Rodney Cyril Sacks - Monster Beverage Corp. Hilton Hiller Schlosberg - Monster Beverage Corp..

Amit Sharma - BMO Capital Markets (United States) Mark S. Astrachan - Stifel, Nicolaus & Co., Inc. Nik Modi - RBC Capital Markets LLC Andrea F. Teixeira - JPMorgan Securities LLC Kevin Grundy - Jefferies LLC.

Good day, ladies and gentlemen, and welcome to the Monster Beverage Corporation Second Quarter 2018 Financial Results Conference Call. At this time, all participants are in a listen-only mode. Following management's prepared remarks, we will host a question-and-answer session and our instructions will be given at that time.

As a reminder, this conference call may be recorded. It is now my pleasure to hand the conference over to Mr. Rodney Sacks, Chairman and Chief Executive Officer. Sir, you may begin..

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. Tom Kelly, our Senior Vice President of Finance, is on a well-deserved vacation.

Before we begin, I'd 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 March 1, 2018, and our Form 10-Q filed on May 10, 2018, 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 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 and designated with asterisks in the consolidated statements of income and other information attached to the earnings release dated August 8, 2018.

A copy of this information is also available on our website at monsterbevcorp.com in the Financial Information section. Growth in the beverage industry globally continues to be challenging. However, we are seeing positive momentum in the energy category.

Net sales for the 2018 second quarter were negatively impacted by $12.2 million due to the adoption of Accounting Standards Codification 606, under ASC 606, commissions paid to The Coca-Cola Company based on our sales to certain of the company's customers, which The Coca-Cola Company accounts for under the equity method or consolidates, are now included as a reduction to net sales.

Whereas prior to January 1, 2018, commissions based on sales to those customers, which Coca-Cola accounts for under the equity method were included in operating expenses. In the second quarter, net sales were $1.02 billion, up 12% from $907.1 million in the second quarter of 2017.

Without the adoption of ASC 606, the percentage increase in net sales would have been $13.3%. Net sales in the second quarter were positively impacted by approximately $16.8 million of foreign currency movements. The company recorded second quarter gross sales of $1.19 billion, up 14.7% from $1.04 billion in the second quarter of 2017.

Gross sales in the second quarter were positively impacted by approximately $21.4 million of foreign currency movements. Gross profit as a percentage of net sales for the 2018 second quarter was 61.1% compared to 64.3% in the 2017 second quarter.

The decrease in gross profit as a percentage of net sales was primarily attributable to an increase in promotional allowances as a percentage of gross sales, the $12.2 million of commissions accounted for as a reduction to net sales due to the adoption of ASC 606, increases in certain input costs such as aluminum cans and other costs, domestic product sales mix and geographical sales mix.

Distribution costs as a percentage of net sales were 3.7% for the 2018 second quarter as compared to 3% in the 2017 second quarter, an increase of $10.7 million largely due to higher carrier cost contract rates in the U.S. Selling expenses as a percentage of net sales were 11.4% compared to 12.6% in the same quarter a year ago.

General and administrative costs as a percentage of net sales were 10.7% as compared to 10.1% in the same quarter last year. Included in general and administrative costs were distributed termination expenses of $5.5 million for the 2018 second quarter as compared with $0.2 million in the comparable 2017 second quarter.

In the quarter, payroll expenses were up $9 million compared to the same period last year, primarily due to head count growth both domestically and internationally.

Legal expenses related to regulatory matters and litigation concerning the advertising, marketing, promotion, ingredients, usage, safety and sale of the company's products were $0.7 million in the 2018 second quarter as compared to $2.4 million in the 2017 second quarter. Operating income was adversely affected by losses in China and India.

The losses in India were due to establishment costs incurred in advance of the launch and in connection with the current rollout as well as inventory reserves. Our effective tax rate decreased from 35.9% in the 2017 second quarter to 24.6% in the 2018 second quarter.

The decrease in the effective tax rate was primarily due to the Tax Cuts and Jobs Act signed into law on December 22, 2017. The decrease was partially offset by the elimination of the domestic production deduction.

Net income was $270.1 million in the 2018 second quarter compared to net income of $222.6 million in the 2017 second quarter, an increase of 21.3%.

The weighted average number of diluted shares outstanding decreased from 578 million for the second quarter of 2017 to 566.4 million for the second quarter of 2018 as a result of share repurchases, which I will cover later in this call.

