Hansen Natural Corp. Q3 2008 Earnings Call Transcript

Nov. 6.08 | About: Monster Beverage (MNST)

Hansen Natural Corp. (HANS) Q3 FY08 Earnings Call November 6, 2008 5:00 PM ET

Executives

Rodney Sacks - Chief Executive Officer

Analysts

Judy Hong - Goldman Sachs

Mark Astrachan - Stifel Nicolaus

Kaumil Gajrawala - UBS

Alex Paterson - RCM

Judy Hong - Goldman Sachs

Operator

Good day, everyone. Thank you for joining today's Hansen Natural Corporation's third quarter 2008 financial results conference call. Today's call is being recorded.

For opening remarks and introduction, I would now like to turn the call over to Chief Executive Officer, Mr. Rodney Sacks. Please do ahead, sir.

Rodney Sacks

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

Before we begin, I would like to remind listeners that certain statements made during this call may constitute forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 as amended and Section 21E of the Securities Exchange Act of 1934 as amended, and 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 Management's currently knowledge and expectations and of 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 herein.

Please refer to the section headed "Caution Concerning forward-looking statements" in our earnings release as well as to our filing with the Securities and Exchange Commission, including our annual report on Form 10-K filed on February 29, 2008 and our most recent quarterly reports on Form 10-Q, including the sections contained therein titled "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.

We have provided an explanation of the non-GAAP of gross sales and certain expenditures, which may be mentioned during the course of this call in the notes designated with asterisks in the consolidated, consolidated or dense consolidated statements of income and other information attached to the earnings release dated November 6, 2008. A copy of this information is also available on our website www.hansens.com in the Investor Relations section.

Consistent with what I have said during my last quarterly report, I reiterate that the energy drink category continues to remain one of the few sectors in the beverage industry that continues to show year-on-year growth. The growth of the entire beverage industry continues to slow consistence with the general slowdown and the weak US economy, the housing market decline and soaring fuel and food costs, which are hampering the spending power of US consumers, who we continue to believe have cutback on impulse purchases at gas stations, amongst other places, gas stations being the most important sector for energy drinks.

While this trend is more marked in California, which is one of the largest energy drink markets, it is a nation wide trend. We continue to believe that this trend continues to disproportionately affect blue-collar workers, who make up a large portion of our consumer base.

The recent upheaval in and dislocation of financial markets appears to have contributed to a reduction in demand for many commodities, with the result that we are now starting to see reduced gas prices at the pumps. We are hopeful that if these levels continue the lower cost or filing up cost will free up disposable income to consumers to spend more at stores at gas stations. However, in light of the continuing volatility in most markets that affect the lives of everyday consumers, we will have to wait and see what trends emerge.

Positive news for us is that despite these factors, the Monster brand has continued to grow in excess of the category and generated the majority of additional dollars earned by the category.

According to the Nielsen reports for the 13 weeks through September 27, 2008 for all outlets combined, namely convenience, grocery, drug and mass excluding Wal-Mart, the energy drink category grew 9.8%. In actual dollar volume the category increased in sales by a total of $115 million to $1286 million for the 13-week period concerned.

Of the increase $68 million was contributed by increased sales of Monster, of which $30.5 million was attributable to increase sales of Java Monster. $27 million from increase sales of Red Bull, $5 million from increase sales of Rockstar and $40 million from increase sales of Amp. Full Throttle was $18 million lower in sales, but NOS was $23 million higher, No Fear was $13 million lower and Adrenaline Rush was $10 million lower.

According to Nielsen's all outlets combined, Monster's market share is 27.9% up 3.1 points. Red Bulls' market share is 37.8%, down 1.1 points. Rockstar's market share is 11.1%, down 0.7 of a point. Amp's market share is 7.8%, up to 2.6 points. While Full Throttle's market share is 4.4%, which is down 2 points. NOS' market share is 2.9%, up 1.7 points, excluding Java Monster Monster's market share is still 25.8% up, 2.3 points over the last year. In dollar terms, Monster sales are 23.4% higher, compared to Red Bull at 6.3%.

The convenience and gas channel grew by 10% over the prior year. Monster's market share increased to 29.1%, on an increase of 23.8% in sales versus Red Bull, whose market share decreased to 34% on an increase of 7.6% in sales. Rockstar's market share decreased to 10.7%, while Amp's share increased to 7.7%. Full Throttle share dropped to 4.6%, while NOS' share increased to 3.2%.

