Monster Beverage's (MNST) CEO Rodney Sacks on Q1 2014 Results - Earnings Call Transcript

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Monster Beverage (NASDAQ:MNST)

Q1 2014 Earnings Call

May 08, 2014 5:00 pm ET


Rodney C. Sacks - Chairman, Chief Executive Officer, Member of Executive Committee and Chairman of Hansen Beverage Company

Hilton H. Schlosberg - Vice Chairman, President, Chief Financial Officer, Chief Operating Officer, Principal Accounting Officer, Secretary, Controller and Member of Executive Committee


John A. Faucher - JP Morgan Chase & Co, Research Division

Mark S. Astrachan - Stifel, Nicolaus & Company, Incorporated, Research Division

Amit Sharma - BMO Capital Markets U.S.

Stephen Powers - UBS Investment Bank, Research Division

Judy E. Hong - Goldman Sachs Group Inc., Research Division

Brian Doyle - CLSA Limited, Research Division


Good day, ladies and gentlemen, and welcome to the Monster Beverage Corporation First Quarter 2014 Financial Results Conference Call. [operator Instructions] As a reminder, this conference call is being recorded. I would now like to introduce your host for today's conference, Mr. Rodney Sacks. Sir, you may begin.

Rodney C. Sacks

Good afternoon, ladies and gentlemen. Thank you for attending this call. I'm Rodney Sacks. Hilton Schlosberg, our Vice President and President is -- our Vice Chairman and President, is with me today; as is Tom Kelly, our Senior 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 our current knowledge and expectations and are subject to certain risks and uncertainties, many of which are outside the control of the company, that may cause actual results to differ materially from the forward-looking statements made during this call.

Please refer to our filings with the Securities and Exchange Commission, including our most recent Annual Report on Form 10-K filed March 3, 2014, 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 measure of gross sales and certain expenditures, which may be mentioned during this course -- 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 May 8, 2014. A copy of this information is also available on our website at in the Financial Information section

We reiterate that our products are safe. More than 10 billion Monster Energy drinks have been sold and safely consumed around the world over the past 12 years. The long history of safe use of products containing caffeine in the U.S. has remained unchanged. Recent studies confirm that the average amount of caffeine consumed by the U.S. population has remained relatively stable despite the entry of energy drinks into the market.

As previously indicated and stated by the FDA in 2012, available studies do not indicate any new previously unknown risks associated with caffeine consumption, although the FDA has continued to explore whether additional research on caffeine or energy drinks is needed.

The Institute of Medicine held a public workshop in August 2013, in Washington, D.C. to help determine whether there were potential health hazards associated with the consumption of caffeine in food and dietary supplements. In January 2014, the IOM forwarded a report of the proceedings to the FDA.

Many studies conducted in recent years in the U.S.A., Canada and Europe, including a very recent study, have all consistently concluded that the principal sources of caffeine, for teens under 18, are coffee, soft drinks and tea, and not energy drinks. In fact, the recent article published by -- in the Journal of Pediatrics analyzed the consumption data. Even after including young adults, aged 19 to 22 years, in the most recent 2-year period study, 2009 to 2010, only some 6% of the caffeine consumed by all persons 22 and under was from energy drinks, as compared to 24% from coffee and 38% from soda.

If young adults aged 19 to 22 are excluded as they are neither children nor adolescents, the percentages are even lower with the result of less than 3% of the caffeine intake for children and adolescents 18 and under comes from energy drinks.

To put the level of caffeine in Monster Energy drinks in context, we, again, remind listeners that a medium Starbucks 16-ounce large brewed coffee contains approximately 350 milligrams of caffeine, which is more than double the approximately 160 milligrams of caffeine that is contained in the same-sized Monster Energy drink.

On April 30, 2014, the American Beverage Association formally adopted new U.S. model guidelines for energy drink companies that are supported by the company, as well as all the other major energy drink companies in the U.S.A.

In the litigation between the company and the city attorney of San Francisco, the company recently filed a motion to strike allegations in the complaint, challenging the theory for relief previously rejected by the court, as well as a motion to bifurcate and/or stake of claim relating to the safety of Monster Energy drinks pending resolution of the ongoing FDA investigation on the safety and labeling of food products to which caffeine is added. These motions are calendared for hearing on May 21, 2014.

