MNST - NASDAQ

Good afternoon, and welcome to the Monster Beverage Company Fourth Quarter 2023 Conference Call. All participants will be in listen-only mode. [Operator Instructions] Please note this event is being recorded. I would now like to turn the conference over to Rodney Sacks and Hilton Schlosberg, Co-CEOs. Please go ahead.

Thank you very much. Good afternoon, ladies and gentlemen. Thanks for attending this call. I am 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 and 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 obligations to update any forward-looking statements whether as a result of new information, future events, or otherwise. Before I turn the call over to Rodney Sacks, I would like to mention a clerical error that we had with the filing of our most recent press release that was filed just within the last half hour. And under the income statement session, under the 3 months ended December 31, 2023 the amount that was reported as gross profit which was reported as $983,372,000 should have been $938,372,000. Aside from that clerical error all other numbers on the press release are correct. I would now like to hand the call over to Rodney Sacks.

Thank you, Tom. The company achieved record fourth quarter net sales of $1.73 billion in the 2023 fourth quarter, 14.4% higher than net sales of $1.51 billion in the 2022 comparable period and 16.1% higher on a foreign currency adjusted basis. Gross profit as a percentage of net sales for the 2023 fourth quarter was 54.2% compared to 51.8% in the comparative 2022 fourth quarter. As a result of the Bang Inventory Step-Up, gross profit was adversely impacted by approximately $5 million during the 2023 fourth quarter. Gross profit as a percentage of net sales was 54.5% for the 2023 fourth quarter, excluding the Bang Inventory Step-Up. The increase in gross profit as a percentage of net sales for the 2023 fourth quarter as compared to the 2022 fourth quarter was primarily the result of pricing actions, decreased freight-in costs and lower input costs. During this call, we will talk about impairment charges of approximately $39.9 million recorded in the 2023 fourth quarter related to the Alcohol Brands segment due in part to the continuing challenges in the craft beer and seltzer categories. We will refer to these charges as the alcohol impairment charges. The alcohol impairment charges related to certain non-amortizing intangibles as well as property and equipment acquired as part of the CANarchy transaction. Operating expenses for the 2023 fourth quarter were $504.4 million compared to $390 million in the 2022 fourth quarter. Operating expenses for the 2023 fourth quarter included the alcohol impairment charges. As a percentage of net sales, operating expenses for the 2023 fourth quarter were 29.2% compared with 25.8% in the 2022 fourth quarter. Exclusive of the alcohol impairment charges as a percentage of net sales, operating expenses for the 2023 fourth quarter were 26.8%. Distribution expenses for the 2023 fourth quarter were $79.6 million or 4.6% of net sales compared to $76.1 million or 5% of net sales in the 2022 fourth quarter. Operating income for the 2023 fourth quarter increased 10% to $434 million from $394.4 million in the 2022 comparative quarter. Operational income adjusted for the Bang Inventory Step-Up and the alcohol impairment charges increased 21.4% to $478.9 million for the 2023 fourth quarter. The effective tax rate for the 2023 fourth quarter was 18.5% compared with 23.3% in the 2022 fourth quarter. The decrease in the effective tax rate was primarily attributable to an increase in the stock compensation deduction. Net income increased 21.6% to $367 million as compared to $301.7 million in the 2022 comparable quarter. Net income adjusted for the Bang Inventory Step-Up and the alcohol impairment charges, net of tax, increased 33.1% to $401.5 million for the 2023 fourth quarter. Diluted earnings per share for the 2023 fourth quarter increased 22.3% to $0.35 from $0.29 in the fourth quarter of 2022. Diluted earnings per share adjusted for the Bang Inventory Step-Up and the alcohol impairment charges, net of tax, was $0.38 for the 2023 fourth quarter, an increase of 33.8%. The company has implemented price increases in the first quarter of 2024 in certain international markets. We are continuing to monitor opportunities for further pricing actions in both the United States and internationally. The company continues to have market share leadership in the energy drink category for all outlets combined in the United States in both the 13-week and 4-week periods ended February 17, 2024. According to Nielsen reports for the 13 weeks through February 17, 2024, for all outlets combined, namely convenience, grocery, drug, mass merchandisers, sales in dollars in the energy drink category, including energy shots, increased by 5.5% versus the same period a year ago. Sales of the company's energy brands, excluding Bang, were up 0.9% in the 13-week period. Sales of Monster declined 0.7%. Sales of Reign were up 21.6%. Sales of NOS increased 5.1%. And sales of Full Throttle increased 3.6%. Sales of Red Bull increased 2.9%. According to Nielsen, for the 4 weeks ended February 17, 2024, sales in dollars in the energy drink category in the convenience and gas channel, including energy shots, in dollars, increased 3.7% over the same period the previous year. Sales of the company's energy brands, excluding