Hansen Natural Mid Quarter Update

This is an overview of the key remarks made during Hansen Natural’s (HANS) Mid Quarter Business Update on December 16th 2008, right after Rodney Sacks [CEO] and Hilton Schlosberg [CFO] rang the NASDAQ closing bell. The call is archived here, and was accompanied by a slide presentation.

Note that all references to sales figures and market share are from Nielsen and are not actual sales or statistics reported by Hansen Natural. There can be a discrepancy between the Nielsen figures and actual results reported by Hansen Natural.

• Monster Energy has been volume leader for some time now, and now regular Monster Energy (16 oz.) is leading in unit sales as well, in the convenience channel (slide 10).
• Monster Ripper will be the name for Monster M-80 in overseas markets.
• Vidration is rolled out through some distributors, it is selling. In process to assess how much effort will be put into it. The category is price driven (discounting) recently, heavy promotions, putting pressure on margins, at levels that are not considered very attractive.
• The growth of the entire beverage industry continues to slow, consistent with the general economy (housing declines, unemployment). Consumers cut back on impulse drink purchases at gas stations, which is the most important channel for energy drinks. This trend, seen nationwide, is most marked in California, an important energy drink market. Blue collar workers are disproportionately affected. Any increase in spending (as falling gas prices might free up some additional disposable income) by consumers is expected to be moderate, given current economic uncertainties. Although many beverage categories are displaying negative growth, the energy category is continuing to grow, albeit at a slower rate. The Monster brand continues to grow in excess of the category and continues to generate the majority of additional dollars earned by the category.
• According to the Nielsen report for the 13 weeks through November 22nd 2008, the category in all outlets combined - grocery, drugs, gas, convenience, mass market excluding Wal Mart (WMT) - grew 7.6%, or $85.8 mln, to a total of $ 1.2095 bln. Monster Energy contributed $45.1 mln, of which $17.5 from Monster Java. Market share for Monster Energy excluding Java is 25.9%, up 2%. Monster sales were up 15.5%, compared to 2.4% for Red Bull. (Figures given during the previous mid quarter update on September 23rd 2008 can be found here).

click to enlarge

• Growth of the energy category in the convenience & gas [C&G] channel (13 weeks ended November 22nd 2008) was 7.8%. According to Nielsen, sales through the convenience & gas channel accounted for 81.6% of energy drink sales.
• For Canada, energy drink growth in the C&G channel is 16%. Monster is both in Canada and Mexico the #2 brand, growing in excess of the category.
• Monster Java represents about 10% of total gross sales of Monster.
• Sales to customers outside the US amounted to $31.1 mln. for Q3 2008, compared to $13.9 mln in Q3 2007. For the nine months ended September 30 th 2008 such sales totaled $79.4 mln, as compared to $40.4 mln in the same period in the previous year. These figures include sales made to the military channel that are shipped overseas: prior to Q3 2008 these were included in domestic sales, and are now reclassified as sales to customers outside of the US.
• Expected to benefit from reduction in the costs of certain raw materials, primarily apple juice, aluminum, milk and sugar. Although dairy prices increased in the course of the third quarter, the milk component has decreased. Currently HANS is negotiating can supply for 2009 and expects to benefit from reductions in aluminum prices, although not to the full extent due to certain hedges. Can prices, though are expected to be lower in 2009 than in 2008.
• Since the Q3 earnings conference call, HANS repurchased 2.169 mln shares at an average price of $24.66. Under the current repurchasing program the company is authorized to buy back another $95.534 mln worth of shares (of a total of $200 mln). Intent to implement the plan going forward.
• The majority of the transition of Monster distribution to Coca Cola Enterprises (CCE) distributors, other Coke distributors and some new AB distributors was completed in November. The transition in Canada from PespiCo (PEP) to Coca Cola Enterprises is scheduled for January 2009.
• The new distribution deal in Mexico with Jumex should improve performance in smaller markets and accomplish more extensive penetration, especially to the smaller stores. The Jumex agreement is due to commence towards the end of January 2009. Additional opportunities through Jumex for other markets in Central America, where Jumex has a lot of their own direct distribution in place.
• Auction rate securities stand at a fair value of $109 mln per December 12th 2008, from $124 mln on June 30th 2008 and $111.4 mln on September 30th 2008, including a $5.4 impairment charge (temporary), creating a tax benefit of $2.1 mln.
• The transition of the distribution of Monster to the Coke system in the UK is deferred to the beginning of January 2009.
• Performance of the independent distributor of Monster in Spain is a little disappointing and is being reviewed; other distribution opportunities in Spain are being evaluated.
• The rollout of the energy shooter Monster Hitman is on track, and HANS expects to launch two additional 3 oz. SKUs in coming weeks into the new year. For Q1 or Q2 2009 HANS expects to launch a completely new line of Monster Energy drinks. Not just an extra flavour, but a new beverage concept (based on “some new technology”). Sacks commenting on it that it’s been quite a challenge to get equipment to run this line and get the right quality, but they have now succeeded to get it right.
• On international expansion: focus now is on digesting the launch in new European markets with CCE distribution and a population of some 200 mln (“2/3 of the US population”), rolling out in the coming 3-4 months. Also looking at potential opportunities in South America, with a little bit more time to gear up for the summer season which starts in September. On an opportunistic basis Monster Energy is already selling in the South American market, but there will now be put more emphasis on building it, approaching it like the European market, putting more effort, time, personnel and marketing behind it.
• Looking into going into Australia, “pretty advanced in the Australian market.” HANS settled a trademark issue and now has the rights for the Monster brand in Australia, New Zealand, Hong Kong, Singapore (and either Indonesia or Malaysia).
• European market: C&G channel not as big as in the US, but more business in standard grocery stores, more sales in cafes, small stores and kiosks. Compared to the US, margins are expected to be not as rich, because of different distribution systems (more layers). And it will take some time to ramp up sales and get the benefits of larger volumes. Emphasizing that it’s important to “set the brand” in new markets, from a promotion perspective (spending ahead), before actually launching the product (e.g. Monster’s sponsorship of a Moto GP team).

Disclosure: long HANS.