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

Executives

Rodney Sacks – Chairman and CEO

Hilton Schlosberg – Vice Chairman and President

Analysts

Judy Hong – Goldman Sachs

Kaumil Gajrawala – UBS

Caroline Levy – SLSA

Mark Astrachan – Stifel Nicolaus

Alec Patterson – RCM

Hansen Natural Corporation (HANS) Q2 2010 Earnings Conference Call August 5, 2010 5:00 PM ET

Operator

Welcome to the Hansen Natural Corporation second quarter 2010 financial results conference call. During today’s presentation, all participants will be in listen-only mode. Following the presentation, the conference will be open for questions.

(Operator Instructions)

As a reminder, today’s conference is being recorded, August 5, 2010. I would now like to turn the conference over to our host, Rodney Sacks, Hansen Natural Corporation Chairman and CEO. Please go 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 our 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 1, 2010, and our most recent quarterly reports on Form 10-Q, including the sections contained therein entitled risk factors and forward-looking statements for a discussion on specific risks and uncertainties that may affect our performance. The company assumes no 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 August 5, 2010. A copy of this information is also available on our website, www.hansens.com in the investor relations section.

There appeared to have been an improvement in the beverage market in general in North America in second quarter of 2010. While certain sectors are still negative, some are showing positive growth, most notably the energy drinks, both drink and tea categories. Growth in the energy drink category including shots accelerated in the second quarter of 2010 into double digit territory when compared to previous quarters. According to Nielsen, for the 13 weeks through June 26, 2010, all outlets combined, namely convenience, grocery, drug, and mass merchandisers, excluding Wal-Mart, sales in the energy drink category including shots increased 10.8% versus the same period a year ago.

Sales of Monster grew 12.7% in the 13-week period concerned while sales of Red Bull increased by 15%. Sales of Rockstar increased 10.3%, sales of Amp dropped 8.2%, sales of NOS increased 7.1%, and sales of Full Throttle dropped 29.3%. According to the Nielsen report for the five weeks ending June 26, 2010, sales of energy drinks in the convenience and gas channel as defined by us increased by 12.9% over the comparable five-week period in 2009.

Over this five week period, sales of Monster increased by 15.4% over last year, while sales of Red Bull increased by 15.7% over last year. Rockstar was up 14.9%, while Amp was down 5.8%. Full Throttle was down 31.1%. No Fear was down 39.7%, while SoBe and Adrenaline Rush were each down in excess of 85%. NOS was up by 8.4%, which was considerably slower than in previous periods.

According to Nielsen, for the five weeks ended June 26, 2010, Monster’s market share of the convenience and gas channel of the energy drink category including energy shots was 27.9% against Red Bull’s share of 31.9% and Rockstar’s share of 9.6%. Nielsen numbers for chain convenient stores as reported by our third party for the four weeks ended July 10, 2010 indicated that the momentum of sales increases for both the category of Monster is increased. These numbers reflect that chain convenient store sales grew 11% versus 9% the previous month while sales of Monster grew 19% versus 14% the previous month.

In actual dollars, sales in the energy drink category for all outlets combined increased by $142.3 million to $1.5 billion in the 13 weeks ended June 26, 2010.

According to Nielsen, sales of Monster increased by $43.9 million as compared to sales of Red Bull, which increased by $62.5 million. Sales of Rockstar increased by $13.4 million, sales of Amp decreased by $7.6 million, sales of NOS increased by $3.3 million, while sales of Full Throttle dropped by $15.4 million.

According to Nielsen, sales of Java Monster represented approximately 11.3% of the sales of the Monster brand for the 13 weeks to June 26, 2010, which is a decrease of 1.8 percentage points as compared to 13.1% for the same period last year. The decline in the sales of Java Monster continues to be attributable primarily to the entry of Starbucks into the category in the middle of the second quarter of 2008 with its new line of Doubleshot Energy Plus coffee drinks in 15-ounce cans which compete directly with Java Monster.

We are continuing to see increased sales of Loca Moca and Mean Bean, which are the primary packages of our Java Monster line over the comparable 13-week period last year. In the 13 weeks ended June 26, for all outlets combined, sales of the ready-to-drink energy plus coffee drinks increased 3.8% over the same period last year. Java Monster is now only 2.9% lower than last year. Starbucks Doubleshot is up 29.3%. Rockstar Roasted is down 18.7%, and Full Throttle coffee is down 58.2%.

