Seeking Alpha
We cover over 5K calls/quarter
Profile| Send Message|
( followers)  

Executives

Rodney Sacks – Chairman and CEO

Analysts

Kaumil Gajrawala – UBS

Judy Hong – Goldman Sachs

Alec Patterson – Dresdner RCM Global Investors

Geoff [ph] – Citigroup

Mark Astrachan – Stifel Nicolaus

Hansen Natural Corporation (HANS) Q3 2009 Earnings Call Transcript November 5, 2009 5:00 PM ET

Operator

Good day, ladies and gentlemen, thank you for standing by, and welcome to the Hansen Natural Corporation third quarter 2009 fiscal results. Currently, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session, and instructions will be given at that time. (Operator instructions) As a reminder, this conference is maybe recorded today.

And now I would like to turn the program over to our host Rodney Sacks. Please go ahead.

Rodney Sacks

Good afternoon, ladies and gentlemen. Thank you for attending this call. I am Rodney Sacks; Hilton Schlosberg, our Vice Chairman and President, he 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 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 herein.

Please refer to our filings with the Securities and Exchange Commission, including our most recent annual report on Form 10-K filed on March 2, 2009, and our most recent quarterly reports on Form 10-Q, including the sections contained therein entitled risk factors and forward-looking statements for discussion on specific risks and uncertainties that may affect our performance. The company assumes no obligation to update any forward-looking statements whether as a result of new information, future events or otherwise.

An explanation of the non-GAAP measures of gross sales and certain expenditures, which may be mentioned during the course of this call, is provided in the notes designated with asterisks in the condensed consolidated statements of income and other information attached to the earnings release dated November 5, 2009. A copy of this information is also available on our website www.hansens.com in the Investor Relations section.

The beverage market in many countries through out the world and in the United States in particular continues to show softness. Both Coca-Cola and Pepsi continued to report lower North American sales volumes. Although we are seeing some positive signs in the US economy, the housing market still appears to be under pressure and there is little sign of new boarding activity. This continues to hamper the spending power of US consumers which we believe disproportionately affect the discretionary spending power of our consumers.

Positive news however is that according to the Nielsen reports for the five weeks ended September 26, 2009 energy drink sales both in the convenience and gas and grocery channels on a year-on-year comparison grew for the first time since March. Sales of energy drinks in the convenience and gas channel increased by 0.9% over the five week period last year. Over the five week period concerned, Monster sales increased by 5.4% over last year while Red Bull sales increased by 5.3%. Rockstar was down 4%, AMP was down 4.4%, Full Throttle was down 13.1%, while NOZ was up 23.2%.

Over the same five week period, sales in the grocery channel grew by 2.1%. Monster sales in this channel were up 9.8%, while Red Bull’s sales were up 8%, and Rockstar sales were down 5.6%, AMP sales were also lower by 16.5%, while Full Throttle sales were down 21%, NOZ’s sales were up 33.1%.

According to Nielsen, Monster’s market share of the convenience and gas channel has continued to increase from 27.8% at the beginning of the year to 30% in the five week period ended December 26, 2009. Red Bull share is up from 33.4% at the beginning of the year to 34.8%, while Rockstar share decreased from 11.2% to 10.4%, and AMP share decreased from 7.6% to 7.2% since the beginning of the year.

According to Nielsen, Red Bull’s market share of the grocery channel has remained flat through September 26, 2009 at 37.7%. Since the beginning of the year, Monster share increased from 22.4% to 24.6%, while Rockstar share decreased from 12.9% to 12.6%. AMP share decreased from 7.7% to 6.8%, while Full Throttle share decreased from 3.7% to 2.9%. And NOZ’s share increased from 1.9% to 2.3%.

According to Nielsen for the 13 weeks through September 26, 2009 all outlets combined, convenience, grocery, drug and mass merchandisers excluding Wal-Mart, sales in the energy drink category declined 1.1% versus a year ago. Sales of Monster grew 3.3% in the 13 week period concerned, while sales of Monster’s main competitor Red Bull increased by 1.9%. According to such reports, sales of Rockstar dropped 6.5%, sales of AMP dropped 10.6%, Full Throttle dropped 11.3% and NOZ was up 22.9%.

In actual dollar sales in the energy drink category by decreased by a total of $13.5 million in the 13 week period concerned. According to Nielsen, sales of Monster however increased by $11.4 million as compared to sales of Red Bull which increased by $9.4 million. Sales of Rockstar decreased by $9.3 million and sales of AMP decreased by $7.5 million. Sales of Full Throttle decreased by $6.9 million, while sales of NOZ increased by $8.6 million.