According to Nielsen, the convenience and gas channel represented 81.4% of energy drink sales in the 13 weeks ended September 27, 2008. For the three months ended September 30, sales of Java Monster in the company represented approximately 10% of the total sales of the Monster brand, so according to Nielsen, they do represent a higher percentage, based on sales out from the retailers to consumers.

For the three months ended September 30, 2008, sales to retail grocery specialty chains and wholesalers represented 8% of gross sales, which is the same as last year. Sales to club stores, drug chains and mass merchandises represented 12% of sales, which was down from 16% in the previous year. Sales to full service distributors represented 75% of sales, up from 72% last year. And sales to health food distributors was flat at 2%, and to military and others, was 3%, which was up from 2% in the previous year.

For the nine-month period ended September 30, sales to retail grocery amounted to 8% compared to 9% in the previous year. Sales to club stores, drug chains and mass merchandises amount to 13%, compared to 50% in the previous year, while sales to full service distributors represented 74% of sales compared to 72% the previous year. Sales to health food distributors were flat to 2% and sales to military and others were 3%, which was up from 2% in the previous year.

For the three month ended September 30th, gross sales outside of California increased from 72.1% to 75.6%, while for the nine months gross sales outside the California represented 77% of sales, up from 72.2% last year. Gross sales to customer outside of the United States amounted to $31.1 million, compared to $13.9 million in the same quarter last year, and represented approximately 9.6% of gross sales, up from 4.9% in the same period last year.

Gross sales to customers outside of the United States for the nine months ended September 30, 2008, amounted to $79.4 million, up from $40.4 million in the nine months ended September 30, 2007. Such sales represented approximately 8.9% and 5.4% respectively of gross sales for the nine months periods concerned.

We have started to see reductions in costs of certain raw-materials, principally apple juice, aluminum, milk and sugar. Although, dairy products rose in the third quarter, the cost of the milk component has since decreased.

The reduction in the price of aluminum will not necessarily be reflected right across the board, as we do have contracts, some of which have afforded us the opportunity of lower can prices from certain suppliers during the current year and some of those contracts will come up for adjustments as we go forward. So, I want to caution although I have reefed to just the aluminum costs having gone down, that doesn’t necessarily equate on an unqualified basis across our can costs.

Turning to the balance sheet, cash and cash equivalents amounted to $256.4 million, compared with $12.4 million at the end of December 2007. Short-term investments were $14.8 million, compared to $63.1 million at the end of the December 2007. Accounts receivable decreased to $73 million from $81.5 million at December 31, 2007. Although, inventories increased to $110 million from $98.1 million at the end of December, they were lowered than they were at the end of the second quarter.

Investments, primarily auction rate securities, decreased from $227 million to a $109.5 million. Days outstanding for receivables were 23 days at September 30, 2008, compared to 28.7 days at the end of December 2007, and 31.2 days at September 30, 2007. The increase in the inventories was primarily attributable to an increase in finished products of Monster and Java Monster. Average days of inventory were 73.3 days of September 30, 2008, which is higher than the 73.1 days of inventory held at December 31, 2007 and 71.2 days at September 30, 2007.

I'll refer to our press release of October 6, 2008, in which we provided certain financial information regarding distribution agreements. In that announcement, we explained that the pretax impact of termination payments that we expect to make to terminated distributors is currently estimated to be in the range of the $110 million to $130 million in aggregate, but could be higher or lower. Actual termination payments could differ significantly from current estimates, because these estimates are based largely on our estimate of each affected distributor's contractual termination rights. This estimate includes, estimates of each distributors own sales and profit levels net of certain allowances.

The actual termination cost will be expensed in full, in the period in which the termination has become effective, which will primarily be in the fourth quarter of 2008. We will receive from newly appointed distributors, non-refundable contributions covering a significant portion of the cost of terminating affected distributors, which will be accounted for as deferred revenue. Such deferred revenue will be recognized as revenue, ratably over the anticipated 20 year lot of the distribution agreements.

This explains the accounting treatment of the above, from a cash flow point of view the above described transactions are expected to be neutral to the company, as largely neutral, as we should receive payment of the contributions in close proximity of time, to the finance that would be required to be made by us to terminated distributors.

We continue to hold auction rate securities, having a fair value of $111.4 million at September 30, 2008, which is down from a fair value balance of $124 million at June 30, 2008, and $227 million at December 31, 2007. This amount reflects an impairment of $5.6 million, which we deemed to be temporary, and was recorded net over tax benefit of $2.2 million as a component of other comprehensive loss. We will continue to review the fair value and treatment to be afforded to these securities at the end of each of quarter.