We continue to see improvements in both sales and Monster’s market share in Canada. According to Nielsen, in the convenience and gas channel in Canada for the 12 weeks ended June 5, 2010, the energy drink category grew 9% while sales of Monster grew 23%. Monster’s market share increased 2.1 points over the same period last year to 19%, while Red Bull’s share increased to 0.5 point to 38.3% and Rockstar’s market share decreased by 2 points to 14.3%.

According to Nielsen, sales of Monster Energy in Mexico in May 2010 grew 13.4% over last year while sales of Red Bull grew 4%. Sales in the energy drink category in Mexico as a whole grew 11.5% in the same period. Monster’s market share in Mexico in May 2010 increased by 0.4 points to 25.2%, which excludes Java Monster. We are working with our distributor to address specific channels, which lower-priced competitor products such as Gladiator has gained share.

Sales continued to progress satisfactorily in the United Kingdom and continental Europe. Equally sales in Hungary, Czech Republic and Slovakia continued to perform very satisfactorily. In the second quarter of 2010, net sales in Europe in U.S. dollars were more 230% higher than in the comparable quarter in 2009. However, sponsorship expenses, sampling costs, and point of sale costs as well as payroll costs continued to be high particularly as we ramp up in new countries in which we are launching Monster.

During the second quarter we launched the Monster Energy brand in Slovakia, Czech Republic and Norway. We are currently in the process of launching the brand in Germany, the United Arab Emirates, Lebanon and Jordan with additional introductions anticipated for later in 2010. While sales of Monster Energy commenced in Brazil in the first quarter, we experienced delays in clearing certain ingredients through customs which resulted in a disruption in our supply chain. We have now recommenced production in Brazil and I am hopeful that we have put the disruptions in supply behind us.

Competition continues to be aggressively in Australia. We believe that our distribution partner is not effectively executing at the point of sale or following the sales strategy that we have found it works well for ourselves. We are working with them to implement our suggested programs. We have launched X-Presso Monster in Australia, which will provide us with the unique product unlike any other energy drinks in that market.

Gross sales were up in each of the three months of this quarter as compared to last year. Sales in July are also ahead of sales in July last year. Monster Energy drinks achieved record sales during the second quarter of 2010 and June sales were the highest ever achieved by the Monster Energy brand despite lower sales of Monster Energy Hitman shots during the quarter.

Sales of our new peach tea brand continued to gain strength and grew approximately $7 million in the second quarter of 2010. We are pleased with the results that we achieved to-date with peach tea. As previously mentioned in our last conference call, sales in the first quarter were negatively impacted by (inaudible) purchases made by customers in 2009 fourth quarter. While such negative impact did not affect the second quarter results, it affected the results for the six months ended June 30, 2010.

We have reviewed our strategy to compete in the energy shot category and are planning to launch a new energy structure in the third quarter or shortly thereafter under the Works brand name.

For the three months ended June 30, 2010, gross sales to retail grocery, specialty chains, and wholesalers represented 5% of gross sales, down from 7% last year. Gross sales to club stores, drug chains, and mass merchandisers represent 13% of sales, up from 12% last year. Gross sales to full-service distributors represented 64% of sales, down from 67% in the same period last year. Other sales were 2% as compared to 3% last year. Gross sales outside the United States increased to 16% from 11% in the same period last year.

Gross sales to customers outside the United States in the second quarter of 2010 amounted to $66.6 million compared to $39.4 million in the same quarter last year. Included in such sales are sales to the company’s military customers, which are delivered in the U.S. and then trans-shipped to the military and their customers overseas.

Gross profit margins in the second quarter of 2010 were 52.9% versus 53.9% in the comparable quarter last year and 52.3% in the first quarter of 2010. The reduction in our overall gross margin was partly due to the higher percentage of our sales attributable to sales in Europe and Australia where gross margins are lower than in North America and lower margins achieved by us for our peach tea brand.

