Monster Beverage Corp (MNST) — Q2 2022 Earnings Call Transcript

Thank you. Good afternoon, ladies and gentlemen. Thank you for attending this call. I am 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 Kelly will now read our cautionary statement.

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 February 28, 2022, including the sections contained therein entitled Risk Factors and Forward-Looking Statements for a discussion on the 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. I would now like to hand the call over to Rodney Sacks.

Thank you, Tom. The company achieved record second quarter net sales of $1.66 billion in the 2022 second quarter, 13.2% higher than net sales of $1.46 billion in the 2021 comparable period and 16.9% higher on a foreign currency adjusted basis. Since the beginning of the COVID-19 pandemic and the subsequent increased demand for the company's energy drinks, the company prioritized ensuring product availability for its customers and consumers. This strategic direction has remained in place throughout the global supply chain challenges and disruptions despite adversely impacting the company's profitability. The company continues to stand by its strategy to ensure product availability and solidify the continued long-term growth of the company's brands. During the 2022 second quarter, the company experienced a significant increase in cost of sales relative to the comparative 2021 second quarter, primarily due to increased freight rates and fuel costs, including costs relating to the importation of aluminum cans, increased ingredient and other input costs, including secondary packaging materials and increased co-packing fees, increased aluminum can costs attributable to higher aluminum commodity pricing, geographical and product sales mix, and production inefficiencies. The company estimates that of the increase in cost of sales in the 2022 second quarter of $250.3 million, approximately $164.4 million was comprised of; one, approximately $66.7 million due to increased freight rates and fuel costs, including costs relating to the importation of aluminum cans; two, approximately $45.9 million due to increased ingredient and other import costs, including secondary packaging materials and increased co-packing fees; three, approximately $27.5 million due to increased aluminum can costs attributable to higher aluminum commodity pricing; four, approximately $15.1 million due to geographical and product sales mix; and five, approximately $9.2 million due to production inefficiencies. The company continued to experience additional global supply chain challenges, including the lack of adequate shipping containers and port congestion, which resulted in shortages of certain ingredients and finished products. As a result, the company continued to air freight substantial quantities of certain ingredients internationally, particularly to EMEA, Asia-Pacific, and Latin America at additional costs and inefficiencies. Furthermore, the company experienced significant increases in distribution expenses, including increased fuel, freight, and warehousing costs, which adversely impacted operating expenses. The company continued to address the challenges in its supply chain as it navigates through the uncertainty of the current global supply chain environment. Gross profit as a percentage of net sales for the 2022 second quarter was 47.1%, compared to 57.2% in the 2021 second quarter. The decrease in gross profit as a percentage of net sales for the 2022 second quarter was partially offset by pricing actions. Operating expenses for the 2022 second quarter were $406.9 million, compared with $310.9 million in the 2021 second quarter. The comparative operating expenses for the 2021 second quarter included a $16.9 million reversal of amounts previously accrued in connection with an intellectual property claim. As a percentage of net sales, operating expenses for the 2022 second quarter were 24.6%, compared with 21.3% in the 2021 second quarter and 25.6% in the 2019 second quarter pre-COVID. Distribution expenses for the 2022 second quarter increased to $87.9 million, which is an increase of 36% or 5.3% of net sales, compared to $64.6 million or 4.4% of net sales in the 2021 second quarter and 3.4% of net sales in the 2019 second quarter pre-COVID. The $23.3 million increase in distribution expenses was primarily due to increased freight-out expenses of $13.5 million as a result of higher outbound freight rates and fuel, increased volume and out-of- orbit freight, as well as higher warehouse expenses of $9.7 million as a result of higher raw material and finished product inventories in the United States and EMEA. The increase in other operating expenses was primarily due to increased payroll expenses, increased expenditures for sponsorships and endorsements, and increased expenditures for travel and entertainment. Certain of these increases were the result of the company's return to activities consistent with pre-COVID-19 levels. We have decreased our reliance on imported cans and are currently purchasing aluminum cans from local sources in both the U.S. and EMEA. We anticipate seeing a reduction in cost of sales through increased use of domestic cans as we cycle through existing inventories of imported cans over the next few quarters. We rebuilt and increased finished product inventory levels across the United States and EMEA to reduce the excessive cost of long-distance freight to satisfy demand and to return to our orbit strategy of producing in closer proximity to our customers. The cost of repositioning finished products to distribution centers is included in freight-in costs. Operating income for the 2022 second quarter decreased 29.1% to $373.0 million from $526 million in the 2021 comparative quarter. Net income decreased 32.3% to $273.4 million, as compared to $403.8 million in the 2021 comparable quarter. Diluted earnings per share for the 2022 second quarter decreased 32.2% to $0.51 from $0.75 in the second quarter of 2021. Through pricing actions, the company was able to achieve positive pricing appreciation in the United States and in EMEA. Due to continued cost pressures, the company is implementing a net sales price increase in the range of 6% market-wide in the United States effective September 1, 2022. The company will also be implementing price increases in the second half of 2022 in certain international markets, some in addition to price increases or pricing actions taken earlier this year in order to mitigate inflationary cost pressures. According to Nielsen reports, for the 13 weeks through July 23, 2022, for all outlets combined, namely convenience, grocery, drug, mass