Good day, and welcome to the Monster Beverage Company Second Quarter 2021 Conference Call. All participants will be in a listen-only mode. [Operator Instructions] After today’s presentation, there will be an opportunity to ask questions. [Operator Instructions] Please note that this event is being recorded.

I would now like to turn the conference over to Rodney Sacks, Co-CEO, to begin the call. Please go ahead..

Good afternoon, ladies and gentlemen. Thank you for attending this call. I’m Rodney Sacks. Hilton Schlosberg, our Vice Chairman and Co-Chief Executive Officer, is on the call; as is Tom Kelly, our Chief Financial Officer. Tom Kelly will now read our cautionary statement..

Before we begin, I would like to remind listeners that certain statements made during this call may constitute forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Act of 1934, as amended, and are based on currently available information regarding the expectations of management with respect to revenues, profitability, future business, future events, financial performance and trends, as well as the future impact of the COVID-19 pandemic on the company’s business and operations.

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, 2021, 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. I would now like to hand the call over to Rodney Sacks..

Monster Punch Papillon and Monster Punch Khaotic, both in a 473 ml can. In April 2021, we launched Reign Orange Dreamsicle in Puerto Rico and our second SKU in Bolivia with Monster Energy Zero Ultra. In El Salvador, we launched Fury Mean Green in May 2021.

In the second quarter of 2021, we launched Juice Monster Pacific Punch and Monarch in a number of countries in EMEA. We also launched Ultra Paradise and Ultra Fiesta in a number of countries during the quarter. During the quarter, we also launched our strategic brand innovation and Predator in additional countries.

In January 2021, we launched Ultra Rosa market-wide in Australia, following an exclusive lead launch with one chain in the fourth quarter of 2020. In March 2021 in New Zealand, we launched Monster Superfuel in both Purple Passion and sugar-free flavors.

During the 2021 second quarter in Japan, we launched Monster Energy Super Cola with our distributor, Asahi Soft Drinks. Additionally, we effected the relaunch at retail of Ultra Paradise and began shipments in anticipation of the launch of Super Fuel early in the 2021 third quarter. Super Fuel has just gone on the shelves in Japan this week.

We also launched Mango Loco in Korea in July 2021. During the 2021 second quarter, we launched Pipeline Punch in Taiwan, Hong Kong and Macau. We also began distribution of Monster Energy Zero Sugar in the Philippines.

As previously mentioned, in the second quarter of 2021, in China, we extended the national rollout of our new Monster Dragon Gold, which is non-carbonated. Our national summer on-pack promotion began in May with one of China’s top consumer ambassadors.

As a result of the COVID-19 pandemic, certain of our planned launches and innovation of new products in a number of Asia-Pacific markets have been deferred for a few months. However, we still anticipate such launches taking place toward the end of the 2021 calendar year.

We are planning to launch a number of additional products and product lines in our domestic and international markets later this year. We estimate that July 2021 sales to be approximately 1.8% higher than in July 2020. On a foreign currency adjusted basis, July 2021 sales would have been comparable to the July 2020 sales.

July 2021 had one less selling day than July 2020, which was 15.8% above July 2019, and which was 17.1% higher on a foreign currency adjusted basis. Certain production facilities, mainly from the Coke bottlers in EMEA, in particular, delayed production from July to August 2021.

Furthermore, as mentioned earlier, the company has not been able to fully satisfy demand in the United States and EMEA due to a shortage of aluminum cans, which adversely impacted July sales. Such shortage was exacerbated in July as can availability did not keep pace with increased demand during the summer months.

Additional cans have been sourced from domestic and overseas suppliers with expected deliveries increasing sequentially during the latter half of the year. We are working to replenish system inventories in order to meet customer demand as soon as possible. Additionally, the company also experienced delays in certain ingredients, which impacted supply.

Our depletions remain solid as do our measured market data, as previously mentioned on this call.

