MNST - NASDAQ

Good afternoon, and welcome to the Monster Beverage Corporation First Quarter 2023 Financial Results Conference Call. All participants will be in a listen-only mode. [Operator Instructions] After today’s presentation, there will be an opportunity to ask questions. Please also note, today's event is being recorded. At this time, I'd like to turn the floor over to Mr. Rodney Sacks and Hilton Schlosberg, Co-CEOs of Monster Beverage. Please go ahead.

Thank you very much. Good afternoon, ladies and gentlemen. Thank you for attending this call. I'm Rodney Sacks. Hilton Schlosberg, 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.

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. Management cautions that these statements are based on our current knowledge and expectations and are subject to certain risks and uncertainties, many of which are outside the control of the company that may cause actual results to differ materially from the forward-looking statements made during this call. Please refer to our filings with the Securities and Exchange Commission, including our most recent annual report on Form 10-K filed on March 1, 2023, including the sections contained therein entitled Risk Factors and Forward-Looking Statements, for a discussion on 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.

Thank you, Tom. The company achieved record first quarter net sales of 1.7 billion in the 2023 first quarter, 11.9% higher than net sales of 1.52 billion in the 2022 comparable period, and 15.3% higher on a foreign currency adjusted basis. Gross profit as a percentage of net sales for the 2023 first quarter was 52.8% compared with 51.1% in the comparative 2022 first quarter. The increase in gross profit as a percentage of net sales for the 2023 first quarter as compared to the 2022 first quarter was primarily the result of pricing actions, decreased freight in costs, and decreased aluminum can costs. Gross profit as a percentage of net sales increased on a sequential quarterly basis to 52.8% in the 2023 first quarter, from 51.8% in the 2022 fourth quarter, and 51.3% in the 2022 third quarter. Gross profit as a percentage of net sales, excluding gross profit for the company's alcohol brands segment increased on a sequential quarterly basis to 53.6% in the 2023 first quarter, from 52.5% in the 2022 fourth quarter, and 51.9% in the 2022 third quarter. The depletion of our remaining higher cost imported can inventories will continue over the next few quarters but should be fully utilized during 2023. Operating expenses for the 2023 first quarter were 412.8 million, compared to 377.2 million in the 2022 first quarter. As a percentage of net sales, operating expenses for the 2023 first quarter, were 24.3% compared with 24.8% in the 2022 first quarter. Distribution expenses for the 2023 first quarter decreased to 76.3 million or 4.5% of net sales, compared to 81.4 million or 5.4% of net sales in the 2022 first quarter. The 5.1 million decrease in distribution expenses was primarily due to decreased freight out expenses of 15.7 million partially offset by higher warehouse expenses of 9.9 million as a result of higher raw materials and finished product inventories in the United States and EMEA. The increase in other operating expenses was primarily due to increased payroll expenses. We're now purchasing aluminum cans from local sources globally. We have rebuilt finished product inventory levels globally to return to our Orbitz strategy of producing in closer proximity to our customers. The cost of repositioning finished products to distribution centers are included in freight-in costs. The company continues to address the challenges in its supply chain as it navigates through the uncertainty of the current global supply chain environment. Operating income for the 2023 first quarter increased 21.4% to 485.1 million from 399.5 million in the 2022 comparative quarter. The effective tax rate for the 2023 first quarter was 20.1% compared with 25% in the 2022 first quarter. The decrease in the effective tax rate was primarily attributable to the increase in the stock compensation deduction in the 2023 first quarter. Net income increased 35.1% to 397.4 million as compared to 294.2 million in the 2022 comparable quarter. Diluted earnings per share for the 2023 first quarter increased 36.6% to $0.38 from $0.27 in the first quarter of 2022. Due to continued cost pressures, the company implemented pricing actions in the United States in 2022, as well as in many other international markets in 2022, and in the first quarter of 2023. The company plans to implement additional price increases in a number of other international markets during the remainder of the 2023 year. In the United States, the company implemented an additional price increase on its 18.6 ounce and 24-ounce lines, effective April 1, 2023. We will continue to review further opportunities for pricing actions in order to mitigate inflationary pressures. According to the Nielsen report, for the 13 weeks through April 22, 2023 all outlets combined, namely convenience, grocery, drug, mass merchandisers, sales in dollars in the energy drink category, including Energy Shots increased by 12.7% versus the same period a year ago. It's also the company's energy brands including Reign were up 10.5% in the 13-week period, sales of monster were up 9.5%, sales of Reign were up 24.1%, sales of NOS increased 14.1% and sales of Full Throttle increased 5.5%. Sales of Red Bull increased 10.6%, sales of