Monster Beverage Corp (MNST) — Q4 2021 Earnings Call Transcript

Thanks. Good afternoon, ladies and gentlemen. Thanks for attending this call. I'm Rodney Sacks. Hilton Schlosberg, our Vice Chairman and Co-Chief Executive Officer, is on the call; as is Tom Kelly, our Chief Financial Officer. Tom will now read our cautionary statement.

Now 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 are based on currently available information regarding the expectations of management with respect to revenues, profitability, future business, future events, financial performance and trends as well as the future impact of the COVID-19 pandemic on the company's business and operations. 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 March 1, 2021, including the sections contained therein Risk Factors and forward-looking statements for 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. I would now like to hand the call over to Rodney Sacks.

Thanks, Tom. The company achieved record net sales in the fourth quarter and for the full year, surpassing $5.5 billion for the first time ever. Despite some challenges in the fourth quarter of 2021, the overall results were solid. It's important to consider that the comparative fourth quarter of 2020 included a one-time tax benefit of $165.1 million and reduced marketing and operational expenses due to the COVID-19 pandemic. These aspects should be factored in when evaluating the year-over-year performance. In the fourth quarter of 2021, we continued to secure more aluminum cans from both domestic and international suppliers to meet rising consumer demand. However, we faced ongoing global supply chain issues, such as freight inefficiencies, shipping container shortages, congested ports, and delays in receiving specific ingredients. Also, we did not have enough co-packing capacity in the U.S. to fulfill the increased demand for certain products, leading to unmet demand in several markets during the fourth quarter. Additionally, aluminum can costs rose due to higher commodity prices, along with increased ingredient and other input costs, affecting our cost of sales and operating costs. We're actively working to address the challenges in our supply chain as we navigate the current global environment. In the fourth quarter of 2021, net sales reached $1.43 billion, compared to $1.20 billion in the same quarter of 2020, reflecting a 19.1% increase. Adjusted for foreign currency fluctuations, the net sales growth for the fourth quarter would have been 19.3%. The 2020 fourth quarter's net sales were negatively influenced by $15.2 million from previous customer returns linked to a European formulation issue and a labeling concern with one product in Japan, known as the 2020 product returns. Gross profit as a percentage of net sales for the fourth quarter of 2021 was 53.9%, down from 57.7% a year earlier, mainly due to higher freight costs, increased aluminum can prices, sales mix variations, and production inefficiencies. Operating expenses for the fourth quarter of 2021 were $334.7 million, compared to $288.4 million in the previous year, representing 24.9% of net sales versus 24.1% in 2020 and 28.9% in 2019 before the pandemic. This increase was driven primarily by higher outbound freight and warehouse costs, elevated marketing expenditures, including sponsorships and endorsements, and increased payroll costs. In 2020, we reduced marketing and travel expenses due to the pandemic impacts. The influence of the COVID-19 pandemic was less severe on our sales and marketing programs in the fourth quarter of 2021. Distribution costs for this quarter rose to $69.8 million, which is an increase of 48.4% from $47 million in the fourth quarter of 2020. Operating income grew by 2.6% to $412.9 million from $402.3 million the previous year. We expect some of the cost increases we've seen over the quarter and the full year will be temporary. With our two new aluminum can suppliers in the U.S. now operational, we will start reducing our dependence on imported cans, although we will continue to import them at a reduced level in the first half of 2022. We anticipate continuing to import cans into EMEA while reducing imports later in 2022. The ongoing supply chain challenges significantly increase logistic costs related to importing and shipping raw materials as well as other freight costs, all included in the cost of sales. The cost to reposition finished products to distribution centers is part of freight-in costs. We are working on rebuilding our inventories to lessen the excessive costs incurred from long-distance trucking to satisfy demand and return to our Orbitz strategy of local production. Increased freight-in costs, chiefly from importing cans, totaled around $38 million in the fourth quarter of 2021 and around $100 million for the full year. Out-of-orbit freight costs included in distribution expenses were approximately $15 million for the fourth quarter and $54 million for the full year. Net income dropped by 31.9% to $321.3 million from $471.7 million in the comparable quarter of 2020, which had benefitted from a nonrecurring tax benefit. Excluding this nonrecurring tax benefit, the 2020 fourth quarter’s net income was $328.6 million. Diluted earnings per share for the fourth quarter of 2021 decreased by 32.1% to $0.60 from $0.88 in the fourth quarter of 2020. Excluding the tax benefit and the product returns from 2020, diluted earnings per share for that quarter were $0.62. According to Nielsen, during the 13 weeks ending February 12, 2022, sales in the energy drink category, including energy shots, increased by 13.3% year-over-year. Sales of our energy brands, including Reign, rose by 8.1%. Monster's sales grew by 10.5%, while Reign's fell by 1.7%. NOS saw a decrease of 12.5%, and Full Throttle's sales climbed 12.4%. The drop in NOS retail sales during the quarter was due to concentrate supply shortages, although the situation is improving. Red Bull's sales increased by 13.8%, while Rockstar's dropped by 1.3%, and 5-Hour's grew by 2.1%. VPX Bang's sales edged up by 0.4%. In the convenience and gas channel, according to Nielsen for the four weeks ending February 1, 2022, energy drink category sales increased by 7.4% year-over-year. Sales of our energy brands in this channel rose by 4%, with Monster's sales increasing by 5.7%. Conversely, Reign's sales dipped by 0.9%, and NOS sales fell by 10.8%, while Full Throttle grew by 6.3%. Red Bull's sales increased by 8.3%, Rockstar's declined by 4.5%, and 5-Hour's dropped by 1.3%. VPX Bang's sales fell by 4%. For the four weeks ending February 12, 2022, Nielsen reported a 1.2-point decrease in our market share in the energy drink category in the convenience and gas channel to 37.2%. Monster's share dropped by 0.5 points to 