Monster Beverage Earnings Call INSIGHTS: July Results, Damages in Japan in Korea

On Wednesday, Monster Beverage Corp (NASDAQ:MNST) reported its second quarter earnings and discussed the following topics in its earnings conference call. Take a look.

July Results

Philip Terpolilli – Longbow Research: This is actually Phil Terpolilli calling in for Alton. Just a couple of quick questions, first off, with the July results, I think you said they are up 25%. Any sense of what’s driving that growth if it’s more of the new products you’ve launched over the last few years like Rehab or of its more of the traditional lines?

A Closer Look: Monster Beverage Earnings Cheat Sheet>>

Rodney C. Sacks – CEO: Generally, we’re continuing to see growth in our original market and our original products. For example, our Green product, which is the original 16 ounce Monster Energy as an — individual SKU grew 24.9% in the 13-weeks in convenience and 13-weeks to July 21. So, we are continuing to see growth in our original SKUs, but obviously we’re also getting benefits from the line extensions. One of the things we need to obviously factor in on the numbers is that the way out of this low, a small proportion is flat, that does tend to take down that number slightly.

Philip Terpolilli – Longbow Research: Just I think you mentioned the gross sales number for international, so if you have a net number by chance?

Hilton H. Schlosberg – Vice Chairman, President, COO, CFO and Secretary: For the quarter?

Rodney C. Sacks – CEO: I don’t.

Philip Terpolilli – Longbow Research: For 2Q.

Rodney C. Sacks – CEO: I don’t think we have a net number available, sorry, thank you.

Damages in Japan in Korea

Mark Astrachan – Stifel Nicolaus: One housekeeping question, you called out the damages in Japan and Korea, how much was that?

Rodney C. Sacks – CEO: We are going to break that out, but we have had some challenges in shipping that, we have had different types of damage, there have been some damages that are potentially reclaimable back from some of our can companies where you had defects in cans, we’ve had some leakers, we’ve had some tab issues, we just general — some production issues, we also had some issues regarding just — which haven’t attributable to suppliers, but basically just shipping damages during shipping leakage of our juices, had secondary damages. So, there has just been numbers of issues and challenges in the products in going into Japan where we have launched, but we have had some high product costs, and those are things we’re obviously learning and addressing and what we have experienced is that the tolerance of the Japanese distributors and retailers is at a very different level to the U.S. and whilst we did appreciate when we went in, but literally every can is inspected one by one and if you have three cans, which have leakers out of the million cans in America the locals throw them away. Here there is a investigation with 200 people involved from all over the world and trying to get to the bottom, that’s very, very analytical and very precise and that has just some issues and that is one of the large issues for our – that slight drop in the gross margin varies. If you look at the six month numbers that difference is very much smaller. Then in the case of Korea, there were some issues where we have had produced products and sent them to Korea and we believe they actually analyzed it incorrectly because they believe there was one of the – we have energy drinks around the world, it’s not permitted in Korea, we took it out, as they reported they came back to save on a (chest) they felt that found this ingredient, we said it’s not possible we took it out. We actually had mass spec test done in the U.S. and as well as in Korea we’ve established without any doubt that there wasn’t any of that ingredients in the product. But the issue is that it disrupted everything in four to six months and so you had product damages with products got shipped to Korea and some of it got shipped back and some has been stored. So, there have been number of these issues, I mean one of the issues we had obviously also anticipated commencing selling in Korea and that the revenues from that anticipated launch were also obviously not realized in the quarter. But those were the main issues regarding product and product damages and issues relating to production.

Mark Astrachan – Stifel Nicolaus: Well, I guess all of that being said if you could help us at least directionally with what the impact was to gross margins in the second quarter that would be helpful? Then second question, so you do the math on what your gross sales were April and May it implies a bit of deceleration. In June obviously you talked about what you did in gross sales in July. So, what explains the deceleration in June, was it comparisons I mean what else is there and could you talk a bit about how you think about the July number rebounding?

Rodney C. Sacks – CEO: Sure. Mark, just going back to the original question of the amount, I mean the amount makes up a large portion of the 1% change in the mix and that is the geographic mix as there were high cost of shipping and inspection costs relating to Japan. So, our margins on the Japanese business had to be low, well very much lower. We think some of that is ongoing. There will be some recruitment and then ultimately the idea is obviously for us, the intention is to produce locally which will change that whole business model, but geographic mix was the main portion. The damages in costs that we’ve talked about, there was also some allowances, some of it was reclassification of certain commissions because some of our distributors as we are paying some commissions to, for example (indiscernible). Once they take over ownership of that particular branch, they then become our customer that particular type commission is basically – it’s being below the line, deduction really goes into lowering gross sales to net. So, those things will have an impact on that 1% change in the gross profit. But many of them are not – we hope, we don’t think there will be ongoing and they will be rectified as we go forward will be normalized more. Then with regard to the other part of your question, I think there was a deceleration, but a lot of that again is a single month that depends on the day in which the July 4th fell in and then you are selling till the July 4th. There is I think a day shorter in the month and measures like that, but there has been a little deceleration in the category. But the numbers are still very healthy as you can see from the numbers that we just discussed.