Diluted earnings per share for the 2018 second quarter increased 23.8% to $0.48 from $0.39 in the second quarter of 2017. We continue to make good progress in the implementation of our strategic alignment with Coca-Cola bottlers globally. We also are making good progress in the U.S.

in non-traditional channels including foodservice accounts and e-commerce. We reached agreements to transition Monster to Coca-Cola bottlers in Arkansas. In the second quarter of 2018, we transitioned parts of Arkansas and are planning on transitioning the remainder of Arkansas in the third quarter of 2018. In EMEA, we launched in Belarus and Tanzania.

Further launches are planned in the third and fourth quarters of 2018 in Armenia, Azerbaijan and Ukraine. We plan to launch Predator later in 2018 and in 2019 as an affordable energy brand in select eastern European and African markets. During the second quarter of 2018, we launched Monster in Uruguay and relaunched Monster in Peru.

In July, we launched Monster in Ecuador. Bolivia is on track to launch later this year. In China, we continue to focus our efforts towards establishing Monster around the country with an emphasis on distribution in the top 40 cities and to key accounts, targeting the younger and more affluent consumer demographic.

We commenced shipments of Monster to Coca-Cola India where we launched Monster in April in a lead market. We have now expanded the launch to a number of larger cities principally in the south and west regions of India. We plan to complete a national rollout in India by year-end.

Mutant, one of our affordable energy brands that is positioned differently than in the U.S., was recently launched in Pakistan and Cambodia with launches in Myanmar and Vietnam during the third quarter of 2018.

According to the Nielsen reports, for the 13 weeks through June 30, 2018, for all our outlets combined, namely convenience, grocery, drug, mass merchandisers, sales in dollars in the energy drink category, including Energy Shots increased by 9% versus the same period a year ago.

Sales of Monster grew 16.7% in the 13-week period while sales of NOS increased 8% and sales of Full Throttle decreased 1.6%. Sales of Red Bull increased 6.5%. Sales of Rockstar decreased by 3.9%. Sales of 5-Hour decreased 3.8%, and sales of Amp decreased 18.4%.

According to Nielsen, for the five weeks ended June 30, 2018, sales in the convenience and gas channel including Energy Shots in dollars increased 10.5% over the same period last year. Sales of Monster increased by 17.5% over the same period last year, while NOS was up 7% and Full Throttle was down 1.7%.

Sales of Red Bull were up 9%, Rockstar was down 5.5%, 5-Hour was down 2.8%, and Amp was down 19.6%. According to Nielsen for the five weeks ended June 30, 2018, Monster's market share of the energy drink category in the convenience and gas channel including Energy Shots in dollars increased by 2.3 points over the same period last year to 38.1%.

NOS's share declined 0.1 share point to 4% and Full Throttle's share declined 0.1 share point to 0.9%. Red Bull's share decreased 0.5 point to 35.3%. Rockstar's share was down 1.1 points to 6.7%, 5-Hour's share was lowered by 0.9 points at 6.4%, and Amp's share decreased 0.3 point to 0.8%.

According to Nielsen for the five weeks ended June 30, 2018, sales of Energy Plus Coffee drinks, which now includes Caffé Monster and Espresso Monster in dollars in the convenience and gas channel increased 22.3% over the same period last year.

Sales of our Java Monster alone were 25.9% higher than in the same period last year, while sales of Starbucks Doubleshot Energy were 3.9% lower.

Our share of the Coffee Plus Energy (sic) [Energy Plus Coffee] (11:21) category including Java Monster, Caffé Monster, Espresso Monster, Starbucks Doubleshot and Rockstar Roasted for the five weeks ended June 30, 2018, was 56%, up 12 points.

Java Monster's share alone for the five weeks ended June 30, 2018, was 45.3%, up 1.3 points, while Starbucks Doubleshot Energy's share was 43.8%, down 11.9 points. According to Nielsen, in the convenience and gas channel in Canada for the 12 weeks ended June 23, 2018, the energy drink category increased 9% in dollars.

Monster sales increased 13% versus a year ago. Monster's market share increased one share point to 32.3%. NOS's sales decreased 15%, and its market share decreased 0.8 share points to 2.7%. Full Throttle sales increased 13% and its market share increased by 0.1 points to 1.5%.

Red Bull sales increased 10% and its market share increased 0.2 points to 37.5%. Rockstar sales increased 12% and its market share increased 0.4 points to 17.2%. According to Nielsen for all our outlets combined in Mexico, the energy drink category grew 20.6% during the month of June 2018. Monster sales increased 28.3%.