MDF and CMAs as a percentage of net sales were slightly lower than in the same period last year. Distribution expenses as a percentage of net sales were slightly higher than the same period last year. Sponsorship and endorsement costs incurred by us were approximately $3.3 million higher than in the comparable period last year. While point of sale costs were approximately $2.6 million higher, such increase was largely offset by a reduction in merchandisers display costs of approximately $2 million.

Although selling expenses were higher than in the same period last year, selling expenses as a percentage of net sales were lower in the second quarter of 2010 than in the comparable period in 2009.

Payroll expenses in the same quarter of 2010 were higher than in 2009. It represented a similar percentage of net sales as in 2009. General and administrative expenses were higher in the second quarter of 2010 as compared to 2009 primarily due to an increase in professional service fees and an increase in bad debts.

Operating income for the second quarter included losses of $4.2 million incurred in relation to our European and Australian operations. As a percentage of net sales, operating losses in the United Kingdom and Europe were substantially lower than in the first quarter of 2010.

The effective tax rate for 2010 second quarter was 42% compared with 38.5% in the same quarter last year. The increased tax rate was primarily the result of a non-cash charge to establish a full valuation allowance against a deferred tax asset related to a foreign subsidiary and its related impact on the company’s overall tax rate.

We continue to make progress in the implementation of the SAP enterprise resource planning system, which was introduced on January 1, 2010. While we believe that delays in filling deliveries and lost sales have significantly reduced since the first quarter, we are unable to quantify what the impact has been, either we continue to believe that the impact was relatively minor and that the change to the SAP will ultimately be beneficial for the company overall.

Turning to the balance sheet, cash and cash equivalents amounted to $409.9 million compared to $328.3 million at December 31, 2009. Short-term investments were $61.7 million as compared to $18.5 million at December 31, 2009. Long-term investments decreased from $80.8 million at December 31, 2009 to $59.5 million. Included in short-term and long-term investments are auction rate securities of $76.2 million.

Trade accounts receivables net increased to $127.6 million from $104.2 million at December 31, 2009. Distribution agreement receivables decreased to $3.9 million from $4.7 million at December 31, 2009. Days outstanding for receivables were 31.4 days at December 31, 2009, compared to 30 days at June 30, 2010.

Inventories increased to $139.2 million from $108.1 million at December 31, 2009. Average days of inventory was 73 days at June 30, 2010, which is higher than the 72 days of inventory at December 31, 2009.

In March 2010, the company entered into an agreement relating to $54.2 million in par value auction rate securities which enables the company to sell such securities, Put Option, in semiannual or annual installments beginning March 22, 2011, with full sale rights available on or after March 22, 2013. Such auction rate securities which have been reclassified from available for sale to trading securities will continue to accrue interest until redeemed through the Put Option or as determined by the auction process or by the terms outlined in their respective prospectuses in the event of auction failure.

At June 30, 2010 the Company held auction rate securities with a face value of $87.3 million, $92.7 million at March 31, 2010 and the Put Option with a fair market value of $4.1 million, which was $5.1 million at March 31, 2010.

The Company determined that an impairment related to its auction rate securities of $6.5 million existed at June 30, 2010, of which $2.4 million was deemed temporary and $4.1 million was deemed other-than- temporary. As a result, a loss of $1.4 million, net of taxes is included as a component of accumulated other comprehensive loss as of June 30, 2010, and we recorded a net charge to earnings of $0.7 million in respect of our auction rate securities for the second quarter of 2010. The auction rate securities will continue to accrue interest at their contractual rates until their respective auctions succeed or they are redeemed.

In the second quarter, we launched Monster Import Light in a 550 ml resealable can as well as Monster Energy and low-cost (ph) Monster Energy in 12 ounce slim cans for our an in-and-out summer promotion.

In the third quarter of 2010, we launched our new Monster Energy Absolutely Zero, which is a zero calorie energy drink in 16 ounce cans. We have also introduced Monster Energy Dub Edition in 550 ml resealable cans. We are planning to introduce both an unsweetened and diet green tea in the peach tea line in the second quarter of this year as well as a new zero calorie nitrous Monster Energy drink extension. We are also in the process of converting our X-Presso Monster coffee energy drinks into a larger size 12 ounce slim can and intend to introduce a second variant to that line, so that it will be a total of two variants in the X-Presso Monster line in the future.