According to Nielsen for the 13 weeks concerned all outlets combined Monster’s market share increased by 1.2 points to 28.8%, while Red Bull’s market share increased 1 point to 35.4%. Rockstar’s market share was down 0.6 points to 10.7%. AMP’s market share was down 0.5 points to 7.3%. Full Throttle’s market share dropped 0.5 points to 4.1% and NOZ’s market share increased 0.7 points to 3.7%. These figures exclude the emerging energy shot category which is reported separately. If the energy drink and energy shot categories are combined, the overall category grew 3.3% in the 13 week period concerned.

According to Nielsen, sales of Java Monster represented approximately 13.1% of the sales of the Monster brand over the 13 weeks through September 26, which is a decrease of 1.6% as compared to 14.7% last year. The decrease in the percentage of our sales represented by Java Monster contributed in part to the increase in gross margin percentage achieved by us during the quarter.

In this regard, we are pleased to note that the gross margin percentage of the warehouse division also improved during the quarter. While sales of Java Monster were lower than 2008, the decline is primarily attributable to Starbucks entering the category in the middle of the second quarter of 2008 with a new line of DoubleShot energy plus coffee drinks in 16 ounce cans which directly compete with Java Monster.

In the 13 weeks ended September 26, 2009 for all outlets combined, sales in the energy plus coffee drinks category increased 5% over the comparable period last year to $103.7 million. Although sales of the energy plus coffee drinks category are higher than last year, the category is being split between two major participants.

According to Nielsen, sales of Starbucks DoubleShot energy plus coffee drinks in the 13 week period concerned amounted to $35.5 million as compared to sales of Java Monster in the same period which amounted to $47.1 million. Java Monster continues to out sell Starbucks coffee plus energy products by a large margin. Sales of our other competitor's products namely Rockstar Roasted and Full Throttle coffee drinks also substantially lower.

Monster’s market share in the much smaller drug and mass channel, which excludes Wal-Mart has remained stable since the transition at the end of last year. We believe that there is opportunity for us to increase our market share in that channel and we are taking steps to address that channel.

I am pleased to report that our overall market share both in Atlanta and Florida has continued to improve and is now higher than it was prior to the transition to the current system. Although CCE is making progress in Texas, we are still not back to the pre-transition share levels in that market.

The convenience channel in Houston, which is a large independent market continues to be a challenge. Interestingly Detroit, which is also a large independent market has also shown softness since the transition, although Monster is still the leading energy drink brand in that market. While the transition to certain of the new AB Distributors has also had its challenges, we are continuing to work through the issues that we encountered.

Overall, the transition in November last year is paying dividends. According to Nielsen, for the five week period ended September 26, 2009 Monster’s market share in the convenience and gas and grocery channels nationally increased to 30% and 24.6% respectively from 28.3% and 22.6% at November last year. We are hopeful that we will continue to benefit from our alignment with the two strongest beverage distribution systems in the United States.

We are continuing to see improvements in sales as well as gains in market share in Canada. According to Nielsen, in the convenience and gas channel in Canada for the 12 weeks ended September 26, 2009 despite sales of the energy drinks being down 5% overall, Monster’s market share increased by 6.2 points over the same period last year to 20.1%, while Red Bull share decreased by 0.3 points to 38.8%, and Rockstar’s market share decreased by 3.6 points to 12.2%. Monster also continued to improve its sales and market share in Mexico. Monster now holds a 26% share of the energy drink market in Mexico.

Sales are progressing satisfactorily in continental Europe and although we were off to a slower start in the United Kingdom, distribution levels of sales there continue to improve. Overall, sales in the United Kingdom and Europe were in line with the expectations. However, promotional and sampling costs and sponsorship expenses were higher than anticipated. We were fortunate to have sponsored both the new Formula One World Champion, Jenson Button, and the MotoGP World Champion, Valentino Rossi, which has resulted in wide exposure for the Monster brand worldwide.

We have appointed a new distributor in Ireland. Sales of Monster energy commenced in Australia during the third quarter through Schweppes Australia Pty Ltd. Initial response from both retailers as well as consumers in Australia has been positive and we continue to be excited about the prospects for the Monster brand in Australia. We are continuing with our plans to produce and launch Monster Energy in Brazil later this year. We also launched Monster Energy in Finland at the end of the third quarter.

For the three months ended September 30, 2009, sales through retail grocery specialty chains and wholesalers represented 6% of gross sales, down from 8% last year. Sales to club stores, drug chains and mass merchandisers represented 12% of our sales which is flat with the previous year. Sales to full service distributors represented 65% of sales, down from 68% in the same period last year. Other sales were 3%, up from 2%. And sales outside the US increased to 14% from 10% in the same period last year.

Gross sales to customers outside the US amounted to $50 million compared to $30.7 million in the same quarter last year. Included in such sales are direct sales to the company's military customers which were delivered in the US and transshipped to the military and their customers overseas. We believe that we will continue to benefit from reductions in the cost of raw materials overall although we expect continuing increases in the price of sugar.

