Monster Beverage Q1'16 Earnings Conference Call: Full Transcript

Operator:

Good day, ladies and gentlemen and welcome to the Monster Beverage Corporation First Quarter 2016 Financial
Results. At this time all participants are in a listen-only mode. Later we will conduct the question-and-answer session and instructions will follow at that time. If anyone should require operator assistance please press star then zero on your touch tone telephone. As a reminder this conference call is being recorded.

I would now like turn conference to Rodney Sacks, Chairman and CEO. You may begin.

 

Rodney Sacks:Chairman and Chief Executive Officer:

Good morning ladies and gentlemen. Thank you for attending this call.
I'm Rodney Sacks. Hilton Schlosberg, 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 these statements are based on our current knowledge and expectations, and are subject to certain risks and uncertainties, many of which are outside of 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 annual report on Form 10-K filed February 29, 2016 including 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 obligations 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 April 29, 2016. A copy of this information is available on our website at monsterevcorp.com in the financial information section. As we have said I should mention that the release of quarterly results in this call are almost a week earlier than normally scheduled. The reason for this change is that Hilton and I will be attending the Coca-Cola global system meeting that starts early next week.

We will refer to our normal schedule for the second and subsequent quarters.

We are continuing to make good progress in the implementation of our strategic alignment with Coca-Cola bottlers worldwide. We have successfully concluded negotiations with Coca-Cola bottlers in many countries, and are planning to launch Monster with these bottlers in most of their international markets in the near future. As previously reported we have concluded agreements with Coca-Cola Amatil, which distributes the Coca-Cola product in Australia, New Zealand, Indonesia, Papua New Guinea, and Fiji. We will be launching Monster in Australia on May 1, and in New Zealand on May 9 with Coca-Cola Amatil.

Additionally as previously reported we have completed agreements with BRG the 100% to earned Coca-Cola bottler that operates in a number of International markets for all the distribution of Monster in certain of these markets. Further to these agreements we are planning to launch Monster on May 13 in Singapore. Our plan to launch Monster in China continuing to move forward with the Coca-Cola system.

In Shanghai we have received the require product approval and manufacturing license and are planning for production of Monster there. In Beijing we have received the required product approval and are waiting to manufacturing license. We have committed to required approval process in -- in South East China.

We are full planning to launch Monster in China later this year but as previously discussed the launch could be delayed by various factors including regulatory approvals and finalization of distribution agreements. We are targeting a re-launch of Monster in India later this year following discussions with the regulatory authorities. We continue to make good progress in our discussions with FEMSA, Arca, and other bottlers operating in South America. We've signed the distribution agreement with the Coca-Cola bottler was lindly which is control by -- for distribution as Monster improve and are planning to launch Monster -- on June 2nd.

We also planning to launch a transition a number of other international market to Coca-Cola bottlers in the industry leading quarters. We continue to make good progress in the repositioning repackaging and reformulation of many of the Coca-Cola energy brands that were required as a result to the Coca-Cola transaction.

We successfully completed our acquisition of the concentrated flavor business operated by American food and Flavors $690 million in cash on April 1 2016. We remained excited by those acquisition which aligns us as our principle flavor supplier and really enable us to expand and secure most of our flavors at an economical cost.

The integration of the business is preceding well. Consistent with company's previously announced plan to return capital to shareholders in 2016 the company currently intends to commence a tender May to purchase upto 2 billion in value of it's common stock through a modified auction tender offer at approx range to be specified.

The company will fund the tender offer with cash on hand. In the third quarter sales and the beverage industry in general and the beverages in particular continue to show weakness private sales with Monster product accelerated during the quarter.

In the first quarter of 2015 in anticipation of the closing of the perception we continue to with 84% of the targeted the future in the US to the other system with an additional 5% consistent in May 2015 consequently the result of the comfortable third quarter of 2015 were impacted by the acceleration of the third revenue of $29.8 million. Distribution to have nation cost of $206 million and Coca-Cola cost was $3.6 million our discussion compares 2016 first quarter results was up 2015 first quarter results also adjustments for the acceleration of the third revenue distribution termination cost and conception cost to about in the first quarter the company achieved growth record sales of $777.5 million up 16% from $617.4 million in the first quarter of 2015 net sales were $680.2 million, up 15.9% from $587 million in the first quarter of 2015. Net sales in the first quarter were adversely affected by unfavorable changes in foreign currency exchange rates of approximately $12.3 million. Our original green Monster Energy drink multi-energy drink continued to perform well at retail.