We anticipate that these products will be introduced before the end of 2010. As indicated earlier, we are also planning to launch a new energy shot under the brand Works during the second half of 2010.

I would like to open the floor to questions, thank you.

Question-and-Answer Session

Operator

(Operator Instructions) Our first question comes from the line of Judy Hong with Goldman Sachs.

Judy Hong – Goldman Sachs

Just in terms of the recent improvement both the category trends as well as your sales trend, maybe give us a little bit more perspective on what you think is driving that improvement? Certainly the comps are going to get a little bit tougher as you get back into the latter part of the year, do you think the acceleration is sustainable? And then, if you have any color in terms of whether the improvement continued into the July months.

Rodney Sacks

As you know Judy, we really don’t give direction or forecast because recently, it will be speculative, all you can see is looking back as to where we are, month by month, we all have seen continued improvements pretty much this year. As you know, last year the category slowed, there were a couple of months, a few months were negative towards the middle of the year or just as we started the second half and then it picked up, but a very, very low single digit. But what we have seen is continued improvement.

So we believe very that what’s happening is, we think that convenience store traffic appears to be picking up, we seem to be getting better results from our 24-ounce which was a package which did suffer most when we started to have the downturn in the economy.

So that’s what we sort of see. So while we are hopeful for the continued numbers improvement, we obviously don’t know, but I mean I did cite the most recent Nielsen numbers, which continued to show that increase and we did indicate earlier that our sales in July without going into detail were in fact up and so we are quite pleased with what we are seeing in July. We are also pleased obviously with what’s going on and we believe in Europe at the moment and the brand is starting to find its feet there.

Judy Hong – Goldman Sachs

And just in terms of a competitive environment, you pulled out in the last call that Red Bull had gotten a little bit more competitive. It seemed like that their sales kind of also accelerated and then the latest month, it seemed like you were actually showing better sales trends. So maybe talk a little bit about what’s been happening in terms of the competitive dynamics what Red Bull has been trying to do –

Rodney Sacks

What’s happened to Red Bull is they have become pretty competitive, they have also been quite aggressive in some of the price promotions but what’s happened is they have also increased to look at their sales mix, they are selling more in their 12 ounce and now they are 16 ounce size. When you look the pricing, they do have a higher pricing structure than we do and their 12 ounces is at $2.99 and their 16 ounce is close to $3.99. So I think that if you look at in units, I don’t think they have the same increase. I think we have continued to increase both in units and sales and dollars where if they have already increased in dollars because what’s happened is they are just selling slightly more of the higher priced units.

So we believe that that’s really driving a lot of the growth over those three different sizes and they are going to start trading off harder comps (ph) because they were introduced last year during the course of the year. So that’s where we think they are getting a lift in that area.

Judy Hong – Goldman Sachs

And then just in terms of your operating expenses, obviously you have seen significant increases as a result of the European expansion. Are you at a point where in terms of the infrastructure, it’s sizeable enough that can support continued launches into other markets or you are continuing to see operating expenses kind of grow in line with sales growth going forward?

Rodney Sacks

Obviously in the many places, what we are going to do is we start off disproportionately because as you launch in a country even though you have got very low to no sale or very limited sales for the first period of time, you do have to establish an infrastructure in each country or basic country managers, softening, marketing person, and softening teams. So that starts to become very top-heavy at the beginning and then it starts to rectify itself quite reasonably quickly. In the basic infrastructure for Europe, we have established our operations in the UK and those are getting to a point where they will start now and we will start to see efficiencies as we continue to increase in sales.

So we are going to see efficiencies in the staffing and bottom line from Europe from the basic operations we have there but obviously that will be a little bit negatively affected by the manpower as we go into new countries, country by country. But overall, our sale volume now is such that we are starting to see the benefits, we are starting to see lower cost per case, and that is continuing to improve and we believe that next year even though we are still planning quite an aggressive expansion program that we still will continue to see better results coming into Europe. They key for us is the ability to achieve the sales and sustain the sales and that’s been important that we can manage our costs lighter, the key is to get the sales first.

Operator

Our next question comes from the line if Kaumil Gajrawala with UBS.