We recently announced distribution arrangements with Coca-Cola Company and Coca-Cola Enterprises, and certain other Coca-Cola Bottlers within the United States. These arrangements are scheduled to commence on November 10, 2008. Consequently, during the third quarter, Coca-Cola Bottlers and certain new Anheuser-Busch distributors purchased substantial products to ensure that they will have sufficient inventory in their warehouses and at distribution points around the territory for which they have been appointed when they commence sales.

Such purchases had the effect of substantially increasing sales during October and more than offset the fall off in sales from distributors who are being terminated. We expect that once the new distribution arrangements going into effect, distributors whose distribution arrangements with the company have been terminated, will seek to return to us unsolved inventory in their possession.

While we may not be legally obligated to take back all such inventory, we believe that in most instances it will in our best interest to do so and thereby avoid such inventory being dumped on to the market, which should have a disruptive on the orderly transition from existing distributors to the new Coca-Cola Bottlers and new Anheuser-Busch distributors.

Consequently, we expect the return of certain amount of inventory, principally in November and December in the United States and in the first quarter of 2009 in Canada, which will have effect of reducing sales during those months. In light of these factors, we believe it would not be appropriate for us to report sales for October at this time. We believe that the afore going adjustments will largely have worked their way through the system by the yearend apart from Canada.

We are pleased to report that we've now launched Monster Hitman energy shooter in 3 ounce sized containers. Gross sales of Hitman energy shooters within the third quarter were just under $3 million. We are continuing with the planned development of a new line of Monster energy products. We are working through certain production and technical issues in connection with the development of that line. Although, we do not believe we will be in a position to launch it before the end of the year. We currently anticipate that we will be in a position to launch that line during the first quarter of 2009.

We continue to believe that the energy category will rebound, and continue to grow at an increased rate during 2009, as the economy and financial markets stabilize. We have now launched Monster energy drinks in a number of countries in Europe, including Sweden, Ireland and Spain, in addition to the United Kingdom.

Operating income was adversely affected during the quarter by losses incurred in the United Kingdom and Europe of approximately $4.3 million, in consequence of a distribution agreements completed by our company with the Coca-Cola Company and Coca-Cola Enterprises.

It is anticipated that Coca-Cola Enterprises will commence the distribution of Monster energy in the United Kingdom during November in place of our existing distributor. We are planning to launch Monster energy in conjunction with Coca-Cola Enterprises in France, Monaco, Belgium, Holland and Luxemburg at the beginning of 2009. We are also planning to commence distribution of Monster energy drinks in Canada through Coca-Cola Enterprises, commencing January 1, 2009

We have extended the distribution test of Hydration enhanced water to a number of additional areas, and are continuing to evaluate consumer demand and resale levels for that product with the view to expanding distribution commencing in 2009.

Finally, with regard to new products, I am pleased to report that we will launching an additional Hitman energy shooter in three ounce containers and hope to be able to do so before the end of this year.

I’d like to open the floor to questions. Thank you.

Question-And-Answer Session

Operator

(Operator Instructions). We will take our first question from Judy Hong at Goldman Sachs

Judy Hong - Goldman Sachs

Hey, Rodney.

Rodney Sacks

Hello, Judy.

Judy Hong - Goldman Sachs

First, in terms of the distribution transition, is there anyway to quantify in October, how much of your sales would have been boosted by inventory building? I know you are not giving the October number per se, but is there anyway to quantify that number?

Rodney Sacks

No, we have not done so.

Judy Hong - Goldman Sachs

What about in terms of how much of the inventory that you will be taking back from your old distributors?

Rodney Sacks

Really, it is a guess. We have no knowledge of what inventory levels they have. How they will sell through, whether they have been holding a lot of inventory or a little. We just do not know.

Judy Hong - Goldman Sachs

Generally speaking is that a week of inventory, two weeks?

Rodney Sacks

I do not know.

Judy Hong - Goldman Sachs

Okay. In terms generally speaking, I know that we are hearing a lot from wholesalers and retailers that they are tightening down inventory even more in this difficult financial situation. I am just wondering if generally speaking if you are hearing similar comments from your customers or that is not happening in your category.

Rodney Sacks

Well really have not heard anything different. I think that in past calls we have discuss this and we have refer to the fact that we believe there has been a destocking by our own customers, by retailers, by everybody to try and minimize their holding cost and that was discussed by us in the context, on a number of the calls, the discrepancy between what we were seeing in sale through to customers from retailers through the Nielsen numbers and our own sales, there was this inconsistency

So that is way we are. It has been happening for sometime and I think it is just continuing to happen, everybody is just taking a conservative view and try to conserve cash and that goes for every type of customer, all the way through from the distributors, and bottlers, to the retailers.

