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

Amit Sharma - BMO Capital Markets (United States) Judy Hong - Goldman Sachs & Co. LLC Vivien Azer - Cowen & Co. LLC Mark Stiefel Astrachan - Stifel, Nicolaus & Co., Inc. William B. Chappell - SunTrust Robinson Humphrey, Inc..

Good day, ladies and gentlemen, and welcome to the Monster Beverage Corporation's Third Quarter 2018 Financial Results. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session and instructions will follow at that time. As a reminder, this call may be recorded.

I would now like to introduce your host for today's conference, Mr. Rodney Sacks, Chairman and Chief Executive Officer. You may begin..

Good afternoon, ladies and gentlemen. Thank you for attending this call. I am Rodney Sacks. Hilton Schlosberg, our last Vice Chairman and President, is with me today; as is Tom Kelly, our Senior Vice President of Finance.

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 August 9, 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 condensed consolidated statements of income and other information attached to the earnings release dated November 7, 2018.

A copy of this information is also available on our website at monsterbevcorp.com in the Financial Information section. There are encouraging signs in the beverage category globally, and we continue to see positive momentum in the energy category.

Net sales for the 2018 third quarter were negatively impacted by $11.6 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.

Gross and net sales for the three months ended September 30, 2018, were impacted by advance purchases made by our customers due to a pre-announced price increase effective November 1, 2018, on certain of our Monster Energy brand energy drinks.

The company estimates that impact to gross and net sales was approximately $18 million and $16 million, respectively. In the third quarter of 2018, net sales were $1.02 billion, up 11.7%, from $909.5 million in the third quarter of 2017. Without the adoption ASC 606, the percentage increase in net sales would have been 13%.

Net sales in the third quarter were negatively impacted by approximately $5.3 million of foreign currency movements. The company recorded third quarter gross sales of $1.18 billion, up 13.7%, from $1.04 billion in the third quarter of 2017.

Gross sales in the third quarter were negatively impacted by approximately $5.6 million of foreign currency movements. Gross profit, as a percentage of net sales, for the 2018 third quarter was 59.8%, compared with 62.6% in the 2017 third quarter. The gross profit percentage, as adjusted for ASC 606, would have been 60.3% for the quarter.

The decrease in gross profit, as a percentage of net sales, was primarily attributable to increases in certain import costs such as aluminum cans, freight in and other input costs; the $11.6 million of commissions accounted for as a reduction to net sales due to the adoption of ASC 606; an increase in promotional allowances as a percentage of gross sales; domestic product sales mix; and geographical gross profit mix.

Distribution costs, as a percentage of net sales, were 4.1% for the 2018 third quarter as compared to 3.2% in the 2017 third quarter, an increase of $12.8 million, largely due to higher carrier contract rates in the U.S. Selling expenses, as a percentage of net sales, were 11.2% compared to 12.7% in the same quarter a year ago.

General and administrative costs, as a percentage of net sales, were 11.1% as compared to 11.8% in the same quarter last year. Included in general and administrative costs were distributor termination expenses of $14.1 million for the 2018 third quarter, as compared with the $15.9 million in the comparable 2017 third quarter.

Excluding distributor termination expenses in both quarters, the comparable general and the administrative costs as a percentage of net sales were 9.7% in the third quarter of 2018 compared to 10.1% in the same quarter last year. In the quarter, payroll expenses, as a percentage of net sales, were 6.2% compared to 6.3% in the same period last year.

Payroll costs increased $5.9 million primarily due to head count growth both domestically and internationally.

Legal expenses relating to regulatory matters and litigation concerning the advertising, marketing, promotion, ingredients, usage, safety and sale of the company's products were $1.4 million in the 2018 third quarter, as compared to $2.9 million in the 2017 third quarter.

Operating income was adversely affected by losses in China of $2.9 million in the quarter. Our effective tax rate decreased from 31.9% in the 2017 third quarter to 21.8% in the 2018 third 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, and to a reduction in certain foreign income that is subject to U.S. taxation. The decrease was partially offset by the elimination of the domestic production deduction.

We anticipate that the effective tax rate will be higher in the fourth quarter. Net income was $267.7 million in the 2018 third quarter, compared to net income of $218.7 million in the 2017 third quarter, an increase of 22.4%.

The weighted average number of diluted shares outstanding decreased from 578.4 million for the third quarter of 2017 to 560 million for the third quarter of 2018 as a result of share repurchases, which I will cover later in this call.