Kaumil Gajrawala – UBS

A couple quick ones. The first thing is, is the tax rate one time? Should it go back to a normalized tax rate or is this 42 something that should –?

Rodney Sacks

It should go back to a normalized tax rate. It may be a little bit high for a period of time as we continued to still have some losses coming through from Europe but as soon as that sort of starts filtering through, it will go down. Again, but it will only be, I think, at most marginally higher than on an ongoing basis whereas we took the adjustment this quarter.

Kaumil Gajrawala – UBS

Okay, I see. And then over time as Europe becomes a larger piece of your business would the tax rate naturally from the mix effect also come down?

Rodney Sacks

That will also come down, but they will also then have the benefit of picking up the losses that we do we are incurring at the current time. So we’ve written back the fate of that. But when ultimately you start earning profits for a period of time, you will actually benefit from that and then it will normalize going forward after that.

Kaumil Gajrawala – UBS

Got it. And then I think if I heard right you mentioned cost of the put option was $4.1 million, is that correct?

Rodney Sacks

I think that is correct. And that’s just a particularly an accounting noncash item.

Kaumil Gajrawala – UBS

But it’s also one-time, that’s not something that will repeat now that you’ve paid for that put option.

Rodney Sacks

We never paid for it. It’s simply a way that we were required to –

Hilton Schlosberg

It’s a evaluation of the production by an independent firm that does such evaluation.

Kaumil Gajrawala – UBS

Okay. Got it, but it hits the SG&A line at least this quarter, correct?

Rodney Sacks

It gets treated through the income statement from an accounting point of view, but it’s completely noncash, it just – and that’s the same reason we had that $0.7 million adjustment as well. It’s just an evaluation, but it’s – there will be no change in the underlying – in the underlying auction rate securities or the creditors or anything, but it’s just again these are evaluation changes that keep affecting the income statement.

Kaumil Gajrawala – UBS

That means we should adjust it out if we are looking for the underlying number, correct?

Hilton Schlosberg

Well, that is fair. If you look on the income statement, it is loss on investments and put option next.

Rodney Sacks

But your point is correct, that if you’re trying to get to a normalized trading, this should be taken out.

Kaumil Gajrawala – UBS

Okay, got it.

Rodney Sacks

We don’t believe we’re actually going to end up with any cost or loss on these auction rate securities ultimately.

Kaumil Gajrawala – UBS

Okay perfect. And then the second – the final thing, if I could just ask for classification – or clarification, you mentioned that July was up. Does that mean year-over-year, did that mean sequentially, was that growth rate, absolute number?

Rodney Sacks

It’s – we generated both year-on-year and that was up satisfactorily.

Kaumil Gajrawala – UBS

Okay, got it, thank you.

Rodney Sacks

Thank you.

Operator

Our next question comes from the line of Caroline Levy with SLSA. Please go ahead.

Caroline Levy – SLSA

Good morning, everybody.

Rodney Sacks

Good morning, Caroline.

Caroline Levy – SLSA

Good morning, everybody. I guess it is afternoon even there. I just wanted ask more strategic questions. First, why you think c-store traffic is improving or c-store sales are improving even though unemployment does not seem to be improving?

Rodney Sacks

Well, it’s just a question of anecdotally that’s the sort of information we’ve getting back from the field. We have started seeing trends back in 24-hour site sales which was really primarily solid in that channel has started picking up. And when we saw the downturn in the economy that’s when the first package that dropped off for us. And so that should – our conclusion from talking to people, people in the field and retailers.

Caroline Levy – SLSA

Yes, just very interesting, because – I guess, I think Coke had said maybe that they felt that some c-stores were offering value packages, but you’re just seeing base package go up again which is a very good sign.

Rodney Sacks

Yes.

Caroline Levy – SLSA

Yes, and then, I would also ask why are you – and I think I’ve asked you this before, but why would you be tackling so many different countries at once and don’t you think there’s risk to do that?

Rodney Sacks

We’re tackling what we think is appropriate. Number one, we’re – basically we were incurring a lot of costs in getting into Europe. And so, a lot of our marketing spend is really a Pan European spend. So we feel it is the right way to go to basically fill out Europe. You have a lot of your overhead and management costs that really in place, that can basically handle and run and go out to the address you have. Secondly, by delaying things, all you do is you let your competitors have more time to establish their brands whether they’re local competitors or low-priced brands.