Bang, decreased 0.1% in the 4-week period in the convenience and gas channel. Sales of Monster decreased by 2% over the same period versus the previous year. Reign sales increased 17.2%. NOS sales were up 6%, and Full Throttle was up 1.7%. Sales of Red Bull were up 3.8%. According to Nielsen, for the 4 weeks ended February 17, 2024, the company's market share of the energy drink category in the convenience and gas channel, including energy shots in dollars, decreased from 36.9% to 35.5%, excluding Bang. Including Bang, the company's market share is 37%. Monster share decreased from 30.8% a year ago to 29.1%. Reign's share increased 0.3 of a share points to 3%. NOS share increased 0.1 of a share point to 2.7%, and Full Throttle share remained at 0.7%. Bang share was 1.4%. Red Bull share increased 0.1 of a share point to 35.1%. Market share of certain competitors were as follows: CELSIUS 8.1%, C4 3.5%, 5-Hour 3.4%, Rockstar 3.2%, and GHOST 2.9%. According to Nielsen, for the 4 weeks ended February 17, 2024, sales in dollars of the coffee plus energy drink category, which includes our Java Monster line, in the convenience and gas channel, decreased 10.3% over the same period the previous year. Sales of Java Monster, including Java Monster 300 and Java Monster Nitro Cold Brew were 4.6% lower in the same period versus the previous year. Sales of Starbucks Energy were 16.9% lower. Java Monster share of the coffee plus energy drink category for the 4 weeks ended February 17, 2024, was 58.2%, up 3.5 points, while Starbucks Energy share was 41.5%, down 3.3 points. According to Nielsen, in all measured channels in Canada, for the 12 weeks ended January 27, 2024, the energy drink category increased 9.2% in dollars. Sales of the company's energy drink brands increased 8.6% versus a year ago. The market share of the company's energy drink brands decreased 0.2 of a point to 41.3%. Monster's sales increased 9%, and its market share decreased 0.1 of a point to 37.3%. NOS sales decreased 5.1% and its market share decreased 0.2 of a point to 1.2%. Full Throttle sales increased 24.6%, and its market share increased 0.1 of a point to 0.6%. According to Nielsen, for all outlets combined in Mexico, the energy drink category increased 10.9% for the month of January 2024. Monster sales increased 10.5%. Monster's market share in value decreased 0.1 of a point to 29.4% against the comparable period the previous year. Sales of Predator increased 23.2%, and its market share increased 0.6 of a share point to 5.6%. The Nielsen statistics for Mexico cover a 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 all outlets combined, in Brazil, the energy drink category increased 19.9% for the month of January 2024. Monster sales increased 33.6%. Monster's market share in value increased 4.7 points to 45.8% compared to January 2023. In Argentina, due in part to hyperinflation, the energy drink category increased 167.2% for the month of January 2024. Monster sales increased 178.2%. Monster's market share in value increased 2.2 points to 55.8% compared to January 2023. In Chile, the energy drink category increased 1.8% for the month of January 2024. Monster sales decreased 2.2%. Monster's market share in value decreased 1.7 points to 40.5%. Monster Energy remains the leading energy brand in value in Argentina, Brazil and Chile. I would like to point out that the Nielsen numbers in EMEA should only be used as a guide because the channels read by Nielsen in EMEA vary from country to country and are reported on varying dates within the month referred to from country to country. According to Nielsen, in the 13-week period until the end of January 2024, Monster's retail market share in value as compared to the same period the previous year grew from 14.9% to 16.3% in Belgium; from 31% to 31.6% in France; from 30.8% to 33.2% in Great Britain; from 4.9% to 6.2% in the Netherlands; from 32.7% to 34.4% in Norway; and from 40.5% to 40.9% in Spain. According to Nielsen, in the 13-week period ended until the end of December 2023, Monster's retail market share in value as compared to the same period the previous year grew from 20.1% to 22.4% in the Czech Republic; from 13.7% to 17.1% in Germany; from 30.2% to 31.1% in Italy; and from 27.6% to 30.1% in the Republic of Ireland. According to Nielsen, in the 13-week period until the end of December 2023, Monster's retail market share in value as compared to the same period the previous year remained flat at 18.6% in Poland. Monster's retail market share in value as compared to the same period the previous year declined from 27.8% to 27% in Denmark; from 37% to 36.1% in Greece; from 19.8% to 19.2% in South Africa; and from 15.7% to 15.5% in Sweden. According to Nielsen, in the 13-week period until the end of December 2023, Predator's retail market share in value as compared to the same period the previous year grew from 32.1% to 33.7% in Kenya and from 19.2% to 21% in Nigeria. According to IRI, for all outlets combined in Australia, the energy drink category increased 13% for the 4 weeks ending February 11, 2024. Monster sales increased 32.5%. Monster's market share in value increased 2.9 points to 19.4% against the comparable period the previous year. Sales of Mother increased 10.5%, and its market share decreased 0.2 of a share point to 10.8%. This period marks the first time that the company's total market share exceeded 30%. According to IRI for all outlets combined in New