In the Kona federal securities case that has been pending since 2008, the company entered into a stipulation of settlement on April 16, 2014, that, if approved by the court, will resolve the litigation and result in the action being dismissed with prejudice. The proposed settlement contains no admission of liability or wrongdoing on the part of any of the defendants, each of whom continues to deny all the allegations. The full amount of the settlement will be paid by the company's insurers -- insurance carriers.

The company assumes no obligation to update any statements made with respect to ongoing litigation and regulatory matters, including with respect to the foregoing disclosures, whether as to new information, future events or otherwise other than as required by law.

Given the current litigation and pending regulatory requests, will refrain from answering questions or commenting further on these specific subjects. We are happy, of course, to answer questions that you may have about our products in general, or about the first quarter as best as we can, after we have concluded our discussion on the business.

Turning to the business. In the first quarter of 2014, the beverage market, generally, in the U.S.A. continued to experience softness. In contrast, the energy drinks sector in the U.S.A. grew in the high-single digits.

In the first quarter, the company achieved record growth sales, up 10.6% to $613.7 million and net sales up 10.7% to $536.1 million. Sales of our Ultra line continued to improve during the quarter, while sales of our Muscle Monster line continue to gain traction. Sales of our Monster Original Green Energy Drink also increased in the quarter.

According to Nielsen reports, for the 13 weeks through March 15, 2014, in the convenience and gas channel, Muscle Monster was the second best-selling brand in the protein supplement sector and achieved a 23.1% market share. Although Muscle Monster's ATV distribution levels have improved, they are still relatively low at approximately 56%. We are working with our distributor partners to improve these levels. We believe that as we achieve increased distribution levels for that line, Muscle Monster's market share will continue to improve.

We are pleased with the sales achieved in the first quarter. Our revenues were affected by less robust growth rates for the energy category, as a whole, in certain of our overseas markets, including within EMEA, and especially Eastern Europe, increased distribution of sales in the U.S.A. of our Ultra line, as well as new Muscle Monster line, sales in the U.S. of our Ultra line were low accretive did result in some cannibalization, generally across our existing SKUs, primarily Absolutely Zero and Lo-Carb.

The sales of Monster Energy products in glass bottles in the U.S.A. were lower during the quarter. Our operating income was up 38.7% to $148.9 million. During the first quarter, our operating income was negatively affected by professional services costs of $5 million related to regulatory matters and litigation concerning the company's marketing, promotions, ingredients, labeling and safety of its Monster Energy drinks, which we believe are exceptional in nature.

Diluted earnings per share increased 49% from $0.37 per share in the first quarter of 2013 to $0.55 per share in the first quarter of 2014. Distributed terminations were 0.01 million in the 2014 first quarter compared to 8.3 million in the corresponding quarter last year.

Net income was reduced by foreign currency losses of about $200,000 this quarter as opposed to $4.7 million in the same quarter last year. The effective tax rate decreased from 39.8% to 36.1%, which was primarily the result of profits earned in certain foreign subsidiaries that have no related tax expense as a result of the prior establishment of valuation allowances on their deferred tax assets.

The effect on diluted earnings per share of professional services costs related to regulatory matters and related litigation, net of tax, is approximately $0.02 per share. According to Nielsen reports for the 13 weeks through April 26, 2014, for all outlets combined, namely convenience, grocery, drug and mass merchandisers, sales in dollars in the energy drink category, including Shots, increased by 6.8% versus the same period a year ago.

Sales of Monster grew 15.1% in the 13-week period, while sales of Red Bull increased by 4%. Sales of Rockstar increased by 4.7%, and sales of 5-Hour decreased by 3.2%. Sales of AMP were down 12.3%, NOS increased sales by 26.3%, and sales of Full Throttle increased 5.7%.