And, we’re there – we’re present in Europe, you might as well as deal with it, the country. So we’re not dealing with it all at one time, we’re dealing with it gradually. We’ve done – as we’ve indicated, there are three countries in the second quarter. We’re doing more countries now, we’re doing more countries in fourth quarter, and it’s going to continue to run along that basis.

We’re going to aggressive – we have two very, very sort of – we have two different basic operations and divisions at under two management heads in Europe, one for Western Europe who handles his expansion, which is Middle East and Europe, and then the – we have a new Head of Central and Eastern Europe, who has joined us, and he really is taking care of those markets. Really, you can’t run them in parallel, because they’re really operating with different teams.

Caroline Levy – SLSA

I see. Okay, that’s helpful. And then the future of tea, do you think it’s – do you see this as a small adjunct or do you think what you are seeing is, that this really could be a meaningful business overtime?

Rodney Sacks

Sorry.

Caroline Levy – SLSA

Tea, I’m looking at tea, and wondering if you this as sort of a tiny and little add-on that is a long from being significant or if there is anything?

Rodney Sacks

It’s an add-on. We’ll call it a little add-on. Everything starts small. And you start brands and you – you start with the brand and then you see what – how the brand develops and you’ve got to be fortunate that you get a brand that gets – that starts picking, that gets resonates well with consumers and many times. And the success of the brand is really a function of that.

In the case of a CC brand, it is small, but at the same time, we are seeing it resonating well. We are seeing good repeat sales, we’re getting pretty exciting responses back from the trade. And so we do believe that the brand, number one, has legs as it, but obviously our goal there is to extend the brand into additional packages that will help in the margins and to continue to grow the brand and you got to plan for the future.

We’re continuing to obviously focus on our main products which is more uncertain to grow. But we’re also continuing to run the business and plan for three years and five years down the line as to what will be and what will be the makeup of our sales mix. And we – it takes time to develop, that don’t just – particularly the size of company like ours are not going to make an impact for the number of years until it grows to a significant size that that we’ve got to continue to develop and put the effort behind our alternative brands and obviously the best of our product offerings.

We just think tea is a nice category, it’s got growth. We think that there was a limited amount of competition and we saw an opportunity and we do believe that in the long term that could be significant brand for us. It may be less significant from my profit point of view. But certainly from an asset and value point of view on the top line, we think it can create a lot of value and for the company.

Caroline Levy – SLSA

That’s really helpful. I just have two other ones. One is, is there any chance you would give EBIT by division or do we have to wait for 10-Q?

Rodney Sacks

I think you should wait on the 10-Q on that.

Caroline Levy – SLSA

If I hadn’t added that, would you might maybe have given it to me?

Rodney Sacks

No.

Caroline Levy – SLSA

And then, finally, if you just look at California, which was your original market, do you have any – I’m sure you do follow this closely – how were – how was your sales growth there compared to general sales growth across the US?

Rodney Sacks

In fact, California did pretty well for us. In the – I’ll just find it for you quickly. I think we are up in – we were up pretty nicely in California, particularly Southern California.

If I look at the – it’d be pretty mature in California, because we have a pretty high share in the convenience channel. We were up 13.6% in Los Angeles market. We have a 38.7% share. So California is actually doing very well for us. They were sometimes last year when we had a big shipment that was sort of a slight falloff in our market share, but it has picked up again.

Caroline Levy – SLSA

That’s excellent. Thank you so much. I appreciate it.

Rodney Sacks

Thank you.

Operator

Our next question comes from the line of Mark Astrachan with Stifel Nicolaus. Please go ahead.

Mark Astrachan – Stifel Nicolaus

Hi, good afternoon, guys, and congrats on the nice quarter.

Rodney Sacks

Thank you.

Mark Astrachan – Stifel Nicolaus

I guess just a question first on your overall thoughts on current distribution footprints. Curious, how you assess whether you think you’re optimizing what you’ve got in both the US and in Europe, and I guess just in particular – yes, it sort of seems like things are doing better in Western Europe in the CC markets, but it still seems like there, there might be a bit more opportunity to educate their sales force to more effectively sell your products. I’m curious if you think that’s true. And then in the US, if you could just give us a sense of how you’re –?

