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Executives

Rodney Sacks - Chief Chairman and CEO

Hilton Schlosberg - President, CFO

Analysts

Judy Hong - Goldman Sachs

Kaumil Gajrawala - UBS

Mark Astrachan - Stifel Nicolaus

Hansen Natural Corporation (HANS) Q3 2010 Earnings Call October 4, 2010 5:00 PM ET

Operator

Good afternoon, ladies and gentlemen, Thank you for standing by. Welcome to the Hansen Natural Corporation third quarter 2010 financial results conference call. During today's presentation, all parties will be in a listen-only mode, following the presentation, the conference will be open for questions. (Operator Instructions)

I would now like to turn the conference over to Mr. Rodney Sacks, Chief Chairman and Chief Executive Officer. Please go ahead.

Rodney Sacks

Good afternoon, ladies and gentlemen, thank you for taking this call. I'm Rodney Sacks, Schlosberg, our Vice Chairman and President is with me today, as he becomes 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 November 4, 2010. A copy of this information is also available on our website, www.hansens.com in the Investor Relations Section.

We are continuing to see an improvement in the beverage market in general in North America and certain countries internationally. In particular, the energy category is building momentum with increased growth, principally in the important convenience and gas store channel, and to a lesser degree in the grocery and drug channels.

That said, the macro environment continues to be challenging, as we still face economic uncertainty and high unemployment levels in the United States and many of the other countries in which we are selling Monster, and which appears to be keeping a consumer lead recovery at bay in many regions, particularly in developed markets such as the United States and Europe, which includes the U.K.

While we believe these conditions are likely to persist, we are confident that we will be able to continue to grow the Monster brand. Our ability to accelerate profitable growth in this quarter demonstrates our ability to leverage the significant opportunities available to the Monster brand.

We will also continue to focus on innovation and introduce new products to the marketplace. During the third quarter, we launched Monster Energy Absolutely Zero to address increased consumer demand for zero calorie beverage products. We are enthusiastic about the prospects for Absolutely Zero, and since its launch, Absolutely Zero has been well received by distributors, retail customers and consumers.

During the quarter, we also introduced Monster Energy Import Light, which is a lower calorie version of our Monster Energy Import Energy drink in 18.6 ounce BRE which is a Ball Re-sealable End cans, which has also been well received by the market. We also introduced a Dub Edition Monster Energy drink in that package, which we believe will enable us to achieve greater preserves and visibility on store sales for our three packages in the 18.6 ounce BRE Re-sealable can size.

To facilitate the introduction of new products for 2011, we are planning to launch a number of new products in the fourth quarter of this year, these products include Monster M3, which is a super concentrate Monster Energy drink in a 5-ounce glass bottle, as well as a new energy shot under the WORX brand name, WORX is spell W-O-R-X, which will be launched in 2-ounce bottles in two variants, original and extra strength.

During the fourth quarter, we are planning to reposition our Java Monster line by replacing three flavors with new improved flavors as well as discontinuing to Java Monster flavors. And we are also introducing X-Presso Monster in a larger 12-ounce slim can and adding a new X-Presso Monster product called Midnight.

We believe that an additional X-Presso Monster SKU together with the use of a larger sized can will improve the visibility on shelf of our original 6.7-ounce single X-Presso Monster product, which was packaged in a small 8-ounce can.

During the fourth quarter, we are also planning to reposition our Nitrous Monster Energy line to better communicate it's attributes to consumers, as Monster Energy extra strength that utilizes Nitrous technology.

We are also planning to introduce a fourth variant in the Monster Energy extra strength nitrous technology line call black ice, which is a zero calorie energy drink. We are also planning to introduce a new non-carbonated Monster Rehab energy drink with electrolytes and additional supplements in 2011. Monster Rehab will be designed for consumers who wish to restore and recharge their bodies in addition to receiving an energy boost.

Sales of our Peace Tea line of iced teas continue to be solid, and we introduced two additional SKUs in that line, mainly a diet green tea and an unsweetened tea in the third quarter. We are planning to introduce a tea lemonade combination in that line in 2011.

I wish to point out that the actual dates for these various planned introductions could change if for example any production issues arise and/or depending on ongoing discussions that we are having with distribution partners as to the most appropriate dates for launching these products.