Our market share in value increased 1.7 points to 29.2% against the comparable period last year. Sales of Burn decreased 31.1%. Burn's market share decreased 1.2 points to 1.5%. Red Bull sales decreased 2% and its market share decreased by 2.2 points to 9.5%.

Vive 100 sales increased 14.6% and its market share decreased 2 points to 38%, while Boost's market share decreased 0.5 point to 7.8%. 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 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.

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.

According to Nielsen in the 13-week period ending July 2018, Monster's retail market share in value as compared to the same period last year grew from 11.5% to 12.2% in Belgium, from 15.2% to 16.8% in Germany, from 17.2% to 19.6% in Great Britain, from 5.7% to 7.2% in the Netherlands and from 27.1% to 29.1% in Spain.

According to Nielsen, in the 13-week period ending June 2018, Monster's retail market share in value as compared to the same period last year grew from 12.7% to 13.7% in the Czech Republic, from 23.7% to 24% in France, from 32% to 32.2% in Greece, from 11.3% to 14.7% in Italy, from 13.7% to 17.1% in Norway, from 7.9% to 11.2% in Poland, and from 9.5% to 12.3% in Sweden.

For the 13-week period ended June 2018, Monster's retail market share in value decreased, however, from 15.5% to 14.7% in South Africa, although the value of sales increased over the same comparative period.

According to Nielsen, in the 13-week period ending May 2018, Monster's retail market share in value as compared to the same period last year increased from 11.1% to 13.9% in Ireland.

According to Nielsen for the month of June 2018, Monster's retail market share in value compared to the same period last year increased from 29.8% to 34.3% in Chile, and from 11.5% to 16.2% in Brazil. According to Nielsen, Monster's market share in Argentina reached 10.9% in May 2018.

According to IRI, Monster's market share in Australia was 8% for the latest four weeks ended July 22, 2018 as compared to 6.8% in the same period last year. And in New Zealand, Monster's market share was 6.4% for the latest four weeks ended July 8, 2018 as compared to 5.5% in the same period last year.

According to Nielsen, in South Korea, Monster's market share in value in all outlets combined grew from 28.1% to 34.6% in the second quarter of 2018 versus the same period last year.

According to INTAGE, Monster's market share in value in the convenience store channel in Japan grew from 43.4% to 48.7% in the second quarter of 2018 versus the same period last year.

We again point out that certain market statistics that cover single months may often be materially influenced positively and/or negatively by promotions or other trading factors during these months.

Net sales for the Monster Energy Drinks segment for the second quarter of 2018 increased 14% from $815.3 million to $929.4 million from the comparable period last year.

Net sales for the Monster Drinks Energy (sic) [Monster Energy Drinks] (17:12) segment in the 2018 second quarter were negatively impacted by $5.1 million due to the adoption of ASC 606. Without the adoption of ASC 606, the percentage increase in net sales for the Monster Energy Drinks segment would have been 14.6%.

Net sales for the Monster Energy Drinks segment in the second quarter of 2018 were positively impacted by approximately $15.5 million of foreign currency movements. Net sales for the Strategic Brands segment were $79.8 million for the second quarter as compared to $85.6 million in the same quarter last year.

Net sales for the Strategic Brands segment for the second quarter of 2018 were negatively impacted by $7.1 million due to the adoption of ASC 606. Without the adoption of ASC 606, the percentage increase in sales for the Strategic Brands segment would have been 1.5%.

Net sales for the company's Strategic Brands segment in the second quarter of 2018 were positively impacted by approximately $1.3 million of foreign currency movements in the quarter. Net sales for the Other segment, which includes third-party sales made by AFF, were $6.6 million in the quarter compared to $6.2 million in the same quarter last year.

Net sales to customers outside the U.S. were $293.8 million in the 2018 second quarter compared to $247.9 million in the corresponding quarter in 2017. Foreign exchange had the effect of increasing net sales in U.S. dollars by approximately $16.8 million.

Included in reported geographic sales, are our sales to the company's military customers which are delivered in the U.S. and transshipped to the military and their customers overseas. In Europe, the Middle East and Africa, net sales in the second quarter increased 21.4% in dollars and 11.2% in local currencies over the same period last year.