Judy Hong - Goldman Sachs

Okay. Then Rodney, just in terms of the international opportunity, it seems like even without the go of the European launch, you have been able to grow your sales outside the US, and it is now close to 10% of sales. So I am wondering if you can just frame for us as you have got launch with the new distribution agreement in the UK and in some other parts of Western Europe in the next year or two years or three years, what mix are we looking at in terms of how much international could be of your total company?

Rodney Sacks

We really do not know, as you can see from the results that we have given, it was a slow bolt in the United Kingdom partly attributable we think to our distributor, not having the strength and some how the focus to get listings and partly due to timing. That is been that, but where it has gone into stores, the feedback we have got is that sold right has been good, it is been stronger than the number of our competitors. So in many cases where we have gone into a chain and then given us test in certain number of stores, we have in recent months also actually increased, and they have comeback reasonably quickly and said we wanted to increase the coverage.

So, we are seeing good results, but it is taking time to bolt. We seem to have got probably a lot more coverage, more quickly in Sweden and even in Ireland, and we have managed to succeed in the UK. It is just again a different distribution systems and the easier way of getting to market in Sweden, particularly, and there we have seen some good results.

Its just too soon, we think that the strength and the depth of the organization of CCE in United Kingdom and France will be very important contributors to out ability to get our products on the shelf in 2009. We are making, and starting to make presentations now, both on organizations and in conjunction with CCE for listings and shelf space for next year and its been done in time. So we believe that we will be able to get on the shelves, and we believe that both of those countries have large populations, and then we have followed that principally with Holland and Belgium.

We believe that we can look forward to some healthy distribution gains and we hope to sell through. It is very new, we do not have experience in those countries and we really are not in a position to give any guidance concerning what extent we believe we will actually achieve distribution, at what level, and what the sales rights will be, we know that sales right in Europe and UK is generally seems to be a little lower than in the US. Generally that is the case for soft drinks and we think that energy drinks would be similar in effect, because we believe that the energy category is not as well developed there, it has the opportunity, but it is going to take time to bolt.

Certainly the ability of having the CCE system working in conjunction with us and our brand, we think will be very beneficial to assent our efforts to get the brand distributed and sell. So we are very hopeful and we are optimistic, but I just can not give you any real numbers or any guidance on where we feel that will turn out, what effect it will have on our numbers generally.

Judy Hong - Goldman Sachs

Okay. Then just my final question Rodney; would you update us on how you are thinking about pricing going forward? You have talked about some of the input cost coming down more recently, but you have some contracts in place that are showing up as a bit more inflationary, how were you thinking about pricing?

Rodney Sacks

At this stage we feel that, we are not going to look at any pricing adjustments. We will wait and see what happens with somebody's cost, we think that, that we will be able to continue to trade at a fair level at and over the fair level of margin, at these pricing levels. So we do not think we should be looking to adjust prices at this time, particularly, in the light of the current economic environment. We just do not know. These are things that we are looking at from month-to-month and we will see what affect they have. So I really can not give you a definite answer on, whether we will or will not increase prices. All I can say to you is that at this stage, we are not envisaging any immediate price increase, but we will review it from month-to-month.

Judy Hong - Goldman Sachs

Okay. Thank you.

Rodney Sacks

Thanks.

Operator

We will take our next question from Mark Astrachan with Stifel Nicolaus.

Mark Astrachan - Stifel Nicolaus

Good afternoon. Question, first on the Coca-Cola Enterprise's relationship, just wondering what steps you all are taking, in terms of working with CCE to ensure a smooth transition in both the US, and Europe, as well Canada?

Rodney Sacks

I mean, that is an operational issue. We obviously are working with them; we are working with their teams. Our sales reps are working with their individual branches and divisions. That is something we operationally do. Just like we have would start off, we would normally kick off any new distributor, you explain the brand to them, and you talk with them, and you get them to understand your selling proposition, and way you are selling and way your chains and customers are. It is just an operation issue. I could not give you any more color than that. Obviously, we are out in the field working with the appropriate people at CCE, and in fact for the new ID distributors that are coming on board as well, and working on helping them and guiding them on what we think is important in going out and selling and merchandizing the brand and what we consider important in that regard.

Unidentified Company Representative

As well as the other counter parties.

Mark Astrachan - Stifel Nicolaus

Yes, they are all under there, independent co-partners, there is United and Consolidated, who have come on board, Sacramento and some others.