Retail sales of the Ultra line continue to show good growth in the United States during the first quarter, as did our Java Monster line.

Gross profit as percentage of net sales was 62.2%, as compared to 56.1% for the comparable 2015 first quarter. The increase in gross profit as a percentage of net sales was largely attributable to increased net sales of the Concentrate segment, which has higher gross margins than the Finished Products segment, the disposal of our non-energy brands, and the price increase on our 16-ounce Monster Energy drinks effective August 31, 2015.

Distribution costs as a percentage of net sales were 3.4%, as compared to 4.4% in the same quarter last year. Selling expenses as percentage of net sales were 10.2% compared to 10.6% in the same quarter a year ago. Sponsorship and endorsement costs, merchandise display costs, social media expenses were all higher in the first quarter as compared to the first quarter of 2015 while commission were lower.

General and administrative costs excluding distributor termination costs and Coca-Cola transaction cost as a percentage of net sales for the 2016 first quarter were 10.6% as compared to 10.8% for the corresponding quarter in 2015. Payroll expenses were up $1.5 million consisting of a $5 million increase in payroll due partially to increased staffing in connection with our acquisition of the strategic brands and an increase in stock-based compensation and non-cash item $3.7 million, which were offset by a reduction of payroll taxes of $7.2 million following the excess - stock options in the first quarter of 2015. Also included in general and administrative costs is amortization of trademarks a non-cash item of $1.8 million attributable to our acquisition of the strategic brands.

Distributed termination costs were $3.4 million in the first quarter as compared to $206 million in the 2015 first quarter. Regulatory matters and litigation concerning the advertising, marketing, promotion, ingredients, usage, safety and sale of the company's product were $5.4 million in the 2016 first quarter as compared to $4.9 million in the 2015 first quarter. In addition, other legal costs were $2.4 million higher for the 2016 first quarter.

Our effective tax rate decreased from an adjusted 38% to 35.8% in the first quarter primarily due to the domestic production deduction. On an ongoing basis, we expect that our normalized tax rate will be approximately 36%. Net income was $166.1 million, compared to net income of $110.8 million during the first quarter of last year, an increase of 49.9%. However, despite the substantial increase in the number of shares on a fully diluted basis from 173.8 million to 206.9 million following the issuance of shares to Coca-Cola, diluted earnings per share increased to $0.80 for adjusting for distributed to the nation expense for the first quarter from $0.64 in the 2015 comparable quarter.

Gross sales to customers outside the United States were $184.4 million in the 2016 first quarter compared to $141 million in the corresponding quarter in 2015. Net sales to customers outside the United States were $149.1 million in the 2016 first quarter compared to $113 million in the corresponding quarter in 2015.
As stated earlier gross sales and net sales to customers outside the United States were higher in local currencies by approximately $15.1 million and $12.3 million respectively. Including geographic sales reported our gross sales to company's military customers which are delivered in the United States and transfer to the military and their customers overseas.

According to the Nielsen reports for the 13 weeks through March 26, 2016 for all outlets combined, namely convenience, grocery, drug, mass merchandisers, sales in dollars in the energy drink category including energy shots increased by 7.1% versus the same period a year ago. Sales of Monster grew 10.8% in the 13 week period, while sales of NOS increased 2.5%, and sales of Full Throttle decreased 9%. Sales of Red Bull increased 4.1%, sales of Rockstar increased by 14.2%, sales of 5-hour decreased 0.1%, and sales of AMP decreased 8.1%.

According to Nielsen for the four weeks ended March 26, 2016, sales in the convenience and gas channel, including energy shots, in dollars increased 5.9% over the same period last year. Sales of Monster increased by 9.6% over the same period last year, while NOS was up 5.4% and Full Throttle sales decreased 5%. Sales of Red Bull increased by 1.3%, Rockstar was up 12.6%, 5-hour was up 1.9%, and AMP was down 4.5%.

