Monster Beverage's (MNST) CEO Rodney Sacks on Q2 2014 Results - Earnings Call Transcript

Aug. 7.14 | About: Monster Beverage (MNST)

Monster Beverage (NASDAQ:MNST)

Q2 2014 Earnings Call

August 07, 2014 5:00 pm ET


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


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

Kevin M. Grundy - Jefferies LLC, Research Division

Bonnie Herzog - Wells Fargo Securities, LLC, Research Division

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

William B. Chappell - SunTrust Robinson Humphrey, Inc., Research Division


Good day, ladies and gentlemen, and welcome to your Monster Beverage Corporation Second Quarter 2014 Financial Results Conference Call. [Operator Instructions] As a reminder, this conference call is being recorded. I would now like to turn you over to your host for today's conference, Mr. Rodney Sacks, Chairman and CEO. Mr. Sacks, 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, is with me today; as is Tom Kelly, our Senior Vice President of Finance.

Before we begin, I would like to remind the 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 and 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, as well as our most recent report on Form 10-Q filed May 9, 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 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 7, 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 12 billion Monster Energy drinks have now been sold and safely consumed around the world over the past 12 years. To put the level of caffeine in Monster Energy drinks in context, we again remind listeners that a medium Starbucks 16-ounce-sized brewed coffee contains approximately 330 milligrams of caffeine, which is more than double the approximately 160 milligrams of caffeine there is contained in the same-sized Monster Energy drink.

On April 30, 2014, that American Beverage Association formally adopted new U.S. model guidelines for energy drink companies that are supported by the company, as well as all other major energy drink companies in the USA. The litigation between the company and the City Attorney of San Francisco is proceeding through the discovery process stage. In the Kona federal securities case on July 29, 2014, the court issued an order granting preliminary approval of the proposed stipulation of settlement. When finalized, the settlement 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 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, we 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 second quarter as best we can after we have concluded our discussion on the business.

Turning to the business, in the second quarter of 2014, the beverage market in the USA, our largest market, continue to experience softness. DSD volumes declined in all major channels, including the convenience and guest channel. In contrast, the energy drink category continued to grow in the mid-single digits. Together, the RTD coffee drink category and the energy drink category were the 2 best-performing sectors.

In the second quarter, the company achieved record gross sales of $779 million, up 7.6%. Net sales were $687.2 million, up 8.9%. Our Original Green energy drink continued to perform well and grew in excess of the growth of the category as a whole. Particularly noteworthy is that sales of our Ultra line continued to improve during the second quarter. We are still in the process of implementing the repositioning of our DUB line into our Punch Monster line, and we are also repositioning our Juice Monster line. New graphics and formulas for these lines are now finding their way onto retail shelves.

While we are pleased with the sales achieved in the second quarter, our revenues were affected by less robust growth rates for the Energy category as a whole, both in the U.S.A., as well as in our international markets. While sales in the U.S.A. of our Ultra line were accretive, that did result in some cannibalization generally across our existing SKUs, primarily Absolutely Zero and Lo-Carb. However, during the quarter, Lo-Carb made up a portion of its previous sales losses.

Gross profit as a percentage of net sales was up 1.9 percentage points to 55.2% from 53.3% in the second quarter of last year. This increase was primarily due to lower allowances compared to the prior year, increased sales of our Ultra line, as well as lower cost of goods, particularly in North America, due to lower sweetener costs. Increased selling prices for our Monster 24-ounce line and increased prices for our Peace Tea line, which is now sold primarily in non-pre-packed priced cans.

Operating income was up 20.3% to $215.8 million. During the second quarter, our operating income was positively affected by the operating profit contributed by international operations, particularly the Europe, Middle East and Africa regions.

Additionally, our operating results improved in Asia-Pacific and South America, principally due to improved profitability in Japan and Chile, and a reduction in losses in Australia. Operating income in Mexico was also higher.

Consolidated selling expenses in dollars were below last year. While sponsorship fees were higher, costs of our TDM met program were lower, driven by the reduction in Europe. Additionally, premiums were lower as our 2013 Gear program was not repeated. Point-of-sale costs were also lower.

Foreign currency losses were substantially lower than last year. The effective tax rate decreased from 39.3% to 34.7%, primarily due to profits earned in foreign subsidiaries that had no related tax expense and as a result of the prior establishment of valuation allowances on the deferred tax assets.