Turning now to the energy drink category, the growth in the energy drink category including shots accelerated in the third quarter of 2010. According to the Nielsen for the 13-week through September 25, 2010 all outlets combined, namely convenience, grocery, drug and mass merchandise, excluding Wal-Mart, sales in the energy drink category including shots increased 14.9% versus the same period a year ago.

Sales of Monster grew 17.1% in the 13-week period concerned, while sales of Red Bull increased by 15.5%. Sales of Rockstar increased by 15%. Sales of 5-Hour Energy increased 73%, sales of Amp dropped 1.3%. Sales of NOS increased 10.2%. Full Throttle decreased 30.6%, and No Fear was down 42.7%.

According to the Nielsen reports for the five weeks ending September 25, 2010, sales of energy drinks in the convenience and gas channel increased by 16.4% over the comparable five-week period in 2009. Over this five-week period, sales of Monster increased by 17.9% over last year, while sales of Red Bull increased by 16.3%. Rockstar was up 17.3%, while Amp was down 0.3%, Full Throttle was down 25.8%. 5-Hour Energy increased 75.6% NOS was up 13% and No Fear was down 41.3%.

According to Nielsen for the five weeks ended September 25, 2010, Monster market share of the convenience and gas channel of the energy drink category including energy shots rose to 28% against Red Bull's share of 31.9, 5-Hour Energy's share of 10.6%, and Rockstar's share of 9.7%.

According to Nielsen in dollars, sales in the energy drink category for all outlets combined increased by $207.9 million to $1.6 billion in the 13 weeks ended September 25, 2010. Sales of Monster increased by $62.9 million as compared to Red Bull which increased by $69.9 million. 5-Hour Energy which increased by $71.4 million and sales of Rockstar, which increased by $20.6 million. Sales of Amp decreased by $1.2 million, sales of NOS increased by 5.1 million, while sales of Full Throttle dropped by $15.8 million.

According to Nielsen, sales of Java Monster represented approximately 10.7% of the sales of the Monster brand for the 13 weeks through September 25, 2010, which is a decrease of 2.3 percentage points from 13% in the same period last year. As reported previously, we believe that the decline in sales of Java Monster is primarily attributable due to the entry of Starbucks into this subcategory 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.

This resulted in Java Monster having to share that subcategory with the Starbucks line. However, the positive news is that according to Nielsen, sales in the subcategory on an overall basis are continuing to grow. In the 13 weeks ended September 25, 2010, for all outlets combined, sales of ready to drink energy plus coffee drinks increased 1.9% over the same period last year.

According to Nielsen, sales of Starbucks Doubleshot Energy increased 26.4% in the current period compared to Rockstar Roasted, which is down 24%, and Full Throttle coffee, which is down 67.2%. Although, sales of Java Monster are reflected in the Nielsen numbers, as 3.6% lower than last year, our sales of Java Monster in this quarter to our customers are in fact higher than in the comparable quarter last year.

In general, we are progressing satisfactorily internationally. Turning to the Canadian market, I can report that we are continuing to see substantial improvements in both sales and market share for Monster in Canada. According to Nielsen in the convenience and gas channel in Canada for the 12 weeks ended September 25, 2010, the energy drink category grew 19%, while sales of Monster grew 51% over last year.

Monster's market share increased 5.4 points over the same period last year to 25.5%, while Red Bulls share decreased 1.3 points to 37.5%, and Rockstar's market share increased by 1.7 points to 13.9%.

According to Nielsen, sales of Monster energy in Mexico in September 2010 grew 8% over the last year while sales of Red Bull declined 17.9%. Sales of Monster's nearest as a competitor which is the lower price energy drink Gladiator were 8.7% lower than last year. Monster's market share in Mexico in September 2010 increased by 3.8 points to 29.8%, which excludes Java Monster.

We are continuing to work with our distributor in Mexico to address the specific channels in which the lower priced Gladiator energy drink products compete with Monster. For the nine months ended September 30, 2010, sales of Monster products to our distributor in Mexico were lower than sales in Mexico in the same period last year, primarily due to the disruption that occurred when we terminated our distributor in the Baja area of Mexico earlier this year.