According to Nielsen in the five weeks ended March 26, 2016, Monster's market share of the energy drink category in the convenience and gas channel including energy shots in dollars increased by 1.2 points over the same period last year to 35.2%. NOS' share remains the same at 3.7%, and Full Throttle share decreased 0.1 points to 1.1%. Red Bull share decreased 1.6 points to 35.1%, slightly below Monster share. Rockstar share was up 0.5 points at 7.9%.

5-hour share was lower by about 0.3 points at 8.3%. And AMP share decreased 0.2 points to 1.8%. According to Nielsen for the five weeks ended March 26, 2016, sales of energy plus coffee drinks in dollars in the convenience and gas channel increased 20.6% over the same period last year. Java Monster was 18.4% higher than the same period last year while Starbucks Doubleshot Energy was 25.2% higher.

We would like to mentioned there had been some changes in the dollar base we used to report on this category.

According to Nielsen in the convenience and gas channel in Canada for the 12 weeks ended March 05, 2016 the energy drink category decreased 2%. Monster sales were unchanged versus a year ago. Our market share increased 0.3 share points to 27.8%. Red Bull sales decreased 1% and its market share increased 0.7 points to 37.3%.

Rockstar sales decreased 9% and its market share decreased 1.2 points to 18%.

According to Nielsen for all outlets combined in Mexico the energy drink category grew 33.1% during the month of February 2016. Monster sales increased 8.3%. Our market share decreased 5.7 points to 25% against the comparable period last year. Sales of Burn, one of our acquired strategic brands, increased 4.9% although Burn's market share decreased 1.7 points to 6.5%.

Red Bull sales increased 0.7% and its market share decreased by 5.1 points to 15.7%. Vive 100's market share increased decreased 3.4 points to 11.3%. In the Nielsen statistics for Mexico cover single months which is a short period that may often the materially influenced positively and renewly -- in offset convenience chain which dominates the market. Those in the I mean change materially by promotions that maybe undertaking in that change by one energy brand during the particular month.

Consequently such activities impact on the month Nielsen statistics in Mexico. According Nielsen in the 13 week period into March 2016 the actual 13 week period very about different months as compared to the same period last year grew from 12.1% and to 13% in Great Britain from 9.3% to 11% in freedom from 8.4% to 9.7% in Belgium from 6.5% in Norway from 7% in the Netherlands and from 18.4% to 20.9% in France. -- February 2016 according to the Nielson month as retail market share in value as compared to the same period last year. Grew from 11.2% to 13.6% in Germany and decrease from 17.5% to 16.4% in South Africa will value sales growth 19.3% higher according to Nielson.

We note that one of those that transition to bottles Monster retail marketing value for 13 weeks ending February 2016 in Ireland increase from 7.4% to 8.7% in from 21.5% to 24.8% in Spain. According Monster market increase decrease in the thirteen weeks of end of February 2016 from 29.3% I would like to point out that the Nielsen IRI numbers in EMEI should only be used as a guard because of channel read by Nielsen and IRI in EMEI varied form country to country. According to Nielsen for the month of March 2016 in Chile of 26 in Chile Monster's retail market chain value increased to 20.4% as compared to 15.3% last year and in Brazil Monster's market share for the month of March 2016 from 4.7% to 3.1% is compared to same period last year.

In South Korea for the month of March 2016 Monster's retail market share in value increased from 10% to 18.7% compared to the same period last year. Going to for the March of 2016 in the convenience store channel in Japan Monster market share grew from 33.8% to 39.9%. Net sales for the finished product segment in the first quarter were negatively impacted by approximately $10.3 million of foreign currency movements in the first quarter. Net sales for the finished product segment in the first quarter of 2016 increased 12.3% from $535.7 million to $624.3 million from a comparable period last year after adjustments for acceleration of deferred revenue.

Net sales from company's concentrate segment were negatively impacted by approximately $2 million of foreign currency movements in the quarter after adjustments currency movements net sales for concentrate segment would have been $57.9 million for the first quarter. As a result of the Coca-Cola transaction which started on June 12 2015 there were no sales for the other segment during the first quarter of 2016 as compared to $31.3 million of net sales in the first quarter of 2015.

In Europe the Middle-East and Africa net sales in the first quarter increased 47.2% in dollars and 58.6% in local currency over the same period last year. Gross profit in this region as a percentage of net sales increased from 39.4% in the same period last year to 50.2% during the 2016 first quarter. EMEA sales were negatively impacted by supply disruptions that were encountered by CCE in Great Britain Monster's largest market in the EMEA during the quarter following the implementation of new software.