Operating income for the 2009 third quarter includes proceeds of $4.7 million related to reimbursements of legal expenses as well as losses of $2.5 million related to Xtruck Inc for the torque off road truck racing series and related to Epicenter Music Festival LLC, as well as operating losses of $0.7 million incurred in relation to our European and Australian operations.

Operating income from the nine months ended September 30, 2009 includes proceeds of $4.7 million related to reimbursements of legal expenses as well as losses of $3 million related to Xtruck Inc for the torque off road truck racing series and related to Epicenter Music Festival LLC, as well as operating losses of $1.7 million incurred in relation to our European and Australian operations.

In the third quarter, gross sales of Monster import which is in a 550 ml resealable can and is manufactured in Europe and imported into the United States were approximately

$8.4 million. While sales of X-Presso Monster and new non-carbonated diary-based espresso energy drink which was launched shortly before the end of the second quarter amounted to approximately $4.3 million in the third quarter. Sales of unused Nitrous Monster Energy line of carbonated energy drinks which are packaged in resealable 12-ounce sleek cans and come in three versions amounted to approximately $13 million in the third quarter.

The package in the Monster Energy range that continues to have been hit hardest by the economic downturn is up 24-ounce size package which is consistent with our belief that the weak US economy has disproportionately affected blue-collar workers who make up a large portion of our consumer base and to all the principal purchasers of our 24-ounce size packages. Sales of Monster Energy in 16-ounce size cans in the United States increased in the third quarter of 2009 over the same period last year, while sales of Monster Energy in 24-ounce size cans in the United States decreased from the same period last year.

Turning to the energy shot category, according to Nielsen, the market share of the Monster Hitman Line of Energy Shooters is close to that of Red Bull energy shots which were launched recently and well ahead of NOZ, Rockstar and Full Throttle energy shots. However, there is a large gap between Five Hour Energy's market share and that of the other energy drink entries in that sector.

We are not satisfied with the sales rate of our Monster Hitman Line of Energy Shooters. We believe that the retail price points of energy shots is excessive when compared with the retail price points of energy drinks. Accordingly, we are implementing a strategy to reduce the processing of Monster Hitman energy shots to $1.99 at retail which we believe is more in line with energy drink pricing. At this time, it is premature for us to comment further on the strategy. We are also evaluating other opportunities in and ways of attacking the energy shot market.

We recently decided to launch a new line of ready to drink ice teas in 23-ounce cans under the Peach Tea brand name. Ready to drink ice tea is a large and growing category that is dominated by two competitors, and which our largest single customer does not have a credible challenger. Our strategy is to launch this line with aggressively pre-priced products to provide real value and encourage trial by consumers.

Once we are able to establish the brand through trial we plan to rationalize pricing in the market and introduce additional packages with higher margins. In this way, we hope to take advantage of an unusual opportunity that exists to establish a volume brand and create long-term value for shareholders. The Peach Tree line will initially be launched in four flavors, green tea, imported salon tea, sweet lemon tea and razzleberry tea in 23-ounce size cans which will be pre-priced at $0.99.

Turning to the balance sheet, cash and cash equivalents amounted to $317.7 million compared to $256.8 million at the end of December 2008. Short-term investments were $30.2 million compared to $29.1 million at the end of December 2008. Investments which are primarily auction rate securities decreased from $89.6 million to $88 million.

Trade accounts receivables net increased to $91.9 million from $45.2 million at the end of December and distribution agreement receivables decreased to $5.4 million from $19.7 million at December 31, 2008. Days outstanding for receivables was 26.9 days at September 30, 2009, compared to 16.9 days at December 31, 2008, and 23 days at September 30, 2008.

Inventories increased to $123.9 million from a $116.3 million at December 31, 2008. Average days of inventory was 78 days at June 30, 2009 which is lower than the 90 days of inventory at December 31, 2008.

In our 10-K for the fiscal year ended December 31, 2008, we have provided certain financial information regarding terminated and new distribution agreements. We explained the impact of the termination payments made to terminated distributors to the income statement, i.e. the full amount was expensed in 2008 including those distributors where we commenced distribution in 2009 mainly Mexico and Canada.

We also explained that while we received non-refundable contributions from newly appointed distributors which covered a significant portion of the costs of terminating certain distributors such contributions are accounted for as deferred revenue. Such deferred revenue will be recognized as revenue right to be over the anticipated 20 year life of the distribution agreements.

Deferred revenue recognized was $1.8 million in the quarter compared to $0.5 million in the comparable financial period last year. This explains the accounting treatment relating to the above. From a cash flow point of view, the above described transactions are expected to remain largely neutral to the company as we anticipated that we would receive payments for the contributions that approximate the payments to be made by us to terminated distributors.

Termination obligations recorded by us to prior distributors for the 2009 third quarter were $0.1 million as compared to termination benefits recorded by us of $0.2 million for the third quarter of 2008.