Net income was $141 million, up 31.9% over net income of $106.9 million earned during the same period last year. Diluted earnings per share increased 31.5% from $0.62 to $0.81 in the second quarter of 2014.

According to Nielsen reports, for the 13 weeks through July 26, 2014, for all outlets combined and the convenience grocery, drug and mass merchandisers, sales in dollars in the Energy Drink category, including shots, increased by 5.3% versus the same period a year ago. Sales in Monster grew 9% in the 13-week period, while sales of Red Bull increased by 4%. Sales of Rockstar decreased by 0.08%. 5-hour's decreased by 2.5% and AMP decreased by 11.1%. Sales of NOS increased by 25.3%, and Full Throttle increased 3%.

According to the Nielsen reports, for the 4 weeks ended July 26, 2014, sales of energy drinks in the convenience and gas channel in dollars increased by 4.6% over the comparable period in 2013. Sales of Monster increased by 6.6% over the comparable period last year, while sales of Red Bull increased by 4.3%; NOS was up 30.5%; Rockstar was down 7.2%; 5-Hour was down 3.6%; and AMP was down 1.8%.

According to Nielsen, for the 4 weeks ended July 26, 2014, Monster's market share in the Energy Drink category in the convenience and gas channel, including energy shots, in dollars, increased by 0.6 points over the comparable period a year ago to 34.6% against Red Bull's share, which was lower at 35.3%. Rockstar share was lower at 6.9%, 5-Hour's was lower at 9%, while NOS share was higher at 3.5%

According to Nielsen, in the 4 weeks ended July 26, 2014, sales in Energy + Coffee Drinks in dollars in the convenience and gas channel increased 9.1% over the same period last year. Java Monster was 4.9% higher than in the comparable period last year, while Starbucks Doubleshot Energy was 16.1% higher. Java Monster sales continue to exceed those of Starbucks Doubleshot Energy.

According to Nielsen, in the convenience and gas channel in Canada for the 12-weeks-ended June 28, 2014, the Energy Drink category grew 2%, while Monster sales increased 16%. Our market share increased 3.5% points to 27.9% over the comparable period last year. Red Bull sales increased 4%, and its market share increased 0.of a point 9 to 38.8%. Rockstar's sales decreased 11% and its market share decreased 2.2 points to 14.9%.

According to Nielsen, for all outlets combined in Mexico, the Energy Drink category grew 12.2% in the month of June 2014. Monster sales increased 6.6%. Our market share decreased 2 points to 38.6% against the comparable period last year. Red Bull sales decreased 18%, and its market share decreased by 9 points to 24.4%. Boost's sales increased 15.4%, and its market share increased by 0.4 to 13.7%. Drivet100, new in 2013, has grown to 12.2% market share, while Coke market share represents Burn and Gladiator together decreased 2.9 points to 6.6%.

The Nielsen statistics for Mexico cover single months, which is a short period that may often be materially influenced positively and/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 by 9.8% to $660.1 million for the 3 months ended June 30, 2014 from $601 million in the same period in 2013. Operating income for the DSD segment increased 19.1% from $215 million to $256.1 million. Gross sales of our Original Monster Green energy drink continue to increase in the quarter, as did sales of both the Ultra and Java Monster lines. However, the increase in sales of these products was partially offset by lower sales in certain SKUs, including Monster Energy, Absolutely Zero, Lo-Carb Monster Energy and the Monster Rehab line and import. Net sales for our Peace Tea line was higher.

Net sales for the company's warehouse segment decreased 9.5% to $27.1 million for the 3 months ended June 30, 2014, mainly due to reduced sales of Hubert's Lemonades in glass bottles.

Operating income increased 16.9% from $1.9 million to $1.3 million this quarter. Net sales of Peace Tea for the second quarter were higher than in the comparable period in 2013. We continue to believe that the Peace Tea brand has good growth potential.

For the 3 months ended June 30, 2014, gross sales to retail grocery specialty chains and wholesalers represents a 4% of growth sales, up from 3% in the comparable period in 2013. Gross sales to club stores, drug chains and mass merchandisers represent 9% of sales, down from 11% in 2013.