Mark Astrachan - Stifel Nicolaus

Okay. In terms of thinking about Europe, which is obviously a relatively new market for you all, how will you be working with the Coke system there in terms of supporting the brand launch, in other words, I am assuming that you are going to be hang for some of the support, and I am assuming that the Coke systems will also help pay for some of that support, is that fair to assume?

Rodney Sacks

I do not want to go into the details of how it is going to be structured. We have a particular structure with them, which ultimately will result in the brand being promoted, but we obviously are going to do what is normal. We are going to the normal programs at a store level to get consumer demand we are already doing substantial global marketing for the brand in the UK and Europe generally. We have signed contracts; we really did that last year, so we have already set the tone and the scene for the brand. The brand already has some level of awareness in Europe from what we have done during 2008. We have sponsored substantial music events in the UK, substantial motor sports, Supercross, Motocross Superbike in Britain, and particularly, the large one is probably our MotoGP, we were a sponsor of the Kawasaki team internationally, the sport extends internationally, but its pretty much focused on Europe, and has is a very high visibility for our consumer.

So we have already done that and we are continuing to do that going forward. We have spent ahead of the brand. We think that that has been the main contributor to the losses that we have incurred in the UK. We think that has been a good investment spent, but it has been done and we will continue to spend going forward, we believe it will be probably substantially less of an impact on our sales, as our sales increase.

We will continue to support the brand, but its going to come principally from us. There are a different ways in which you cut off the margin, but ultimately it comes out of the margin chain and we are playing to spend at a sufficiently high level to make sure the brand has every chance for success in Europe.

Mark Astrachan - Stifel Nicolaus

Okay. Great. Then just thinking on a worldwide basis, if you look around what market do you see that you are not in that are potentially intriguing from an energy category standpoint?

Rodney Sacks

That would just be premature at this point. We really are focused on Europe at this time. There are some other markets, which I do not want to go in to, we are looking at, but Europe is pretty much the prime focus of where we are looking. We are selling elsewhere. We are looking at the Australian, New Zealand market, but really our focus is on Europe at this time.

Mark Astrachan - Stifel Nicolaus

Great and just finally on share repurchase. Can you talk a bit about where that stands, where you are headed in terms of potential increase in the authorization that you have?

Rodney Sacks

Well, I think we first go to; we first go to basically use up the current authorization. In the lines of the discussions and negotiations that we are underway with Coca-Cola, we really are not in a position, which obviously now you can see why, to do anything during the last open period. We believe that we will resume the share buy back once we are in a position to do so, in a couple of days' time.

The debt line, depending on how that share buy back goes, we will consider looking at increasing to buy back depending on, where we see the pricing, just on the timing basis. So that is our current thinking. The Board will have to evaluate whether to increase, is it something which I certainly an Hilton do not. We can not make that decision on our own. We will be raising that with the Board.

Mark Astrachan - Stifel Nicolaus

Alright. Great, thanks.

Rodney Sacks

Thank you.

Operator

We will take our next question from Greg Badiskanian with Citi.

Unidentified Analyst

Hello, I am standing in for Greg. Just wondering, if you have a sense for how the energy drink market is holding up in the UK and in Europe and given the timing of watching of the launching there or you seeing any customers who wants to take on inventory there?

Rodney Sacks

We think, the market has continued to hold up. Its growth was historically in the last few years substantial lower than obviously the growth here, but it was healthy growth. I do not know what it is done in the last six months to nine months, but it has continued to be reasonably solid and we are quite comfortable that it will continue to grow. Particularly, we believe that we will be able to expand that market as we approach it in market, promote our products in a very different way to Red Bull, which is the market leader there.

Unidentified Analyst

Then give a sense for sales potential for Hitman may be even as a percentage of your sales and how do you think of that.

Rodney Sacks

We really do not know. That is a category that is so small, it started. It started to get some impetus. A lot of the major energy drink companies have all entered into that segment. So everybody entered it, and so it became a bit flooded. One of the challenges, is, how the way you put this shots, when there is one little box sitting on the counter it is easy for convenience store. Now you have got six or eight brands out there and you got some of the main brands there.

So we think that there is going to be some evolvement of where it is, how they get marketed, where they get put on the shelves, and then we would have to see, ultimately, whether the consumer base for them actually broadens, I think that if this market has to really have any significance, you would have to have some basically cannibalization from we think the regular energy drink consumers who would prefer to try and get their energy boost, but act with this volume for whatever reason.

