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

Executives

Hilton H. Schlosberg – Vice Chairman, President, COO, CFO and Secretary

Rodney C. Sacks - CEO

Analysts

Judy E. Hong - Goldman Sachs Group Inc

William Chappell – SunTrust Robinson Humphrey

Mark S. Astrachan - Stifel, Nicolaus & Co

Kaumil S. Gajrawala - UBS Investment Bank

John Faucher – JPMorgan

Alec Patterson – RCM Capital

Monster Beverage Corp. (MNST) Q3 2012 Earnings Conference Call November 7, 2012 5:00 PM ET

Operator

Good day, ladies and gentlemen, and welcome to the Monster Beverage Corporation Third Quarter 2012 Financial Results 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. You may begin, sir.

Rodney C. Sacks

Good afternoon, ladies and gentlemen. Thank you for attending this call. I'm Rodney Sacks. Hilton Schlosberg, 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 on February 29, 2012, 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 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 8, 2012. A copy of this information is also available on our website, at www.monsterbevcorp.com, in the Financial Information section.

I’m sure that you’re aware that our company as a result of certain litigation, regulatory requests and media reports, has been the subject of discussion recently. I want to take this opportunity to briefly address this. First and foremost, we reiterate that our products are safe. More than 8 billion cans of Monster Energy drinks have been sold and safely consumed in the United States and around the world since 2002. Additionally, 10 of billions of energy drinks manufactured and distributed not only by us, but by other companies, have been sold and safely consumed worldwide for 25 years.

We believe that consumers are justified based on that long track record in having confidence in the safety of our products. A principal area of attention relates to caffeine. Unfortunately, there has been some misinformation published recently regarding the caffeine content of Monster. So let me give you the facts. Monster energy drinks generally contain approximately 10mg of caffeine per ounce from all sources. By comparison, the leading brands of coffee house brewed coffee, for example Starbucks, contain on average in excess of 20mg of caffeine per ounce. In other words, a 16 ounce can of Monster Energy contains about half the caffeine of a 16 ounce cup of coffeehouse brewed coffee. Even a 24 ounce can of Monster Energy, which contains about 240mg of caffeine from all sources, has about 30% less caffeine than an average medium sized 16 ounce cup of coffeehouse brewed coffee.

So again our products are just as safe for consumers as a cup of coffee purchased at your favorite coffee house. Even an extra large size single serving of a Mountain Dew fountain drink which is readily available throughout America contains about 234mg of caffeine. In addition, the amount of caffeine per ounce in other major energy drinks on the market is comparable to or higher than the amount in Monster. There is absolutely no basis for singling out Monster in this regard.

Another area of recent media focus has been on the fact that Monster Energy drinks are labeled as dietary supplements rather than as foods. In the case of Monster Energy drinks, this is a red herring. Our products could be labeled and sold as foods if we chose to do so. As previously indicated, Monster Energy drinks, including their ingredients and labeling, comply fully with all laws and regulations in the United States and in each of the more than 70 countries in which they are sold. All of the ingredients contained in our products at current levels are either FDA approved food additives or are GRAS, which stands for Generally Recognized as Safe and are therefore permissible for inclusion in and labeling as foods,

As a result, with the Monster Energy drinks are classified as dietary supplements or as a food is a distinction without a difference. Either way, the current ingredients, none of which are secret or hidden, are fully permissible as a food and a supplement. In other words, we are confident that if we chose to do so, we could re-categorize Monster Energy drinks as a food. Apart from minor changes in form, the labels of Monster Energy as a food would be almost precisely the same and contain the same details as currently appear on our cans. In fact, all of our main competitor’s energy drinks with the labeled as foods or supplements, contain similar, if not substantially higher levels of caffeine than do our products.

Furthermore, from the time Monster was launched more than 10 years ago, the labels on all Monster Energy drinks have expressly stated that the product should be consumed responsibly and are not recommended for children, people sensitive to caffeine or pregnant women. Finally, there’s also been recent focus on so-called adverse event reports that are filed with the FDA. The FDA itself has stated quite clearly that adverse event reports about a product are not reports issued by the FDA and do not themselves establish any cause or link between a product and the reported event. More specifically, the fact is that the FDA has made it clear that it has not established any cause or link between Monster Energy drinks and any of the handful of events reported in adverse event reports.