Without the adoption of ASC 606, the percentage increase in net sales would have been 27.5% in dollars and 17.3% in local currencies. Gross profit in this region as a percentage of net sales for the quarter was 43.8% compared to 49% in the same quarter [Technical Difficulties] (19:22).

Without the adoption of ASC 606, gross profit as a percentage of net sales would have been 46.5% for the second quarter. Gross profit in the region was impacted by a higher percentage of Monster sales. We are pleased with the rollout of additional SKUs in the Ultra range in EMEA markets.

In the second quarter of 2018, we introduced Ultra Citron in Austria, Ultra Red in Switzerland, Romania, Slovenia, Bosnia and Croatia, Ultra Sunrise in Croatia and Slovenia, and Ultra Violet in the Czech Republic and Slovakia. Various SKUs in the Ultra line are now sold in 38 EMEA markets.

We are also pleased that Monster continues to perform well and gain market share in Belgium, Czech Republic, Germany, Greece, Great Britain, Ireland, Italy, the Netherlands, Norway, Poland, Spain and Sweden. In Asia-Pacific, net sales in the second quarter increased 5.8% in dollars and 2.2% in local currencies over the same period last year.

Without the adoption of ASC 606, the percentage increase in sales would have been 7.5% in dollars and 3.9% in local currencies. Gross profit in this region as a percentage of net sales was 49% versus 50.7% over the same period last year. Without the adoption of ASC 606, gross profit as a percentage of net sales would have been 49.8%.

The decrease in the gross profit percentage was also impacted by a higher percentage of Monster sales. In Japan, net sales in the quarter increased 13.9% in dollars and 10.1% in local currency compared to the same quarter last year.

In South Korea, net sales increased 30.5% in dollars and 23.8% in local currency as compared to the same quarter last year. In Oceania, which includes Australia, New Zealand, Tahiti, French Polynesia, New Caledonia, Papua New Guinea and Guam, net sales increased 2% in dollars and 0.2% in local currencies as compared to the same quarter last year.

In Latin America, including Mexico and the Caribbean, net sales in the second quarter increased 22.8% in dollars and 23.9% in local currencies over the same period last year. Without the adoption of ASC 606, the percentage increase in net sales would have been 25.3% in dollars and 26.3% in local currencies.

Gross profit in this region as a percentage of net sales was 47.4% versus 46.7% over the same period last year. Without the adoption of ASC 606, gross profit as a percentage of net sales would have been 48.4%.

Net sales in Brazil in the quarter increased by 1.6% in local currency, impacted by ASC 606 and higher taxes on sales and decreased 6.3% in dollars as a result of foreign currency movements. Net sales in Chile increased 39.3% in dollars and 28.5% in local currency.

Turning to the balance sheet, cash and cash equivalents amounted to $659.7 million compared to $528.6 million at December 31, 2017. Short-term investments were $211.1 million compared to $672.9 million at December 31, 2017. At the end of the quarter, we held no long-term investments.

Accounts receivable increased to $592.6 million at June 30, 2018, from $449.5 million at December 31, 2017. Days outstanding for accounts receivable were 45.2 days compared to 43.8 days at December 31, 2017. Inventories increased to $275.6 million from $255.7 million at December 31, 2017.

Average days of inventory were 62.7 days at June 30, 2018 compared to 75 days at December 31, 2017. In the second quarter of 2018, we launched Monster Mule, a ginger-flavored energy drink exclusively with a large regional convenience store customer. Initial results have been positive.

In Canada in the second quarter of 2018, we launched Monster Green and Zero Ultra in a slim 310ml can and a Collector's Edition Lewis Hamilton Monster Energy drink in a 473ml can. We also launched Monster Mango Loco with 7-Eleven in Canada this June and we will roll out nationally in Canada during the third quarter of 2018.

Following the launch of Monster Hydro in the first quarter in Sweden and Germany, we launched Monster Hydro in 550ml PET bottles in France and BPM Zero in Ireland in June 2018.

In the first half of 2018, we launched Monster Mango Loco in Great Britain and Sweden along with Monster Pipeline Punch in Great Britain, Belgium, France and Germany, and Relentless Apple Kiwi in Great Britain. We also recently launched Mutant as an affordable energy drink in Pakistan and Cambodia.

In the second quarter of 2018, we launched Monster Ultra Citra in South Korea. We are planning for approximately a 4% increase in our pricing to our customers effective November 1, 2018 for Monster and January 1, 2019 for NOS and Full Throttle. We estimate July 2018 gross sales to be approximately 15.9% higher than in July 2017.