Rockstar increased by 3.7%, and sales of 5-Hour decreased 4.1%. VPX Bang sales decreased 55.5%. The company continues to have market share leadership in the energy drink category all outlets combined in the United States in both a 13 week and 4-week periods ended April 22, 2023. According to Nielsen for the four weeks ended April 22, 2023, sales in dollars in the energy drink category in the convenience and gas channel, including energy shops in dollars increased 12.7%, over the same period of previous year. Sales of the company's energy brands, which include Reign, increased 11% in the four-week period in the convenience and gas channel. Sales of Monster increased by 9.3% over the same period versus the previous year. Reign sales increased 37.8%, NOS was up 8.8% and Full Throttle was up 11.7%. Sales of Red Bull were up 9.8%, Rockstar was up 5.4% and 5-Hourwas down 5.8%. VPX Bang sales decreased 59.5%. According to Nielsen for the four weeks ended April 22, 2023, the company's market share of the energy drink category in the convenience and gas channel, including energy shots in dollars decreased from 37.5% to 36.9%. Once the share decreased from 31.6% a year ago to 30.6%, Reign share increased a half a share point to 2.9%, NOS share remained at 2.6 and Full Throttle share remind 0.7 of a percent. Red Bull share decreased 0.9 points from 35.2% a year ago to 34.3%. The VPX Bang share decreased 4.2 points to 2.4%, 5-Hour share was lower by [5.7] [ph] points, -- at 3.7%, Rockstar share was down point to 2 of a point to 3.4% CELSIUS share is 5.4%, C4 share is 2.8% and Ghost share is 2.9%. According to Nielsen for the four weeks ended April 22, 2023 sales in dollars of the coffee plus energy drink category, which includes our Java Monster line in the convenience and gas channel increased 0.8 of a percent over the same period the previous year. To other Java Monster including Java Monster 300 and Java Monster Nitro Cold Brew was 0.6% higher the same period versus the previous year. Sales of Starbucks energy were 4.7% higher. Java Monster share of the coffee plus energy drink category for the four weeks ended April 22, 2023 was 55.1% down point one of a point while Starbucks energy share was 44.5% at 1.6 points. According to Nielsen, in all major channels in Canada for the 12 weeks ended March 25, 2023, the energy drink category increased 14.7% in dollars. Sales of the company's energy drink brands increased 19.5% versus a year ago. The market share of the company's energy drink brand was 43.1% up 1.7 points. Monster’s sales increased 19.7% and its marketing increased 1.6 points to 38.6. NOS sales increased 4.2% and its market share decreased by point one of a point to 1.3%. Full Throttle sales decreased 8.4% and its market share decreased point one of a point to 0.4%. According to Nielsen for all outlets combined in Mexico, the energy drink category increased 17.8% for the month of March 2023. Monster’s sales increased 24.8%. Monsters’ market share in value increased 1.7 points to 30% against the comparable period the previous year. Sales of Predator increased 71.3% and its market share increased 1.7 share points to 5.4%. The Nielsen statistics from Mexico cover single month, which is a short period that may often be materially influenced positively and/or negatively by sales in the OXXO convenience chain which dominates the market. Sales in the OXXO 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 March 2023 compared to March 2022, Monster's retail market sharing value increased in Argentina to 53.5% and in Chile from 36.4% to 42.7%. In Brazil for the month end March 2023, our share increased from 42.1% to 43.9%. Monster Energy is the leading energy brand in value in Argentina, Brazil and Chile. I'd 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 13th week period until the end of March 2023, once this retail market share in value is compared to the same period the previous year, grew from 14.8% to 15.8% in Belgium, from 18.3% to 20.9%, in the Czech Republic, from 32.4% to 33.4%, in France, from 15% to 16.6% in Germany, from 29.3% to 30.9%, in Great Britain, or 28.2% to 30.4% Italy, from 29.7% to 34.6% in Norway, from 27.9% to 28.7% in the Republic of Ireland, from 38.2% to 39.9% in Spain, and from 15.9% or 18.1% in Sweden. Monster's retail market sharing value as compared to the same period the previous year declined from 7.8% to 4.7% in the Netherlands, from 21.2% to 19.2% in Poland, and from 20.1% to 19% in South Africa, According to Nielsen in a 13-week period until the end of February 2023, Monster's retail market share in value as compared to the same period the previous year increased from 27% to 27.7% in Denmark, once these retail market share in value as compared to the same period the previous year, declined from 38.3% to 36.5% in Greece. According to Nielsen in the 13-week period until the end of February 2023, [indiscernible] retail market share in value as compared to the same period the previous year grew from 23% to 31% in Kenya, and from 14.7% to 19.5% in Nigeria. According to IRI in Australia, Monster's market share in value for the four weeks ending April 9, 2023, increased from 13.5% to 16.6%, as compared to the same period the previous year. Mother's market share in value increased from 10.3% to 10.7%. According to IRI in New

Ladies and gentlemen, we will now begin the question-and-answer session. [Operator Instructions]. Our first question today comes from Peter Grom from UBS. Please go ahead with your question.