According to Nielsen reports for the 4 weeks ended April 26, 2014, sales of energy drinks in the convenience and gas channel, in dollars, increased by 6.7% over the comparable period in 2013. Sales of Monster increased by 13.4% over the comparable period last year, while sales of Red Bull increased by 2.8%. Rockstar was up 2.6% while 5-Hour was down 1.7%. NOS was up 24.7% and AMP was down 7.7%.

According to Nielsen for the 4 weeks ended April 26, 2014, Monster's market share of the energy drink category in the convenience and gas channel, including energy shots, in dollars, increased by 2.1 points over the comparable period a year ago to 35.4% against Red Bull's share, which was lower at 34.5%. Rockstar's share was lower at 7%, 5-Hour's share was lower at 9.2%, while NOS share was higher at 3.3%.

According to Nielsen, in the 4 weeks ended April 26, 2014, sales of Energy Plus Coffee drinks, in dollars, in the convenience and gas channel increased 12.8% over the same period last year. Java Monster was 7.1% higher than in the comparable period last year, while Starbucks Double Shot energy was 21.7% higher.

According to Nielsen, in the convenience and gas channel, in Canada, for the 12 weeks ended March 8, 2014, the energy drink category grew 2%. Monster sales increased 11%. Our market share increased 2.4 points to 28.3% over the comparable period last year. Red Bull sales increased 1% and its market share decreased 0.5 point to 36.6%. Rockstar sales increased to 12% and its market share increased 1.5 points to 16.9%.

According to Nielsen, for all outlets combined, in Mexico, the energy drink category grew 14.5% in the month of March 2014. Monster sales increased 23.3%. Our market share increased 2.6 points to 37.1% against the comparable period last year. Red Bull sales decreased 19.2%, and its market share decreased by 11 points -- 11.1 points to 26.5%.

Boost sales increased 42.9% and its market share increased 3.1 points to 15.7%. And Vivo 100, new in 2013, has grown to 8.5% market share, while Coke's market share represented by Burn and Gladiator decreased 3.1 points to 9.3%.

The Nielsen statistics for Mexico cover single months, which is a short period that may often be materially influenced, positively or negatively, by sales in the OXXO convenience chain, which dominates the market. Sales in the OXXO convenience chain, in turn, can be materially influenced by promotions that may be undertaken in that chain by one or more energy drink brands during a particular month. Consequently, such activities could have a significant impact on the monthly Nielsen statistics for Mexico.

Net sales for the company's DSD segment increased 11.8% to $514.4 million for the 3 months ended March 31, 2014, from $460.2 million in the same period in 2013. Operating income for the DSD segment increased 34.2% from $139 million to $186.5 million.

Gross sales from original Monster Green Energy Drink continued to increase in the quarter as did sales of Java Monster. However, the increase in sales of these products, together with the sales of our Ultra and Muscle Monster lines, as well as certain other Monster Energy products, was partially offset by lower sales of certain Monster SKUs, including Monster Energy Absolutely Zero, Lo-Carb Monster Energy, the Monster Rehab line and Import.

Net sales of our Peace Tea line were higher. Net sales for the company's warehouse segment decreased 9.5% to $21.8 million for the 3 months ended March 31, 2014, mainly due to the reduced sales of Hubert's Lemonade, in part, due to a purchase last year by a large customers that was not repeated in the same quarter this year. Operating income decreased from $0.4 million to $0.3 million in this quarter.

For the 3 months ended March 31, 2014, gross sales to retail grocery, specialty chains and wholesalers represented 4% of gross sales, up from 3% in the comparable period in 2013. Gross sales to club stores, drug chains and mass merchandisers represented 9% of sales, down from 10% in 2013. Gross sales to full-service distributors represented 62% of sales, the same as in the comparable period in 2013. Gross sales internationally were consistent at 23%. Other sales at 2% for the period were also consistent with the comparable period in 2013.

Gross sales to customers outside the United States in the first quarter of 2014 amount to $144.3 million compared to $130.7 million in the same quarter in 2013. Included in such sales are sales to company's military customers, which are delivered in the United States and transshipped to the military and their customers overseas.

Net sales in Europe, the Middle East and Africa in the first quarter of 2014, in dollars, were 5.2% higher than the same period last year. Net sales in Europe and the Middle East alone were 9.3% higher than the same period last year.