[Operator Instructions] Our first question today is from Peter Grom with UBS. Please go ahead.

Thanks, operator and good afternoon everyone. Hope you're doing well. So I wanted to ask a question specifically on gross margin. Clearly, the quarter came in a bit better relative to some of the commentary from the investor meeting. Maybe first, did something surprise you in the quarter? And then second, just going back to that same commentary from the investor meeting, there seem to be a lot of optimism that the gross margin trajectory would improve nicely from 4Q looking out to '24. I know you don't give guidance specifically, but just any thoughts on how we should think about the margin trajectory given the very strong exit rate? Thanks.

So I think at the Investor Meeting, as I recall, we already spoke about 2023 Q4. As you know, we don't give guidance, and we really do try not to give guidance. So if I could just talk about Q4 for a minute, Q4 was strong. But there were a number of really nonrecurring items included in GP in Q4, mainly related to true-ups of various promotional items, various true-ups with partners as well as -- we have a few, we don't have very many, but we have a number of rebate programs. So looking at Q4 of 2023, I would say to you that on an ongoing basis, Q4 came up very much in line with what we expected, which was an increase over Q3. And it's at the level probably of about 53.5% on a kind of standalone basis excluding these nonrecurring items.

The next question is from Filippo Falorni with Citi. Please go ahead.

Hey, good afternoon, guys. I wanted to ask you about the energy drink category in the U.S. We've seen a bit of a slowdown in January. How much do you think it was the weather? How much would you think we're some other external factor on the consumer? And then maybe you can comment a bit on market share trends in the U.S. We've seen a little bit of pressure on the core Monster brand. So any color you could give would be helpful.

Yes. Firstly, I don't think one should discount the fact that the weather was a factor. Secondly, we do have a lot of non-measured channels. And if you heard earlier in the call, January sales were -- in my book, were really impressive, the increase in January sales. Added to that, Nielsen doesn't cover everything, as we've discussed before, and there were some interesting things in January, for example, one of the big club store chains had what we call an MVM, which is a club store chain that is not read by Nielsen, and in itself is pretty substantial. Adding to that, if you go back to January 2023, we had very robust increases mainly because of the launch of 2 brands that really hit it out of the park. One was Monster

The next question is from Andrea Teixeira with JPMorgan. Please go ahead.