Gross sales to full-service distributors represented 62% of sales, the same as in the comparable period in 2013. Gross sales internationally represented 23% of sales, up from 22% in 2013. Other sales of 2% for the period were also consistent with the comparable period in 2013.

Gross sales to customers outside of the United States in the second quarter of 2014 amounted to $180.2 million compared to $160.4 million in the same quarter in 2013. Included in the sub-sales are sales to the company's military customers, which are delivered in the United States and cargo-shipped to the military and their customers overseas.

Net sales in Europe, the Middle East and Africa in the second quarter of 2014 in dollars were $80.3 million, 14.6% higher than in the same period last year. Once we continue to gain momentum and increase its market share at retail in EMEA and, in particular, in Greece, Spain, Belgium, Sweden, Germany and South Africa.

We're now starting to see the benefits of the strategic changes implemented in the second quarter of last year. Overall, our EMEA division traded profitably during the second quarter of 2014, which contributed to the reduction in the effective tax rate of the company.

Central and Eastern Europe contributed in operating profit before allocation of corporate overhead for the first time. Gross sales in the Africa Pacific region grew 29 -- sorry, Asia Pacific region grew 29.9% versus the comparable quarter last year. Gross sales in Mexico were higher for the quarter. During the quarter, Japan contributed an operating profit to the division, and sales there continued to increase satisfactorily. In addition, significant progress was made in Chile. Our distributor in Brazil continues to secure increased distribution in sales for month-to-month.

We are continuing with our expansion strategy in international markets. In the quarter, we launched Monster in Angola, Serbia, Macedonia and Bahrain. In addition, we are planning to launch Monster in a number of additional countries later this year, including Bosnia, Georgia, Oman, Qatar and Nigeria. We are continuing with our strategy to secure local production in certain of our international markets in order to improve gross margins, reduce rates, reduce damages and assist in mitigating the effects of exchange rate fluctuations.

Production in Japan commenced in February and contributed to the improved results earned last year in the quarter. In addition, we are continuing to make good distribution progress in India. Our plans to produce Monster Energy Drinks in India, as well as in South Africa, are progressing.

Gross profit as a percentage of net sales achieved in the second quarter of 2014 was 55.2%. This is 53.3% in the comparable quarter in 2013. The increase in gross profit as a percentage of net sales was partially due to lower allowances, product mix and lower cost of goods sold as a percentage of net sales due to higher percentage of our sales that was represented by the Ultra line, as well as lower cost of goods, particularly in North America due to lower sweetener costs, increased selling expense prices of our Monster 24-ounce line and increased prices of Peace Tea, which is now sold primarily in non-pre-priced cans.

Gross profit percentages achieved in the second quarter, both in North America, as well as outside North America were higher than in the comparable quarter in 2013.

As indicated on our last conference call, 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 our current levels increases in costs of any raw materials will have a material negative effect on our margins.

Distribution expenses as a percentage of net sales in the second quarter were 4.4% versus 4.5% in the comparable quarter in 2013. Selling expenses as a percentage of net sales were 10.5% in the quarter versus 11.6% in the comparable period in 2013. While sponsorships and endorsement costs, as well as commissions and merchandise displays were higher. Costs of premiums, point-of-sale and allocated trade development and TDM met program were lower during the quarter.

General and administrative expenses increased 8.9% in the second quarter. The increase in general and administrative costs was primarily attributable to increased professional service costs for legal, accounting and other professional costs, other expenses incurred in connection with the regulatory matters and litigation regarding our Monster Energy drinks. We are continuing to work towards reducing our overall operating costs in our international markets.

Our effective tax rate in the 2014 second quarter was 34.7% compared to 39.3% in the 2013 second quarter. The decrease in effective tax rate was primarily the result of profits earned in foreign subsidiaries that have no related to tax expenses as a result of the prior establishment of a valuation allowance on their deferred tax assets.

During the 2014 second quarter, no share repurchases were made under the board-authorized share repurchase program.

Turning to the balance sheet. Cash and cash equivalents amounted to $373.1 million compared to $211.3 million at December 31, 2013. Short-term investments of $454 million compared to $402.2 million at December 31, 2013. Long-term investments, of which option rates securities comprised $12.8 million increased to $51.7 million from $9.8 million at December 31, 2013.