During the nine months ended September 30, 2009 the company redeemed 12.3 million of its auction rate securities at par. At September 30, 2009 the company held auction rate securities with a face value of $100.2 million, $105 million at June 30, 2009 and $112.5 million at December 31, 2008.

The company determined that a cumulative impairment of $12.1 million had occurred at September 30, 2009, $12.3 million as of June 30, 2009 and $14.9 million as of December 31, 2008, of which $7.6 million was deemed temporary and $4.5 million was deemed other than temporary as a result included as a commencement of other comprehensive loss is $4.5 million net of taxes as of September 30 2009.

Included in other income or expense other than temporary impairment of $3.3 million and $3.9 million for the three and nine months ended June 30, 2009. The auction rate securities will continue to accrue interest at contractual rates until their respective auctions succeed or they are redeemed. During the third quarter, the company repurchased 1.6 million shares of its common stock at an average purchase price of $31.96 per share.

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

Question-and-Answer Session

Operator

Thanks sir. (Operator instructions) Our first question comes from Kaumil Gajrawala with UBS. Please go ahead.

Kaumil Gajrawala – UBS

Hi everybody, hi Rodney, hi Hilton.

Rodney Sacks

Hi.

Kaumil Gajrawala – UBS

It looks like selling expenses kicked up as a percentage of sales. You talked about some of the sponsorships in the UK. Are there any other areas specifically you have kicked up selling expenses? And to what degree are they related to the new countries that you are rolling out and to what degree are they related to some of the new products in the US?

Rodney Sacks

I think that pretty much across the board the expenses that we have been incurring in Europe are higher than they’re been in the US, and that’s where you have seen when you combined and you – the two, you end up with the higher rate. As a percentage, small items for example like simple things like point of sale and premiums as a percentage of sales have just been substantially higher in Europe and UK particularly, samples are also higher and the sponsorship fee.

As I indicated earlier, the – we have tried to sort of split the cost of the sponsorships that we had particularly that are particularly appropriate to Europe, for example, the Jensen Button and the Rossi sponsorships and MotoGP. But despite even though you do that and trying to portion it, obviously it’s weighted heavily and you find that the costs are just moving up on the sponsorships.

I mean the end result is that those particular promotional properties are very beneficial to the company and the brand and will be going forward, because those basically promotional events take place in countries that we are going into, take place in countries where the races are televised, for example, Australia, both of those sports are very popular, Brazil, F1 racing, Formula One is very popular. So they are going after and those are going to prove beneficial as we continue to expand internationally.

Additionally, we took a decision to invest in basically it’s called torque off road truck racing, it’s a series, the previous series had sort of folded. And we decided to invest in a new series and take a different approach to the promotion to sort of take an ownership stake in. So hopefully over a period of time, hopefully we will be able to reduce our ongoing cost of promoting these sports which we think are key to our consumer demographic. And so you had that much higher – that loss that I referred to in the extra series.

We also took an decision to take a controlling interest in a concert series called Epicenter which had a concert in California during the summer. Going on, we have sort of – we lost a little bit of money in that series, but based on what we have learnt and based on our numbers going forward, we believe that that series will effect at least breakeven or probably be profitable, so that will effectively reduce our sponsorship cost going forward. So we are looking at sort of tackling how we go forward with getting into and sort of owning certain key properties and with a view to try and sort of manage our costs on a longer-term basis.

I think I have said over many calls over the years that as we continue to find more success in the extreme sports, the cost of sponsoring extreme sports, athletes, and series it continues go up every year. But disproportionately this year those two properties did affect our expense and our cost ratios.

Kaumil Gajrawala – UBS

Thank you. So as we look forward, there might be a little more bumpiness in the selling line depending on whether there is a new property involved or not?

Rodney Sacks

Yes, we are looking at one or two others, but we hope to be able to try and manage them a little better going forward, it’s – we are also going through a learning curve in these areas. We are also obviously as we continue to – the brand continues to gain traction and we continue to get listings in Europe, so the cost that we are incurring in establishing the brand in Europe will continue to settle down an be more normalized.

Obviously, as you go into new countries you have that same issue when you have slightly higher startup costs or promotional costs as a percentage of sales because you got to start and get going. But we do think it probably will be a little less – have less impact going forward. Australia has been very good in that respect. There, we had a very good launch, and our numbers are showing good results as compared to the cost and hopefully we will be able to replicate that in new countries as we roll out further.

Kaumil Gajrawala – UBS

Great. And you mentioned Brazil, is that somewhere that you’ve already rollout or you are eventually rolling out?

Rodney Sacks

No, we have had a trial run in production and we – because of the taxes and the number of complications in importing finished products, we will be producing in, but also we have a planned rollout for later this year and for launch of the product, but anything conjunction with actual production in Brazil and so we’ve been – we’ve had certain delays in getting production going and getting our goods and ingredients cleared into Brazil, but we plan to start selling later this year.