These reports were received by the FDA over an eight year period between 2004 and 2012 so there are no new or sudden issues. The FDA has long been aware of these reports. It was aware of them, including the report relating to the 14 year old girl whose family brought the lawsuit against Monster when the agency stated publicly in August of this year that it monitors the products it regulates, specifically including energy drinks by examining current scientific data, monitoring new ingredients added to products and investigating reports of adverse effects.

The FDA stated its conclusion that the available evidence and I quote, does not indicate any new previously unknown risks associated with caffeine consumption. In short, there is not a shred of information which cause of links Monster to these adverse events and the Fournier lawsuit is the first the company has received alleging a fatality caused by Monster. Nor are we aware of a single instance anywhere in the world in which Monster Energy drinks have cause anyone’s death.

While of course we are saddened by the death of the 14 year old girl whose family brought the lawsuit against the company, the allegations in that lawsuit claiming to the contrary are false and totally baseless and are not supported by either the science or the facts. The autopsy report reveals that a caffeine blood level was not performed and that her death was natural and associated with a preexisting heart condition which by itself increased her risk of cardiac arrhythmia and sudden death. We will defend vigorously the lawsuit.

I hope this clarifies some points that have been made that have been the subject of recent media reports and makes clear our complete confidence in our products. We will of course provide an appropriate response to any regulatory or similar inquiry that we receive. The company can document and support the legal basis by which its products are properly labeled as dietary supplements and also produces adequate third party scientific documentation to substantiate their safety.

However, given the current litigation and pending regulatory recourse, I hope you understand that we will refrain from answering questions or commenting further on these specific subjects. We are happy of course to answer questions you may have about our products in general or about third quarter results as best we can after we have concluded our discussion on the business which I will turn to now.

While the beverage industry in general continued to experience softness in the third quarter, sales volumes, the energy category in our principal market, the United States, continued to grow in the teens in the third quarter, although slightly lower than the growth rates of the energy category in the US in the second quarter. overall, the company had a good third quarter with record third quarter growth sales, up 15.4% to $632.3 million. Net sales up 14.2% to $541.9 million and operating income up 6.5% to $140.7 million.

Our tax rate was higher this quarter at 39% versus 37.2% in the same quarter last year. Diluted earnings per share increased 6.1% from $0.44 per share in the third quarter of 2011 to $0.47 per share.

While we are pleased with the results we achieved this quarter, this can be described as the quarter of the proverbial thousand paper cuffs with less robust growth for the quarter being due in part to less robust growth for the energy category as a whole in the US together with less robust growth for Monster Energy in our US market, particularly in the latter half of the quarter. lower sales in Canada in the quarter largely due to a realignment by Coca Cola Canada of their inventory levels, the strength of the US dollar against certain currencies in our international markets, lower sales of Monster Energy Extra Strength Nitrous Technology Energy drinks. This product line has been repositioned from 12 ounce cap cans to 12 ounce SLEEK flap top cans and effective September we lowered pricing for the extra strength line in line with our regular 16 ounce Monster Energy drinks, lower sales of Worx Energy Shots and also lower sales in our warehouse division.

Nielsen recently commenced reporting sales information for the United States market based on an expanded sample of outlets, which now includes Wal-Mart, dollar stores such as Family Dollar, Dollar General and Fred’s, DeCA Military Stores and club stores namely Sam’s and BJs, but excluding Costco.

On this call and in the future, well at least for the remainder of this year, when we discuss the Nielsen reports for the United States for all outlets combined and the reported information contained in it, will be based on this expanded sample. This will not affect the reported information governing sales in the convenience and gas channel, grocery and or drug channels which might from time to time be referred to individually. We will provide figures on both basis as we only begun referring to reports based on the expanded sample earlier this year.

According to the Nielsen reports for the 13 weeks through October 20, 2012 for all outlets combined, then the convenience grocery, drug and mass merchandisers on the expanded basis I just described, including Wal-Mart, dollar stores, DeCA Military Stores and club stores, but excluding Costco. Sales in dollars in the energy drink category including shops increased 13.3% versus the same period a year ago.

Sales of Monster grew 19.5% in the 13 week period while sales of Red Bull increased by 16.6%. Sales of Rockstar increased by 10.8% and sales of 5-Hour decreased by 1.8%. Sales of Amp were down 8.9%, NOS increased 13.2% off a low base and sales of Full Throttle increased 9.1%

For comparative purposes, according to the Nielsen reports, for the 13 weeks through October 20, 2012, on the previously reported basis for all outlets combined, namely convenience, grocery, drug and mass merchandisers, excluding Wal-Mart, sales in dollars in the energy drink category including shots increased 13% versus the same period a year ago. Sales of Monster grew 18.7% in the 13-week period, while sales of Red Bull increased by 16.9%. Sales of Rockstar increased by 11.4% and sales of 5-Hour decreased by 1.8%. Sales of Amp were down 10.4%. NOS increased 11.1% off a low base, and sales of Full Throttle increased 6.9%.