Diluted earnings per share for the 2018 third quarter increased 26.4% to $0.48 from $0.38 in the third quarter of 2017. Excluding distributor termination expenses in the 2018 third quarter and in the comparable quarter last year, earnings per share would have increased 25.6% to $0.50 per share.

We continue to make good progress in the implementation of our strategic alignment with Coca-Cola bottlers globally. We are also making good progress in the U.S. in non-traditional channels, including foodservice accounts, e-commerce and home improvement stores.

In the third quarter of 2018, we completed the transition of Arkansas to Coca-Cola bottlers. This concludes the Anheuser-Busch distributor transition in the United States. In EMEA, we launched in Ukraine. Further launches are planned in the fourth quarter of 2018 and in the first quarter of 2019 in Azerbaijan and in Armenia.

Last week, we launched Predator in South Africa as our strategically preferred energy brand. And plan to launch Predator later in 2018 and in 2019 in select Eastern European and African markets. During the third quarter of 2018, we launched Monster in Ecuador. Paraguay and Bolivia are now on track to launch in the first quarter of 2019.

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 younger and more affluent consumer demographics. Our core range will expand its offering and appeal with the launch of Ultra White in the fourth quarter.

We continued the rollout of Monster to Coca-Cola India. We have now expanded the launch to 40 of the largest cities across the country. Monster is now selling in approximately 75% of the country, with national rollout expected by year-end.

Mutant energy, one of our affordable energy brands that we have positioned differently from the Mutant Super Soda previously sold in the U.S., was launched in Myanmar and Vietnam in the third quarter. Mutant energy is now available in Cambodia, Myanmar, Pakistan and Vietnam.

I wanted to take a moment to address one aspect of our agreement with Coca-Cola. Among other provisions, these agreements between the company, Coca-Cola and certain affiliates restrict Coca-Cola from competing in the energy drink category with certain exceptions.

As some of you may have read, Coca-Cola has developed two energy products it believes it may market under an exception relating to the Coca-Cola brand. We believe that the exception does not apply. While mutual agreement to obtain clarification, the issue was submitted to arbitration last week on October 31, 2018.

Coca-Cola has indicated that it has suspended the proposed launch of such energy products until April 2019.

According to the Nielsen reports for the 13 weeks through September 29, 2018, for all outlets combined, namely convenience, grocery, drug, mass merchandisers, sales in dollars in the energy drink category, including energy shots, increased by 6.6% versus the same period a year ago.

Sales of Monster grew 10% in the 13-week period, while sales of NOS increased 4.8% and sales of Full Throttle decreased 1.4%. Sales of Red Bull increased 4.8%, sales of Rockstar decreased by 7.9%, sales of 5-Hour decreased 3.9%, and sales of Amp decreased 24.6%.

According to Nielsen, for the five weeks ended September 29, 2018, sales in the convenience and gas channel, including energy shots, in dollars, increased 5.1% over the same period last year. Sales of Monster increased by 8.8% over the same period last year, while NOS was up 2.7% and Full Throttle was up 0.4%.

Sales of Red Bull were up 2%, Rockstar was down 12%, 5-Hour was down 6.6%, and Amp was down 29.2%.

According to Nielsen, for the five weeks ended September 29, 2018, Monster's market share of the energy drink category in the convenience and gas channel, including energy shots, in dollars increased by 1.3 points over the same period last year to 38.1%.

NOS's share declined 0.1 of a share point to 4%, and Full Throttle's share remained the same at 0.9%. Red Bull's share decreased 1.0 points to 33.7%, Rockstar's share was down 1.3 points to 6.6%, 5-Hour's share was lower by 0.9 of a point at 7%, and Amp's share decreased 0.3 of a point to 0.7%.

According to Nielsen, for the five weeks ended September 29, 2018, sales of coffee plus energy drinks, which now include Caffé Monster and Espresso Monster in dollars in the convenience and gas channel increased 18.8% over the same period last year.

Sales of our Java Monster alone was 17.1% higher than in the same period last year, while sales of Starbucks Doubleshot Energy were 2.5% lower.

Our share of the coffee plus energy category, which includes Java Monster, Caffé Monster, Espresso Monster, Starbucks Doubleshot and Rockstar Roasted for the five weeks ended September 29, 2018, was 56.3%, up 9.6 points.