On a foreign exchange adjusted basis, we estimate July 2018 gross sales to be approximately 15.7% higher than in July 2017. Please note that the impact of ASC 606 has not been included in determining these figures. July had one extra selling day in 2018.

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 and promotions in retail stores, distributor incentives, as well as shifts in the timing of production.

In some instances, where our bottlers are responsible for production and unilaterally determine their production schedules, which affects the dates on which we invoice such bottlers, as well as inventory levels maintained by our distribution partners which they alter unilaterally for their own business reasons.

We reiterate that sales over a short period, such as a single month or even two months, should not necessarily be imputed to or be regarded as indicative of results for a full quarter or any future period.

During the 2018 second quarter, the company purchased approximately 10.6 million shares of common stock at an average purchase price of $52.42 per share, for a total of $553.2 million, excluding broker commissions. As of August 7, 2018, approximately $196.7 million remains available for repurchase under our previously authorized repurchase program.

On August 7, 2018, the company's board of directors authorized a new 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; One, the company's continued to achieve record market shares in the U.S. and many countries.

Two, retail sales statistics from many countries around the world demonstrate that the energy category is continuing to grow, and that Monster is generally growing ahead of the category in line with earlier periods. Three, the new additions to the Monster family continue to add to the company's sales.

Four, we are excited by the prospects for our brands and our new product launches. Five, we are pleased with our performance in our international markets and reiterate the growth potential for us in China and India. Six, we are continuing to launch Monster Energy drinks with Coca-Cola bottlers in certain markets.

And I would now like to open the floor to questions about the quarter..

Thank you, sir. Ladies and gentlemen, at this time if you would like to ask a question....

Sorry, just – sorry. Could I just make – just one clarification. The price increase I referred to is related to the U.S. Sorry. Thank you..

Thank you, sir. Ladies and gentlemen....

All right, thank you..

...my pleasure. And our first question will come from the line of Amit Sharma with BMO Capital Markets. Your line is now open..

Hi. Good afternoon, everyone..

Good afternoon..

Rodney, just talk about international sales growth a little bit. We saw some deceleration across all three regions.

Anything to note there or is it just part of normal volatility in these markets?.

We think it's part of the normal operations. There have been some sort of – some noise – some countries were higher than others. We are looking at it, but we think that it's, again also distorted in some cases by monthly numbers. We are seeing quite big differences in the monthly numbers as we see them come through from overseas markets.

So I think we'll just wait and see what the trend is going to be when we go through the third quarter..

Yeah, I think that's fair. If you look at the consolidated foreign numbers, including Canada, net sales grew at 18.69%. So we also have to adjust for ASC 606. So there are some variabilities in that, and overall we haven't seen a slowing in sales.

There's just been some issues in certain countries, which we believe will correct themselves in the next few months..

Any abnormal inventory builds in any market that's worth pointing out to?.

No. Actually, there was inventory issues in the quarter, mainly in Europe, where unfortunately, there was insufficient production capacity to satisfy demand. They're having a very hot summer in Europe, as you know, and we've had some production challenges in Europe. So to the contrary, it's lower inventories rather than higher inventories..

Thank you. And our next question will come from the line of Mark Astrachan with Stifel. Your line is now open..

Yeah, hey, thanks, and good afternoon, guys..

Hi, Mark..

So just a quick follow up on the last one and then another question. In Asia, it sounded like that was a little bit weaker.

Maybe any sort of update on what's going on in China? Was there any sort of impact there from lapping the sell-in from a year ago? And then shifting to the U.S., just curious, anything you're seeing domestically? It looked like the trends, if I looked at it correctly, were a little bit below what the scanner data said consumption looked like, you said that online and on-track was doing well.

So I don't know, anything that you see there that may have explained the delta?.

Well, I think you'll always see a discrepancy between Nielsen and ourselves. And we've discussed this many times on various calls that we sell to our distributors. We also have some direct customers, but in the main, our sales go to our distributors. They sell to their customers, and their customers sell to retail.

So you'll always see the discrepancy between Nielsen, which is retail sales, and our own sales. And what I've always advised is the real test is not what we're selling, but the real test is what's coming off the shelves..

Yeah, with regard to China, we've just really focused on the top cities. There was probably a little bit of additional inventory in the pipeline and, with distributors from last year going into summer, which we needed to work through, and our distributors to work through because we didn't – in order to get them fresh inventory.