According to the Nielsen report, for the four weeks ended October 20, 2012, sales of energy drinks in the convenience and gas channel in dollars, increased by 10% over the comparable four week period in 2011. Sales of Monster increased by 19% over the comparable period last year, almost twice the growth of the energy drink category in convenience and gas, while sales of Red Bull increased by 12.6% over the same period. Rockstar was up 6.2% while 5-Hour was down 8.4%.

According to Nielsen, for the four weeks ended October 20, 2012, Monster’s market share of the energy drink category in the convenience and gas channel, including energy shots in dollars, increased by 2.5 points over the comparable period a year ago to 33.5%, against Red Bull share of 33%, Rockstar share of 8% and 5-Hour share of 10.5%.

According to Nielsen, in the 13 weeks ended October 20, 2012, for all outlets combined, sales of energy plus coffee drinks, in dollars, increased 19% over the same period last year. Java Monster was 23.3% higher than in the comparable period last year and Starbucks Double Shot energy was up 18%. Sales of our noncarbonated Monster Rehab tea plus energy line, according to Nielsen for the 13 weeks ended October 20, 2012, represented approximately 13% of the sales of all Monster beverages sold in the convenience and gas channel.

According to Nielsen, in the convenience and gas channel in Canada, for the 12 weeks ended September 22, 2012, the energy drink category grew 5%, Monster sales increased 8% and our market share at 26% increased 0.7 points over the comparable period last year, while Red Bull sales increased 7% and its market share increased 0.9 points to 39.6%. Rockstar sales increased 4% and its market share decreased 0.1 point to 34.4%.

According to Nielsen, in the 4 weeks ended September 22, 2012, sales of energy drinks in Canada for the convenience and gas channel grew 5%. Over this period, sales of Red Bull increased 8% and sales of Monster increased 9%, while sales of Rockstar increased by 1%.

Sales of Monster through our distributor in México in the third quarter of 2012 were 46% higher than in the comparable period last year.

Net sales for the company's DSD segment increased 15.5% to $516.3 million for the three months ended September 30, 2012, from $447.1 million in the same period in 2011. And contribution margin increased 11.1% from $153.1 million to $170.1 million.

Net sales for the company's warehouse segment decreased 7% to $25.7 million for the three months ended September 30, 2012, compared with $27.6 million for the same period in 2011. And contribution margin decreased to $0.4 million in this quarter versus $2.5 million for the same quarter last year, largely as a result of lower sales – sorry misquoted. It’s $0.04 million in this quarter the contribution margin which is $40,000 versus $2.5 million for the same quarter last year, largely as a result of lower sales and the impact of increased costs of Apple juice concentrate.

Changes in foreign currency exchange rates had an unfavorable impact on net sales of approximately 2% for the three months ended September 30, 2012, which was primarily due to a stronger U.S. dollar compared to certain local currencies in which we conduct certain of our international business. This had a negative impact of approximately $12 million on net sales. Sales were also negatively affected by lower sales to Coca Cola refreshments Canada Ltd, our Canadian distributor largely due to the realignment of inventory levels, lower sales of Monster Energy Extra Strength Nitrous Technology line which we repositioned from 12 ounce cap cans to 12 ounce Sleek flat top cans as I indicated earlier in which effective September 1 were part in line with our regular 16 ounce drinks.

Sales of Worx were also lower and net sales of the warehouse division were 7% lower in the quarter than the comparable period last year, primarily due to lower sales of sodas and apple juice which was partially offset by increased sales of Hubert's Lemonades.

For the three months ended September 30, 2012, gross sales through retail, grocery, specialty chains and wholesalers represented 3% of gross sales, down from 4% in the comparable period in 2011. Gross sales through club stores, drug chains and mass merchandisers represented 10% of sales, down from 11% in the comparable period in 2011.

Gross sales to full-service distributors represented 62% of sales, the same as in the comparable period in 2011. Gross sales internationally increased to 23% from 21% in the same period in 2011. Other sales were 2% for the period, the same as in the comparable period in 2011.