As I mentioned in our conference call on February 27, in anticipation of the introduction of a sales tax on energy drinks in France on January 1, 2014, our distributor in France increased its purchases in the fourth quarter of 2013 by an estimated $3 million and which we estimated resulted in a reduction in our sales to our French distributor in the first quarter of 2014 by a similar amount. We have implemented a formula change for our products sold in France to address this tax. We estimate that as a result, our sales in Europe were negatively affected in the quarter by about 4.2%.

Sales from our distributor in South Africa during the quarter were also negatively impacted by a price increase in South Africa, which took effect over a few months in 2013, as well as the shift in timing of a promotion with a large retailer from the first quarter of 2013 to the second quarter of 2014.

Monster continues to gain momentum and increase its market share at retail in Europe, and in particular in the United Kingdom, Spain, Greece, Sweden, Belgium, France, Germany and Hungary, as well as in South Africa. Group progress is made in Western Europe and Africa in increased distribution levels and sales.

While the Central and Eastern European market is still incurring operating losses, we are seeing improved results from the strategic changes we implemented during last year. Overall, our EMEA division traded profitably during the first quarter of 2014.

The addition of Monster Ultra Blue and Ultra Red, as well as the launch of our Muscle Monster line in 2013, was successful. We're continuing with our expansion strategy in international markets. In addition, we are proposing to launch Monster in a limited number of countries in Asia, Central and Eastern Europe and Africa this year.

Sales of the Monster Energy brand internationally, including Japan, in particular, continue to grow satisfactorily. Relative to the comparable quarter last year, the weaker yen negatively affected our growth sales in U.S. dollars, as well as our margins in Japan during the quarter. Sales to our Japanese distributor in the first quarter of 2014, both in yen and in dollars were higher than sales in the comparable quarter last year.

Production in Japan has commenced and plan for production elsewhere in Asia continue to move forward. We are also moving ahead with our plans to produce Monster Energy drinks in India, as well as in South Africa. Sales in Chile continued to progress. Our distributor in Brazil continues to secure increased distribution from month-to-month.

We are continuing with our strategy to secure local production in certain of our international markets in order to improve gross margins, reduce freight, reduce damages and assist in mitigating the effects of exchange rate fluctuations.

Net sales of Peace Tea for the first quarter were higher than in the comparable period in 2013. We continue to believe that the Peace Tea brand has good growth potential and have added a mango juice cocktail to the line. We are planning to launch an iced coffee line in glass bottles under the Peace Tea brand later in 2014.

In the Warehouse division, sales of Hubert's Lemonades in glass bottles for the first quarter of 2014 were lower compared to last year, largely due to a purchase by large customer last year that was not repeated in the same quarter this year.

Gross profit as a percentage of net sales achieved in the first quarter of 2014 was 53.5% versus 52.1% in the comparable quarter in 2013. The increase in gross profit as a percentage of net sales was primarily attributable to a small decrease in allowances and lower cost of goods sold as a percentage of net sales.

Gross profit percentage achieved in the first quarter in North America in 2014 was higher than in the comparable quarter last year. Gross profit percentages achieved outside North America for Monster Energy were lower in the first quarter of 2014 than in the comparable quarter in 2013.

We have covered a significant portion of our anticipated requirements for aluminum cans in 2014, as well as a significant portion of our anticipated requirements for apple juice and sugar over the same period. We do not believe that, at current levels, increases in cost of any raw materials will have a material negative effect on our margins.

Distribution expenses as a percentage of net sales in the first quarter were 4.7% versus 4.6% in the comparable quarter in 2013. Selling expenses, as a percentage of net sales, were 10.7% in the quarter versus 13.5% in the comparable period in 2013.

While sponsorships and endorsement costs, as well as commissions were higher, cost of premiums, allocated trade developments, social media and point-of-sale were lower during the quarter. Total general and administrative expenses decreased 3.3% in the first quarter. The decrease in general and administrative costs was primarily attributable to an $8.3 million decrease in distributed termination costs in the quarter.