Accounts receivable net increased to $395.5 million from $291.6 million at December 31, 2013. Days outstanding for trade accounts receivables were 45.3 days at June 30, 2014, and 42.8 days at June 30, 2013, compared to 40.1 days at December 31, 2013.

Inventories decreased to $207.9 million from $221.4 million at December 31, 2013. The average days of inventory was 60.8 days at June 30, 2014, which was lower than the 71.3 days of inventory at June 30, 2013, and lower than the December 75.6 days of inventory at December 31, 2013.

We are planning to launch Monster Unleaded, a new non-caffeinated energy drink in the Monster line in the U.S.A. later this year, as well as Ultra Sunrise, which is an extension to our successful Ultra line. Ultra Sunrise has a citrus-based flavor. Our new Monster Energy Valentino Rossi energy drink that was positioned as a summer promotion in selected countries in Europe and South Africa, has been well-received by both retail buyers and consumers. We are in the process of introducing an Ultra Black variant as a summer promotion with 7-Eleven in the U.S.A.

In the ordinary course, we introduced additional existing SKUs in various countries around the world from time to time. However, I would like to specifically mention that we are planning a full launch of Monster M3 in glass bottles in Japan later this month, as well as a Coffee Monster Energy drink in Japan later this year.

Gross sales in July 2014 were approximately 7.9% higher than in July 2013. The increase in gross sales in the United States was, in fact, higher than this percentage. The increase in gross sales was partly offset by decreased sales in certain international markets in July as compared to last year mainly due to destocking that occurred in some countries.

We caution again that sales in a single month and over a short period are often disproportionately impacted 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 our results for the full quarter or any future period.

In conclusion, I'd like to summarize some recent positive points. North American and international gross margins are healthy. Our 2014 second quarter gross margins in North America, as well as international, generally were higher than in the comparable quarter in 2013. U.S. Nielsen market statistics show the energy category continues to grow in the mid-single-digits and that Monster Energy's growth is still outpacing the growth of the category is all. The new additions to the Monster family that were introduced during 2013 and earlier this year are continuing to gain market share and contributing positively to the overall increase in the company sales.

We believe our recently repositioned Punch Monster and Juice Monster lines will appeal to a broader consumer demographic and will be positively received by our distributors and consumers in 2014. We believe that Monster Unleaded will appeal to consumers since the true caffeine, who until now were not consumers of energy drink, as well as to consumers who would like to limit their daily consumption of caffeine but wish to increase the consumption of Monster, particularly later in the day or early evening.

Our new strawberry and peanut butter cup Muscle Monster energy drinks are performing well and should further enhance the Muscle Monster line in 2014. We are now rolling out our peanut butter cup Muscle Monster drink to the general market.

Turning to international markets. We are pleased with the performance of our international expansion, particularly in Japan. Spain, South Africa, Greece, Belgium, Germany, Brazil and Chile. According to the Nielsen, in the 4-week period to the end of June 2014, the actual days of the 4-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 21.6% to 22.9% in Spain, from 8.3% to 9.1% in Germany, and from 7% to 7.9% in Sweden. In France, our market share remains flat at approximately 16.8%. In Belgium, our market share increased from 7.1% to 8.2%, and from 9.9% to 10.3% in Great Britain. Monster's retail market share value for the 4 weeks ending May 2014, as compared to the same period last year, grew from 18.3% to 19.9% in South Africa, and according to IRI, from 19.5% to 24.1% in Greece.

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.

In Chile, in May, Monsters retail market share in value as compared to the same period last year grew from 7% to 11%, and in Brazil, in June, from 2.9% to 5.2% as compared to the same period last year. Sales of Monster in Japan are continuing to increase and remain encouraging.

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 the line of Judy Hong from Goldman Sachs.

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

So maybe just on international margins. The first time, I think, many of your markets actually showed profitability in the quarter. So I just wanted to get some color on what the key drivers of that improvement were in the quarter, how sustainable that improvement is? And if you look at the overall gross margins for the company in that 55%, do you think this is, at least, the sustainable level, at least for the foreseeable future?