So we do believe it is going to grow, but we believe that it is still going to be a niche with energy category. Category has got good margins, so that is positive for the company. We all do have plans to extent, and have indicated the deadline, and we may extend it further, going into 2009, when we get a better read and feel for them all. So it is very premature, but we are giving some sale through and at the moment it does seem to be incremental and not completely cannibalizing, but we do not know we will have to see how that evolves in the next two or three quarters.

Unidentified Analyst

Then, I apologize if I missed this but were the name drivers for the higher risk margin at present?

Rodney Sacks

I think the main driver was really just again as we got a mix and I think we have been able to just get some better margin in products like the shops and generally just probably a higher product mix between Java Monster and Monster in that quarter than perhaps in some of the previous quarters.

Unidentified Analyst

Okay. Thank you very much.

Rodney Sacks

Thank you.

Operator

We will take our next question from Kaumil Gajrawala with UBS.

Kaumil Gajrawala - UBS

Hi, thank you.

Rodney Sacks

Thank you.

Kaumil Gajrawala - UBS

First, as you think about the markets in the United States where you are going to be transitioning the CCE, could you talk a little bit about where you believe CCE would be able to offer incrementally, maybe such recent channels whatever it is, talk about what is behind some of the transition in the US markets?

Rodney Sacks

Well, obviously we believe that on an overall basis CCE has a very extensive network of salesmen, merchandisers, trucks and a very professional selling organization behind them. They have got very deep reach; they reach a large number of additional accounts that have not really been available to us through an alcoholic system, because in many cases they just do not go to the same universe of accounts. There are many areas in the US where there are dry areas or the alcoholic and non-alcoholic systems do not line up.

So for all those reasons, we believe that in those areas, where we have made transitions. We are getting a very strong distribution partner. Now is some cases, we were doing very well and our previous distributors had built up strong market shares for us and a lot of them have been smaller distributors or entrepreneurial, they did a very good job.

So in small instances, you may find that you may not get a big uplift but if you take the overall area and territory that has been transitioned and then you take the overall territory that is now left in the analyzable system, you do have the best of two strong systems and you have, one of the best, but you have two strong systems, each of slightly different strengths and we just believe that with both systems we will have the real opportunity to maximize our distribution and penetration in the markets that each of these respective systems are now charged with distributing the product and with the additional manpower behind it and additional points of sale that we will reach in additional tops of outlets, we believe that we will, on a overall basis benefit the brand in the longer term.

Kaumil Gajrawala - UBS

Then just to clarify it. It is your decision to where you are in transition and not transition and 100% your?

Rodney Sacks

Yes, but obviously this was subject initially to negotiation with Coca-Cola before we entered into the agreement and mapped out, in general terms, where we would be transitioning there have been a number of instances, where they have been changes to that because of different factors. Where there have been changes, as we have gone forth that has been necessitated and basically, nothing domestic, pretty much in shape now and it is in the course of now being implemented.

Kaumil Gajrawala - UBS

Then, if I could move on, without talking, maybe about your business but clearly gas prices have come down fairly quickly, have you already seen a step up in traffic in to these stores?

Rodney Sacks

I can not answer that, we just do not have that information.

Kaumil Gajrawala - UBS

Okay. Then last question on international. I respect that you have done quite a bit already in terms of planning up sponsorships but it looks you will be rolling up faster than you could perhaps initially we had planned when you first lined down these sponsorships. Now that you are going through the CCE, so should we be expecting a bit of step up to some degree in marketing?

Rodney Sacks

Not really. We think what we are doing translated not only into the UK but of course Europe and so, to some measure, what we did this year was really preparatory for going in to Europe and really sometimes it is not what like the US, where you can take a national, if you only once taken the US, you had an athlete that was no national, he is going to get you the benefit across the whole, the US naturally what happens there.

A lot of their competitions are not focused on one single country. So while some athletes were very much country focused, the majority of the athletes and programs that we conclude or will have to perform and compete an event situated different countries around Europe, they are shown on TV around Europe.

So we are not going to change that marketing very much. We are going to re-look at, we are going to revisit what we got sure, we will be stepping up in, but where will step up more marketing in the individual countries as and when as we go into those countries and look for local athletes, local events, local promotions that are more meaningful to those countries.

That we will be more tied to way we get to the country. So it as though just because we are in a more country than we had initially, we are going to splash up more money on marketing. We think that is going to be more inline effect. We probably spent more thus, in the area than we will far more per case than we anticipate we will be spending in 2009.

Kaumil Gajrawala - UBS

Okay, good, that is useful. That sounds like no F1 cars in the near term?