The decrease in general and administrative costs was partly offset by increased professional service costs for legal accounting and other professional costs. $2 million of the increase in the quarter related to regulatory matters and litigation regarding our Monster Energy drinks. Federal expenses and insurance costs also increased by approximately $3 million.

Operating income increased 38.7% over operating income for the same period a year ago. We are continuing to work towards reducing our overall operating costs in our international markets. We recorded foreign currency exchange losses of $200,000 for the quarter as compared to $4.7 million in the same quarter last year.

Our effective tax rate in the 2014 first quarter was 36.1% compared to 39.8% in the 2013 first quarter. The decrease in the effective tax rate was primarily the result of profits earned in foreign subsidiaries that have no related tax expense as a result of the prior establishment of valuation allowances on the deferred tax assets. During the 2014 first quarter, no share repurchases were made under the board authorized share repurchase program.

Turning to the balance sheet. Cash and cash equivalents amounted to $312 million compared to $211.3 million at December 31, 2013. Short-term investments were $438.9 million compared to $402.2 million at December 31, 2013. Long-term investments, which are comprised of certain auction rate securities, decreased to $8.1 million from $9.8 million at December 31, 2013. Included in the long- and short-term investments are auction rate securities having a fair value of $14.5 million.

Accounts receivable, net, increased to $342.1 million from $291.6 million at December 31, 2013. Days outstanding for trade account receivables were 50.5 days at March 31, 2014, and 50.4 days at March 31, 2013, compared to 42.5 days at December 31, 2013.

Inventories decreased to $204.1 million from $221.4 million at December 31, 2013. Average days of inventory was 73.7 days at March 31, 2014, which was lower than the 83.5 days of inventory at March 31, 2013, and lower than the 75.6 days at December 31, 2013.

We recently launched the new Punch Monster line by converting our existing 2 Dub Edition products into Punch Monster products with new can graphics and flavors. We are planning to launch new additions to the Monster family later in 2014.

Gross sales in April 2014 were approximately 7.8% higher than in April 2013. We caution, again, that sales in a single month and over a short period are often disproportionately affected by various factors such as, for example, selling days, days of the week in which holidays fall and the timing of promotions in retail stores and should not necessarily be imputed to or regarded as indicative of results for the full quarter or any future period.

In conclusion, I would like to summarize some recent positive points: North American gross margins remain healthy. Our 2014 first quarter gross margins for North America were higher than in the comparable quarter in 2013; two, Nielsen market statistics show that energy category growth has recovered to the high single digits, and that Monster Energy's growth is still outpacing the growth of the category as a whole; three, new additions to the Monster family is that we're introduced during 2013 are continuing to gain market share and contributing positively to the overall increase in the company sales; four, we believe that our recently launched new Punch Monster line will appeal to a broader consumer demographic than the Dub Edition and will be positively received by distributors and consumers in 2014. Our new Strawberry and Peanut Butter Cup Muscle Monster Energy shakes are performing well and should further enhance the Muscle Monster line in 2014.

Turning to international markets, we're pleased with the performance of our international expansion and investments, particularly Japan, United Kingdom, Spain, South Africa, Brazil and Chile. According to Nielsen in the 13-week period to the end of March 2014, the actual days of the 13-week period vary by a few days between different markets.

Monster's retail market share in value as compared to the same period last year grew from 18.7% to 21.1% in Spain; from 18.4% to 18.5% in South Africa; from 16.2% to 17.9% in France; from 18.6% to 27% in Greece; and from 7.9% to 8.1% in Germany.

In Great Britain, Monster's retail market share value for the 4 weeks ending April 26 grew from 10.3% to 10.7% -- 10.8%. I would like to point out that the Nielsen and IRI numbers in EMEA should only be used as a guide because the channels read by Nielsen and IRI in EMEA vary from country to country;

Nine, it is noteworthy that even though the energy drink category has been in existence in Europe for over 26 years, our EMEA markets on average are still experiencing single-digit growth while Monster continues to grow in excess of the category; ten, sales of Monster in Japan are continuing to increase and remain encouraging. We have finally commenced production in Japan; 11, we were finally able to obtain a regulatory approval for the sale of Monster in India late last year. Sales in the quarter have progressed satisfactorily; 12, as advised by Ambev, distribution levels and their sales in Brazil to their customers continue to improve.