We've done it under the cap promotion this summer in China, which has done nicely, and we are slowly starting to build up some core repeat business and consumers focused on the modern trade in the top, I think, as we said, 40 cities. So it's a slow build. It's steady.

We are planning to launch Monster Ultra in China later this year and to roll it out again slowly. It won't be in all the business units initially. It will be in the business units where we feel they're able to handle it better. So we do have some plans to expand the product line with an additional launch next summer early in 2019.

We believe this is – it is sort of appropriate and necessary for us.

It'll help us, we think, get visibility for our brand on the shelves, which is one of the things we've referred to in earlier calls is it's been hard for us to have a smaller sized can and get recognized with a single can in stores, and particularly in Coke coolers where some of the Coke products have similar size cans.

So we believe that the additional products will continue to help build the brand. So we're pretty positive on the build in China, but it is going to be a long, slow build. But ultimately, we think that the brand is going to continue to do well, and as we've said, the new products we've done some initial taste tests of them.

They've been very well received. So we're pretty excited. The first product will be Ultra, and the next product will be our Mango Loco product for China..

Yeah, I think the only thing I would add to that, Mark, is that remember we were rolling out China last year. So there was a buildup of inventory gain to the system last year. And Japan was good in the quarter. Korea was good in the quarter. So overall, I think we were satisfied with the numbers bearing in mind the differences in various countries..

Okay. Thanks, guys..

Thank you..

Thank you. And our next question will come from the line of Nik Modi with RBC Capital Markets. Your line is now open..

Yeah, thanks, and good afternoon, everyone..

Hi, Nik..

Hi. A modeling question and then another question.

On modeling, can you just – I know you don't want to give guidance for margins, et cetera, but just to help us think about it going forward, can you just rank order the factors weighing on gross margins kind of most impactful to least just to give us a better understanding? Because I guess when we look at the P&L and we look at the year-ago compares, promotional allowances are always listed first when you talk about gross margin pressure, and I know we're going to start lapping some of the Java promotional dollars as you are getting it back on the shelf.

So that's the first question on gross margin. And then the second, the bigger picture question is, at the shareholder meeting, you talked about talking to the Coca-Cola Company about Mutant and potentially a new arrangement around that brand, and I just wanted to know if there is any progress there? Thanks..

Okay. Well, if I could just answer the first question. Remember on a previous call, I spoke about a personal view about margins what I felt about personally.

So if you go back to the number that I gave you then and you look at this quarter, you adjust for ASC 606, and you adjust for the issues that we have had to sustain in increased aluminum prices relating to increases in aluminum can purchases, you'll find that the number is just kind of within – is in that number.

So the margin adjusting for those two factors alone was just above 62%. So while we talk about promotional answers and that is a fact and, yes, promotional answers are up, and one of the big reasons for that is increased shelf costs and cooler placement fees.

There is a reduction in margin as we continue to sell products such as the coffee product, Muscle Monster, Caffé Monster that are lower than the Monster cold food products. And then added to that, you have the issue of international sales where the margins are not as high as the U.S. margins.

So I hope that's given you a good feel about the margin structure..

Only thing I would add on to the margins is in addition, there's also been a switch between the proportion between we have strategic brands which have concentrated models which have higher margins and Monster. And Monster is continuing to grow ahead of the strategic brand, so that continues to put some pressure on the margin as well.

So you take all those three factors on product mix, geographic mix, and mix between the actual product, the Monster versus strategic brands and that has had that effect..

So what I'm looking at here is that if you rank them in order, the point that Rodney mentioned was kind of at the bottom. So you've got all those other factors, plus you've got the strategic brands Monster percentages. And that should give you a full explanation to your question..

Very helpful.

And then on Mutant?.

On Mutant, we have not made progress with the Coke Company on a different model. We're sort of reevaluating Mutant. We think that Mutant in the U.S. is probably something that's – we're probably going to tailor off and sort of refocus our attention.

We're actually spending we think too much time and effort on the brand, and we just don't feel that that's where we would be best spent going forward. So I think that we're going to focus on newer products. We have some additional new product lines and some positioning in the Monster brand in the U.S. I think we're going to focus on that.

We will continue to – have regard to Mutant as I indicated earlier internationally as an energy brand and Predator depending on the different markets. But at this point, we just don't see the reward and payback for Mutant in the U.S., so that seems to be something that we're de-emphasizing and moving away from I think going forward..