Rodney Sacks

I think both markets are in a similar position, but at a different stages of development. In the UK, for example, our distribution levels are so – we’ve got a substantial way to go. I think that looking at one of the reports which indicated that our distribution levels were under 50% for our top SKU and then the two are lower in the CC system.

Now, if you look at Relentless, which is the other Coke energy drink their system, their distribution level it’s about 80 for their SKU. So we believe we are continuing to improve and grow and we all – we have upside growth to improve our distribution levels there, but I think it applies across the whole board in Europe.

If I look at our sales per point against Relentless, we are at or equal to or exceeding them already. But as a brand, we’re actually still behind them, because of our – we’ve got to catch up to do on the distribution levels. So we do have – we believe room to grow. And as we continue to become more well established in Europe, we think sales performance and our sales rate will also improve.

In the US, it’s obviously, we’re more mature. But, again, even in the US, we still have the same issue. We can always improve and we can always still find additional distribution. When you take our top selling SKU in convenience, yes, we’ve got 95% distribution. But when you go down to the 24 ounce and we have 65% distribution.

And so you drop-off – you drop-off from there and about 88% for the diet, the low carb, but then after that when you go to our new product Import is 52%, Khaos is 72%, Java Monster is in the 60%, 63%, 65%. So the two top Java Monster line. So there is still room to improve the quality and depth of our distribution of all products and that’s obviously what we continue to work on. And I think we’re improving, but getting better distribution. But we just got that opportunity to continue to keep in our sights as we go forward.

Mark Astrachan – Stifel Nicolaus

And what about on premise in the US?

Rodney Sacks

On premise, we’re sort of looking at some of our strategy. It’s still a very small proportion of our business. We are doing some nice business in some key accounts like Hard Rock Hotel in Las Vegas and in some other key accounts, but it’s still a very small proportion and we still have a lot of upside potential. We’re looking at making some changes in how do we go to market there, what distribution partners might be better suited in certain states and we are looking at making some changes in that area as we go forward.

Mark Astrachan – Stifel Nicolaus

Okay, great. And then just two housekeeping questions. One, did you buyback any more stock versus what you indicated at the shareholder meeting?

Rodney Sacks

No, not since then.

Mark Astrachan – Stifel Nicolaus

Okay. And the second is on the G&A side in terms of the professional service fees. Anything in the numbers this quarter like legal settlements, anything like that that wouldn’t be recurring?

Rodney Sacks

The costs in that area were much higher this quarter than obviously last year. We saw quite a bit of increase and that was due just through some quite a bit of legal actions or some of them have been resolved already, some are sort of ongoing. But they will get resolved reasonably soon. And so they shouldn’t be ongoing at that level.

We also incurred professional fees for SAP, license fees, consulting fees just to get to button down that implementation of that system, which also will not be ongoing. We also had – what we did do also was we terminated a distributor who was distributing in a portion of Mexico for us.

We ascertained that the particular distributor was, in fact, trying shipping some of their product that they were buying back into the United States, it was sort of disrupting some of our markets and we ended up terminating that distributor. So we did incur some legal costs in connection with professional fees of investigators plus legal costs and also we have made the provision for a bad debt against the net balance owed by that distributor as to whether we will be effective in the recovery.

We have a legal right to recover, but as to whether we will be able to effectively – recover is another issue, we have taken steps to a point of terminating that distributor’s agreement. We appointed the distributor that handles the rest of Mexico for us which is Humex, to cover that territory in the Baja and Sanora areas. So that also made up quite a bit of the additional cost that we incurred in this quarter, in the G&A area.

Mark Astrachan – Stifel Nicolaus

So ballpark what about should we be back out as potentially or not recurring?

Rodney Sacks

I don’t know those – those sort of items are probably between roughly $2 million to $3 million.

Mark Astrachan – Stifel Nicolaus

Perfect, thank you.

Rodney Sacks

But that’s a pretty guesstimate figure. Thanks.

Operator

Our final question comes from the line of Alec Patterson with RCM. Please go ahead.

Alec Patterson – RCM

Hi, Rodney, how are you?