31.6%. Reign's share decreased by 0.2 points to 2.4%, and NOS also decreased by 0.5 points to 2.5%. Red Bull's market share gained 0.3 points to 36.2%, while Rockstar's decreased by 0.5 points to 4% and 5-Hour's fell by 0.4 points to 4.5%. VPX Bang's share decreased by 0.8 points to 7%. In the coffee plus energy drink segment, Nielsen reported a 2.3% year-over-year increase for the four weeks ending February 12, 2022. Sales of Java Monster, including Java Monster 300, rose by 4.2% during the same period. Starbucks Energy was up by 0.7%. The share of the coffee-plus energy category dominated by Java Monster, which includes various lines like Java Monster 300, Starbucks Doubleshot, Tripleshot, Rockstar Roasted, and Bang Keto Coffee, was 53.7%, reflecting a 1-point increase. Starbucks Energy's share slipped to 44.1%, down by 0.7 points. In Canada, Nielsen noted a 12.3% increase in the energy drink category over a 12-week period ending January 29, 2022, with our energy drink brands growing by 10.8% and the market share for our brands sitting at 40.8%, a decrease of 0.6 points. Monster's sales rose by 13.9% with an improved market share of 36.3%. NOS sales dropped by 7.2%, resulting in a market share decline to 1.6%. Full Throttle's sales fell by 25.4% with a corresponding share decrease of 0.3%. In Mexico, the energy drink category had a significant increase of 25.9% in January 2022. Monster's sales rose by 24.5%, although its market share in value dipped slightly. Sales of Predator surged by 38.3%, boosting its market share. It’s important to remember that the Nielsen data for Mexico, which are monthly, can be influenced by specific promotions in stores, particularly in the OXXO convenience chain. In Argentina, Monster's market share rose from 41.3% to 43.8%, maintaining its lead as the top energy brand in value. In Brazil, this share increased from 32.2% to 37.8%, while in Chile, it fell from 47.2% to 33.1% due to shipping container shortages. It's worth noting that Nielsen's figures for EMEA should be interpreted with caution as reporting varies by country and date, and we faced supply challenges in EMEA affecting the statistics. In the 13 weeks ending January 29, 2022, Monster’s retail market share in value grew in several countries, while it saw declines in Belgium, France, and Poland. In Australia, according to IRI, Monster’s value share increased, while Mother's share saw a decline. In New Zealand, Monster's market share rose. According to INTAGE, in Japan, Monster's share grew significantly in the convenience store channel. In South Korea, Monster's share in all outlets increased. We acknowledge that short-term market data can be significantly affected by promotional activities during those periods. Total net sales outside the U.S. reached $508.1 million, representing 35.7% of total net sales in the fourth quarter of 2021, compared to $384.8 million in the same quarter of 2020. The foreign currency exchange rate negatively impacted net sales in the fourth quarter by approximately $2.4 million. Our sales to military customers are delivered in the U.S. and transshipped overseas. In EMEA, net sales increased by 47.5% in dollars and 46.1% in local currencies year-over-year. Adjusted for the 2020 product returns, net sales increased by 41.2% in dollars and 39.9% in local currencies. Gross profit in the EMEA region was 32.6% of net sales, compared to 30.2% in the fourth quarter of 2020, and it was impacted by can freight and airfreight costs for raw materials. Although shortages in can supply, ingredient availability, and truck capacity adversely affected sales and availability on store shelves, we expect improvements in trucking availability later. We are addressing the supply chain issues in EMEA by importing cans and expanding co-packing capacity. We are pleased that Monster gained market share across several countries in EMEA in the fourth quarter of 2021. In Asia Pacific, net sales grew by 19.2% in dollars and 22.8% in local currencies. Excluding the impact of the 2020 product returns and labeling issues, net sales increased by 10.7% in dollars and 14.1% in local currency. Gross profit in this region as a percentage of net sales was 41.4%, compared to 34.8% in the prior year, and gross profit would have been 40.3% in 2020 when excluding the 2020 product returns. In Japan, net sales increased by 12.7% in dollars and 20% in local currency, while, without the effect of the 2020 product returns, net sales decreased slightly. In South Korea, net sales rose significantly, and in China, we exceeded sales by 22.6% in dollars and 17.6% in local currency. We're reassessing our product range for China and remain optimistic. In Oceania, net sales increased by 7.5% in dollars and 4.8% in local currencies due to sales timing. In Latin America, net sales saw a growth of 17% in dollars and 21% in local currencies. Sales in Brazil increased significantly, as did sales in Chile and Argentina. There are ongoing legal matters with VPX, but we cannot discuss them at this time. In the U.S., we launched our True North Pure Energy Seltzer line and have introduced several new products planned for 2022, alongside expanding our product offerings in international markets. On February 17, 2022, we completed our acquisition of CANarchy Craft Brewery Collective for $330 million, which adds several brands to our portfolio while maintaining our energy beverage structure. We're excited about the potential this acquisition offers in the alcohol segment and its distribution network. Preliminary sales figures for January 2022 show significant gains compared to January 2021. While we notice some improvements in our supply chain challenges, they did affect January sales. It's vital to understand that short-term sales can be influenced by various factors, and therefore, they should not be seen as indicative of longer-term performance or future periods. If economic conditions continue to deteriorate because of COVID-19 in certain areas, our new product launches may be affected. To conclude, our production facilities, co-packers, warehouses, and distributors are currently operational. We are encountering rising operational costs, some of which may be temporary. We are implementing reductions in promotions and adjustments to pricing to manage these increased costs. Our flavor facility in Ireland is now operational, enhancing service levels in EMEA. We're pleased with our product portfolio and planning further launches of high-performance energy drinks internationally, alongside continuing our growth with affordable energy brands. Our supply chain issues are gradually improving, and we are optimistic about the opportunities with CANarchy. I’d now like to open the floor for questions regarding the quarter and the year. Thank you.