Thank you, operator. Just you said that you continue to look at opportunities for pricing in the U.S. What is preventing you to announce pricing at this point? Do you see -- I mean, obviously, the key competitor announced pricing back when we all saw you here in New York, you were talking about potentially looking at the impact of elasticities. It seems that things have been moderately positive. Is there any reason why you'd wait? And then second, Hilton, when you spoke about a normalized gross profit margin of 53.5%. Should we expect margins to continue to build from here given that potentially the high 50s, it's still below where you were before the pandemic at 60. Is there any reason why these new plans would not leverage as fast or any structural reasons that you would be below the high 50s?

No, the only structural reason is we don't give guidance. So that's the only structural reason I can think of. Obviously, we're working on margins. I'm proud to say that the Midwest premium and aluminum, which is one of [indiscernible] are coming down. But against that, we've said that we have increases in other commodities and other pricing. So we're bringing up our own manufacturing facilities up and we're doing whatever we can to improve gross profit percentages. But we don't give guidance and I don't know what's going to happen with freight, for example. We had a good benefit from freight-in this quarter -- this last quarter, and I'm not sure what's going to happen as we look forward into 2024 and the implications of the election and everything else. So that's about that. And then on pricing, we're taking pricing in a number of markets internationally. We've taken pricing in January in a number of markets. And we're moving through with an aggressive price increase program internationally. As regards to the U.S., we really are just -- we're waiting and evaluating. We run a very sizable business here. We have a number of customers that we deal with. And we want to make the right decision. So we're not saying no to a price increase, and we're not saying yes to a price increase this time. What we are saying is that we are honestly really evaluating and constantly evaluating the retail pricing environment. And if we believe there are opportunities, we will take them.

The next question is from Dara Mohsenian from Morgan Stanley. Please go ahead.

Hi, guys. Good afternoon. So the comments on some of the U.S. performance were helpful. Just given the strength of that global January number, can you spend some time discussing what you're seeing internationally in terms of category growth and your market share progression? And any thoughts on maybe key expansion plans internationally in terms of some of your key brands and how we should think about that for 2024? Thanks.

So, Dara, on the call, we did talk about progress internationally in very great detail. I think sometimes we give far more detail than we should, but we do. We gave market shares in various countries we indicated the new product innovations that are going to happen through -- throughout our international territories, and I'm not sure what other question -- what part of your question, we possibly have an answer. And I don't mean to be disrespectful. I just feel that a lot of your question has been covered. Rodney, I don't know if you've got anything to add.

No. Other than the -- there's -- if you look at the international markets, they've sort of been a little bit all over the place in many ways. But generally, they've been good. There was a little bit of slowing in Asia Pacific. We are taking steps to see some growth. But obviously, we are very substantial in those markets and the actual markets have been a little flatter. But we've got great opportunity in some of the international markets that are developing. We look particularly to markets like China and India. We're at the beginning of a growth phase in India, particularly focusing on not only Monster, but also Predator there. So I think that it is mixed. Some of the markets have had some sort of ups and downs, but overall, we're in growth in most of the markets, and we still see that as very exciting. And you can see from the results in January, we are still seeing -- despite the Nielsen numbers, we are still seeing good growth in the U.S. as well.

The next question is from Steve Powers with Deutsche Bank. Please go ahead.

Yes. Hey, good afternoon, guys. Two questions for me, if I could. The first one is just on G&A expenses in the quarter. They were up a lot relative to our expectations of almost 25% in the fourth quarter. Just anything to unpack there and anything anomalous in that number?

Yes, we spoke about -- Steve, sorry to interrupt, but let's just answer the first. So remember, we spoke about impairment charges of $40 million in this quarter relating to the Alcohol Brands.

Yes. Sorry, I'm excluding that. It's still up a lot, excluding the impairment charges.

We'll look at that, but it's not what I've been seeing.