Gross sales to customers outside of the United States in the third quarter of 2012 amounted to $144.7 million, compared to $116.8 million in the same quarter in 2011. Included in such sales are sales to the 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 third quarter of 2012, in dollars, were 42.6% higher than in the same period last year. Excluding the effect of the strengthening dollar, such net sales would have been 65.4% higher. Monster is continuing to gain momentum and market share in Europe. In particular in the UK, Spain, Germany and the Benelux, Monster achieved substantial sales gains as well as substantially increased its market share. In the United Kingdom, according to Nielsen, Monster’s market share now exceeds 10%. Our European and Africa operations overall, are now operating profitably, particularly South Africa where we have made good strides in increasing distribution levels and sales. The Central and Eastern European region is still incurring operating losses, although we are starting to see the benefits from certain strategic changes which we are implementing.

During the quarter we launched Monster Ultra Zero and Cuba Lima in 16 ounce cans and are in the process of launching two new DUB products called Baller’s Blend and Mad Dog in 16 ounce cans. Baller’s Blend was previously positioned as DUB edition in a 550ml size resealable can.

We are continuing with our expansion strategy into new international markets. We launched Monster Energy in the Philippines and Turkey in the third quarter of 2012 and in conjunction with a new distributor, participated in an expanded launch in the Ukraine. We are continuing with our plans to launch Monster in Chile, Peru and Singapore in the next few months and in Argentina and Taiwan in 2013. We’re also planning to launch Monster in additional countries in Central and Eastern Europe in 2013. We believe that we’ve largely overcome product approval and label issues in Korea and anticipate commencing sales there within the few months.

Additional positive news is that sales in Japan in the third quarter continued to exceed our expectations. However, we incurred damages of product losses in relation to the production and shipping of products for Korea and Japan which negatively affected our gross margins during the quarter. We are hopeful that the damages in product losses experienced will be materially reduced in the future and are working towards local production.

Sales of Peace Tea, ready-to-drink iced teas continue to exceed our expectations. In the third quarter of 2012, gross sales of Peace Tea increased 44.1% over the same period in 2011. We are continuing with our plan to introduce additional packages and container sizes for the Peace Tea brand during the first quarter of 2013. We are continuing to sell in market Worx Energy shots, although we have experienced a substantial drop-off in sales. We have agreed to more favorable terms with our principle distribution partner in central and eastern Europe, Coca Cola Hellenic and are in the process of executing final sign distribution agreements with them to give effected too.

Although we still have a long way to go, we achieved improved results in Australia in the third quarter as compared to the second quarter of 2012 through a significant reduction in losses. We are in the midst of reevaluating our strategy in Brazil as we have not been satisfied with Monster’s results achieved there this year and have reached an advanced stage of negotiations with an alternative distributor.

Gross profit margins achieved in the third quarter of 2012 were 50.5% versus 52.7% in the comparable quarter in 2011. The decrease in gross profit as a percentage of net sales was largely attributable to geographic mix, production variances and product damages primarily in Europe and Asia, including production cost increases forced onto us by our partner in the United Kingdom, an increased promotional and other allowances as a percentage of net sales. Gross profit margins achieved in North America overall were marginally lower than in the comparable quarter last year. Although in the United States, they were slightly higher.

Distribution expenses, as a percentage of net sales in the second quarter, were comparable with the same period in 2011. Selling expenses, as a percentage of net sales, decreased to 11.6% from 12.6% in the same period in 2011. The decrease in selling expenses, as a percentage of net sales, was primarily attributable to decreases in advertising, primarily Worx and lower royalties in sales commissions paid to third parties other than customers. The decrease was partially offset by increases in sponsorships, trade development programs and other marketing costs in the third quarter of 2012 as compared to the same quarter in 2011.

As previously reported, we are continuing to invest in the Monster brand internationally, in Europe, the Middle East, Africa, Australia, Asia and South America, particularly through trade development programs to supplement our distribution partners' respective sales forces and to service and merchandise the small independent store channel. The cost of product sampling teams and trade development personnel are included as part of our selling expenses and do not form part of our payroll costs. These costs were substantially higher in Europe in the quarter as compared to the US and last year. As distribution improves and the European markets mature, we envisage a reduction in these costs, particularly as a percentage of sales. However, as we continue to enter new markets in Asia and South America, we intend to fund similar trade development programs to establish the Monster brand in those countries.

