Earnings Transcript for MNST - Q2 Fiscal Year 2024

Operator: Good afternoon, everyone, and welcome to the Monster Beverage Company Second Quarter 2024 Conference Call. [Operator Instructions] Please also note this event is being recorded. At this time, I'd like to turn the floor over to Co-CEOs, Rodney Sacks and Hilton Schlosberg. Please go ahead.

Rodney Sacks: Thank you. Good afternoon, ladies and gentlemen. Thanks 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.

Thomas Kelly: 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. 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 February 29, 2024 and quarterly reports on Form 10-Q, including the sections contained therein entitled Risk Factors and Forward-Looking Statements for a discussion on specific risks and uncertainties that may affect our performance. The company assumes no obligations to update any forward-looking statements, whether as a result of new information, future events or otherwise. I would now like to hand the call over to Rodney Sacks.

Rodney Sacks: Thanks, Tom. The energy drink category in the United States and in certain other countries experienced lower growth rates in the second quarter. Retailers have reported a reduction in convenience store foot traffic and we have seen a shift in retail towards more mass and dollar channels. Other beverage and consumer packaged product companies have also seen a tighter consumer spending environment and weaker demand in the quarter. The energy category globally continues to grow and has demonstrated resilience as we believe that consumers view energy drinks as an affordable luxury. We believe that household penetration continues to increase in the energy drink category. Growth opportunities in household penetration per capita consumption, along with consumers' need for energy or positive factors for the category. We continue to expand ourselves in non-Nielsen measured channels. The company achieved record second quarter net sales of $1.9 billion in the 2024 second quarter or 2.5% higher than net sales of $1.85 billion in the comparable 2023 quarter, 6.1% higher on a foreign currency adjusted basis, 4.3% exclusive of Argentina's impact. Net sales on a foreign currency adjusted basis, excluding the alcohol brands segment increased 7.4% in the 2024, second quarter. Gross profit as a percentage of net sales for the 2024 second quarter was 53.6% compared with 52.5% in the 2023, second quarter. The increase in gross profit as a percentage of net sales for the 2024 second quarter as compared to the 2023 second quarter was primarily the result of decreased freight-in costs, pricing actions in certain markets and lower aluminum can costs partially offset by production inefficiencies. On a sequential quarterly basis, gross margins were 0.5% below 2024 first quarter margins, primarily as a result of higher allowances certain of which we believe are nonrecurring as well as production inefficiencies. Operating expenses for the 2024 second quarter were $492.3 million, compared with $450.4 million in the 2023 second quarter. The increase in operating expenses were primarily the result of increased sponsorship and endorsement expenses, increased payroll expenses and increased storage and warehouse expenses. As a percentage of net sales, operating expenses for the 2024 second quarter were 25.9%, compared to 24.3% in the 2023 second quarter. Distribution and warehouse expenses for the 2024 second quarter were $87.4 million or 4.6% of net sales compared to $82 million or 4.4% of net sales in the 2023 second quarter. Operating income for the 2024 second quarter increased 0.6% to $527.2 million from $523.8 million in the 2023 comparative quarter. The effective tax rate for the 0.6%, 2024 second quarter was 22.9% compared to 23.2% in the 2023 second quarter. Net income increased 2.8% to $425.4 million as compared to $413.9 million in the 2023 comparable quarter. Diluted earnings per share for the 2024 second quarter increased 5% to $0.41 from $0.39 in the second quarter of 2023. As previously reported, we will be taking an approximately 5% price increase on our core brands and packages effective November 1, 2024, in the United States. We are continuing to monitor opportunities for further pricing actions. The company continues to have market share leadership in the energy drink category for all outlets combined in the United States for the 13-week period ended July 2, 2024. According to the Nielsen reports for the 13 weeks through July 20, 2024, for all outlets combined, namely convenience, grocery, drug, mass merchandisers, sales in dollars in the energy drink category, including energy shots, increased by 0.6% versus the same period a year ago. Sales of the company's energy brands, excluding Bang were down 2.5% in the 13-week period. Sales of Monster declined 3%. Sales of Reign were down 0.5%. Sales of NOS increased 4.1% and and sales of Full Throttle decreased 6.9%. Sales of Red Bull increased 1.7%. According to Nielsen, for the 4 weeks ended July 20, 2024, sales in dollars in the energy drink category, in the convenience and gas channel, including energy shots in dollars, decreased 2.2% over the same period the previous year. Sales of the company's energy brands, excluding Bang, decreased 4.8% in the 4-week period in the convenience and gas channel. Sales of Monster decreased by 5.4% over the same period versus the previous year. Reign sales decreased 3.8% and NOS was up 2.6% and Full Throttle was down 8.6%. Sales of Red Bull were up 0.7% or 0.8%. According to Nielsen, for the 4 weeks ended July 2024, the company's market share of the energy drink category in the convenience and gas channel, including energy shots in dollars, decreased from 35.7% to 34.7%. Excluding Bang, including Bang, the company's market share is 36.7%. Monster share decreased from 29.4% a year ago to 28.5%. Reigns share rains decreased 0.1 of a share point to 3%, NOS share increased 0.1 of a share point to 2.6%, and Full Throttle share remained at 0.7%. Bang's share was 1.9% and Red Bull share increased 1 share point to 35.9%. Market share of certain competitors were as follows