Sales in Mexico during the third quarter were in fact higher than in the comparable 2009 quarter. We believe that such disruption is now behind us, and that we are making up lost ground in Mexico. However, during the course of the last few weeks, the Mexican legislature has proposed a 25% tax on energy drinks sold in Mexico. If it is implemented, we believe this tax will have a dampening effect on the energy category from the beginning of 2011, when this tax is scheduled to be introduced. We intend to monitor the potential implementation of this law and the decisions and to actions of our main competitors in that market before we make the final decision on our strategy for Mexico in 2011 to deal with this challenge.

Sales of Monster in the United Kingdom and Europe continue to make good progress. Sale in Hungary, Czech Republic, Slovakia also continuing to perform satisfactorily.

In the third quarter of 2010 net sales in Europe in U.S. dollars are more than 156% higher than in the comparable quarter in 2009. Although sponsorship expenses, sampling, points of sale costs, as well as payroll costs in Europe continue to be high, as we leverage our increased sales in Europe, we have been able to reduce those costs on a per case basis to the point that in the third quarter we achieved a breakeven position in Europe on a currency neutral basis.

We are hopeful that the region will start contributing to profits in 2011. During the third quarter of 2010, we launched the Monster Energy drink brand in Germany, Europe's second largest energy drink market. United Arab Emirates, Lebanon, Jordan and Tahiti, we are in a process of launching Monster in Switzerland, Australia, and Iceland and are planning to launch Monster Energy in Bulgaria before the end of the year.

Sales of Monster are continuing to progress in Central America, European (ph) Brazil, Australia, New Zealand, Tahiti and South Africa. We are working through the importation and production issues that we faced in Brazil, and look forward to increasing Monster's market penetration and sales in Brazil in 2011. We are continuing to work with our distribution partner in Australia to implement programs that have worked elsewhere with a view to improving Monster's market share in that country.

We plan to expand the sales of Monster into Asia in 2011, and to this end have appointed a Vice President International for the Asia region, who will be based in Hong Kong from the end of this year. We are continuing to focus on expanding sales of Monster into new countries in South America, as well as into new countries in Central and Eastern Europe, the Middle East, and Africa, in 2011.

Monster Energy drinks continue to achieve record sales during the quart quarter. Net sales volumes of our Java Monster product line in the third quarter are slightly higher than in the comparable quarter last year. Net sales of our new Peace Tea brand continue to gain strength that we are approximately 9.1 million in the third quarter of 2010. The increase in sales of Monster was partially offset by decreased sales of X-Presso Monster.

We have previously referred to advanced purchases made by our customers in the fourth quarter of 2009, due to our announcement of a new per case marketing contribution program for Monster Energy distributors commencing January 1, 2010, as well as to avoid potential interruptions in product supply due to our announcements to transition our North American operation to the SAP Enterprise Resource Planning System, which commenced January 1, 2010.

We estimated that the negative impact of such advanced purchases was approximately 4% to 6% of sales in the fourth quarter of 2009. Although, advanced purchases did not negatively impact third quarter 2010 results, we believe that they did negatively impact the results for the nine months ended September 30, 2010.

In evaluating sales and earnings for the fourth quarter of 2010, we believe that it is important that analysts and shareholders take such advanced purchases into account as the volume that was experienced in the fourth quarter of last year will not be repeated in the fourth quarter of this year, and the absence thereof will negatively affect any comparison of sales and earnings in the fourth quarter of this year when compared to the fourth quarter of 2009.

For the three months ended September 30, 2010, gross sales to retail grocery, specialty chains and wholesalers represented 5% of gross sales, down from 6% 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 63% of sales down from 65% in the same period last year. Other sales were 3% for both periods. Gross sales outside the United States increased to 16% from 14% in the same period last year. Gross sales to customers outside the United States in the third quarter of 2010 amounted to $69.8 million, compared to $50 million in the same quarter last year, and $66.6 million in the second quarter of 2010, 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.

Due to the redeployment of troops in Iraq, our sales to the military in Iraq was down on last year. Although, other regions have shown increases.

Gross profit margin in the third quarter of 2010 was 51.9%, versus 53.6% in the comparable quarter last year, and 52.9% in the second quarter of 2010. The reduction in our overall gross margin was partly due to sales within the DSD segment of products which have lower gross profit margins, particularly Peace Tea, and geographic mix, particularly of sales internationally, including Europe and Australia achieved lower gross margins than in North America. The reduction in overall gross margin was also partly attributable to excessive off (ph) invoice and promotional allowances, as well as increased costs of goods incurred by the warehouse segment in the third quarter of 2010, as well as the impact of sales of closeout inventories and certain other promotional activities.