General and administrative expenses increased 23.6% in the quarter. The increase in general and administrative costs was primarily attributable to increased payroll expenses and in particular, increased stock-based compensation expense, which was $7.9 million for the quarter compared to $4.9 million last year, and $21.6 million for the nine months ended September 30, 2012 compared to $12.9 million for the nine months period last year. For the quarter ended September 30, 2012, operating income was negatively affected by combined operating losses of $2.5 million from our operations in Europe, the Middle East, Africa, Australia, South America and Asia. This figure was however lower than the $4.5 million losses incurred for the same period last year.

Our effective tax rate in the 2012 third quarter was 59% compared to 37.2% in the 2011 third quarter. The increase in the effective tax rate was primarily the result of lower than expected tax benefits from the 2011 domestic production deduction as well as an increase in non-deductible equity compensation.

During the 2012 third quarter the company purchased 6.9 million shares of common stock at an average purchase price of $57.99 per share for a total amount of $397.5 million, which excludes brokers’ commissions. Subsequent to September 30, 2012 the company purchased an additional 1.9 million shares of its stock at an average purchase price of $54.99 per share which exhausted the availability under the repurchase plan.

Turning to the balance sheet, cash and cash equivalence amounted to $283.1 million compared to $359.3 million at December 31, 2011. Short term investments were $307.7 million compared to $411.3 million at December 31, 2011. Long term investments comprised entirely of auction rate securities decreased from $23.2 million at December 31 to $19.9 million.

Days outstanding for credit accounts receivables were 41.3 days at September 30, 2012 and 42.4 days at December 31, 2011 compared to 38.7 days at September 30, 2011.

Our sales outside of the United States continued to increase as a proportion of our overall sales we expect that days outstanding for receivables will increase due to the different terms generally granted to customers internationally in accordance with local practices in their respective countries.

Inventories increased to $193.9 million from $155.6 million at December 31, 2011. Average days of inventory were 65 days at September 30, 2012 which was lower than the 71.6 days of inventory at December 31, 2011.

At September 30, 2012 the company held auction rate securities with a face value of $28 million, $44.8 million at December 31, 2011with an amortized cost basis of $20.8 million.

Growth sales in October 2012 were approximately 28% higher than in October 2011. We are encouraged by the strong sales that have been experienced by the company in North America, Western Europe and Japan. We caution again that sales in a single month and over a short period are often disproportionately impacted by various factors and according to each are not imputed to be or regarded as indicative of results for the full quarter or any future period.

In conclusion, I’d like to summarize the numerous positive points that occurred during the quarter. The United States gross margins are healthy and are up. 2012 third quarter gross margins for North America were only nominally lower than in the comparable 2011 third quarter. We are satisfied with the performance of our international expansion and investment. Our European business is profitable and the losses we sustained internationally were reduced in the quarter compared to the third quarter of last year.

The U.S. deals and market statistic shows Monster Energy is outpacing the category. Our market share in the important convenience and gas channel in both units and dollars now exceeds that of Red Bull. According to Nielsen, our market share in the United Kingdom has exceeded 10% for the first time. We have reached agreements with Coca Cola Hellenic for a more favorable terms for distribution of our Monster line in certain countries in Central and Eastern Europe. Monster sales in Japan are very encouraging and are exceeding our expectations. We are planning to launch Monster Energy in Korea within the next few months and as we have largely overcome the product approval and label issues that we experienced with our Korean products earlier this year.

Gross sales in 2012, in October 2012 were approximately 28% higher than in October 2011, and we have demonstrated that our products off site are properly labeled and that the caffeine content in the Monster Energy drink at approximately 10 milligrams per ounce is less than half the milligram per ounce of caffeine contained in the Starbuck brewed coffee.

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

Question-And-Answer Session

Operator

Ladies and gentlemen, (operator instructions). Our first question comes from Judy Hong, with Goldman Sachs.

Judy E. Hong - Goldman Sachs Group Inc

So just in terms of your sales trends. So Rodney, you’ve cited some of the headwinds that you faced in the third quarter, the realignment by CCR in Canada and the Nitro sales being impacted. Could you quantify how much those were a drag in terms of your top line growth in the third quarter?

Rodney C. Sacks

We – at this point I think we haven’t broken those out. Just trying to find something for you. I think the extra strength generally both in the North America were down about $4 million and works about $1.7 million. Just over – so perhaps $6 million for those two and the impact on sales in Canada – trying to find that figure for you Judy. I think was somewhere in the region of about $12 million.