Rodney C. Sacks

I think that Europe -- I think the improved profitability came from, I think, better distribution in -- largely, in existing accounts. I think we still have an opportunity to increase distribution in numerical number in additional accounts. So we've been trying to focus on improving the quality of distribution and we will continue to do so. And also, in some of the markets that are becoming more mature, we also, as we indicated earlier, we did review our operating model and took down some of the -- some of our marketing and costs that we had spent in establishing the brands in those markets. We felt that we were able to do so going forward, and so we will continue to do so on an ongoing basis.

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

Then just maybe on some of your innovation that you've have called out in the call. I guess the last comment you made at the shareholder meeting was really trying to be maybe more thoughtful about innovation and, perhaps, thinking about innovation being more incremental to your brand portfolio. So if you can help us kind of -- how you think about the upcoming innovation? Do you really think this is now more incremental to your existing portfolio? And as you go into the market, kind of thinking about how you would approach getting extra shelf space as opposed to taking one out and placing the new innovation with -- replacing with your existing brand?

Rodney C. Sacks

I think that, that is illustrated by the value we sort of believe in, for example, in the Punch Monster line. We believe there is a subset sort of set of energy, which is in Punch products. I believe that by focusing our brand back into that Punch line with 2 SKUs, it will, in fact, help us. It is, in fact, doing that. We believe we are increasing distribution on the Punch Monster line. It has taken a little bit of time to get the new graphics out. There are new flavors that are more fit the Punch profile a little bit, they've being tweaked a little bit. And so we believe that is more strategic and that will become a key subset for us. We also believe that -- and many years ago, when we had the Juice Monster product, we rolled them out and -- but I think there were less sort of strategically focused as being a subset. And again, we had some fall-offs just because they became older and less-exciting and people went on to newer and more exciting things. So we've -- Khaos has continued to do well, but the -- and maybe started a little bit -- it was probably a little bit too heavy as a drink. So again, we've looked -- people are really turning to, we believe, lighter, easier-to-drink product. So again, the focus that we've had is in changing and reducing the juice content of our drinks because the -- and maybe sort of had a connotation to that, added percent juice. We've taken the juice content down quite substantially. So we've changed the name to Ripper, which is in line with the -- that, basically, product that we have overseas. So again, we've now clearly delineated what the product is. They're in very bright-colored cans. They've got texture on them. We believe they'll stand out on their own. There will be 2 Juice Monsters. And once we can solidify some distribution losses that we had on M-80, which is now Ripper, and get the line into a solid distribution, at position, we will then strategically, probably, expand that line with one more juice product. But again, there is a strategy behind it. We think there is a place that it can go, but it needs to be able to be identified separately. It shouldn't blend in with the larger line now because there are many SKUs, and it should have its own identity. So those are, again, in the process of getting -- rolling out new product cans, which we think are really, really attractive, as well as having lighter, lower-content juice flavors, which we believe are far more drinkable and easily drinkable because they are still carbonated. Again, we've been -- we think we've been strategic. We understand what's been happening to the Ultra line. It's been very successful. And again, we've -- we're going to introduce a selected one this year, which is Ultra Sunrise. We have plans to introduce another one next year. We're going to decide on that. We're also going to go through a test on a summer promotion with our Ultra Black. Test that flavor. See how that flavor does and see how the product does. And either that will be the line extension for next year or we'll have another one, which we have in test at the moment. Internally, we'll make a decision on that. So that's really where I wanted to look at that. The Ultra Sunrise is, in fact, a very similar product to what we did in Europe with the Rossi can. The Rossi can, again, although it says summer promotion, and that has been our strategy for it, strategically, as we see the success of that can, we have the opportunity if we want to, obviously, to turn that into a more permanent SKU. It's called the Doctor, which is the nickname for Rossi, but -- the name by which he is known. It is a full-calorie drink. The Ultra Sunrise here is a low-calorie or 0-calorie drink so -- but the flavor profile is all the same. We think that's a great flavor profile. And so we think that those will -- both products will play well. Rossi is not as well-known. MotoGP is not as popular sport in the U.S. as in Europe, and so we believe that the Rossi product is more appropriate for Europe. It still gives us an opportunity, obviously, to use -- to introduce Ultra and the extensions, including Ultra Sunrise in Europe later. But for the moment, we were looking to see where we want to go with the Rossi product and then the Ultra Sunrise here. We also have 1 or 2 line extensions. We repositioned our Rehab line, which has been a little soft, and we've really emphasized and changed the can emphasis on the fact that it's an iced tea and an iced tea lemonade line. That is the focus. We've -- obviously, strategically, we're going out to secure distribution of that line in the tea door. And that's how we're trying to obviously obtain more real estate for our brands and to get -- improve the depth of distribution. As we go through that, we are revising some of the flavors and tweaking them in the Rehab line, and we probably are planning to introduce one more Rehab product next year. So again, that's the sort of line in which we are following on product innovation. I don't want to go too much into detail of what we might do in the future. But we also are looking at introducing I think it's one more product in the Java Monster line. The Java line is doing nicely. We have, again -- we've strategically reformulated and repositioned the Kona Cappuccino line. It was in a darker can. I think the Kona, sort of -- it was a little bit confusing to consumers because we had a Kona blend, which is our original product, which is simply a good quality but an original basic quality coffee product. And the -- so we've now changed the graphics, again tweaked the formula and made it in a very much larger can, in line with the multi-content in it. So we have a cappuccino product, which we are rolling out now with the new graphics. So those changes, we believe, are really -- they may seem small, but they've been done carefully, and we think that's important because when you look at our distribution levels, we still believe we have a lot of low-hanging fruit in the line extensions that have substantially less distribution than the top view. And we believe that, that will continue to help drive improved sales and profitability.