I'd like to open the floor to questions about the quarter. Thank you.

Question-and-Answer Session


[Operator Instructions] And our first question comes from John Faucher from JPMorgan.

John A. Faucher - JP Morgan Chase & Co, Research Division

Want to talk a little bit about the margin expansion in the quarter and, Rodney, can you talk a little bit about, particularly on the gross margin line, with the gross margin up a lot this quarter, how are you -- how should we look at that in terms of maybe some favorability of raw material trends versus some of the more structural changes you're making in terms of moving the manufacturing more to the local markets? And then, also, if you can give us a little bit more color on the SG&A leverage, which was very strong in the quarter. Are you finally getting to that point in some of these markets, you talked about European being positive, where you're really getting solid leverage on some of the marketing investment you've been making for the past couple of years?

Rodney C. Sacks

Well, let's just deal with the margins. I think, sales mix is clearly one of the most important factors that has influenced the margin change. This can be seen from the fact that we've had the very successful increase in sales of our Ultra margin -- Ultra line. The Ultra line cost-wise has a lower cost of goods than some of the other lines, particularly lines like the juice lines or any of the java lines or Muscle Monster lines. So when you weigh the numbers, clearly, that has helped our margins. And we also had, as we indicated earlier, some cost of goods as well. Also sales of Peace Tea, in many cases we've gone away from the $0.99 price, pre-priced cans, so our margins have improved slightly on Peace Teas. We've also been able to lower some freight expenses, we reinstated a co-packer in the Texas market, which is a pretty big market for our product, which, if you eliminated a lot of freight we were incurring in shipping product into that market from surrounding states. So when you take into account the fact that you're looking at the substantial volume we've actually been able to achieve, look at the Nielsen's on the Ultra line, and being a lower-cost item, that has primarily been the primary source of the extra margin. We also had to put of our pricing on 24-ounce and that is starting to show through on the margins as well. And that package is also starting to come back and do quite nicely. The -- with regard to the operating expenses, one of the large differences was incurred in basically the cost of premiums decreased due to the gear promo, which was very successful promotion we've done in past years, but it was costly promotion, in supplying gear and sending it out to consumers. And so we had alternative promotions this year, which we felt were good, but didn't involve us in having to contribute as much back to the consumer through benefits. So that helped us quite a bit. We also, as we indicated, we sort of basically took a closer look at International Operations. We pulled back on a number of expense items, some sampling and sales people in the markets. We also pulled back on some sponsorship opportunities and promotions internationally, with the result that we -- overall, we've just been able to, in fact, reduce our selling expenses, which has been very fortunate for us. If we just look at -- we also have the effect, as we indicated earlier, of the distributed termination costs, which is a large item, which hit our P&L last year in the comparable quarter. So clearly, we are getting to a point now with the steps we've taken to operate more leanly overseas. We are getting positive profits from Europe now and we actually -- we believe we will continue that sort of trend going forward.


And our next question comes from Mark Astrachan from Stifel.

Mark S. Astrachan - Stifel, Nicolaus & Company, Incorporated, Research Division

I guess, I wanted to dive a bit deeper into the April number, the plus 7.8%. Maybe just talk a bit about what you're seeing from a trend standpoint that resulted in what seems to be a pretty good deceleration for a first quarter, and maybe, just more broadly, how you're looking at trends through the first quarter and into April, given the January number was also better than what the overall first quarter sales number came in at.