Okay. The second question is, in January, you highlighted plans just to step up focus on in-market execution in the U.S., specifically commercialization around placing of the full portfolio and innovation. And just any update you can share on progress made and cooperation you're getting on the -- from the Coke system on that effort?

Yes. I think that's not a one-fix issue. That's something that's ongoing, and we are working with the Coke bottlers to improve execution. As I said earlier, we are rolling out a number of new products and the new sets are all taking place in this first quarter from February onwards and early into the second quarter. And I think you'll see that -- well, I hope you'll see from those numbers when we report them, that the positioning should be somewhat different to where we are today.

The next question is from Mark Astrachan with Stifel. Please go ahead.

Yes. Hey, afternoon guys. I wanted to go back to international because I feel like it's one of those things that doesn't get the credit that's due, right? You built nearly a $3 billion run rate business at this point. And I think from the outside, it's a little bit hard to get a sense of kind of what's going on there. So not necessarily to Dara's question, but maybe talk to some of the dynamics in terms of number of SKUs that you have on shelf, not obviously by country, but sort of broader strokes of the opportunity you have to still develop your portfolio within those markets? How much opportunity is there broadly to develop the energy category? And sort of related to that, margins have improved, but they're obviously still a lot lower than your domestic margins, both gross margin and EBIT margin in that international business. How do you think about improving that over time? Is that possible relative to current levels? And kind of how do you think about the progression of that?

We've always spoken about the fact that internationally, we compete very strongly against -- in the main Red Bull. And we really try and keep our pricing. We have a pricing strategy that's worked well for us, and that's really keeping within a particular percentage of Red Bull pricing. And the minute we stray from that, we find that our market shares really suffers. So we really have an interesting dynamic in that we have, obviously, relationships with The Coke partners. And we have a pricing structure that kind of has a ceiling, right? So it's -- while we are always on a mission to improve gross margins, and we do that on an ongoing basis, there are some areas where it is very difficult to get gross margin. And I've said this before, that I think it will be very difficult in the main to get gross margins internationally to the levels that we have enjoyed in the U.S. You can see what happened in EMEA. They nudged their margins up by 1% in the fourth quarter. And it's an ongoing battle to improve margins, bearing in mind the dynamics of what we are working against.

This concludes -- I'm sorry, go ahead, sir.

Sorry, I just finish the other part of the question that Mark had raised just before we sign off. Just to talk about the international opportunity, I think what Mark is alluding to is correct. In many markets, the international markets have really followed the U.S. We have a far broader portfolio in the U.S. Innovation continues from year to year. But what -- the benefit that the international markets have is they see what we've introduced in the U.S. and the large number of additional SKUs and literally brand families we have in the U.S. And they're able to try and look to those and try and introduce selected SKUs, which gives them a very large runway. In some markets, the runway is focused on the Monster premium brands. And in some markets, the growth is coming from an affordable sector. And we have addressed that. So we have Monster in many markets, but we've also -- where we see that the premium sector has more of a limited percentage of the population that can really afford to have the buying power. We are growing, and that's where we're starting to grow brands like Predator in many international markets and that will help us continue to see growth and Predator also has a lot of depth. We were launching Predator in China this year. We've just launched Predator in India in cans. We are now just rolling out PET in India. We are trying to address some volume production issues because there's not a lot of availability, but that will sort itself out reasonably soon. And we see enormous opportunity once we get some availability for production in PET for PET in India. So there are a lot of opportunities, but they vary from market to market and continent to continent. As you know, we've just recently launch, for example, in Egypt, we launched both Monster and Predator. Predator's quickly made a name for itself as a growing brand. So we have these opportunities in different countries around the world. And so we're quite excited about seeing that. As I said, we did have some slowdown in some of the more developed countries in Asia. The category slowed, but I think that those -- we are taking steps to address and introduce more and different innovation in those markets and to grow them. So we do look forward to having a really attractive runway around the world for us.

This concludes our question-and-answer session. I would like to turn the conference back over to Rodney Sacks for any closing remarks.

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, 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 bottler 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 very much for your attendance.