Java Monster's share alone for the five weeks ended September 29, 2018, was 46.1%, down 0.7 of a point, while Starbucks Doubleshot Energy share was 43.6%, down 9.5 points. According to Nielsen, in the convenience and gas channel in Canada for the 12 weeks ended September 15, 2018, the energy drink category increased 6% in dollars.

Monster sales increased 12% versus a year ago. Monster's market share increased 1.5 share points to 33.9%. NOS's sales decreased 9%, and its market share decreased 0.4 of a share point to 3%. Full Throttle's sales increased 10% and its market share remained at 1.4%. Red Bull's sales increased 7% and its market share increased 0.5 of a point to 37.8%.

Rockstar's sales decreased 4% and its market share decreased 1.4 points to 14.9%. According to Nielsen, for all outlets combined in Mexico, the energy drink category drew 30.6% during the month of September 2018. Monster sales increased 34.5%. Our market share in value increased 0.9 of a point to 29.9% against the comparable period last year.

Sales of Burn were flat. Burn's market share decreased 0.5 of a point to 1.6%. Red Bull's sales increased 2.9% and its market share decreased by 2.4 points to 9%. Vive 100 sales increased 27.6% and its market share decreased for 0.9 of a point to 37.2%, while Boost's market share decreased 1.2 points 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 significant impact on the monthly Nielsen statistics for Mexico.

I'd like to point out that 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 October 2018, Monster's retail market share in value as compared to the same period last year grew from 11.4% to 12.4% in Belgium; from 22.8% to 23.3% in France; from 18.4% to 20.9% in Great Britain; from 6.4% to 7.1% in the Netherlands; from 15.3% to 18% in Norway; from 27.5% to 29.3% in Spain; and from 10.3% to 13.6% in Sweden.

According to Nielsen, in the 13-week period ending September 2018, Monster's retail market share in value, as compared to the same period last year, grew from 12.4% to 14.4% in the Czech Republic; from 15.4% to 16.4% in Germany; from 33.6% to 34.5% in Greece; from 13.2% to 17% in Italy; and from 7.3% to 10.7% in Poland.

According to Nielsen, in the 13-week period ending August, Monster's retail market share in value, as compared to the same period last year, grew from 13.4% to 14.7% in Ireland.

For the 13-week period ended September 2018, Monster's retail market share in value decreased, however, from 15.6% to 15.3% in South Africa, although the value of sales increased in the same comparative period.

According to Nielsen, for the month of September 2018 in Chile, Monster's retail market share and value increased from 30.8% to 34.5% compared to the same period last year. According to Nielsen, in Brazil, Monster's retail market share for the month of September increased from 13.7% to 16.9% as compared to the same period last year.

We launched Argentina in mid-February 2018. According to Nielsen, Argentina reached a 13.8% market share in value as of September 2018. According to IRI in Australia, Monster's market share in value increased from 7.4% to 8.9% in September 2018, as compared to the same period last year.

Mother's market share in value increased from 12.9% to 13.5% in September 2018, as compared to the same period last year. According to IRI in New Zealand, Monster's market share in value for the last four weeks ending September 30, 2018, increased from 6.4% to 6.8%, as compared to the same period last year.

Lift Plus market share in value decreased from 9.7% to 8.8%; and Mother's market share in value decreased from 6.3% to 5.7%. According to Nielsen in South Korea, Monster's market share in value in all outlets combined grew from 24.9% to 38.4% in the third 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 44.9% to 48.9% in the third 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 those months.

Net sales of the Monster Energy Drinks segment for the third quarter of 2018 increased 13% from $827.7 million to $935.1 million in the comparable period last year. Net sales for the Monster Energy Drinks segment in the 2018 third quarter were negatively impacted by $5.3 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 13.6%. Net sales for the Monster Energy Drinks segment in the third quarter of 2018 were negatively impacted by approximately $3.9 million of foreign currency movements.

Net sales for the Strategic Brands segment were $74.4 million for the third quarter, as compared to $76.6 million in the same quarter last year. Net sales for the Strategic Brands segment for the third quarter of 2018 were negatively impacted by $6.3 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 5.5%. Net sales for the company's Strategic Brands segment in the third quarter of 2018 were negatively impacted by approximately $1.4 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 third quarter, as compared to $5.2 million in the same quarter last year. Net sales to customers outside the U.S. were $283 million in the 2018 third quarter, compared to $260.1 million in the corresponding quarter in 2017.