Rodney Sacks

No.

Kaumil Gajrawala - UBS

Thank you.

Rodney Sacks

Thanks.

Operator

(Operator Instructions) We will take our next question from Alex Paterson with RCM.

Alex Paterson - RCM

Yes, Rodney. I just wanted to clarify the DSD net sales if you back out international, US looks like it was up 10%, does that sound about right for Q3?

Rodney Sacks

I do not know if you back out international because international includes Canada, includes Mexico, I think the numbers on DSD are pretty much up closer, just our full service; sales to full service distributors are up probably closer to 20%. So I do not believe that that figure is right. I think that is higher than that, but just sitting here I can not give you an answer on that figure.

Alex Paterson - RCM

Okay. We are going to circle back on that. Then the warehouse group was up and I still thought the WIC contract which I know was not necessarily going to loose all those sales but they were going to change that. Was warehouse better than expected for any particular reason?

Rodney Sacks

What happened was, while the WIC contract terminated, the WIC contract did continue for apple juice on a non-exclusive basis, but we have continued to see some decent volumes of apple juice even after termination of that contract. Where we did not continue was in the juice blends. That category where we originally had a juice blend category was terminated by WIC and juice blend does continue of to qualify. So we saw a fall off in the juice blend side of the business on that side. Overall, we ended up I think, as we have indicated, higher than in the warehouse division than in the previous quarter.

Alex Paterson - RCM

I mean is there any reason to think because of the nature of the business going forward that we should expect that to be running below recent trends or should we take this quarter as a fair seasonally adjusted run rate for what warehouse should be doing.

Rodney Sacks

I do not believe I can give you an answer on that, Alex.

Alex Paterson - RCM

Yes. Okay.

Rodney Sacks

Now that is as far as getting into the projections and into the guidance which we really do not give.

Alex Paterson - RCM

Well, actually I am sorry. What I was trying to understand is, what the changes you did make in the WIC contracts and the way they have turned out to play out the bottom line is we should presume that there is been a step function down in the sales potential of that division given the way Q3 played out?

Rodney Sacks

That is correct. As a slight up we have actually been able to probably make up as much of the loss that we have in juice blends, is really what you are saying, with continued sales of juices and we have had some increases in our tetra pack business, the safety pack business, and so that is helped that business

Alex Paterson - RCM

Okay, all right, that helps. I have been trying to get a handle on the fourth quarter, Rodney, because of last years give or take $20 million of load and you tried to highlight how that A, does that seem like a fair number that we should be using in terms of turn it back that out of fourth quarter, and then what play does that have on the operating margins, as obviously last year's $20 million extra created a lift over to expense structure and this year we wont' have it, obviously with CCE and all that is going to make difference but just underline all that, can you give us framework for understanding how the fourth quarter plays out relative to last year.

Rodney Sacks

I really I do not think that we are in a position to give you any guidance on that. We have a quota that is subject to a substantial changeover in our distribution system very extensively. We have had volumes from Coke. We have got return of inventory. In an ideal world, they should equal each other but each of these different distributors are going to have different criteria of how much inventory they want to have on their floors at any one time.

We have got to see when that actually comes through the company. We are obviously looking at just managing the business, the $21 million last year of volume, we understand did this to topple the last year situation but the business is solidified. We also are waiting to see how the category does, generally the economy does. So it is very difficult for me to give you guidance and really we just do not that and particularly this quarter is more difficult than any other quarter.

Alex Paterson - RCM

Right, Rodney. I perfectly understand that. Perhaps a better read on last year's fourth quarter, the degree to which the $21 million created any artificial lift on margins because it was more than a normal quarter because of that load in. Is that a fair read or were the margin fairly representative of the business without the load in.

Rodney Sacks

Again, I think it is unfair for me to try and categorize that because there was a lift, roughly $21 million we estimated for the increase was a combination of 16 ounce which was pretty much our entire product range in Monster. Also, there was a large price increase in Java Monster and it was higher, it was about 12% or 13% versus a 6% or 7% increase in Monster.

Now how much of that increase was of Java Monster and that just perhaps a little disproportionate, there is a bigger bind of increase of that or not which more than offset that margin, I do not know. So we are just not in a position to say to you we think that the margin structure is good or bad. What we can say to you is that going forward, this year, we have historically what has really happened is that we have been able to improve the margin, I think, this quarter.

We think that we have got Java Monster has as a percentage of sales is a little lower. 24 ounce is a little lower in the Monster mix and those are the two lines that have smaller, lower margins. At the fourth quarter this quarter this year, we will have some sales and some higher margin sales from the energy shooters.