merchandisers, sales in dollars in the energy drink category, including energy shots, increased by 8.2% versus the same period a year ago. Sales of the company's energy brands including Reign were up 6% in the 13-week period, sales of Monster were up 7.4%, sales of Reign were down 5.6%, sales of NOS decreased 3.9%, and sales of Full Throttle decreased 0.8%. Sales of Red Bull increased 3.8%, sales of Rockstar increased by 2.1%, and sales of 5-Hour decreased 3%. VPX Bang's sales decreased 14.5%. The sales growth of the Monster brand exceeded that of Red Bull in the period. According to Nielsen for the four weeks ended July 23, 2022, sales in dollars in the energy drink category in the convenience and gas channel, including energy shots, in dollars increased 6.6% over the same period the previous year. Sales of the company's energy brands, which include Reign, increased 5.6% in the four-week period in the convenience and gas channel; sales of Monster increased by 6.4% over the same period versus the previous year; Reign sales increased 0.9%, NOS was down 1.8%, and Full Throttle was down 2.5%. Sales of Red Bull were up 3.9%, Rockstar was down 1.8%, and 5-Hour down 3.5%. VPX Bang sales decreased 16.3%. According to Nielsen for the four weeks ended July 23, 2022, the company's market share of the energy drink category in the convenience and gas channel, including energy shots in dollars decreased 0.4 points to 36.1%. Monster share decreased from 30.6% a year ago to 30.5%, Reign share decreased 0.1 of a share point to 2.3%, NOS share decreased 0.2 points to 2.5%, and Full Throttle share remained at 0.7%. Red Bull share decreased one percentage point from 37.4% a year ago to 36.4%, Rockstar share was down 0.3 points to 3.5%, 5-Hour share was lower by 0.4 at 4.2%, and VPX Bang share decreased 1.6 points to 6%. According to Nielsen for the four weeks ended July 23, 2022, sales in dollars of the coffee plus energy drink category, which includes our Java Monster line in the convenience and gas channel increased 4.4% over the same period the previous year. Sales of Java Monster, including Java Monster 300 and Java Monster Nitro Cold Brew were 2.3% higher in the same period versus the previous year. Sales of Starbucks Energy were 9.4% higher. Java Monster share, including Java Monster 300 and Java Monster Nitro Cold Brew of the coffee plus energy category, which primarily includes Java Monster, Java Monster 300, Java Monster Nitro Cold Brew, Starbucks Doubleshot and Tripleshot, Rockstar Roasted, and Bang Keto Coffee for the four weeks ended July 23, 2022 was 50.9%, down 1 point, while Starbucks Energy share was 47.7%, up 2.2 points. According to Nielsen in all measured channels in Canada, for the 12 weeks ended June 18, 2022, the energy drink category increased 12.8% in dollars. Sales of the company’s energy drink brands increased 8.5% versus a year ago. The market share of the company’s energy drink brands was 40%, down 1.6 points. Monster sales increased 10.8% and its market share decreased 0.7 points to 34.8%. NOS' sales decreased 9.6% and its market share decreased 0.4 to 1.5%. Full Throttle sales increased 13% and its market share remained at 0.6%. According to Nielsen for all outlets combined in Mexico, the energy drink category increased 21.2% for the month of June 2022. Monster sales increased 26.9%. Monster's market share in value increased 1.3 points to 28.4% against the comparable period the previous year. Sales of Predator increased 53.1% and its market share increased 0.8 of a share point to 4%. The Nielsen statistics for Mexico cover single months, which is a short period that may often be materially influenced positively and/or negatively by sales in the OXXO convenience chain, which dominates the market. Sales in the OXXO convenience chain in turn can be materially influenced by promotions that may be undertaken in that chain by one or more energy drink brands during a particular month. Consequently, such activities could have a significant impact on the monthly Nielsen statistics for Mexico. According to Nielsen for the month of June 2022 compared to June 2021, Monster's retail market share in value increased in Argentina from 46.9% to 49.2%. Monster Energy continues to be the leading brand in value in Argentina. According to Nielsen for the month of June 2022 compared to June 2021, Monster's retail market share in value increased in Brazil from 35.7% to 39.9%. Monster is now the leading energy brand in value in Brazil, marking another important milestone for our brand in South America. In Chile, Monster's retail share for the month of June 2022 decreased from 41.9% to 38.1% due to a shortage of shipping containers. I would like to point out that the Nielsen numbers in EMEA should only be used as a guide because the channels read by Nielsen in EMEA vary from country to country and are reported on varying dates within the month referred to from country to country. According to Nielsen in the 13-week period ending July 17, 2022, Monster's retail market share in value as compared to the same period the previous year, grew from 25.8% to 31.6% in France from 27.8% to 32.1% in Norway and from 37.6% to 39.7% in Spain. According to Nielsen in the 13-week period until the end of June 2022, Monster's retail market share in value as compared to the same period the previous year grew from 15.3% to 16% in Belgium, from 15.1% to 15.4% in Germany, from 28.9% to 29.9% in Great Britain, and from 19.4% to 19.8% in Poland. Monster's retail market share in value as compared to the same period the previous year declined from 20.5% to 20% in South Africa. According to Nielsen in the 13-week period ended June 19, 2022, Monster's retail market share in value as compared to the same period the previous year, grew from 14.5% to 15.6% in Sweden. Monster's retail market share in value compared to the same period the previous year declined from 8.5% to 6.6% in the Netherlands and from 29.3% to 28.1% in the Republic of Ireland. According to Nielsen in the 13-week period until the end of May 2022, Monster's retail market share in value as compared to the same period the previous year grew from 15% to 17.5% in the Czech Republic and from 37.9% to 38.7% in Greece. Monster's retail market share in value as compared to the same period the previous year declined from 30.1% to 28.3% in Italy. According to Nielsen in the 13-week period ending May 22, 2022, Monster's retail market share in value as compared to the same period the previous year grew from 25.7% to 27.5% in Denmark. According to Nielsen in the 13-week period until the end of May 2022, Predator's retail market share in value as compared to the same period the