Kaumil Gajrawala – UBS

Got it. Thank you.

Rodney Sacks

Thanks.

Operator

Thank you, sir. Our next question comes from Judy Hong. Your question please.

Judy Hong – Goldman Sachs

Thanks. Hi, Rodney.

Rodney Sacks

Hi, Judy.

Judy Hong – Goldman Sachs

Just in terms of the category growth improving in September, can you tell us what you think drove that improvement, and do you know if that improvement continued into October?

Rodney Sacks

We really – I can’t really give you more color on that. We’ve actually seen – we see a little bit of bumpiness still in our sales numbers out to distributors, in some cases, they are ordering too much. And the best indicator to us has been the actual sell-through rates. And we just got that couple of few days ago, so at this point we don’t have a bit of handle on that. We just know that it has – it does seem to be positive and we are encouraged by that.

Judy Hong – Goldman Sachs

Yes, it just seems a little bit counterintuitive to what we are hearing from other beverage companies in terms of the overall category still pretty soft and particularly in the premium priced product. So I am just surprised that that – I mean obviously this is one month of trend that you saw that improvement, and I was just wondering if that was a one-month phenomenon or it sort of continued into September.

Rodney Sacks

I know that there was a switch couple of months back by consumers to much more of the store brands and private label and cheaper brands. What we've been hearing is that consumers are more encouraged by the economy and that there was a earlier report out on Monday that consumers were seemed to be going back to brands and focusing on brands.

But again, all we can say that everything that as I said earlier in the call, it has disproportionately affected our 24 ounce, so that pretty much is our higher priced product on a single serve. It’s at the – it’s in the $3 ring range as opposed to the $2 ring range for the 16 ounce and that’s why I indicated, in the period, our 16-ounce numbers were continuing to increase. So we are seeing – these numbers are small, but we are seeing positive signs for the Monster brand.

We obviously have also been assisted by the new products that we've introduced, but ultimately they do often cannibalize other products, so I can’t give you the net effect of them, other than to say that overall we are seeing – the brand is up which is positive for us. But there are other brands as I indicated, a lot of them are down.

Judy Hong – Goldman Sachs

Yes. And then just in terms of Red Bull’s latest performance, it seems like that their share trend is getting a little bit better at least in the five week data that you provided. Anything to call out there in terms of what’s driving sort of sequential improvement on their brands?

Rodney Sacks

I don’t think so. I think that they’ve probably just had some focus on a couple of areas where they were weaker. They seem to be putting a lot more attention into those areas. They seem to be getting a little more traction in their 16 ounce can size at the expense of their (inaudible) ounce. They seem to be a little bit of a switch-up from 8 to 16 which is helping with their improvement because of the higher ring.

Judy Hong – Goldman Sachs

Okay.

Rodney Sacks

It doesn’t help on the units number, but on the ring, it does.

Judy Hong – Goldman Sachs

Okay. And then just in terms of your comment about taking pricing down on the Hitman, can you just maybe elaborate a bit more in terms of what the rational behind that strategy is and –?

Rodney Sacks

What we saw initially was the pricing was very irrational in the shot category. Prices were going on reasonably consistent with the energy drink pricing on a case basis, but the retailers were taking a much larger margin on the shots and putting them on the shelf that up to $2.99 a little 2 ounce short. We have looked at.

We have looked they’ve been pricing, that’s been the $2.49 to $2.99 in those areas and as where most of the pricing has settled down. But when you do look at that in relation to the pricing of energy drinks, you do see a disconnect. I mean the energy drink is going to give – we believe will give the consumer a boost and it’s a use occasion. And if it’s 8 ounce, it’s close – it’s priced close to $1.99 or 16 ounce is priced in the $2.29, $2.39 category.

You're getting a big product in 16-ounces size can and you're paying 20%, 30% more for a little 2 ounce short. And so we just believe that there should be more rationality between a single use occasion with a shot which serves a particular purpose or function and a single can or a – of an energy drink which serves a – which is designed to serve a similar function. And so we think that if we can bring that pricing down and give a little more value to consumers, we think that might help. That’s the strategy.

We are going to look at doing it and we will see how that works. We also have some other thoughts on how to address that category and how to work out a way to make inroads, because I think all the energy drink companies’ products have sort of – are all in the same sort of ballpark in that category. So we all got to find a way to break into that in a more meaningful way.

Judy Hong – Goldman Sachs

Okay. Thank you.

Operator

Thank you. Our next question comes from Alec Patterson. Please go ahead.

Alec Patterson – Dresdner RCM Global Investors

Yes, hi. Rodney –

Rodney Sacks

Hi, Alec.