Monster continue to gain momentum and increased market share in Europe in the first quarter. Overall EMEA is now operating well and we've made good start in achieving increased distribution levels and in store execution including securing distribution by Coca-Cola bottlers in new countries and territories within the region.

We are pleased with the launch of Ultra in Europe. We commence distribution of Ultra in an additional eight markets in EMEA in the first quarter. Ultra will be launched in ten additional market in EMEA in the second quarter of 2016. In particular in Germany, France, Denmark, Belgium, Hungary, Ireland, Netherlands, Norway, Poland, and Sweden Monster achieved increased sale guidance as well as increased market share.

In Asia-Pacific, net sales in the first quarter increased 93.5% in dollars and 97.7% in local currencies over the same period last year. Gross profit in this region as a percentage of net sales increased from 31.2% in the same period last year to 45.2% during the 2016 first quarter. In Japan, net sales in the quarter increased 63.4%, 62.5% in local currency as compared to the same quarter last year. We continue to experience strong performance in Japan.In South Korea, net sales increased 293.4% to 312.6% in local currency as compared to the same quarter last year.

In Mexico, Central America and South America, net sales for the first quarter decreased 3.2% in dollars and increased 9.2% in local currencies over the same period last year. Gross profit in this region as a percentage of net sales increased from 39.8% in the same period last year to 41.1% during the 2016 first quarter.

Net sales decreased in Brazil largely due to the overall difficult economic and market conditions together with the ongoing uncertainties for our distributors related to the Coca-Cola transaction. In Mexico net sales decreased -- due to customer destocking during the quarter and delivery disruption during the month of March, however as reported by Nielson Monster sales at retail in Mexico grew during the quarter. In Chile, net sales in the quarter increased 52.3% in dollars and 74.9% in local currency as compared to the same quarter last year.

As previously mentioned we are moving ahead with planning for local production in India and anticipate we entering the market in India later in 2016. As mentioned earlier, we are optimistic that we will able to finalize agreements with Coca-Cola bottlers in numerous in the near future. We are also continuing to evaluate production opportunities with Coca-Cola bottlers both in the US and internationally which we believe will yield cost productions.

Turning to the balance sheet, cash and cash equivalents amounted to $2.5 billion at March 31, 2016 prior to close of the AAAs transaction compared to $2.2 million at December 31, 2015. Short-term investments were $508.2 million compared to $744.6 million at December 31, 2015. Long-term investments decreased to $7.4 million from $15.3 million at December 31, 2015. Days outstanding for accounts receivables were 48.7 days at March 31, 2016, and 43.2 days at December 31, 2015 compared to 46.4 days at March 31 2015, inventories increased to $165.9 million from $156.1 million at December 31 2015.

Average days of inventory was 58.1 days at March 31 2016 which was higher than the 58 days of inventory at December 31 2015 and lower than 69.1 days at March 31 2015.

During the 2016 first quarter we launched our new energy drink and salted caramel -- initial consumer response has been positive, we are planning to launch -- an new beverage that will be positioned as refreshment energized in the third quarter of 2016. For competitive reasons we intend to provide our further information on this new beverage at the stock holder meeting on June 14.

As previously discussed we are also have additional new product plan for later this year. As -- weak earlier than usual we can only provide an estimate for April 2016 gross sale. Based on growth sale through April 28 2016 we estimate April 2016 growth sales in dollars will be approximately 15% higher than in April 2015. In local currencies we estimate April 2016 growth sale will be approximately 16% higher than in April 2015. To note that April 2015 sales included the old warehouse segment April 2016 includes the constant currency segment.

The -- net sales of a short period often disproportionate the impact by various factors such as for example selling days, days at the weekend which holidays school, timing of new product launches and the timing of branch increases and promotions and retail stores and should not necessarily be in future to rewarded as indicative of results for the full quarter or any future period. In conclusion I would like to summarize some recent positive points. Our position of is exciting and represents an important milestone for the company through the ownership of the proprietary formulas for our principle product. This transaction will be accretive to the company's earnings from the closing of the transaction on April 1, 2016.