previous year grew from 17.1% to 26.8% in Kenya and from 8.1% to 15.4% in Nigeria. According to IRI in Australia, Monster's market share in value for the month ending July 3, 2022, increased from 13.2% to 14.2% as compared to the same period the previous year. Mother's market share in value decreased from 11.5% to 10.2% during the same period. The market share of the company’s brands in Australia for the month ended July 3, 2022, decreased from 24.7% to 24.5%. According to IRI in New Zealand, Monster's market share in value for the four weeks ended July 10, 2022, increased from 12.4% to 12.6% as compared to the same period the previous year. In the month ending June 2022, Monster's market share in value in the convenience store channel as compared to the same period the previous year grew from 50.6% to 56.7%. According to Nielsen, in South Korea, in the last month ending June 2022, Monster's market share in value in all outlets combined as compared to the same period the previous year decreased from 61.9% to 59.9%. We again point out that certain market statistics that single months or four-week periods may often be materially influenced positively and/or negatively by promotions or other trading factors during those periods. Net sales to customers outside the U.S. were $649 million, 39.2% of total net sales in the 2022 second quarter, compared to $546.3 million or 37.4% of total net sales in the corresponding quarter in 2021. Foreign currency exchange rates had a negative impact on net sales in U.S. dollars by approximately $53.4 million in the 2022 second quarter. Included in reported geographic sales are our sales to the company’s military customers, which are delivered in the U.S. and transshipped to the military and their customers overseas. In EMEA, net sales in the 2022 second quarter increased 13.8% in dollars and increased 26.8% in local currencies over the same period in 2021. Gross profit in this region as a percentage of net sales for the second quarter was 26.7%, compared to 39.8% in the same quarter in 2021. Gross profit in the second quarter was impacted by increased freight for imported cans, increased raw material and ingredient costs and increased co-packing fees, higher aluminum commodity pricing and air freight costs. In local currencies, gross profit as a percentage of net sales for the quarter was 27.1%. The company is continuing to address the controllable challenges in its supply chain in EMEA. We are also pleased that in the 2022 second quarter, Monster gained market share in Belgium, Czech Republic, Denmark, France, Germany, Great Britain, Greece, Norway, Poland, Spain, and Sweden. In Asia-Pacific, net sales in the 2022 second quarter decreased 1.1% in dollars and increased 8.2% in local currencies over the same period in 2021. Gross profit in this region as a percentage of net sales was 40.4% versus 44.4% over the same period in 2021. In Japan, net sales in the 2022 second quarter decreased 9.6% in dollars and increased 3.3% in local currency. Sales performance for the comparable period in 2021 was largely impacted due to COVID-19 restrictions in Japan. In South Korea, net sales decreased 5.2% in dollars and increased 3.8% in local currency as compared to the same quarter in 2021. Monster remains the market leader in Japan and South Korea. In China, net sales decreased 2.1% in dollars and 8% in local currency as compared to the same quarter in 2021, largely impacted by COVID-related lockdowns. We remain optimistic about the prospects for the Monster brand in China. In Oceania, which includes Australia, New Zealand, Tahiti, French Polynesia, New Caledonia, Papua New Guinea, and Guam, net sales increased 1.3% in dollars and 7.6% in local currencies. Sales in Australia and New Zealand were negatively impacted by shipping delays of certain flavors, concentrates, and ingredients. Furthermore, sales in Australia were also impacted by severe flooding in that country in the 2022 second quarter. In Latin America, including Mexico and the Caribbean, net sales in the 2022 second quarter increased 66.7% in dollars and increased 69.7% in local currencies over the same period in 2021. Gross profit in this region as a percentage of net sales was 36.4% for the 2022 second quarter versus 40.7% in the 2021 second quarter. In Brazil, net sales in the 2022 second quarter increased by 8.8% in dollars and 63.9% in local currency. Net sales in Mexico increased 49.3% in dollars and 49% in local currency in the 2022 second quarter. Net sales in Chile increased 26.1% in dollars and 45.3% in local currency in the 2022 second quarter. Net sales in Argentina increased 200.1% in dollars and 269.4% in local currency in the 2022 second quarter. I will now provide the most recent update on our litigation with Vital Pharmaceuticals, Inc., which I will refer to as VPX, the maker of Bang energy drinks. In June 2020, Monster Energy Company, which I will refer to as MEC and Orange Bang, Inc., a family-owned beverage business and the rightful owner of several trademark registrations to the Bang marks initiated an arbitration against VPX. MEC and Orange Bang alleged that VPX breached a 2010 settlement agreement with Orange Bang that restricted VPX's use of the Bang trademark to products that are creatine-based or marketed and sold only in nutritional channels, as well as claims that VPX infringed Orange Bang's trademark rights to the Bang marks. In April 2022, the arbitrator issued a final award finding in favor of MEC and Orange Bang on all claims. The arbitrator awarded MEC and Orange Bang $175 million to remedy VPX's past misconduct, as well as attorneys' fees and costs, which amounted to nearly $9.3 million. The arbitrator also ordered VPX to pay MEC and Orange Bang an ongoing 5% royalty on all future sales of VPX Bang's energy drinks and other Bang branded products. Pursuant to the terms of the agreement between MEC and Orange Bang, the award and future royalties will be shared equally between MEC and Orange Bang. On July 1, 2022, the United States District Court for the Central District of California granted MEC and Orange Bang’s motion to confirm the arbitrator’s award and denied VPX’s motion to vacate the arbitrator’s award. MEC and Orange Bang have requested that the court issue a final judgment. On July 28, 2022, VPX filed a notice of appeal to the United States Court of Appeals for the 11th Circuit. The company will not recognize the award or royalties until such time as they are realized or realizable. Yesterday, the United States Court of Appeals for the 11th Circuit issued a ruling affirming the decision of the United States District Court in the Southern District of Florida, in which the District