Off invoice, MDF and chain CMAs as a percentage of net sales was slightly lower in the third quarter of 2010, than in the same period last year. We have not yet covered our anticipated requirements for aluminum cans for 2011, although, we have covered part of our anticipated requirements for sugar. In light of the current commodity market, we anticipate increases in the cost of raw materials in 2011.

Distribution expense as a percentage of net sales was slightly higher than in the same period last year. Sponsorship and endorsement costs incurred by us were approximately 1.1 million higher than in the comparable period last year, but were lower as a percentage of net sales, although, selling expenses were higher than in the same period last year, selling expenses as a percentage of net sales were lower in the third quarter of 2010, than in the comparable period of 2009.

The increase in operating expenses was primarily attributable to increased expenditures of $6.5 million for professional service fees, including legal and accounting costs. The 2009 comparable period included a credit of $4.7 million from the reimbursement to the company of legal expenses previously paid by the company.

Operating results from Europe, Australia, and Brazil reflect a marginal loss in the third quarter, which is a substantial improvement on the operating loss that was incurred in previous quarters in 2010 and 2009. Europe achieved a breakeven position on a currency neutral basis. Operating income includes operating losses of $1.6 million, and $0.4 million related to (inaudible) LLC for the three months ended September 30, 2010, as compared to September 30, 2009 respectively, and 2.1 million related to extracting for the three months ended September 30, 2009. We intend to limit our participation, as a promoter in these types of events in the future.

Our effective tax rate for the 2010 third quarter was 38.1%, compared to 39.1% for the three months ended September 30, 2009, versus 42% for the second quarter of 2010. The decrease in tax rates is compared to the comparable quarter last year was primarily attributable to the increase in tax benefits related to the domestic production, deduction, and the decrease in tax rates from the second quarter was primarily the result of a one-time non-cash charge that was incurred in the second quarter to establish a full valuation allowance against a deferred tax asset related to a foreign subsidiary and it's 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, however, we continue to believe that the impact was relatively minor and that the change to SAP will ultimately be beneficial for the company overall.

Turning to the balance sheet, cash and cash equivalents amounted to $509.6 million, compared to $328.3 million at December 31, 2009. Short-term investments were $24.2 million, as compared to $18.5 million at December 31, 2009. Long-term investments decreased from $80.8 million at December 31, 2009, to $46 million, included in short and long-term investments are auction rate securities of $70.2 million.

Trade accounts receivables net increased from $113.9 million from $104.2 million at December 31, 2009. Days outstanding for receivables were 29.7 days at the September 30, 2010, compared to 31.4 days at December 31, 2009. Inventories increased to 148.9 million from 108.1 million at December 31, 2009, average days of inventory was 73 days at September 30, 2010, which is higher than the 71.8 days of inventory at December 31, 2009.

In March 2010, the company introduced an agreement relating to 54.2 million core value auction rate securities, which enables the company to sell such securities to put option in semiannual or annual installments giving March 22, 2011, with full sale rights available on or up to March 22, 2013. Such auction rate securities, which are been reclassified from available for sale to trading securities will continue to accrue interest until redeemed through either the put option, or by the auction process, or by the terms outlined in their respective prospectuses in the event of auction failure.

At September 30, 2010, the company held auction rate securities with a face value of $81.5 million, which was $87.3 million at June 30, 2010 and 92.7 million at March 31, 2010, and the put option with that same market value of $3.8 million, which was $4.1 million at June 30, 2010, and $5.1 million at March 31 2010. The company determined that an impairment related to its auction rate securities of $7.2 million existed at September 30, 2010, of which $2.2 million was deemed temporary, and $5 million was deemed other than temporary.

As a result, a loss of $1.2 million net of taxes is included as a component of accumulated other comprehensive loss as of September 30, 2010, and the company reported a net non-cash charge to earnings of $0.7 million in respect to the auction rate securities and put option for the third 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.

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

Question-and-Answer Session

Operator

Thank you, sir. We will now begin the question-and-answer session. (Operator Instructions)

Our first question is from the line of Judy Hong of Goldman Sachs. Please go ahead.