Thank you, operator. Hello everyone. You have discussed the improvements in supply and the measures you're implementing to enhance it. However, I noticed your margins have dropped significantly, around 540 basis points. Can you elaborate more on margins rather than just the availability of product, and how we should consider that in light of the changes planned for '22?

We've addressed the supply chain challenges previously, so I won't reiterate what we've said before. However, it's important to note that some of the costs we discussed are expected to be temporary. For instance, we had to open up specific manufacturing and distribution areas to meet demand, which incurred significant costs. We shared those details during this call. Additionally, importing cans is quite costly, but we expect this to improve in 2022 as we have two new suppliers already in operation. This will help reduce our reliance on imported cans in the U.S., and we anticipate being self-sufficient in the second half of the year. In EMEA, while we will still import cans, those figures should decrease as we progress through the year. Some costs may be temporary, while others could persist. We've encountered rising expenses, particularly with aluminum prices, which have surged significantly compared to last year. We are actively working to manage these costs, but it's uncertain how long aluminum prices will remain at this level. Overall, we believe we are managing these supply chain challenges effectively and are committed to ensuring our customers receive their products. Ultimately, our focus is on generating revenue, not just margins, and while our gross profit percentage may decrease, we are confident this is not a permanent situation and that margins will recover over time.

Hi, good evening everyone. Thank you for the question. I wanted to follow up on that topic. Looking at where analysts are estimating your gross margins for 2022, they seem to be slightly higher. However, if I understand correctly, with ongoing aluminum inflation, you’ll continue sourcing cans from different suppliers. This will lead to freight costs. While pricing, as you mentioned during the annual Investor Day, will contribute positively, it may not fully counterbalance the inflation. I want to confirm that while the top line remains strong, gross margins are expected to face challenges in 2022, with improvements anticipated in 2023 as these costs adjust. Additionally, regarding the quarter-to-date figures, is the performance primarily driven by international markets compared to the U.S., considering the discrepancies with Nielsen sales? Thank you for that insight.