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 for, 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 should not necessarily be imputed to or regarded as indicative of results for a full quarter or any future period. If the COVID-19 pandemic and related unfavorable economic conditions continue in certain regions, our new product innovation launches in those regions could be delayed.

In conclusion, I would like to summarize some recent positive points. Currently, the company’s flavor manufacturing facilities, its co-packers, warehouses, and shipment facilities, and bottlers and distributors are all operating.

We are continually addressing our aluminum can requirements, given our volume growth and the current supply constraints in the aluminum can industry. We are pleased with the new additions to the Monster Energy portfolio and are planning additional launches later in the year.

We are planning to continue additional launches of our Reign Total Body Fuel high-performance energy drinks in additional international countries. We are pleased with the rollout of Predator and Fury and our affordable energy drink portfolio internationally.

We are proceeding with plans to launch our affordable energy drinks in a number of international countries during the year. I would like to open the floor to questions about the quarter. Thank you..

Thank you. We will now begin the question-and-answer session. [Operator Instructions] The first question will come from Dara Mohsenian with Morgan Stanley. Please go ahead..

Hey, guys..

Hey, Dara..

Great top line growth in the quarter, but we have seen share losses in U.S. track channel data worsened recently.

A, just short-term, how much of that do you think is attributable to out of stocks and the supply constraints that you mentioned? Is that a material factor in retail sales? And then maybe, B, from a longer-term standpoint, it has been a couple of quarters now where the share losses have reaccelerated year-over-year, just some progress in the beginning of the year.

So, I was just hoping you could review some of the key factors that have been driving the share losses in the U.S.? And how you think about those factors going forward in terms of continuing or dissipating and how you guys are positioned? Thanks..

Hilton, if you take that, and I’ll also say something once you’ve….

All right. I think, Dara, what’s important is that, that’s not a result and not due to us not growing. We are not keeping up with our share, but our business is certainly growing. And you can track that from Nielsen. You can also track that from the non-measured channels, which are growing really very nicely.

So while we’re not keeping up necessarily with Red Bull in the major channels. As I’ve spoken on previous calls, Red Bull had a very large on-premise business, which has moved to off-premise and moved to off-premise during COVID. And that led to an acceleration in their share.

However, we mentioned that we had and are continuing to sustain can issues and result in supply. And of course, that’s having an impact on the share numbers that you are seeing. So I think on balance, the business is growing. You’ve seen the results. It’s continuing to grow. And we are growing, but not at the extent of the market.

I think with the full deck of cards, the situation may well be very different. But right now, we really are struggling with sufficient supplies of aluminum cans really to keep up with demand, which is, I suppose, a good position to be in. And on the other hand, is not such a good position to be in. The business is growing.

And, that’s the message I want to leave you with and other investors..

I think in – I’ll just add two short points in that regard. I think what we’ve tried to do is to try and also basically focus on our faster selling and our larger SKUs, which has necessarily resulted in some of the smaller SKUs, which normally have their own traction and followers. So those haven’t got on to shelf.

And then the one additional thing that I think that has negatively affected our distribution sales and distribution levels in the U.S. is labor shortages. And I think that what we’ve seen is that many of the bottlers, Coke bottlers are experiencing labor shortages. And while one would ordinarily say, well, everybody is going to have the same problem.

I think that where you have Red Bull is our main competitor, they have a dedicated system. I think they’ve been able to address their labor shortages just more effectively than the larger bottlers with large labor pools. And that has also, I think, detrimentally affected our distribution levels going forward.

But again, I think those are things that once things start settling down and things will get back to normality, that’s something that I think that will also, in due course, right itself..

Yes, I think we should also – Dara, I think we should also add that what we’re seeing with cans is something that will persist through this year. I’m a bit more optimistic about the fourth quarter because we have two new can suppliers coming on board. But the situation will persist.

And then make sure, we should be in – we believe we’ll be in very good shape. But again, it all depends on consumer demand, which is growing, and you’ve seen that month-by-month and quarter-by-quarter..