Court rejected VPX's claim that MEC's line of Reign energy drinks infringed the trade dress of its line of Bang energy drinks. MEC’s lawsuit against VPX for false advertising, unfair competition, and misappropriation of trade secrets in the Central District of California is still pending with trial scheduled to begin later this month. As this litigation and other pending proceedings with VPX are subdued, I will not be answering any questions on those matters on today’s call. The first alcohol-based product line that we plan to launch since the acquisition of CANarchy will be a full-bodied flavored malt beverage that will be launched late in the 2022 fourth quarter under the brand name 'Beast Unleashed.' Beast Unleashed will leverage Monster's brand equity while carving out its own unique space in the beverage alcohol sector and will be distinguishable from the many hard seltzer brands that have become so ubiquitous over the last several years. The Beast Unleashed will have a 6% alcohol content by volume and will come in four great tasting bold flavors, which are based on certain of Monster's well-known and popular flavor profiles. Beast Unleashed will be launched through beer distributors in the United States, utilizing a phased state launch approach, with the goal of being national by the end of 2023 and will initially be offered in 16-ounce single-serve cans, as well as a 12-can variety pack in 12-ounce sleek cans. Our alcohol innovation pipeline is robust, with a number of additional innovative product lines currently under development. We look forward to sharing more details on such additional alcohol beverage products at a later date. We are excited about the planned launch of our new Monster Energy Zero Sugar energy drink in the 2022 fourth quarter initially in the United States. Monster Energy Zero Sugar was specifically developed as an indistinguishable Zero Sugar analog of our original unique Monster Energy Green flavor. We are excited about the opportunity that this product will provide to our Monster consumers who have come to enjoy the unique taste profile of our original Monster Green flavor, which remains our leading flavor. In April 2022, we launched Pure North Energy Seltzers in sleek 355 ml cans in three flavors: Cucumber Lime, Black Cherry, and Grapefruit Lemonade in Canada. At the end of June 2022, we expanded our core Monster Energy portfolio in Canada by launching Monster Reserve in two flavors, Watermelon and White Pineapple, both in 473 ml cans. In Latin America, we introduced several new energy drinks in our Monster Energy Predator and Fury product lines in certain Latin American countries in the 2022 second quarter. In April 2022 in New Zealand, we launched LIVE+ Watermelon, our fourth LIVE+ flavor. In EMEA, in the second quarter of 2022, we launched Monster Nitro and Monster Assault in a number of countries. In certain countries, we also launched Juiced Monarch and Chaotic during the 2022 second quarter. During the 2022 second quarter, we also launched additional SKUs of Burn, Relentless, Nalu, and Reign in certain countries. During the second quarter of 2022, we launched Predator in Turkey and we continued the national rollout of Predator in India and Vietnam in June, expanding the brand to East India and North Vietnam. We also launched Predator in Cambodia in July 2022. We are planning to introduce the Predator brand in several additional countries in the APAC region in the second half of 2022. In Japan, we launched Monster Super Fuel Killer Kiwi and Monster Energy Ultra Sunrise in China. We estimate July 2022 sales, including those to CANarchy, to be approximately 12.9% higher than in July 2021 and 11.2% higher than in July 2021 excluding CANarchy. On a foreign currency adjusted basis, excluding CANarchy, July 2022 sales would have been approximately 16.6% higher than the comparable July 2021 sales. July 2022 has had one less selling day compared to July 2021. The company had sufficient can capacity and co-manufacturing facility capacity across all regions to address demand for July. In this regard, we caution again that sales over a short period are often disproportionately impacted by various factors, such as, for example, selling days, days of the week in which holidays fall, timing of new product launches and the timing of price increases and promotions in retail stores, distributor incentives, as well as shifts in the timing of production in some instances where our bottlers are responsible for production and unilaterally determine their production schedules, which affects the dates on which we invoice such bottlers, as well as inventory levels maintained by our distribution partners, which they alter unilaterally for their own business reasons. We reiterate that sales over a short period, such as a single month, should not necessarily be imputed to or regarded as indicative of results for a full quarter or any future period. If the COVID-19 pandemic and related unfavorable economic conditions continue, in certain regions, our new product innovation launches in those regions could be delayed. In conclusion, I would like to summarize some recent positive points. One, the company is increasing its raw material and finished product inventories to better service its customers and ensure availability of its products. Two, our AFF flavor facility in Ireland is now providing a large number of flavors to our EMEA region, enabling better service levels and lower landed costs to our EMEA region. Three, we are pleased with the new additions to the Monster Energy portfolio. Four, we are planning to continue additional launches of our Reign Total Body Fuel high-performance energy drinks in additional international countries. Five, we are pleased with the rollout of Predator and Fury, our affordable energy drink portfolio internationally. We are proceeding with plans to launch our affordable energy brands in an additional number of international countries. Six, we are enthusiastic for the planned launch of the Beast Unleashed, our first flavored malt beverage alcohol product, and for the opportunity that the CANarchy acquisition presents. Seven, we believe that we will be able to address many of the challenges we have experienced in our supply chain. Eight, we consider that certain of the increased costs we have experienced in the quarter may well be transitory. For example, the current cost of aluminum has reduced materially from its recent March highs, and we are beginning to see a reduction in fuel and freight costs, as well as reductions in the cost of shipping containers and ocean freight. I would like to now open the floor to questions about the quarter. Thank you.