Hilton H. Schlosberg

We also spoke about the impact of the currency, which was also about $12 million in the quarter.

Judy E. Hong - Goldman Sachs Group Inc

Right. I guess the better question is if I sort of look at the Nielsen trends and then just kind of back in and just look at the third quarter. It looks like U.S. was up by 13%, international up kind of 24% and the U.S. trends if I adjust for some of these factors do you think the 18%, 19% trends that you are seeing in Nielsen is pretty much representative of kind of what’s going on in the underlying level in terms of the U.S. sales trends.

Rodney C. Sacks

I can’t speak – the Nielsen numbers attract sales going up from retail outlets to consumers. So this is a time actually I just don’t have, we don’t have an analysis on what that time line gives and how it affects us in different channels. What we are saying is that basically gross sales in the U.S. were up at about – North America was up at about 14% and we’ve sort of – we can only give you obviously our sales numbers. They are choppy from month-to-month depending on ordering patterns and they vary for a number of factors. And so – but obviously you are just got to try and marry those as best you can, the same way as we do with the Nielsen numbers.

Operator

Thank you. Our next question comes from Bill Chappell with Sun Trust.

William Chappell – SunTrust Robinson Humphrey

Hi, good afternoon. Can you talk a little bit more about the gross margin you hit in the quarter and just anything you’ve done in terms of finding the distributor or finding I guess local manufacturing for Japan and maybe Korea to help that out?

Rodney C. Sacks

We are working towards the -- challenge in Japan and Korea is finding the right size Cans for those markets and plants that are able to produce our type of products and we are working towards that at the moment. We’ve launched in Japan in a Sleek can a 55 malt sleek Can and there isn’t – we haven’t been able to find a Sleek can available in Japan. So we’ve been working with Can companies to have them manufacture more to actually be able to supply us with a Sleek Can because the alternatives will go to – which will go to something like a 400 but it was a very stubby Can and we just didn’t feel that was right for the brand.

Getting the right product to be used in the right Cans in those two countries has been a challenge but we are actively working on doing so because we obviously we appreciate that it will remove the shipping damages and risks inherent in shipping as well as the shipping cost. And with the market -- but obviously what happens is when you start a market to make the investments and we’ll require some capital investments from us to do so as well with the Can companies and to some of the packing companies in Japan. But until we saw the sales velocities and the viability of packing locally, it just didn’t make sense to have those costs incurred upfront and then try and launch and then work, found out later whether your product was or wasn’t viable and it’s velocity. Based on the velocity we see -- it’s been very positive but the problem is there’s been higher costs or higher damages with that higher velocity. But it has accelerated our plan to go to local production and we are working on it.

We also just had some price increases in the U.K. from our packer and we had some price variances and some damages there again. We had some losses. There were a number of changes that took place in some countries for regulatory reasons and we ended up with some inventory excesses which we are obviously trying to work through to sell elsewhere. But we think we will be able to work through that as it will normalize more going forward as we continue to establish the brand and the company internationally.

William Chappell – SunTrust Robinson Humphrey

And just a follow up on the October sales…

Rodney C. Sacks

I just want to point out again. In talking about Japan and Korea, the modulates were quite substantially affected by these losses, the cost of shipping. With the result was that the business achieved, they had very low margins. Going forward we believe we will be able to obviously improve on those margins both by getting better at exporting and shipping Cans and also through local production and obviously increase sales. So those gross margins were very low in those areas because of that. Gross margins were also lower in Europe largely because of the production, and co-parking increased production losses as well.

William Chappell – SunTrust Robinson Humphrey

Thanks for the color and just on the October sales I know one month doesn’t make a quarter but that’s all for I think 31% growth in October of last year. Is that sign that some of the issues are behind you or just a timing of shipment. How should we look at that October number?

Rodney C. Sacks

I think it’s a timing issue, they ship when they orders, we ship when products are ordered, whenever we can and it just falls where it falls. So going forward we’ve obviously – we are encouraged by that factor. We did see a little bit of a fall off towards the end of the quarter. Again, it was what is was and we’ve seen it pick up both – we deal with it as it comes.

Operator

Thank you. Our next question comes from Mark Astrachan, with Stifel, Nicolaus.