Consistent with companies previously announced plan to return capital to shareholders in 2016 the company currently intends to commence a tender offer in May purchased up to $2 billion value of it's common stock through a modified tender offer at range to be specified. The company will fund the tender offer with cash on hand. While Hilton I will participate in the offer for asset divesification reasons we will continue to own a substantial majority of our current holdings following any successful tender offer. North American international gross margin remained healthy and continue to improve.

The U.S. Nielson market stastics and statics from many countries around the world show that energy categories is continuing to grow and that Monster is generally driving ahead of the category.

The new additional to the Monster family continued gain momentum and add to the company's sales. We are excited about the prospects for our new beverage which we are planning to launch in the third quarter we are particularly pleased with our performance in our international market. We have successfully transitioned a number of international countries to Coca-Cola bottlers and we have reached an advance stage to transition many more markets to Coca-Cola bottlers from the second quarter of 2016. I would like to answer questions about quarter and the year.

Please note that we will not be taking any questions with respect to the tender offer on this call. Thank you.

 

Question & Answer

 

 

Operator:

Thank you ladies and gentlemen if you have question at this time please press star then the number on your touch tone telephone. If your question has been answered or you wish to remove yourself from the queue pound key due to limited time please to one question only per participant. Our first question comes from Kevin Grundy of Jefferies. Your line is now open.

 

Kevin Grundy:Jefferies:

Hey good morning guys. I wanted to start with China given the importance of you launch in that market. Can you talk a little about building upon the timing of that around the brand positioning the investments is going to required for trial there and to I am sorry to raise brand awareness that will be helpful. Thank you.

 

Rodney Sacks:

To give most of the information that you asking would be giving future estimates and indications and even more difficulties in the market we're just going into. We are all I would like to say about China is that we are planning enter China in the similar way to which we've entered other markets. We look at building distribution on the store-by-store basis. We're getting into market with one SKU which is Monster Green is primarily our main product. As I indicated in the call we are still looking to finalize negotiations with distribution partners on the distribution agreements and those negotiations are have taken some time.

We also addressing with registration. So we are in a new country its we're looking at obviously we do have a lot of experience in and so to say more than that I don't know we all looking to continue later this year, but there could be delays in getting the registrations but we are continuing to focus on China which and I just believe that there is more at this point that we will be able to say. Obviously we will need to make investments in the market which we will do as appropriate to established the brand, but it is a slow traditional build for us going into China.

 

Kevin Grundy:

Can I ask a follow up?

 

Rodney Sacks:

Yes.

 

Kevin Grundy:

Thank you. Just switching gears to the US some of the Nielson data has slowed a bit broadly for the category and some of this may been have a cycled the pricing that red bull has taken in and your own cycle that into the fall. But can you talk little bit about some of the slowing that we are seeing broadly in the category in the US whether that's concerning at all or whether you think its a bit of a blend and then what sort of is your expectation broadly for the category for the balance here of the Europe. Thank you.

 

Rodney Sacks:

In those category might be see slowing slightly but obviously it's still growing at a good and positive rate. You going to look at the category in the context of beverages generally, I think the point you made is one of the important points is that part of that categories growth is that we are cycling on price increases now and you if you look at the growth and its largely is influence the category growth largely influenced by the growth that obviously red bull and us contribute to the categories as the major participants in the category and you have seen the slowing in the red bull numbers and that really has probably large influence on that category. So we don't see much difference we positive about the category but obviously we done in a we gone to with a category will growth lots of innovation will come from a competitors. We have innovation as of indicated coming it is going to come later in the year but we do have quarter robust innovation front line.

 

Operator:

Thank you and our next question comes from Jury Hong with Goldman Sachs. Your line is open.

 

Judy Hong:Goldman Sachs:

Thank you. Good morning.

 

Rodney Sacks:

Good morning, Judy.

 

Judy Hong:

So broadly speaking it seems like your international sales growth is accelerated in Q1 versus Q4 and I was just hoping to get a little bit more color just in terms of how much is this lapping some of the inventory issues that you had and or we now mostly behind some of that issue how much are you getting gross some of the transition market and as you look at over the next 6 months market like Australia where you transitioning to Amatil and then you got Nigeria and some of the newer market you're entering your expectations in terms of how quickly you can see growth accelerating just broadly from an international perspective.