Hi. Thanks. Hi. Operator: Your line is now open. Okay. Thank you. I guess a question on gross margins. I simply don’t understand really why they were bad in the quarter. I guess I was under the impression that you were already buying a fair amount of your aluminum cans from U.S., and therefore, should have been less reliant on the importation of cans, I guess, at least in the U.S. So, I thought that was the plan. However, I do see your inventory levels in the quarter went even higher and are almost three times the level they were last year. So, I guess, help us understand that and just trying to think through, is this really the right way to manage the business? And then, Hilton, you mentioned these pressures are transitory or it was in the release, but I guess, they are not really feeling like it. So when do you guys expect to be 100% buying in the U.S. and EMEA for your supply, and really no longer importing aluminum cans?

Sure. Bonnie, thank you for that question. I think a lot of people probably may want to ask the same question. So thanks for addressing it early on. We have always taken a stance that our objective is to support our customers and our consumers. We went through entire times in 2020 and 2021 when we did not have enough capacity to service our customers and our consumers. We had bottlers screaming. We had retailers screaming, and at the time, we made a very conscious effort that we were going to import cans at expensive costs, not in terms of the actual cost of the can, but the cost of importing the cans, the container costs, just everything relating to the importation of aluminum cans. So that was an absolute conscious decision. As cans started arriving late in 2021, EMEA was the most affected. I think we have had a number of discussions about how EMEA was affected and a substantial number of those cans went into EMEA and have been consumed over a period of time. It’s difficult with our business because we have promotions from time to time. For example, we have got the Apex Legends promotions now and the cans that come in are not promotional cans. So, they are using production when there’s market and market demand. So, in EMEA, we stopped importing cans. We thought we would still have to import cans during 2022. We stopped that and there’s no longer importation of cans into EMEA in 2022. In 2021, we had coming in the U.S. and we will soon be out of those cans as soon as we get over this Apex Legends promotion. But in the U.S., the percentage of imported cans in our furnish is very low compared to what it was in the second quarter in EMEA. So I hope that answers your question. We did it as a conscious effort to support and to supply our customers because we are in this business for the long-term. We are not in this business for the second quarter of 2022. We are in this business for the long-term and it’s important to us to ensure that our customers and our consumers continue to have energy products.