Operator: [Operator Instructions] Our first question today comes from Dara Mohsenian from Morgan Stanley.

Dara Mohsenian: The commentary on the U.S. category was helpful. Could you just put the recent slowdown you're seeing maybe in context versus other soft patches if you go back in history just in terms of drivers, magnitude, et cetera, just to give us some insight on how long you expect this to last? And also within that, maybe you can just touch on the promotional environment and how that might impact your plans to maybe cushion some of the pending U.S. price increase with promotion and how you guys think through that?

Rodney Sacks: Sure. Dara, historically, we've seen declines in quarterly year-over-year volumes, really only during the financial crisis and COVID lockdowns in the U.S., and they particularly significantly impacted foot traffic. The current situation in the U.S. is actually relatively unprecedented. And we've not seen inflation rates, and we haven't seen inflation levels, I'm sorry, and interest rates for one heck of a long time. And we believe that those have contributed to the slowdown. If you look internationally and those markets traditionally have been -- have a longer history of energy drinks. We saw and have seen slowdowns in certain European countries over the periods. And in each case that we've seen them, the levels have, in fact, rebounded. So at the end of the day, when you look at the positive factors, we believe that energy drinks certainly are a need state, consumers want energy drinks and Household penetration is growing, all the things we spoke about really on this call. And what we like other consumer products companies, we see this decline primarily driven by a reduction in consumer spending and the lower foot traffic in the convenience channel. We've seen reports of foot traffic convenience channel being down by as much as 3% to 3.5%. And then a swing towards more grocery mass on -- online purchasing. So it's kind of a situation where we are a blue collar brand. And our consumers are more hard pressed than consumers in other categories. And that's why maybe we have seen a larger reduction than other competitive products in the space. But at the end of the day, some of those competitive products have had price increases, which we have not had yet and we will have later this year.

Operator: Our next question comes from Andrea Teixeira from JPMorgan.

Andrea Teixeira: I was hoping if you can talk about the -- basically about the channels, you discuss the mass channels and discounts being 1 and how you've been able to shift for those consumers who are looking for basically more affordable energy. And you did a reference to to production challenges internationally. Is there a way to think about it and the impact and if it's temporary, how we should be thinking about those?

Rodney Sacks: The production challenges, which were in Germany have largely been resolved now. It is a situation where there was a lack of capacity in a particular plant, we set up facilities in other manufacturing entities and then the plants in Germany that the distribution points in Germany we're unable to accept product because there were -- they had challenges getting product in because we have a very large market in Germany. So it was a mix of factors. By the end of the day, we're back and running and we don't anticipate a recurrence of that issue in Germany this quarter.

Hilton Schlosberg: Just to give color on the German issue. You must appreciate that in the second quarter, they had the European soccer championships, and there was a lot of extra demand a lot of unusual things happen, and that's why we ended up with this challenge. Which we think was unusual, and it's not likely to occur again in the future, and we've taken steps to address it for -- in the future and have more visibility.

Operator: Our next question comes from Kaumil Gajrawala from Jefferies.

Kaumil Gajrawala: Can you try to just kind of reconcile the idea of still taking a price increase with the slowdown in the category. The commentary on who your core consumer is, they're being a little bit more careful doesn't seem to align with the idea to take a price increase, later?