 

Rodney Sacks:

Again like everything everybody would lot of things to happen instantaneously but it takes time. As we transitioned we are starting to see once you had a settle down with the particular bottler in that market we all starting to see good progress good but again it also depends on the commitment of the bottler and each bottler has its own priorities his own commitments and it is very the trend which is clearly from what we given indication on each of the countries on our market share the trend is generally is continuing to tight market share.

I would say look at the German numbers Judy that we spoke about on the call and also South Korea there is a two markets that have been transition to the Coca-Cola system. First make it some indication that the other markets that we have not seen that amount of growth and there is a summary markets so as Rodney said it does differ from country to country so those are two good indications.

 

Hilton H. Schlosberg:

So we just thing generally positive as we go forward obviously we do with our way through the chopiness and the transition issue that we had in the past.

 

Operator:

Thank you and our next question comes from Mark Astrachan from Stifel. Your line is open.

 

Mark Astrachan:Stifel:

Hi Good morning

 

Rodney Sacks:

Good morning Mark.

 

Mark S. Astrachan:

I wanted to ask about the concentrate business so it still seems to a little bit weaker I think then originally trending going into the deal close I guess I am curious if you were to try to pass to out sort of differently may then some question have been asked about it in the past how much of the under performance has been driven by some of the larger brands like Relentless in particular but also like Burn in terms what its happen from re launches, repositioning potential reduction in shelf space in favor of Monster and the like in other words they related to think about it by the bigger brands and maybe in some of those smaller brands that could be getting discontinued.

 

Rodney Sacks:

well I think it's a mistake have actually have done full analysis of these strategic plan like here we also need to understand what's the position is with regard to those brands some of it is relating to weakness in the brands themselves that we are in various way some of that of course is foreign currency and there is another factor in that in certain countries we have been unable to structure ourselves in a way that we could actually so concentrate and what we do in certain countries is we get a royalty from because of Coca-Cola company which equates to effectively what we would have done had we sale the constraints if structure is sitting up various countries to accommodate the Concentrate business. So there is a whole lot of factors that one has to take into account in a valuating adding the concentrate business.

But largely there is some weakness, but we are not seeing in these numbers to full extent of the concentrate business because of some of these adjustments that have to take place.

 

Mark Astrachan:

I would just add that I think that one of the things we did mentioned previously that we did found that in some other cases the investment in the strategic brands prior to and during the transition headwind -- and CapEx and that's did effect trial. So we did see a reduction in sales in those countries as a results we believe of that. So what we've had to do is not only just going and blindly obviously reinvest in marketing. We've had to re-look at how we repositioning these brands and at the same time get the repositioning done both in repackaging and designs in flavors and then obviously then recreate marketing plans to put those the new positioning that we have looked that for these brands particularly firm brand and -- are two of the largest brand that did have some weakness.

We have also in many ways repositioned -- a little bit in the US so that we haven't change packaging we all are going to modernize that packaging and that's still coming through now. So this is a long process because there are where many brands in many countries and laid on top of our earn stocking and our earn business obviously at Monster it just takes it takes a long time to get a lot of these repositioning done. So we think that's the partially the reason for it and yes it has been weaker than we had estimated. But we are doing repositioning we improving some focus and we are starting to see some strong signs and we do believe that will continue to be positive.

Some of the other brands smaller again its mixed bag you can't put it into one category because in some cases the brands off more and may go way. But in other cases some of those smaller brands are very good and very strong brands and we are if you looking to long term growth from those brands. But again its going to be positioning in a build its not going to happen not. But there are some good brands that we see in the mix that we do believe we will see growth from going forward.

 

MNST:

Is that answer to your question Mark. So its a kind of mixture of funding -- in certain bands that are being addressed and other factors.

 

Operator:

Thank you and our next question comes from Bill Chappell with SunTrust. Your line is now open.

 

Bill Chappell:SunTrust:

Thanks, good morning. Rodney tell little bit more about Mexico from the some numbers you really enough I couldn't tell if there were some short term turbulence or may be you can give little more color on what's going on there.