Judy Hong - Goldman Sachs

Thanks. Hi, Rodney. My first question is, in terms of the U.S. sales it looks like if I backed out the international sales U.S. was up around 20% to 23%, which is a little bit above the convenience and the all channel data that we've seen, which shows up about 18%. So, is there a little bit of disconnect there, and what do you think is the difference in terms of your shipment numbers and kind of what we're seeing in the consumer takeaway data?

Rodney Sacks

You know, we always end up tracking slightly higher or slightly lower than Nielsen. We have commented on it many times. You know, there are timing differences in inventory, stocking differences that our distributors have. It may just depend on the timing, where you have sort of holiday weekends where you close your quarters, but we generally find that there is a difference, we report our own sales. In this case, it's slightly higher than our Nielsen numbers are reflecting.

Judy Hong - Goldman Sachs

Okay. And then in terms of the fourth quarter, you've called out the benefit of the buy-in that you saw in the fourth quarter. It sounds like you have a lot of new products that you're introducing though in the fourth quarter. So, is there some level of benefit that you would also get in terms of the fourth quarter because of a lot of these new products, or is that not a meaningful driver in terms of the year-over-year benefit?

Rodney Sacks

In some of them, they really are small tweaks, we really are just repositioning and tweaking some products. Others that we are sort of driving out and you will get initial sales, but it also will depend on the timing, because some of them will come out very, very close to the end of the period. You know, a lot of these things we are sort of talking to our distributors to work with them on when the most, sensible windows will, you know, open up our different products, because also distributors have and bottles in the curve but they all have other products that we are introducing as well, as they continue to go through the Christmas and New Year seasons. And so, at this point in time, it's really it's something, it's very odd for us to really predict. We can only tell you what our sort of intentions and plans are, and they'll be as they, whatever they are.

Judy Hong - Goldman Sachs

Okay. And then on the cost side, you have called out potentially higher costs on 2011, given the raw material increases. Can you help us with some perspective on what level of increase you are looking at, given where the spot prices are today, and then is there some plan to take pricing to offset some of this, the raw material costs?

Rodney Sacks

At the moment, we generally don't cover extensively. That's just been the way we have normally traded. We look at opportunities, as we go through the year to see what happens with the pricing, and we do sometimes lock in pricing if we see it has moved down at the moment. It has moved up and we are sort of just sitting on the sideline. It may well move down before, and then we will lock in some pricing, but we just have a flexible, we don't have a fixed policy in this regard. We just really are seeing some, prices of the commodities, being higher, and so, we just sort of, clearly just sort of wanted to make that point so that everybody understood that. And so, going forward, we're just not sure, where we'll be in that area.

Judy Hong - Goldman Sachs

Okay. And then, my final question is just in terms of your sales expense, selling expenses, it sounds like it's the second quarter in a row where you got some pretty nice leverage in terms of the selling expenses, as a percent of sales coming down. Are we at a point where now the spending level is actually stable enough that you would see the benefit going forward in terms of getting something positive operating leverage? You've talked about Europe breaking even at this point. It sounds like other markets could potentially improve in terms of the profitability, so I'm just wondering if this 10% or 11% selling expenses, as a percent of sales is a kind of reasonable sustainable number.

Rodney Sacks

You know, we sort of don't give any future direction. We're not sure, we're just not sure what we're going to do next year in the sense of, we're looking at Asia, depends on when we get into Asia, and what extent we need to feel that we need to support the brands there. We're going to launch WORX, WORX we're going to advertise through the traditional advertising that is our strategy for the WORX shot brand.

So that will result in sort of higher expenditure than early, sort of, part of the large cycle of the brand. So, things keep on changing, but I think the point you're making is correct. If you look at our actual DSD division, although, we had a lower gross margin, we were able to manage our oil operating expense item line all the way through to the point that we ended up with our contribution marginal operating income for our DSD division for the quarter, being almost the same percentage as last year. And so, we were able to bring some of those savings to the bottom line, between selling and total operating.