Foreign exchange had the effect of decreasing net sales in U.S. dollars by approximately $5.3 million. Included in reported geographic sales are our sales to the company's military customers, which are delivered in the U.S. and trans-shipped to the military and their customers overseas.

In EMEA, we had a challenging quarter with supply chain and production issues, which not only affected our sales, but also resulted in a number of out-of-stocks and cancellations of orders from the retail trade in certain countries in EMEA. As mentioned earlier, our Nielsen growth rates and market share continues to be strong in the territory.

We are continuing to address these supply chain and production issues. In EMEA, net sales in the third quarter increased marginally in dollars and increased 0.6% in local currencies over the same period last year. Without the adoption of ASC 606, the percentage increase in net sales would have been 4.8% in dollars and 5.3% in local currencies.

Gross profit in this region, as a percentage of net sales, for the quarter was 41.3%, compared to 50.9% in the same quarter last year. Without the adoption of ASC 606, gross profit, as a percentage of net sales, would have been 44% for the third quarter.

Gross profit in the region was also impacted by a higher percentage of Monster sales, relative to sales of concentrates for our Strategic Brands in the region. We estimate that net sales in the quarter in dollars, without the adoption of ASC 606, were adversely affected by approximately 11% due to supply chain and production issues.

We are pleased with the rollout of additional SKUs in the Ultra range in EMEA markets. In the third quarter of 2018, we introduced Ultra Citron in Italy and Poland, Ultra White in Macedonia, and Ultra Violet in Sweden. 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, France, Germany, Great Britain, Greece, Ireland, Italy, the Netherlands, Norway, Poland, Spain and Sweden. In Asia-Pacific, net sales in the third quarter increased 27.2% in dollars and 28.3% in local currencies over the same period last year.

Without the adoption of ASC 606, the percentage increase in net sales would have been 29.6% in dollars and 30.7% in local currencies. Gross profit in this region, as a percentage of net sales, was 44.1% versus 46.5% over the same period last year. Without the adoption of ASC 606, gross profit as a percentage of net sales would've been 45.1%.

The decrease in the gross profit percentage was also impacted by a higher percentage of Monster sales, relative to concentrate sales of our Strategic Brands. In Japan, net sales in the quarter increased 17.4% in dollars and 17.1% in local currency.

In South Korea, net sales increased 155.7% in dollars and 151.2% 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 21.4% in dollars and 27.5% in local currencies as compared to the same quarter last year.

In Latin America, including Mexico and the Caribbean, net sales in the third quarter increased 20.5% in dollars and 32.5% in local currencies over the same period last year. Without the adoption of ASC 606, the percentage increase in net sales would've been 23.4% in dollars and 35.4% in local currencies.

Gross profit in this region, as a percentage of net sales was 44%, versus 47.6% over the same period last year. Without the adoption of ASC 606, gross profit as a percentage of net sales would've been 45.3%. Net sales in Brazil in the quarter increased by 31.6% in dollars and 57.2% in local currency.

Net sales in Brazil were impacted by ASC 606 and higher taxes on sales. Net sales in Chile decreased 16.2% in dollars and 16.4% in local currency in the quarter, largely due to supply issues. Turning to the balance sheet. Cash and cash equivalents amounted to $713.7 million, compared $528.6 million at December 31, 2017.

Short-term investments were $457.9 million, compared to $672.9 million at December 31, 2017. Long-term investments were $1.6 million, compared to $2.4 million at December 31, 2017. Net accounts receivable increased to $620.2 million at September 30, 2018, from $449.5 million at December 31, 2017.

Days outstanding for accounts receivable were 47.6 days at September 30, 2018. Inventories increased to $262.1 million from $255.7 million at December 31, 2017. Average days of inventory were 57.7 days at September 30, 2018, compared 75 days at December 31, 2017.

In the third quarter of 2018, we launched Pacific Punch, a line extension of our Juice Monster family in the U.S. Initial results have been positive. In Canada in the third quarter of 2018, we launch Mango Loco nationally.

In Mexico in the third quarter of 2018, we launched our Lewis Hamilton Monster Energy Drink and also re-launched Monster Energy Khaos. In the third quarter of 2018, we launched our Lewis Hamilton Monster Energy Drinks in Romania and Finland and launched Monster Pipeline Punch in Sweden.