But, I guess, for me, it’s still back to the question as you are making this conscious decision to keep a bigger supply of cans and have elevated inventory. How do we think about that as I assume you are going to work down that inventory now? Is that starting to happen or will happen in Q3 and Q4, and I assume it’s very elevated cost. So do we think about these pressures on your gross margin, quite frankly, very much continuing in Q3 and Q4, is that right about the product?

No, that's a great question. Looking ahead, we see that cost of sales is declining, particularly with fuel and freight. We are managing this on a daily basis and have noticed reductions in ocean freight as well. We've successfully reduced the amount of materials needing air freight to maintain product flow from the U.S. with concentrates. We are aware that our facility in Ireland is operational, and the reliance on aluminum cans is decreasing along with aluminum costs. For instance, the peak aluminum price, including the Midwest premium, reached 1.8073 on March 7th. We purchase the unhedged portion at M minus 1, meaning the pricing for April cans references March. Currently, aluminum is priced at 1.36, a drop from its peak. Additionally, we have built up inventories due to previous unsustainable levels in 2021, which has allowed us to mitigate some shipping and freight costs. While we don’t provide forecasts, it's evident that the second quarter of 2022 was likely our most challenging margin quarter, but I want to emphasize that we are committed to long-term business strategies and supporting our customers and operations.