Rodney Sacks: Yes. Kaumil, if you look at our pricing, where we are relative to other other beverages that we would regard as kind of comparative. Those are the beverages, they've dramatically expanded their price. We've passed the price index to Monster products. And -- we still see it as an opportunity. The extent is not that significant. We still will retain a very competitive price for consumers. . Both within the energy category and the ready-to-drink beverages as a whole. And we've discussed it with most of our major distributors and customers. And we've absorbed significant increases. As you know, we had one increase in the last 2 years. And our competitors in the ready-to-drink beverage space have had multiple. So we still see it as an opportunity. And we think it is something that we should pursue and move forward with.

Operator: Our next question comes from Peter Grom from UBS.

Peter Grom: Thanks, operator. Good afternoon, everyone. So I was hoping to get some just some thoughts on the quarter-to-date trends, just when backing out the benefits from selling days, it doesn't imply a ton of growth on an underlying basis, if at all. So can you maybe just talk about category trends in July maybe unpack it from a U.S. versus international perspective? And just going back to Dara's question, just any thoughts in terms of how you see growth kind of progressing from here through the balance of the quarter?

Rodney Sacks: We look at Nielsen like the rest of the group. And you can really see Nielsen if -- you look at U.S. convenience and you look at all measured channels, that the situation is actually getting worse in July, and it's not getting better. So we've always spoken about our nonmeasured channels and our nonmeasured channels have continued to be a significant part of our activities and continue to grow. But looking at the Nielsen numbers, and I'm sure you've seen that, Peter, the July numbers are -- so it's not a dramatic, but it is a worsening trend.

Operator: Our next question comes from Bonnie Herzog from Goldman Sachs.

Bonnie Herzog: I thought...

Rodney Sacks: Bonnie, we haven't thought to come on this call, we've been waiting for you.

Bonnie Herzog: Well, you didn't pick me early enough. I've been here waiting. So I did want to...

Rodney Sacks: We don't see the picking unfortunately.

Bonnie Herzog: Yes. Okay. Well, I did want to circle back, of course, slowdown that you guys did report in the quarter versus your expectations. I guess I am still trying to reconcile a few things. Could you maybe help us understand where bottler inventory levels are? I mean, is there any timing impact by chance, especially internationally that might have impacted Q2? And then second, maybe help us understand your innovation pipeline. I know you talked about a lot, but any shipment timing impact that you saw with the rollout of innovation, whether it was in Q1 or in Q2? And then how do we think about the second half? Do you possibly have more innovation rolling out in the back half versus what you did in the first half?

Rodney Sacks: Well, let me talk about -- answer your first question, Rodney will talk about innovation. We haven't heard of any bottle inventories that are challenged or have changed significantly this card. We are in summer -- and we haven't heard anything. I know and I read, obviously, one of the competitors mentioned that they had bought the inventory issues -- but we have not seen that. The only thing we spoke about is this German issue for 1 million cases, which has been rectified.

Hilton Schlosberg: But I think we always every quarter, we have choppy issues with bottlers because -- as we said earlier in the quarter, it depends on when they produce and sometimes they may be producing just before or at the end of the period. That does have some effect. But again, we've not really looked and gone into it because it's really -- it's just part of the way our business is done, and we just got to live with it. And so we haven't called it out specifically, but these things do continue to occur.

Rodney Sacks: If we hear something significant. Obviously, we call it out, but we haven't [indiscernible].

Hilton Schlosberg: Now with regard to innovation, innovation has been fine. We've had 2 good products -- the fantasy Ruby Red has done very well, and we've got out a little later with the Rio funds. They've both done very well. If I look at the sales point of those 2 items are pretty strong they're ahead of sales per point of competitive new product launches like Red Bull, their sugar-free this year. In fact, the sales per point of those 2 new items that we launched are actually ahead of South per point of the very top Celsius sort of SKU. So I'll just give you some sort of perspective. One of the perhaps challenges this year was perhaps a little lower than others. If you look at our the distribution levels we achieved on the innovation, they're perhaps a little lower. They've been in the 60s -- but 60s and perhaps we think that in a perfect world, that should have been closer to 75% or 80%. So that's something we are addressing with our bodily partners and with the industry. And obviously, I think we could probably improve on that. But that is probably one of the issues that perhaps didn't deliver as much in dollars on the innovation as One of the reasons that the innovation was maybe a little lower. But ultimately, the innovation has done -- is still doing pretty well when I look at even the latest weekly figures. Also, we do have this planned innovation. We have really a large company focus on the launch of Ultra Vice Guava. We think it's a really exciting, it's a really -- it's a great package. It's a great flavor. But we are, in fact, galvanizing our own team and the partners -- and we're going to go out and have a -- we believe, a real good launch of this product towards the end of this year, in the end of the third quarter, beginning of the fourth quarter. So we see that as being really positive -- and I think that give us something to execute against. We also got some good innovation coming in next year and -- but that will start shipping at the end of this year, part of it and some of it at the end of January. And we've got a good plan going through for spring of 2025. So we remain encouraged by our innovation. In fact, one of the other innovation items we launched was Zero Sugar in EMEA, which has done really nicely. We also launched Juice bad apple which we hadn't launched in the U.S., and that has been rolled out, and that is also getting some really good reception. So that is something that we'll be looking at to maybe expanding in other areas, but we went -- we tested it first in EMEA. So we do have some pipeline coming or newer products. So we are positive going forward that we'll be able to address consumer trends and look at the industry will be positive going forward.