So maybe just two quick margin questions, if I may. So, one, I know you don't want to get into guidance, but you continue to comment on the sequential margin performance or improvement. So with pricing, coming in and cost moderating, should we expect to see sequential improvement in gross margin from here as we move through the year? And then, just somewhat related, as we look at selling expense as a percentage of sales today versus 2019? It's down quite a bit. So as we look ahead, is this high single digit rate that we've seen over the past couple of years sustainable? Or would you be looking to take that higher over time, particularly as gross margin begins to improve? Thanks.

So addressing your first question on gross margin, as you know, we don't give guidance. But what we can say and what we have said in previous quarters, and where we've spoken about the price increases, we have [rolling] [ph] price increases in EMEA during the whole year. So that will escalate as the year goes through. In the U.S., we had a price increase, as you know, late last year, and we had a price increase on April 1 in larger sizes the 19.2, 18.4 and the 24 ounce can. So that's something that will be reflected continually as the year goes through. In addition, we took up some pricing later on in the year in LATAM and some in LATAM in 2023, as well. In Asia Pacific, we largely took up pricing in Q1 of this year. So they will be a benefit, I believe from pricing as we go through 2023. With regard to costs, that's something that we continue to evaluate. We know that, for example, aluminum has kind of stabilized which is positive for, I think, for us. And we've also had a situation where we've seen freight rates reducing, and we balanced freight in two sections in our P&L trade-in for materials and for finished goods as they move to distribution centers are regarded as part of cost of sales and freight-out is obviously regarded as an operating expense. So we are seeing some improvements. We mentioned, I think on previous calls, and in the script today, that there are some challenges in our cost of sales, including what we're seeing certain ingredients, and co-packing fees. So overall, I think, I could see a situation where we have the price -- we have the price benefits, they seem as if the -- they have been sensibly executed and that we haven't had major resistance from customers. So I think that gives you the background probably to make your own assessment. And then on your second question on selling expenses, we work towards a budget on selling expenses, which we believe are necessary to execute our play. And what those budgets are and where they end up is a factor that we very seriously consider in dealing with the needs of our consumer and the needs of the market. So, we don't really compare it to themselves and at the end of the quarter everybody else does. But we look at the needs of the marketing programs, and what we need to do to keep our brands exciting and in the eyes of the consumers.

Our next question comes from Filippo Falorni from Citi. Please go ahead with your question.

You talked about the energy drink category remaining solid, can you talk about what you're expecting in the balance of the year for the category, are you seeing any signs of potential weakness at the low end of the consumer base, or you're seeing trends held up in the U.S. particularly? Thank you.

So we don't give guidance, Rodney, you go ahead and respond to that.

Go ahead.

No, please. Now you go ahead, that's fine.

We don't give guidance and the category has in line with other consumer products in a little bit of a slowing, I think there's been a lot of price increases across not only the energy category, but all beverage and consumer product. And so there has been a little bit of slowing, I think there's been a little bit of trimming of benefits under the snap programs that were increased during COVID. And those are sort of being pulled back a little bit generally now. So I think you would see a little bit of a sort of rationalization by buyers as they have slightly less disposable income. But again, I think that will settle down. We are overall though, if you look at the numbers, we gave you the Nielsen numbers, there is still healthy growth in the energy drink category as a category, it's continuing to grow and expand. But other than the direction you're seeing from Nielsen, we really can't, and won't give any further direction. But obviously, we think that certainly in dollar terms, the category will continue to grow. In actual volumes, they may be a little bit of a slowing. But I think that we will think that it'll be more than made above by dollar increases in pricing.

Our next question comes from Bonnie Herzog from Goldman Sachs. Please go ahead with your question.

I guess I wanted to ask a little bit about some of the innovation, just maybe a little more color on,

Okay. So if you look at

The only thing I would add is, Bonnie, internationally, we do have plans to also roll up the

Yes. And we just launched in Canada as well. So really exciting times, I think for that particular product.

Now with regard to the expectations, Bonnie's, Reign Storm really was launched right at the end of the first quarter. So it's just too early to tell. But obviously, we are optimistic about it. Again, and with regard to the Beast, we rolled it out slowly. And we are trying to do that in a cautious way. And we so far, the result, sales, some of the repeat sales have also been encouraging. And but again, it's early on, we have a lot of additional innovation in alcohol that we are looking at and planning. So we were quite excited, it just takes time. And we are rolling it out through this whole new distribution system, which we are continuing to build distributed by distributor, so it's taking time to get there. But as we said on the call, we hope to be national, by the end of the year, we hope to have additional product. So the whole system, I think is working, moving forward according to plan.