Hi. Good afternoon. Thank you. Regarding the cost pressures and pricing, would you say that both domestic and international pricing would show mid single-digit increases and could potentially cover about a third of the $250 million you mentioned? Additionally, I appreciate the breakdown you provided; you can offset some of the higher aluminum costs and the $67 million for imported cans. So would the pressures reduce from $250 million to about $100 million to $150 million in the fourth quarter? I’d like to confirm that. Also, with respect to Monster Zero Sugar, congratulations on that. Should we consider that it could draw new consumers into the category similar to Coke Zero Sugar? I assume, as Rodney mentioned, it resonates with the typical Monster consumer due to its taste profile and packaging, which may appeal more to core consumers. Is that accurate? How much support can you provide for the launch? Thank you.

Okay. Those were two questions. I will start with the first one. We don’t provide guidance, but I have tried to offer some direction during this call. What we are seeing is a gradual decrease, which will not happen overnight due to existing costs that need time to resolve. Although we do not provide guidance, I hope the general direction I provided will be useful for you and other analysts in assessing our path forward. I want to emphasize again that we are focused on the long-term in this business and dedicated to supporting our customers. While we experienced a dip in gross margin in the second quarter of 2022, we faced various cost pressures, such as those from imported cans. However, we managed to restore our inventories to a level that allows us to meet our customers' and consumers' needs. It would be detrimental if our prices increase on September 1 and we lack sufficient inventory to meet demand. We are committed to staying on track in a challenging supply chain environment.

Thank you. I can address the question about the Zero Sugar products. We have offered Zero Sugar options, including the full Ultra line, low carb, and absolutely zero varieties. However, none of these have truly mirrored our original Monster Green. The original Monster Green flavor has been our top product for over 20 years and continues to lead in nearly every market globally. Consumers are looking for choices, and as they age, they tend to seek sugar-free alternatives. We aim to maintain the same franchise with our existing product's identity, which features a black can with green claw marks. We believe there is an opportunity to both expand our franchise to attract consumers who desire the original Monster flavor in Zero Sugar, and to retain and grow our current customer base. Younger consumers generally show less concern for sugar content, while older consumers do begin to consider it more. Additionally, many countries have implemented sugar taxes and labeling requirements. By introducing our original Monster Green flavor in a sugar-free version with a similar yet distinguishable can design, we aim to deepen and expand our consumer base for years to come. This development is vital for maintaining and enhancing Monster’s uniqueness because the Monster flavor is a distinct and popular offering, and we want to continue growing and building upon it. Therefore, we plan to roll this product out extensively after its launch in the U.S.

Yes. Hey. Good afternoon, guys. I guess I am going to ask one question in two parts, but I swear it’s related. So, the first one, Hilton, I mean, obviously, I get what you're saying about guidance, what you think about cost pressures. I just think it would be immensely helpful based on just the commentary that I have been getting from folks or feedback from your shareholders. If you could at least just directionally confirm the gross margins should get better from here and if you could give a sort of magnitude around it, I think it would be helpful. But the related and more serious question is, you have a lot of volatility historically in gross margin, and I have asked this question before, but I am curious, given the current environment, how you think about whether you want to do more with the Coke system from a procurement standpoint, potentially manufacturing through their co-packers in the U.S. or their bottlers in the U.S.? And has there been any sort of change in how you might be thinking about that, given, obviously, what’s happened over the last, call it, 12 months where you would have less to worry about, I suppose, if you are working with them more closely?