Mark S. Astrachan - Stifel, Nicolaus & Co

Hi, guys. I guess one follow up to the last question. So monthly volatility has certainly increased from a sales standpoint. If you go to April and May it was up in the lower 30 if you had in June deceleration, July was up 25% August, September then worse in October back up. I realize when you get the orders and when you ship the products that you can’t fully control but is there something that you’ve thought about or is there some way that we can sort of rationalize how the selling and sell through sort of work here. So there’s a bit of an explanation for the increased volatility because obviously the underlying sales per the scanner date are good but they ship way too much volatility here month-to-month. I guess any color there. And then the second question -- so you exhausted the share repurchase authorization. How you are thinking about the roughly $600 million in cash on the balance sheet right now?

Rodney C. Sacks

First, going to the first question Mark. The best measure of the sales which gives you a smoother feel for – you need to follow the Nielsen’s, because the Nielsen’s are obviously a broad sample of different channels and if you look at the Nielsen’s going through from the July Nielsen’s, it’s pretty steady. Monster four weeks for the end of July was 20.2% up, in the convenience channels was 18.1%, in August 19.5%, in September and 19% for 20th October. That gives you a pretty smooth channel and that’s all sales are basically going year-on-year, that’s the increase in the channel. Ordering patterns from our customers are what they are. It depends on timing of promotions, timing of orders and so I can’t show any more color on that other than to say that you look at the sales going through and you got to look at – I know that everybody works off and looks at quarters but at the end of the day you also have to look an annual base in which I think gives everybody a fairer and a more balanced view of the direction of the company, the brand, the sales etcetera. Our quarters are just all choppy, that’s the only patterns have come in and that’s how we take it as it comes.

Hilton H. Schlosberg

We sell to distributors. You know what I mean.

Rodney C. Sacks

On the stock repurchase issue. As we’ve stated in the past stock repurchases are determine by our board of directors. The board continues to review many factors affecting the company’s stock plan as well as the strength of the overall market and will at the appropriate time review whether to authorize a further stock repurchase plan. In light of the fact that we have now used up the existing plan.

Mark S. Astrachan - Stifel, Nicolaus & Co

Thanks guys.

Operator

Our next question comes from Kaumil Gajrawala, with UBS.

Kaumil S. Gajrawala - UBS Investment Bank

Also on the margin question and to make sure I understand it. How much was the actual product damages versus just the additional cost related to shipping product out to Korea and Japan. Were there pallets that needed to get resent and more one-time damages that were…

Rodney C. Sacks

There were a number of issues that we faced. Products – sometimes the specs are very tight for Japan and they really are much tighter than the U.S. project were perfectly capable in the U.S. We were being inspected and we are being rejected for minor things, the blemishes and scratches and there’s a whole host of things and dense – they have some pressure issues on cap rates and defective cap issues. So were a whole lot of issues there and again just continued to face us in shipping these large distances. And it’s something that is just difficult to ship full Cans under pressure from the U.S. to Japan. We believe that we will be able to get this more under control as we continue to regain more experience in shipping and understanding Japanese requirements.

But it got to a point where literally every case had to be disassembled, examined Can-by-Can and then repacked and that’s where the costs became very high, and as a result our margins were very little but we were there, we were pregnant, we were launching and we needed to continue and the result is we’ve been able to establish our brand very strong, very solidly in the Japanese market but it certainly has been very costly for us, for all these different regions, but as we go forward we hope that we will avoid the damages, we hope we will avoid having to continue these very costly labor and meddling inspections to satisfy our Japanese customers and then retailers in Japan for our quality standards which are just very exerting because compared to the standards normally acceptable in the U.S.

Kaumil S. Gajrawala - UBS Investment Bank

Okay. Got it. And then it sounded like from the very beginning of your opening remarks that the slowdown started about half way through the quarter and then obviously there’s bounce back in October. Was there anything specific you was feel was behind that? And then also was it timing related with selling days or anything like that?

Rodney C. Sacks

We really didn’t see anything specific. We obviously did look and try to understand and there really wasn’t anything specific other than the matters we sort of mentioned and then you’ve seen the pickup in October. We just haven’t seen it and – basically for us it was obviously we initially looked at it and said – looked at directionally but basically once we saw the numbers coming back in October, that obviously gave us a lot more comfort. But basically we think that you go back and you take into account the chemical issue which was an unexpected issue and the currency where it is. I mean the business is doing much better as I indicated, the sales are up and the numbers are up in local currencies, up over 60%. So again, it’s as if the factor -- all these factors at the time just really shaved the top.