We also launched Monster Mixed Punch (00:27:51) in Croatia, Estonia, Latvia, Lithuania and Slovenia; Monster Hydro in 550 ml PET bottles in Australia; and Monster Mango Loco in Germany..

Austria..

Sorry, PET bottles in Austria and Monster Mango Loco in Germany. Sorry, thank you. In Australia, in the third quarter of 2018, we launched Monster Mango Loco and are in the process of launching Monster Pipeline Punch with a major convenience and gas retailer in Australia with a national launch planned for the first quarter of 2019.

In October 2018, we launched both Monster Mango Loco and Monster Pipeline Punch in New Zealand. During the quarter, and in line with our agreement with The Coca-Cola Company, we transitioned the Lift Plus strategic brand in New Zealand to LIVE+ with three SKUs and new graphics.

In the third quarter of 2018, we launched Monster Ultra Citron in South Korea and Monster Ultra in Taiwan and Hong Kong. We've implemented an approximately 4% price increase to our U.S. customers, effective November 1 for Monster Energy. We will implement a price increase for NOS and Full Throttle on January 1, 2019.

We're planning a price increase to our Canadian customers, effective February 1, 2019, for Monster Energy, NOS and Full Throttle. We estimate that October 2018 gross sales to be approximately 18% higher than in October 2017.

Gross sales for the month ended October 2018 were impacted by advance purchases by our customers due to the price increase, effective November 1, 2018, on certain Monster Energy drinks. We estimate that October 2018 gross sales would've been approximately 12% higher than in October 2017 without these advance purchases.

On a foreign currency adjusted basis, October 2018 gross sales would've been approximately 14% higher than the comparable October 2017 gross sales.

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 days 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 regarded as indicative of results for a full quarter or any other future period. No shares of common stock were repurchased by the company during the 2018 third quarter.

However, we do have outstanding board authorizations of approximately $696.7 million for the repurchase of our common stock. In conclusion, I'd like to summarize some recent positive points. The company continues to gain market share in the U.S. and many countries.

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. The new additions to the Monster family continue to add to the company's sales.

We're excited about the prospects for our brands and our new product launches. We are pleased with our performance in our international markets and reiterate the growth potential for us in China and India. We are continuing to launch Monster Energy Drinks with Coca-Cola bottlers in certain markets.

I would like to open the floor to questions about the quarter. Thank you..

Thank you. Due to time limitations, we ask that you keep your questions to one only. Our first question comes from Amit Sharma with BMO Capital Markets. Your line is open..

Hi. Good evening, everyone..

Hi, Amit..

Hi, Amit..

Rodney, can you provide a little bit more context into the energy drink brands being developed by Coca-Cola? How far along are they or any other information on it, please?.

I think that we have some information, but we don't have full information. And I think that now that an arbitration has been filed between us to try and determine our respective rights, we just believe that it isn't appropriate for us to provide additional comments at this time.

Our commercial business activities and relationship is continuing as in the past, and we are looking to just get a third-party determination for the correct interpretation of our respective rights..

Thank you. Our next question comes from Judy Hong with Goldman Sachs. Your line is open..

Thanks. Hi, everyone..

Hi, Judy..

Hi, Judy..

So, Rodney, just as a follow-up, just a quick follow-up on the last question. I mean, maybe if you could take a little bit of a step back and just kind of give your perspective on the relationship that's been evolving with The Coca-Cola Company. Obviously, the Mutant situation didn't also go as well as I think that you were hoping for.

So kind of how do you see this changing your relationship with the KO, as well as the bottlers? So maybe just be helpful to just get your broader perspective. And then, more specifically, my other question is just really on the EMEA supply chain issues.

I'm just wondering if this is limited to certain countries or this is really a broader regional issue. And whether this is being addressed as we speak, so we get more of a bump up in sales in the fourth quarter? It seems like we've been having some of these supply chain issues in international markets time-to-time.

So how do we think about really more fully addressing the issue broadly? Thank you..

That's a lot for one question, Judy..

A follow-up, one was a follow-up..

Okay. On the relationship with Coke, I think our relationship is good and continues to be good. There is Coke, obviously, looking at their own portfolio and looking for where they believe they see opportunities and where their own BUs would look to expand their own portfolio.

As we indicated in the call, there is an exception for certain products that are in the Coca-Cola brand and that is of itself an area that we are looking at. We have a difference of opinion on it.

