems solid. So I was just hoping you could give us a bit of your perspective on category growth here post COVID. Are you seeing more of a sustained pickup perhaps people are substituting energy drinks for coffee shop consumption? Or should we still expect sort of below pre COVID growth levels with the consumer not back to full mobility? Just really wanted to get some perspective on category growth. And I'm thinking more longer-term ex restrictions, but while you're on the subject, perhaps you could touch on the short-term risk from the second round of restrictions also?

All right. I'll take that. I think that we're in an area of uncertainty. I think everybody is guessing as to whether people are going to be switching from coffee to energy. I think what we do know is that there are substantial channels, which is from the convenience channel to larger packages and take-home packages. I think that's, obviously, also impacted the certain impact, for example, on-premise, I think the -- some of our competitors have substantial on-premise businesses. I think those businesses have been impacted more severely than we have because we have smaller on-premise. But I think that's resulted in some channel switching. So how this is -- this mix is all going to pan out, at the end of the day, we really -- I think it's just speculative for us to anticipate. But what we do know is, obviously, we've seen the trends. We're seeing the higher sell rates for the category. We are seeing our own numbers through Nielsen. And obviously, our own numbers internally in the company continuing to strengthen. We've had good momentum and we've got good innovation. I think the innovation this year has been very disrupted all over the world. We launched some products just before COVID hit, some products during COVID, some products we've tried to get out late in summer. And I think a lot of those things are still disrupting our sales, but we obviously feel that as we go forward, I think things will settle down more. But again, we just don't know. You're having Europe sort of going backwards again a number of their countries are now starting to impose restrictions. So we don't know how this will all turn out, Dara. It's just too speculative for us to give you any real guidance. I just don't think anybody really knows.

Maybe I can just add a little color, if you wouldn't mind. So what we're seeing is that caffeine is a need state for consumers, okay? And we're also seeing that energy drinks are an affordable luxury. So even though people are at home in greater quantities than they've been before, they're drinking more energy drinks and they could very much as well drink coffee, which they're doing, which is obviously the cup is cheaper than an energy drink. So I think we're not going to go back to where we were before. We're going to go back to somewhere that's kind of in the middle of where we were and where we are now. And so my color is -- and I don't give guidance, we never give guidance. But if I'm thinking about the category and the category growth that has been sustained in this time of COVID, it's -- you can enjoy your own conclusions, but that's the kind of color that I've been thinking of.

And our next question will come from Andrea Teixeira with JPMorgan.

Can you help us with the sales cadence in the quarter? Was there any reason like retailers rebuilding inventory ahead of the -- any potential pricing to explain this lumpiness in a certain amount of region? I guess from the strong July that you included in the last call, implied a deceleration in August and September, to high single digits, but then sharply reaccelerated now in October. And just a follow-up commentary about EMEA. What is your view of the impact of the lockdowns now and the current mobility as well?

I didn't hear that very much of what you were saying. It was very unclear. I don't know if you heard it, Hilton, perhaps you could...

Yes. I think Andrea was talking about Red Bull. Is that correct?

No. Yes, sorry for the technical issues, but I was just asking about the sales cadence in the quarter. Was there any reason why you saw some in July and then...

Okay. You're talking about our cadence?

Yes, your cadence. Correct.

Yes. So what happened, and we can go through the history on that, but what happened was that our bottlers decreased inventories, and we spoke about that. And then there comes a time when they have to order to get to inventories back to where they should be, bearing in mind the depletions. So there's been a steady percentage growth in depletions, which were not sort of matched by orders. And so what you've seen in the quarter is a steady rebuild of inventories in the distribution system in order to support the growth at retail. And also what happened in the quarter was that many of our bottlers were back, particularly in the U.S. in more full force, so they were covering the stores in a better frequency than they had in the past. So that's where we saw that acceleration. And then your second question was about EMEA. And I would refer you to what happened in the first and second quarters in EMEA. The third quarter, particularly in EMEA, was really strong. But the EMEA guys felt there was still a lot of runway. So we know what October is and we've spoken about October. In November and December, we'll -- as again, we don't give guidance, but we don't know what the impact of the lockdowns are going to be, but we've got some sense for what happened earlier this year.