And the next question today will come from Bonnie Herzog with Goldman Sachs. Please go ahead..

Thank you. Hi, everyone. I just wanted to ask about your gross margins. Clearly, they continue to be pressured as broadly expected, which you guys have been discussing with us. But just want to get your outlook for these pressures in the back half of the year? Hilton, you just mentioned that you’re optimistic.

So just wanted to verify that you still expect some of these pressures to ease by Q4? Or do you think it’s going to take a little bit longer, especially in light of the recent spike in aluminum prices.

So trying to understand how that factors in? And then just a clarification on the can shortages that you mentioned that you’re still experiencing, I guess, it sounds like it’s getting worse, but I really did want to clarify that.

And is there any way that you guys could quantify how big of an impact the supply shortages had on your top-line either in the quarter or in July? Just trying to understand how much you think your shipments would have been up in July without these shortages, for instance? Thanks..

Okay. So let me deal with the first issue first, if I may. I spoke about optimistic about can supplies. I really didn’t talk about margins. You’ll recall on the last call, I spoke about the issues that we were confronting with margin pressures like most other beverage companies. And where we are right now with aluminum, I mean, nobody knows.

So you can talk to the leading banks in the field, which we do on a regular basis, and they really are pulls apart about their projections for aluminum in 2022, let alone 2021. So the last couple of days, you’ve seen a spike in the Midwest premium from this tax that is expected to be imposed on Russian aluminum.

And as you know, the Midwest premium is strongly factors the last ton of aluminum to enter the U.S. and the cost of that. And so we’ve seen a spike in the Midwest premium. And we continue to see spikes in aluminum. So from that score, I think we just are in uncharted territory.

I’ve been in this business for a long time, as you know, and I’ve never seen aluminum where it’s at right now. And I’ve never seen the Midwest premium at these kind of levels. So aluminum, I really cannot talk about.

And also when you look at our business and you look at the factors that really have affected gross margin, number one, the fact that we’re selling a lot more internationally. So I talked earlier about 37.4% of our sales in the quarter outside of the U.S. 30% last year, that obviously impacts margins.

We are importing cans from a number of countries that obviously impacts margins. In fact, the China and India cans that we are using in the United States and in EMEA will only be filed in August and July, and they will be filled this month, so that in itself, the imputation will impact gross margins.

And then to cap everything else, we have ingredient issues. We had ingredient issues, as we mentioned, in July, which again reduced the amount that we would actually sell because we didn’t have sufficient ingredients to meet themselves, particularly with NOS. And so there are a number of factors that are increasing our cost of goods.

And last quarter, I said I didn’t think that margins would get better in the second and third quarters. I read they will not – I think margins will deteriorate in the third quarter. In the fourth quarter, we’re getting some relief in terms of supplies from the U.S. on cans that are – have been contracted for and they were contracted for two years ago.

And we saw the opportunity to work with two major suppliers to get additional cans produced in the U.S., and that’s why we have two new supplies opening, and we are an important and an anchor customer of both those facilities. But even that, you’re still dependent on aluminum.

We have some hedges in place, but obviously not enough to take into consideration the amount of sales and the amount of consumer demand that is out there. So that’s a long-winded way of saying, I think, answering your question and as best as I can.

And then just getting to your second question, because you’re really only allowed one, but to get to your second question, we have quantified or try to quantify the impact on can shortages in July and in this quarter and in the – potentially in the third quarter, but I really don’t want to – I’m not comfortable with those numbers yet.

A lot of detailed work is being done on them. And I just – I can’t in good contents give those numbers because we still are in the throes of kind of finalizing what we think is probably correct. Rodney mentioned in his script earlier that a number of the bottlers, he mentioned particularly in EMEA, but there were cases in the U.S.

as well, and there was a substantial case in the U.S. where the bottlers were obviously focused on other things in the quarter and were producing Coca-Cola brands.

And as a result, I think we – our production got moved from July to August, so when I look at July, it doesn’t – I don’t get overly concerned because I know the sales are going into August..