So, we are trying to sort of make sure that as we continue to grow in new countries, we will try and continue to keep that in line, but I don't think that we can sort of take a sort of a direction from this to say that it's going to continue to improve. It's going to change from quarter-to-quarter, depending on the rate of our development and launch in new markets. That will have an effect, we believe, the main effect on us we have to keep cost, but obviously, we are hopeful to be able to continue to deliver bottom line in the warehouse, DSD division at least as high or better than in the past. Some of the loss of margin we incurred and increase expenses this quarter was attributable to the warehouse division. We ended up with a much lower contribution margin than in the comparable quarter last year, and we obviously are going to address that going forward.

Judy Hong - Goldman Sachs

Okay.

Rodney Sacks

But again, I want to caution again that we really are concerned, because we do not give guidance, and I just don't want to be put into a position where we are actually starting to give any guidance in this regard.

Judy Hong - Goldman Sachs

Okay. That's fair. Thank you.

Operator

Thank you. Our next question is from the line of Kaumil Gajrawala from UBS. Please go ahead.

Kaumil Gajrawala - UBS

Hi guys. I guess the first question, did you buyback any shares in the quarter?

Rodney Sacks

No, we didn't.

Kaumil Gajrawala - UBS

And is your current authorization full, or is there any reason why you have not?

Rodney Sacks

No, we have capacity, the authorization is in existence, we just didn't buyback in the quarter. We are going to review that again, and that's just a factor that we'll take into account the share prices and other factors and then make a decision.

Kaumil Gajrawala - UBS

Got it. And then, on the tax rate for this quarter, is this the appropriate tax rate or was there any one times in there, we should consider or thinking about the next couple of quarters?

Rodney Sacks

I think this is reasonable. Again, it's changed in the last two quarter, you've seen some jumps in that, but this is in the sort of general ballpark area of where we see it going forward.

Kaumil Gajrawala - UBS

Okay. Got it. And then last question on Europe. How long, at least in the existing markets, do you think before you get to appropriate run rate on margins? Obviously crossed over to breakeven, but clearly you'll still have a mixed impact on margins to some degree, so are the existing countries that you've been in expanding it to a degree where for the weight that it had on your overall margin starting to lift, or will the new countries you're rolling into offset most of that?

Rodney Sacks

First, I think the new countries will offset a lot of the costs here, but the actual margins are not affected by going into new countries. The actual margins are what they are in most of the European countries, and they are lower than in the U.S. Where we believe, we will try and pick up some margin, is we are looking at additional production facilities. We recently started producing at the CC plant in Milton Keynes in the U.K., we're looking at an additional plant in Central Europe and quite possibly another plant in northern Italy, or certainly in Southern Europe, and we believe that, using additional plants throughout Europe will help us reduce some of our costs, and in that way improve our margins.

But the margins are all over the place. Each country that we are going into now has a very, very different value chain that sort of, there's nothing in that's really standard all in Europe. As you know, one things of Europe as a single continent and some sort of continuity because of the, but there's not. Every single country has different regulations regarding their product, their different formulas in every country and there is different margin chains, and they are very, very considerably, particularly into Central and Eastern Europe.

So, in some cases where you have sort of very small, third word countries, you're making nice margins. In others are that you have got a pretty good economy, your margins are down because of a strong presence in that market of a private label or a local brand, which tends to have quite a big influence on the retail sale level. So, it really does fluctuate, but on the whole, we believe that margins will go down a little as we continue to expand into Europe, because there is a compression on the sales level there, and our cost of goods generally as a percentage is higher there. Production costs are higher there than in the U.S.

Kaumil Gajrawala - UBS

Got it. And then just a final question because of the leverage you have got on the selling side, was there anything in the G&A number? Looks like there's a bit of a step up there as well. Thank you.

Rodney Sacks

The G&A, as a percentage was actually down. I'm sorry, I'm maybe speaking, I'm sorry, I'm just getting some, was 23? SG&A. That's not right. G&A was in line with last year. I've got the number here.

Hilton Schlosberg

That's excluding the legal fees on the transaction derivative. And that benefited from 4.7 million credit last year. Strictly general and admin were in line with last year.

Kaumil Gajrawala - UBS

So, G&A was roughly in line when you make the adjustments?

Rodney Sacks

Yes, yes.

Kaumil Gajrawala - UBS

Got it. Thank you.

Operator

Thank you. Our next question is from the line of Mark Astrachan, Stifel Nicolaus. Please go ahead.