And our next question will come from Mark Astrachan with Stifel.

I guess just building on one of the earlier questions on the U.S. Not that it's not improving as pandemic lessens and mobility increases. More curious your thoughts about the still disconnect that we're seeing in the data between your business and Red Bull or even Red Bull share gains versus the category. So you mentioned that you're doing a better job. You talked about that last earnings call about the coast system being back in the market, I think, right around July or so. But Red Bull is now growing close to 20%. So what do you think is really contributing to their outperformance? And how do you think that sustains, if it does, as we go into next year, and they, in particular, have to lap that and you guys have to lap easier comparisons?

I think Red Bull probably going to start having a tougher time on comparisons. But I think what they -- what you can see is they've got a lot of impetus in the 12 ounce. We think there's been some increased consumption because a lot of Red Bull's business was done in the bars. And I think people who are just not going to bars but are still using Red Bull as mixes are probably following them in the off-premise channels. And that's, I think, we think it could be contributing to some of their increase. As I think we said on the last call, I think that the Red Bull has a very dedicated and focused distribution system. And they, I think, stayed in the field and had focused much, much better than not only Coke, but Pepsi's and every -- all of the bigger companies. I think that is -- we are still seeing the effects of that. Their execution has been good. And you can see that in comparison to some of the other competitors who are negative, even though one would have expected some of them to have started going into positive territory. And so that's an issue which we are addressing. They had some good innovation, but the innovation has now sort of leveled off a little bit, but you're seeing large gains, particularly as I said in the 12 ounce, right across their whole line, including the -- some of the original products. And I think that we're getting back. We've got new products introduced now. I think we've got to get a little more focus and what we've done is we are now stepping up. We have basically created a new division with a street team having -- we've appointed a Chief Field…

Our next question will come from Peter Galbo with Bank of America.

And maybe just to piggyback on Mark's question and talk a little bit about the innovation. I guess just with the introduction of Watermelon, a, has that shipped at this point? And maybe just talk to us a little bit about what you observed with seasonality with that product. And help us understand, I guess, in your own internal planning, how you're thinking about how big that line could be relative to, say, an Ultra Paradise or a Fiesta or a Rosa?

It has shipped. It shipped at the beginning of October. And it's had a very good reception, both from our bottlers and from retailers. Very initial indications of sales per point in some of the retail chains are showing that it's really doing well. It's ahead of some of the others. I mean the Ultra Fiesta was a really good launch earlier this year and is continuing. Those are still new products, and that's continuing to grow. But this is actually starting to outpace those ones after 3 to 4 weeks, we're actually seeing a higher rate of sale. But we've launched it now. We don't -- I think that like everything, it's -- it does get affected by the winter months, but we think that being a 0-calorie product, it will help the product. And we're quite optimistic for Watermelon as a really good opportunity. It's a really good product. And the whole Ultra line is continuing to perform really well. So any color on that, Hilton?

Yes. The only thing I would add is that the energy drink category is not as seasonal, as for example, sodas and other soft drinks and beer. And it is 0-calorie. It's on trend. We're seeing higher rates of sales in some of our major retailers. So as we transition into the January's and the better-for-you months, it's really very much on trend.

And this will conclude our question-and-answer session. I'd like to turn the conference back over to Mr. Rodney Sacks for any closing remarks.

Thanks. 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 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 will be able to navigate through the challenges ahead as a result of the COVID-19 pandemic and hope that this unfortunate situation will resolve itself in the not-too-distant future. We believe that we are well positioned in the energy drink category and continue to be optimistic about our total portfolio of energy drink brands we hope that you will stay safe and healthy. Thank you very much for your attendance.

The conference has now concluded. Thank you for attending today's presentation. You may now disconnect your lines at this time.