We don't know and at this point we don't think it's appropriate for us to speculate on if that comes to fruition, what effect that might or might not have on our brand. I mean, we continue to be partners with Coca-Cola and with the bottlers. We continue to have our full range sold by them.

And we just don't think that at this point we'd be in a position or should be in a position to speculate on what effect that might happen. There will just be another product being sold by Coca-Cola bottlers, but the impact and effect on us would be something I think wouldn't be appropriate for us to deal with that.

We don't believe it will have a majority impact on our relationship. We just believe we'll have to manage it in an appropriate way if and when it occurs. On the EMEA supply chain side, I think....

Sorry, Rodney. Maybe I could give a different perspective to Judy or a similar perspective..

Sure..

The relationship with The Coca-Cola Company, I believe, is good. And I'm not a lawyer, so I'm giving the response to you from a business perspective. There is an issue in an agreement, which we've agreed to go to arbitration civilly and determine what course of action is appropriate. So nothing has changed in the relationship.

And the manner in which this situation will be dealt with will be conducted from both parties on a civil basis according to the agreement. So I honestly don't see any changes in the relationship with The Coca-Cola Company..

Sure. All right. On the EMEA supply chain side, it affected us through a number of plants in different areas, not obviously right through all of the – there are probably 70 or 80 countries that comprise EMEA, but there were a number of countries and a number of plants that did have supply issues for a whole host of reasons.

We've taken steps to address this. We had a period of time when our previous Senior VP of Operations retired and we were looking for a successor. We have appointed a successor who is – he has got his feet on this desk and he's in the job, he's been out in Europe.

We have also appointed a new VP of Operations in Europe to give us more hands on deck there. And so, we are looking at getting our hands around it. We are in the process of doing it at this point in time.

Perhaps if you'd like to add some color to that?.

No, I think that we've had issues. Remember, it was a very hot summer in Europe and a lot of the plants were working to capacity and beyond capacity. We've had certain issues, which are being addressed and will be addressed going forward. And the one thing is clear is that our business is growing, which is a good thing.

And we have to ensure that we have sufficient capacity and sufficient plants to be able to accommodate our needs..

Thanks..

Thank you. Our next question comes from Vivien Azer with Cowen. Your line is open..

Hi. Good evening..

Hi..

So I was hoping to talk about your U.S. business and specifically the trends for your core Green Monster, where, at least in the Nielsen scanner data that we have, it does appear that there has been a modest softening in terms of the market share declines.

So can you offer any color on whether there has been a change in your promotional strategy heading into the price increase or is this more interaction with new product offerings that are hitting the market? Any color there would be helpful. Thank you..

If I'm looking at the general market, Monster is continuing to increase its share. The category is growing and Monster is growing in excess of the market. If I look at regular Monster as such, I'm just looking, for example, at the main channel, which is convenience, there is still some growth in Monster in the original core line in its 16-ounce.

And then, obviously, we have additional SKUs with the original Green Monster. So the core brand is continuing to grow.

There has been the entry into the market of additional products, primarily probably in what we would maybe call or describe as a performance energy category or a workout fitness energy category or not even really maybe in that category. And there is some sales on that.

There are a number of reasons that those products are all sort of starting to gain some traction. But if I look at the sales levels, they are still behind the increase in sales. So I think, overall, we are getting additional products in the category, but the category itself is continuing to grow..

So we're still seeing growth, Vivien, in Monster Green. It's continuing to grow. And remember, we've added a number of other SKUs into the portfolio on both juice products and the Ultra range, which is the no-sugar product. So while we are seeing growth in Monster Green, there has been as well the proliferation of other SKUs within our portfolio..

Yes. In that side, obviously on the coffee side, we are continuing to see growth in Java. We've just launched a line extension in Java. We have the Caffé Monster line and Espresso Monster again, that has continued to grow.

On the Ultra line, which is growing, we do have plans to launch an additional Ultra in the spring, which will be launched, which is Ultra Paradise. So we are all continuing to see growth in the category. And we see additional entrants probably to some extent.

We are not sure of the exact measurement at this point in time, but do see some increase in incremental sales coming into the category from these new entrants..

And Monster Green does remain a very important barometer for us..

Thank you. Our next question comes from Mark Astrachan with Stifel. Your line is open..

Yes. Hey. Good afternoon, guys..

Hi, Mark..

So I'm going to try the Coke thing again. You can answer or not, I guess. My understanding of the exceptions relate to the specific products or specific ingredients which is in there.