Alec Patterson – Dresdner RCM Global Investors

Hi. Just wanted to get a read, you mentioned how in the UK the ACV levels were improving and the relationship with CC there. But in terms of how you're sorting out the local operators' incentives between relentless and your product, can you give a sense of how you worked it out so that you know you are getting the same level of emphasis versus their own brand?

Rodney Sacks

We’ve had a lot of discussions with CC, the CC team in Great Britain on that. And we are clearly getting – we are showing them and explain them why we think there is a differentiation between the brands and what they – the different brand stand for. And that we have also sort of working through with them how they can persuade and justify to retailers why they would be better off having both brands and would broaden their consumer base because the brands we think do appeal to different consumers and we are all getting that.

We are seeing that simply as a fact, we are seeing it in listings, we are seeing them starting to make presentations. In some cases, we are attending some of the presentation, the customer chain calls with them. We are getting listings in some of the smaller stores. We recently had a listing in some maybe 2000 stores. And so we are definitely improving our distribution levels.

We also – they’ve put together a team of dedicated sales personnel. They’re all starting to share numbers with us, so we are knowing – getting to know what their team is selling, whereas before we didn’t know where their emphasis was. So we are able to give input on their team and make sure that we are getting a fair share of attention. We are looking at putting some of our own independent sales people into the field in the UK, we are working with CC now, we really didn’t have that as a sort of relationship before, but we have it.

We were able to work together to make sure that we go to different retail outfits so we don’t end up stepping on each other’s toes. And we think that will help drive create demand in the small independent stores and the system in GB is most of those independents end up buying their products from the cash and carry wholesalers like Bookers and Bestway.

And so once we can drive – create some demand at the store level then they will start picking up their purchases from the cash and carries and that’s a pretty extensive system that exists in Great Britain, so that’s the strategy we have. But we definitely are getting more listings. It’s probably premature we had a trial with a large group and our product did very well, it was selling at the same rate as relentless. And so we are hopeful we haven’t got the nod yet. But we are hopeful we will get a good listing there and our products are doing quite well in some of the other stores.

In fact, it had been suggested that in – as the product hasn't been doing as well effect, as the contrary, we confirmed with, guys, that in fact the product is very well in (inaudible) and they are probably expanding the product’s footprint into more stores. So there are all challenges in different countries, but overall, we have picked up some nice market share and we are continuing to grow.

We are actually seeing continued growth quarter-by-quarter and/or period-by-period in most of the European countries which is good for the brand, so – because it is at least sticking. And so we just are going to continue to focus on the plans. We do have plans to increase our numbers next year and we were pretty comfortable with that.

Alec Patterson – Dresdner RCM Global Investors

Okay, and great, I appreciate that. Do you have market share numbers for the UK or France?

Rodney Sacks

I don’t have them here. I know that in the – I think in France, we have probably just over a 10% share now. It’s gone over 10% in most of the channels. But I don’t have the details of the exact channels or how much it is.

Alec Patterson – Dresdner RCM Global Investors

Okay. And then as you went through explaining some of the puts and takes going on at the operating profit level with the ventures, the extract, et cetera, A, are you going to be detailing that in the Q so we can at least understand what’s going on? And B, are all those items behind what happened in terms of the selling expense ratio jumping up year-over-year or did they all flow through that and we should expect that current ratio of north of 12% to kind of hold now going forward?

Rodney Sacks

I am really not sure I can give you information on that. It clearly, obviously comes into the – these items come into the expense line. And we don’t expect there to be that sort of impact going forward. It mainly hit the line in this third quarter, both Xtruck and Epicenter. But I am just not in a position to be more definite on how it’s likely to be going forward. We would think it’s coming down, but I really can’t give you that with any definity [ph].

Alec Patterson – Dresdner RCM Global Investors

Okay. All right, thank you, Rodney.

Rodney Sacks

Thanks Alec.

Operator

Thank you, sir. Our next question comes from Greg Badishkanian. Please go ahead.

Geoff – Citigroup

This is Geoff [ph] on for Greg.

Rodney Sacks

Hi, Geoff.

Geoff – Citigroup

How are you doing? Can you talk about the promotional environment particularly this quarter and into September and October? Would you say it's gotten more or less promotional?

Rodney Sacks

More or less promotional, I am not sure.

Geoff – Citigroup

Just from a competitor standpoint.

Rodney Sacks

Competitive, it's been – it's pretty much the same. It has just been a question of where we – we are in a sort of position now where we are reviewing – changing certain directions in promotions and how to do promotions. The last quarter was in many ways it was a learning curve through Xtruck and Epicenter. There are one or two other opportunities that are evaluating that are different.

But looking at it on the same on a similar basis to actually acquire a stake in the even or in the actual property so that we actually have an asset that we can leverage going forward, we can stabilize our costs and actually hopefully even grow some profit, there is some profit on it. But at this point, we are a little higher in our cost but – for the US but not much. It’s really is attributable to the Europe where we’ve had the higher costs.