And our next question comes from the line of Kevin Grundy with Jefferies.

Kevin M. Grundy - Jefferies LLC, Research Division

So Rodney, my question is on broadly the energy drink category in the U.S., and we've seen some slowing here, and you look at the Nielsen data in the convenience and gas channel, and we've gone from low-double-digit growth to about mid-single-digit growth in the category. So my question is broadly, what is your consumer research telling you that's driving the slowdown here? What are your expectations for the balance of the back half of the year? Do you think that innovation is going to help drive an acceleration? And just broadly here, are you getting the sense now that some of the consumer health concerns that are hitting the carbonated soft drink market are kind of seeping into consumers' awareness here as well?

Rodney C. Sacks

Yes. We really don't have any market research on what is driving the trends. We obviously see the continued soft trend across beverages in general. We think that the Energy category is being slowed down a little bit by the negative growth that is being experienced by 5-Hour, which is an energy shot. We lump it in the same sort of category. So we think that is pulling down a little bit of the growth as well. The growth would be higher without the energy shots in the category as a category. But overall, we are just seeing that slowing trend. We think that it's -- it seems to be around the world. It seems to have slowed a little bit as well in some of the -- in most of the international markets. But we believe that eventually that will sort of settle down and ride itself. We think there have been some health concerns about CSDs, and then the CSDs have now translated into the dark CSDs, so illogically, because of some scares about sweetness. Again, we think this too will pass, and I think things will settle down. But there are certainly some changing consumer trends and preferences. And those are something that, I think, we'll deal with them. We will deal with some of them, I think, by adapting our products to be more drinkable, to be lighter, lighter in calories and lighter in taste. And that's the sort of profile that we have for the Ultra line, and that's what we're now doing in reformulating the juice line. On the other hand, there are a lot of -- a majority of consumers still like full-flavored, heavy-bodied drink, just as they like light wines, and they like heavy wines. So we're trying to obviously cater for the full gamut of consumers, and that is the reason we introduced Muscle Monster. We think there is a trend for consumers, again, on a broader-based and pure sports people or bodybuilders to actually have drinks with protein in addition to the having the energy component, and that is why we introduced that line. So these are lines that are starting to solidify themselves, and we think that they will continue to grow. And we have -- I think we're well-positioned because of the broad range of our line to actually address this as we go. But we don't have any specific ideas as to why some of these of things are happening. I think a lot of the beverage companies would like to be able to have a crystal and see, but we just don't.


And our next question comes from the line of Ms. Bonnie Herzog from Wells Fargo.

Bonnie Herzog - Wells Fargo Securities, LLC, Research Division

I just have a first quick follow up question on Ultra Sunrise specifically. Is your goal to merchandise this new product within the CSD door? And then how realistic do you think this will be if, in fact, that is your strategy?