Rodney C. Sacks

Yes, I think, again, in this month, in particular, I think, you got to take into account that these are one monthly numbers. We've seen some non-matching trends when you look at things like Nielsen because we basically find that we don't work to timing a particular month. And if you take, for example -- we've seen some destocking or just managing of entire inventories from our distributors. Again, we -- in many cases, we don't have visibility to their stock, but for example, I'll give you one example. In 2013, the short lead orders, which are orders that are placed -- they're require shipment within 6 or 7 days, last year, we received from CCR a total of 42 orders, which was 1.3% of the total orders got into the we-urgently-need-inventory category. In 2014, the short orders -- short lead orders had increased to 272 orders, which was 6.7% of the total orders. We believe they are -- they have reduced inventories and are managing their inventories much more tightly, but the result is that, that means that they've run out inventories more quickly on this, and then they need these urgent orders to replace them. But again, most of our distributors and bottle partners we don't have visibility on their stock policies. Sometimes, you get some idea, we have a feeling about it but we don't always. So I think that what is important to us ultimately is the trends that you see from the Nielsens, which are really showing consumer demand at the retail level. That's showing the pull-through from month-to-month. And we think that. When you look on a longer-term basis, those are more indicative of the trends than looking at the one monthly numbers. But -- and that's why we do have that caution because really is something we need to be cautious about.

Mark S. Astrachan - Stifel, Nicolaus & Company, Incorporated, Research Division

Okay. And maybe if you could just touch on sort of sequential trends through first quarter. And then just sort of a related question, how much was the FX impact on the international revenue growth line? And inclusive of that, what was the Japan impact?

Rodney C. Sacks

I think that was about 0.5% -- it's about a 0.5% higher, yes.



Our next question comes from Amit Sharma from Bank of Montréal.

Amit Sharma - BMO Capital Markets U.S.

Can you talk about -- and this is a follow-up to what John was asking in the international profitability, I mean, you mentioned that Europe is now positive and also some tax benefits from profitability in some international markets. Can you give us some idea where profitability is in some of your key markets and which of them are now profitable versus not making money?

Rodney C. Sacks

I think we've -- we have broken it down to as much as we want to, we don't break it -- we're not going to break it down any further. Because the other markets are really new and they're choppy. They're being affected by many factors where you do promotions, where you've got -- we do have issues with foreign exchange and goods damages and shipping costs. Like for example, with Japan, we're now right in throes of changing over to local production so we think that will have a big effect. But the tale of the issues we've been facing, affect these numbers quite dramatically. And for that reason, we think that it really wasn't -- it's not appropriate to break it out into the other markets here. We have focused on the main international area at the moment, which was Europe, which we've gone positive and that's, I think, a very important turning point for the company. We believe that as the other markets starts to settle down, we start to be able to get local production, those results will also improve as we go forward.

Amit Sharma - BMO Capital Markets U.S.

Okay. And then the tax benefit that you had during the quarter, is that sustainable through the rest of the quarters as well, the lower tax?

Rodney C. Sacks

We think regarding [indiscernible] it's probably pretty much up.

Hilton H. Schlosberg

As long as there's profitability off season, yes.

Amit Sharma - BMO Capital Markets U.S.

Got it. Okay. And then...


Our next question comes from Steve Powers with UBS.

Stephen Powers - UBS Investment Bank, Research Division

I guess, so going -- first, going back to what you're saying regarding channel inventory relative to Nielsen trends, which have been stronger, at this point, do you feel there's still essentially excess inventory to work through from your distributors or are you seeing more of a catch-up that's yet to come as the year progresses?

Rodney C. Sacks

It's -- again, it's something which we really don't have the visibility on, but we have seen this trend. And it gets to a point where, obviously, we are seeing -- it's not going to be able to go on forever. But -- and as we believe they are likely to start getting more in line. But that -- we're just facing our sales. And unfortunately, people look at the Nielsens in advance, and then obviously you look at our sales and then you do the comparison all the time. They just really are not comparable. There's various reasons why we don't necessarily match all the time, particularly in newer markets where you're starting a new market, your customer may order too much or may order to little. And then, you have a catch-up, and then he gets pipeline, and then the next year, he's got a sales trend, and then all these factors that continue to influence the relationship between Nielsen. As you get to more stable markets, long mark to [indiscernible] they do have -- start to have a much closer correlation but even in the U.S. nets that I alluded to, we have this situation now where we do feel we have -- there has been a realignment by our larger customers to try and manage down their inventories, and that has an effect on our sales versus when you look at the market. Obviously, there are other issues in the market that also change, which is timing, but that would be the main reason we feel.