I don’t want to break them out at this point, but pretty much across the board, if you look at Europe that’s where we are ending up in with substantially higher costs and that needs us to normalize. When that normalizes, I think we will able to go get back to much closer to the historical levels.

Geoff – Citigroup

Okay. And then as you sort of think about 4Q margin, how do you think input costs might impact your margin in the quarter?

Rodney Sacks

I think we gave you some indication of the – from the cost side that we think it’s reasonably good. And so – sugar’s up a little bit, but we really do think we should be able to keep the margins in line. But again, we just don’t give guidance, so we just don’t get to a point where I am not sure of where we are going to end up and a lot of it will depend on the mix.

The mix was a little bit less in the coffee. If we can do – if we think we can actually do some a little better in this quarter with newer products like import and Nitrous, which may help the margin, but again I really go back to the point that we really don’t want to give guidance and don’t give guidance on those numbers.

Geoff – Citigroup

Great. Thank you.

Operator

Thank you. And our final question comes from Mark Astrachan. Please go ahead.

Mark Astrachan – Stifel Nicolaus

Yes. Hi, good afternoon, guys.

Rodney Sacks

Hi, Mark.

Mark Astrachan – Stifel Nicolaus

I guess just first question on the promotional allowances line, could you talk in broad strokes about the leverage or kind of the reversal of leverage in that line and how important those are to driving growth. And basically, I know you can’t really answer this, but directionally if you didn’t see that increase in promotional spending or promotional allowances, do you think you still would have had pretty nice revenue growth. I mean is it really a necessary driver to the business?

Rodney Sacks

That’s the million dollar advertising question. You never know the answer to that question. On a personal level, I believe that a lot of the – well not lot, but certain of the properties in the promotional expenses we incurred did not have a direct relation on our revenues. I think a lot of them were very much more preparatory to the internationalization if I could describe it like that way of the brand.

How much did the Jensen Button promotion, the fact that he won the world champion have on sales? He only won the world championship two weeks ago, so his picture is all over the paper with drinking Monster, wearing Monster hats in a very incredible setting. So what will that do to our sale directly in the UK, it may improve them in the fourth quarter, it’s probably nothing in the third quarter. But what’s more important is that the brand is credible, the brand is now well known in Brazil where they had the race. The brand is well known in – it helped the brand we think in Australia which has got off to a great start.

We are planning obviously new launches expanding into additional countries in Europe next year, expanding from Brazil into additional countries, in South America, we are looking at the Asia, we don’t have any fixed plans yet. But those countries have – they have a lot of exposure to these international properties, the Formula One, the MotoGP, those are clearly going to benefit the brand on a longer-term basis and to help create awareness for the brand and ultimately pull when you go into those markets. But it’s really, really odd for me to say – and yes, on a short-term basis if we managed the company on a very short-term focus, we could probably pullback some of these things that we are doing.

And in the short term, it probably wouldn’t make much difference or no difference to our sales. But we think it will make a difference in long term and we are trying to manage the brand for the long-term and so a certain percentage, not all of what we're doing, is designed to address the international growth expansion of the brand whereas other things are a design to current sales and keep the brand relevant and in the forefront of the mind of consumers.

Mark Astrachan – Stifel Nicolaus

Okay, great. And then directionally speaking, if you go back a year ago and look at the contribution from some of the ancillary brands like Lost or Rumba, was that business what I would call meaningful a year ago and is part of the reason why you can say that your 16-ounce business is growing, but potentially you are seeing some pressures because you are laughing some of those businesses being bigger a year ago than they were this year.

Rodney Sacks

Not really, those brands have been non-core is one way of defining them for USA. They've really not had a real impact for some years on our numbers, on our sales, on our profits or anything. The – many years back there was an opportunity that might have come about with those brands and then maybe would have contributed to the bottom line a little bit.

As the energy category evolved, it became – these brands became less and less important. We're sort of looking at these brands to try and test the market or test consumer response to different types of products. In the case of Lost, it’s pretty much the same as energy drinks, there is not a lot of point to – no real points of difference. In the case of the energy juice which is Rumba, there is – it is a non-carbonated 100% juice product, and we are looking at testing it and how to market it and seeing if there is an opportunity that might grow and develop.

If we nurture it in that – and then open up a new category or sub category, the sales of that have been okay, but it’s not making a big difference either way. So we're looking at that and we're saying do we persist with it. We're reviewing it. But we're looking at information that we get to maybe tweak that into another direction.

We are sort of – we are thinking about taking a juice product in another direction now and doing something different. But some of it's derived from information we received from Rumba. But they really are non-core and they don’t really effect the – the brand that’s – when I say 16-ounces increase, that is Monster and that is continuing to be strong and continuing to show positive increases.