Rodney C. Sacks

This product has got nothing to do with CSDs. It has nothing to do with CSDs. It's got nothing to do with Mountain Dew. This product is going to be merchandised in the Energy door with the other Ultra products. It is a citrus flavor, probably more aligned into an orange flavor. It's got nothing -- it's not designed to address Mountain Dew or Kickstart in any way. It is simply a lighter -- 0-calorie and a lighter-tasting and refreshing and easier-drinking energy drink, completely in line with the original Ultra White product. The whole Ultra line mantra is the same. That is the subset that we are focusing on. And we're not changing the characteristics of that product at all. So if anything, our product is probably -- this product is aligned more to an Orangina-type of flavor profile. And -- which is similar to, again, to the Rossi can, and not to any of the other CSDs.


And our next question comes from the line of Mark Astrachan from Stiefel.

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

So 2 questions on international. First, what drove the slowdown on easier comparisons, which continued into July? Could you quantify the impact from timing and/or destocking? And then secondly, can you quantify the impact on international growth broadly from your focus on profitability?

Rodney C. Sacks

I think there were a couple of factors that occurred in July. We don't want to go into more details because it is a single month. But -- and it varies quite dramatically. We believe that a lot of the factors that happened in July will not recur and it will make itself up into August, so we're not particularly concerned with it. But we really don't want to go into more detail on that front. It really was mainly destocking and movement and changes in production from one month to another because some of the production -- or some, actually, it's on an increasing level of production, is being handled in some cases by our distributors. And so their planning cycles are not necessarily linked to our sales and they will produce when they have gaps in production or when they feel they need it and we all find it and we try to smooth it out with them. But if we are finding that they were overproducing one period and then go down in inventory levels to another month, and then suddenly, the beginning of the month, start up again. And that is having quite a dramatic effect on some of our numbers on a month-to-month basis. Internationally, generally, we're starting to see some slowing but we've also tried to focus on getting many of the countries profitable. We will look again to accelerating sales but focusing on the bottom line and ensuring that we don't go back into the red in those countries. And so we're trying to just balance that through. We think that there has been some slowdown, but many of the international markets are really doing very well and starting to improve. Sales, for example in -- although we had a slowdown in international in July, and as I indicated, the actual sales in the USA were actually higher than the average company sales, the sales out in many of our markets, particularly in EMEA, from our distributors to customers, were up actually in the double digits in the EMEA in July. But our sales to our customers were substantially lower than that. So it's just a mismatch in July of some of those numbers.


And our final question comes from the line of Bill Chappell from SunTrust.

William B. Chappell - SunTrust Robinson Humphrey, Inc., Research Division

Just wanted to follow-up on the gross margin side and just -- was there a big contribution from local manufacturing in Japan and elsewhere? And is that expected to kind of continue as you open up in Korea and India? Or I mean, have we seen kind of most of the gains this quarter?

Rodney C. Sacks

We think that the effect of local production in Japan was substantial and that really did help us. Sweetener cost was a big contributor as well as we started packing again at Dr Pepper in Texas, which also helped us -- we had stopped for a period of time, which was also beneficial. As we go forward, as we said, Japan is now onstream, where we're launching M3 in Japan, we're launching that with the local production from the get go. When we launch Coffee Monster in Japan, that will be locally produced. So again, that is being improved. We have had some challenges in getting going in Korea and South Africa with local production, getting their production up to speed and up to our quality, and same thing in India. We're all working with it and we're all making progress. And as those countries come on board, it will obviously improve the results there quite substantially. We recently expanded our production facilities in Europe by adding another facility, which we have approved. And so as we continue to really rollout and become more well -- better well-established overseas, we clearly will continue to derive the benefits from better production in those countries. And also, the other thing that will help with our margin, Bill, was just mentioned back there, it was lower allowances. We were able to achieve these sales by not having to go as deep with our CMAs and other allowances we've had historically provided to retailers. We think that we will be able to manage that on a similar level going forward.


And there are no further questions in the queue. I'd like to turn the call back over to Rodney Sacks for closing remarks. Mr. Sacks, please go ahead.

Rodney C. Sacks

Thank you. 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 that our products are safe, are properly labeled, and the caffeine content of a Monster is approximately 10 milligrams per ounce. It's less than half the milligrams per ounce of caffeine level that's contained in Starbucks and other coffee house brewed coffee. Thank you very much for your attendance.


Ladies and gentlemen, thank you for your participation in today's conference. This concludes the program, and you may all disconnect. Everyone, have a wonderful day.

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