Let's revisit your second question. The U.S. figure for January is very close to what you're referencing. We have many unmeasured channels in our system, and Nielsen doesn't always accurately reflect our sales to distributors. Now, if we take a step back to address your first question, aluminum prices have risen significantly today. As of yesterday, it was $0.10 a ton less than today. Due to the war and other global factors, it's uncertain what will happen with aluminum prices, which is crucial since most of our products are in aluminum cans. Regarding your other comments, I mentioned that we currently have enough cans. We're moving towards closing off and restarting our orbits, which should greatly reduce trading costs. I can't specify when this will occur, but it will happen. We are controlling other costs in the system. Looking ahead, I anticipate that 2022 will be challenging. Whether margins will stabilize at the levels discussed in this call is uncertain and largely hinges on aluminum prices. We've been importing fewer cans into the U.S. than in 2020, which will positively affect margins in the second half of the year. We expect to be fully self-sufficient with cans in the U.S. during that period, which is beneficial. Additionally, in EMEA, we will import cans in the first half, with significant reductions expected in the second half. There are many positive aspects related to costs, but the situation remains challenging. We discussed price increases on previous calls, and we have a strategy in place independent of Red Bull. We're focused on reducing promotional ounces, and you've already seen price increases in trade and from Nielsen. Prices have increased through modest reductions in promotional launches during the quarter. As we progress through 2022, you'll notice an acceleration in price increases within our business.

Hi, how are you? I just wanted to perhaps elaborate more on what you said, Hilton on the pricing front. Are you saying that we should be able to see pricing be on what was passed through by top manufacturing at some point in 2022? And then regarding that, are you seeing any impact from the gas stations given the gas prices going up? Or is this not a concern for affordability at this point?

You've observed the convenience and gas figures in Nielsen, which are slightly below the overall market recently. However, we have experienced higher gas prices in the past without them significantly affecting sales. It's worth noting that Nielsen indicates a decline in the convenience and gas numbers within the energy category. Whether this trend will continue is uncertain. Despite this, history shows that we've maintained our sales in the energy sector despite the fluctuations in convenience and gas pricing. Now, let's talk about pricing.

There has been a slight increase in the last week. If you examine last week's numbers, which represent a very brief timeframe, we are noticing an improvement in convenience due to the effective price increase. We'll see how this trend continues.

Yes, it's a 1-week number, sure. And with regard to pricing, we spoke about what we were doing to increase pricing. We're running our play. 24 ounces going up April 1 in low double-digit numbers. So that will be a nice percentage in 24 ounce. And the rest, we're working on, as you know, with our revenue growth management department, working on taking promotional allowances down to achieve the same result as a price increase. But we're continuing to monitor whether we need to take a general price increase or not. And if we have to, we will, and in particular, with regard to metal, and we don't know where metal is going. But with regard to metal, if it becomes a permanent situation, yes, then we probably have to reconsider and decide what else could be done on the pricing front, but we're not ruling out a general price increase.

Good afternoon, guys. I wanted to come back to your strategy on alcohol. So now with the CANarchy deal closed, do you think the company has the right product portfolio, distribution and capabilities at this point in time to deliver against your ambitions? You've been talking about this for the better part of two years and now with this deal closed, do you think you have everything that you need to deliver? And I guess, specifically, just to kind of drill down a little bit, do you think that you need more in terms of capabilities with respect to spirits, both consumer capabilities, a broader wholesaler distribution network? And if the answer to that is yes, how do you intend to sort of address that and is larger scale M&A a possibility?

I believe that the CANarchy acquisition is not the entire solution to our needs. They have craft brands and a distribution network, as well as some brand sales. We have a strong infrastructure in place, and we plan to utilize that for growth. We intend to refine their distribution system and enhance the sales of their products while also focusing on our own products that we've previously discussed, strategizing on how to launch them through the CANarchy system. We are also considering the possibility of acquiring additional brands, whether in the malt, beer, or spirits categories. These represent potential opportunities. However, we are currently evaluating the whole business, and while the platform we have is promising, we recognize that there will be challenges and issues to address for full implementation. It's not a flawless system we've acquired, but it provides a solid foundation, and we are confident and pleased with the acquisition, which positions us well moving forward.

Hi, good evening. Thank you for the questions. I was wondering if you could just offer some better detail on your supply chain in Russia, in the Ukraine and if you could quantify your exposure to those two countries, please?

Yes. The countries in that region, including Belarus and Kazakhstan, account for about 10% of our sales in EMEA. We have a solid business in Russia, and we are watching the situation closely. We also have a reasonable business in Ukraine, with staff present in both countries. It is concerning because we are uncertain about what will happen next.

Thank you. On behalf of the company, I'd like to thank everyone for their continued interest in the company. We continue to believe in the company and our growth strategy and remain committed to continue to innovate, 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 bottling system internationally. We believe that we are well-positioned in the beverage industry and continue to be optimistic about the future of our company. We hope that you will stay safe and healthy. Thank you very much for your attendance.