So those are factors that are going to influence the quarter and more than that I just can not give you any more indication. We are also at the fourth quarter going to be affected by the accounting for termination cost and deferred revenue. Those, again, have to be backed in and out. So there is just a number of moving targets in this quarter.

Alex Paterson - RCM

Okay. Rodney, I appreciate that but lastly just the international sales, as you are expanding them through CCE, should these be margin accretive, neutral, dilutive over the time?

Rodney Sacks

We think that there will probably there will be a slight decrease in margins from margins overseas that seems to be the trend because of crossing their higher cost of doing business, higher cost of our distribution arrangements and the route to market. So, overall, at this point in time, it seems to us, in the countries we have gone in to that we will have a lower margin then we have enjoyed in the US.

Also there will be a big factor on foreign currency, as you know, whereas up to couple of weeks back, the dollar is weak the currencies were strong which helped us. That swung in the last couple of weeks ago and so that will also start having an affect on us going forward but at this time, it is not. It is just too premature for us to be able to assess that.

Alex Paterson - RCM

Lastly, the December meeting.

Rodney Sacks

The December meeting, we are planning to have a December meeting, update meeting to stockholders. It will be, I think, the date is around about the December 16, and it will be held in New York at which, investors will be invited, which we will be honored to attend.

Alex Paterson - RCM

All right, thanks very much, Rodney.

Rodney Sacks

Thank you.

Operator

We will take a follow up from Judy Hong with Goldman Sachs.

Judy Hong - Goldman Sachs

Hi, Rodney. A couple of follow up questions with respect to the agreement with the Coke system. First, is there any opportunity to move your manufacturing out of your co-packers and move that into the Coke system and perhaps help your gross margin from that perspective?

Rodney Sacks

That is something that is just too premature for us to discuss at this point in time. There is always opportunity but that is something we will be considering as we go forward, and we will be holding some discussions with Coke and where we believe it is appropriate we would consider adding some Coke facilities to our production network but at this point in time we are continuing to produce through our existing network at the full. Again, this is something we all looking at. It is been evaluated.

Judy Hong - Goldman Sachs

Okay. Then my understanding is that this more of a long-term agreement, something like a 20-year an agreement, and I am just wondering logic of entering into this long-term relationship and what actions or what do you have in place that may limit the risk of consumers buying another energy brand, or then developing their own organic energy plan and perhaps that takes attention away from your brand.

Rodney Sacks

We think we have safeguard build into the agreements to protect the amount of focus and attention that our brands will get. There are certain limitations on what the distribution partners will be able to distribute. We are pretty comfortable. We do not think that there is any real, major difference between this arrangement and Anheuser-Busch relationship in principle.

The two relationships are reasonably similar and we believe that they both will be beneficial for the company. As we said, we do have safeguards that we do have build into to obviously ensure that we do not get locked into a system that is not performing or is not giving us a fair amount of attention.

It is up to us provide that they give products on to the shelf and perform their distribution functions efficiently, which is all weaken, it is up to us to undertake the global branding for the brand and to make sure that brand remains exciting and get pulled off the shelf. Provided we do our job, we believe that the distribution arrangements will continue to be positive for us on a long term basis, both with the IB system and with the Coke system.

Judy Hong - Goldman Sachs

So it would be fair to assume that the most of the terms in the agreement whether it is a margin structures or exit terms are relatively similar in this instant versus your prior agreement?

Rodney Sacks

I think they are relatively similar to the IB arrangements.

Judy Hong - Goldman Sachs

Okay. Thank you.

Operator

That does conclude today's conference and concludes the question and answer session. I would like to turn the conference over to Mr. Rodney Sacks for any additional closing remarks.

Rodney Sacks.

Thank you. Just in closing, the fourth quarter is a period of transition for us. It is quiet a extensive transition that we are going through as a company and we obviously are very focused on that. We are also focused on getting the transition in place in the UK, and then ultimately, getting the products established in the CCE system in the additional countries. so we believe we got a lot of work on our hands going forward, but we believe that this will ultimately be very beneficial to the brand and for the long-term growth, not only in the US, but also internationally for the brand. So we are pretty excited about the arrangements that we have been able to conclude and as we go forward, we think that 2009 will be a very exciting year for the company.

Thank you very much. We have to be in position to give the investors a further update when we have our interim investor conference in New York in mid-December and thank you for your support. Thank you very much.

Operator

That does conclude today's conference, we appreciate your participation. You may now disconnect.

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