Mark Astrachan - Stifel Nicolaus

Good afternoon, guys. I guess just following up on that last point, trying to get a sense of what the G&A numbers might look like on a run rate basis. I guess even if sort of normalized but that it looks like the 6.5 million that you are pulling out for professional fees might have been an increase from the prior year. Do any of those or any of those anticipated to go away, or should we think of that as sort of a run rate to use?

Rodney Sacks

I really don't know. It's just that it was, it just seemed to be high in this quarter.

Mark Astrachan - Stifel Nicolaus

Got it. Okay.

Rodney Sacks

But legal fees are really up predictable. It just depends on when you get to, we filed and dealt with applications to dismiss some of these security class actions and other actions which were successful, and then there were amended complaint on new series that have come out, and so we have now, briefing those applications to dismiss the claims on new grounds. It just depends on when those fall in timing, so it's really hard to predict.

Mark Astrachan - Stifel Nicolaus

Okay. And in terms of sales that you had by package size, any color on the 24-ounces and above? Are we seeing any sort of improvement in sales there?

Rodney Sacks

24-ounce, we are see something improvement in recent times. We are seeing an improvement in the 24-ounce can size.

Mark Astrachan - Stifel Nicolaus

Okay, great. And just finally, in terms of thinking of the opportunity to take pricing not necessarily related to heightened commodity costs, but just in general, you've taken one price increase over the years, it's been a few years now since that, in some cases retailers are selling the Monster product were more than you are essentially selling, I mean they are taking that spread for profit of sales, is there any opportunity that you guys think about in terms of being able to take some pricing, not necessarily on a year-on-year basis, but just could take it on occasion when you feel like you can, when you have some sort of commodity cost benefit that you could sort of pass it through and say we have got to take some pricing here?

Rodney Sacks

At this point, we sort of generally discussed this, and at this point, we haven't made a decision to take pricing up, but we actually have it as an item on the agenda over the next couple of weeks, and so it won't be, it's unlikely to be something we will take up as from January 1 in to our DSD. We may do it. We more likely in January want to take it up in our warehouse division. But it doesn't mean, we won't take it up in the next month or two after that in DSD. We all looking at and are currently reviewing the market and our costs and if we do see a large increase in our raw material costs, I think we will actually look to moving it on little bit.

Mark Astrachan - Stifel Nicolaus

Great, thanks, and great quarter, guys.

Operator

Thank you. That is all the time we have for questions today. I would now like to turn the call back to Mr. Sacks for concluding remarks.

Rodney Sacks

One of the things I would like to, perhaps, refer to in conclusion is just to go back to the one area, the DSD division, as such, net sales in the DSD division, were up 26.8%, where as the net sales in the warehouse division were down 6.8%. Although, as I indicated earlier the gross profit was slightly lower in the DSD division, it was substantially lower in the warehouse division, but based on the costs that we were able to manage, our operating income really ended up at the same percentage as this period last year.

So, we really do believe that it was a good performance. Obviously, we would like to continue to maintain and improve on that performance, but I think it is relevant because of the numbers coming out to show that we all are able to continue to manage our bottom line. We are continuing to look at the management of that item, particularly as we go forward. Obviously, we see the future of the company being able to take advantage of the momentum we already got going in Europe, and Central Europe, so obviously we have our whole infrastructure there so we really want to concentrate on that.

South America is another we think good opportunity for our brand. Our brand has already started to do well. We are seeing good response anecdotally from consumers, so we are obviously encouraged and we want to focus on South America. And then obviously, the big question is Asia. It is potentially a very large opportunity for energy drinks, particularly because they've had their traditional types of energy drinks in the market for, decades, and so we believe if we can literally crack the code and convert a reasonable percentage of users to Western, call it Western or new or modern sort of energy drinks, we would have, very, very good potential in Asia.

So, we are going to start focusing. We think that's going to be a much longer road, and we'll have to persevere there for a longer for many years, but we do see good long-term opportunity there. So, we are pretty excited by what we've been able to achieve domestically, as well as the international business, and the way it's turning around for us, and growing, and we hope to be able to continue to deliver increased results to our shareholders going forward. Thank you very much.

Operator

Ladies and gentlemen, this concludes the Hansen Natural Corporation third quarter 2010 financial results. You may now disconnect. Thank you for using ACT Conference.

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