 

Rodney Sacks:

There were obviously some challenges in March as we indicated. That is the market that has not transition so its just there is obviously some uncertainty relating to the market. The market we have still grown just short of 10% and so the brand continually grown quarter-to-quarter. But there is the emergence of low cost brand we have a 100 in the market that have been very aggressive and they have really expanded market so and that's why when we look at the market we say our market share is decreased but it is very much increased market and maybe may be a little bit different.

And then we had a debate earlier as to does Vive 100 really put into category or do well we really in the premium category and Vive 100 is in a lower price category are they really different and should we be splitting them.

And as we think we have traditionally put them into the one category, but that really what’s happens. So if you look at the underlying market bearing the uncertainties et cetera it is still growing and obviously one of the issues is ForEx and affordability, but we are still growing. So we are comfortable with end market, we think it’s a good market and we think that in the future we will continue to see pretty good growth from there.

 

Bill Chappell::

So since you like numbers, let me quote the number enough for Vive 100, there 340 ml PET which is their leading product in pesos sells for 10 pesos. Our product, a 473ml U.S. product that sold in Mexico sells for 30 pesos to 32 pesos.


So that’s the comparison in pricing. It’s a very, very aggressive competitor and we don’t want to go down and we will not go down to that type of pricing for Monster.

 

Operator:

Thank you. And our next question comes from John Faucher with JP Morgan. Your line is open.

 

John A. Faucher:JP Morgan:

Thank you. Just want to follow-up on the last couple of questions. You’ve talked about sort of preaching patients in terms of getting these bottler deals done totally understand that. Can you tell us what goes into the negotiations, it sounds like some of these sort of brand shifts what the underlying support levels are the transition may be out of some of the Coke Concentrate brands into the Monster brand and how you manage that transition? It sounds like that’s part of the negotiations and so is that really why this is taking longer? And so I guess a little bit of color in terms of kind of what you need to nail down with the bottlers as you do these deals? Thanks.

 

Rodney Sacks:

I think you put into two different buckets, the one bucket is although we are trying to get us have ourselves the hope further that we will become more integrated into the Coca-Cola System. We are still nevertheless an independent publicly traded company and as a result it’s been important for us to continue to negotiate agreements on terms that we believe will put us in a position where we can take protect ourselves and our brand if things -- the relationships didn’t go as planned.

And so the contract that we have agreed to with the company as a principle and obviously now you take that to the individual bottlers they have their own lawyers, they have their own local laws and they have their own view of license, very respectfully many of them are not used to signing a contract of this nature, which is more akin to a finished product distribution agreement as oppose to a manufacturing concentrate bottler agreement, which puts a lot more discretion and decisions in the hands of the bottler whereas we tend to keep or want to keep most of those decisions about global marketing, about some of the local marketing and a number of things.

The other thing is that we obviously got to be very cautious that we don’t get into a situation, we have a large line of products for example and we don’t want to be in a position that if the bottler decide he wants to take one skew or three skews and not the rest that we are kept out of the market for the rest of the SKUs. So there are bones of contention that keep going up and down between the legal agreements and we’re getting through them, but it’s in many case that it’s really a question of literally educating a bottler in a country with their lawyers about why our agreement is in the form that why we need the protections. Then the other obviously is the other bucket is just goes back to the old life money, how do you share the value chain that’s available in the country and it’s just arm wrestling between us and the bottlers as to how do we get to a fair value share and in some cases we are at odds with the bottlers on what we believe we want out of the value share and we’re not going to compromise the value share and take less in order to simply try and get deals done. Because you want to move quickly I mean what we going to negotiate is going to stay with us for 20 or 30 years or whatever long the agreement are.

So we really do want to have a fair relationship and a fair share of the value chain bearing in mind that we spend and do a lot more than it’s normally done by Coca-Cola Company in a bottler relationship when they split whatever the split is when they split their value chain the bottler picks up a lot more of the obligations. In our case we do and we don’t want to be in a position where we split the chain and we end up with still the lion share of the marketing and other expenses, which aren’t fairly shared. So it’s been in the negotiation and we just we’re getting through them one-by-one and I think that’s really the color I have got I don’t know Hilton if you would like to add to it.