Perhaps, if I just on the shortage level, just to add that when we buy cans in contracted for our annual amount, they usually are sort of reasonably flat line across the year. And we used the first half of the year to build up can inventories and finished product inventories with ourselves and our bottlers.

Earlier this year, obviously, demand sort of was strong, and so we really didn’t have that opportunity. So what has happened is that in June and July, which is your normal peak months, the demand has been higher, but our supply has been more level until we can get more can inventories into the market.

So what happened is just that we have had a sort of a heartened increased shortage in the last month and July and probably will be a little bit in August.

And then obviously, as we start increasing our – the cans we’re getting in, and then we’re able to balance it more and our demand balances more, we’ll start to have less of a different delta between these demand and supplier and eventually be able to – we’re hoping to able to build up our inventories and supply back to normal by the end of the fourth quarter or during or by the end of the fourth quarter..

Yes. No one’s comfortable with the level of finished goods inventories that we’re running at, but it’s a sign of the times. I mean, we’re doing everything we can to supply our customers. And that’s why we spoke about freights.

Freight is a big issue, not only getting raw material ingredients into co-packing system and into our bottling system and – but also distributing from our co-packers. And obviously, the one goes into cost of sales and freight out goes into operating expenses. So that’s why you’ll see freight really hitting both of those line items..

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

Hi. Thank you. Hi. Good afternoon..

Hi..

Hi, Andrea..

How are you Hilton? Hi..

I’m good..

Yes. Just on the gross margin, because your gross margin comments were very helpful and given this deterioration obviously that its probably here to stay in the next few quarters. How are you thinking about pricing? Obviously, you can’t supply the service levels that are used to with the retailers.

So is that is something that takes – obviously, you have to take into account? Or perhaps as you get more informed on how the aluminum cost will evolve, you may contemplate it again?.

Yes. With regard to pricing, we continue to evaluate pricing, honestly, on a very, very regular basis, if not weekly. So we continue to evaluate it, and we want to make a good decision.

Last time around, as I mentioned on previous calls, we went out alone, and we would like to have been in a situation this time where we followed our competitor, but we have to evaluate, obviously, the business as we see it and the impact for us. What we’ve done is we’re reducing our promotional allowances.

So we’re taking a price increase the other way, through reducing promotional allowances, but the impact of that reduction in the second quarter was not as we would have liked. So we are – we really put the accelerator down and are more aggressive in reducing our promotional allowances. But we are continuing to evaluate the pricing and price increases.

And then I have to leave this call with my favorite saying, and that is, we don’t bank gross profit margins, we bank gross profit dollars. And to me, the fact that we’re doing everything we can to satisfy our customers as best as we can is impacting gross profit margins.

But at the end of the day, we don’t want to lose gross profit dollars, which is really important to ensure the sustainability of the brand and that’s the most important thing for us right now..

Thank you. That’s fair. Thank you, both..

Yes. Basically, just make it clear, at this point, we are watching and we’re not planning a price increase. So we’re not adverse to a price, but we’ll wait and see what the market does and what our competitors do..

Thank you, Rodney..

This will conclude today’s question-and-answer session. I would now like to turn the conference back over to management for any closing remarks..

Thanks very much. Thank you, everyone, for your continued interest and support of the company. We continue to believe in the company and our growth strategy to remain committed to continuing to innovate, develop and differentiate our brands and to expand the company, both domestically and abroad.

And in particular, expand distribution of our products through the Coca-Cola bottler system internationally. We believe that we will be able to navigate through the challenges ahead as a result of the COVID-19 pandemic and hope that this unfortunate situation will resolve itself in the near future.

We believe that we are well-positioned in the energy drink category and will continue to be and are optimistic about our total portfolio of energy drink brands. We hope that you will stay safe and healthy. Thank you very much for your attendance..

The conference has now concluded. Thank you for attending today’s presentation. And you may now disconnect..