Mark Astrachan – Stifel Nicolaus

Okay. And if you think about just the 16-ounce Monster, was that up this quarter versus last quarter?

Rodney Sacks

I don’t – 16 ounce, I would be guessing. I don’t know. I will try and find that figure out for you now, but –

Mark Astrachan – Stifel Nicolaus

Well, but it was still up in the second quarter, right, year-on-year?

Rodney Sacks

To the best of my recollection it was.

Mark Astrachan – Stifel Nicolaus

Okay.

Rodney Sacks

Yes.

Mark Astrachan – Stifel Nicolaus

All right.

Rodney Sacks

I think we have seen 16 ounce in Monster decrease. I think it’s continued to improve. The softness has been in the 24 ounce and even a little bit in the 32-ounce package because of the higher ring and we think the problem particularly in the unemployment in blue-collar workers and that’s in been the problem. So generally we’ve continued to see Monster 16-ounce products continue. I think looking back to – my recollection is looking back at Nielsen numbers continually. We have always continued to show positive numbers on the 16 ounce.

Mark Astrachan – Stifel Nicolaus

Okay. And just finally, just to go back to some of the numbers that you had touched on from the Xtruck series and there are some other things I missed in there. Could you just give us those again? There were some legal expenses in there, there were some other puts and takes.

Rodney Sacks

Yes, there was a recovery of legal expenses of about $4.7 million. There were costs in the three months attributable to Xtruck and the Epicenter Music Event of about $2.5 million. And then an operating loss net of about $0.7 million in relation to the European and Australian operations, that was slightly higher in Europe and there was a profit contribution from Australia.

We just combined those two. And when you look at them, they're pretty close. They're immaterial, but they do certainly have an impact on the operating income line and that is why we addressed them for both the three and the six month – three and nine months. It was a small differential in the six – in the three months and there was a – pretty a zero effect from those on the operational income in the nine-month period.

Mark Astrachan – Stifel Nicolaus

Great, thank you.

Rodney Sacks

Sure. One of the things that I would like to allude to is just to mention that the tax rate for the period will be about 39.1% as compared to 37.5% for the same period last year. This increase was primarily attributable to a decrease in non-taxable interest income from certain investments and a decrease in tax benefits attributable to operations in certain tax jurisdictions having lower tax rates.

I just wanted to make that, because that's – you can see there is the differential in the operating income line and the net income line. So the increase in – just to go back, answer an earlier question, sorry, the 16.2-ounce, yes, that has been positive both the second and the third quarter over prior year. Just to confirm that.

We are at a planning time at the moment. We really are planning to have a reasonably large push to expand our international distribution on different continents. We are engaged in a lot of discussions on – in that respects that will be our ongoing focus early next year.

We hope we are able to announce a meaningful relationship in the near future in that regard and probably hopefully before we have the shareholder update in the middle of December. At this point, we are planning on continuing to implement our share repurchase scheme this quarter. And thank you very much for your attendance.

Operator

Ladies and gentlemen, this does conclude today's program. Thank you for your participation and have a wonderful day. You may now all disconnect.

Copyright policy: All transcripts on this site are the copyright of Seeking Alpha. However, we view them as an important resource for bloggers and journalists, and are excited to contribute to the democratization of financial information on the Internet. (Until now investors have had to pay thousands of dollars in subscription fees for transcripts.) So our reproduction policy is as follows: You may quote up to 400 words of any transcript on the condition that you attribute the transcript to Seeking Alpha and either link to the original transcript or to www.SeekingAlpha.com. All other use is prohibited.

THE INFORMATION CONTAINED HERE IS A TEXTUAL REPRESENTATION OF THE APPLICABLE COMPANY'S CONFERENCE CALL, CONFERENCE PRESENTATION OR OTHER AUDIO PRESENTATION, AND WHILE EFFORTS ARE MADE TO PROVIDE AN ACCURATE TRANSCRIPTION, THERE MAY BE MATERIAL ERRORS, OMISSIONS, OR INACCURACIES IN THE REPORTING OF THE SUBSTANCE OF THE AUDIO PRESENTATIONS. IN NO WAY DOES SEEKING ALPHA ASSUME ANY RESPONSIBILITY FOR ANY INVESTMENT OR OTHER DECISIONS MADE BASED UPON THE INFORMATION PROVIDED ON THIS WEB SITE OR IN ANY TRANSCRIPT. USERS ARE ADVISED TO REVIEW THE APPLICABLE COMPANY'S AUDIO PRESENTATION ITSELF AND THE APPLICABLE COMPANY'S SEC FILINGS BEFORE MAKING ANY INVESTMENT OR OTHER DECISIONS.

If you have any additional questions about our online transcripts, please contact us at: transcripts@seekingalpha.com. Thank you!

Source: Hansen Natural Corporation Q3 2009 Earnings Call Transcript
This Transcript
All Transcripts