 

Hilton H. Schlosberg:

No, I think that’s absolutely right. One of the big issues the legal stuff can be negotiated and it is but it’s got to be a fair agreement in terms on commercial terms for us and a fair agreement for the bottler and often the bottler feels he is entitled to more and we as a brand owner have substantial expenses, have substantial marketing expenses and we have to ensure that after those marketing expenses we do a good deal for our shareholders. So it is a bit of a hedging, but as you can see from the agreements that have been finalized we’re moving forward and we’ll move forward in due course with some of the other bottlers or we won’t. And if it’s not there are other distribution partners that we’ll be working with.

 

John A. Faucher:

Yes. I agree.

 

Operator:

Thank you and our last question comes from Caroline levy from CLSA. Your line is open.

 

Caroline Levy:CLS

Thanks so much, good morning. My question relates to margins which were just outstanding in the quarter 840 basis points improvement I believe and as you move into the next four quarters I believe you’ll get about a 250 basis points left from the benefit of the acquisition. So I just want to…

 

Hilton H. Schlosberg:

So it’s your estimate.

 

Caroline Levy:

Yeah I just want to be sure that within the margin expansion we did see there were no unusual items in the first quarter and obviously there is the benefit of the acquisition which will continue I think through most of the second quarter. But if there are any moving parts you can elaborate on little bit more on margins or is this the new status quo the…

 

Rodney Sacks:

We spoke about the price increase number one; number two, we’ve got the Concentrate business has now kicked in it wasn’t in the first quarter of last year. So those are two factors that influenced margin in this quarter. There is product mix, which has also influenced margin so apart from those I’m not aware of anything unusual apart from those that influenced margin in the quarter.

 

Caroline Levy:

And I'm wondering if you could…

 

Rodney Sacks:

And in going forward yes we will have the benefit of the AFF transaction.

 

Caroline Levy:

Yeah just because I think the strategic is the million dollar question on the company is do you think overtime international margins get pretty close to domestic and I mean we could talk in 5 or 10 year increments I guess is there a reason why international structurally would always be below the U.S.?

 

Hilton H. Schlosberg:

Well pricing differs from country to country obviously and we have very good pricing in the U.S. and in some countries internationally we don’t benefit from the same pricing structures. So what we’ve done we don’t give projections as you know, we don’t give guidance, but what we’ve done in this quarter is we’ve actually given you the margins in the international territories in aggregate so you can see the trends in margin in EMEA and the trends in Asia Pacific and Central and South America.

 

Rodney Sacks:

I think I’d like to just add is that if you look at international margins I think we should expect them to be lower than U.S. because of pricing and in many of those cases our cost of goods seems to be higher, we’re producing out of the U.S. particularly for the -- in the immediate future when volumes really get to the levels of the U.S. we’ll see some reduction but even then I think we should expect cost of goods to be higher internationally.

The other thing is that we go through the -- in looking at the mix it’s a mix bag Caroline because even internationally we’ve obviously got Concentrate business, which has got traditionally the higher margins, but as Monster and we think that ultimately the growth in the long-term for the company is that the Monster brand will grow while again we think we will get growth from the new brand there is some nice brands in the strategic group that will continue to grow as well.

If you looked if we looked at it we think that ultimately the larger growth will come from Monster and then as Monster there will be a cause they’re international there will be some slight reduction in overall margin, but you want to take the mix…

 

Hilton H. Schlosberg:

Because it’s a finished goods margin.

 

Rodney Sacks:

Correct. And that’s So again I just want to bear that in mind so there I am conscious like a I think just a straight line and then take the incremental margin we should get from AAF and should be applied going forward. So while we do expect there to be an improvement in some immediate factors that one should take into account.

 

Hilton H. Schlosberg:

And we don’t give predictions.

 

Operator:

Thank you and I'm showing no further questions. I would now like to turn the call back to Rodney Sacks for any further remarks.

 

Rodney Sacks:

On behalf of Monster I’d like to thank everyone for their continued interest in the company. We continue to believe in the company and our growth strategy and remain committed to continuing to develop and differentiate our brands and to expand the company both at home and abroad and in particular to expand distribution of our products through the Coca-Cola bottler system internationally.

We are also particularly excited by the new opportunities that we have going forward with a robust portfolio of energy drink product throughout the world comprised of our Monster energy brand together with the strategic brands. Thank you very much for your attendance.

 

Operator:

Ladies and gentlemen thank you for participating in today’s conference. This concludes today’s program. You may all disconnect, everyone have a great day.

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