Rodney Sacks: And one other thing I just wanted to mention, Bonnie, was that if you look at 2023, remember, we launched Zero Sugar, which was the analog to Monster Green. And that was a very, very significant launch. So when you compare '24 to '23, Zero Sugar was really a major push as indeed with Strawberry Dreams, great flavors. So was really incredible with regard to launches. 2024 was great, but obviously not at the same level as '23.

Hilton Schlosberg: We'll also just as a matter of interest, we've got some great innovation. We're looking to launch for Bang because that's been a new brand to our portfolio. We have our own sort of innovation launch for early next year. And we have another launch in conjunction with all means possible. And their social media response and presence on their channels and for the brand has been, we are seeing some really positive signs. So we are sort of quite positive about also being able to take Bang into start to sort of start to get that brand more focused with new innovation now, which we haven't had until now. We'll be consolidating and just getting relistings.

Operator: And our next question comes from Filippo Falorni from Citi.

Filippo Falorni: I wanted to ask about gross margins. You mentioned in the release that you were 50 basis points below the first quarter because of higher allowances that you think are nonrecurring and some production efficiencies. Should we think those go away starting in Q3? And then maybe you can talk about the commodity environment. It seems aluminum is still favorable year-over-year -- is it going to be still favorable in the balance of the year? Just any color on the commodity environment as well?

Rodney Sacks: Let me talk a little bit about what you're referring to -- and yes, indeed, we do believe that these -- the high allowances and the production inefficiencies will take care of themselves. I'm not sure where the the production inefficiencies will take care of itself in the third quarter, but certainly, it will over time. The production inefficiencies relate to the 2 plants that we have up and running. We opened Norwalk for production in April, and we're gearing up production in NOC, which is one of the reasons for the production inefficiencies because we're gearing up that plant to full production. And then on the other hand, we have our facility in Phoenix that we acquired as part of the bank transaction, which is at present, only producing bank products. But we're gearing it up to produce Monster both the Ultra versions of Monster and Reign, which are the nonsugar varieties and then ultimately, the sugar varieties because they don't have -- they don't have sugar tanks. And we've had issues with water that we've been dealing with to ensure that we deliver the best Monster flavors possible. So that's where the production inefficiencies are coming from, and they will resolve themselves over time. The alliances absolutely will resolve themselves, we believe, in the -- this next quarter, they should be gone. So that's where we are on that. Now in the -- on the commodities environment, we hedge aluminum. So how we hedge aluminum is we use the ladder. So we purchased aluminum according to a prescribed formula and we have certain amounts at our discretionary reevaluate aluminum on a weekly basis. So -- and we take advantage, of course, of pricing when pricing falls but there are instances where we may have purchased aluminum at higher prices to ensure that our latter strategy is properly executed because there was a time in aluminum, as you know, was up -- and everyone is going to purchase aluminum and now it's back down -- so it's a -- they're plus and minuses. But I do believe that we're in good territory with aluminum and aluminum, we should be able to see reductions over time.

Operator: And ladies and gentlemen, at this time, I'd like to turn the floor back over to Rodney Sacks for closing remarks.

Rodney Sacks: Thanks. On behalf of the company, I'd like to thank everyone for their continued interest. We continue to believe in the company and our growth strategy and remain committed to continue to innovate, develop and differentiate our brands and to expand the company both at home and abroad and in particular, capitalizing on our relationship with the Coca-Cola bottling system. We believe that we're well positioned in the beverage industry and continue to be optimistic about the future of the company. We hope that you remain safe and healthy. Thank you very much for your attendance.

Operator: And ladies and gentlemen, with that, we'll conclude today's conference call. We do thank you for attending. You may now disconnect your lines.