So are we talking about a product in similarity to, say, a Kickstart from the Pepsi system, where it's effectively sort of a competitor, but not really? Are they adding some sort of caffeine component to some other beverage, which is a non-carbonated soft drink? I mean, any sort of color you can give on that, that would be helpful..

Mark, there isn't a limitation on them just adding caffeine. They could have a higher caffeine product, there's no limitation on that. There is, if you look at the agreement, which is filed, there are certain ingredients that are, if used in combination, obviously then create a definition. And there is a definition of what an energy drink is.

The exception goes back to the Coca-Cola brand, not Sprite, not Kickstart, not any other brand, it's the Coca-Cola brand. And there are certain exceptions about what – because the Coke brand has certain – otherwise there would be certain limitations. And there is an exception for that brand. But I think that it's a long explanation.

There are different analyses of what that means and what that entitles Coke to do under that brand. Again, if it was just a question of adding vitamins, well, then Coke would obviously add vitamins. There isn't an issue with that.

But where the brand transcends into a product that we see positioned as an energy drink, that's where we have a difference of view on the exception and under the Coke brand. That is really where we are. I think there is not much more we could really add or more color we could give at this point in time.

There is a section in the agreement that you guys could look up if you really had that interest. But we are dealing with it with Coke. And we think we will come to a resolution reasonably quickly as to what that exception means and how it should be implemented..

And just to add on that, Mark, what I said earlier, the discussions are very civil and very business-like, very civil. And it's a question of difference of opinion, which will be resolved in per the agreement..

Thank you. Our next question comes from Bill Chappell with SunTrust. Your line is open..

Thanks. Good afternoon..

Afternoon, Bill..

Just a little bit further on the gross margin, but for kind of the quarter and then going forward with pricing.

Trying to understand, as we look, will this more than offset – I mean, can you hold gross margins relatively flat going forward? And when I say that, have we seen the full impact of costs in the third quarter? Or do you still have another kind of layer or step-up of cost input inflation that kicks in fourth quarter and 2019?.

Well, what's interesting looking at aluminum and the tariffs and the imposition of tariffs were announced way after we had our discussion on this call about gross margins. So we've had this increase in tariff, which has resulted in increase of aluminum, which is slowly coming off, right? It's a very slow process.

So we've also had extreme increases in freight-in in costs that we account for cost of sales, where product is moved to our co-packers or moved to our warehouses. That's all included in cost of sales. So we have had significant cost increases in that regard as well. So we have these cost increases.

I think that the quarter that we've just experienced, I'm not seeing further increases in aluminum and I'm not seeing further increases in freight either, but anything is possible. Having said that, we will have price increase from November 1.

And the other thing for sure is we will continue to have this ASC 606 adjustment, which we didn't have when we first spoke about the gross margin issue earlier this year. So it's kind of a mixed bag, with increases and cost increases, which is exactly why we were forced into having a price increase. So – but I hope that answers your question..

Yeah.

I think I understand, but I guess it's more of, do you see any need for further price increases from here?.

Well, we've announced a price increase in NOS and Full Throttle, which we spoke about on the call. We are proposing a price increase in Canada, which we discussed on the call.

And where we are now with regard to price increases, I'm not sure we will – having implementing a price increase in November 1, I'm not sure there is runway to do it again within a short period of time unless costs dramatically and significantly increase from where they are today..

Yeah. At this point, we haven't sort of envisaged price increases in other places around the world, but I think that is something we will be evaluating and looking at the markets, the elasticity where we – if we can justify pricing. We'll evaluate that going early in the new year..

See, in the United States, we really are now the market leader. In the various countries around the world, we really price ourselves after Red Bull in most cases. And we don't want the difference between our pricing and Red Bull's pricing to be significantly out of whack..

Yes. Thanks.

Next question?.

Thank you. Thank you. That ends our Q&A session for today's call. I would now like to turn the call back over to Mr. Sacks for any further remarks..

Thank you. On behalf of the company, we'd like to thank everyone for their continued interest.

We continue to believe in the company and our 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 to expand distribution of our products through the Coca-Cola bottling system internationally.

We also particularly excited by the new opportunities we have going forward with a portfolio of energy drink products throughout the world, comprised of our Monster Energy brand together with our Strategic Brands, as well as Hydro, Mutant and, in particular, Predator. Thank you very much for your attendance..

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