Operator

Thank you. Our next question comes from John Faucher with JPMorgan

John Faucher – JPMorgan

Thank you very much. A couple of questions here. It sounds like with all the extra -- you talked about the improved profitability on the international business. It sounds like with all the extra costs with Japan and everything that Europe might have seen a relatively significant increase in profitability. Is that a fair analysis to make coming out of your comments?

Rodney C. Sacks

I wouldn’t say significant, I think it had a nice increase in bottom line and they are all continuing to improve the effectiveness in Europe but we are still got a lot of individual countries where we are at the very early stages of developing the brand as a result we continue to divest quite heavily in trade development personnel, South personnel, sampling in order to make sure the product, the companies established in each of these countries. Although the – Europe again is not one country like America, each country has to be dealt with individually, different languages, different sales team, different support in order to get your brand. And even though the countries are small, you really have to support your brand and that becomes costly until you get to a sort of at least a minimum level of sales in that country and then things will start kicking in. Because we’ve got some really good shares in small countries but it’s costly. In countries like Lithuania, and last year we were up to 15% market share but when you look at it in actual case terms its very small.

So to support that get the product established there has been expensive but it is starting to kick in on its own. We’ve got very nice shares in certain of the markets like Greece, Bulgaria, some of those smaller markets in the east and then there were others that also sort of we just are still trying to get out of the blocks. So while we are all continuing to see some good change from losses to profits in those areas they will continue to improve. We are also obviously looking at trying to be a little more strict with your marketing spend to support the brand. A lot of the international properties that we started with in order to give the brand international credibility. We are trying to avoid obviously increasing that spend so that we actually end up with a spend per case lower. It is going the right way. It’s happened for the last two years and so now we believe we are going forward. We will be able to start showing better bottom line coming out of Europe.

John Faucher – JPMorgan

Great. And that’s great. And then one point of clarification here you talked about the board making a decision on the share repurchase authorization. Is it safe to say that none of the sort of noise going around that you talked about at the beginning of the call impacts your ability to repurchase stock or to authorize another repurchase program?

Rodney C. Sacks

We don’t believe so. But obviously we need to be advised by our lawyers but we don’t think so.

John Faucher – JPMorgan

Okay. Great. Thank you.

Operator

Our next question comes from Alec Patterson, with RCM.

Alec Patterson – RCM Capital

Hi Rodney. First just on the October numbers I just wanted to be sort of clear, with the launches of the new products you mentioned the Cuba Lima or Lima. Sorry, I forgot the names. Was there any impact from that in those numbers?

Rodney C. Sacks

I think the loss was very light in the quarter. It was almost missed the quarter. So you had some launch numbers in the October numbers more from the sort of zero ultra then from Cuba Lima. Because that’s been a bit slow at giving out and we are still trying to get some of our distributor network to take Cuba Lima. Zero Ultra has been taken across the whole network. So that has got out net get impact to buy it, but again I am not sure of the amount of brand as you know started to do very well. But it does take time to get these brands out into the market. So it’s not as though day one you press a button you have a fortune of sales. It’s – these things do rollout over a period of months. But I don’t know the actual effect of the sales of Cuba Lima in October. If I can get that figure before the end of the call I’ll give it to you guys but I just don’t have it with me.

Alec Patterson – RCM Capital

Okay. Fair enough. And just in terms of the December meeting. Is that still on and also just quickly, should we anticipate any surprises in the Q filing?

Rodney C. Sacks

The December meeting is going ahead of schedule. I think the 11 December. I wouldn’t think they are any surprises. I think the 10-Q will be very similar to – we’ve gone into the detail pretty extensively of the business in the quarter and the issues. So I don’t think there should be a need. But again I can’t anticipate what you might think is surprising or material, but we don’t think so.

Operator

Thank you. I am not showing any further questions at this time. I’d like turn the conference back to our host for closing remarks.

Rodney C. Sacks

I am probably not going to be able to get the information on Zero Ultra in time for the close – before the close. I apologize. But on behalf of Monster I’d like to thank each of you for your continued interest in the company. We continue to believe in our growth strategy and remain committed to developing and differentiating our brands and to expanding the company at home and abroad. Thank you very much.

Operator

Ladies and gentlemen, that concludes today’s presentation. You may now disconnect and have a wonderful day.

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

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

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

Source: Monster Beverage's CEO Discusses Q3 2012 Results - Earnings Call Transcript
This Transcript
All Transcripts