Our next question comes from Chris Carey from Wells Fargo Securities. Please go ahead with your question.

Just one clarification or maybe if you can help the 18.6 and the 24 ounce? How meaningful are those as a percentage of your overall portfolio? Or is there just any way to frame the size of that price increase as a contribution to total business? And then, just a bigger picture one, that I feel a little bit, but I get questions pretty often just about succession planning and long-term succession planning on Monster and how strong is the bench, and how much of that bench building is going on behind closed doors. It just comes up enough that, I thought maybe this could be an interesting place to just maybe offer some perspective on just how you think about developing talent and developing talent for the long-term. So, thanks for the -- maybe a little bit of help on the scope of the pricing and just on talent development. Thanks.

Chris, I would refer you to the Nielsen numbers. And you'll see that those larger sizes are less than 10%, probably in the 6% to 8% range. But if you look at Nielsen, you'll be able to get a good assessment of that percentage. Secondly, on succession, obviously, the Monster Board is, and Rodney and myself are really concerned about succession. And something that we are addressing, and we continue to address on an ongoing basis. We have a very, in our view, a deep strength in the bench of the team below us that are being developed and are growing and we are helping them develop. So I think from that perspective, it's something that ourselves, the board, are very well aware of. And we'll continue to address that issue. However, I don't think Rodney is going anywhere in the foreseeable future and frankly, neither am I. So we are here and will help develop and segue when the time is right, a new management team.

Our next question comes from Andrea Teixeira from JPMorgan. Please go ahead with your question.

I just have a clarification. So went back to Bonnie's question on how accretive Monster

Okay. So remember that we had a product called Absolutely

Just maybe I will just add on the Ultra side. We have had a really successful launch of Ultra Strawberry Dreams. I think that some of the ACV, if you look at your Nielsen's, you'll see some of the ACV or some of the additional flavors Ultra -- Ultra Heavy in fact decreased a little bit. I think that's something we just need to look at and attend, I think as you get go through this change and introducing of new flavor, sometimes -- some of these additional SKUs that are not the top three, or four or five, sometimes get a little bit lost in the wash. So that's where we've seen a little bit of a drop-off in some of those additional flavors. But I think there's -- we think that there are solid and sound products and I think, we just need -- just really make sure we focus on just reestablishing some of the distribution levels on those. And we think those sales will continue to increase. Sales of Ultra as a brand or sub-brand have gone up in the United States and internationally. But I think that we've had, as I said, some of those flanker sort of flavors are, we need to just put some focus behind which we are doing.

And our next question comes from Mark Astrachan from Stifel. Please go ahead with your question.

Two housekeeping questions. One cash balance, it keeps growing. Any thoughts on how you'd like to implement spending some of it share repurchase? It was nice to see there were some interest income this quarter, I assume we shouldn't be thinking to that continues to grow. And then, on the alcohol brands gross margin, the implied number this quarter was a little better sequentially than 4Q, anything is there kind of beneath the surface that we should consider and trying to model that business because it's clearly a lot harder to see what's going on there. And then sort of the legacy business. Thanks.

On the alcohol side, I think that what we did was -- we had quite a drop off in the seltzer business that which is part of the brands that we acquired, and that affected in operating business where they're running their own production that affected their overhead costs, because you've got some fixed costs. So as you noted in the earlier, last quarter of last year, we reported on the margins were really very [indiscernible] on the -- what we call the legacy business. Those margins are improving. We're busy sort of refitting the one line out to be able to increase the capacity for doing the Beast products. And as we go forward, we will start seeing an improvement in the margin in the legacy business. The margins on the Beast side are healthier, quite a lot better than on the legacy craft business side. And as again, those are probably smaller, lower now than they'll be as we start of getting some scale, we are doing some co-packing, we will be using our own facility and we will obviously be maximizing that. And as we go forward, we will start working on using additional co-pack as we will actually lower our costs. So we do think there will be additional margin going forward, but it is a thinner margin product, and we obviously are traditionally used to seeing on the Monster side. And maybe Hilton, you want to take the question on the cash side. Go ahead.

And, at this time, we'll be concluding today's question-and-answer session. I'd like to turn the floor back over to Mr. Rodney Sacks for any closing remarks.

Thank you, all for the company. I'd like to thank everyone for their continued interest. We continue to believe in the company and our growth strategy. And we remain committed to continuing to innovate, to develop and differentiate our brands and to expand the company both at home and abroad. And in particular, capitalizing on our relationship with the Coca-Cola Bottlers System. 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. And thank you for your attendance.