Regarding your first point, I believe I have already addressed that. I think the second quarter will likely see the lowest margin of the year. As for guidance, we typically don’t provide it. On your second point, we aren't entirely certain and have had discussions with our distribution partner about several issues. We are unsure if further engagement on these topics would positively impact the cost of sales. However, we continue those discussions, and if it makes sense, we will proceed. I don’t want to share too much, but one of our partners in Europe, part of the Coca-Cola system, did not perform better in can procurement than we did. I want to emphasize that it’s not necessarily a guaranteed solution.

Hey. Good afternoon, everyone. Hope you are doing well. I guess I will ask about topline I guess. So, Rodney, Hilton, I guess, I just wanted to ask about Bang, like what are you seeing there in terms of shelf space and kind of what do you expect as they kind of transition to distributors? And I guess, do you see a potential opportunity for you to capture some of that incremental shelf space?

I think generally in transitions there’s always upheavals, okay. Transitions never happen cleanly overnight. There’s always upheavals. And remember, that Bang is in a lot of the Pepsi shelf space and a lot of the Pepsi companies and despite that you guys have seen their shares decrease over the last 24 months or so. So I don’t want to say any more than that. I am not sure if Rodney wants to say anymore, but I would say that, obviously, we continue to grow up as much shelf space as we can. We contract for a lot of our own shelf space and we work with the Coke bottlers and then, on the other hand, we work with the Pepsi space and with the Pepsi coolers.

Yeah. Just to bullet lightly. I mean, if Bang transitions out of the Pepsi coolers, you are obviously all aware of the announcement that Celsius, who’s been trying to secure and has been securing additional shelf space, will go into the Pepsi system. So there will be a lot of fighting going on. There’s the Ghost brand lining you to a lesser degree and C4. So you have got all of these sort of performance brands basically fighting for some more shelf space, and obviously, we will do the same. So there will be a lot of transition going on and we believe that we are obviously focused on that as well and our own brands and increasing our own shelf space.

Hi guys. One of the things we have been watching carefully about the impact on inflation on the consumer with gas prices and stuff. It doesn’t seem like we have seen a slowdown at all. I am curious what you are observing and maybe if you have done any test in markets like maybe Midland, Texas or Phoenix, or some of those markets where inflation is much higher than it has been nationally if you are perhaps seeing different trends?

So what I’d like to comment on is, one, a retailer and I am not going to mention who they are in terms of their own schematics and their own structures, went early on the price increase. They rolled out early and not only with us but with the competition as well and they have seen no reduction in sales based on that action. So what we are seeing anecdotally is a continuation of the growth in the category. Yes, it has slowed somewhat, but look in Europe, where the categories are a lot older. The growth has been escalating there faster than in the U.S. So we have seen that and now we are seeing the other concern may be abating everyone is asking questions about gas prices and whether gas prices affect the consumption of energy drinks, and frankly, we said at the time that when we have seen high gas prices a portion that hadn’t affected the sale of energy drinks and we are seeing gas prices now coming down slowly, but truly they are coming down. So I think that maybe answers your question as well.

Hi, Hilton, Rodney. Thanks for the question. Hi. I was wondering if you could talk a bit about the price increases you put through in your international markets and what the response is there. And maybe if you could just touch on the scope of the price increases you are planning for in H2 2022, maybe just some information on what countries and what products would be very useful please?

In the first half of 2022, we implemented price increases or reduced promotions in various countries, which is already showing a positive effect on this quarter. For the second half of the year, we plan to implement additional price increases in several countries, though I won't go through the entire list right now. For instance, in France, if there has been one price increase in a year, a second one cannot be made. We've already taken price increases in Brazil and Chile earlier this year, and we continually do this not to take advantage of inflation, but to offset rising costs throughout the system.

Thank you. On behalf of Monster, I would 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 innovate, develop and differentiate our brands and to expand the company both at home and abroad, and in particular, 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.