Thank you. And our next question will come from the line of Andrea Teixeira with JPMorgan. Your line is now open..

Thank you, all. Hi. Good afternoon, there. I just wanted to actually explore a little bit more on the pricing, first of all, if you're seeing any signs of potential moves from your competitors? And then if you can kind of elaborate more if you're thinking of pricing also internationally.

I know the pressures from COGS are less so of aluminum, but perhaps because of some places where FX may be going the other way, it hasn't been the case of course for you guys, but if you see some room for international pricing as well. Thank you..

Well, we only really recently announced the pricing increase. Yeah, so we've really not really had any input back or heard anything back from our competitors. So we really can't give you much direction in that regard.

We believe that they are undoubtedly also facing the same price and cost increases that we have, so we would believe that they probably will follow similarly, but we don't have any indication on that..

And then internationally, as we've always advised, we are the smaller player in many international markets and we price according to the leading competitor. And we just have to ensure that we are priced correctly relative to that competitor to be able to capture a good share of the market.

So we would not lead – necessarily lead internationally without the lead competitor going first..

But that being said, with all of the uncertainty that's been happening in the world with the aluminum price and some other raw material price increases, we are keeping a watch in different countries.

And as and when there are price adjustments by leading brands and other competitors in those markets, we will react to that and obviously look at the opportunities as well individually for taking up pricing as and when we think that that's appropriate. But we are certainly focusing initially now on the U.S.

pricing, and then which is the largest impact on our business, and then we will look at – probably early in the New Year look at the international markets..

Thank you. And our next question comes from the line of Kevin Grundy with Jefferies. Your line is now open..

Thanks. Good evening, guys. I was hoping for a follow up on the pricing, and then maybe some commentary on India. The follow up on the pricing is just to what extent will the pricing that you announced cover the input cost inflation that you're seeing? Is it adequate to cover all of it? Is it a large portion of it? So commentary there would be helpful.

And then help me just building on sounds like a loose guidance or (42:46) your personal view before with the 62%. We've seen this with the presence of negative geographic mix, promotion, et cetera. So in theory, while those things will still be present to some degree, pricing has not been obviously.

So should we be thinking about something a little bit better than that 62% as we get into Q4 and then looking out to next year? And then, Rodney, a broader question on India. Maybe talk a little bit about sort of early indications there, and how you're defining success in that market? Thank you for all that..

Okay. So you're kind of getting greedy. The price increase should cover increases in input costs and the increases in freight. But who knows where they're going to go from there. I mean, today aluminum shot up again based on a number of factors. So as we sit here now, the pricing should contain our cost increases.

Will we get more? I don't know, and I honestly I wouldn't consider even discussing more on this call because it's just too premature..

If we increase pricing, I mean it's not going to have an effect through to us, certainly not in the current year. And then talking about India, we've had a controlled rollout, literally by city and surrounding region-by-region basis. It's gone well. We are seeing some good response.

There is a recognition of the brand from when we were there many years before when we did sort of rollout and we were in India. We had a very limited presence but the brand was there, so we are seeing some recognition of the brand, which is good sort of very different to China where we really obviously had no brand recognition while we've launched.

So it is different, and we are – but it really is premature. Hilton and I are both planning to go to India and review the markets and launch this ourselves personally within the next few months, but at this point it just is premature for us to comment on really what is happening there and how it's going.

We're getting some good anecdotal reports but that's not sufficient for us to be comfortable to give you a direction from the company at this point yet..

Okay. Thank you. Good luck..

Thank you..

Thank you. Ladies and gentlemen, this concludes our question-and-answer session for today. So now it's my pleasure to hand the conference back over to Mr. Rodney Sacks, Chairman and Chief Executive Officer, for closing comments and remarks..

Thanks, everyone. On behalf of the company, I'd like to thank everyone for their continued interest in the company. We continue to believe in the company and our strategy and remain committed to continuing to develop and differentiate our brands and expand the company both at home and abroad.

And in particular, to expand distribution of our products through the Coca-Cola bottling system internationally.

We are also particularly excited by the new opportunities that we have going through with our portfolio together with our strategic brands as well as Hydro, Mutant, and Predator in the affordable energy sector in many Eastern European, African, and other markets where that sector is continuing to show good growth opportunities.

Thank you very much for your attendance..

Ladies and gentlemen, thank you for your participation on today's conference. This does conclude our program, and we may all disconnect. Everybody have a wonderful day..