And our next question comes from Judy Hong from Goldman Sachs.

Judy E. Hong - Goldman Sachs Group Inc., Research Division

I guess, Rodney, I guess, I just wanted to circle back on the April number I don't want to really get this into too much -- just understanding it's just one month. But what I'm hearing from you is that from a consumer kind of takeaway, all the trends that you're seeing, both at Europe from your brands and in the category levels seem to be relatively healthy. The full down [ph] really appears to be driven by the inventory movement at your wholesalers, primarily in the U.S. market. Are there any other markets that you're seeing this inventory kind of disconnect continuing? I think, in the second quarter, or sorry, the first quarter, you said Japan was up year-over-year. I think Asahi had numbers up by 40% so I'm just trying to reconcile what's happening in the U.S. from underlying versus inventory, and then also some of the international markets.

Rodney C. Sacks

Yes. If you take the -- basically, South America and Asia Pacific markets, in the month, those were down. But if you take, which is the point I made and our sales were down because of timing, or mistiming whatever the case -- whatever you want to put it, of purchases, when we went to new distributor last year, and it was very choppy. So you end up with one month where there was a high level of purchases coming out of Brazil, and then this month, you end up with a much lower level. But if you go through the numbers, and you look at the sales out of that distributor in Brazil, and that is one particular distributor where we do have some visibility on their sales numbers. Their sales numbers have continued to grow and are substantially higher than last year. But our sales into them, in April, specifically, are negative. And if you take the Asia Pacific, it's not only -- it's largely Japan but then there are a lot of other markets in that one month while we were up in the quarter, we were negative in that month. And that was part of that transition month where we changed over from supplying goods made in the U.S. to local production. So again, we believe that will change as we go forward during the quarter. But those had -- those 2 markets had quite an effect on the April number. The April number would have been quite a few percentage points higher if you take -- if you just take into account sales in, basically, North America and Europe, or EMEA, as we put it. So we're quite comfortable with the numbers going forward. We think the categories showing pretty resilient and healthy signs. And as you can pick up from the Nielsen, that really is the best indicator of ultimate consumer demand for the brand and for the category.



And our next question comes from Caroline Levy from CLSA.

Brian Doyle - CLSA Limited, Research Division

This is Brian Doyle, filling in for Caroline. I was just wondering -- just on international profitability, again, you said EMEA is now profitable. I was wondering if you could just update us on how big that is as a percentage of your total international revenue. And then, secondly, just on the international gross margin, I was kind of surprised that it was down in the quarter. My first thought that, that would largely be currency-related, but it sounds like currency was only like 0.5 point hit to the top line, so just a little clarity on when the sort of international margins are going to improve.

Rodney C. Sacks

It's -- at the moment, it's -- the actual net margins are small in relation to the sales. It's just basically at the beginning of turning the corner. And we -- as we go forward, we believe we will continue to improve there, but we do have thinner margins overseas. We did indicate, I think earlier, that our gross margins overseas were slightly less than its comparable periods last year. And we're looking to, again, trying to deal with -- address that. Again, we think some of that will be addressed as we look for -- go forward. One of the things we will be looking to do is to introduce new products where we believe we will have better margins internationally as we expand the product range overseas. So we, obviously, are looking to try and improve those margins, but at this point a lot of that will depend on our ability to get our cost down.



Ladies and gentlemen, that does conclude our question-and-answer session for today. I would now like to turn the call back over to your host, Rodney Sacks, for any further remarks.

Rodney C. Sacks

On behalf of Monster, I'd like to thank everyone for their continued interest in the company. We continue to believe in the company and our growth strategy and remain committed to continue to develop and differentiate our brands and to expand the company, both at home and abroad. We reiterate our products are safe, our frothy labels and the caffeine contents of a Monster at approximately 10 milligrams per ounce is less than 1/2 the milligrams per ounce of the caffeine levels contained in Starbucks and other coffeehouse brewed coffee. Thank you very much for your attendance.


Ladies and gentlemen, thank you for participating in today's conference. This does conclude your program. You may all disconnect and have a wonderful day.

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