Rodney Sacks

Fine, good, thanks. And you Alec?

Alec Patterson – RCM

Fine, thanks. I was just curious, Rodney, the data you give about the category trends in the US and you go through the various major players. In years past there used to be a lot of other players, a lot of one-offs, in and out, that sort of thing. And now that the marketplace is consolidating to 70% in the hands of the top three players, I was just wondering what are you seeing in the all other segment? Is there much activity there?

Rodney Sacks

There really isn’t – there are still dozens of off the wall brands that get launched and try and come into the market. But the market is clearly settling down and stratifying. It’s becoming more mature, it’s becoming clear that there is a really big gap. You really have a very good – you have Red Bull at the top.

You really have a very big gap even between Rockstar which is pretty much a third of our size in the market. And the interesting thing is that the brand from Coke and Pepsi, they’ve got a whole spiel of five or six brands, but they are not being able to hold their own for those brands even they’ve got – they’re over spaced, they – because they have ability to execute and negotiate or secure the substantial self space which it’s making it more difficult for even some of the independents to get shelf space because these guys are over spaced and they’re not doing the sales.

So you already got quite a big group of brands that really don’t deserve the space they’re getting and you’re really blocking up the space. So we even see some of those brands finally going away and we probably end up with a more normalized market, which is be limited to three or four brands.

Alec Patterson – RCM

Okay. How nice. And also, I was wondering do you have any market share data for the UK and France?

Rodney Sacks

I don’t have. I’ve talked with our guys, but I just don’t have anything. I think that’s concrete enough that I’m uncomfortable [ph] enough to talk about at this time.

Alec Patterson – RCM

Okay, and fair enough. And then on the Brazilian situation, not clear. Did you imply that you had shipped in the first quarter, had issues in the second quarter, restarted in the third?

Rodney Sacks

Correct. We had to pull back some of our distribution efforts that didn’t into certain channels, because we just didn’t have enough finished product. And then we started our production now in July and we’re doing it – we’re producing now in August and we believe we’ll have enough to start going forward. We’re pretty much sort of almost relaunch it in a much extensive scale.

Alec Patterson – RCM

Okay. And then lastly, Rodney, just curious as you have expanded all of these markets, and the new entry markets, et cetera, your manufacturing footprint, has it spread out as well or is that on the comp to sort of match your new markets?

Rodney Sacks

We’ve generally had one source of manufacturer in Europe which has always as we’ve expanded into Europe, it has resulted in us incurring quite a lot of freight costs that have been pretty expensive.

We are just starting up a second point of manufacturer in the UK with CCE and we believe we will be – it is our intention to start up at least another manufacturer somewhere towards Central or Southern Europe. So we should have – by summer, we are hoping to have at least three manufacturing plants up and running in Europe, which will help at least make us more efficient on the freight and transportation side for Europe.

Alec Patterson – RCM

Okay, thanks very much, Rodney.

Hilton Schlosberg

We manufacture in Australia and we also manufacture in Brazil.

Rodney Sacks

Yes.

Alec Patterson – RCM

Okay, thank you.

Hilton Schlosberg

In Canada.

Rodney Sacks

And in Canada as well. So, again, and as we expand the company to South America, we will see if we can source it from the Brazilian once the single source there.

Alec Patterson – RCM

Great.

Operator

Thank you. At this time, I would like to turn the conference back to Mr. Sacks, for closing remarks.

Rodney Sacks

Thank you very much. We’ve been pretty excited about the fact that we are seeing these positive trends returning to the market.

We also as you may have heard we recently appointed a Senior VP of Sales to head up our North American operations, Emily Terry [ph], who was a Business Unit Manager and VP at Anheuser-Busch. And so we’re quite hopeful that we’ll get a lot of focus.

She is a very detailed person and we believe that she’s going to be very valuable to the company as we continue to meet the challenges of continuing to grow from our position of strength in the energy market.

But we’re hopeful that we’ll have a good second half of the year, and we’re very excited, and thank you for your support.

Thanks very much.

Operator

Ladies and gentlemen, this concludes the Hansen Natural Corporation second quarter 2010 financial results conference call. Thank you for your participation. You may now 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!

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 Q2 2010 Earnings Call Transcript
This Transcript
All Transcripts